4 Clues That a Stock Market Collapse Is Coming (+2K Views)

You might be well advised to keep your powder dry and your portfolio small – or even be tempted to sell everything and wait for the storm to blow over [given the 4 clues put forth in this article].

So says Chris Mayer (dailyreckoning.com) in edited excerpts from his original article* entitled Near the Debt Ceiling, No One Can Hear You Scream.

The following is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here). The excerpts may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.

Mayer goes on to say in further edited (and perhaps paraphrased in some cases) excerpts:

There are 4 clues that tells us there is a stock market collapse coming:

1. Looming Debt Ceiling Drama

Jacob Lew, the Treasury secretary, just whispered that the next market crash begins no later than mid-October.  Of course he didn’t say those exact words but he did report that the Treasury’s “extraordinary measures” to avoid hitting the debt ceiling will be “exhausted in the middle of October” and you no doubt remember that the 2011 debt ceiling talks and the drama around a government shutdown led Standard & Poor’s to downgrade the U.S.’ credit rating for the first time ever. The market fell more than 15% while all of this was going on from April to August and we’re looking at something like that all over again as the government’s debt presses up against that ceiling.

Even though Lew’s whispering those words now, soon he’ll begin screaming about it. The budget deficit crisis will likely soon be front-page news…as the brinkmanship over the debt ceiling ramps up again. I think we’re in for a rough couple of months.

2. Huge and Unsustainable Amount of “Stimulus” Buying

As John Williams at ShadowStats points out, the Federal Reserve has bought 110% of the net issuance of U.S. Treasury this year meaning that the Federal Reserve Bank has bought every new dollar of debt issued and then some. As Williams says, this is “a pace suggestive of a Treasury that is unable to borrow otherwise.”

By mid-October, the Federal Reserve’s purchases should be approaching 140%, by Williams calculations. This is clearly absurd and can’t go on forever. (If for no other reason than the Fed will eventually own the entire federal debt market. As it stands now, it owns about a third of it!) When it ends, interest rates will likely rise. That could also bring the easy-money party to a close.

Ironically, right before Labor Day weekend, the government issued its revised GDP numbers claiming that the economy grew at an annual rate of 2.5% for the second quarter which was a 47% boost from the initial government estimate of 1.7%. Officially, the government is telling us that the economy has now completely recovered from the 2008 crisis – that economic activity is now higher than it was at the 2007 peak.

What’s most interesting is the contrasting picture of a glowing GDP report with everything else. As Williams points out, “No other major economic series has shown a parallel pattern of full economic recovery. Either the GDP reporting is wrong, or all other major economic series are wrong.”

3. An Economy Far Weaker Than Gov’t Reporting

There is a lot of nonsense in economic reporting, and GDP is the worst of all. (Williams himself admits that GDP “remains the most worthless and most heavily politicized” of the government series) but when you look at something that’s harder to fudge – median household income – you don’t see any recovery, and these are the government’s official numbers. The point is there has been no full recovery as can be clearly seen the chart below.

4. Slowing Profit Growth and a Rising Market

The bigger concern is that the market doesn’t have any of this priced in at all…

• The stock market has pushed higher this year — putting in a new all-time high on Aug. 2 — even though earnings growth has clearly slowed.
• Earnings growth for the S&P 500, a broad proxy for the market, was up just 2% for the second quarter which was all due to the financials (banks, insurers). If you take them out, earnings actually fell 3%. Analysts have been adjusting their estimates. Earnings growth for the third quarter is now just 3.7%, versus 6.5% at the start of the quarter — a 43% correction!

Slowing profit growth and rising market mean valuations have climbed. Bloomberg reports that “Valuations last climbed this fast in the final year of the 1990s technology bubble, just before the index began a 49% tumble.” I don’t think we have that big of a decline ahead of us, simply because we’re starting at a much lower valuation. In 1999, the market went for 30 times earnings. Today, it goes 18 times earnings. That’s still a high number, reflective of too much optimism about future growth.

Most still see earnings and the economy growing briskly in the back half of the year. Barron’s recently polled 10 of the most influential Wall Street seers. They project 8% earnings growth in the second half! When it becomes obvious that is a fairy tale, the market is going to be in for a shock.

Conclusion

Keep your powder dry and your portfolio small. After reading the above, you might be tempted to sell everything and wait for the storm to blow over.

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

*http://dailyreckoning.com/near-the-debt-ceiling-no-one-can-hear-you-scream/ (© 2013 Agora Financial, LLC. All Rights Reserved.)

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