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Where the devil lives


by GS Early

I have a friend who has a boutique money-management firm and he writes a service that I read regularly. He is about as skeptical about the markets as I am and, given the fact he’s making his living buying and selling in these markets, I find it helpful when he confirms my suspicions about the markets’ shenanigans and illusion.

There is so much good data here that I wanted to share it with you. It’s from his free service The Whaley Report, with commentary.

His take on this mysterious ‘feel-good’ economy:

… It turns out that the U.S. economy actually lost 6,000 jobs in May rather than gaining job positions. This is the first time the U.S. economy has lost jobs during the month of May since 2009.

We are only adding minimum wage jobs, which is making it difficult for the U.S. to get a decent lift on wage growth. Wage growth is how people buy cars, computers and services that help our economy grow. More jobs are absolutely good, but we need an increase in jobs and an increase in wages before we’ll see a substantial lift in the U.S. economy.

We also lost construction jobs for the first time since 2010. This is the kind of information that gets overlooked, but can sometimes be the canary in the coal mine. I have no idea if it’s a canary or not, but anything labor-related that is occurring for the first time in six years certainly has my attention.

I can hear you now saying, “Calm down, it’s all good. Both the Atlanta Fed and the New York Fed’s GDP forecasts [are for] 2.4 percent and 2.1 percent respectively. That’s an acceleration from Q1 growth of 1.1 percent.”

If you think Uncle Benny’s dart game is all over the place, you should check out the Fed’s track record for forecasting GDP. I prefer current economic data over forecasts that have no possible chance of being accurate.

Just 24 hours before the Non-Farm Payroll report came out, ADP released the private payroll data which showed the weakest annual growth rate in over three years.

We also found out last week that factory orders have declined for the 19th month in a row. This has never happened in 60 years! If you think something that hasn’t happened for six years has my attention, something that hasn’t happened 60 years has my full and undivided attention.

And the latest service-sector reports are pointing to a Q2 GDP growth rate of just 1 percent.

You don’t need a math tutor to realize that 1.0 percent is lower than 1.1 percent. Which means that U.S. growth, which was already as malnourished as a Paris runway model, is getting even weaker. But it’s not just economic reports, the markets are telling us the same thing about U.S. growth, only in real-time.

So if the economic data continues to paint an unfavorable picture, and the smart markets are confirming this picture in real time, then how is it that the S&P is within earshot of a brand-spanking-new all-time high?

It’s corporate buybacks.

During Q2, the only net buyer of U.S. equities was the U.S. corporations themselves. Hedge funds, retail investors and institutional investors were all net sellers for the second consecutive quarter. Not to mention that sovereign wealth funds have been net sellers for well over a year.

Sovereign funds from crude countries like Qatar to the United Arab Emirates and Russia have all been unloading U.S. equities since oil started to fall apart in 2014. In the last 12 months alone, China has dumped 40 percent of their U.S. equity holdings. Almost half!

Just a couple of weeks ago, post Brexit, all of the big U.S. banks announced more plans for buybacks. Morgan Stanley, Goldman, Bank of America, and JP Morgan all announced buybacks from $5 billion to $11 billion.

But there are no corporate buybacks during this earnings season. So the only recent buyer of U.S. equities is going to be sidelined for another month.

Secondly, corporate earnings have slowed for four consecutive quarters, and Q2 could be the fifth. It’s not all the energy sector’s fault either. Only half of the S&P sectors are expected to post positive earnings. The other half, including financials, are expected to be in all out contraction.

So how much longer can corporations who can’t generate positive earnings keep buying back loads of stock? I guess we’ll find out, but I wouldn’t want to bet my 401(k) on that outcome.

Remember, the event that set the 2008 financial crisis in motion was the July 2007 Bear Sterns liquidation of two funds investing primarily in the subprime sector. The dollar peaked a year before, and U.S. yields began to decline the month before. The S&P 500 reached a brand new-all time high three months after the fact in October 2007. It went on to lose 57 percent over the following 18 months. Fixed income and currency markets can sense when the storm is coming. Equities tend to stand in the rain and debate whether they should go back inside for an umbrella.

If that sounds dire, it’s because it is. This is why it’s important to maintain a strong hedge in gold and silver and unload all the stocks you can. Don’t try to guess at a top. Stocks continue to rise with no real underpinnings. Real assets like precious metals will be very popular as this illusion disappears. When the stampede for the exits starts, it will be too late.


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