($SPX) Archives

Goldilocks Delivers a Nonfarm Payroll

Does it get any better than this? First, the hometown San Francisco Giants win the World Series in a four game sweep. Then the San Francisco 49er?s play in the Super Bowl. Finally, I win the World Series/Super Bowl of investing by capturing an absolutely pyrotechnic 21% year to date performance, boosting me once again the top ranks of the hedge fund industry. Hey, two out of three is not bad. 31-34, ouch! Life is good.

Back in the real world, traders were humming the rhythms of Lauren Hill?s Doo Wop on Friday, the top selling hit of 1998. That was the last time that a January posted such a virile stock market performance. In London they were humming Donna Summer?s This Time I Know It?s for Real, who led the charts with this tune in 1989, the previous time the FTSE 100 delivered such robust numbers.

No, this is not a compilation of Golden Oldies. Not too hot, not too cold. That was the conclusion of the equity markets on Friday when the Dow blasted over 14,000 for the first time in 5 years. With many researchers expecting a January nonfarm payroll over 200,000, you would think traders would have dumped shares on a 157,000 print. The headline unemployment rate remained etched in stone at 7.9%. Instead, stocks gapped up at the opening and never looked back, closing at the highs, up 147.

The phone lines between Wall street and San Francisco burned up with portfolio managers and investment advisors trying to figure out why. It appears that the number was strong enough to maintain a tepid 2% GDP growth rate. But is was not so expansionary as to prompt the Federal Reserve to abandon is quantitative easing policy any time soon, on which risk assets everywhere have been richly feasting.

I can see a particular psychology taking hold on Wall Street. Good data is proof that our buying of shares with reckless abandon is justified. Bad data is written off as a backward looking, one time only, statistical anomaly, as we saw with the incredibly weak Q4, 2012 GDP report of -0.1%.

In this scenario, the market either goes up, or goes up more. A new, all time high for the Dow this week looks like a done deal. We could hit my 2013 target of a Standard and Poor?s (SPX) of 1,600 by March. Like my friend, hedge fund giant, David Tepper, says ?When there?s a bubble, act bubbly.?

Our Course, I warned you all this was coming as far back as October (click here for ?My 2012-2013 Stock Market Forecast? ). I followed up with my ambitious ?Why My Shorts are Missing? in December, pressing the point home (click here ). Then, I really went out on a limb in my ?2013 Annual Asset Review? (click here), arguing that we would see an unprecedented market multiple expansion in the face of weak earnings growth. That is exactly what we got.

It is a good thing that I put my money where my mouth was. That has earned followers of my Trade Alert Service a blistering year to date performance of 21%. If the latecomers, short coverers, and lemmings keep pouring into this market, I could double that by April.

The Trend is Your Friend in Weekly Jobless Claims

Ten Years of Nonfarm Payroll

Looks Like It?s Rising to Me

The Race to the Bottom for Currencies Means a Race to the Top for Stocks

Diary, Newsletter

Even the Old Hands, like myself, are somewhat amazed by the strength of the global equity markets this month. The S&P 500 has risen 11 out of the last 12 trading days, and is up almost every day this month. It has been the best January in 18 years.

The first week saw the biggest inflows to equity mutual funds in 10 years. Yet, the market went up so fast, most of the largest investors were left at the starting gate, with the bulk of their new money yet to go into the market. If you weren?t as fast on the trigger as I was, you were left to read about it in the Wall Street Journal, and on your way to the Tombstone career cemetery. Hint to market strategists: that money is still out there trying to get in.

It appears that the race to the bottom for currencies is the race to the top for equities. The reality is that in such a competition, everyone wins. Since the mid November low, the (SPX) has risen by 12%. But Germany (EWG), which has had to carry the dead weight of an appreciating Euro, is up 29%. Japan, where the yen has plunged 16%, has seen the currency hedged equity ETF (DWJ) soar by 31%. My own Trade Alert Service tacked on 21%. For investors, this is a ?heads I win, tails you lose? market.

Certainly, the data flow has been there in abundance to justify such ebullience. Everywhere I look, I see improving PMI?s, increasing orders, rising real estate prices. Some 70% of American companies have, so far, beat earnings expectations.

In the US, business is running on all 12 cylinders (or all 80 kw of lithium ion battery power in my world), with the housing, energy, and auto industries all kicking in at once. Yesterday, weekly jobless claims hit a five year low at 335,000, and this morning the HKSB private Chinese PMI rose to a healthy 51.9.

The new Japanese stimulus efforts are so Godzilla like in proportions that the country?s GDP growth could flip from -3.5% to +3% in a mere two quarters. Do I hear the words ?global synchronized expansion?, anyone? Yikes. It makes the (SPX) at 1,500, and the (IWM) at $89 look positively cheap. Even the Federal Reserve?s own dividend discount valuation model says that the (SPX) should be worth 1,750 here.

Hedge funds are getting creamed, as usual, because their shorts are rising much faster than their longs. Look no further than Netflix (NFLX), which had a jaw dropping open short interest of 45%, but soared by a staggering 71% in two days after their earnings announcement. The pain trade is on. That?s why I have been going commando, without any shorts at all, save in the Japanese yen. Thank goodness I?m not in that business anymore. It is sooo last year?s game.

It is, in fact, a one stock market. But this time, there is only a single stock going down, Apple (AAPL), while everything else rises. A close friend whose market timing I respect told me on Tuesday, when the stock traded at $514, that it would hit a final bottom at $438 in three months. Three days later, and here we are at $437.

When the company announced an increase in cash on the balance sheet of $23 billion, the market took $100 billion off its market capitalization, depriving it of its vaunted ?largest company in the world? status. Go figure. This is truly a classic falling knife scenario, which is better observed from afar.

If you had asked me in September, when Apple was trading at $700, where would the (SPX) be if it fell to $437, I would have answered 1,000. Yet, here we are at 1,500. Here?s an intriguing thought, what if my friend is at least partly right, and Apple goes up from here? My own target of the (SPX) at 1,600 becomes a chip shot, possibly by March. Hey, if Ben Bernanke wants me to pile into risk assets, who am I to argue? I?ve always been a team player.

I think I?ll buy more stocks (SPY), (IWM), sell more yen (FXY), (YCS), and drive the Tesla around the mountain one more time. Maybe I can get the clock up to 500 miles.

In this Market, You are Either Very Fast, or Very Dead.

SPX 1,600, Here We Come!

Diary, Newsletter

Take a look at the chart below for the S&P 500, and it is clear that we are gunning for an all time high between 1,550 and 1,600. With the debt ceiling crisis now cancelled, you really have to look hard to find any near term reasons to sell stocks, so we could hit those lofty numbers as early as March.

A perusal of the short-term charts certainly demands one to conclude that we are overbought. The Relative Strength Indicator has just hit 70%, normally a signal that we are reaching an interim top. However, the RSI can stay elevated for an extended period of time and trade as high as 80 before the downside risks show their ugly face. That could be months off.

In the meantime, we could see some sort of correction. But it is more likely to be a time correction, not a price one. That has the market moving sideways in an agonizing, tortuous, narrowing range on declining volume for a while before launching on another leg up.

This year?s rally occurred so quickly that a lot of money was left on the sidelines, especially with the largest managers. That is why we have seen no meaningful corrections so far. This condition could remain all the way out until April.

It is likely that traders are going to keep ramping up this market until the January month end book closing. That sets up a quiet February. The deep-in-the-money options that I have been recommending to readers are ideally suited for this falling volatility environment. They reach their maximum point of profitability, whether the market goes up, sideways, or down small.

You see confirmation of this analysis everywhere you look. Treasury bonds (TLT) can?t catch a bid, and are clearly threatening to break out above the 1.90% yield band that has prevailed for the past year. The Volatility Index (VIX) hit another new five year low today at $12.40. Oil (USO) just hit a multi month high. It all points to stock prices that will remain on an upward path for the foreseeable future.

I think I?ll buy more stocks and then go drive my new Tesla around the mountain.

A Tesla S-1 Performance

The 30-Year View on What's Happening Today.

Newsletter

Take a look at the 30 year chart of the S&P 500 below, and it?s clear that the market is approaching a critical juncture. With the closely watched index closing at 1,460 today, we are a mere 140 points from the iron ceiling that has been unassailable for the past 13 years.

The chart is a roll call of past disasters for American investors. The 2000 peak was the apex of the Dotcom Bubble. The 2006 high water market defined the end of the Housing Bubble. Since March 9, 2009, a scant 15 days after president Obama took office, the index has soared by a record breaking 119%.

Something tells me this won?t go down in history as the ?Great Obama Bull Market?. Maybe it will become known as the ?Quantitative Easing Bubble? or the ?Bernanke Bubble?. Only future armchair economic historians will know for sure.

The chart clearly defines the last lost decade for stocks, as well as the second missing decade we are currently in. If the US economy were growing at a nice 3% annual clip, I would say that we are taking a run at the 13 year high, will breakout to the upside, and quickly tack on 10%-20% from there.

Unfortunately, that is not the world we live in. In fact, we are growing at half that rate on a good day, and are facing major challenges ahead. Bernanke?s announcement of QE3 last week (although he never used that precise term), will give markets the juice to take a serious run at 1,600 in the coming six months. But then, I think the fundamentals will cause it to fail once again.

Even the best case scenario for the resolution of the fiscal cliff at year-end takes a minimum of 3.5% out of GDP growth next year. The economies of Europe, China, and Japan remain in free-fall. U.S. corporations may be about to deliver their first YOY zero earnings growth in three years.

All of this sets up a recession in 2013 that will be tough to avoid. This is why U.S. companies are loathe to hire, have crimped capital spending at half of their historic levels at $2 trillion, and are sitting on cash mountains. They are obviously running scared.

The shock of the magnitude of this QE3 will get digested and fully priced in by the markets by Q1, 2013, right around the time the (SPX) is peaking short of 1,600. Then, one of the greatest shorting opportunities of the century will set up. I hate to sound like a broken record, but ?Sell in May and go away? is likely to work for the fourth year in a row. Except this time, you might not want to come back until August of 2014.

Is This a SELL Signal?

The ?Safe? Trade Beats All

Newsletter

I certainly hope you took my advice to load your portfolio with corn and gold and to dump your equities five years ago. What? You didn?t? Then you have almost certainly suffered on the performance front.

According to data compiled by my former employer, the Financial Times, corn was the top performing asset class since 2007, bringing in a stunning 146% return. Who knew that global warming would be such a winning investment strategy? It was followed by gold (GLD) (144%), US corporate debt (LQD) (44%), US Treasuries (TLT) (38%), and German bunds (BUNL) (26%). This explains why my long gold/short Morgan Stanley (MS) has been going absolutely gangbusters today.

If you ignored my advice and instead loaded the boat with equities, chances are that you are now pursuing a career at McDonalds (MCD), hoping to upgrade to Taco Bell someday. The worst performing asset classes of the past half-decade have been Greek equities (-87%), European banks (-70%), Chinese stocks (-41%), other European equities (-21%), and UK stocks (-11%). If you were in US equities, you are just about breaking even (1%).

Corn is, no doubt, getting an assist from what many are now describing as the worst draught since the dust bowl days of the Great Depression. But there is more to the story than the weather. Empowered with long term forecasts from the CIA and the Defense Department, I have been pounding the table for years that food would become the new distressed asset. These agencies have been predicting that food shortages will become a cause of future wars.

For a start, the world population is expected to increase from 7 billion to 9 billion over the next 40 years. Half of that increase will occur in countries that are net importers of food, largely in the Middle East and Africa. You can also count on the rising emerging nation middle class to increase demand for both the quantity and quality of food. Obesity among children is already starting to become a problem in China.

Managers who have been wrong footed through being overweight equities and underweight bonds will get some respite in coming years. It will be mathematically impossible for government bonds to match their recent performance unless they start charging negative interest rates. My best case scenario has them going sideways to down in the years ahead.

Not so for gold, which will continue to see steady demand from emerging market central banks and their new middle class. Five years ago, gold trading carried a death penalty in China. Today, there are shops on every street corner flogging the latest issue of one ounce Chinese Panda coins.

As for corn, the sky is the limit. If you don?t believe me, try eating a one ounce Chinese Panda.

Is Corn the New Gold?

The Volatility Death Spiral Continues

Newsletter

Mr. Market sometimes speaks in mysterious tongues, and you really have to wonder what he is struggling to tell us by taking the Volatility Index (VIX) down to a subterranean $13 handle on Friday, a new five year low.

A number of advisors have been recommending that investors load up on the (VIX) in recent months to give them downside protection from an imminent market crash. Those who followed such advice were hammered, their clients no doubt striking them off invitation lists for summer barbeques.

In the past month, the (VIX) has cratered from $20 to $13. Just last October, it touched $49, when I urged readers to pile in on the short side. I came out in the mid-$30?s weeks later.

Those who traded the triple leveraged (TVIX) fared even worse, this blighted ETF plunging from $5 to $2.50 during the same period. The (TVIX) is doing the best impression of an ETF going to zero that I know of. A year ago it was trading at $110. This is why I plead with traders to avoid triple leveraged ETF?s like the plague. These things are designed for day trading by hedge funds only. Eventually, they all go to zero.

I am even seeing this in my own portfolio. A week ago, I sold short the September, 2012 (SPY) $147 calls at $0.38. A week later, the (SPY) has risen by 1.2% but the call options have done a swan dive to $0.34. This can only happen when they are crushing volatility.

I quit recommending (VIX) plays in March when I realized that there is some sort of arbitrage going on in the hedge fund community that is punishing (VIX) owners. I haven?t figured out the exact mathematical dynamics yet, but it has to involve selling short the cash stocks and shorting (VIX) contracts against them. Whatever they lose on the cash short is more than made up by the profits on their (VIX) short.

It?s easy to see how successful this would be. While August (VIX) traded at a lowly 13.40%, September volatility is still up at 18%, and January, 2013 is trading at a positively nosebleed 25%. That spread provides a lot of room to take in some serious money.

So what is the 13% really trying to tell us? Here are some thoughts:

*It is discounting multiple tranches of quantitative easing by central banks around the world that take all asset prices up for the rest of the year.

*It reflects the complete abandonment of the stock market by the individual investor, which is why trading volume has collapsed.

*It also indicates how exchange traded funds are taking over, sucking volume out of the stock market. The (VIX) doesn?t reflect activity in ETF?s.

*It could be discounting an Obama win in the presidential election. Stocks have delivered a 72% return since the Obama inauguration, the third best in history after Franklin Roosevelt and Bill Clinton. Mixed stock and bond portfolios have delivered the best returns on record, with both asset classes appreciating dramatically for 3 ? years, something that never happens.

It could be that the (VIX) at this level has it all wrong, and that a stock market selloff is about to send it soaring. Those who have rigidly held on to that belief until now have been severely tested.

For those who have fortunately avoided the (VIX) trade so far, let me give you a quick primer. The CBOE Volatility Index (VIX) is a measure of the implied volatility of the S&P 500 stock index. You may know of this from the talking heads on TV, beginners, and newbies who call this the ?Fear Index?.

For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations.

Ready to Take the Plunge on Volatility?

When Bad Becomes Good and Worse is Even Better

Newsletter

Welcome to the ?Heads I win, tails you lose? market. The prospect of imminent quantitative easing by the US, Europe, China, and even Japan is supporting asset prices globally. The worse the economic data reports, the greater the likelihood of such action, and the higher prices can rise. In this topsy turvey world, bad becomes good, and worse is even better.

The only reason for the central banks not to act is if the economy starts to reaccelerate on its own without outside intervention. So the choices presented to investors are really quite limited: you either buy, or you buy. This is the twisted logic that has allowed traders to run the markets up to within 2% of the four year highs on incredibly small volume.

There is only one problem with this approach to the market. It requires mental gymnastics that would earn a gold medal at the London Olympics.

The harsh reality is that this impressive gain in the market has occurred in the face of decidedly deteriorating fundamentals. American companies managed to eke out a 5% gain in earnings in Q2, down from a 15% increase a year ago. Adjust for inflation and this growth rate approaches zero in real terms.

What is particularly disturbing is that they achieved these scanty results in the face of falling revenues. They did this by cutting costs, primarily through the firing of workers. This is why the unemployment rate remains at a stubbornly high 8.3%, despite some of the most impressive stimulus measures in history. Companies are burning the candle at both ends to gin up extremely modest positive results. They are literally eating their seed corn.

Needless to say, this does not support any kind of thesis for long term investment. All it does is move us from the bottom to the top of a six month range. I can?t imagine that you are going to see many aggressive buyers higher than here. Edge up from here, and you might witness the disgusting sight of traders throwing up on their shoes as they rush to cover premature shorts.

That is when you want to hold your nose and establish your shorts. Even the most bullish forecasts have the S&P 500 going up only 5% from here to 1,475, before it heads back down again.

This is not the first time that the market action has divorced itself from the fundamentals. I watched the Japanese stock market go from strength to strength for ten years before it knocked itself out crashing into the ceiling at ?39,000. Last night it closed at ?8,978, some 22 years later. Those analysts at Morgan Stanley obsessed with fundamentals only during the 1980?s saw their offices moved next to the elevator, then the men?s bathroom, the one with the big punching bag hanging from the ceiling, and finally, out of the building completely.

At this point you have to ask how much of QE3 is already priced into the market. If the Federal Reserve instituted this aggressive monetary expansion policy two months ago, they might have been able to engineer a 200 point move in the (SPX) or 2,000 points in the Dow. If they do it today, they might get only 50 (SPX) points, 500 Dow points, and perhaps none at all, followed by a sharp drop.

Lighten up your book, take short-term profits, sell short-dated-out-of- the-money calls, and meaningfully reduce your risk. Find something else to trade besides stocks. That is unless you have the luxury of staying out completely. The traders who don?t remember to sit down when the music stops playing will get burned badly.

Don?t Ask Me How I Got Here

This Party is About to End

Newsletter

They are really rocking the market today, with the Dow up nearly 200 points off the back of a non-disastrous Chinese GDP growth figure of 7.7%. However, there is a serious disconnect going on in our markets which suggests to me that our own party may be about to end.

Yesterday?s blockbuster weekly jobless claim took applications for unemployment benefits down to a four-year low of 350,000. But if you ignore this, you have an unending series of data reports that shows an economy clearly decelerating to a growth rate of 1% per annum or less. That is one-seventh China?s rate.

And yet, you have an S&P 500 with a top end range that is a mere 3% within the high for the year. You don?t need a PhD in math from MIT to understand that rising stock prices and falling growth are an anomaly that can?t last and can only end in tears.

I think this is happening for a couple of reasons. Many traders are awaiting Q2, 2012 earnings reports and are willing to give companies the benefit of the doubt until they are out. Stocks are at the historic low end of valuation ranges. Many institutions are still underweight, and willing to use dips to pick up some bargains. This is why this summer has been a short seller?s nightmare, volatility has fallen through the floor, and many hedge funds have bailed for the duration.

I also think that many institutions are waiting for the Federal Reserve to announce QE III at their end of July meeting, thus powering the market to new yearly highs. I?m betting that they will be sorely disappointed. Ben Bernanke has so few bullets left to protect the economy that he will wait until the Indians are circling the wagons and unleashing a barrage of arrows, before he takes action. Quantitative easing is meant to be a safety net, not a stepladder from which to boost ever-higher asset prices. The Fed?s failure to deliver could give us the trigger we need to break to new lows in August.

Take a look at the charts below to see how clearly defined the recent channels and ranges are. Next time the SPX approaches 1,370, I might think about going short, taking out some downside insurance, selling out of the money calls, and generally getting yourself into a risk off posture. If you don?t, your summer could turn into a giant rainstorm.

This Party is Nearly Over

Why I Am Chopping My US GDP Forecast to 1.5%

Newsletter

For the past two years, I have maintained a GDP growth forecast for the US of 2% a year. I have not stuck with this figure because I am stubborn, obstinate, or too lazy to update my analysis of the future of the world?s largest economy. I have kept this number nailed to the mast because it has been right.

I have watched other far more august institution with vastly more resources than I gradually ratchet down their own numbers towards mine, such as Goldman Sachs (GS) and the Federal Reserve. So I feel vindicated. But now that they are coming in line with my own subpar, lukewarm, flaccid 2% prediction, I am downsizing my forecast further to 1.5%. This is not good for risk assets anywhere, and may be what the markets are shouting at us with their recent hair raising behavior.

I am not toning down my future expectation because I am a party pooper or curmudgeon, although I have frequently been called this in the past. After all, hedge fund managers are the asset jockeys that everyone loves to hate. My more sobering outlook comes from a variety of fundamental changes that are now working their way through the system.

First, let me start with the positives, because it is such a short list. The work week is now the longest since 1945, no doubt being helped by onshoring triggered by rising Chinese wages. The car industry is in amazingly good shape, although the vehicles they are selling in larger numbers are much smaller than the behemoths of the past, with thinner profit margins. Credit is expanding, if you can get it. The housing market has finally stopped crashing and might actually add 0.3% to GDP this year.

Now for the deficit side of the balance sheet. The $4 trillion in wealth destruction created by the housing crash is still gone, and will remain missing in action for at least another decade. The home ATM is long gone. Income growth at 1.7% is still the slowest since the Great Depression, and is far below the historic 3% annual rate. Not only do people work longer hours, they get paid much less money for it.

Home mortgages rationed to only the highest credit borrowers has cut housing turnover off at the knees. This means fewer buyers of appliances and other things you need to remodel a new home purchase. It also kills job mobility, trapping worker where the jobs aren?t. Notice that vast suburbs remain abandoned in Las Vegas and Phoenix, while thousands live in impromptu RV camps in booming North Dakota.

If you want to understand the implications of the fiscal cliff at year end, watch the cult film, Thelma and Louise, one more time.? That?s where the heroines deliberately go plunging into the Grand Canyon in a classic Ford Thunderbird. The noise surrounding the presidential election is going settle ones nerves about as much as scratching one?s fingernails on a chalkboard.

The global situation looks far worse than our own. This is not good, as foreign sources account for 50% of S&P 500 earnings, and as much as 80% for many individual companies. To understand how wide the contagion has spread, look at the numbers put out on a recent JP Morgan forecast.

The European impact on our economy is about as welcome as the 1918 Spanish flu, when million died. (JPM) cut their expectation of growth there from -0.1% to -0.5%. Italy is shrinking at a -2.2% rate. Their prediction for growth in Latin America has been chopped -0.5% to 3.3%, while China has been pared by -0.5% to 7.7%. Japan is enjoying a rare 0.5% pop to 2.5%, but that is expected to fade once a massive round of tsunami reconstruction spending is done. Overall, global growth is decelerating from 4.5% to only 2%, with 82% of that growth coming from emerging markets. The last time a global slowdown was this synchronized was in 2008. Remember what stock markets did then?

All of this may be why hedge funds are fleeing this market in droves as fast as they can, including myself. Many of the small and medium sized funds I know are now 100% cash, and the big ones are only staying because they are trapped by their size. There are few good longs out there for the moment and fewer shorts. Prices are gyrating on a daily basis, triggered by overseas headlines where every else seems to have an unfair head start.

Suddenly the yacht at Cannes, the beach at the Hamptons, and the golf course at Pebble Beach seem much more alluring. Yes, clients dislike it when their managers are flat because they are getting paid for doing nothing. But they hate losing money even more.

Did You Say 1.5% US GDP Growth?

No Fed Action Disappoints QE Bulls

Newsletter

It?s always nice when intelligent people agree with you. That was my feeling after the Federal Reserve gave notice today that it was downgrading its forecast of US economic growth for 2012 from 2.6% to 2.15%. That is a major step down from the 3% and higher predictions they were hanging on to earlier.

The news came in the written statement that followed the Fed?s somewhat disappointing decision today. As I expected, there will no QE3. The Fed needs to keep dry powder in case we get another market crash, possibly as early as this summer. Operation ?twist? was renewed for another year, but wasn?t extended to include mortgage backed securities. It was about as conservative of a conclusion one could have expected from the Fed, given the rapidly deteriorating economic data flow that I chronicle daily in these pages.

It brings the August panel of respected central bankers in line with my own 2% expectation, which I have been posting since January. Here?s a good rule of thumb from a four decade long Fed watcher: they are always behind the curve, sometimes way behind, often by a year or more.

The problem for you is that 2% is not my forecast anymore. As of today, I am ratcheting it down to 1.5%. Without a QE3 it is really hard to see where additional growth is going to come from this year. US corporations are producing record profits and sitting on mountains of cash, so they have absolutely no incentive to stick their necks out whatsoever. Additional government spending is hamstrung by an election year and a gridlocked congress.

Virtually the entire international arena is slowing, in some cases dramatically so. China is about to bust through the bottom of its target growth range at 7%, down from 13% a few years ago. Tsunami reconstruction spending in Japan has just about run its course. Europe is clearly in a major recession. Even powerhouse, Germany, is shrinking from 2% growth to 1% because of weakness in its major export markets.

The market implications of this lower growth rate are many. It means that the recent 100 point rally in the S&P 500 was built on so much hot air and false hope. It was never driven by more than a round of furious short covering and profit taking. Let the permabulls enjoy a few more days of summer, possibly taking the index as high as 1,400 by month end.

It also means that another round of pain for the Euro (FXE) (EUO) is not far off. The best case for Treasury bonds (TLT) is that they churn sideways until the next Fed meeting in six weeks. In the worst case, the spike up to challenge the old highs, taking yields up to 1.42% for the ten year once more.

The lows for the year haven?t been put in yet, but they are about to. Before, we had a 4% GDP stock market and a 2% GDP economy. Now we have a 4% GDP stock market and a 1.5% GDP real economy. Watch out below. The only question is whether 1,250 in the (SPX) holds this time, or whether we have to plumb the depths of 1,200 before the penance is paid for our hubris.

Sorry Guys, No QE3 Today

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