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The Empire Index Strikes Back!

Monday, August 17, 2015
Money and Markets
You can also access this issue on our website.
The Empire Index Strikes Back, Raising Economic Worries
Market Roundup
Dow +67.78 to 17,545.18
S&P +10.90 to 2,102.43
NASDAQ +43.46 to 5,091.50
10-YR Yield -0.046 to 2.15%
Gold +$4.30 to $1,117
Oil -$0.62 to $41.88

By Mike Larson

The Empire State Manufacturing index is a second-string economic report, not on par with the main “roster” of reports we get on GDP, employment, retail sales or inflation.

It’s kind of like preseason NFL football, actually. You normally don’t need to pay too much attention, because the scores don’t matter and many of the guys battling it out on the gridiron right now will be out of a job come Labor Day.

But every once in a while, something strange happens. You get a reading that’s so out of the ordinary … so shockingly bad … that you have to sit up and take notice. That’s precisely what we got today.

Specifically, the Empire Fed index collapsed to NEGATIVE 14.9 in August from positive 3.9 in July. That was much, much worse than the average forecast of +4.5… the third drop in the last five months … and most importantly, the worst reading since April 2009.

Yes, April 2009. The tail end of the last recession. A month where the Dow Jones Industrial Average was going for around 8,000. It wasn’t just the headline number that stunk up the joint, either. Sub-indices that track new orders, shipments, inventories and employee workweeks all plunged into negative territory.

This is what it looks like in chart format. That shaded area from 2008-09 represents the last recession. So basically, this number is so bad that it’s typically something you see only when the economy is shrinking.

Source: Federal Reserve Bank of New York Source: Federal Reserve Bank of New York

So what’s going on? Well, let’s go through the challenges we’re facing one by one:

The energy sector is in the midst of a nasty pullback, with layoffs, bankruptcies and investment all plunging …

Several emerging-market currencies, stock markets and economies are collapsing, with some declining at their fastest rates in decades …

The dollar has been rallying for several quarters, and China is now devaluing its currency. That puts U.S. multinationals and manufacturers at a big disadvantage versus foreign competitors.

As a matter of fact, the Atlanta Federal Reserve publishes a “GDPNow” indicator that is updated frequently as new data comes in. Its latest estimate for GDP growth in the current quarter? A pathetic 0.7%. That would be a major slowdown from 2.3% in the second quarter — and far below the average “expert” prediction of economists, currently 2.6%.

In short, it’s not just one minor problem or threat the economy is up against. It’s several converging at one time. That’s why this Empire index reading is worth paying attention to. IF it’s a harbinger of what’s to come from bigger, more widely followed reports, the stock market could be in for even rougher sledding.

So what do you think? Is the Empire reading something to worry about? Or a tempest in a teapot? Do you think the problems overseas are going to wash up on our shores, and that will hurt the broad averages? Or will we remain relatively healthy even as the rest of the globe catches an economic cold? Let me know at the Money and Markets website.

Our Readers Speak

It’s a new week, but many of last week’s worries are still weighing heavily on investors like you. There’s definitely a higher level of concern about the stock market now than we’ve seen in some time, and in my opinion, for good reason.

Reader T. said: “U.S. markets can only hold up so long – and will start crashing or at least declining in September, I think. There’s much skepticism, so there is an ability for markets to ‘climb the Wall of Worry.” But it’s not worried enough with the VIX around 13 – my read on it for now.”

Reader Novice T. added: “I am buying some inverse 3X ETFs like SPXS, YANG, NUGT. Start collecting as insurance and take profit on some, if any, opportunity and keeping some for the major correction.

“At the beginning of the year, I had 75% invested in stocks. Now I have only 35%. With a six-year bull market, one has to know when to take profit and be ready for ‘bottom fishing’ when the market correction is a year or more old.”

Reader Henry A. also said: “The foreign market deterioration was predictable. The Third World has been borrowing cheap U.S. dollars, doing the carry trade, for development. And now, they will be paying their debt with expensive U.S. dollars. Things will get much worse before they get better.”

But Reader Tom suggested there may be some opportunity out there, saying: “Let me be the contrarian here. While Mike and others are saying dump stocks, I say buy into high-quality stocks with not a lot of China exposure. Google (GOOGL) comes to mind. This is a great buying opportunity if you know the right stocks to look for.”

It’s always nice to hear differing opinions, so thanks for weighing in, Tom. But it should be clear from my recent columns that I’m more aligned with what Henry A., Novice T. and others are saying right now.

More and more global markets are outright crashing. Yet U.S. stock investors are just going along their merry way as if nothing’s happening. That kind of dichotomy is hard to maintain for long, and I’m very concerned our markets are doomed to play “catch down” soon. We shall see.

Any comments you’d like to add? Then don’t miss out. The website is there as your outlet. I hope to hear from you soon.

Other Developments of the Day

BulletThe emerging-market meltdown I wrote about last week continued overnight, with EM currencies collectively suffering their worst declines since 2000. Turkey, Malaysia, and Brazil led the latest slump. So I will pose the question again: How can the U.S. remain an island of prosperity in a sea of market sickness?

BulletHow much pain and volatility is China’s economic slowdown causing? Quite a bit, as last week’s currency devaluation demonstrated. After all, the yuan move was meant as a form of economic stimulus.

The Wall Street Journal goes into more detail in this story from late yesterday, noting the wide range of U.S. corporations warning about China weakness and the impact on their earnings. It lists everyone from Weyerhaeuser (WY) to Cummins (CMI) to Juniper Networks (JNPR) as victims of the slowdown.

BulletLiberty Interactive Corp. (QVCB) agreed to buy Zulily (ZU) for $2.4 billion, adding the online retailer to its home shopping network empire. Liberty is the parent company of long-time retail company QVC, while Zulily is a 5-year-old upstart whose shares have struggled in the past several months.

BulletAn Indonesian airplane carrying 54 people crashed in a remote region of that island nation, and a combination of rugged terrain and lousy weather is making recovery efforts difficult. Indonesia has a history of accidents and crashes, and the Trigana Air Service company that owned the plane in question is banned from flying in Europe due to safety concerns.

Any thoughts on the latest bout of EM weakness, and the implications for our markets here in the U.S.? What about the latest deal in online retailing … is the combined QVC/Zulily company a bigger threat to the likes of (AMZN)? Let me hear about these or other topics online and I’ll do my best to address your comments and questions.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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