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John Hussman: All of the Above

July 01, 2013
GuruFocus

GuruFocus

370 followers
Here's the situation. Even if the Fed reduces the pace of quantitative easing, there is virtually no chance that short-term interest rates will be raised in the foreseeable future. As I observed last week, "Investors who believe that 'QE makes stocks go up' – with no other condition required – just got a handwritten, perfumed note from Bernanke to keep buying. The fact that we are instead seeing broad internal deterioration here is of some concern, because it smacks of something more afoot. It might be the increasing credit strains in China. It may be growing expectations for disappointing earnings preannouncements. It may be economic weakness that finally catches up to the general (though not uniform) deterioration that we’ve seen across leading measures of economic activity. My own litany of concerns is well-known (see Closing Arguments – Nothing Further, Your Honor). But whatever the reason, investors appear to be shifting from risk-seeking to risk-aversion."

Market internals remain broken here. That may change, and it might even change soon. Until it does, we would be inclined to tread carefully, because this may be the highest level investors will see on the S&P 500 for quite some time. Choosing between potential catalysts - credit strains in China, the risk of disappointing earnings, or economic weakness, the incoming data is consistent with one conclusion: all of the above.

On the economic front, I noted last month that broad coincident and leading measures of economic activity continue to slump (employment is decidedly a lagging economic indicator), with the main bright spot being a jump in the Chicago Purchasing Managers Index that diverged significantly from other measures. As I noted at the time (see Following The Fed to 50% Flops), “When we plot ‘outliers’ (where the Chicago PMI deviates from the average of the other surveys), against subsequent changes in the Chicago PMI, what results is a clearly downward-sloping scatter, meaning that positive outliers, as we presently observe, are typically corrected by subsequent disappointments in the Chicago PMI. Conversely, however, outliers in the Chicago PMI are typically not related to subsequent positive surprises in the other indices.”

On Friday, the June Chicago PMI was reported. Reversing the May surge from 49.0 to 58.7, the index dropped back to 51.6. This was the largest monthly drop in four years. Both production and new orders declined, and order backlogs slipped into the deepest contraction since September 2009.

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