Spooky Markets: October's 10% Gains May Lead to November Pains

There's still plenty to worry about.

Despite one of the best months ever for stock market bulls, these stimulus-driven rallies do not tend to have a lot of staying power and now that the Fed has once again not raised rates (and neither has the BOJ this morning) - where is the next catalyst going to be coming from?  What is going to drive us over the Summer highs of 2,132 on the S&P, 18,137 on the Dow, 5,232 on the Nasdaq, 11,032 on the NYSE and 1,296 on the Russell?  

Considering the Russell 2,000 is actually DOWN 35 points for the year at 1,165 and still 10% off it's June highs - one has to wonder what the Hell is wrong with America's small-cap index or, perhaps more correctly, what the Hell is wrong with the Dow, Nasdaq and S&P?  As you can see on this chart, the Russell stocks have not benefited from the massive QE boost the way the Big Boys in the Big Indexes have - and neither has the broad-based NYSE, which is 6.7% off its May high and down 2.7% for the year.  

In truth, in much the same way as the 0.01% are making Billions while the bottom 99% are struggling to make ends meet - the Top 1% of our Corporate Citizens are becoming astoundingly wealthy - getting ever-larger slices of the pie while the bottom 9 out of 10 of our Business brothers struggle to survive.  If the US GDP is growing 1.5% and AAPL, MSFT and GOOG grow 20% - where does the other 18.5% come from?  

There is a myth of an ever-expanding pie which is used by Conservative pundits to make excuses for people who have half the pie already to take another big, fat slice but the pie is not growing folks - not that fast anyway and, when they take themselves a bigger slice, that simply leaves less for you.  Well, maybe not YOU - you are reading a stock market report in the morning, so you are a reasonably successful person - much more so than the bottom 51% of this country, who make less than $30,000 per year.  

You can find the report that the Social Security Administration just released right here.  The following are some of the numbers that really stand out:

  • 38 percent of all American workers made less than $20,000 last year.
  • 51 percent of all American workers made less than $30,000 last year.
  • 62 percent of all American workers made less than $40,000 last year.
  • 71 percent of all American workers made less than $50,000 last year.

That first number is truly staggering.  The federal poverty level for a family of five is $28,410, and yet almost 40 percent of all American workers do not even bring in $20,000 a year.  If you worked a full-time job at $10 an hour all year long with two weeks off, you would make approximately $20,000.  This should tell you something about the quality of the jobs that our economy is producing at this point.

I know that my Conservative Members don't like talking about how evil we're being by taking all the money but I don't hate the players - I hate the game and it's the game that has to change!  Much like in 1929, we are at the extremes of wealth inequality where we are destroying the foundation of our economy.  What good does it do for those of us at the top of the pile to get richer and richer if we allow the foundations to crumble which will take us all down in the end?  

Well, not all - we were just discussing which countries were best to run away with our money when America falls apart last week in our chat room.  Those of us who have $10M+ liquid will be fine as we can take our cash piles elsewhere and set up shop in another land where the middle class hasn't been fully exploited yet - though it's getting a bit harder to find unexploited workers these days thanks to Globalization.  

The very unfortunate end-game of the cut-throat brand of Capitalism that is now embraced by most of the World is that, when we run out of poor people to exploit - we have to turn on each other.  In a fairly stagnant economy, how are the rich going to get richer if the poor have nothing left to give them?  As it is we are approaching negative interest rates in the banks - meaning we actually penalize poor people for trying to save their money.  

Even at -1%, a person who starts saving $10,000 at 20 will have about $6,000 at 65.  Keep in mind the Fed considers 2% inflation mandatory so the same stuff that costs you $10,000 today that you were saving up for will cost at least $24,000 in 45 years - if the Fed does their job properly.   Just to be clear - the Fed, doing their job, are willing to keep effective rates below zero while making sure inflation is 2%, which essentially guarantees to impoverish you unless you are able to take advantage of equities, options and Futures to stay ahead of the game.  

As I said, clearly the bottom 99% have nothing left to give at this point and that will only get worse in the Future (unless, by some miracle, we do elect a "Socialist" - ie. "a person who cares about our society as a whole and not just the privileged few").  That means, in order for our beloved CEOs, in the example above, to get a 10% raise next year ($2,000/hr), they will need to cut 0.05 per hour from the wages of 40,000 workers.  5 cents doesn't sound like much and that's the trick -- isn't it?  

It's the same 5 cents they rip you off for at the gas pump or at the grocery store or on your phone or cable bill or 100 other places you see it but don't bother to complain.  But, on an hourly check, those 0.05/hr add up to $2/week or $100 a year contributed by each worker to the boss' yacht.  Nationally, it becomes a tragedy as the rich get much, much richer and the poor keep losing $100 a year and wondering where it went.  Clearly they are just lazy compared to these guys:

Now they are coming after your Social Security benefits and Health Care and after that, what will be left?  As you get older, those of you who don't get your SS checks will still need food and shelter and health care but thank goodness you kept the Government out of your business, right?  And what then for the consumer economy?  Will doubling Donald Trump's wealth offset the loss of 40,000 customers who can't afford to eat out anymore?  Who will fill the movie seats, who will buy the cars?  There's a definite lack of thinking ahead in these Conservative policy plans...

Meanwhile, as I said, we reach the end game where the rich have to turn on each other.  Already you are seeing companies cut back on dividends that are sent out to their Top 10% shareholders to maintain the cash for the Top 1% bosses.  Those negative rate returns go to the Top 1% bank owners and soon we'll see top-level management cut-backs and bonus cutbacks and 100 other ways the Top 1% will begin clawing it back from the Top 10%.

And then they turn on each other and the real fireworks begin!  

We're not there yet but just this morning, Chevron (CVX) announced they would cut 6-7,000 workers to improve on their $2Bn quarterly profits (not enough!).  Hewlett-Packard recently announced they would be laying off 30,000 employees along with A&P (GAP)'s 8,500, MSFT's 7,800, Caterpillar's (CAT) 5,000 and Haliburton's (HAL) 3,800.  Microsoft is the most notable because they knocked it out of the park with earnings and that STILL WASN'T ENOUGH to reward the workers by letting them keep their jobs.  

Note the trend-line in job cuts is heading higher - not lower and that's not going to be good for the broad economy.   We have Non-Farm Payroll reports coming next Friday and we'll see how those look but those have gotten much weaker since last year already.  This morning, we got bad news in Personal Income (+0.1% vs 0.2% expected, 0.4% in Aug) and Personal Spending (same).  Even more telling, Personal Disposable Income DROPPED 0.1% for the month, a 0.5% turn-down from August and included a 1.2% decline in non-durable goods purchases.    

Nonetheless, the Employment Cost Index rose 0.6% for the 3rd quarter as Corporations are running out of fresh workers to exploit and are having trouble finding any benefits left to cut (what benefits).  Productivity growth has slowed.  As minimum wage increases begin to phase in around the country, look for a bit of a margin squeeze in Q4 Corporate profits.  

I already put out an Alert to our Members this morning to short the Dow Futures (/YM) at 17,750 ahead of this news - you can see our Tweet right here.

It's still a very dangerous market out there - be careful! 

Have a great weekend, 

- Phil