Most Stocks in the US are Already in Decline

Dec 7, 2015


Paris, France

We spent a pleasant weekend back in the old country - Ireland. It rained almost the whole time. But life in the pubs was bright and cheery.

We are renovating a handsome, but derelict, old building in County Waterford. It will be our new European headquarters. The building was once the mansion residence of the Malcomsen family - a prosperous clan of cotton merchants.

Alas, the family threw its lot in with the Confederates in the US War Between the States. When the South lost, the Malcomsens found themselves with a big stack of Confederate notes...and never recovered.

Meanwhile, Mario 'whatever it takes' Draghi came back strong on Friday. After disappointing investors on Thursday with a limp and irresolute promise to juice up the world's markets, he made it clear that he would be held back neither by common sense, nor by sensible theory, nor by the experience of six generations of central bankers. Barron's:

  • Draghi dismissed speculation that dissent among the ECB's governing council (notably from the Germans) kept him from taking more forceful action. Dissent is normal at central banks, including the Fed, but he added that lack of unanimity isn't a constraint on his decisions. Neither is the size of the ECB balance sheet, which can be expanded as needed to meet its objectives. 'We have the power to act. We have the determination to act. We have the commitment to act,' the ECB president stated emphatically.

Draghi's goal is to force higher inflation levels on Europe. Why losing purchasing power is a worthy goal for a nation's money has never been fully explained. Certainly, the Malcomsen's wouldn't have thought so.

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Nor has it been demonstrated - either in practice or in PhD theses - that buying the crummy debts of the banks at above-market prices is an effective way to boost consumer prices.

But it's pretty clear, now, that when you put more money in the financial sector you're likely to jack up stock prices. So investors all over the world responded to Draghi's words like a fat trout responds to a wiggly worm.

The Dow rose 396 points on Friday.

Our guess is that the worm hides a hook. And the hook is tied, ultimately, to a real, worldwide economy. In this economy, things are made, shipped, and people who, sooner or later, must pay for them.

Neither the world economy nor the US economy shows the kind of strength that would normally justify such high expectations in the stock market.

US trade with the rest of the world is falling. The Wall Street Journal reported last month that:

  • For the first time in at least a decade, imports fell in both September and October at each of the three busiest US seaports.

Both exports and imports were down in October, with exports off 7% year on year. The drop in exports is easily traced to a stronger dollar - making US manufactured goods more expensive on global markets. But why are imports also falling? No one knows, but it suggests that the US economy is not as strong as Janet Yellen says it is.

Trade within the United States seems to be on the skids too. Inventories, compared to sales, have been building up for the last three years - a trend that shows no sign of reversing.

If you can't sell your product, there is no point in making it in the first place. Maybe that's why the Markit Flash US Manufacturing Purchasing Managers' Index for November came in at its lowest reading in more than two years.

In the US, if you buy something from out-of-state, odds are good that it will come to you on-board a heavy truck. The Cass Freight Index has been falling since June...and the angle of descent has become so steep that if it were traced by a commercial airliner there would be fire engines and ambulances rushing to the scene.

If you're not selling and not shipping, you don't need big trucks to move the merchandise. Sales of the big rigs - class five to eight tractor trailers - fell more than 40% in November.

You don't need railroads either. Union Pacific laments that its shipping volumes are down 5% so far this year.

The data is so depressing that you might think it is a miracle that stocks are not in decline too. But maybe they are.

Two weeks ago, Goldman Sacks reported that only 10 stocks were responsible for all of the S&P 500 gains in 2015. Not surprisingly, few of those companies actually make things in America and ship them to customers.

Instead, like Amazon, Google, and Facebook, they are technology companies that often don't make anything and - with the exception of Amazon - don't have anything to ship.

And Oppenheimer & Co tells us that two thirds of all the stocks on the NYSE are below their 200-day moving averages. In other words, most stocks are already in a bear market.

Pretty soon, as we've been saying long enough to lose credibility, all of them will be.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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