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The Curse of the Magazine Cover Indicator

 
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Washington, DC -- (SBWIRE) -- 09/19/2013 -- It's fitting that last week former Treasury Secretary Hank Paulson came out to speak about debt issues during a month when Time published a bull on the cover of its magazine. The bull is a symbol of a strong and positive stock market, but it seems whenever a U.S. company makes the cover of a publication, the company is in trouble and that its run is at an end.

As silly as this sounds, studies have supported this idea. Some even call it the curse of the magazine cover indicator. For instance, Princeton economist Paul Krugman once stated that for “whom the Gods would destroy would first put on the cover of Business Week”. He’s not the only one who finds truth in this weird market barometer. A famous example is the bear market of 2000-2002, when in 1999 Time magazine anointed Amazon’s CEO Jeff Bezos as man of the year. The Internet bubble was at its peak and Amazon was near its high of $113 a share. Within twelve months, Amazons’ share price was under $16, an 86% drop.

What then, does this mean for the U.S. stock market? We are approaching the fifth anniversary of the near meltdown of the U.S. financial system in 2008 and a bull has shown up on the cover of Time magazine. Media coverage is aiming to portray us in a full blown economic recovery. Yet this time, I think the editors of Time have figured out the curse because by reading the entire article, the reader would come away with the sense it is suggesting something other than a raging bull.

Both former Treasury Secretary Paulson and Time magazine are suggesting that the too big to fail problem is bigger and more prone to failure than ever because U.S. banks have become even bigger than before the financial crisis. Even with the passage of Dodd-Frank, U.S. bank activities have not been curtailed, certainly not enough to cut them down to size, which is why Hank Paulson said this past week at the Economic Club of New York that another financial crisis for the U.S. is a certainty. Mr. Paulson went on to list three reasons for another financial crisis that we need to watch out for.

First, he mentioned the shadow banking system, which I agree needs to be more transparent to protect investors.

The second thing to watch is the mortgage finance behemoth Freddie Mac and Fannie Mae. They need to shrink to a manageable size. Of the Fed’s monthly injection of $85 billion into the U.S. financial market, about half goes to Freddie Mac and Fannie Mae to stop them from failing. Yikes.

Lastly, there are too many financial regulators, which Paulson believes tend to engage in dysfunctional competition.

Next week, there is a strong possibility that the Fed just may start to scale back its monthly liquidity injections of easy money to the financial markets. The bond markets are already showing deterioration and investors have been paring back. Long–term and medium-term bonds are susceptible to long-term interest rate moves and the ten-year Treasury rate has already jumped this summer from 1.6% to nearly 3%. All of which is highly negative.

The icing on the cake is that the Wall Street Journal reported last week in a survey they did with 47 economists, 2 out of 3 believe the Federal Reserve will begin tapering after the Fed’s meeting next week, which will be tough on the U.S. financial markets since it has not been fundamentals holding up the markets, but the Fed’s easy money program.

So if the re-emergence of former Secretary Paulson and the bull on the cover of Time magazine is any indication as to what investors are up against in the U.S. stock and bond markets, you have been formally warned.

About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She can be reached at dbennett@bennettgroupfinancial.com