It’s difficult to make predictions, especially about the future.

Posted by Eric LeRiche | July 2, 2010 .

As Yogi Berra once said, it’s difficult to make predictions, especially about the future…

To generate cash investing, you need to be ahead of the crowd… or at least seeking the story no one is telling.

That is a challenging endeavor today. All of a sudden, talking about the unspeakable — a double-dip recession and a retest of the March 2009 lows — is in style. Even readers are fed up with the end of the world as we have known it “stories”…

With valid reason, I believe. Stocks recorded their worst quarter since the whole thing hit the fan in Q4 2008. After cautious trading most of Wednesday, the major indexes went over a cliff in the final half-hour the moment the S&P hit 1,040… closing the day lower 1%.

As I suggested yesterday in my blog, technical analysts think this 1,040 figure is definitely a crucial line in the sand.

“If the S&P falls below 1,040,” writes Dan Amoss, “then we’re likely to revisit the lows below 700″. Who knows if this broadly reported ‘if, then’ conditional likelihood is legitimate? We might find out quickly enough. Whenever globally recognized technical support levels are breached, we have a tendency to see heavy rounds of ‘self-fulfilling prophecy’-based selling.

“Regardless of the way the technical conditions play out, there’s still a big difference between current stock values and the prices that many value investors are prepared to pay to assume the risks of owning stocks. The term ‘risk’ is key. In times of increased economic and political risk, investors demand higher risk premiums to hold on to stocks.

“A simpler way of saying ‘higher risk premiums’ is ‘lower stock prices.’”

My oh my, those annoying fundamentals.

The growth of manufacturing in the United States is slowing down — significantly. The ISM manufacturing index registered 56.2 for June. At first glance, that’s good, since anything above 50 indicates growth. But it’s merely one of these “unexpected” numbers that keep turning up nowadays — well below even the gloomiest guesses of 57.6.

Remember last month our friend Barry Ritholtz found a solid relationship between the ISM and jobs — which isn’t good. ISM topped out in April at 60.4, thus it “seems to be flashing late stage prior to employment has had any chance to clamber out of its ditch,” he said.

Sure enough, the jobs numbers we’re seeing this morning are still in the ditch — and on their roofs, wheels spinning.

With jobs and the manufacturing looking weak, all the major U.S. stock indexes were down 1% in the first 45 minutes of trading yesterday. The Dow has breached 9,700. The S&P is now down 15% from its April 23 high. That means there’s a 4-in-5 chance it’ll reach the 20% bear-market threshold.

The following things aren’t helping matters…

Manufacturing in China is also exhibiting a slowdown. Indicators from both the Chinese government and HSBC fell last month, and HSBC’s number is becoming precariously in close proximity to the expansion-contraction threshold, at 50.4.

For some reason, we have a feeling Beijing is in even less of a hurry to revalue the yuan now than it was earlier.

“You will notice,” wrote the Richebacher Society’s Rob Parenteau recently, “we have had nothing to say about the spellbinding, earth-shattering Chinese currency announcement… because it is a nonevent in our mind.”

All you had to do was study the declaration released by Chinese officials to realize they were just blowing smoke ahead of the G-20 summit in Toronto. But noone reads anymore, and few investors know how to think for themselves anymore, present company excepted.

“Having pegged to the dollar, which means the RMB has currently revalued as much against the euro in recent months as the dollar, the last weird idea the Chinese officials want to do is revalue the RMB even higher in the face of a sputtering trade surplus — in an economy that has been operating an export-led rapid growth approach, no less… with a labor force asking for salary hikes or committing suicide due to the fact conditions are a little bit too difficult to deal with on the 24/7 assembly line.

“How can all of this not be totally obvious? Simply because very few individuals know how to think for themselves any longer, and thinking on their own about macrofinancial dynamics is practically an extinct capability.”

As many have been forecasting, the expiration of the homebuyer tax credit sent pending home sales plummeting in May that blew away what the experts anticipated. The National Association of Realtors (NAR) index of existing homes under contract fell 30%, double the consensus.

This occurs on top of some other detrimental markers we got this week on the housing front…

* Foreclosures accounted for 31% of all home sales during the first quarter. Prices on those homes were 27% lower than homes that were not distressed sales. “The lower price will probably stay between 25-30% percent as lenders cautiously manage the number of new foreclosure actions in order to avoid flooding the market,” according to RealtyTrac, which crunched these numbers

* The taxpayer rescue of Fannie Mae and Freddie Mac — already costing $145 billion — could reach $400 billion, according to the Congressional Budget Office. And that is if housing prices hold. If they drop, that may rise to $1 trillion.

In yet another desperate effort to prop up the housing market, Congress decided this week to provide homebuyers under contract another 2 months to get to closing and still claim the homebuyer tax credit.

Without that extension, it would have expired yesterday.

Well, it seems European banks will roll over 442 billion euros in 12-month loans from the European Central Bank (ECB) with relatively little trouble.

The ECB is lending about a quarter of that figure — 111 billion euros — to tide some of the banks over for an additional week. But they’re not the largest banks, so traders aren’t bothered and are holding the euro steady this morning at $1.23.Russia grew its gold stash by 22.5 tons in May, according to the International Monetary Fund. That’s four consecutive months in which Russia has added to its gold holdings, which now total 703.1 tons — the ninth-largest in the world.

All of that being said, it does look obvious that we will be be going lower before going significantly higher but I want to remind everyone that there is a strong contrarian movement and given the volatility of the world’s economy you ever know what’s going to move the markets next so don’t bet the farm on any direction and use pay special attention to your money management strategy.

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Enjoy

Eric LeRiche
InvestorRules

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