S&P 500: Hate Mail, Crumbling Factories, And Sinking Stocks by Tony Sagami, Mauldin Economics
The bulls are mad at me!
I’ve been heavily beating the bear market drum in this column since the spring.
The S&P 500, by the way, peaked on May 21, and this column has been generating a rising stream of hate mail from the bulls as the stock market has dropped. My hate mail falls into two general categories: (1) you are wrong, and/or (2) you are stupid.
[NOTE: Please feel free to leave your comments—good and bad—in the discussion forum at the end of the column.]
Well, I may not be the sharpest tool in the Wall Street shed, but I haven’t been wrong about where the stock market was headed.
This column, however, isn’t about me. It’s about protecting and growing your wealth—and that’s why I have been so forceful about the rising dangers the stock market is facing.
One of the themes I’ve repeatedly covered in this column is the rapidly deteriorating health of the two most basic economic building blocks of the American economy: the “makers” (see August 25 column) and the “takers” (see July 14 and August 4 columns).
There are thousands of economic and business statistics you can look at to gauge the health of the US economy, but at the economic roots of any developed country is the prosperity of its factories (makers) and transportation companies (takers) delivering those goods to stores.
This week, let’s look at the latest evidence confirming the piss-poor health of American factories.
Factory Fact #1: The Institute for Supply Management released its latest survey results, which showed a drop to 51.1 in August, a decline from 52.7 in July, below the 52.5 Wall Street forecast, and the weakest reading since April 2009.
NOTE: The ISM survey shows that raw-materials prices dropped for 10 months in a row. If you own commodity stocks—such as copper, oil, aluminum, or gold—you should consider how falling raw-materials prices will affect the profits of those companies.
Factory Fact #2: Despite all the crowing from Washington DC about the improving economy, US manufacturing output is still worse today than it was before the 2008-2009 Financial Crisis, according to the Federal Reserve.
Factory Fact #3: Business inventories increased at the fastest back-to-back quarterly rate on record. Inventories increased 0.8% in Q2, following a 0.3% increase in Q1, and now sit at $586 billion. That’s a 5.4% year-over-year increase!
Remember, there are two reasons why businesses accumulate inventory:
- Business owners are so optimistic about the future that they intentionally accumulate inventory to accommodate an upcoming avalanche of orders.
- Business is so bad that inventory is starting to involuntarily pile up from the lack of sales.
Factory Fact #4: The Manufacturers Alliance for Productivity and Innovation (MAPI), a trade association for US manufacturers, is none too optimistic about the state of American manufacturing.
The reason for the pessimism is simple: US manufacturers are struggling.
- US-manufactured exports decreased by 2% to $298 billion in the second quarter, as compared with 2014.
- The US deficit in manufacturing rose by $21 billion, or 15%, compared with the second quarter of 2014.
“The US $48 billion deficit increase in the first half of the year equates to a loss of 300,000 trade-related American manufacturing jobs, and the deficit is on track for a loss of 500,000 or more jobs for the calendar year,” said Ernest Preeg of MAPI.
So what does all this mean?
When I connect those dots, it tells me that American manufacturers are struggling. Really struggling.
Take a look at the Dow Jones US Industrials Index, which peaked in February and started to drop well ahead of the August market meltdown.
You know what’s really nuts? The P/E ratio for this struggling sector is almost 19 times earnings and 3.3 times book value!
Is there a way to profit from this slowdown of American factories? You bet there is.
Take a look at the ProShares UltraShort Industrials ETF (SIJ). This ETF is designed to deliver two times the inverse (-2x) of the daily performance of the Dow Jones US Industrials Index.
To be fair, I should disclose that my Rational Bear subscribers have owned this ETF since June 16, 2015, and are sitting on close to a 15% gain.
Critics could say that I am “talking up my book,” but I instead see it as “eating my own cooking.” My advice in this column isn’t theoretical—we put real money behind my convictions.
That doesn’t mean you should rush out and buy this ETF tomorrow morning. As always, timing is everything, so I suggest you wait for my buy signal.
But make no mistake, American “makers” are doing very poorly, and that’s a reliable warning sign of bigger economic problems.
30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.