Picture This

"Every picture tells a story." - Proverb

Looking at tea leaves you can apparently predict the future.  I am not sure that I will ever believe that but the charts below seem to indicate that the future for the market is tough sledding ahead.

The first chart shows the S&P 500 chart for the past twelve months.  As you can see the index was stuck in a trading range for most of the year before falling to the support line around 185.  It bounced there but could not break above the resistance at 900 and appears to be under duress at present. 

Before drawing conclusions it is always good to take a look at what some consider to be the market's leading indicator and that is the Russell 2000.  This index is made up of 2000 smaller companies that make up a broader market and also tend to lead the charge on both the up and downside.  The reason being that smaller companies benefit from and feel the pain of positive and negative market impacts far earlier than the larger companies.  Taking a look at this index and one can see that the lows of 2014 have still not been reached.  In fact this index is holding up better than the S&P 500 at present but that said it also looks weak and if the lows of 1050 are broken it could signal a very poor market ahead.

The final index that I want to look at today is the Dow Transportation Index.  There has never been a period of new market highs without the transports recovering and settling into a long run bull market.  The reason for this is that transports are the pipes of the economy that funnel growth.  If these pipes are crammed full then things should be going well and if not watch out below.  It is clear, looking at this chart that the transports are signalling more weakness.  Not only are they in a prolonged downward trend but they have clearly breached the 2014 lows and are not showing any clear signs of a recovery.

So while the Federal Reserve once again begins its jawboning about raising interest rates it is clear that the market is uneasy and while we may have just entered a correction it is certainly looking like some more pain lies ahead and I would not view this as a buying opportunity.

Boxed In!

What a surprise, the Federal Reserve this week left interest rates alone.  Readers of this blog would have expected nothing else but what is now interesting is that this move shows how the Federal Reserve is completely boxed in.

The market got what it desperately needed, low interest rates to prop up ever higher values and free money to go deeper into margin debt, but after the S&P 500 jumped to 2018 minutes after the announcement was released it dropped 60 points or almost 3% a day and a half later!  Had the Federal Reserve raised interest rates it may have cratered even more so it is clear that regardless of which direction they head the one banner of hope, the US Stock market, has decided that enough is enough.

Everywhere that you look people are losing their jobs.  HP, Qualcomm and the LA Times being the most recent companies to announce mass layoffs but I am sure there are more to come.  The slow down in China and the rest of the world is having a marked impact on large US business and this is feeding into an accelerating slowdown in the global economy.  Whether the market bounces around here for a while before cratering or whether it keeps accelerating to the downside it is clear to me that the world's economy is in bad shape and this will feed into market returns.

It is also clear that printing money and giving it to banks to exploit does not work.  It never has, it never will and it certainly is not working now but I am sure that if the market continues its downward spiral that they will fire up the printing presses in one more effort to prove that they can fix the problem with even more debt.  Moreover I expect that they will be joined by the rest of the world's central bankers in one last almighty money printing effort.  This is the fuel needed to explode gold and precious metal prices higher and with the mining stocks at decade lows it is, to me, the only place in the market to allocate investment dollars.

I have said it over and over in the last few months but I see no reason to invest in the stock market other than in precious metals and mining stocks but as those normally make up a very small portion of an investment portfolio I would advise cutting your exposure to a 10th of what it normally would be and wait it out or, as I am doing, find alternative investments that will take advantage of the situation and alleviate the daily stress of an overly hyped market.

The world engulfs the USA

"You know, I think of the global economy as an inverted triangle, resting on the shoulders of the American consumer.  and if the American consumer cannot have enough disposable income in order to maintain a standard of living that creates more opportunities generation after generation, that's bad for everyone." - Hilary Clinton

In decades past the world was firmly in the palm of the United States' hand.  Whatever happened economically in the United States was immediately exported to the rest of the world but as recent troubles in China have shown, those days are over.  While this was always inevitable the speed at which it has happened is truly amazing and the impact on ones portfolio need to be addressed in far more of a global light than ever before.  It appears that the world has now finally engulfed the United States and the scary part of it is that as the quote above shows our political leaders have their heads deeply buried in the sand (or somewhere else far from reality).

One of the biggest issues with the current economic arena in the United States, and one that I have discussed at length in previous blogs, is the tilting of the playing field firmly in the direction of big business at the expense of small business.  For the past 50 years or more big business has employed legions of lawyers and lobbyists to drag government policy toward their side of the ring.  In addition to this politicians are no longer ordinary people bent on improving the lives of their citizens but are career political clowns.  The mix of the two has created a huge divide between the upper and lower classes and this can be seen in the frequent social unrest across the country (mostly related to police brutality and race discrimination but the aftermath gives a sense that their is more to the frustration).

As large business is now clearly in the pound seat when it comes to business laws, political control and access to capital, the effects of global problems are felt very quickly.  Back in the 90's when there was a problem outside of the United States' borders the impact was minimal for the simple reason that small business was in its prime and large swaths of the economy relied exclusively on their output.  These businesses were more immune to a slowdown or problems abroad as their market was local not global.  According to the SBA the percent of GDP related to small business in the United States has fallen from 51% to 45% since 1998 and the downward trend shows no sign of turning the corner.

Furthermore back then large business had more of its products consumed within the country's borders than outside but today with small business reeling and large business exposed across every border in the globe, crises from abroad impact the United States almost instantly.  So while the current slowdown in China may not necessarily mean a recession there it could easily export a recession to the United States for the simple reason that a large portion of United States company revenue and earnings growth has come from China's previously strong economic growth.  Add to this continued slow growth in Europe and Japan and external forces are now having a larger than normal impact on the United States economy.  As a larger than normal percent of US GDP growth is reliant on large business (55% and climbing) and the companies that make up the S&P 500 are feeling the pinch in both their revenue and earnings growth, the impact of a global slowdown is being felt very rapidly in the United States.

If the playing field was more balanced and small business was booming, the issues abroad may be contained slightly more but the greed of both policy makers and large business is now coming back to haunt the United States who will continue to struggle with economic growth and wage distortions until the structural issues that have been created over the last 50 years are unwound.  The problem is that outside of Donald Trump every candidate is a career politician with no incentive to change the rules as doing that would hurt the people changing the law - themselves!  Now while I am not a fan of Donald at least he is a breath of fresh air and while he more than likely will not win the presidency he has certainly gained the ear of the American people for the simple reason that they are fed up with more of the same.  It is a pity then that the politicians cannot see the error of their ways and start to make amends but until then expect the market to become more prone to huge swings associated more with the outside world's issues than with problems in the United States.  Time to brush up on your macro-economics as this will have more impact on the market direction than a set of good financial results.

The Palm Tree Index

"Never make a prediction, especially about the future." - Casey Stengel

In our efforts to extrapolate an edge over the market we investors and analysts are constantly searching for a predictive index or data points that give us proper insight into the future of the economy.  In the good old days Warren Buffet used to go to Disney movies repeatedly just to see how full the cinema was so that he could estimate whether Disney stock price was undervalued and worth owning.  Nowadays hedge funds often acquire the rights to satellite images of shopping malls during the holiday season to see how full they are and then use this data to try to predict how strong the holiday shopping season will be.

While these efforts may have some validity there are numerous indices that are completely useless such as the football index that has predicted the year's market direction about 80% of the time based on whether an NFC or an AFC team wins.  There is obviously no correlation between the index and the market so the index is a mere coincidence.  With the current market volatility and the questionable reasons being given for the negative sentiment (such as a quarter percent rate hike), it seems to me that it may be time to look at two indices that have some presidence regarding the future.

Before I look at these one needs to understand that assuming the Federal Reserve makes an adjustment to the interest rates the immediate impact on the economy is purely psychological.  There will be minimal difference in the rate charged to home buyers, there will be limited impact on companies borrowing money and you will not see a sudden spike in the interest rate on your credit card.  The initial move is more of a signal to the market that the economy is overheating and requires some cooling down.  This is the first step in a long road to supposedly finding that happy medium between growth and overheated.  An increase in rates takes time to achieve its goal of slowing an overheated economy and as the economy is far from overheated I would expect at most a very gradual controlled rate increase rather than the accelerated pace that we witnessed under Greenspan back in the late 90s when he was fighting a true bubble (by the way one that he created with his loose policies).

The first index that I want to discuss is the price of copper.  As I have mentioned previously, copper is a global product that is driven by the forces of demand and supply.  A rise in the price shows growing global GDP while a sharp drop in the price of copper shows a world where GDP is slowing quickly.  While the price of this commodity is fairly volatile the price has been in a tail spin since May falling from around $3.00 to $2.25, a drop of 25% in 4 months.  This indicator is clearly signalling a sharp global contraction.

The second index that may seem a little on the wild side but is what I am referring to as the Palm Tree Index.  A friend of mine has a palm tree business and each time the economy slows his business feels the heat almost instantly.  The underlying reason is put down to discretionary spending and people and companies will cut out the palm tree for a much cheaper tree when times start to become difficult.  In his words; "When the market tanked last time (2008) I saw the slow down coming in palm trees well before the #@!# hit the fan --the phone stopped ringing -- ironically my business has been crazy busy this year until about two weeks ago -- the phone has stopped ringing -- somewhat similar to back in 2005 without the weird mortgages."

So while the Federal Reserve toys with the idea of slowing the economic growth engine with its first rate hike in years I believe that the rest of the world's woes are doing this job nicely and it may be that we are very close to a global recession.  Certainly not the time to be putting on the brakes and it may be that with hindsight the historians will come to the conclusion that as in the 1930s so again in 2015, the brakes were put on at the exact wrong time.  This certainly would not surprise me in the least but one thing is for sure it is a critical decision for the globe economy.  Palm trees anyone?