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Everybody Out of the Pool

Posted by Larry Doyle on August 17, 2009 2:39 PM |

Were economists and market analysts realistic in thinking July retail sales were truly going to increase by .8%? The actual report came in last Thursday at -.1% and without the benefit of the promotions within the automotive space, the report would have generated an amazingly weak -.6% reading. Missing a piece of economic data of this importance by that magnitude is not only embarrassing, but also a statement on the current and future economic landscape.

Against the backdrop of this report, the equity markets have sold off approximately 3-4% over the course of the last few trading sessions. When working on a trading desk, we would often say on big down days in either the stock or bond markets, “everybody out of the pool.”

While the markets are down over the last few days, please do not forget the market has had close to a 15% run since early July. Based on what? Surprisingly strong earnings. Really? The earnings have been much more a function of expense reduction than increased sales. With the American consumer clearly ‘in the pain chamber’ in terms of economic outlook, sales will continue to lag. If sales lag, how can companies truly generate meaningful earnings? Smoke and mirrors only work for so long.

Within specific market segments, the one sector that has outpaced almost every other is the high yield space within the bond market. An ETF which I reference for market performance is COY. Prior to the recent selloff, this specific fund had risen almost 50% on the year. It has given back approximately 6-7% over the last few days.

Additionally, the bloom seems to be off the commodity index which is off approximately 5% over the last few days.

Add it all up and risks are very high with fundamental values seriously lacking. I believe investors should be very careful allocating money to the market at this level.

Perhaps I should also say, this entire period is an “Adult Swim Only.”


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