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Week Gone By at Phil’s Stock World

Week Gone By at Phil’s Stock World 

By Elliott and Ilene 

A man rides a bicycle in front of the construction site of a residential complex in Kolkata August 31, 2010. Tuesday's data showed annual rate of growth picked up to 8.8 percent from 8.6 percent in the previous quarter, underscoring continued growth momentum in Asia's third-largest economy amid a slowing pace of global recovery. REUTERS/Rupak de Chowdhuri (INDIA - Tags: BUSINESS CONSTRUCTION)

Globalism is featured in several of this week’s Favorites articles. The ever insightful Paul Craig Roberts asks whether “economists have made themselves irrelevant” in his article "Death by Globalism".

Michael Synder points out that globalism is no longer "something that is going to happen in the future", but is instead a hard reality that is currently annihilating our middle class in his article "Winners and Losers."  Of our new global economy, Michael writes: 

"…American workers are just far too expensive.  So middle class manufacturing jobs are fleeing our shores at a staggering pace.

Since 1979, manufacturing employment in the United States has fallen by 40 percent.

Are you alarmed yet?

You should be.

The truth is that we did not have to merge our economy with nations like China.  China does not have the same minimum wage laws that we do.  China does not have the same environmental protection laws that we do.  In China, companies can treat their workers like crap.  As a result of open trade with the United States, scores of shiny new factories have opened all over China while once great manufacturing U.S. cities such as Detroit have degenerated into rotting war zones.  We continue to expand trade with China even though their communist government stands for things that are absolutely repulsive and has a list of human rights abuses that is seemingly endless.

But politicians from both parties swore up and down that globalism would be so good for us.  Now we have created a network of free trade agreements that would be virtually impossible to unwind…"

What is the result? We have the disparity of multinational corporations doing remarkably well in the face of a weak and sickly U.S. economy. The large corporations are relying on the U.S. consumer less and less. They have moved their factories overseas, avoided U.S. taxes, laid off U.S. workers, and taken advantage of cheap off shores labor.  And their earnings may continue relatively unharmed by a lull, double dip, or continued recession in the U.S. – depending on whose perspective. (See Consumer Metrics Institute’s report on the U.S. consumer and our economic malaise.) The result of this corporate earnings/U.S. economy disparity is reflected in the stock market’s performance which seems to have decoupled from the health and well being of the average American.

The Pragmatic Capitalist discusses this trend in WHY AREN’T EQUITIES SELLING OFF MORE SIGNIFICANTLY?:

The deterioration in the economy has been clear in recent months, but the equity markets have confounded many investors.  Stocks are just 10.6% off their highs and have shown some remarkable resilience, particularly in the last few weeks. There’s a great tug-of-war going on underneath what appears like a potentially frightening macro picture.

A closer look shows that what we’ve primarily seen is deterioration in the macro outlook and not so much in specific corporate outlooks. Despite the persistently weak economy, earnings aren’t falling out of bed.  Without a sharp decline in earnings there is unlikely to be a sharp decline in the equity markets (outside of some exogenous event such as a sovereign default).

The most distinct characteristic I can recall from the the 2007/2008 market downturn was the persistent deterioration in earnings.  Like dominoes we saw the various industries go down one by one: housing, then banks, then consumer discretionary and on down the line.  While the macro picture has deteriorated recently we haven’t seen the same sort of deterioration in earnings that we saw in 2007 and 2008.

In a recent strategy note JP Morgan elaborated on the divergence between the macro outlook and the earnings outlook:

“What matters for equities is earnings and not GDP growth. US GDP growth projections are being cut, but earnings projections have been little affected so far. Investors and analysts are hoping that, to the extent the soft patch in US GDP growth lasts for only a few quarters and does not spillover to the rest of the world, US companies will be able to protect their revenues and profits. Indeed, this is what happened during 2Q, when US companies were able to deliver strong top line and EPS growth even as US GDP grew at only a 1% pace. 

It is a prolonged soft patch that poses the greater threat for corporate earnings and equity markets as it raises the specter of deflation and profit margin contraction. Why is deflation bad for corporate profitability? When nominal interest rates are bounded at zero, a fall in expected inflation causes a rise in real interest rates and the cost of capital, hurting corporate profitability. In addition, nominal wage rigidities mean that deflation reduces output prices by more than input prices putting pressure on corporate profitability. Indeed, the Japanese experience of the 1990s provides an example of the erosion in corporate margins under a deflationary environment.”  

(Continue here >)

Germany, Berlin

Phil discusses the high level of bearishness in the markets in his article "Troubling Tuesday – Bears and Bears and Bears, Oh My!" and continued on this theme in his article "Non-Farm Friday – Time to Spring the Bear Trap?  In both articles Phil talks about the current tendency for CNBC and the rest of the "Mainstream Media" to allow "bears to control the message and terrify the masses," and the challenges this presents for investors.  

Speaking of small investors, what are they doing with their money in this market?

Tyler Durden of Zero Hedge reports on the current trend in mutual fund flows in his article "Can You Hear Me Now? 17th Weekly Fund Outflow As Equity Fund Redemptions Accelerate." In this article, Tyler claims "…no matter what the market does (and somehow it has been flat during the entire period of record redemptions: good to know someone is putting capital into stocks), on a short-term basis, nobody wants to touch it with a ten foot pole."

In another article, High Frequency Chicanery, Mike Whitney at CounterPunch writes: 

"Here’s something to munch on from Dennis K. Berman in last week’s Wall Street Journal:

"Today, small investors are fleeing the equities markets in droves, according to data from the Investment Company Institute, pulling out a net $34 billion from stock funds so far this year…..They say, "I still feel like someone is screwing me……trading feels different than it used to."

Berman traces the problem to its source, the "inscrutable interplay between myriad exchanges and high-frequency traders, whose volume now accounts for an estimated two-thirds of all trading"…"a market that many perceive as tainted and prone to gaming by a cadre of insiders."

That sounds like a long-winded way of saying the market is rigged."

Taking a contrary view of what small investors are doing, not necessarily on whether the market is rigged, The Pragmatic Capitalist posted the article "Small Investors Wade Back Into Equities" pointing out that "the latest monthly survey from the AAII shows that small investors increased their equity allocation despite the tumbling market."  How to explain the discrepancy?  Just a guess, but if small investors are taking money out of funds, and also increasing their equity allocation with money that remains, both observations could be true.  

Cash Card Fraud

At Phil’s Stock World, we know the markets are rigged and know HFT controls the scene, but we aim to get on the right side of the rigging and follow the flow of money!  Rigged doesn’t preclude us from trading effectively, though we do wish that the U.S. stock market might someday be respected as an honest mechanism for investments in public companies. 

Speaking of rigged markets, Michael Hudson, asks: Does Our Economy Really Have to Run on Fraud?

Fed Chairman Bernanke testified on Thursday, September 2, that “the market” itself breeds what most people would call fraud. Widening the market for home ownership necessarily involves lowering loan standards, he explained. But as the Lehman failure illustrates, where should we draw the line between “illiquidity” and insolvency on the one hand, and higher risk and outright fraud?

The Fed argues that the economy cannot recover without a solvent financial system. But what about that large part of the financial system based on fraud? Would the economy fall apart without it – without mortgage fraud, without deceptive packaging of junk mortgages, and for that matter without computerized gambling on derivatives? What of the credit-ratings agencies whose AAA writings were as much up for sale as the conscience and honesty of politicians on the Senate and House Banking Committees? Do we really need them?

The war in Iraq was officially declared to be “over” this week. In the article “War is Over Wednesday” Phil writes:

“President Obama formally declared an end to the 7-year Iraq war last night.

This came as quite a surprise to the 50,000 soldiers who are still there but, so far, it sure beats the end of the Vietnam war where we had to get the hell out of Saigon as the city fell beneath us.  To be fair, the Vietnam War had been going on for 116 years (the French began an unwelcome occupation in the 1800s) - we just came in for the last quarter…

"Just" 35 years after the official end of that war, Vietnam, which is the 18th most populous nation on Earth at 90M people, is reunified and a vital part of Asia and a strong emerging market.  Perhaps it is hard to imagine that ever happening to Iraq but I remember the utter chaos that marked the end of Vietnam and it seems to me that Iraq is actually in better shape.  The war was, of course, a total disaster for us, costing well over a Trillion Dollars and thousands of American lives.

The U.S. "sent our young men and women to make enormous sacrifices in Iraq, and spent vast resources abroad at a time of tight budgets at home," Obama said. "We have met our responsibility. Now, it is time to turn the page.  Today, our most urgent task is to restore our economy, and put the millions of Americans who have lost their jobs back to work.  This will be difficult. But in the days to come, it must be our central mission as a people, and my central responsibility as President." 

LONDON, ENGLAND - OCTOBER 28:  A children play in fallen leaves in Hyde Park on October 28, 2009 in London, England. The week has seen un seasonably warm Autumn weather, with temperatures around 19 degrees ranging across much of the country, and is expected to continue into the weekend.  (Photo by Dan Kitwood/Getty Images)

Michael Steel, speaking for House Minority Leader John A. Boehner (R, Ohio), said the President’s pivot to domestic policy showed no clear plan to revive the economy beyond a call to "unleash innovation" and "strengthen our middle class."  But Mr. Obama said the end of combat operations was a time to thank U.S. service members, not relive political disagreements, and to acknowledge the sacrifices made in a war that cost more than 4,427 American lives and tens of thousands of Iraqi lives. Another 34,265 U.S. troops were wounded.  Obama also commented: "No one could doubt President Bush’s support for our troops, or his love of country and commitment to our security." 

Is September a treacherous month for the stock market? In Legends of the Fall, Joshua Brown, The Reformed Broker, explains how the typical make-you-panic-then-save-you article, about September in the stock market is written. Then after all the drama, he concludes, there’s no way to know. 

Wrapping up this week’s review is "The Art of Spinning: How to Identify Possible White Collar Criminals or at Least Unethical and Deceitful People Who You Should Avoid" by Sam Antar. As Ilene put it, "Sam wrote this timeless piece a few years ago but searched it out specially for us. For non-criminal types, this article is pretty depressing, but if you feel entangled in one of these criminal-non-criminal, or unethical-ethical person, relationships, it behooves you to know how the game is played. If you are an aspiring white collar criminal, this essay can be used as a how-to manual." 

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