Experts Calling For U.S. Stock Market Correction

Gold prices closed slightly lower, but gained for the week as investors worry about the sharp losses on Wall Street. U.S. stocks suffer big weekly loss, Nasdaq now below 4,000. Gold last traded at $1,319 an ounce. Silver at $19.95 an ounce.

Merill Lynch used to be bullish. Not anymore. Bank of America/Merill Lynch is now calling for a “10% to 15% correction” in the US stock market later this year.

They may be a little tardy in their call. All major stock markets around the world are sharply lower today. In fact the Nikkei index in Tokyo saw its largest weekly fall in three years this week. Shanghai and Hong Kong were also down. The news was the same in Europe. And today, all three major US stock indices are down, egged on by a disappointing earnings report from financial services giant JPMorgan.

One famous market expert believes conditions in the stock market will get far worse before they get better. Marc Faber told CNBC yesterday that he expects a crash in the stock market worse than the one experienced in 1987, when the down fell 20%+ in one day. Faber points out that underlying earnings have not supported stock market performance for some time and will eventually precipitate a major sell-off.

Of course exogenous events could touch off such a sell-off in stocks. One possible factor that has been largely forgotten but could re-emerge is the economic crisis in Europe, which has never been truly resolved. A panel of European university economists warned yesterday that the Eurozone debt crisis persists and could re-erupt on a larger scale.

National debt for several European nations remain precarious. Italy’s debt is 130% of its annual GDP. Greece’s is 170%. These conditions are a recipe for disaster if there is an economic downturn. Economists also worry that European politicians act as if the crisis is history and they say that is far from the case. A crisis over the Ukraine, a crisis involving Iran or the impact of a slowdown in the Chinese economy could all create the conditions in which Europe could be dealt an economic catastrophe.

Meanwhile, here in the US, the second sign of rising inflation in the past week appeared. The Producer Price Index was up 0.5% during March, the fastest rate in nine months, owed largely to higher costs experienced by clothing retailers, grocers and wholesalers of chemical goods–a broad base of inflationary pressures.

What’s more, some inflationary pressure could be building in the pipeline. The price of unprocessed goods such as animal feed or sheet metal has risen by 5.8% in the past 12 months, the biggest increase since last summer. If those costs keep rising, they could eventually push up the price of wholesale goods and filter into consumer products.

This could introduce a whole new economic factor into the investment calculus.

Expectations of higher inflation could further buoy gold prices; along with a softening dollar. Banking giant HSBC’s take on the recently released Federal Reserve Open Market Committee meeting minutes was that policies over the near-term would weigh on the dollar and support higher gold prices.

Finally, Harvard University released a study this week indicating that each American worker’s personal share of our government’s national debt is a whopping $106,000. In other words, every employed American would have top pay $106,000 to pay off the national debt. If the debt was spread across every person living in the US, that figure would “only” be $52,000.

Stock Sell-Off May Not Be Over Yet

Gold prices ended slightly lower, but climbed higher after release of Fed minutes. U.S.stocks rally after Fed minutes revealed a more dovish stance than investors expected. Gold last traded at $1,305 an ounce. Silver at $19.77 an ounce.

The stock market has rebounded somewhat over the past two days but there are indications that the sell-off could resume.

Technical analyst Louise Yamada says the stock slide isn’t over just yet.

“I don’t think the pullback is already over,” Yamada, of Louise Yamada Technical Research Advisors, said on Tuesday. “I think that it’s an interim pullback, and we’ve certainly seen what we’ve expected, in the Internet and biotechs coming off. And I think that although they may bounce, there’s probably still a little bit more to go on the downside.”

The selling could spread to other sectors, such as aerospace and consumer discretionary stocks. Yamada says the weakness in stocks lines up well with broader bearish indicators, such as the fact that 2014 started with a weak January, and is a midterm election year.

Another sector that has been in the spotlight recently has been banking. US banking regulators on Tuesday ordered the eight largest “too big to fail” banks to raise capital levels in a bid to address weaknesses seen in the 2008 financial crisis.

Federal Reserve Chair Janet Yellen said the robust capital standards — the banks will need to raise a reported $68 billion in additional capital — were “essential to reduce systemic risk and mitigate the distortions imposed by institutions deemed too big to fail.”

The banks affected are Bank of America, The Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.

The move is designed to help ensure banks can remain on their feet when the funding market for banks suddenly dries up in a crisis, as happened in 2008, when governments were forced to step in and prop up financial institutions.

This is just the latest sign that there are serious concerns about the health of the banking sector and its ability to withstand an economic and financial crisis.

Let’s face it: you don’t keep ordering banks to prepare for crisis if you don’t have a concern that a crisis is on the way.

The Federal Reserve may be imposing policies on the private sector but the private sector has its own opinion of Federal Reserve policies. Wall Street in particular has been the beneficiary of the Fed’s loose money policies. Now that the Fed is tapering Quantitative Easing and making noises about eventually raising interest rates, Wall Street is protesting.

The latest Fixed Income Forum Survey from global rating agency Fitch Ratings showed that money managers desire the Federal Reserve to maintain their loose monetary policy. According to the data, 70% of the respondents said the Fed’s monetary support is either important or critical.

Rising interest rates are negative for the bond market as they depress the prices of existing bonds.

The money managers also see one major risk to the economy: the labor market. Most believe the employment situation is worse than reported in official statistics–something we’ve been pointing out for months.

There is another long-forgotten factor that may be creeping back into the economy: inflation, in the form of rising prices. Extreme weather has thinned the nation’s cattle herds, roiling the beef supply chain from rancher to restaurant. As a result, beef prices have reached all-time highs in the U.S. and aren’t expected to come down any time soon.

The retail value of “all-fresh” USDA choice-grade beef jumped to a record $5.28 a pound in February, up from $4.91 the same time a year ago. The same grade of beef cost $3.97 as recently as 2008.

Soaring beef prices are being blamed on years of drought throughout the western and southern U.S. The dry weather has driven up the price of feed such as corn and hay to record highs, forcing many ranchers to sell off their cattle. That briefly created a glut of beef cows for slaughter that has now run dry.

The nation’s cattle population has fallen to 87.7 million, the lowest since 1951, when there were 82.1 million on hand, according to the USDA.

Finally, as we have reported repeatedly over the past several months, there is a long-term trend to supplant or even replace the US dollar as the world’s reserve currency. One candidate to step up into the dollar’s place is the Chinese yuan.

Numerous reports have shown nations declaring interest in or directly discussing diversifying away from the US dollar. Standard Chartered bank notes that at least 40 central banks have invested in the yuan and several more are preparing to do so. The trend is occurring across both emerging markets and developed nation central banks. Perhaps most ominously, for the dollar, is a former-IMF manager’s warning that “The Yuan may become a de facto reserve currency before it is fully convertible.”

More Disappointing Economic Reports For U.S.

Gold prices end slightly lower on a higher U.S. dollar after ECB decision. U.S. stocks lower after four days of gains as U.S. jobless claims rise. Gold last traded at $1,284 an ounce. Silver at $19.86 an ounce.

More disappointing economic reports have been released by the US government today as key Wall Street analysts warn of a reversal in the stock market and the financial world continues to wake up to gold’s positive performance thus far in 2014.

The number of Americans filing new claims for unemployment benefits rose more than expected last week. Initial claims for state unemployment benefits increased 16,000 to a seasonally adjusted 326,000, the Labor Department said this morning. Economists polled by Reuters had forecast first-time applications for jobless benefits rising to 317,000. The claims report also showed the number of people still receiving benefits after an initial week of aid rose 22,000 to 2.84 million.

Statistics published by the New York Times also show an especially bleak job market for the medium- and long-term unemployed.

All of this data seemingly fly in the face of claims by Fed Chair Janet Yellen and other members of the Obama administration that the economy is recovering nicely.

Weakness in the US economy tends to drive investors away from dollar-denominated assets and the US stock market, making gold an excellent alternatives as gold has traditionally served as a hedge against weakness in the dollar and has historically moved independently of stocks.

More negative news for the dollar, America’s trade deficit has widened.

The U.S. trade deficit climbed to the highest level in five months in February as demand for American exports fell while imports increased slightly.

The deficit increased to $42.3 billion, which was 7.7 percent above the January imbalance of $39.3 billion, the Commerce Department reported this morning.

A higher trade deficit acts as a drag on economic growth because it means U.S. companies are making less overseas than their foreign competitors are earning in U.S. sales. A higher trade deficit also puts downward pressure on the value of the US dollar, since sending more dollars overseas increases the supply of dollars relative to foreign currencies.

Given this overall economic uncertainty and the length of time since the stock market experienced a significant correction or bear market, it’s no surprise more expert market observers are issuing warnings about the stock market.

The S&P 500 is a mere 10 points away from a 30% plunge, says Saxo Bank’s chief economist Steen Jakobsen.

He expects equities will peak at around 1,900-1,950 before that big plunge kicks in. Given the S&P 500 is hovering around 1,890, that selloff looks like it’s just around the corner. Instead, it could be a long, slow meltdown.

“We’re not looking at this correction for next month or for the next two quarters, this is for late 2014. If you’re looking at it right now, the market may have an upside of 5%, but then you’re looking at a 30% downside in the final month of 2014,” he says. And if investors only have the potential of around 5% upside from here, Jakobsen says it may be worth backing out of equities starting now.

He predicted the S&P would soon suffer from a decline in real corporate earnings, as well as a “very significant” global slowdown.

Jakobsen says equities, unlike other asset classes, haven’t had a proper correction since the first round of quantitative easing began back in 2008.

Statistically speaking, he says, markets have had a correction of 10% almost every year, and 25% to 30% every five years.

By those numbers, the US stock market is due for a fall.

Jim Paulsen of Wells Capital Management forecasts a similar fall, but perhaps more dramatic.

In 37 trading days, the ongoing bull market would be 1,311 trading days old, says Paulsen.

That is a scary date because it was on the 1,311 trading day after the start of the 1982 bull market that the Standard & Poor’s 500 suffered its biggest one-day crash in history on Oct. 19, 1987. That crash snuffed out what had been a powerful market rally starting in 1982.

Normally these kinds of things are just market oddities. But investors are taking this one seriously since there are such strong similarities with the 1982 bull market and the one the market is currently in. For instance, the current bull run has marked a 175% rally from the low, which is where the 1982 bull was at this point in its run, Paulsen says.

Investors won’t have to wait long to know if the 1987 market is a pattern. The current bull run hit its 1,274th trading day on March 31, 2014. The 1,274th trading day of the 1982 bull market was Aug. 25, 1987, which turned out to be a notable top, Paulsen says.

So, where should investors turn?

Gold would be a good place to turn and it has performed admirably thus far in 2014. Investors are starting to notice.

The Banking Sector Is Looking Unhealthy

Gold prices lower on a stronger U.S. dollar and better-than-expected economic data. U.S. stocks end lower amid concerns over the Fed raising rates sooner than anticipated. Gold last traded at $1,294 an ounce. Silver at $19.71 an ounce.

America’s largest banking conglomerate, Citigroup failed the Federal Reserve’s so-called “stress test” recently, the second time in three years Citi has done so.

The Fed cast doubt on the bank’s financial projections for its sprawling operations, rejected the bank’s plan to increase dividends and repurchase stock and expressed concerns about the “overall reliability of Citigroup’s capital planning process.”

The Fed’s criticisms echoed concerns voiced by investors and analysts after the discovery of a $400 million fraud in Citigroup’s Mexican unit last month. The fraud, involving a Mexican company, forced Citigroup to restate its earnings and raised questions about whether the bank is properly overseeing its many units.

In addition to Citigroup, the Fed rejected the capital plans of the American units of three international banks: HSBC, Santander of Spain and the Royal Bank of Scotland, which operates under the Citizen’s Bank brand in the United States.

Given similar doubts about Bank of America’s performance in the stress test recently, it is beginning to look as if the banking sector is decidedly unhealthy. This could be an early warning sign of broader problems ahead in the economy and financial markets. A strong banking sector is virtually a prerequisite to a strong economy. Trouble in banking seems to reverberate into the broader financial services industry.

The banking sector is certainly not the only source of concern these days and that is showing up in Americans’ attitudes on the economy. Americans’ views remain depressed with only the slightest improvement compared to a year ago, according to the CNBC All-America Economic Survey. More than 80 percent view the economy as just fair or poor. Just 17 percent of Americans view the economy as good or excellent.

One economic factor that may be influencing Americans’ attitudes toward the economy is inflation. Not inflation as reported by the federal government’s Department of Labor with the monthly Consumer Price Index and Producer Price Index; but real, actual price increases. And even though the CPI and PPI may indicate inflation is benign, when consumers shopping for groceries are experiencing something altogether different.

US food prices, as measured by the CRB Spot Foodstuff Index, are up 19% so far in 2014.

In reality, inflation is tied to the value of currency and the US dollar has been losing ground, due to a variety of factors. We may be on the cusp of seeing an acceleration of that process.

More and more nations are viewing US economic and financial clout as overweight given the nation’s fiscal and economic health. Many of the G20 nations–the 20 largest economies in the world–are unhappy that the US keeps flooding the world with dollars. There is speculation that, when the G20 meet next, there will be a movement to reduce the dollar’s global clout.

It’s difficult to blame other nations given the circumstances. After all, US economic growth has been downright anemic and other countries are suffering as a result. The US economy grew at a 1.9% pace in 2013, which was quite disappointing given that from 2009-2011, the White House was consistently forecasting a growth rate of over 4% for 2013.

Given the US stock market’s current bull trend has been ongoing for some 56 months–longer than most bull markets last–an anemic economy is not good news. It’s the stuff that brings bull markets to screeching halts. One analyst sees just that on the horizon.

Joe Fahmy of Zor Capital believes all indicators lead to a correction, the only question is whether it comes in the form of a crash or lengthy grinding. “The market can do one of two things,” says Fahmy, “It can correct through price or correct through time.”

Calling last year “almost too easy” for bulls, Fahmy sees parallels to 2004. “After we had a huge year in 2003 the market didn’t really go anywhere. The S&P never corrected more than 10% and it just digested those gains.”

That’s the best-case scenario. The alternative isn’t an extension of last year’s 30% rally but something more akin to 2010 when stocks went on a brutal ride including a 1,000 point “flash crash” and a 15% slide between April and the beginning of July.

Fahmy says there’s a decent chance of a correction into the summer as investors adjust their expectations. “If there is any upside volatility I think it will come in the fourth quarter.”

That’s a nice way of saying things are probably going to get worse before they start getting better.

Investors Turn To Gold!

Gold prices end slightly lower but logged a monthly gain of 6.6%. U.S. stocks higher, S&P 500 notched its 48th record close in the past year. Gold last traded at $1,321 an ounce. Silver at $21.24 an ounce.

Investors are once again flocking to the safety of gold.

Last year the price of gold fell for the first time in over a decade. In 2014, the price of gold is rallying. It is up 11% so far this year and now trading at a 4-month high.

Investors are turning to gold because they have persistent concerns about a slowdown in the U.S. economy (despite Fed denials).

Also boosting demand for gold is weak economic data from China and the new political and economic turmoil in Ukraine.

“In general whether it’s Ukraine, the U.S. economic data or worries about China, there seem to be a lot more reasons than there were six weeks ago for looking at gold,” Nomura analyst Tyler Broda told Reuters.

A surging gold price is scary to some, especially big financial institutions who have large positions in paper assets. Perhaps that is why they have been attempting to manipulate the price of gold, according to a research paper by New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investors Service.

Nevertheless, the free market always wins in the end and the free market is driven by economics. The trouble brewing in the US economy is one driving factor behind the surging price of gold. More evidence emerged today that the economy is not doing so well, despite what Fed Chair Janet Yellen may be telling Congress.

This morning, the federal government cut its figure of U.S. growth in the waning months of 2013, calling into question whether the economy is primed to accelerate in 2014 after years of a sluggish expansion.

The total value of all goods and services produced by the economy, known as gross domestic product, rose 2.4% in the 4th quarter of 2013. Initially the Department of Commerce had reported the U.S. economy grew 3.2%.

The reduced growth figure suggests the U.S. did not enter the new year with as much momentum as previously believed.

The report also casts doubt on whether the U.S. is ready to grow in 2014 at its fastest rate since the recession ended, as many private economists and the Federal Reserve believe.

It also calls into question whether we can trust government economic reports and statistics.

One legitimate activity of the federal government we depend on is common defense. But a new report from the Pentagon’s Cyber Command indicates the US military is ill-prepared to defend America against the growing threat of cyber attacks, against both public and private infrastructure.

This is of concern to investors because the financial system and exchanges are prime targets for such attacks. All the more reason to own assets that don’t only exist in cyberspace. Gold is real. It has value you can tangibly feel.

U.S. Stock Market Takes Breather From Yesterday’s Carnage

Gold prices end slightly lower on stronger U.S. dollar, equities rebound. U.S. stocks rebound after heavy sell-off. Gold last traded at $1,251 an ounce. Silver at $19.42 an ounce.

The turmoil in global stock markets persisted overnight, with bourses in China, Japan, Germany and the United Kingdom all sharply lower. For now, it appears the US market is taking a breather from the carnage, but there is still a wall of worry in the financial world.

Yesterday’s hugely disappointing US manufacturing report has served as somewhat of a wake up call, prompting renewed worries about the US economy. This is on top of the global worries about a slowdown in China and emerging market nations.

Mitul Kotecha, an analyst at Crédit Agricole articulated the concerns that trouble investors right now:

“A combination of tapering, a confluence of country-specific emerging-market country concerns and weaker growth in China provide the backdrop for a volatile few weeks if not longer, ahead.”

The Nikkei, Japanese stock market, is now down 14% for the year. The S&P 500 is down around 7%.

Despite the renewed concerns about the US economy, Richmond Federal Reserve President Jeffrey Lacker said that it was unlikely the Federal Reserve would stop “tapering” (cutting back on bond purchases). We shall have to see if Lacker’s attitude is shared by others at the Fed if the economy continues to disappoint. New Fed Chair Janet Yellen is known as an inflationist who believes in the myth of easy monetary policy as an economic stimulant.

One factor that could definitely figure into Yellen’s decision-making is a new report from the Congressional Budget Office (CBO) that Obamacare will push the equivalent of about 2 million workers out of the labor market by 2017.

That’s a major jump in the nonpartisan budget agency’s projections and it suggests the health care law’s incentives are driving businesses and people to choose government-sponsored benefits rather than work. That would amount to a double whammy for the financial world as it contributes to higher deficit spending and higher unemployment at the same time.

It’s no wonder experts are urging investors to accumulate gold at current levels in anticipation of higher prices down the road.