While above-average companies continued to outperform this week, average ones went nowhere – and I guess that’s good news considering the ugly Market environment that surrounds us. The stock market selloff that began in April got some more juice this week: Best Buy’s profit fell again, this time 25%; and consumer staple cereal maker General Mills announced a massive restructuring that will add another 35,000 people to the unemployment line. Not good.
This tells us something very important about the stock market dynamic this year: strength has performed well thus far but average and below-average have not. The Average is up just 1.9% this year. The above-average 15-51 strength Indicator gained 24.3% so far; while gold (GLD) is around breakeven. That’s called, “market weakness.” See chart below.
In a nutshell, stocks are correcting and gold looks confused. That’s what crazy market conditions do to trend-lines. It creates volatility and sends mixed signals. It breeds uncertainty. Over-reactions up always lead to over-reactions down.
And why not the move down? There’s continuing trouble in the U.S. financial system, as money isn’t moving in the right direction. We find out now that the mess at JP Morgan wasn’t limited to bad “synthetic” bets made overseas by the relatively unknown villain named “the London Whale,” but that huge losses were also incurred on high risk investments made in “financially challenged companies” located here in America.—This, mind you, while hundreds of thousands of consumers can’t refinance the mortgages on their primary residences. And some people wonder why the housing market hasn’t recovered yet. Banks don’t want to be in the mortgage business – “conventional banking” no longer their thing. That’s not good for the housing market or consumers.
Banks have all turned into investment companies – and that’s an institutional problem. When this is the case certain borrowers get squeezed out of the market and it’s usually the little guy, the small business, the individual and consumer alike. To be sure, in conditions like these Banks are more willing to lend money to larger institutions than any other populous (see: Red Flag in Bank Lending? Wall Street Journal on-line) – or place bad bets on high-risk gambles, in massive number, both here and abroad.
Add the trouble in the U.S. banking system to the continuing saga happening overseas.
This week, and amid new evidence of a global recession (see: New Signs of Global Slowdown, Wall Street Journal on-line), Fitch Ratings Company downgraded the financial status of Japan, the world’s third largest economy. Ouch. This won’t help the matter of world order.
And then, of course, there’s the disaster waiting to happen in Europe. Cash run-ons have nearly crippled Spanish and Greek banks as citizens withdrew hundreds of billions of Euros in fear of a monetary collapse. And since banks don’t reserve 100% of customer deposits, it’s easily possible for banks to run out of money – especially if their sovereign governments can’t print more. Remember, individual countries in the Euro Zone can’t print money. Only the European Central Bank (ECB) can do that. As a result, Spain and Greece must go to the ECB to get more money – and recently the ECB has dramatically reduced funding to those nations without aggressive government budgetary cuts. Greece and Spain are steadfast against such cuts, and appear to be banking on the “too big to fail” premise in hopes of landing another bailout.
To capitalize on the panic over there, Germany took unprecedented action this week by announcing it will offer zero percent interest-rate bonds. As mentioned, the global competition for profit begins with a competition for capital. Germany recognizes this, and is using this strategic monetary policy to attract scared capital stuffed under mattresses in Spain and Greece – and to keep Euros in Europe. Like China, Germany is in the monetary game.
With limited financing options, you wonder if Greece and Spain will turn their attention to the International Monetary Fund (IMF), which just raised more than $400 billion, and is planning to restructure its governing body. Wouldn’t it be interesting if they struck a new deal with them?— China and Russia the big-players there.
So what should investors take from all of this?
Expect more volatility. Stocks are looking to move lower and gold is looking for a reason to move upward strongly. Be comfortable with your asset allocations and remember that cash is king — only if it’s safe. (You can’t buy low without it.)
Stay ready, and be patient.
And I’ll be here….