Marc Faber could be right about Stocks

Marc Faber’s noticeable absence from financial reporters and television interviewers questions in the past two weeks hasn’t left investors without his previous guidance.  His last call, reported by Wall Street Pit, in which he stated that U.S. equities markets are in the midst of a correction, appears to be still operative.

In his last interview of May 4, Dr. Faber, the publisher and editor of Gloom Doom Boom Report, told Wall Street Pit he anticipates a tumble in U.S. stocks of 10%, noting weakening market internals, including a drop in the number of stocks reaching new 52-week highs.

The S&P500 peaked at 1,364.14 on April 29, a 10% decline from the April high calculates to 1,228.10, or 43 points higher from the close of 1,185.64 on Oct. 26, 2010—the date Faber made his first call for a 10% correction in the 500-stock average—which illustrates the difficulty of timing market tops, even among the best.

In contrast, Faber’s miraculous call of a market bottom on March 6, 2009, when the S&P500 did, indeed, reach the low of 666.79 was much easier for him.  In fact, the call for a bottom on the day during the panic of March 2009 was the easiest call he’s ever made, according to the Swiss money manager who lives in Chiang Mai, Thailand.  As a contrarian market timer, Faber noted the record bearishness in sentiment for stock on March 6 as the basis for his call for an imminent rebound rally in stocks.

But calling tops involves more than watching for extremes in market sentiment. Among many popularly followed indicators and a rather reliable one, is the price of copper, which is also referred to as Dr. Copper for its highly correlated and leading price patterns to equities.

While the S&P500 reached new multi-year highs early this month, the copper price failed to confirm the rally in the S&P, moving lower in May from its February highs, further buttressing Faber’s case for an imminent decline in stocks.

On Feb. 15, copper reached $4.65 per pound, but the price has trended sideways to down since then, trading as high $4.05 in the June contract, yesterday.

However, Faber’s call for a correction in stocks shouldn’t be construed that he is an U.S. equities bear.  Though, when priced in gold, the S&P500 will drift significantly lower, he has repeatedly said, but in nominal terms, Faber expects equities to move higher as long as the Fed continues its zero interest rate policy (ZIRP)—that is, real interest rates after the inflation rate is deducted from the Fed’s overnight federal funds rate target.  Presently, overnight real interest rate is  negative.

In an April 27, 2009, Bloomberg interview, at a time of heightened fear of a global meltdown in the equities markets, Faber cautioned investors to not be too pessimistic as long as the Fed has the power to inject endless capital into the banking system.

“Don’t underestimate the power of printing money,” said Faber.

“The more things will go bad, the worse things become, the more the money printer at the Fed, Mr. Bernanke, will print,” he added. “He will print endlessly. Even if things go bad economically, you could have no revenues at companies and no earnings and stocks will go up because of money printing.”