from John Maudlin's weekly investment letter
(snip)"Soft Around the Edges
While inflation did indeed come in softer, the numbers which accompanied the inflation numbers also showed that the economy is softening. Industrial production slowed, and capacity utilization and manufacturing output dropped, as well as utilities generation. The announcements from Ford and Daimler Chrysler this week showed that auto sales, if your name is not Toyota, are soft.
Barry Ritholtz noted that while headline August retail sales were touted as strong, the Census Bureau, which gives us the numbers, includes the sales of used cars, boats, RVs, etc. If retail sales were all that good, would Ford and Chrysler be talking down future guidance? Barry also gives us these thoughts:
"In the past 16 Federal Reserve tightening cycles, there has been one true soft landing in 1994. I continue to look at that not as impossible, but as a low probability event.... My largest present concern is oil and other commodity prices. It's no coincidence that gas, oil, gold, aluminum and copper all have dropped at the same time. I read that as signs of a global slowing in demand."
I agree with Barry about natural gas and copper, but a drop in energy prices has been building for months. Supplies have been building up as storage has been getting harder to find. As I have said, it would not surprise me to see oil prices drop below $60 a barrel, and perhaps much lower for a short period, as the price of a barrel of oil that can't find a quick home will drop pretty fast.
OPEC has made it clear that they would cut supplies in order to hold the price in the $60 range. Can they do it? They all cheat on their quotas, so maybe not if we see a global slowdown. But that would only be a temporary setback. Long-term, as world demand for energy of all types grows, oil prices are going to rise. The easy money in energy stocks has been made. Now it is time for the hard road.
And this statistic from Paul Robinson: What happens when you have 3-plus years without a 10% correction in either the S&P 500 or DJIA? On March 15th, 2006 the market sustained 3 full years without a substantial sell-off from a 6-month high. This long a bull run has occurred only 3 other times in the past 100-plus years of market history and led to an average decline of 18.5% between the 3 occurrences.
In summary, I think it is too early to throw in my bearish towel. A slowdown means that earnings are not going to grow as fast as currently projected. That means some disappointments may (will?) be coming our way in the next few quarters.
Disappointments are the stuff that makes for bear markets. Can we come to the end of a Fed tightening cycle with no pain? A Kinder, Gentler Mr. Market? Now that would be different.
The following chart comes from good friend Matt Blackman, writing in the EquiTrend Weekly Market Watch. I think most of you will find it useful. It is a very nice visual picture of the how the economic market typically cycles. New cycles are never identical to the previous one, but there is a rhythm. Falling interest rates often signal (trigger?) the expansion phase, and rising rates eventually start the contraction phase. We would now be at 3 o'clock in this illustration. "(snip)
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