Stock market crash looming on horizon?

The 30 percent plunge in silver prices over the past two weeks could be an early warning signal that there’s something going wrong in the markets. I’d even go so far as to say it’s starting to look like 2008 out there.

The 30 percent plunge in silver prices over the past two weeks could be an early warning signal that there’s something going wrong in the markets. I’d even go so far as to say it’s starting to look like 2008 out there. That’s got a lot of investors moving into defensive positions, and that doesn’t bode well for stocks. Here are five signs that it might be time to lighten up your portfolio:

1) New margins on the CME. Changes in initial margin requirements for Comex silver futures have gotten most of the press. A series of recent hikes drove silver margins up 84 percent in just 8 days. What’s gotten slightly less press is the news that the CME Group didn’t limit their margin hikes to silver alone. Margin requirement for crude oil climbed from $6,750 to $8,438 on Tuesday, May 10. The United States Oil Fund LP ETF (NYSE:USO) is down 12 percent since the start of the month. “Increases in margin requirements have a history of triggering selling,” David Kotok, the Chief Investment Officer at Cumberland Advisors, writes at FinancialSense. Kotok noted that his fund is raising cash on the heels of the CME Group’s “game-changing” margin hikes.

2) Bullish on healthcare. It’s always a bad sign when investors start moving into healthcare stocks. Like utilities, the sector is one of few that consumers can’t cut back on when times get tight. Consider this: of the 10 S&P sectors, healthcare has performed the best this year. It’s up 14.9 percent, per Reuters. A lot of people with a lot of money apparently see signs that it’s time to get defensive.

3) The end of QE2. The Fed’s still doing its best to inject more money into the economy with QE2, but we all know that program’s due to end next month. When it does, the cash sloshing around in the stock markets could dry up quickly (just as it did at the end of QE1). Credit Suisse expects at least a 10 percent drop in equities at the end of QE2, according to Reuters. Value investor Jeremy Grantham’s calling for a 30 percent drop in stocks.

4) Weekly Leading Index. The Weekly Leading Index (WLI) from the ECRI (Economic Cycle Research Institute) is closely watched by professional traders thanks to its ability to forecast economic growth. In recent weeks, the WLI has flattened and slowly started edging downward – most recently from 6.6 percent to 6.4 percent. It’s an indication that economic growth is slowing. If regional manufacturing reports due out this week from New York and Philadelphia confirm the trend, the bears could again take the upper hand. And they just might as manufacturers suffer with higher input costs thanks to rampant energy inflation.

5) The debt ceiling debate. For all the drama surrounding the debt ceiling debate, I think Washington realizes they’re truly jeopardizing faith in the dollar. If the ceiling isn’t raised, it would be tantamount to a default on U.S. debt; something that even the most hard-line Tea Party member should realize isn’t a good thing. Even Speaker of the House, John Boehner (R-Ohio), has said as much: “They’ve pushed the date back, pushed the date back, pushed the date back. But it’s clear to me that at some point we’re going to have to raise the debt ceiling.” That should alleviate short-term fears of a bond default, and – coupled with the end of QE2 – move investors back into bonds and the dollar.

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What would happen in the event of a U.S. debt default in 2011?

Even toying with the idea that the U.S. could default on its debt obligations probably has foreign lenders looking for new places to park their surplus capital.

With the drama surrounding Friday’s near-shutdown of the federal government, it’s easy to forget there’s a bigger problem looming: the need to raise the federal government’s debt ceiling. As it stands, government debt is currently capped at $14.3 trillion, and we’ve rung up some $14.287 trillion in debt (and climbing), Reuters reports.

The Treasury estimates we could bump up against the debt ceiling as early as mid-May, although we may be able to extend D-Day as late as July 8. Hitting the debt ceiling sounds innocuous, but the implications are downright scary: if Congress doesn’t raise the ceiling, the U.S. would, in effect, default on some of its loans as there would be little other way to meet the government’s spending obligations.

The only alternative would be balancing the Federal budget overnight, and – according to NPR – that would require slashing spending by 40 percent, raising Federal tax receipts by 40 percent or some combination of the two (translation: it would be all but impossible without crumpling our economy).

If a debt default did happen, it would make the 2008 financial crisis look like child’s play. Treasury Secretary Timothy Geithner was on Capitol Hill last week trying to drive home that fact with Congress. Here are just a few of the problems he sees if the government fails to raise the debt ceiling:

  • Dramatic rises in borrowing costs for all Americans
  • Decreased payments to the military
  • Cuts in social security
  • A surge in unemployment
  • “Thousands, if not hundreds of thousands” of business failures

Defaulting on our government debt, Geithner added, would “call into question the willingness of the United States to meet its obligations” and this would “shake the … foundations of the entire global financial system.”

On top of Geithner’s concerns, we’d probably see more problems:

  • The death of the U.S. dollar’s status as the world’s reserve currency
  • A downgrade of U.S. sovereign debt
  • Hyperinflation
  • A stock market collapse
  • Decreased or complete cessation of payments for Medicaid, Medicare, Social Security, military pensions and other government programs
  • An IMF bailout of the U.S. government
  • Draconian spending cuts imposed by foreign lenders
  • Mass layoffs for state and federal employees
  • School closings and consolidations
  • Protests, demonstrations and widespread civil unrest

In the words of President Obama’s White House spokesman Jay Carney, “failing to raise the debt ceiling would be Armageddon-like.” No matter what your politics, it’s hard to argue with Carney.

Even toying with the idea that the U.S. could default on its debt obligations probably has foreign lenders looking for new places to park their surplus capital. Let’s just hope our Congressmen realizes that there are some issues that take precedence over political maneuvering. We elected them to protect our interests, and raising the debt ceiling is in the interest of everyone.

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