It is easy to point out that Europe is burning and that Asia is slowing and putting on the brakes harder than a cab driver in Chicago. The ISM data in the United States showed we are not yet in a manufacturing recession. Last week’s jobless claims came in unexpectedly less bad than expected. GDP is still expected to remain marginally up for Q3, but “marginally” should read “by the hair of the chinny-chin chin.”
The downside calls from equity strategists are getting worse and worse, now with one guy calling for as low as 700 on the S&P 500 Index. That would be brutal and it is painful to imagine what that would put the economy in… Maybe as a pure guess: -3% GDP, 11.5% unemployment, even wider budget deficits.
The VIX is so high and back above 45.0 that we cannot wonder if a severely oversold technical bounce is close in the equity markets. The trick is trying to predict a catalyst as the markets are hostage to Europe and Asia and the situation is worsening and is also lacking any obvious catalysts.
Bonds are back at the lowest yields again, with the 30-year Treasury at 2.76% and the 10-year Treasury at 1.78%. The 2012 U.S. election is now just a year or so away and it seems more and more likely that a regime change is headed our way each month that passes if you look at the economic situation. We certainly expect Ben Bernanke and Fed governors to continue lowering their growth targets for the rest of 2011 and likely into 2012.
There is some good news and some bad news. With the VIX so high and with every single market participant calling for a weaker market, this is an environment that is a contrarian’s most pleasurable dream scenario that there can be. The problem is that it is hard to find any bullish catalysts. Europe is in total denial. Much of Southeast Asia may have reached close to its capacity for a while. Africa and the Middle East are now not even concerns at all for the West. We are still waiting for some sort of flush-out event.
We would like to leave one last closing statement here. As you can see, there is almost no good news included here that is worth much for the bulls. The banks and techs are getting sold wholesale and the regulatory and political environment gets less and less business friendly by the day. The only cover is in the truly defensive stocks and those stocks that offer predictable earnings. If the world does not get dragged back into a system wide recession, then this market carnage may in many cases be a gift. Some will say that the opportunities are almost as great as they were in February and March of 2009. Stay tuned.
Here were Monday’s closing levels:
- DJIA: 10,655.30 (-258.08; -2.36%)
- NASDAQ: 2,335.83 (-79.57; -3.29%)
- S&P500: 1,099.23 (-32.19; -2.85%)
- FTSE100: 5,075.50 (-52.98; -1.03%)
- DAX: 5,376.70 (-125.32; -2.28%)
- CAC40: 2,926.83 (-55.13; -1.85%)
JON C. OGG
Stocks below from Stockcharts.com in iShares MSCI Brazil Index (NYSE: EWZ), Market Vectors Russia ETF (NYSE: RSX), WisdomTree India Earnings (NYSE: EPI), and in iShares FTSE China 25 Index Fund (NYSE: FXI):