Bear Market Shows Its Face, Brazilian Warning, GDP Surprise, Global Demographics and More!

by Addison Wiggin & Ian Mathias

  • Bear market’s back! What data hurt stocks, and which one caught our attention
  • Bill Gross proclaims the stock rally is “likely at its pinnacle”
  • Traders fire shots over Brazil’s bow… one clue the Bovespa’s in for a rough patch
  • Government claims recession is over… Rob Parenteau on what that means for the “recovery”
  • Chris Mayer on the demographics of investing: Which nations have the youth to forge ahead
  • Plus, signs of the times: Rap legend shows fiscal restraint, banking analyst frets his TV fame


  We take a few days off and look what happens… the bear market’s back. While we conducted our bimonthly editorial meetings over the last two days (more on that in a few minutes), the S&P 500 fell 3.4%. Here’s how:

  • The S&P/Case-Shiller home price index saw nice year-over-year improvement. But as we wrote on behalf of The Daily Reckoning on Tuesday, the real “recovery” in home prices is still minimal. The average house, according to S&P, is still back at its 2003 price
  • New home sales fell for the first time in five months, the Commerce Department said yesterday
  • GMAC, the financial arm of GM, is in talks with the Treasury for ANOTHER taxpayer bailout. Uncle Sam has already given the company $12.5 billion in exchange for a 35% stake
  • The mighty Goldman Sachs revised its third-quarter GDP projection down to 2.7%, from 3.3%. (The surprising, official results are below.)

  And here’s the bit that really gave us pause: American consumption confidence hit a new crisis low on Tuesday. The Conference Board’s headline number sank from 53 to 47. That’s not great news for the Street even at face value, as the consensus was looking for a very small improvement. But check out the fine print of this survey… scary stuff:

The Conference’s Board’s gauge of consumption attitudes is supported by two subindexes: one that gauges how people feel about the present situation and one that somehow charts our future expectations. The present index, aka the only one worth trusting (if the crowd was any good at seeing what was coming… well… we wouldn’t be in business) just hit a score of 20.7. That’s the lowest it’s been throughout this entire crisis. In fact, you’d have to go back 26 years for a score that low.

  “Asset appreciation in U.S. and other G-7 economies has been artificially elevated for years,” proclaims Bill Gross in his monthly missive. “In order to prevent prices sinking even lower than recent downtrends averaging 30% for stocks, homes, commercial real estate and certain high-yield bonds, central banks must keep policy rates historically low for an extended period of time…

“But while this may support asset prices — including Treasury paper — across the front end and belly of the curve, at the same time it provides little reward in terms of future income. Investors, of course, notice this inevitable conclusion by referencing Treasury bills at 0.15%, 2-year notes at less than 1% and 10-year maturities at a paltry 3.40%. Absent deflationary momentum, this is all a Treasury investor can expect…

“Broadening the concept to the U.S. bond market as a whole (mortgages plus investment-grade corporates), the total bond market yields only 3.5%. To get more than that, high-yield distressed mortgages and stocks beckon the investor increasingly beguiled by hopes of a V-shaped recovery and ‘old normal’ market standards. Not likely, and the risks outweigh the rewards at this point. Investors must recognize that if assets appreciate with nominal GDP, a 4–5% return is about all they can expect even with abnormally low policy rates.

“Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets — while still continuously supported by Fed and Treasury policymakers — is likely at its pinnacle.”

Of course, it is convenient that a purveyor of bonds suggests future stock returns will not mimic the returns of the last six months… but he’s probably right.

  While U.S. stocks have suffered a few hits this week, Brazilian shares have taken a right cross to the nose. Here’s the blow by blow:

This is something worth watching as the bear market rally inevitably unravels. So much money has ridden the Brazil ride on the way up, and it looks as though traders won’t be afraid to jump ship on the way down. That was certainly the case with China and India during the 2008 crisis… which proved to be a stellar buying opportunity. All the more reason to check out our latest creation: BRIC by BRIC.

  “Young populations predict strong economic growth,” writes Chris Mayer, like your editor, an armchair demographist. “A young population means that most people are of working age as a percentage of total population. The emerging markets and developed markets are on the verge of trading places, as this next chart, from the fund Absolute Return, shows:

“This doesn’t mean all emerging markets have young populations. If you look at the so-called dependency ratios by country, you see that Russia and China quickly get old. In fact, their dependency ratios will surpass the U.K.’s over the next two decades. The really young populations, at least among the big emerging markets, are in India and Brazil.

“This chart, again from Absolute Return, shows you how many people are aged 65 or older for every 100 people aged 15-64. So if the ratio is 40, it means that there are 40 people aged 65 or older for every 100 people aged 15-64 (the working-age population).

“Low numbers mean lots of working people supporting the elderly. Higher numbers mean there are fewer people working to support the elderly. The theory goes that the younger populations with lower dependency issues will grow faster than those older populations.

“So looking at this chart, you can see the clear winners through 2030 in the demographic game — India and Brazil. The U.S., perhaps surprisingly, doesn’t look so bad. Of course, the ages here are somewhat arbitrary. It seems to me that one way out of the problem is that people simply work longer. Why retire at 65?”

Chris spent some time explaining an interesting U.S.-Brazil-China nexus during yesterday’s editorial meeting. Here’s the gist: China needs food and water — so much that it will have to import both for the indefinite future. But from where? And how does a nation bring potable water into its borders? Heh, not by containership. Stay tuned for more…

  Back in the U.S., the recession is over! That’s the ipso facto word from the Commerce Department this morning, which claims that American GDP expanded at an annual rate of 3.5% in the third quarter. That blows Wall Street estimates out of the water, including Goldman’s last-minute revision.

Interestingly, 3.5% is the precise number Rob Parenteau threw our way last week, when he forecast that this GDP surprise “will mark an official end to the severe recession. One consequence is that Treasury bond buyers may be reluctant to add to their exposures, especially with the Fed’s quantitative easing for this asset category ending in a month. The housing recovery is tentative enough that a backup in mortgage rates into year-end would undoubtedly prove problematic.”

Until then, the GDP number has put the risk trade that Bill Gross spoke of back in full force. The Dow is up over 100 points as we write.

  Though the recession might have reached its technical conclusion, people are still out of work. An additional 530,000 Americans filed for jobless claims for the first time last week, the Labor Department says today.

  Sign of the times: “The credit crunch has hit rap,” rap mogul 50 Cent told The Telegraph this week. In a surprisingly susinct obeservation, 50 said, “These are times when you learn about the value of money. I buy diamonds on a very regular basis, but now I am selling my old stuff before I get something new.”

Heh, man’s got a plan.

  50’s hard-earned dollars might buy him a few more carats today, as the dollar index has risen from its recent lows. Just as Bill Bonner predicted in these pages, a wave of fear on Wall Street restarted the flight to U.S. paper. Thus, the dollar index rose from 75.3 at the start of the week to over 76 today. That puts the euro down 3 cents from Monday, to $1.47.

  The dollar’s sudden rise has put the hurt on commodites. Oil’s down $3 since the start of the week, now at $79 a barrel. At $1,040 an ounce, gold is well off its recent high of $1,070.

  Last today, this is what’s wrong with the world:

“I’m not going to do it anymore. I’m going to have to see the numbers before I go on air,” celebrity banking analyst Dick Bove told Dow Jones yesterday. In a shocking, earth-shattering change of heart, Bove has decided to stop doing instant earnings reaction bits on CNBC and Bloomberg. This comes after he ate crow for it last week — he said Wells Fargo earnings were “standout” on air, then in a print report later that day (after he actually read the earnings), called Wells’ numbers “pretty poor” and downgraded the stock.

What a party pooper, eh? That really ruins the game… no more of that off-the-cuff, emotionally driven reaction then zooming in on the live-to-the-nanosecond bid/ask… or overlaying his face on a WFC chart that’s moving in real-time. Now Bove’s is just going to carefully perform his job in a professional and ethical manner. BO-RING.

That’s not going to sell any commercial space, Dick.


Ian Mathias

The 5 Min. Forecast

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