This Week in Barrons – 6-5-2016:
“I am The Greatest.” … Muhammad Ali (passed away at the age of 74)
Few people in my lifetime have called themselves “The Greatest,” and have gone on to prove it to the world. Muhammad Ali won boxing’s heavyweight title three times in his 21-year career. But it was his life outside of the ring that inspired adjectives such as: pretty, badass, fast, loud and brash. He openly attacked American racism at a time when he was expected only to say thank you and keep quiet. He joined the Nation of Islam at a time when the FBI labeled them a dangerous cult bent on destroying America. He challenged the legitimacy of the Vietnam War, refused to enlist, committed an act of civil disobedience, and was suspended from boxing for more than three years. But Ali’s greatest trick may have been his transformation – from one of the nation’s most reviled characters to one of its most beloved. Born Cassius Clay Jr. in 1942, he was the son of a sign painter and a domestic worker – his grandfather a convicted murderer and his great-grandfather a slave. Cassius Clay had dyslexia and struggled to read the printed word. He discovered his talent for boxing by accident when his bicycle was stolen, and the rest is history.
Just imagine living through:
- Seeing the U.S. go from being #1: to #11 in 4th grade Math, #13 in GDP per capita, #23 in PISA science scores, and #24 in Literacy.
- And seeing the U.S. go from being #1 at LOANING money to the rest of the world; to #1 at OWING money to the rest of the world.
He (like a lot of us) lived through:
- Having his baby crib painted with lead-based paint,
- Having NO childproof lids on medicine bottles, wearing NO helmets while riding our bikes,
- Hitchhiking, and riding in the back of a open pick-up truck on a warm day,
- Drinking water from a garden hose,
- Sharing a soft drink (in one bottle) with lots of friends,
- Falling out of trees, getting cut, breaking bones – all without a single lawsuit,
- Having team tryouts and not everyone making the team,
- And playing sports and NOT everyone getting a medal.
Muhammad (even at his most subversive) spoke with a twinkle in his eye, in poetic verse, and always eager to please and torment simultaneously. I remember him saying: “He who is not courageous enough to take risks, will accomplish nothing in life.” Muhammad Ali was the most fearless, political, and radical athlete that ever lived. He was a man of strong principles and convictions that never shied away from letting anyone know what he thought, even if it made him unpopular. It's impossible to overstate the impact Ali had on the world. He began his life as Cassius Clay, winning an Olympic gold medal in 1960 before becoming the man everyone would grow to know and love. His role outside of boxing remained huge even after his career ended, as he helped to secure the release of 15 hostages in Iraq in 1990. Ali was the kind of talent who comes along only once in a lifetime (if you're lucky), and one whose legacy will last forever. "Float like a butterfly and sting like a bee, his hands can't hit what his eyes can't see." Muhammad Ali – may you Rest In Peace.
There is a clear downward trend in JOBS – starting in October of 2015.
Factually, what can you say about last week’s action in the stock market? We received May’s Nonfarm Payrolls Jobs Report – and it wasn’t pretty.
- We saw the worst job growth in 6 years. We added only 38K jobs (versus an expected 160K) with the prior 2 months also being reduced by 59k.
- The FED’s Birth/Death model added 224,000 ‘fictitious’ jobs to that 38K reading. Therefore, by removing that distortion, we actually LOST 180K jobs in May.
- The unemployment rate slipped to 4.7% from 5%, but only because more Americans (664K) left the labor force. A staggering 94.7M people are no longer in the workforce, causing the participation rate to fall to 62.6% (the lowest since 1977).
- Part-time workers for economic reasons increased by 468K. That means either: (a) there were NO full time jobs available, and people needed anything they could get, or (b) they were making so little money at their first job, they needed another job to make-ends-meet.
- New York's Purchasing Manager’s Survey collapsed to the lowest reading since April 2009,
- China's PMI's slipped lower, and U.S. mortgage applications fell,
- GM sales fell 16%, Ford fell 5%, with the average auto loan topping 7 years and over $500 in monthly payment for the first time in history.
- Manufacturing performance was the weakest in over 6.5 years,
- The Chicago Purchasing Manager’s Index showed a contraction,
- S&P 500 1st Quarter earnings declined for the 4th straight quarter, and more sharply than in any quarter since 2009,
- Preliminary 1st Quarter Productivity declined 1%,
- The dollar plunged, while safe-haven related investments such as bonds and gold jumped higher,
- But stocks ended down only slightly on the day.
This should put to bed any thoughts that our stock market is a ‘free market’ that reacts to ‘fundamentals’. With the worst jobs report since September of 2010, we should be looking at the beginning of a crash, but we aren't because the FED is holding the market up. The low rates continue to fund share buybacks and mergers & acquisitions activity. But earnings have now declined for three straight quarters and the economic data certainly hasn’t provided the results the FED had been hoping for.
If I'm right and the market is being held up artificially, so that J.Q. Public thinks that all is well in the world, why not just go all in (100% invested) and take the ride? After all:
- The Swiss National Bank has purchased $14B worth of U.S. stocks in the first quarter alone.
- The Bank of Japan is buying $Billions of U.S. stocks.
- The ECB is printing $85B a month, and is now buying Corporate Debt.
- Economic reports continue to deteriorate, big brands have gone bankrupt, the oil industry has experienced 121 bankruptcies, and we’ve seen weak durable goods orders, and falling earnings – HOWEVER, we are just 2% from all time highs.
I believe the market is up for 2 reasons: (a) to give the illusion that the economy is strong, as most people still believe that the DOW is a reflection of the economy. And (b) that there are so many current derivatives that use equities as collateral, if the FED allowed the markets to fall it would cripple our economy.
I also believe there are 2 reasons why you might NOT want to be 100% long in this market: (a) The FED has tried all of their tricks and they are now desperate. What if they just loose control (circa 2007)? And (b) what if they’re just holding it up long enough to get a reconstruction plan in place to pick up the pieces (potentially with The Donald at the helm), and then just allow it to crash?
I remember November of 2007 – the market was at an all time high and Jim Cramer was on CNBC screaming “Buy-Buy-Buy”. The FED’s Ben Bernanke was saying: “There is zero chance of any major economic event.” Yet a few months later we came into the worst stock market crash since the 30's.
What if we're in the same situation? What if they press the ‘reset’ button? What if (despite their best efforts) market forces simply overwhelm the FED? After all markets generally rise for a long time, and then they ‘snap’. We are 8 years into this run, and they’ve tossed the kitchen sink at it to keep it going. If you think that they can pull it off – go for it and go 100% long. I (on the other hand) think that reality always wins, and we will get another ‘snap’. I’m considering buying more physical gold and silver, and investing more in Bitcoin.
It’s scary to think that the FED has raised rates only once in the past 10 years, despite unemployment dropping well below their mandated 5% and inflation ticking higher. If oil keeps rising, then the Fed will have rising inflation to deal with as well. Due to the Jobs Report, the odds of a June rate hike have dropped from 30% to 4%. I think the most amazing part of the whole ordeal was that Friday’s market closed right at S&P 2100 – a level they've been flirting with for months. No mater how big the intraday dip, they always seem to find a way back to 2100.
So the question is, what now? You can see that the FED is trying to push us higher, and that remaining flat is the 2nd best thing. The charts tell me that putting in a close under 2085 on the S&P would trigger more selling, and closing above 2105 would trigger more buying and requiring them to challenge the all-time-highs.
We live in perilous times. Please be safe out there.
Is the next ‘gimmick’ for our FED going to be Negative Interest Rates?
SF wrote me pointing out that in the 2008 financial crisis – 34% of working age individuals were without work, and today 37% are not working. Over the next several weeks I’m going to try to find the actual number of hours worked from 2008 to 2016 per sector. The goal is to understand whether these ‘new jobs created’ have actually contributed to a recovery. OR have we simply turned one full-time 40-hour/wk. job into several part-time 12-hour/wk. jobs, and we’re calling that a recovery because we now have 3 jobs where previously we only had 1. I (like SF) am guessing that the real net gain in hours worked is less than what the decline in unemployment would lead us to believe, and (in fact) we may be having NO recovery at all. If anyone has access to that data (average hours worked per sector between 2008 and 2016) – please let me know, and thank you in advance.
- The SKEW is at 135, and the 10-day Moving Average of the Put/Call ratio is dropping – both bearish indicators for the upcoming weeks’ indices.
- Gold and Silver appear bullish.
- Charts of Goldman Sachs (GS) and J.P. Morgan (JPM) both look bearish.
- Long various mining stocks: AG, AUY, CDE, FFMGF, FSM, NGD, and PAAS,
- And Long an oil supplier: REN.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts aand trades – my handle is: taylorpamm.
Please be safe out there!
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