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Wrong Again, As Expected
by Mark M. Rostenko
Editor, The Sovereign Strategist
August 9, 2004

Stocks hit the skids last week as all the major indices plunged to new multi-month lows and confirmed major tops. The rally in the Dollar Index gave up once again at the long-term downtrend line and turned sharply lower last Friday while gold surged higher to test the $400 level. And crude oil continued to climb to new lifetime highs.

I should have known something big was coming, judging from the veritable cornucopia of uninspired “you’re wrong wrong wrong” hate mail received last week. In the future I request that hate mailers be more specific in their criticism. Please check off one of the following:

A) “You are wrong about the stock market topping out.”
B) “You are wrong about there being no lasting recovery.”
C) “You are wrong about crude oil prices going still higher.”
D) All of the above.

Last week we got further evidence that a) the stock market has topped out, b) there is no lasting recovery and c) crude oil prices are going higher. In other words, d) all of the above.

That the stock market has topped out should be obvious, but let’s go over the details. The S&P 500 plunged to a new 8-month low, completing a major topping formation bounded on the bottom by the May 1076 low. Actually, that May low confirmed a major top, but the subsequent reversal and rally threw the whole thing into question, suggesting a false breakdown. However, last Friday’s plunge confirms its status as “the real deal.”

The ease with which the market sliced through support was indeed surprising, but I don’t expect that the powers that be will let it go without a fight. Lower volume, summer doldrums trade should make the business of spooking shorts relatively easy for the friendly folks at the Fed. But if their efforts fail and the market continues to plunge, look out below because a test of the bear market low is likely in the cards.

In fact, I believe that a test of that low (769 on the S&P 500) is inevitable in time and most likely this top is the beginning of the road to that test. Will the bear market resume? Will the test fail? Undecided on that one, I must admit. While I’d bet my best boots that a bull market isn’t forthcoming any time soon, whether the market posts new lows or simply spends years trading in a range remains to be seen. 

That’s what happened the last time we saw similar economic conditions of rising inflation, low job growth, a falling dollar, rising commodity prices, an oil shock and a printing press-happy Fed. It was the 1970s and stocks spent the decade doing not much of anything overall, although the year-to-year action was undoubtedly thrilling for those anticipating something big.

The market’s breakdown was triggered in part by the aforementioned further evidence of the absence of a lasting recovery. Last Friday’s reported 32,000 June jobs gain shocked, surprised and horrified the mainstream “experts” and the financial media. The “experts” had been calling for a 228,000 gain. Ladies: Time for an upgrade to Statistical Model 2.0, perhaps?

Actually the most surprising thing is that the Ministry of Fudged Labor Data let loose such a small number on the markets. One has to wonder what the REAL number was, stripped of all the statistical massagery. How many jobs did America LOSE last month? If the best the statistamagicians could conjure up was a measly 32,000, the potion must truly have been lacking ingredients.

Regardless, Minister of Financial Propaganda John Snow stated that “the economy continues to move in the right direction.” Let’s take a look at the “direction” shall we? 208,000 jobs in May. 78,000 jobs in June. 32,000 jobs in July. Admittedly, I have repeatedly been overlooked for the Nobel Prize in Grade School Mathematics, but I’m pretty sure the “direction” here is downward. And that’s not really “right.”

Snow went on to defend the fervent pace of the unrecovery by citing the gain of 10,000 manufacturing jobs. That puts us 0.5% closer to the number of jobs we should have at this point in the so-called recovery and almost, just almost puts a dent in the number of manufacturing jobs that have been lost in the past three years.

But it’s all good news. Always. Just like the “transitory” increase in crude oil prices which resulted in yet another lifetime high last week. We’re up to almost $45 per barrel now in the face of a rapidly softening economy. I’ve repeatedly mentioned that surging crude oil prices have consistently forecasted recessions and from the looks of it, this time will be no exception.

Actually, it is good news. At least for the Fed. I’ve gone on official TSS record stating that, despite all their jawboning about measured this and that, the last thing the Fed wants to do is raise rates. (Hence the incessant play-down of the obvious inflation issue.)

They don’t believe their own hype about recovery and the trivial increase we’ve seen thus far was merely a psychological ruse designed to make the recovery story appear legit. We can’t afford a significant rate increase; the credit and housing bubbles depend on it. Our economy is addicted to low rates.

Last week’s data gives the Fed some room to increase rates at a “super duper measured rate.” As in, not raise them at all. Ten-year note yields plunged last Friday in anticipation of just such a thing, closing at a 4-month low of 4.22%. A little more economic weakness and maybe the refi bubble can be blown up once again, showering Americans with billions in debt masquerading as increased wealth. I assure you that if the Fed can’t heat up the economy (and they obviously can’t), they’ll settle for the next “best” thing which is keeping the credit and housing bubbles inflated. Is there any other choice?

I’ve said it before and I’ll say it again: there is no sustainable recovery in the works and the Fed is NOT going to raise rates to any appreciable degree unless and until the market forces their hand. What does that mean for the stock market? Once the weak data is digested and folks get used to higher oil, the market will once again contend with the fact that interest rates are exceptionally low. No real investment competition for stocks might just be enough to prevent new bear market lows. But a new bull in the works? Probably not for a long time. 

© 2004 Mark M. Rostenko
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