Stock Prices Already Vulnerable Even Before Taper Time Starts


By Charles Biderman


Most who follow markets now knows that the US Federal Reserve wants to “Taper” the amount of new money printed daily. But nobody seems to know when. And the real question is: what does that mean to the markets if the Fed does or doesn’t taper?


My numbers tell me that stocks are vulnerable even before the Fed starts to Taper. The financial world altered back on May 21 when Fed Chairman Ben Bernanke said the free money drug will stop flowing at some point. Since then over $110 billion has flowed out of bond funds. Why? Interest rates have surged. A 10 year Treasury was 1.6 percent on May 21 and is closing in on three precent today.


Remember flow follows performance. The average supposedly safe bond fund has lost 7 percent in price since May, therefore outflows have surged.


On the other hand, the stock market has been pretty much flat since May 20. So what does a stock investor do now?


Most important to me as an investor is what is really going on in the US economy as well as the supply and demand of cash and shares. What I do not care about are Wall Street’s opinions, guesses and fantasies.


And what is going on is a continuing supply of the free money drug by Fed, and a bearish trend by Corporate America on top of a slowdown in the overall economy.


Let us start first with the underlying economy. Wage and salary growth is puny to non-existent based upon our analysis of the US Treasury’s daily withheld income and employment taxes. Currently wages and salaries are growing at less than 3% year over year before inflation, and the growth rate has been slowing since mid July. The recent slowdown trails the surge in interest rates by six weeks.


All that means is that the housing market has started to slow but the numbers do not yet show that slowdown. Remember mortgage rates spiked early in June. Since closings take place six to 10 weeks after the contract signing, July existing home sales were based on May to early June contracts.


Yes, many Wall Street types are saying that housing will stay strong even if mortgage rates average five percent. After all, five percent is still close to all time lows. Really? That ignores the fact that at today’s 4.9 percent mortgage rate, you need to be making 40 percent more to qualify for the same dollar amount of mortgage then when rates were 3.5 percent. In other words, home affordability has dropped by 40 percent! A 40 percent spike in home costs has to hurt future home sales. And as we get into September, the home sale numbers will be horrendous.


So while higher interest rates are slowing an already slowly growing US economy, stock prices today are virtually unchanged from when Taper Time started May 21. Why are stock prices doing so well as bond plunge in price? Simple. The Fed is still dispensing $4 billion daily in free drug money, $85 billion monthly.


Therefore, the market is unlikely to plunge until the Fed actually starts creating less new money. But any upside growth could be limited as corporate America has turned bearish over the past three weeks. IPOs and new share sales have swamped announced buybacks and cash takeovers since early August. In addition insider selling not only is more than 12 times insider buying but total August insider selling could be the most for any month this year.


Bottom line. Higher interest rates are slowing the US economy. If corporate America remains a seller, then the downside risks to stock prices seem to be much greater than any upside potential. And if the Fed does Taper in September on top of all of the above, watch out below.





3 Responses to Stock Prices Already Vulnerable Even Before Taper Time Starts

  1. [...] post Stock Prices Already Vulnerable Even Before Taper Time Starts appeared first on Biderman’s Money [...]

  2. Ed_B on August 24, 2013 at 7:58 pm

    Yes, stock prices are vulnerable and have been for a couple of months. This trend is more likely to become worse instead of better in the coming months.

    I had hoped for the usual lackluster August stock blahs followed shortly by a decent, if not stellar, back to school shopping season, and an average holiday shopping season. These would have resulted in a reasonably good retail season, slightly better corporate earnings, some additional seasonal jobs, and justifiably higher share prices. But will we get this?

    We seem to have the August blahs firmly in hand but the back to school shopping seems slow and there is no indication yet that the holiday season will be much better. All of this adds up to no real seasonal boost to what is, after all, a mediocre economy, at best.

    Because of all the Fed and Gov manipulated numbers, it is not possible to use their “data” when attempting to make a market forecast. Inflation is CLEARLY higher than the approximately 1% claimed by the Fed. Unemployment is CLEARLY higher than the 7% rate claimed by the BLS. Despite these obviously incorrect numbers, the talking heads in the US financial media and most of their guests continue to parrot them. This does not inspire confidence among those of us out here in the small investor trenches. If we can see the obvious, why can’t these erudite individuals and captains of industry? Who knows?

    What we do know, however, is that the US stock market is at or near all time highs, yet the US economy is nowhere near the kind of performance that it would take to justify such lofty share prices. By virtually any metric one chooses, this economy is neither healthy nor growing. In fact, once REAL inflation is considered, it is shrinking at a fairly strong clip. The rate of increase in the number of people on some form of public financial assistance should be all the proof anyone really needs that this economy is in very deep trouble and that trouble is being masked by bogus performance numbers rather than exposed for what it is and corrected. Our national leadership is in denial or at least they appear to be. Maybe they do know the real story but are afraid of the political backlash of saying it in public? This is not unusual among those who truly believe that it is just as good to appear to know what you are doing as it is to actually know!

    As if things were not bad enough, the continuing saga of Obama Care continues to weigh heavily on the minds of CEOs all across America. Many of whom are now taking action to minimize the tremendous damage that this ill-conceived program will cause when it is fully implemented. They are cutting employees, cutting hours, refusing to hire more people, installing more automation, and are limiting health insurance to just their employees instead of their employees AND their families. Obama Care supporters all claimed that this would not happen, yet it IS happening, as was predicted by many who actually know how to run a business and what MUST be done when costs threaten to spiral out of control. Unfortunately, many Obama Care supporters have never run a business, so seem completely oblivious to the fact that actions, particularly Gov and Fed actions, always cause reactions. We are seeing that now and it will get worse, and perhaps a LOT worse, before it gets any better.

    Those who support Obama Care claim that it will be great. Despite this, many of their friends and supporters are clamoring for exemptions, and in many cases getting them, while the rest of us do not. The most egregious of these was when Congress managed to wangle an exemption to this for their staff members. This is an admission on their part that they cannot handle this program and want OUT of it. But, somehow, American citizens will be able to make it work when Congress cannot. Is anyone else out there shaking their head in disbelief at this point?

    In any case, this is not the time to be optimistic about the US economy or its stock market. This is a time to “duck and cover”, as they say, because something nasty is about the hit the ventilator. 2014 is liable to be a very rocky uphill road where it will be of MUCH greater importance to hang on to what we have rather than trying to grow our money via making increasingly risky investments. To be sure, there will be individual stocks that prosper in almost any environment and great stock pickers will do well. Those who short the market are likely to also do well.

  3. black dog on August 26, 2013 at 2:21 pm

    *and an average holiday shopping season.*

    the year over year comparisons won’t be friendly.

    thanksgiving 2012 earliest possible (22nd)
    thanksgiving 2013 lastest possible (28th)
    december 2012 one of mildest on record
    2012 (POTUS) election year … billions spent goosing economy into holidays
    2012 saw creation of half new business day (big boxes opening 8pm thanksgiving evening … driving spending/wage income) … this year will only match.
    2012 pulled forward income to beat tax increase … no doubt most reinvested … how much spent during holiday?

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)