Three Warning Signs

I.C. Angles Investment Post…

As the stock market struggles to make new highs, investors are increasingly complacent despite worrisome developments. Yet, the U.S. stock market itself is looking increasingly shaky. Worrisome signs are also growing around the U.S. housing sector critical to America’s economy and China’s economy, which has been an engine of growth for the global economy. Although the price action of this stock market remains healthy enough to justify holding a substantial amount of stocks in a long-term portfolio, this does not justify complacency or in my view significant stock exposure for investors with shorter-term time horizons, particularly in light of growing bearish signs.

I have written before about corporate insiders, who understand their business prospects better than anyone else, selling stock at an accelerated rate. This is a bearish sign. On that note an insightful recent article “In-the-know Insiders are Dumping Stocks” details that when large institutional investors, who are not corporate insiders in the traditional sense of the definition are stripped out, the insider sell ratio actually becomes historically an even more accurate predictor of market downturns and is also generating an even more bearish signal today. Those insiders may be reacting to the slowdown in corporate earnings, where there are signs that measures, including stock buyback accounting tricks, used to drive profitability in the absence of healthy revenue growth may be hitting a wall.

Another bearish sign is going off in the U.S. housing market, which is an important pillar to the economy. Mortgage financing has dramatically dropped off. Many cash buyers, who have made up a disturbing number of recent buyers, are also pulling back. An excellent recent post on this topic “Why Housing Markets are Heading South… Again” concludes with the prediction that demand will drop as supply increases this Spring.  My own opinion is that odds are the real estate market will turn this year, but a truly nightmarish downturn in real estate is likely to be a longer ways off.

Lastly, in one more warning sign the price of copper has collapsed. That is a bearish signal for Chinese defaults because companies use copper as collateral and the wave of selling is indicative of that collateral being called in to make debt payments. The country’s Premier Li Keqiang is starting to see serious risks. He warned after the last session of the national people’s congress that there are serious challenges ahead due to impending bankruptcies, which will come as no surprise to readers of this blog.

None of this is getting much attention. What is in the news is a disappearing Malaysian airplane and the Russian takeover of Crimea and massing of troops elsewhere. These developments, however, do buttress the point I have made before that the world is not becoming a safer, more stable place. In addition troubling signs around China, record corporate earnings in a weak economic environment and housing all buttress points I have previously made in regards to noteworthy threats to this current bull market. Fund managers may be extremely confident about the stock market and margin purchases, representing money borrowed to buy stocks, may be hitting alarming highs, but all this complacency is simply not justified.


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