This Week in Barrons – 12-27-2015:
Thoughts:
“The more violent the storm, the quicker it passes.” … Paulo Coelho
Dear Ms. Yellen:
I hope that
you and your family are having a happy holiday season. I wanted your thoughts on a discussion that
SF and I were having last week on GF’s ‘The Exporting Crisis.’ It seems many of the top exporting nations
are worried about the currency ‘race to the bottom’. Countries like South Korea and Germany are
extremely efficient exporters – to the tune of exporting about half of their
GDP. And at one time this ‘export’ ability
was an asset, but now customers are holding exporters hostage. You’ve no doubt heard the saying: “If I owe
you $1 – it’s MY problem, if I owe you $10m – it’s YOUR problem.” Currently customer problems have become the exporting
country’s problems – because an exporting country’s economic, political, and
social lives depend upon their ability to continue to export.
Recently, the
lack of appetite for Chinese goods (specifically in the U.S.) became an
exporting crisis for China. That, in
turn, created an exporting crisis for those fueling China’s economic growth,
including oil and other raw material exporters. China had assumed that the U.S. and European
economies would recover, and would resume importing Chinese goods. South Korea assumed that China would resume
prior levels of production, and would resume importing their goods. Even now, the world is assuming that the
collapse of oil prices and of secondary exporters like South Korea will recover
and return to previous levels.
Putting
these assumptions aside, there are additional, critical exporting and currency
related issues. Germany (for example) is
the world’s fourth largest economy, exporting just under 50% of its GDP.
Germany
needs to maintain the European free trade zone at all cost, and is therefore
leading the Euro lower in the ‘currency devaluation race’. Germany is the most effective economy in Europe,
and also the most insecure. It is
incredibly vulnerable to any reduced demand for its products. Its prosperity and full employment depend upon
its export system. However in a ‘no or
low growth’ world, the appetite for exports has become less than robust. There are enormous pressures on German exporters
to seek new markets. Now it becomes even
clearer why the Eurozone/Germany needs to continue to devalue its
currency. A cheaper Euro allows German
suppliers to be the ‘low cost provider’ and to more easily penetrate new
markets.
In contrast,
the U.S. only exports 13.5% of its GDP, but is the producer of almost
one-fourth of the world’s GDP. The U.S.
has relatively high domestic consumption, and therefore relatively limited exposure
to foreign dysfunctions.
It comes
down to the exporting economies being extremely vulnerable to their existing
customers during ‘no or low growth’ environments. Europe and Asia (due to their natural
‘exporting’ nature) are currently in chaos.
So insulating ourselves from them economically via an interest rate hike
was a good thing. Also the ‘export-based
economies’ are beginning to experience lower-priced competition from East
African countries and from some neglected parts of Asia. These countries are developing production capabilities
in garments and cell phones, and are proving to be worthy competitors to the
Europeans and Asians.
I worry that
we are entering an era of European and Asian economic and social instability –
where no amount of QE or currency devaluation can save their economies from
real export competition and reduced consumption. History tells us that the only solution for a
downturn in an export-based economy – is war.
The only solace is: “The more violent the storm, the quicker it passes.”
The Market...
Factually:
-
Existing home
sales fell 10.5% in November – making it (arguably) the largest November drop
ever.
-
If you chart the
S&P for the past 6 months, you will see is a series of lower highs attained
on various bounces. After the August
lows and then the September retest of those lows, we charged higher – running out
of steam at 2109. Then we pulled back, and another push higher to 2102. Then we faded again, followed by another run-up
to 2091. Then we plunged, only to be followed by a snap back rally to 2073. Each high number has come up slightly shy of
the previous one: 2109 to 2102 to 2091 to 2073. That's not a tremendously
bullish omen.
We just came through a
powerful 3-day bounce, followed by a pause on Thursday. So what’s next? We are in the time slot for the ‘Santa Claus
Rally’, and many are hopeful that the next 8 trading days will bring us back to
the year's highs. It certainly
could. After all, markets no longer
require fundamentals to go higher.
We're coming into the last
4 trading days of the year, and two out of my three predictions have come true.
1. China was accepted into the IMF's SDR reserve
currency basket.
2. The FED did NOT do any more QE, but did increase
rates.
3. And, in May I said that the market had ‘topped’ and
without any new stimulus or QE, we would not see new highs this year. So far so good.
To see new highs by
yearend, the S&P needs another 70+ points and the DOW needs 760 points. And even for these banksters, 760 points in 4
sessions is a stretch.
For 2016, I’m hearing
rumblings that Central Banks would like to do a ‘Helicopter Drop’. What’s a ‘Helicopter Drop’? The idea is that when all else fails to stimulate
an economy, Central Banks will find ways to get cash directly into consumers
pockets – bypassing the idea of ‘trickle down’.
For example, what if you woke up Monday morning to a ‘Treasury Tax
Rebate’ where $10,000 dollars had been wired into everyone’s bank account. Some might save it, but the U.S. (being a
consumption society) would see most people busting down doors to get to the
malls and car dealers as quickly as possible.
Instantly ‘Business would be Boomin’, and for a short period of time the
surge in the economy would be epic.
This is exactly what's
being talked about as a serious suggestion for the Eurozone, and eventually the
U.S. Remember, exporters need consumers
to survive. But can you imagine the
idiocy of such a decision? First of all,
the money would be printed out of thin air, and therefore the value of that
currency would be crashing. Secondly, all
of that printed money would end up on some ledger as being more debt that could
NEVER be repaid. And finally, think of the
shortsighted nature of that decision. Just
like the trillions in QE over the past 6 years has ‘drawn forward’ demand, and now
that QE is dwindling – the demand is drying up along with it. The same thing would happen with a ‘Helicopter
Drop’. Uncle Sam would give every
citizen $10K to spend. Millions would rush
out and buy every gadget they ever wanted. The gadget suppliers would ramp up production
to meet demand. The suppliers of the raw
materials to make the gadgets would be hiring, and everyone would be happy –
until the last person spends his $10K.
Then instantly demand goes
back to where it was BEFORE the $10K hit everyone's pockets. The effect would be over. All those extra miners, refiners, assemblers,
trains etc. would sit idle (as they are now). Refresh my memory, but wasn’t this what QE was
supposed to do – jump-start a slowing economy?
I fail to comprehend the idea that doing MORE of something that FAILED
is going to give us a better outcome. From my view (in the cheap seats), we would
just fail BIGGER. But that's the very idea
that Draghi is trying to get accepted by other Central Banks and our FED – over
in the Eurozone.
It’s too early for my 2016
outlook; but you can bet that it is going to be a fairly ‘ugly’ read. Big changes are coming too quickly for
economies to pro-act. For example, consider
the job market. Just two years ago
petro-engineers were in high demand – writing their own paychecks. The shale oil companies were competing against
each other for their services. Now, many
are laid off, and more will be hitting the unemployment lines as sub $40 oil
will put a halt to many of those operations.
With that in mind, please be careful out there. It's a very strange time in the markets, in
politics, and in the world. Try and be
safe.
Tips:
I am looking at:
-
Allergan (AGN) has a deal with Pfizer (PFE) that is
heating up. AGN is potentially range bound to the upside – so we may be able to do a
Diagonal or a Broken-Wing Butterfly.
-
Restoration
Hardware (RH) is setting up nicely to the upside for a January or February
Diagonal or Broken-Wing Butterfly.
-
Other names (like
the above) that are setting up to the upside are: IBB, AAPL, CRM, COST, LMT and
NKE.
-
Boston Beer
(SAM) for a JAN, 185 / 190 to 220 / 230 Iron Condor,
-
Polaris (PII)
for a JAN, 75 / 80 to 95 / 100 Iron Condor, and
-
Cracker Barrel
(CBRL) for a JAN, 115 / 120 Put Credit Spread.
I am:
-
Long various mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,
-
Long an oil supplier: REN @ $0.56, and
-
SPX – Jan – Iron Condor – 1945 / 1950 to 2125 / 2130.
To
follow me on Twitter.com and on StockTwits.com
to get my daily thoughts and trades – my handle is: taylorpamm.
Please
be safe out there!
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