Economic Activity Deteriorates As The Stock Market Levitates

Monday, August 8, 2016
By Paul Martin
August 8, 2016

The Fed is doing what it can to keep the broad market indices from selling off, but underneath the marquee lights there’s a whole world of stocks that are collapsing in price…

By PM Fund Manager Dave Kranzler, IRD:

In my latest issue of the Short Seller’s Journal, I predicted a weak showing for July auto sales. Both GM and Ford missed Wall Street’s forecast. With the magic of seasonal adjustments, the industry data overall was presented to show a .7% increase in overall sales vs. June. GM sales dropped 2% and Ford’s sales fell 3%. Again, any overall industry gains can be attributed to mysterious “seasonal adjustments.” June auto sales dropped 3.4% from May.

When Ford reported its Q2 earnings, Ford’s auto finance division reported a decline in profits that reflected lower values realized at auction on cars returned after the lease expired. Auto market weakness typically shows up first in the resale/used market (I traded the auto supply sector junk bonds when I traded on Wall Street in the 1990’s, which is why I’m familiar with auto cycle dynamics). In addition, Ford Credit reported higher than expected credit losses.

My point here is that the auto industry, after being hyper-stimulated by the Fed with $100’s of billions of subprime quality car loans and leases, is going to head south – probably rather quickly. Our financial system is about to feel a huge shock from delinquent and defaulted car financing extended to people who could never really afford the payments. Ford is already feeling it. Carmax also reported bigger than expected losses in its car loan portfolio.

Housing is the other economic sector that has been hyper-stimulated by the Fed and the Government with artificially low interest rates and taxpayer-sponsored low to no-down payment mortgages. Housing is going to head south quickly as well. This was evident with yesterday’s construction spending report: June private construction spending fell .6% from May, non-residential construction dropped its most since December, April construction spending was revised to down 2.9% from down 2%.

Not only is construction spending declining, previously reported construction spending is being revised to show that it was weaker than originally reported.

The Rest…HERE

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