This Week in Barrons – 1-17-2016:
'It’s the economy, stupid.’ … James Carville
Dear. Ms. Yellen:
I’m not sure you realize this, but the FED has NEVER forecast a recession. Never. Even in 2007, when we were on the verge of the largest recession since the depression, you told us that there was ‘clear sailing’ ahead. Your track record (when it comes to forecasting recessions) is worse than the Cleveland Browns at picking starting quarterbacks – 21 different ones in the last 15 years.
I remember something James Carville said when he was acting as Bill Clinton’s campaign strategist: “It’s the economy stupid”. And now, because the correlation between global economies is higher than ever, it’s about the GLOBAL economy. Ms. Yellen, that’s why your December rate hike was so perplexing. You said that our economy was fine, that unemployment had fallen dramatically, and there were no recessions on the horizon. Even though:
- Our $700 Trillion in derivatives continue to grow.
- Sub-prime loans are dominating auto sales.
- High-yield credit is imploding.
- Europe has negative interest rates.
- 1/3 of our population is NOT even in the labor force.
- 1/6 of our population is on Food Stamps.
- Wal-Mart (the single largest U.S. employer) is closing 250 stores.
- Japan and Europe are printing trillions just to survive.
- The majority of all jobs over the past 4 years are waitresses, bartenders, and ‘do you want fries with that’.
- The Baltic Dry Shipping Index is consistently making new lows.
- AND (even though you modified the way GDP is calculated) the Atlanta FED still dropped its GDP forecast to a mere 0.8% growth.
I’ve heard you over and over again say: “The consumer is fine, unemployment is only 5%, and plunging energy prices are putting a lot of loose change back in their pockets. Therefore, the economy can't possibly fall into a recession with such a healthy consumer.” Ms. Yellen, do you really think that the consumer is healthy? Larry Fink (the CEO of Blackrock) recently completed a study that showed:
- The average American with a retirement plan (only 32% of Americans) has saved enough for a $9,000/YEAR retirement. Combine that with an additional $18,000/yr. in Social Security, and you get a retiring class that will live on $27,000/yr. – well below the poverty line.
- The study also confirmed that 62% of Americans have less than $1,000 in savings, and only 14% have more than $10,000.
Is it any wonder that an advocate for change like Donald Trump, and a socialist like Bernie Sanders are generating broad appeal? I almost laughed out loud when the President (in his State of the Union Address) stated: "Our online tools give the entrepreneur everything he or she needs to start a business in a single day." Well Mr. President, maybe not everything. According to the U.S. Bureau of Labor Statistics, the number of new businesses created peaked in 2006, and today’s number is down by 50%. In fact, it seems that entrepreneurship has steadily declined on your watch – Mr. President.
And lastly, let’s dive into your December Jobs Report. All I heard last week was how the U.S. had created an incredible 292,000 jobs. Naturally (like the other reports before it) I was skeptical. The first issue is that you used a 'seasonally adjusted’ number, and not the ‘actual’ number. Factually, the ‘seasonal adjustment’ accounted for 280,000 of the created jobs. On top of that, the ‘Birth/Death’ model added another 15K jobs. Therefore, by removing the ‘seasonal adjustment’ and the ‘birth/death’ model – we actually LOST 4,000 jobs in December.
Ms. Yellen, on what planet do you think any of the above warrants a Federal Reserve rate hike? Not on any planet that I live on. But the real issue is that you can’t take it back – without looking like you’re ‘out of control’. Chalk it up to being yet another quarterback of the Cleveland Browns.
To say that the markets are ‘Under Pressure’ would be an understatement. It's fascinating to listen to the various market pundits pontificate on whether or not we are at a low, and then go on to tell me how it’s a buying opportunity. It’s important to remember that nearly all of these ‘experts’ work for firms who profit from rising markets – so they rarely call for more downside.
That’s why it’s important when (last week) the Royal Bank of Scotland (and 4 other banks) warned their clients to: “Sell everything except high quality bonds. This is setting up to be a cataclysmic year – where markets could fall 20% and oil could hit $16 a barrel. This is about return OF capital, not return ON capital. This is a crowded hall, and the exit doors are small." They went on to align the current situation with that of 2008, when the collapse of the Lehman Brothers investment bank led to the global financial crisis. This time they are pointing to China being the crisis point.
The graph below shows the combined 23 developed and emerging market indices. The gray shaded areas are global recessions. What are circled are corrections in the global markets that do NOT include a U.S. recession. The large troughs are where the U.S. and Global recessions collide. Notice:
- Without a Global and U.S. recession – the average drop is 11.9%.
- With a Global recession and NO U.S. recession – avg. drop is 16.8%.
- With a Global and a U.S. recession – the average drop is 45.2%.
We are currently NOT in a global or a U.S. recession, and the market has already dropped 19%. So the big question is: Will the global economies fall into recession, and will the U.S. join them? If you think that a recession this year will be avoided – then this correction has probably run its course. But, if you think the globe and the U.S. will slip into recession – then stocks could fall an additional 30%.
The bottom line is that we’re staring a massive market correction right in the eyes. The past 7 years have fixed NOTHING, but rather simply kicked the can down the road. As this market creaks and groans its way lower, there's going to be enormous counter rallies that rip your head off. Some of them will be so powerful you'll swear we're heading back to the all time highs. But we won't. We will stair step lower.
This is the worst annual start for the capital markets in history. Starting the day before New Years Eve, the market has given up over 1,400 DOW points, over 200 S&P points, and over $1 Trillion in market value. The indices are truly masking the real market carnage. If you remove 9 stocks from the S&P, the S&P average would be down by more than 5 additional percent. 65% of all stocks are already down 20% or MORE.
Watch the 1867 level on the S&P. If it doesn't hold, we are on our way significantly lower – potentially all the way down to the low 1,600’s. Right now, I would NOT consider anything as a buy and hold. Until this market settles down, holding anything will be a disaster. Our markets are closed on Monday, but China isn't. If China has a bad Monday and/or oil falls even further, I could easily see us punching through Friday’s lows and falling to 1862 and then to 1815. If however, China rebounds and/or oil finds it’s footing, I could see the pundits telling us that the ‘1867 test’ was successful and it’s safe to buy again. But remember, it’s just a bounce.
How can I be so sure? By connecting the dots. Thus far the FED has refused to budge off its current 4 rate-hike policy in 2016. Combine that with the current earnings season being under-whelming – with a mere 22 companies beating their earnings estimates, and NONE beating their revenue estimates. Combine these elements with China, Oil, Geo-Political issues (ISIS), and U.S. politics – and you have a recipe where nothing on the menu appeals to the investor.
Yes we are SEVERLY overdue for a massive snap back bounce, but you will need to be fast. Feel free to ‘hop in and take a short ride’, but this is NOT the time to look for stocks that you can just ‘set it and forget it’. For some upside targets, we would need to get up and over Thursday's 1921 close first. If we hold that, the next levels are 1940 and 1950 respectively.
On Tuesday, maybe the markets will accept Friday’s ‘stick save’ as being close enough for the time being. But I will say, the largest single market gain I've ever had was buying puts, inverse ETF's and going short during the 2008 meltdown. If this market loses the 1867 level on the S&P, I think those very strategies can be employed and small fortunes made. If you don't know how to short stocks, consider using inverse ETFs that increase in value when their corresponding indices track downward. If you are fluent in options, then buy PUTS and/or sell CALLS. Watch that 1867 level on the S&P.
First, the crude oil and copper markets are the ‘canary in the coal mine’. Each will tell you what you need to know about:
- Growth = non-existent - hence the copper and oil downtrend.
- Inflation = the FED is telling us that there is not enough. Both these downtrends will affect oil services and mining stocks. I recommend selling the OIH (the oil index) on any bounce.
Secondly, Facebook, Amazon, Netflix, and Google – the ‘FANG’ stocks will lead the NASDAQ higher if and when it finds support. Each of these four stocks have corrected into weekly ‘swing’ buys. However, my time horizon on these stocks as true ‘buys’ is a minimum of 1 year. Watch for true interest returning to these four stocks, and allow that to be your gauge that a risk-on appetite has returned.
- Long various mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,
- Long an oil supplier: REN @ $0.56,
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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