Thursday, July 15, 2010

Looking Under The Surface

My company recently purchased an apartment complex in Raleigh, North Carolina.  I've been in Raleigh this week helping them out with the management transition.  The apartment community is gorgeous, and I would imagine residents or people driving by would be shocked to know the community was purchased in bankruptcy.

This weekend when I get back to Charlotte I plan on spending some time in the Epicentre in uptown Charlotte.  It is the city's newest attraction featuring bars, retail shopping, and a great hotel.  The building deserves its name as it provides an amazing atmosphere both inside and out.

Visitors to the great Epicentre would probably be shocked to know the Epicentre received foreclosure papers this morning.

My reason for giving these two examples is to show the importance of viewing something not how it looks on the outside, but also by taking a look at what lies under the surface.  Looks can be deceiving.

Since July 1st the stock market has experienced a magnificent rally.  Today we find out that the BP oil spill has been capped, and that Goldman Sacs has settled with the SEC for $550 million after robbing the American taxpayer of hundreds of billions in wealth.  This good news brought the market back from a large sell off early in the day.

When the stock market goes up, people feel good.  If it looks good, things must good.  Right?  Let's take a look at what lies under the surface.  The following is the economic data we received in the last 48 hours:

1.  The broadest measure of money supply, M3, turned negative in December of 2009 and has fallen month over month since.  A broad fall in M3 is catastrophic for an economy dependent on growth.

2. Mortgage loan applications have fallen to the lowest level since 1996

3.  The Baltic Dry Index (measures global trade) has experienced its longest fall in 15 years

4. Small business confidence this week feel to 88 from 92, reaching a three month low

5. 25% of Americans have a credit score under 599 and cannot get access to desperately needed financing

6. Retail sales are down .5%, Auto sales are down 2.3%, a massive drop off

7. The Philly Fed (measures manufacturing) plunged this morning to 5.1.  The consensus was at 10.

8. The Empire Manufacturing Index plunged to 5.08 on expectations of 18.  It was at 19.57 as of last release!

9. Non seasonally adjusted initial jobless claims this morning came in at 513,347.  Emergency Unemployment Claims fell by -236,162.  Extended jobless benefits fell by -18,580.  These last two represent the people unemployed for so long that they no longer qualify for government assistance, also known as the most likely to riot when hungry.

10. Stock market (equity) mutual funds showed the largest sell off in three months.  It has now been 10 straight weeks of equity mutual fund sell offs with the money moving into the bond fund.

This last one is important and probably puzzling to the average market observer.  Remember this huge stock fund sell off came at a time when the stock market rocketed higher over the past week.  How could this be possible?  What we saw last week was what is known as a short covering rally.

When investors sell a stock short a they must buy that stock back at some point in the future to collect their profits.  This happened last week in a major way as commercial investors took profits across the board.

The stock market now has a beautiful exterior right after its sharp rally upward, just as the bankrupt building does that I worked in today, and just as the foreclosed Epicentre does that I will be having drinks in this weekend.

However, if you plan on putting money into the stock market today, please take another look at what lies under the surface.

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