This Week in Barrons – 3-8-2015:
“Send Hookers, Drugs and Money … into the GDP”… pseudo-Aerosmith
Thoughts:
Dear Ms. Yellen:
I’m reminded of a conversation Sir Winston Churchill had with a socialite many years ago:
Churchill: "Madam, would you sleep with me for five million pounds?"
Socialite: "My goodness, Mr. Churchill. Well, I suppose."
Churchill: "Would you sleep with me for five pounds?"
Socialite: "Mr. Churchill, what kind of woman do you think I am?"
Churchill: "Madam, we've already established that. Now we are simply haggling about price”
I think Mr. Churchill’s point was that everyone ‘prostitutes’ himself / herself for a price – the only question is: ‘At what price?’ You see, in 2013 virtually every nation decided to change their measurement of GDP (Gross Domestic Product) in order to make their individual countries look better. In the U.S. we have changed the rules to include: research and development, and artistic originals such as: books, movies, TV shows, music, photographs and greeting cards. However, countries in the EU went one-step further and decided to also include gambling, prostitution and illegal drugs into their GDP calculation(s). There are distinct differences between calculating the effects on an economy from an R&D effort and it’s subsequent spin off income, versus the selling of humans, heroin, cocaine, and crystal meth. The first thing that comes to mind is: How exactly is all of that illegal activity being accurately measured? Given it’s ‘illegal’, the effects and business relationships aren’t exactly traceable via normal invoices – not to mention how to calculate the impact on a country’s Gross National Product.
The Organization for Economic Cooperation and Development (OECD) concluded that the nefarious transactions from hookers, drugs and gambling added a full 1% to Italy's GDP and 0.9% to Spain’s GDP. Thus far (in the U.S.) our changes to the GDP equation have resulted in an increase of between 2 and 3%. Yet despite this obvious slight of hand, our GDP readings have been dismal at best. This week we learned that our reading from the 4th quarter of 2014 was revised downward from 5% to its current 2.2%. Which means that under 2013 calculations, our 4th Quarter GDP would have been less than 0. That’s right – ZERO growth for all of 2014.
Also, this week the Atlanta FED and J.P. Morgan came out with 1.2% as their preliminary estimate for 1st Quarter 2015 GDP growth. That means without including all of the ‘art’ and ‘tv re-runs’ our economy would be performing in the negative 1% range. So it looks like (from where I’m standing) we need to include Hookers, illegal Drugs, and Gambling in our GDP calculation in order to remain in positive territory.
Ms. Yellen, is it a sign of strength when:
- After 6 years of QE and zero interest rates, we still need to creatively modify our economic reporting?
- With over 100M people NOT being counted in the labor force, can we really say that the unemployment rate is 5.5%?
- Our ‘real’ 2014 GDP was 0%, and our ‘real’ 1st Qtr. 2015 GDP is negative?
- The individuals running hedge funds are under-performing the markets, because THEY are afraid of taking too much market risk?
- We've seen 22 global interest rate cuts in two months, and 2 nations are offering negative rates?
It’s interesting to me that without the ‘revised’ GDP calculation, our nation would be showing two quarters of NEGATIVE GDP growth – which (under normal circumstances) would denote a recession. Therefore Ms. Yellen, I will NOT be surprised when you propose that Hookers, illegal Drugs and Gambling be included in our upcoming GDP calculations.
The Market:
Factually this week we learned:
- In February, we created 295k new jobs, and the unemployment rate fell to 5.5%, with part-time work and bartending leading the way.
- In 2015, $16.8B has come out of stock market ETF’s (Exchange Traded Funds). This is the largest outflow of capital from ETF’s since 2000.
- In 2015, there have been over 103k announced work related layoffs.
- For only the 2nd time in 40 years, our 4th Quarter GDP has fallen. It fell from a previously reported 5% to a newly revised 2.2%.
- The dollar hit an 11-year high against the euro; therefore, hurting international demand,
- The Institute for Supply Management reported that the manufacturing activity for February declined, and that U.S. factory orders dropped for the 6th month in a row.
- QE in Europe will begin officially on March 9th.
Friday’s Job’s Report showed that we created 295k new jobs last month, and the unemployment rate fell to 5.5%. This number just ‘smells bad’ because:
- Companies are cutting their forward earnings estimates,
- This winter has been particularly bad on the Mid-Atlantic and Northeast,
- Initial jobless claims are rising, and
- Decreasing oil prices have shut down or suspended many operations.
The banksters are talking about the FED’s March 18th meeting suggesting an interest rate increase in June. That bothers corporations because they are using these 0% interest rates to borrow money, sell debt and buy-back their own stock. This does several things. First, it lowers the amount of stock in the public ‘float’ – which effectively pushes the stock price higher. Secondly, it gives the insiders of the company huge ‘bonuses’ as their income is often laced together with stock incentives. Stock buy-backs are now the single best way of manipulating a company’s stock price, and making a company’s poor performance look considerably better. According to Sundial Capital Research (as pictured below), technology companies have been buying back stock in record amounts. But at the same time, insiders, directors and senior executives (of those same technology companies) have been selling their own shares at the heaviest pace in the last eight years.
On Friday the 2090 level on the S&P did not hold as we ended the day at 2071. The next level of support for the S&P is around 2062 – the 50-day moving average. I suspect we hold this level, otherwise we could see a drop all the way into 2017 before the next soft support takes hold. The bottom line is simply that this bull market is a little ‘long in the tooth’. The FED is acting tough despite 38 out of 40 economic reports missing their estimates to the downside. The world is a more dangerous place (in many respects) than it has been in many years. I’m NOT jumping in here and ‘buying the dip’ – at least not yet. Patience is a key.
TIPS:
On Friday:
- The New York Stock Exchange (NYSE) produced a record number of stocks with new low prices for the year (2,234). Taking into account all of the indices, Friday saw a record 4,500+ new lows set on fairly significant volume. This is a red flag for this coming week.
- We had our first close in the DOW below the 21-Day moving average. I watch for a 2nd close below that same average, and if/when that happens it tells me to start ‘Selling the Rally' rather than ‘Buying the Dip’.
- The NASDAQ was the only major index that held it’s 21-day moving average. I find that when indices and currencies begin to experience greater than 1% moves to the downside, then investors begin to panic – dump everything – and ask questions later.
- Money was flowing OUT of both the Bond and the Stock markets. The common wisdom is that when money comes out of bonds – it must go into stocks. But currently money is moving out of stocks and bonds into cash.
- If the price of oil continues lower, it will drag the S&P index down with it.
- It’s been my experience that ‘hope’ and the stock market do not make good bedfellows. Therefore, because the S&P has broken its 21-Day Moving Average, and because BONDS were also down – I sold virtually all of my directional long positions on Friday.
I believe that we are about to enter a period of dramatically increased volatility. If you have positions that are ‘larger than normal’ - then best ‘batten down the hatches’ and either exit, or be ready to defend strong moves one-way or the other. I believe that there is a massive economic reset coming, and there is nothing that can stop it. We are in a collective ‘get all you can – while you can’ time period with the only question is timing. Thus far the FED has been a master of ‘pulling a rabbit out of a hat’. My fear (however) is that they are running out of rabbits. I have a sneaking suspicion that our ‘empty hat’ is going to come in the September / October 2015 time frame when:
- The IMF is going to rebalance its currency SDR’s,
- The Greeks could logically choose to exit the EU,
- Our FED could raise rates, and
- NATO could decide it’s time to move closer to the Russian borders.
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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