Washington, DC -- (ReleaseWire) -- 07/28/2015 --"Happy Hunger Games. May the odds be ever in your favor!" These are the words that the character Effie Trinket addresses to the downtrodden masses more than once in Suzanne Collins' Hunger Games books and the hit movies based on them. "May the odds be ever in your favor." This resonated with me last week as we watched markets begin to signal, in all asset classes, that the Federal Reserve and their policies are beginning to lose control. Because the truth is, no matter what Effie Trinket or Janet Yellen says, the odds simply can't be "ever in our favor." We are seeing second order effects of the unprecedented and, frankly, experimental global actions from the Federal Reserve and other central banks in the years since the 2008 global crisis begin to manifest. These actions have consistently prioritized benefits today over consequences tomorrow, and it is becoming clear that tomorrow is coming ever faster and faster.
For those who may not have read the books or seen the movies, The Hunger Games and its sequels take place in a dystopian future, in what remains of our country, America. The country is totally impoverished, except for the capital city, which rules over 13 subservient districts keeping them poor, hungry and desperate in order to maintain control. After a failed rebellion, the capital organized something called "The Hunger Games," in which participants from each district fight to the death in a reality show gladiatorial free-for-all, with the winning contestant earning their district food and other gifts.
'What?' You ask. 'Why are you telling me this? No one's being forced into a battle royale here.' True. But please think about this. The Fed's intervention in the economy and the markets is really a symptom of a larger pattern of overreach by a government that is simply too large and too entrenched to serve any needs but its own. Excessive control has effects, consequences, that are detrimental if not downright harmful to individuals in the long term. The US Constitution is based on the assumption that unchecked power, no matter who holds it, is a recipe for corruption and tyranny.
We can certainly see this in last week's terrible markets, responding to what can be seen as failed central bank policies from across the globe. The Russell 2000 was down -3.1 percent, its worst week since October, 2014. The Dow was down -2.8 percent, the worst week since December, 2014. The S&P 500 was down -2.1 percent, the worst week since January, 2015. Transportations, otherwise known as trannies, were down -2.8 percent. That's the worst week since March, 2015. The NASDAQ was down a negative 2.2 percent. "May the odds be ever in your favor..."? Doesn't look like it.
Thanks to interventionist monetary policies and outright manipulation, we've been riding record highs in the stock market, but they're hollow. Earnings per share and revenues are sagging. After just over a third of companies have reported for the second quarter earnings season, FactSet is predicting a -2.2. percent decline for earnings per share and a -4.0 percent decline for revenues. Not only that, by they expect the year-over-year declines to continue in Q3 and Q4, as do many other research houses.
Despite all this, major indices have been holding near their highs. It's crucial to look at the internals. Advance/decline breadth; advance/decline volume; and new highs vs. new lows are gauges of the health of the broad stock market, and this health can differ significantly from merely watching the major averages like the S&P 500, the NASDAQ, or even the Dow. Usually you like to see strong internals as the indices run up, but when the internals weaken, it is a sign of vulnerability for the broad market even with the major averages at their highs. I can say with confidence that the high we've been experiencing in 2015 is actually the thinnest new high on record in the stock market. No volume at all behind it. There were just 967 advancing issues on the NYSE Friday vs. 2086 declining issues. We're thinning out of market breadth, which holds potential negative ramifications for the broad stock market as well as your portfolio. And I don't think this is a one- or two-day wonder, it's a trend that's been building for about 12 months now. The odds do not look good, do they?
Société Générale, a French multinational banking and financial services company, came out with a surprisingly honest statement last week, lamenting that China isn't the only one trying to directly influence equity prices, and asserting that central banks have globally become so concerned with asset prices that the idea of them directly purchasing equities is "no longer confined to the lunatic fringe." The analysis goes on to warn that "none of these institutions are remotely interested in weighing up the long-term returns" even in the absence of attractive valuations and true growth in cash-flow. Further, they note that corporate executives "are also experts in the art of creating a short-term positive market impression, and to great effect."
Look at the evidence in front of us: China's draconian intervention is failing to stop a freefall in their markets. The Troika and Greece talk and talk, but there seems to be no way for Greece ever to service its debt. The Federal Reserve keeps blowing air in our market bubble, but the leaks are showing in poor earnings and revenues, and playing out in other internal indicators of market health. So once again, Effie and Janet: stop saying "May the odds be ever in your favor." Please? We know they're not, and the appropriate response is to hedge against the tomorrow that's barreling toward us, whether by holding a strong cash position, or hedging with short-term bonds, or investing in gold.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or email@example.com