"A well used minimum suffices for everything." - Jules Verne, Around the World in Eighty Days
This week's blog takes a very quick look at the big picture and what headwinds the market faces. It will have to be brief as there is so much news floating around that to make sense of it can be overwhelming so below is my summary of the main economic events that should impact the markets.
The Federal Reserve left interest rates unchanged and hinted that another hike may be off the table. This is significant due to the fact that (as I have mentioned repeatedly throughout my blog posts) they have backed themselves into a corner and the rest of the world's weakness is now forcing their hand. A continued downward spiral in the stock market will negate another interest rate hike particularly if the economy starts to feel the headwinds of slow global growth.
Fourth quarter GDP growth was far lower than anticipated coming in at 0.7%. This is anemic to say the least. Another quarter like that and you will start to see the unemployment numbers start to ratchet back up as companies try to protect their bottom lines by cutting costs. Once again no interest rate hikes will be made if weakness continues to spread. Furthermore, continued weakness may even lead to the reversal of the 1/4 point that they so proudly unveiled a few months ago. Now that would be egg in the face!
Japan joined the growing throng of countries moving into negative interest rate territory. So another country where you now have to pay to lend money to a government that is essentially broke! NICE! In a desperate attempt to shore up an economy teetering on the brink of recession they moved yesterday to lower interest rates below zero. At first the Nikkei rallied but then reversed course as the Japanese equity investors finally worked out that low interest rates do not necessarily mean growth and in fact this lowering of interest rates is more a sign of weakness and a coming recession than of impending strength.
The result of the Japanese move is a burgeoning dollar which will cause further problems for the struggling emerging economies. At around a 2.00% yield the United States 10-year treasury is looking like something of an outlier in the world of bond investing and, as interest rates trend lower around the globe, I would anticipate more and more money flowing into the United States pushing the dollar far higher. The upshot of this is that the Federal Reserve, unlike China as you will see below, has the ability to use this influx of capital to stimulate the economy but the issue is that their preferred methods are not and will not work.
China is grappling with an outflow of money into dollars and other currencies. This outflow is causing them problems as their foreign reserves are transferred away from government control and into the hands of investors and business owners who are moving money off shore at an alarming pace. Welcome to the world of global currency markets. In joining the global basket of currencies one of the mainstays of that club is that members have their currency freely available and this loss of control is moving economic control away from China's central government. It will be interesting to see how this plays out but I would guess that currency controls will soon be put back into place and this could destroy an already weakened economy as international investors shun a country whose fiscal policies are inward looking.
Taking the above main issues and placing them in context of a central banker what are you able to really do? Interest rates are essentially zero to negative, money printing has not worked, inflation will not be your savior as crude oil remains at depressed levels and as the world's economy sinks countries are increasingly turning inward rather than opening up their borders to trade. Well there are a couple of prongs left. One is to lower taxes and the other is to spend money directly on infrastructure and other projects. These may have the necessary impact of stimulus but in an election year neither of these are on the table so I expect that the market will continue to take it on the chin in 2016.
Friday, January 29, 2016
Friday, January 22, 2016
Are we having fun yet?
"Never, ever underestimate the importance of having fun."
I'm going to keep having fun every day I have left because there is no other way of life. You just have to decide whether you are an Eyore or a Tigger." - both quotes by Randy Pausch
It is interesting that the market seems to be trading in tandem with the price of oil and certainly the press has latched onto this as the main culprit for the draw down but I ask you, what is the correlation between a low oil price and a technology company? It is certainly loose at best and non existent normally, so what the market must be sensing is that the weakness in oil is more about a lack of demand rather than a glut of supply. This would indicate that the world economy is weaker than anticipated which would feed into technology earnings and therefore impact the stocks. That said in the commodity world there is a wonderful saying that low prices end low prices and high prices end high prices. This will be true of the oil price as at some point the price will be so low that producers will close down slowing the supply while consumers will be ramping up the purchase of large fuel guzzling trucks and the price will swing to the upside. This day however I feel is some way off.
According to the oil industry estimates, the glut of crude will be here for at least another 12 months and that is based on some pretty rosy projections by the IMF for global growth in 2016. While the IMF has already cut its global growth forecast by 10% to 3.4% (and we are only in January) I suspect that there are more cuts to come and that we could end the year with global growth well off this number. In this scenario of weakening global growth it would appear that any short term market rally is an opportunity to sell your remaining positions rather than a signal that the good times are back.
There is one caveat though and that is the Federal Reserve. While they are almost forced to sit on the sidelines at present, if the market falls apart they will step in and that could be a short term buying opportunity. I say short term because at some point the market will wake up to the fact that their efforts are not repairing any of the world's economic problems but are creating a larger ones. The sad part is that they have managed to export their poor economic solutions to the rest of the world and that is the real problem!
At present though it looks like we may escape a recession which would mean a relatively short sharp draw down in stocks to a level more commensurate with the economic outlook and current company earnings forecasts. This level though is still at a minimum another 20% from here so I would expect more pain ahead in the coming weeks and months.
Friday, January 15, 2016
The Fed to the Rescue?
With the markets in full correction mode it will be interesting to see what the Federal Reserve does going forward. I would doubt that there will be an interest rate hike in March as it is should now be clear to the Federal Reserve that the market is completely reliant on their support and without it a bear market will begin. As we wait for their decision market participants like to point at something as a cause for their woes and present it is China and the price of crude oil that are being blamed but the problems run far deeper than that.
Certainly the low price of crude oil is playing havoc in the economies of those reliant on crude oil exports but outside of that it is a win for companies like Ford who will sell more large trucks (the bedrock of their profits), airlines and commuters around the globe who are feeling some relief at the pump. Outside of these headlines is the high yield (or junk) bond market which is reeling as many loans were to the fraking industry which is highly over leveraged. No doubt there will be numerous defaults and bankruptcies to come from this industry but that alone is not enough to undermine the market to this extent, particularly as crude prices have been low for over a year.
China's problems are of a larger concern because they have become an economic power and a major part of the global growth story. With their growth dropping precipitously and with a lot of their growth reliant on poorly performing state run businesses it is clear that their growth will languish well below 7% for the foreseeable future and this will cause a significant drag on global growth. The results of this fallout are being felt throughout the developed world as companies like Apple are discovering that without meteoric growth in China sales growth is hard to come by. For this reason the S&P 500 companies will earn more than 20% less than what they earned in 2014 and combined with a market that has stretched to one of the highest price to earnings ratios in history, the result should logically be a bear market.
The questions that should really be asked are, 1) will the Federal Reserve reverse course and come to the market's rescue and, 2) will a bear market cause a recession in the United States? To answer the first question one need look no further than the actions of the Federal Reserve since the Greenspan era. Yes they will come to the aid of the markets but the question is will the markets react to the stimulus with enthusiasm or despair? If one thinks about it rationally despair should be the answer but stock investors will look past the "Hail Mary" pass from the Federal Reserve and will more than likely rally the market. Should the Federal Reserve do this then, as I have repeatedly explained throughout the years of this blog, the future fallout will be even worse than it would be if they left things alone. How many more times do we have to witness this folly? But, amazingly they continue to believe in their methods and have even managed to convince the rest of the world's central bankers to follow suite. Next time around though they will have to double down so it is likely that we are looking at $10 trillion more of wasted money rather than the trifling $5 trillion that has been spent to date and this should create a much larger problem! Well done them!
The main issue to me though is will we enter a recession in 2016? As a small business owner it finally felt in 2015 that the whole "trickle down" theory had finally started to reach the man on the street. There was more money being spent on consumer items and profits started to appear. For the first time since 2009 the small business owner was making headway! A recession would undercut this grass shoot recovery and that would be a real tragedy as the middle class rely on small businesses for their survival. Already the Great Recession has created a massive imbalance in the structure of United States society by wiping a large swath of the middle class away. Should this class continue to contract the economic repercussions would be deeply felt and would create a massive disturbance in the force (I couldn't help myself)! The force that I refer to is the United States economy which would take years if not decades to recover if the middle class contracts much further. Furthermore, with large businesses feeling the effects of a global slow down it is imperative that small business pick up the slack; they are more insulated from global market shifts, they are the job engine of the United States and the middle class's last bastion of hope. A recession would undermine this and would result in a true economic disaster.
Unfortunately, unless the selloff in the stock market is quick and sharp the effects of this will feed into the public's outlook and consumer sentiment will crater. With it wallets will close and the first to feel the impact will be the small business owner. My hope (and as all readers of this blog will know hope is the worst of all four letter words) is that we have a 30% to 40% market sell off in a swift three to six month period followed by a steady recovery based on proper fundamentals but the chances of that happening are slim to none, but we can always hope!
Certainly the low price of crude oil is playing havoc in the economies of those reliant on crude oil exports but outside of that it is a win for companies like Ford who will sell more large trucks (the bedrock of their profits), airlines and commuters around the globe who are feeling some relief at the pump. Outside of these headlines is the high yield (or junk) bond market which is reeling as many loans were to the fraking industry which is highly over leveraged. No doubt there will be numerous defaults and bankruptcies to come from this industry but that alone is not enough to undermine the market to this extent, particularly as crude prices have been low for over a year.
China's problems are of a larger concern because they have become an economic power and a major part of the global growth story. With their growth dropping precipitously and with a lot of their growth reliant on poorly performing state run businesses it is clear that their growth will languish well below 7% for the foreseeable future and this will cause a significant drag on global growth. The results of this fallout are being felt throughout the developed world as companies like Apple are discovering that without meteoric growth in China sales growth is hard to come by. For this reason the S&P 500 companies will earn more than 20% less than what they earned in 2014 and combined with a market that has stretched to one of the highest price to earnings ratios in history, the result should logically be a bear market.
The questions that should really be asked are, 1) will the Federal Reserve reverse course and come to the market's rescue and, 2) will a bear market cause a recession in the United States? To answer the first question one need look no further than the actions of the Federal Reserve since the Greenspan era. Yes they will come to the aid of the markets but the question is will the markets react to the stimulus with enthusiasm or despair? If one thinks about it rationally despair should be the answer but stock investors will look past the "Hail Mary" pass from the Federal Reserve and will more than likely rally the market. Should the Federal Reserve do this then, as I have repeatedly explained throughout the years of this blog, the future fallout will be even worse than it would be if they left things alone. How many more times do we have to witness this folly? But, amazingly they continue to believe in their methods and have even managed to convince the rest of the world's central bankers to follow suite. Next time around though they will have to double down so it is likely that we are looking at $10 trillion more of wasted money rather than the trifling $5 trillion that has been spent to date and this should create a much larger problem! Well done them!
The main issue to me though is will we enter a recession in 2016? As a small business owner it finally felt in 2015 that the whole "trickle down" theory had finally started to reach the man on the street. There was more money being spent on consumer items and profits started to appear. For the first time since 2009 the small business owner was making headway! A recession would undercut this grass shoot recovery and that would be a real tragedy as the middle class rely on small businesses for their survival. Already the Great Recession has created a massive imbalance in the structure of United States society by wiping a large swath of the middle class away. Should this class continue to contract the economic repercussions would be deeply felt and would create a massive disturbance in the force (I couldn't help myself)! The force that I refer to is the United States economy which would take years if not decades to recover if the middle class contracts much further. Furthermore, with large businesses feeling the effects of a global slow down it is imperative that small business pick up the slack; they are more insulated from global market shifts, they are the job engine of the United States and the middle class's last bastion of hope. A recession would undermine this and would result in a true economic disaster.
Unfortunately, unless the selloff in the stock market is quick and sharp the effects of this will feed into the public's outlook and consumer sentiment will crater. With it wallets will close and the first to feel the impact will be the small business owner. My hope (and as all readers of this blog will know hope is the worst of all four letter words) is that we have a 30% to 40% market sell off in a swift three to six month period followed by a steady recovery based on proper fundamentals but the chances of that happening are slim to none, but we can always hope!
Friday, January 8, 2016
Now what?
"And now we welcome the New Year. Full of things that have never been." - Rainer Maria Rilke
I'm back from a few weeks off and I have to say I had a great time and I hope that you did too. But now it is back to business and I have to say that I cannot resist bashing on the Federal Reserve. I have to wonder what is going through their minds now that they have made their first rate hike since the iPhone was invented and have watched the market fall almost 10% from its November peak. Since November 3rd, 2015, the S&P has fallen (as of the close today) by 8.6%. This is not quite an official correction but well on its way to one. In fact if calculate the percent drop from its all time high in May then we have officially entered a correction. It certainly appears as if the market could head a lot lower in the near term as there are really no catalysts that I can see to propel a rally; earnings should be weak this quarter, the Federal Reserve has backed itself into such a corner that to come out to rescue the market so soon after a mere 1/4% rate increase would be to admit a complete failure of their policies and globally economic growth is absent. So I was asked the question, now what?
Well as long time readers of my blog know I have been expecting this for some time and while I was calling for the markets to collapse a while ago it should have given you plenty of time to scale back your holdings in equities. By now I would expect that you are holding minimal equity positions but if you are still holding on for dear life I would plan to sell at any rally as to me this weakness is far from over and, as I have been repeatedly saying, printing money has never and will never fix the global economic woes. The more money that is printed the bigger the disaster that will befall us and as equities have risen almost unabated for an unprecedented number of years the selloff should be sharp and deep. While timing a market top or bottom is impossible there is still time right now to exit at healthy gains so I would take any market rally to sell positions that are causing you sleepless nights.
The next step for those of you willing to play the game is to go short or buy put options. One problem with both of these strategies, particularly now, is that they will be expensive and you can lose even if you are right and the market falls further as once you feel the burn in your most precious of body parts it is incredibly hard to stay the course. Plus of course there is the Federal Reserve that can change its course and throw the market one more lifeline reversing the natural trend of the market and once again creating a fictitiously buoyant market at the expense of those of us short. Believe me that is no fun and I have the blisters and burns to prove it. So for most of you this strategy is off the table.
The next strategy would be to move into a cash position. There is little wrong with this strategy other than for most people money tends to burn a hole in their pocket meaning that they move back into risky positions way too early and get burned anyway. This is also a timing strategy and as I have proved with this blog, trying to time a market top or bottom is incredibly tough to do which means that unless you are anticipating another bear market (as I am) sitting in cash is going to also prove hard to bear and you will probably miss the entry point. That said I quite like this strategy as long as you can remain patient and accept meager returns (but no losses which is key) while you wait for a sign of an economic recovery or an entry point. That said I would expect that this blog post will provide you enough signals as to when things are overdone, not that I am expecting to call the end of the fall as that is impossible but I can give you advance notice that you should start to slowly dip into the long positions that you crave.
The next strategy is one I have been employing for the past few years in anticipation of these events and that is to invest in positions that should benefit from the fall. While I am short the market in various forms and I have a decent cash position, the majority of my portfolio is invested in an underlying strategy that should continue to benefit from both the market's fall and the continued low interest rate environment. This strategy took years to develop but is gaining in strength each day. Not that I plan to reveal my strategy here but there are plenty of investment strategies that you can deploy that do not require an allocation to the stock market but continue to provide you with an excellent rate of return. Some ideas are buying written off debt, finding rental properties, investing in privately held businesses, learning how to create a career in the bankruptcy and turnaround markets to name a few. The problem with these strategies is that you should have been entering them years ago rather than piling into one of them today but if you would like to learn more feel free to drop me a line and we can discuss these ideas in more detail but suffice it to say as I did in the last blog I wrote before the holidays, THIS IS NOT A BUYING OPPORTUNITY!
I'm back from a few weeks off and I have to say I had a great time and I hope that you did too. But now it is back to business and I have to say that I cannot resist bashing on the Federal Reserve. I have to wonder what is going through their minds now that they have made their first rate hike since the iPhone was invented and have watched the market fall almost 10% from its November peak. Since November 3rd, 2015, the S&P has fallen (as of the close today) by 8.6%. This is not quite an official correction but well on its way to one. In fact if calculate the percent drop from its all time high in May then we have officially entered a correction. It certainly appears as if the market could head a lot lower in the near term as there are really no catalysts that I can see to propel a rally; earnings should be weak this quarter, the Federal Reserve has backed itself into such a corner that to come out to rescue the market so soon after a mere 1/4% rate increase would be to admit a complete failure of their policies and globally economic growth is absent. So I was asked the question, now what?
Well as long time readers of my blog know I have been expecting this for some time and while I was calling for the markets to collapse a while ago it should have given you plenty of time to scale back your holdings in equities. By now I would expect that you are holding minimal equity positions but if you are still holding on for dear life I would plan to sell at any rally as to me this weakness is far from over and, as I have been repeatedly saying, printing money has never and will never fix the global economic woes. The more money that is printed the bigger the disaster that will befall us and as equities have risen almost unabated for an unprecedented number of years the selloff should be sharp and deep. While timing a market top or bottom is impossible there is still time right now to exit at healthy gains so I would take any market rally to sell positions that are causing you sleepless nights.
The next step for those of you willing to play the game is to go short or buy put options. One problem with both of these strategies, particularly now, is that they will be expensive and you can lose even if you are right and the market falls further as once you feel the burn in your most precious of body parts it is incredibly hard to stay the course. Plus of course there is the Federal Reserve that can change its course and throw the market one more lifeline reversing the natural trend of the market and once again creating a fictitiously buoyant market at the expense of those of us short. Believe me that is no fun and I have the blisters and burns to prove it. So for most of you this strategy is off the table.
The next strategy would be to move into a cash position. There is little wrong with this strategy other than for most people money tends to burn a hole in their pocket meaning that they move back into risky positions way too early and get burned anyway. This is also a timing strategy and as I have proved with this blog, trying to time a market top or bottom is incredibly tough to do which means that unless you are anticipating another bear market (as I am) sitting in cash is going to also prove hard to bear and you will probably miss the entry point. That said I quite like this strategy as long as you can remain patient and accept meager returns (but no losses which is key) while you wait for a sign of an economic recovery or an entry point. That said I would expect that this blog post will provide you enough signals as to when things are overdone, not that I am expecting to call the end of the fall as that is impossible but I can give you advance notice that you should start to slowly dip into the long positions that you crave.
The next strategy is one I have been employing for the past few years in anticipation of these events and that is to invest in positions that should benefit from the fall. While I am short the market in various forms and I have a decent cash position, the majority of my portfolio is invested in an underlying strategy that should continue to benefit from both the market's fall and the continued low interest rate environment. This strategy took years to develop but is gaining in strength each day. Not that I plan to reveal my strategy here but there are plenty of investment strategies that you can deploy that do not require an allocation to the stock market but continue to provide you with an excellent rate of return. Some ideas are buying written off debt, finding rental properties, investing in privately held businesses, learning how to create a career in the bankruptcy and turnaround markets to name a few. The problem with these strategies is that you should have been entering them years ago rather than piling into one of them today but if you would like to learn more feel free to drop me a line and we can discuss these ideas in more detail but suffice it to say as I did in the last blog I wrote before the holidays, THIS IS NOT A BUYING OPPORTUNITY!
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