Market Roundup
Dow -50.58 to 16,279.89
S&P -3.98 to 1,938.76
NASDAQ -3.98 to 4,752.74
10-YR Yield +0.02 to 2.14%
Gold +$4.60 to $1,129.60
Oil +$0.34 to $46.17
March 2009. It wasn’t a good time for the global economy.

The Great Recession was raging.

The credit markets were imploding.

And the Dow Jones Industrial Average was trading around 6,500 – roughly ten THOUSAND points below today’s level.

So the latest Chinese economic data isn’t at all encouraging. Specifically, the country’s Purchasing Managers Index sank to 47 in September from 47.3 in August. Not only did that miss the average forecast of 47.5, but it was also the worst since … you guessed it … March 2009.

The report also showed that new orders are falling, output is falling, employment is falling, and prices are falling. Pretty much an across the board slump, any way you slice it, and as you can see in this chart, there is no sign of a rebound anywhere …

Stock futures initially plunged overnight on this news. But on Wall Street, it seems that hope springs eternal. Investors stepped in and bought stocks later in the overnight session on the hope that European Central Bank members would signal an imminent boost in Euro-QE.

But ECB member Ewald Nowotny told Bloomberg that the central bank shouldn’t react to every market wiggle, and talked up the European recovery. Another ECB member, Bostjan Jazbec, also threw cold water on calls for more QE.

Then in a speech before the European Parliament in Brussels, ECB President Mario Draghi reiterated that message, saying he plans to stay pat. That took the wind out of the market’s sails again, even as stocks didn’t completely fall apart.

Bottom line: Stocks are continuing to swing to and fro in the near term, buffeted by lousy real-world data and offsetting puffery from various central bankers. But the big-picture trends that are pointing lower haven’t gone away – most importantly, the ongoing meltdown in China’s economy that the latest PMI data points toward.

“I feel it’s much more likely that stocks break down than break out to the upside.”

That’s why I feel it’s much more likely that stocks break down than break out to the upside. I’m watching the 16,000 area on the Dow Industrials and 1,900 on the S&P 500.

If those levels give way, a re-test of the panic lows from August would likely follow. And if they can’t hold, it could be “Look out below” time. So buckle up, raise cash, add some downside hedges, and get ready for more potential turmoil.

Does that sound like a good game plan to you? Or do you think stocks have fallen enough, and that it’s time to buy? What do you think about the prospect of more Euro-QE? Is it a reason to buy or sell? And what do you see happening as we head deeper into the fall? Here’s the link to the Money and Markets website where you can comment.

Our Readers Speak

After another day of remarkable volatility, several of you sounded off about your outlook for the markets and the Fed’s potential responses to these wild swings.

Reader Tommr said: “The Federal Reserve has absolutely unlimited power to create any amount of money for whatever purpose. If they want to buy stocks, well, I think they already are at times.

“All the markets are being manipulated by anyone and everyone who can. Someone simply says something about some market related thing and the market reacts to it. I continue to advise: Ignore all of this noise.”

Reader Steven shared this detailed outlook: “While this may seem like Econ 101, the events in the markets during the past few weeks have once again demonstrated why a focus on the ‘three-legged stool’ the economy sits on is necessary for any investor.

“Mike, first you warned us about banking and finance and how the ZIRP gravy train had run out of steam and will hopefully coast to the station. Today, your report brings up the major suppliers in the commodities market and how they are foundering. You then introduced the third leg in the form of Volkswagen AG being caught with its credibility down.

“This morning’s report by Jon Markmam that was followed by Larry Edelson’s warnings are indicating that the third leg of the equities market, where investment in goods and services is in not much better shape than the other two legs of finance and commodity. The apparent conclusion is that it is time for a new ‘stool’ or platform for the world’s economy to be built upon. The mix of Smith, Marx and Keynes has produced a model that is on the verge of failure and collapse.”

Reader Ed S. also shared a pessimistic view of the economy’s prospects, saying: “When no one is coming into the store to buy your products, raising your prices is not the best of ideas. Banks can’t lend the money they have.

“The economy still stinks. That five-and-one-half-percent unemployment rate is a myth. The Fed can’t do it on its own. It has used up all its weapons. The best it can do now is to not do damage. It’s time for our do-nothing Congress to get into the act by providing the funding to rebuild our rotting infrastructure and at the same time invigorate our economy.”

Finally, Reader Billy said: “Sharp people have had this current bear market downturn pegged. This is all about a Keynesian-based, sovereign debt, derivative and deflation crisis that has been building for decades. Now, the Fed is out of bullets in this country and by extension the rest of the world.”

Thanks for sharing. I agree wholeheartedly that the Fed and other foreign central bankers are losing their power and influence over the markets, in large part because the underlying global economy is getting worse by the month. Investors are selling central bank-driven rallies, not buying them anymore. That means individual investors need to change their approach to the markets if they want to continue building wealth.

Sound about right to you? Or not? Then let me hear about it online using this link.

Other Developments of the Day

● Want to do business in China? Then you better be ready to sign up local “partners” and face other forms of pressure over your operations. That’s the message from this Wall Street Journal story, which chronicles the struggles networking gear-maker Cisco Systems (CSCO) is having in that market.

●  Margin debt at the New York Stock Exchange exploded during the latest market boom – hitting an all-time high of $507 billion in April. But it just dropped for two straight months to $473 billion in August. Previous turning points in outstanding loans to buy stocks coincided with massive tops in stocks, so this is another warning sign that a bear market may have begun.

●  Finally, New York Yankees great Yogi Berra passed away at the age of 90. The catcher appeared in 14 different World Series, the most of any Major League Baseball player. He was also well-known for his offbeat catchphrases and comments like “It’s déjà vu all over again.”

What do you think about doing business in China – are the hassles worth it for Corporate America? How about the decline we’re seeing in margin debt after hitting a record high? Does that worry you? Let me hear about it over at the website.

Until next time,

Mike Larson