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Closer To the Cliff
by Mark M. Rostenko
Editor, The Sovereign Strategist
September 19, 2004

Stocks were mostly stronger last week as the S&P 500 climbed to a new 2-1/2 month high while the Dow finished somewhat weaker. The dollar continued to do not much of anything in particular and gold followed suit. Meanwhile crude oil futures rebounded to a 1-month high, easily surpassing the $45/barrel mark.

The market's rebound from the August low continues, as does the same boring, range-bound action that's been going on all year. In relative terms this latest rally has been a decent run for the S&P 500, but in overall terms we have yet to see this market do something it hasn't already done repeatedly for the past nine months.

Last week's action put the S&P 500 just under the upper boundary of its downward trending trading channel and if it's going to reverse, thereby keeping this year's trading pattern intact, this would be a fine place for it to do so. Odds are it will but even if it doesn't, I wouldn't recommend holding your breath for new "bull market" highs.

That's because the big boys aren't too thrilled about making major commitments ahead of the election. Sure, the market is at this point anticipating a Bush victory. But you never know. And the market isn't a huge fan of uncertainty. The election is less than two months away and if the market could stay mostly range-bound for the better part of 2004, it isn't likely to mind holding out a tad longer.

In fact the market is so bloody boring that the VIX, the CBOE Market Volatility Index hasn't registered figures this low since early 1996. Some folks suggest that this "extreme" low of volatility indicates the kind of complacency indicative of a forthcoming surprise a.k.a. "a major market move." But that's just another fine example of why yours truly doesn't put too much faith in indicators.

The VIX has been darn low for a full year, indicating extreme complacency and leading various pundits to forecast some kind of "surprise" for some time. But so far all that low volatility has forecast is still lower volatility and a very boring market. Apparently investors have been justified in their complacency.

Naturally something is going to happen at some point. That's pretty much the rule of life on this planet. Stuff does in fact happen. Unfortunately, trying to figure what and when can get rather tricky.

You know where I stand: the next "big thing" is down. Oh sure, there's a chance that the S&P 500 will post a new high (over 1163) before skidding lower. The market does like to fake folks out as often as it can. But there's just aren't any very compelling reasons for a sustained bull market.

The latest Green-spin says that the economy is "gaining traction." Unless the word "traction" is Fedspeak for "very little of anything", I don't get it. Despite revisions to the data that primarily pull frustrated job seekers out of the figures and thereby magically boost the numbers, we're still in the seven figures of being short the number of jobs that should have been produced at this stage of the recovery.

Aside from an occasional good month, retail sales are not very hot overall. Auto sales were atrocious this summer. If the tireless consumer is the lifeblood of the economy (and 2/3 of GDP), he may finally be running out of steam. Household debt is bumping up against $10 trillion, up quite a bit from $7 trillion in late 2000.

Perhaps Mr. Consumer is beginning to wake up to the fact that spending more and more money you don't have on more and more stuff you don't need isn't the recipe for long-term prosperity? Mr. Greenspan had better hope not because his entire "recovery" is being held together by the lynchpin of debt. Wages have been stagnant for some time but folks are spending more and more money during a time when prices are rising overall. You don't drive a sustained expansion on borrowed money, at least not a healthy one.

And how healthy is this current period of "growth"? According to Dr. Kurt Richebächer, the 2001 recession and subsequent recovery amount to the worst U.S. economic performance since World War II. Not really the stuff that raging bull markets are made of.

What do you see that's going to change that? From a cyclical perspective the U.S. economy is already past the point of peak corporate earnings. We had some strong numbers earlier in the year but the third quarter is expected to come in relatively poor. According to Reuter's Estimates, we've already gotten 583 negative pre-announcements. What's going to drive the stock market to new highs? Earnings are past their peak and so is the stock market.

It'll take quite the miracle to launch a bona fide bull and sustained recovery while the government and the consumer tack on record debts. We continue to bleed money on Iraq and oil prices continue to bleed us all. All that talk about how oil prices were too high and how OPEC will pump more oil? Somewhat ought to tell the price of oil because despite a normal, technical correction, it sure as pie ain't in a downtrend. Sorry folks but you just don't get big economic booms when fuel costs dance around at lifetime highs.

In the meantime, there's no telling how long this low-volatility going-nowhere-in-particular market can continue. Rest assured the lack of action is fully backed and supported by the powers that be, particularly those at the Fed. Creating real growth out of nothing is bloody hard and apparently even Uncle Al has his limits in that area. But as long as nothing bad happens everyone is happy, a bit like Wily E. Coyote off the cliff, suspended briefly in mid-air, going neither forward nor backwards, oblivious to the fact that his course will soon change to downward...

© 2004 Mark M. Rostenko
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