I
watched Lakshman Achuthan of the Economic Cycle Research Institute on CNBC on
Friday. As I reported here last week,
and as quoted by John Hussman today, Mr. Achuthan said: "This is a done
deal. We are going into a recession. We've been very objective about getting to
this point, but last week we announced to our clients that we're slipping into
a recession. This is the first time I'm saying it publicly. A broad range -
this is not based on any one indicator - this is based on dozens of indicators
for the United States - there is a contagion among those forward looking
indicators that we only
see at the onset of a business cycle recession.”
As
you know, I am prone to quote John Hussman, PhD, of Hussman funds on this web
site. Mr. Hussman feels that the ECRI is
the most credible of the organizations analyzing the economy.
John
Hussman’s view on the cause of this double-dip:
“We are headed toward a new recession because our policy makers never
addressed the underlying problem in the first place, which was, and remains,
the need for debt restructuring...Think of restructuring this way. U.S. stocks
just lost $2.5 trillion last quarter. Why should the public bail out the
bondholders of financial institutions when the assets of these companies are
far beyond what is needed to cover their liabilities to depositors and
customers?”
He
continues with a typically thoughtful and analytical analysis of why the
Government should let banks fail, rather than bail them out, with his thesis
that there is no “too-big-to-fail.”
Since it is only the investors in the banks who lose money, why
sacrifice taxpayer funds to rescue those who made poor investments? For the full article, see John Hussman, PhD,
“Weekly Market Comment” at www.hussmanfunds.com (used
with permission)
Regarding
coming recession, remember: The average
drop from the top in a bear market is 39%.
That would put us at around 820 on the S&P 500 as a guess of the
bottom of this cycle if we enter recession, as I am afraid we will.
There
was some good news today, the Institute for Supply Management's manufacturing
index went up to a reading of 51.6 in September from last month’s level of
50.6. (A value above 50 indicates
expansion.)
The
market didn’t believe the good news, however, and the S&P 500 lost 2.9%. In the process, the S&P broke the 1119
prior low on high volume and dropped to a new closing low of 1099 so we failed
the test of the prior low. We’ll need to
test the new low on low volume before we can issue a buy on volume
analysis.
Today,
we had another statistically significant down day for the 2nd day in
a row.
Tomorrow
could be interesting - UP based on the 2-big down days in a row, (breadth is
near some important lows too) or another panic DOWN. We’ll see…
The
Navigate the Stock Market computer model was SELL again and is showing more deterioration
in most of the indicators. VIX, Volume,
Price action are all headed in the wrong direction.
I sold on the 27 July sell signal at S&P 500 1301 and I am
defensively positioned with only a small amount of my portfolio invested in
stocks. (Zero stocks in the 401k.) (See the page “How to
Use the NTSM System” – the link is on the right side of this page).
