FYI | May 21 2014
By Peter Switzer, Switzer Super Report
Last week I got a sick feeling when a US technical expert, Ralph Acampora, told a conference that he had a “sick feeling” that stocks could fall 25%! It came when a lot of smart people were scratching their heads as to why the US bond market yields were falling, when they should be rising, given the general economic belief that the US economy was heading up.
So, was he saying the top US economists I watch, were wrong on the US recovery? Or was there something else that insiders were on top of that the majority of us so-called experts are missing?
I know I was a little concerned when John Howard asked me if I had heard of a major property problem in China that the New York Times was talking about. On closer research that was linked to a Barclay’s note on Chinese real estate and while they looked at worst case scenarios, they were largely comfortable with the outlook for property in China.
The facts, just the facts
To understand why the bond market yield on 10-year US Treasuries has fallen, and is in fact below the worrying 2.5% level, let’s run through the possible reasons to see a reason to panic or to discount this rubbish about a 25% fall in stocks soon. Sorry, I might have revealed my hand too soon!
The first reason could be that the US economic recovery story is not believable and so soon the data will turn bad and so the bond yield story was a sensible action from better economists.
However, US factory and housing data is at odds with this, and one of the best indicators – weekly jobless claims – is really screaming out loud that the Yanks are set to grow at around 4 to 5%.
This chart from the www.financialsense.com website and Bloomberg shows the good correlation between the S&P 500 and jobless claims, and so I am ruling out this concern.
The next issue could be geopolitical worries – think Vlad Putin and the Ukraine – and while I think some Europeans could be looking to shift money from the Eurozone to the safety of the USA, there are other signs suggesting this is an overblown issue. For example, the ruble is up about 7% since March and the Russian stock market is about 20% higher, so I am downgrading this as a big fly in the financial market’s ointment.
Another concern is the slowdown in Europe. But Germany grew at 0.8% for the March quarter while the expectations were for around 0.4%.
Italy and France underperformed and will have to be watched and this could explain some shift of money from the Continent to the USA bond market, which would bring down yields.
Against this there is a high expectation that the European Central Bank will bring out its bazooka again in June and that could easily turnaround stock market sentiment.
The final explanation, which is not really a concern, is that Europeans, who are used to very low returns on bonds and deposits, actually like the safety of the US recovery and thought the 3% returns were good value and so there was a big rush for US bonds..
This is why there we have the crazy situation of an expected improving economy in the US, which will help stocks and then force bond prices down as people chase stocks and dump bonds, the opposite is happening.
So, I don’t think there is a hidden US economic problem. There could be a looming European growth issue but I suspect the ECB will work hard to fix that. If it can’t, then stocks might slide, but I reckon we have few months up our sleeve before that’s going to happen and by then the Eurozone just might look better than it does today.
The bottom line is that I would see any stock market sell-off as a buying opportunity, which is now sounding like a reliable broken record.
And for those who point to the 12% fall in the Russell 2000 index, just remember that this index was up 39% last year and really needed a correction – big time.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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