3 Economic Signs Show Weakness Despite Fed Action

Michelle Remo, “Big 4″ observer
September 25, 2012 /

ETF investors sold the major indexes Monday. SPDR S&P 500 ( SPY ) eased 0.15% to 145.65.

PowerShares QQQ ( QQQ ), tracking the 100 largest nonfinancial stocks on the Nasdaq, gapped down 0.59% to 69.74.

SPDR Dow Jones Industrial Average ( DIA ) fell 1.02% to 32.10.

“Markets have gotten ahead of the underlying fundamentals, and investors are not being as well-compensated for the potential risks,” Matt Freund, senior vice president of investment portfolio management at USAA Investments, wrote in a commentary Monday.

He’s underweighted stocks, while overweighting bonds and gold in his global funds.

“The markets for risk assets such as stocks have recently decoupled from underlying economic conditions,” Freund wrote. “The world economy is clearly slowing — led by Europe, which is in recession — yet risky assets such as stocks have been rising for several weeks. We view this time as an opportunity to trim risk.”
He believes a U.S. recession is possible as recent manufacturing, business and other economic indicators show the economy is growing slowly.

Troubling Economic Indicators

The stock market is going to correct 15% to 25% over the next few weeks and rebound before the election, said Stanley Crouch, chief investment officer at Aegis Capital in New York. He believes precious metals and commodities will also “correct significantly” because of poor readings in three major economic indicators: the Baltic Dry Index, rail waste carloads and the velocity of money.

A low reading in the Baltic Dry Index shows there’s weak demand for shipping raw materials by sea.

“It’s signaling that we’re still very challenged in the macro picture worldwide; companies are shipping less raw materials,” said Crouch. “It flies in the face of all of this stimulus.”

Guggenheim Shipping ( SEA ) tracks a basket of global shipping firms includingDryships ( DRYS ),Kirby (KEX) andTeekay (TK) and can be used as a proxy for the Baltic Dry Index, which gauges the price of shipping raw materials by sea.

Although SEA has appreciated nearly 11% year to date and 5% in the past year, it’s fallen 18% from its 52-week in March. It’s also trading below its 200-day moving average, which is very bearish.

The American Association of Waste Carload data indicates consumers and businesses are using less stuff, and demand for raw materials is low. It tracks the number of rail carloads of everything from trash to raw materials such as lumber, grains and metals.

Companies moved 3,933 carloads weekly on average over the past six months. That’s sharply lower than the 12,772 weekly carloads on average seen in 2007. “It’s diverging with gross domestic product and that’s a bit concerning,” said Crouch.

And finally the velocity of money, which measures how frequently money is changing hands between consumers, banks and corporations, is hovering at a historic low, said Crouch. That means everyone is hoarding money instead of spending it like the Federal Reserve intended.

The bulls on the other hand believe the market remains strong.

“Technically, the market is in good shape overall,” Kevin Marder, principal at Marder Investment Advisors in Los Angeles wrote. “Breadth and volume have both increased lately. Small-capitalization and financial titles outperform. These will usually top in advance of the averages.”

IShares MSCI EAFE Index (EFA), tracking developed foreign markets, fell 0.34% to 54.36.

IShares MSCI Emerging Markets Index (EEM) shed 0.08% to 41.74.

Fund Flows

The Federal Reserve’s quantitative easing program has finally inspired retail investors to get off the sidelines and into stocks, according to EPFR Global.

Inflow into global, emerging markets and Europe stock funds hit 52-, 32- and 19-week highs, respectively, the past week. It marked their biggest weekly combined total in over four years.


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