Official Bear Market, Jobs Report, Illegal Immigrants, Oil Hits $145, Big Currency Swings, and More!

  • Dow, Nasdaq enter bear markets… how far and how long stocks will continue to fall
  • U.S. sheds jobs for 6th straight month… why even illegal workers are losing interest in American employment
  • Oil to $145… the two catalysts for consecutive days of record prices
  • John Williams on dumping the dollar… why now might be the time for nations to ditch dollar pegs
  • Currency traders break the paradigm… ECB hikes rates, yet euro plummets

  Welcome to a bear market…

The Dow closed down 1% yesterday and is officially 20% below its record high… the textbook bear market. The Nasdaq followed suit and is in official bear territory as well. The S&P 500 is “just” 19.4% off its high.

  So what does that even mean? Well, aside from 2008 earning an asterisk or footnote in the pages of U.S. market history, it means that worse times are likely ahead. Historically, markets rarely rebound after first breaching bear market territory. Data varies, but the typical U.S. bear market falls 29-33% below its high and takes an average 1-1.3 years to return to prebear market levels. And these averages, we hasten to add, don’t include the mother of all bear markets — the Great Depression (shares declined 86% then and took around three years to recover).

  And like worse bear markets before it, almost everyone is getting pinched. Driven by high energy prices, a weak dollar, falling home values and crumbling financials… this particular bear market hurts more than just your 401(k). For example:

  31% of Americans have canceled or shortened their planned Fourth of July celebration because of rising fuel costs, says a CNN poll this morning. According to the survey, 72% of respondents said gas prices have caused changes in their daily lives — 30% said those changes were “major.”

Gasoline, in American terms at least, is becoming inhibitively pricey. In fact, the dollar’s decline has caused almost everything to be noticeably more expensive… except home prices — the No. 1 source of equity for the average American. As we learned last week,   home prices are down an average 15% over the past year.

Want a cheap loan to help offset these tough times? Forget it… under typical bear market conditions, the Fed’s low rates would allow consumers to pick up some cheap money. But that assumes the nation’s lenders are in the fiscal shape to be extending inexpensive lines of credit… which ain’t happenin’ either. Just last month, we noted U.S. mortgage rates were at an eight-month high, averaging only 0.5% lower than in 2007. Just can’t catch a break these days, whether you’re an investor or not.

  And lest we forget the U.S. employment scene… the nation lost 62,000 jobs in June, the sixth straight month of decline. Economists came close to predicting the monthly loss, but the unemployment rate was largely expected to decline due to seasonal factors… which it didn’t. U.S. unemployment remains at 5.5%.

Nearly every sector lost jobs in June, most notably business services and construction. The government was one of the few (and largest) contributor to job gains.

But before you get depressed, we must reiterate the same disclaimer that always accompanies our coverage of the monthly jobs report. In short, it’s far, far from definitive… even for government standards.

  It looks as though illegal employment is on its way down, as well. We found this curious measure in the economist today:


It’s an imperfect correlation, that’s for sure, but interesting, nonetheless. Could American economic growth affect the rate illegals cross our borders looking for work? Homeland Security dumps more money into border protection every year, yet we’ve entered a period of notably fewer arrests. In fact, you can see arrests peaked before Sept. 11, right around the tech bust. Maybe heightened border patrol has deterred border jumpers from even trying to enter the U.S., or — just maybe — those who used to come to I.O.U.S.A. for a quick buck are taking their business elsewhere. 

We admit, this chart might be too “big” for our humble 5 minutes… but we thought it might be worth pondering as you celebrate the spirit of American independence this weekend.

  Back to the stock market… traders had plenty of reasons to sell yesterday. ADP kicked off the morning with a nasty employment report . Oil hit another high (more on that below), while the dollar continued to fall. The Commerce Department said factory orders grew only 0.6% in May — in line with forecasts, but way below April’s 1.3% rise.

But we also note, as we did last week, the market’s measure of uncertainty remains low. The VIX, commonly referred to as the Volatility Index, trades around 25. That’s notably below the 30-plus levels commonly associated with panic selling and capitulating bottoms.

  Oil hit more record highs yesterday and today, up to $145 a barrel as we write. Yesterday, the latest U.S. Energy Department oil inventory report pushed crude to a record $144. Inventories declined by over 2 million barrels last week, much worse than the marginal decline predicted by the Street. What’s more, commercial stockpiles are now resting below 300 million barrels for the first time since January.

After the New York close, we saw some of the typical saber rattling between Iran and the U.S. officials in Tehran warned it would consider taking control of the Strait of Hormuz if the West didn’t leave its nuclear program alone… the U.S. military responded by reminding Iran that America is ready and willing to fight over the strait that controls 40% of the world’s oil… blah, blah, blah.

Same old story, but it was enough to add a $1 fear premium to crude prices.

  “With oil trading above $140 per barrel,” notes John Williams , “serious inflation consequences are in store for those economies that have been propping the greenback against their own domestic currencies.

“Overhanging the markets for a number of years has been the question as to when the major holders of excess U.S. dollars might look to dump those holdings. An opportunity for that dumping is at hand. Most central banks know that their unwanted dollar hoards are going to generate long-term losses, but the oil markets have opened up an opportunity to mitigate some of those losses.

“From a perspective outside the United States, an offset to oil price-based inflation risk is available in dollar depreciation, which reduces the cost of oil in the currency of the purchasing country. The current oil price problem in many ways is a dollar problem — tied to the weakness of the U.S. currency. At some point, oil producers likely will be forced to abandon oil pricing based in U.S. dollars. The broad effect of that would be an intensified inflation spike in the United States, with the energy inflation impact much mitigated in the non-U.S. dollar world.”

  Gasoline crept up to a new high this morning, too. The average American will be filling ’er up at $4.10 a gallon today.

  The dollar trended lower in the last 24 hours. The dollar index drifted to a score of 72 this morning, mostly on the expectation of the European Central Bank’s decision to hike rates… which it did early. Because of ECB President Trichet’s heavy hinting over the past few weeks, the rate hike to 4.25% was mostly baked into euro/dollar prices.

In fact, the ECB rate decision ended up being a disappointment for euro investors. After announcing the lending rate hike, President Trichet said he has “no bias” or “precommitment” to further rate alterations. Currency traders wanted an indication of more future hikes… and sold the crap out of the euro when they didn’t get it.

The euro fell two cents, to $1.57. The pound backed down to $1.98. The Japanese yen held steady at 106.

  The ECB rate hike seems to have shaved a couple bucks off gold’s spot price, as well. The precious metal fell $15 in early trading this morning. But all things considered, it’s holding up nicely, at $935 as we write.

  Your summary of the Bill Gross article is very misleading,” writes a reader. “If you use the full text of his statements, he is not overly critical of Obama, but of the state of the country. It is my perception that the point was for Obama to be honest with the people and let them know hard times are ahead. Your blurb made it seem as if Gross believes the Obama policies would cause the stock market problems, rather then just being a sideshow, as the full text demonstrates.

“The Gross message could just as easily been used against McCain, as his continued war spending would rival Obama’s middle-class tax cuts and affordable insurance for those interested. Neither candidate will be able to balance the budget anytime soon. With Obama’s proposed elimination of small business capital gains taxes, he will actually be more pro-growth than McCain if he comes around on lowering the corporate tax rate, which he is currently considering. We all know the country can’t grow its way out of the enormous problems, but business expansion will help minimize their effects.”

The 5: Our blurb made it seem as though Obama’s polices might produce a huge deficit and market problems… because they might. As you mentioned, so could McCain’s. At this stage in the game, we won’t pretend to know whose economic plan is better or worse.

Guess it’s just the way we both chose to read Gross’ letter. We read a legendary investor predicting a trillion-dollar deficit and declining stock market in the near future… and got a little worried. It sounds like you read the words “Barack Obama,” and got defensive.

  “I’m an American living in Australia for 25 years” writes our last reader, this one responding to yesterday’s debate over Jim Rogers and his ideals.

“I’ve traveled extensively through Southeast Asia, and having lived in Europe, I can tell these last two ‘patriotic’ critics that their patriotism is going to kill their accounts, their kids’ financial future and perhaps even themselves. You see, these types are so blindsided by the great American dream that they lack the ability (or education) to put forth a logical argument regarding the state of the nation. Jim Rogers leaving America is a fine example of a person putting their money where their mouth is. He has not done this lightly, I am sure. But Agora is about financial and geopolitical matters, as the two intertwine. Please, fellow readers, can we not make this personal or criticize those who choose to live in other countries?

“You see, the attitude that anywhere is the ‘best’ place on Earth makes one so limited and shallow in all ways. To be financially literate and independent, one must be worldly and put patriotism aside. If you love America and her ideals, you will stand up (and maybe even leave) and rage against the system by demanding that the country be restored to the ideals and laws of the Constitution. Have you read it? I have. And America is far off the economic landscape and laws put forth by the forefathers of the Constitution. Which America do you love? Which America do you think Mr. Rogers left?”

The 5: Zing! Pretty appropriate end to our Independence Day issue. We’re excited to hear your rebuttals.

Like the markets, The 5 will be taking the day off tomorrow. Addison’s in Vienna, attending the inaugural meeting of the Society for Austrian Economic Thought. He’ll likely return to his 5 Min. post sometime next week, armed with plenty of ideas and anecdotes no doubt.

This editor’s ticket to Austria must have been misplaced, so we’ve opted for a more “traditional” celebration of Americana… fireworks, BBQ and the cultural marvel of the New Jersey shore. We hope you get a chance to celebrate a little too, one way or another. 

Happy Independence Day,

Ian Mathias
The 5 Min. Forecast

P.S. Monday will be the last day you can join the Agora Financial Reserve. At midnight, we’ll slam the doors shut. There’s no telling exactly when we’ll open them again, or how much the cost of entry will rise in the future. If you’re interested, it’s time to pull the trigger. Get all the details here.


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