In the past few weeks I have said that I believe the market is overbought, and we are headed toward an early 2011 correction. Well, it is my opinion that such corrections are usually brought about in the media through the proliferation of "bad news", and then traders use that as an excuse to take the market lower. Here is my list of the top ten news stories (in no particular order) that I believe will spur our move lower:
1) The conflict between North and South Korea
Today, South Korea declared North Korea it's enemy. Big shock there. Quite frankly, that tiny man with the crazy here in North Korea is crazy. Tension has been boiling over between them and the rest of the world for quite some time. I believe that any sort of military action in that region would weigh on the markets if it came to pass.
2) Rising interest rates - both in China and here in The United States
While the media will tell you that rising rates here in America are a problem, truth be told, the rate on the 10-year could rise 15% from a 3.50% yield to 4.00% and still be at historically low levels. The problem is, as rates go up, so does the cost to service and obtain debt. Credit cards, adjustable mortgages, new mortgages, you name it. All of those reasons could be tough on American consumers.
On the other hand, China has a similar issue. Anything seen as a negative in China is seen as a negative for the rest of the world. I don't so much buy into this theory, but it's true. Rising Chinese rates will have the same effect on their economy as the reasons I just stated above for the U.S. economy.
3) The Euro Zone's debt problems
We've already had Greece and Ireland. I promise you, they are not the only ones on the other side of the pond with trouble. Portugal and Spain are also going to be an issue, and Spain is a much larger economy than the others.
4) Slowing or no perceived job growth
To quote Adrian Van Eck's most recent publication, "weekly jobless claims remain much improved from their levels of six to twelve months ago. They have been running in the area near 420,000 to 430,000 for a while now. A year or two ago, many economists were saying that weekly jobless claims would have to break below 425,000 before any kind of meaningful improvement in the monthly employment picture could take place." Now that we are at that level, the media and economists are going to want lower numbers. All in due time. Jobs are the last things to come back during an economic recovery.
5) Rising oil prices
Oil is currently around $91 a barrel, and many analysts are saying it's going to $100 or maybe even higher. Such things are sometimes a self-fulfilling prophecy. Higher oil will be seen as an added "tax" on the American consumer, and will drive up the prices of everything from goods to travel.
6) Rising inflation in China
The Chinese economy has been on a tear the last few years, fueled by gobs and gobs of money pumped into the economy by the government. With that came increased real estate and food prices, among other things. As inflation on basic items rises, demand will decrease and I ultimately feel that the huge labor force in China will demand higher wages. As wages increase, so does the cost to produce things, and so does the cost to buy Chinese made goods. The world, especially the U.S. consumes a lot of Chinese goods. See where I am going with this one?
7) Profit-taking
Honestly, the link says it all. The market has made a huge run, and most everybody is bullish as you can tell from the sentiment data I publish in my portfolio updates. Traders will want to lock-in profits at some point...
8) Municipal and State debt problems
A couple days ago, Meredith Whitney went on television and forecasted a major state and municipal debt problem here in the U.S. Meredith Whitney is famous for her call of the Financial Crisis of 2008. While she was right on her predictions then, I think she is borderline fear mongering. While I believe there will be some debt problems, in my opinion, they won't be as soon nor as deep as Meredith is forecasting.
I do not mean to downplay Ms. Whitney's work. I read this story on an obscure news site a few days back, and was astounded that this did not get more national play. Surely, this small Alabama town is not going to be the only one...
9) Iran
See: Korea, North. These folks have a crazy leader with nuclear capabilities too. 'Nough said.
10) Home price instability
October home price data came out this morning, and it wasn't good. Foreclosures are going to weigh on the market for quite some time. However, I can tell you that a realtor friend of mine told me she had her best November ever this year. While the real estate market is quite soft, as I have observed personally, I don't think it's as bad as it is made out to be in the media.
To conclude, while I do not think that all these things are going to happen, and while I think that many of these things have little to no actual economic bearing or consequence to our economy or our markets, I do think that at least one of these stories is going to be played up in the media, and I also believe it will coincide with the market correction I am forecasting.
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