By Anthony Mirhaydari
It was all fun and games just a few a weeks ago. The bulls shrugged off troubles in the emerging world. China's debt problems were dismissed. The currency volatility of Argentina and Turkey were ignored, after all, the two countries combined have a smaller annual output than Texas.
But that is all changing now as the economic slowdowns hitting China, Russia, and elsewhere lands here at home. And the realization that the U.S. cannot be an island onto itself, but is sensitive to the fluctuations of fortunes of its trading partners, is deepening the worst market downtrend since late 2012.
On Monday, we learned that U.S. factory activity growth is slowing at a rate not seen since 2011.
And the Markit U.S. Manufacturing PMI, on a seasonally-unadjusted basis, suggests manufacturing activity is contracting on a month-over-month basis for the first time since 2009 in the midst of recession. That's bad news, especially for corporate profits.
On Tuesday, we learned that factory orders dropped at a rate not seen since July as inventories swell. That suggests the weakness in manufacturing activity will continue.
All of this couldn't come at a worse time for households, who relied on credit and savings to fund what was still a disappointing holiday 2013 shopping season. Higher taxes, stagnant wages, and persistent inflation in things like food have eroded away their purchasing power. You can see how real disposable personal income is now contracting at an annual rate not seen since the mid-1970s—exceeding the lows set during the recession/financial crisis.
Moreover, despite a quick-than-expected drop in the unemployment rate (due mainly to people dropping out of the workforce) payroll gains disappointed last month rising just 74,000 vs. the 200,000 that was expected. You have to go all the way back to January 2011 to find another month in which hiring was so tepid.
And due to all of the factors above, as well as the rise in interest rates seen last year that pushed the 10-year Treasury yield above 3% recently, the housing market is under pressure with pending home sales down nearly 9% in December over November for the weakest result since, you guessed it, 2011. The Federal Reserve's loan officer survey pointed to a sizable drop in demand for new mortgages.
Add it all up, and the emerging market problems are opening the door to a hit to the real economy here at home. Investors should continue to maintain a defensive positioning, focusing on safe havens like U.S. Treasury bonds and opportunistic short plays. The leveraged Direxion 3x Treasury Bond Bull /zigman2/quotes/209018185/composite TMF -4.54% is up 12% since I added it to my Edge LetterSample Portfolio on January 10. I also just closed a short play against Brazilian steelmaker Companhia Siderurgica Nacional /zigman2/quotes/207286412/composite SID -1.49% , which gained 12%.
Thanks to a skeptical outlook, the Edge Portfolio gained nearly 16% in January vs. a near 2% loss for the S&P 500.
Disclosure: Anthony has recommended TMF to his clients.