By Keith Fitz-Gerald
Money Morning/The Money Map Report
For those of you who don't know, the phrase "Katy bar the door" is British slang for "take precautions, there's trouble ahead."
It's a perfect warning for the present market.
Beginning in July of 2005, in presentations that I've made to investors - and more recently in articles that I've written for Money Morning - I've repeatedly warned that it would be "Katy bar the door" for both the U.S. economy and its stock market if three things happened:
- The yield curve inverted.
- The Standard & Poor's 500 Index dropped to 1329.26.
- And if Wal-Mart Stores Inc. (WMT) missed its same-store sales targets.
According to my analysis, if all three indicators hit simultaneously, the odds are very high that there's a recession dead ahead.
Has that happened? Let's look and see:
First the yield curve: The yield curve inverted in December 2005, practically to the day that I predicted it would. Usually, long-term interest rates are higher than short-term rates. And if you think about it, that makes perfect sense: The longer time period allows for greater uncertainty. Investors require greater compensation for that greater uncertainty - and that additional compensation comes in the form of higher interest rates. But when near-term uncertainty is higher than long-term unpredictability, the yield curve "inverts," meaning that short-term rates have actually climbed above long-term rates.
Indeed, history demonstrates time and again that when the yield curve inverts, it almost always means the economy will fall into a recession within 18 months. The only time in the last 30 years that an inverted yield curve didn't signal a recession, a bear market, or both, came in 1998, during the height of the so-called "Asian Contagion" financial crisis.
But there's a story here - and it's almost like an "asterisk." You see, when the Asian financial crisis hit, the U.S. Federal Reserve cranked up its printing presses and flooded the market with cheap money. That surge fueled the Internet bubble and, in a bit of economic slow motion, the housing bubble that followed. That set the table for the subprime mortgage crisis, and the credit crisis that we're only now facing. You could argue that the central bank artificially pushed the downturn we should've experienced back then to the present day.
And that brings us to our second data point: The S&P 500: We dodged the bullet temporarily, but now, 25 months after the yield curve inverted, the credit crisis overwhelmed the Fed's "soft-landing," and caused it to flounder. When my analysis demonstrated what was going to happen, I set up a system of "tripwires" to warn me as market conditions deteriorated.
The S&P crossed the first tripwire when it dropped below 1,494.12 last December. It crossed the second tripwire when it traversed the 1,436.68 level, and continued south. But it wasn't until it fell below 1,411.89 that it dropped into the "danger zone." Once that happened, I warned investors that if it closed below 1,329.26, a recession would be lurking ahead of us as surely as an iceberg sat awaiting the.
We narrowly missed it - by 7.41 points - on Tuesday, when the S&P closed at 1336.67 - the day Richmond Federal Reserve Bank President Jeffrey Lacker broke ranks and publicly used the big "R" word. On Wednesday, the SPX closed at 1,326.45 - in iceberg territory. Then Thursday, the S&P 500 rebounded 10.46 points (0.76%) to close at 1,336.91.
At midday Friday, the ticker told us that the S&P was trading at 1,329.26 - meaning we're back in potential iceberg territory. The S&P closed Friday at 1,331.29.
As this has all unfolded, we've also been feeling the pain of the whipsaw trading patterns we've seen in recent weeks. When the Dow Jones Industrial Average dropped more than 370 points on Tuesday, the Wilshire 5000 - which tracks almost half of all publicly available stocks - endured a whopping $500 billion haircut in a single trading session.
That's bad, though we could argue that we'll see a rebound, soon. Unfortunately, these trading patterns aren't taking place in a vacuum, meaning there's another indicator that we have to consider. Taken together, these two indicators are signaling that there are some very difficult times to come.
And that brings us to the third recession warning, the Wal-Mart indicator: Back in August, I warned Money Morning readers to keep a very close eye on Wal-Mart: If it missed its same-store-sales targets, I said, that'd signal trouble ahead. Last week, Wal-Mart reported that it had missed its same-store-sales target - and badly. The No. 1 U.S. retailer [and in a little-known fact, the largest private employer in both the United States and the world] said same-store sales rose a miniscule 0.5%, far below the company's own 2% growth forecast. In a classic bit of Wall Street understatement, Bank of America Corp. (BAC) analyst David Strasser called it "another worrying signal for the health of the consumer."
Wal-Mart said gift-card redemptions were below expectations, as consumers held onto them longer than usual. What's more, they used these cash replacements to pay for food and other necessities more often than ever before - instead of using them for discretionary purchases, or luxuries.
That's not good.
For the fiscal year, Wal-Mart's U.S. same-store sales rose just 1.4%, the lowest figure since the company began releasing this data nearly 30 years ago.
That's even worse.
The "Wal-Mart Warning Indicator," as Executive Editor William Patalon has labeled it, is especially significant because an estimated 70% of Americans shop at a Wal-Mart in a given week. That makes the sales statistics for the retailing giant one of the most accurate and telling economic indicators around. [If you think that I'm making more of this than is warranted, consider that CNNMoney.com posted its own story about Wal-Mart's lousy sales report under the headline: "Wal-Mart's Distress Signal"].
Officially, Wal-Mart's version of the story is that they had poor gift card redemptions. But I have a hard time buying that - pun absolutely intended. Wal-Mart isn't a destination retailer known for gift carding. Couponing - and that annoying yellow bouncing smiley face in their adverts - maybe, but gift-carding ... well, I just don't buy it....
I think the more likely story is that the Average Joes who shop there [like my family] are feeling the heat of a three-alarm economic meltdown. Unlike our politicians, or our Federal Reserve chairman, who all seem to live in a rose-colored world, we're cutting back on our shopping and our purchases. We're also looking to make each dollar we have go farther.
Nor is Wal-Mart wallowing alone. Other big names like Macys Inc. (M), Nordstrom Inc. (JWN), and Target Corp. (TGT) are seeing their sales crater, too. In fact, of the 30 retailers Thompson Financial tracks, 58% have missed expectations.
The bottom line is that the U.S. market is trying to tell us that it's ill, and these wheezing same-store-sales figures suggest that the U.S. economy may be a lot sicker than we believe.
And that's why we need to take steps to protect our wealth, and to profit, both at the same time.
And let me underscore that these dual objectives are possible to achieve - even simultaneously.
We've articulated a "safety-first" investing strategy in a number of reports here in Money Morning over the past few weeks. Rather than go through that all again, we're going to post several of those research reports here for your perusing convenience. Take the time to look them over. Trust me, it will be time well spent. Both reports are free of charge.
- Money Morning Investment Research Report #1: Five Survival Strategies That Will Allow You to Profit Even in a Recession.
- Money Morning Investment Research Report #2: How Dividend-Paying Stocks Can Help You Tame the Bear.
As for the debt-laden consumer that got us into this mess: Well, he's out behind his local Wal-Mart, getting ready to back into the ditch that he helped dig.
Too bad Club Fed isn't out there with him - since it provided the backhoe.
News and Related Story Links:
- Money Morning News Analysis:
The Drumbeat for a Downturn Deepens as Service-Sector Report, Richmond Fed Official Both Point to Recession.
- Money Morning Investment Analysis:
Three Places to Profit in Spite of the Fed's Missteps.
- Money Morning Investment Analysis:
The Three Secret Indicators That Will Pave the Way to Global Profits.
- Dow Jones News Service:
- Money Morning Investment Research Report:
Five Survival Strategies That Will Allow You to Profit Even in a Recession.
- Money Morning Investment Research Report:
How Dividend-Paying Stocks Can Help You Tame the Bear.
Katy Bar the Door.
- Web Site:
RMS Titanic Inc.
Wal-Mart's Distress Signal.
Inverted Yield Curve.
- Honolulu Advertiser:
Wal-Mart is World's Largest Private Employer.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.