New declines in equities, commodities and yields are foreshadowed

Despite Friday's relief rally in both equities and some commodities, the outlook for these markets has turned decidedly bearish. At the same time, the outlook is for still lower US Treasury yields, despite the significant decline over the past month. That combination of prospects should come as no surprise to readers of this blog and to those aware of recent economic, financial and technical events. Added to these developments are ever more apparent and widespread uncertainties, including the European credit crisis, bearish views on China's growth rate, the consequences of new financial regulations and the inevitable renewed downtrend in the Euro.

While the US economy remains in recovery, even without taking the latest devlopments into consideration, the vigor of that recovery has been disappointing. It has been far from the V shape that many had hoped for. At best, that points to sluggish economic growth that will keep unemployment high for years to come, preventing any meaningful consumer led recovery and capping inflation fears.

But now new adverse developments, which had been only threats on the far horizon, have become either realities or imminent dangers. To start with, the vitality of the US recovery is faltering. Housing's rebound is fading (to be expected after the end of the homebuyer tax stimulus), the index of leading indicators has dipped, and consumer confidence has given ground. Commercial real estate is still in a slide as those who made purchases at inflated prices in recent years are having pronounced difficulty in meeting their mortgage payments amidst declining rents and rising vacancies. Bank sales of foreclosed commercial properties have met a spate of foreign buying at unsustainably high prices that will likely soon wane as it becomes clear that inflation is far from imminent. A new spurt in residential mortgage foreclosures is likely to place renewed downward pressure on home prices. Far too many homeowners are simply walking away from their mortgages when they realize that their home's market value is well under the amount they owe on their mortgage. That array of fundamentals and prospects suggest more sluggish economic growth in the second half this year and 2011. That by itself raises serious questions over the pace of demand for goods and services, business pricing power, profits and earnings performance. Unfortunately the litany of bad news is has much further run.

Much of the projected favorable performance of the US economy and US companies was dependant on US exports to a burgeoning global economy. But, that major prop under favorable US economic expectations is now in serious jeopordy. Slower economic growth in Europe is the almost certain outgrowth of the crisis of confidence in the Euro and the bailout of Greece and growing concerns over the sovereign debt and banking system of the other nations threatened by a run among the so called "PIIGS". In addition to Greece, the threatened countries that have most lived beyond their financial means include Portugal,Italy,Ireland and Spain. The near $1 trillion bailout package threatens all of Europe, putting it into an era of pronounced fiscal restaint. Even with the weaker Euro, and the prospect of a still weaker Euro to come, which tends to make European products more competitive, European trade will be significantly dampened by investor uncertainty and lending restraint.

Even further afield, there are justified and growing concerns that China's concerted efforts to slow its economic growth, and especially its housing sector, will slow not only its growth rate but that of the global economy. Already there are legitimate concerns that residential real estate prices in the major cities in China will plunge 30% to 40% or more from inflated levels. That will further depress real estate developer stock prices. The adverse impact of such developments will constrain Chinese consumer and investor confidence, spending and investment. Perhaps even more significant is an increasing willing of global investors to short specific Chinese stocks. That willingnes to short Chinese stocks stems from a strong suspicion of fraudulent earnings reports based on a wide disparity between reports of good earnings to the SEC and in some instances a lack of earnings to Chinese authorities. Keeping a double set of bookkeeping accounts, one for domestic and one for foreign consumption, is apparently a common practice in China. But its complete significance is unclear. Nevertheless, it makes confident reliance on the growth and earnings reports of suspect Chinese firms virtually impossible.

As if all of the forgoing were not a sufficient justifcation for caution, a number of advance technical indications of equity market prospects are flashing sell signals, portending far deeper declines to come. The decline in a key stock index, made up of Goldman Sachs, Morgan Stanley, Monsanto, Mosiac and Freeport McMoRan Copper and Gold, alredy points to a further 100 point decline in the S&P 500 according John Roque of WJB Capital Group, who created the leading index. Other indicators are also bearish. Crude oil prices are down sharply. Though, that in large part reflects the rise in the dollar, it is also seen as a precurser of weak demand and lower equity prices. Whenever equity prices decline by 4% or more in a single week, as it did last week, especially across the spectrum of various stock indices, it is seen as a signal to not only sell out of long positions, but to establish comparble short positions. To many this is likely to seem a further confirmation of the long standing adage to sell in May and go away and not to buy again until October.

Taken together, these strands in the economic and financial envirionment point to not only low inflation, but to at least a renewed threat of deflation, as well as persistant Federal Reserve accomodation through this year and quite likely 2011 as well. That combination, in turn, indicates a further decline in Treasury bond yields,despite their already significant retreat in recent weeks. For example, the Treasury 10-year note yield,already down to 3.24%, will again break well below 3.00%.


Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

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I can be reached at philipbraverman@Gmail.com