By Markos N. Kaminis
For many passive market followers, the correction in US stocks last week came as a surprise, but not for Wall Street Greek blog readers. Over past weeks, I have noted the “Holy Resurrection” of an economic recovery, both on these pages and at the daily blog. We have reviewed the many flaws in the supposed improvement. We have discussed the pace of manufacturing recovery, and also its relation to bare bones levels of activity that the growth is being compared against. We have talked about the government crutches supporting economic stability, and have openly wondered if the hobbled economy could still stand once those crutches were pulled away. We have noted the ongoing weakness in the real estate market, and we have duly warned about the incessant bleeding of the labor market. We said a jobless recovery is neither a recovery now nor a sustainable state of affairs. And last week, our technical analyst, Steven Ferguson, with his intricate algorithmic equations and colorful charts, described brilliantly the precipice we stood upon. He warned days before it all went down that something special seemed likely to occur, something ugly… and then it did.
While the Dow gained 1.25% Friday, most of which came in the last few minutes of trading, the broadly followed index lost 4.0% on the week. The Dow Jones Industrials Index is off 9.0% since its April 26 close, as investors reassess the state of global affairs. European unraveling, while a net positive for investment capital fund flows into the US, now has the global investment community reconsidering sovereign risk, global currency valuation and global economic forecasts. Still, the flow of funds into US investments is up sharply, as seen by March’s Treasury International Capital Report (TIC) posted recently.
We explained at the blog over recent weeks that the market seemed overbought. Put/Call ratios indicated investors were overly bullish, and hedge funds were too far long versus short. Also, investor advisor sentiment was mighty cheery. These were all signs of a market vulnerable to a decline should the right catalyst come along. In the end, it seems a confluence of catalysts combined with a “fat finger” gave birth to the latest bearish trade. The factors weighing included heavy austerity measures being implemented in Greece, Spain and Portugal, and rising concerns about a need for similar actions in Ireland, the U.K. and France. Meanwhile, chatter has steadily increased about China risk, and the expanding asset bubbles across the Pacific. Side stories including the ash cloud effects on European and global business, as well as the Gulf of Mexico oil spill’s long-term impact on exploration and short-term hit to fisheries did not help the situation.
Basically, the sustainability of global economic recovery is in question. In the US, 9.9% unemployment weighs on the economy, and last Tuesday’s data produced an increase in weekly jobless claims to 471K. Manufacturing activity, while still reported expanding, saw a slowdown in pace, based on New York and Philadelphia area surveys. While oil prices fell on a strengthening dollar and global demand concerns, futures contracts a few months out showed no sign of softening. These factors weighed on stocks, and our technical analyst saw something in the trends. Ferguson views 900 on the S&P 500 Index a real possibility, and that mark is 17.3% lower than the index’s current value at 1087.69. Keep up with daily market and economic activity and forecasts, along with shipping, real estate, antiquities and fine art market news, at the Wall Street Greek blog.