This Week in Barrons – 1-17-2016:
Thoughts:
'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.
The Market:
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.
Tips:
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.
I am:
-
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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