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Summary
Some interesting developments emerged from last week's bond- and stock-market behavior. And from the week's key economic data, too. If coming events do cast a shadow in advance of their arrival, then it is quite possible last week saw some important shadows being cast on the landscape.
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Introduction
It seems to me that stocks are about ready to show -- in an unambiguous manner -- that we remain in a secular bear market. In the process, the equity market will confirm that "go away in May," at least in May of 2005, was not a bad idea. In addition, though, we may now have the makings of a new cyclical bear market -- in bonds, of all things and believe it or not!
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While this missive is mostly a brief stock-market update, let's quickly look at some of the other important developments that may have taken place last week. Emphasis here is on "may," since confirmations are still required with regard to most of the following:
* A major upturn in crude oil prices.
* An important low during the week in physical
gold, around the $413 level, with a close on
Friday around $422.
* Important lows (in yield) on Friday morning on
the 10-year and 30-year Treasury issues: 3.80%
and 4.15%, respectively, versus respective
late-Friday levels of 3.98% and 4.28%.
* A new multi-month high on the US dollar --
above 88, using the Dollar Index as a proxy.
However, there is some technical indication
that the dollar is entering an area of possible
trouble, and from which there could be a sizable
correction.
* A stock market that was mixed for the week,
as it entered June. However this reversed
the strong performance of the prior two weeks.
(The seven-measure tracking group was down an
average of 0.1% last week, with four of its
components down and three up.)
* Two unexpectedly weak results for May from the
Institute for Supply Management for its indexes
measuring the economy's manufacturing and
service sectors.
* A disappointing payroll employment number for
May from the Labor Department, dashing a good
deal of the enthusiasm generated by April's
relatively strong number.
(NOTE: The Gillespie Research Website contains an analysis of last Friday's employment and ISM service-sector data. It can be reached at: "A Closer Look at Last Week's Employment and ISM Service-Sector Data.
Also on the economy, I point to the recent work and forecast of friend and associate, John Williams. In his May 11th edition of "Shadow Government Statistics," John wrote:
"The Shadow Government Statistics' Early Warning System (SGS-EWS) has been activated, signaling the onset of a formal recession in the later part of the current quarter or early part of third-quarter 2005. Sporadic, negative GDP growth likely will not surface in government reporting until later in 2005 or 2006, and the National Bureau of Economic Research will likely time the downturn to mid-2005 and announce same sometime in early-to-mid 2006."
More on the above in the "Concluding Comments" section of this missive.
The Stock Market
There are some major equity-market themes that have been and remain in play. A reaffirmation:
(1) I remain steadfastly in the "secular bear" camp. The highs put in during the first quarter of 2000 are likely to hold for a long time to come. Years, yet, is a strong possibility.
(2) Secular bear markets will contain some very powerful cyclical rallies. A wonderful example is the cyclical bull commencing off the market's complex bottom created during the July-October 2002 period.
(3) Nevertheless, that cyclical bull episode is more than likely over. It probably ended with a complex topping pattern that concluded during early March. If so, a final confirmation could be imminent.
(4) Which is a nice segue into another theme developing over the last several weeks, to wit: My growing feeling that "go away in May" would be a highly sensible idea this year. I have a hunch that, on balance, the summer of 2005 is going to get pretty ugly.
(5) Ugly enough to fulfill a forecast of several months ago that during 2005, the bellwether measures would experience double-digit declines from their respective 12/31/04 closing prices.
Market Levels of Interest/Importance
* As of last Friday (6/3), my seven-measure tracking group showed an average year-to-date decline of 2.8% (median decline of 3.0%).
* All seven proxies were in the red for the year, with losses running in a range of 1.1% for the NYSE Composite and the Wilshire 5000, to 4.8% for the Russell 2000.
* As of last Friday, the DJIA, the S&P 500 and the NASDAQ 100 stood 10.8%, 21.7% and 67.2%, respectively, below their 2000 closing highs.
* An overall 10% decline sometime this year from 12/31/04 closing levels sounds reasonably formidable -- particularly so, considering where many of the important market proxies stood last week. On the other hand, were June and July of 2005 to behave at all like the same months of 2002, the 10% bogey is eminently doable.
As of last Friday's closes, here is how the minus 10% math worked out. As the table below indicates, it would have required an average 7.4% decline from last week's closing levels to do the trick. On an individual basis, the necessary declines ran in a range of 5.5% for the Russell 2000, to 9.0% for the NYSE Composite and the Wilshire 5000.
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SELECTED STOCK-MARKET MEASURES -- DECLINES REQUIRED
FROM RESPECTIVE CLOSES ON 05/27/05 TO PRODUCE
10% DECLINES FROM RESPECTIVE CLOSES ON 12/31/04
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12/31/04 2005
Close Minus 10%
06/03 12/31 Minus 10% Close
2005 2004 ------------- Versus
Measure Close Close Points Price 05/27
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Russell 2000 620 652 66 586 -5.5%
NASDAQ 100 1544 1621 163 1458 -5.6%
Value Line (G) 389 404 41 363 -6.7%
DJIA 10461 10783 1079 9704 -7.2%
S&P 500 1196 1212 122 1090 -8.9%
NYSE Composite 7169 7250 725 6525 -9.0%
Wilshire 5000 11844 11971 1198 10773 -9.0%
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Average -7.4%
Median -7.2%
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Concluding Comments
We believe in a number of important principles, but the following two are among the more critical:
(1) Ultimately, financial-market prices do trend towards their underlying fundamentals.
(2) Coming events do cast a shadow in advance of their arrival, although that shadow if often very faint and difficult to detect.
We have been and remain concerned about the performance of the US economy, particularly as this year progresses. If we are correct, this could treat stock prices harshly as the phenomenon becomes better recognized. In fact, the process already be underway, since few beginning-year forecasts envisioned a negative stock market through this year's first five months.
Here are some additional comments from John Williams' May newsletter. Remember, these views were authored before the latest round of disappointing numbers:
"Irrespective of how one views the quality of government statistics, inflation-adjusted money supply growth has fallen to a level that always has been followed by an official recession -- always! A number of other key economic indicators also rapidly are nearing, are at or have moved beyond their fail-safe points. Once beyond their fail-safe points, these indicators have not sent out false alarms, either for an economic boom or bust.
"...The softening that has been seen recently in most economic data will accelerate sharply, with monthly contractions beginning for payroll employment and industrial production in the next several months. Significant deterioration also will be seen in federal tax receipts (a widening budget deficit) and corporate profits. This outlook is predicated on economic activity that already has taken place. Not considered, so far, are any risks from exogenous factors, such as renewed terrorist activity in the United States.
"...At the root of current difficulties, a consumer starved of income growth and overburdened with debt cannot sustain the real (inflation-adjusted) growth in consumption needed to keep GDP growth in positive territory. The income weakness is a direct result of the loss of a significant manufacturing base to offshore locations and the ensuing explosive, perpetual growth of the U.S. trade deficit.
"...Market perceptions will be slow to adjust to the renewed downturn in business activity. When expectations finally begin to anticipate weak data, expectations will be lowered for inflation. As a result, consensus forecasts generally will tend to continue to be surprised on the downside for economic reports, and on the upside for inflation reports, for some time to come. ..."
Sometime over the next few weeks, John Williams and I will be communicating some rather important developments relating to our joint research activities. If you would like to be apprised directly of this information when we release it, please use the "Contact Us" link of John's website to provide us with at least your e-mail address. If you are willing to leave a name behind, this would be quite helpful, too. Or if you wish, you may e-mail me the information at: drgillespiesr@aol.com.
In addition, John will be publishing a special paper on the federal budget deficit. This work will not be for the faint of heart. However, it is still better to know the truth about this exceptionally disquieting area of the country's financial affairs. A complimentary copy will automatically be sent to everyone leaving behind an e-mail address. Again, simply use the "Contact Us" link of John's website, or e-mail it to me at: drgillespiesr@aol.com.
In preparation for the budget deficit paper, readers might wish to read some primer work John did on the subject last summer. The following link will take you directly to the article on John's website: "Federal Deficit Reality".
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