Wipeout Indicators

Posted On Aug 24, 2016 By Dave Gonigam

  • What happened a year ago today doesn’t matter…
  • … but what happened one day in May eight years ago could wipe you out
  • Stockman returns with more alarming indicators, and a chart you can’t afford to miss
  • The cellphone-cancer link: Opportunity emerges as consumers won’t wait for science
  • Central bankers venture into social media, hilarity ensues
  • Another frontline report from the War on Cash, where we really stand on income taxes, rock ‘n’ roll wisdom from the grave… and more!

As if to illustrate the difference between what’s urgent and what’s important… it was one year ago today the Dow industrials tumbled 1,000 points on the open.

Bet you didn’t even remember.

It was urgent at the time. But not important. By day’s end, the Dow recovered some of those losses to close at 15,871. This morning as we check our screens, it’s at 18,523.

No, Aug. 24, 2015, isn’t the date that’s on our mind this morning. As our David Stockman puts the final touches on a free live event for Agora Financial readers tomorrow night, he’s drawing our attention to a date in the more distant past…

“As is typical of a mania,” says David “the revelers do not see their precarious position until after the bubble bursts.”

As David pointed out here last week, the broad U.S. stock market currently trades at a price-earnings ratio of 25.1 — way high by historical standards.

With that in mind, he invokes the date May 16, 2008.

“That was the last time P/E ratios on an honest GAAP (generally accepted accounting principles) basis were near current nosebleed levels,” he says. “It was also a time when the U.S. economy was already in its sixth month of recession. But no one had bothered to tell the Eccles Building or the Wall Street punters.

“In fact, at the time, the White House Council of Economic Advisers said there was absolutely no recession in sight. Likewise, Bernanke had proclaimed that the subprime problem was ‘contained’ and was preaching mainly blue skies ahead.”

But on that day, as the S&P 500 touched the 1,430 level, the market was trading at nearly 24 times earnings — a peak for the post-dot-com market cycle.

It was all downhill from there. By March 2009, S&P 500 earnings had collapsed 90%. The S&P itself fared much better, down “only” 53%.

The situation now is even more precarious — and not only because the S&P’s earnings multiple is even higher now than in May 2008.

Here David is taking us deep into the accounting weeds. But we promise it’s worth the trip. There are GAAP earnings based on generally accepted accounting principles. Those are the numbers companies report to the feds. They try to make those numbers as accurate as possible, the better to avoid fines and jail time.

But then there’s something called “operating earnings,” or, if you want to use the terms the pros use, earnings “ex-items.” These are the numbers companies tout to their investors. They tend to look better than GAAP earnings.

Recently, The Wall Street Journal examined the difference between the two for major U.S. companies during calendar year 2015. Earnings ex-items rang in at $1.04 trillion. GAAP earnings totaled only $757 billion.

That’s a quarter-billion gap — identical to the size of the gap that preceded the Panic of 2008.

“It seems as if companies actually need a periodic recession,” David quips, “so that they can toss into the kitchen sink the write-offs for all the dumb deals and investment mistakes they made while the bubble was still inflating.”

Already, the weaker numbers from Corporate America are showing up in lower tax revenues for Uncle Sam.

Yesterday, the Congressional Budget Office issued a new estimate of the fiscal 2016 federal budget deficit — $549 billion, up from an estimate earlier this year of $500 billion.

The big factor in the increase (aside from growing federal spending, of course): a 13% drop in corporate income tax payments.

One more recessionary indicator, just in case David hasn’t yet convinced you.

As he explained last week, total business sales are one of the most telling economic numbers you can look at… and they peaked two years ago.

Now let’s compare sales with inventories. When inventories are rising, it can mean businesses are having trouble moving product. If inventories are rising as sales are falling, that’s a very bad sign, indeed…

Danger Ahead: Total business inventory-to-sales ratio, seasonally adjusted

A spike like you see on the chart “is what always happens on the eve of a business cycle downturn,” says David. “The inventory-sales ratio spikes, triggering a period of liquidation and reduced output and employment.

“That’s a recession. And it doesn’t take too much chart gazing to see that we are close to the 2001 and 2008 triggering points.”

All that is bad enough… but the uncertainty of a presidential election makes matters even worse.

The Panic of 2008 occurred amid the backdrop of a presidential election in which the incumbent was a lame duck. And it’s only the passage of eight years that makes Barack Obama’s victory over John McCain feel inevitable.

It was anything but at the time; only after the collapse of Lehman Bros. on Sept. 15 did Obama pull into a consistent and convincing lead in the polls. Something to bear in mind the next time someone tells you a Hillary Clinton victory this year is a sure thing.

But we don’t much care about the horse-race aspect of the campaign; it’s the potential for a market shock amid the horse race.

During every presidential election cycle of David’s long career in Washington and on Wall Street, he’s observed how a select group of insiders has applied a technique to bag triple-digit gains in a matter of weeks. It’s worked every four years going back to at least 1976, when at age 29 he ran for the U.S. House (and won).

Tomorrow night at 7:00 p.m. EDT, he reveals this technique to retail investors for the first time during a live online briefing. You can watch it at no cost and no obligation. If you’re busy tomorrow night, we’ll have a replay available that you can watch later. Just drop us your email address at this link and we’ll guarantee you access.

As the morning wears on, the Dow is little moved, down less than a quarter percent, at 18,509. The other major indexes are likewise in the red by a skootch. Not much movement in bonds, either; the 10-year Treasury yield clocks in at 1.56%.

But gold has sold off to a four-week low; at last check, the bid is down three-quarters of a percent at $1,326. Dollar strength accounts for some of that, but not all — the dollar index has firmed to 94.9.

Crude is tumbling after the latest inventory figures from the Energy Department; a barrel of West Texas Intermediate is down 2.5% as we write, back below $47.

The lone economic number of the day is existing home sales — which came in way below expectations, down 3.2% in July. Quite the contrast to yesterday’s new home sales figure, which surprised to the upside.

Year over year, existing home sales are now down 1.6%.

“We’re on the cusp of a ‘clean phone’ trend,” says our Gerald Celente — always on the lookout for transformative technology opportunities.

“Emerging research suggests cellphone use could be detrimental to your health. As the research compounds, consumers will demand clean phones.”

Gerald compares it to the way more and more consumers demand “clean foods” — a term he coined in 1993 as consumers were just starting to turn Whole Foods into the $10.6 billion company it is today.

“Scientific evidence eventually confirmed the spectrum of ill effects of processed, chemically laden foods. Large-scale food producers could no longer deny the evidence. And as I predicted, a robust, growing countertrend parallel industry was born.”

In the same way, “safer cellphone devices that are effective and marketed with a ‘clean phone’ theme and brand will corner a market with rich and growing potential,” Gerald goes on.

While such devices aren’t on the market yet, our science-and-wealth team is already spotting opportunity… because the illness most often linked to cellphone use is brain cancer.

“It’s hard to treat brain cancer,” says Ray Blanco, editor of Technology Profits Confidential. “The central nervous system maintains a barrier that prevents many types of chemical compounds from crossing over the bloodstream. We have drugs that could work, but they cannot make it into the brain.

“But what if we could train our own cells to fight off cancer? Our bodies already do this regularly. We have billions and billions of cells, and some of them mutate and begin to go bad every day. When that happens, our immune system cells swoop in and destroy them.”

Ray’s readers are already clued in to a company working on just such a treatment for brain cancer. He says it’s still a buy.

Who at the Federal Reserve thought it would be a good idea to launch a Fed Facebook page?

It launched last week, promising to “increase the accessibility and availability” of its “news and educational content.” Which in practice means another distribution channel for its lame-ass press releases.

“I’m sure it sounded like a good idea at the time,” says Michael Covel of Trend Following With Michael Covel — who tipped us off to this one.

Because who could who could possibly imagine it would get such a scathing reception, right?

Facebook Comments

Heh… Reminds us of the time in 2013 when JPMorgan Chase thought it’d be a fine idea to do an #AskJPM session on Twitter. Enjoy these responses we dug up from The 5‘s voluminous archives…

Twitter Comments

Twitter Comments

“#Badidea! Back to the drawing board,” the bank posted less than six hours later. In contrast, the Fed FB page has been up since last Thursday.

“Just recently,” a reader writes with a front-line dispatch from the War on Cash, “Newport Beach, California, changed all of their parking meters to credit cards only and did not remove the coin slot, quarters only.

“It was only after I popped in two quarters that I saw no movement — gone forever. What a pain in the ass.

“Keep up the good work.”

The 5: And a sly way to boost city coffers, if only a bit.

“Last week, you discussed the 16th Amendment and contended it’s illegal,” a reader claims.

[No, we published an email from a reader contending it’s illegal. We publish many reader emails, including yours, because it keeps things lively around here; in no way does it constitute our endorsement of what a reader says. But please, go on…]

“If that’s true, what would happen if you refused to pay based off your information? I would appreciate a response even though you probably don’t want to give it.”

The 5: Please, try to read with a little more discrimination. That’s our response.

Our own position, as long as you bring it up, is that you use every legal means to pay as little income tax as possible… but not to use cutesy legal arguments to get out of paying it altogether. Even if you’re right, the feds have more guns and power than you do. See “Schiff, Irwin (1928–2015).”

“In the category of astute rock ‘n’ roll insights,” a reader writes after yesterday’s episode, “how about Frank Zappa? ‘Government is the entertainment wing of the military-industrial complex.'”

The 5: Ah, Zappa. Hard to believe he’s been gone well over 20 years now. Another good one of his, even more relevant now than it was during his lifetime…

“The United States is a nation of laws: badly written and randomly enforced.”

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. David Stockman’s live and exclusive briefing for Agora Financial readers is less than 36 hours away.

If you want to insulate yourself against an inevitable election-season market shock… and parlay the volatility into as much as six times your money… you won’t want to miss this event.

Again, it’s tomorrow night at 7:00 p.m. EDT. You can even submit questions during the event. And if you can’t watch it live, we’ll have a replay available.

But you can’t watch if we don’t know you’re interested in watching. Send us your email address and we’ll be sure we save you a spot.


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