When it comes to having fun, I thoroughly enjoy several wild roller coaster rides at Magic Mountain. Part of the reason the rides are fun to me is because I know they are strategically designed to keep riders safe, but scare the hell out of us for every second we are on board. I also know the ride will only be for two minutes or less and there is a start and a finish. 2015 was a wild ride and US markets were mostly flat.
In 2016, stocks are down sharply one day and up the next. When it comes to the ride for other people’s money, however, I don’t want any part of drastic downward volatility, as I much prefer the tortoise to the hare. Do not get sidetracked on the prediction of what might happen when. Focus instead on the preparation you can take.
As of this writing at about 1:40 pm, ET on January 29, 2016, according to CNN Money, the S&P 500 was trading at 1925, with the year-to-date return (1/1/16-1/29/16) at -5.82%.
Thanks to Dent Research, here is our weekly information roundup ending the week on January 29, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
As Expected, the Federal Reserve Held Rates Steady… The central bank announced no changes to interest rates, noting that it still only expects gradual increases in rates. The Fed officials stated they are monitoring global events, but didn’t provide risk guidance.
What it means – And as expected, their comments did more harm than good, causing a market sell-off, leaving everyone wondering what the central bankers will do next. Investors wanted acknowledgment that the bankers see the current carnage and won’t raise rates in the face of the looming economic meltdown we at Dent Research have been warning about. They didn’t get it. But thank goodness they’re watching global events!
Not that it matters. I presume they read the papers most every day, and yet they’ve fueled asset bubbles, pumped $4 trillion into the banking system to save the firms at the center of the previous crisis, and essentially destroyed the institution of saving in the U.S. (with ultra-low interest rates for six years).
But other than that, hey, what could go wrong? I think they might raise rates one more time this year, just to prove they’re clueless. Harry thinks their next move is to ease. We’ll see what happens.
S&P/Case-Shiller Home Price Index Up 5.8% for the Year through November 2015… The non-seasonally adjusted index increased a modest 0.1% for the month of November but posted solid gains for the full year.
What it means – Let’s give this one some more time. The index lags by two months, so the figures we’re looking at are from eons ago. That's when the weather was unseasonably warm, analysts were predicting that oil would pop any minute, retailers expected a strong holiday season, and the world thought Donald Trump would self-destruct. OK, so the last one might still happen… who knows? But back to housing... With sentiment turning decidedly negative over the past couple of months in just about every sector of the economy and corner of the globe, it will be interesting to see how real estate reacted at the very end of 2015 and the beginning of this year. I expect it softened as people watched their equity portfolios sink.
New Home Sales up 10.8% in December to 544,000… Surpassing estimates, new home sales zoomed higher at the end of December.
What it means –Like the index above, I want to give this one more time to play out. While the numbers are current, December is a weird month for new home sales, new home completions, and housing starts. Traditionally, the weather and the holidays get in the way of new home activity at year-end, so this statistic includes a big seasonal adjustment. The Midwest and Northeast, which had very mild December weather, experienced big gains in new home sales. We’ll see if this followed through in January when the winter finally showed up.
Durable Goods Orders Dropped 5.1% in December, and Fell 1.2% Excluding Aircraft… Analysts expected a slight decline. These numbers were anything but slight. For all of 2015, durable goods orders eased 0.6%; excluding transportation, orders dropped 1.6% for the year.
What it means – Manufacturing has not rebounded. It’s that simple. The numbers get worse when we drill down to business orders. Non-defense spending excluding aircraft fell 4.3% for the month and is off a whopping 7.5% for the year. This is what happens when the rest of the world is in an economic funk, the U.S. dollar is riding high, and GDP at home grows tepidly. It’s hard to see how wages will shoot higher in this environment.
U.S. Fourth-Quarter GDP Rose a Modest 0.7%... Estimates of fourth-quarter expansion fell steadily throughout the quarter, but growth still dipped below expectations.
What it means – Last year, GDP grew 1.625%. Ugh. Keep in mind that we are the growth engine of the developed world! Consumer spending dropped back from previous quarters, but the fall in business spending, exports, and inventories really dragged on GDP. There’s no reason to think any of these areas will improve this quarter. It looks like a tough year ahead.
Earnings Thrill and Kill… Facebook earned more than $1 billion for the first time in history, Apple forecast falling iPhone sales, and Amazon’s record profit disappointed.
What it means – This will be an earnings season to remember, no doubt. I’ve talked about this a number of times over the last three months, and John Del Vecchio just devoted an entire webinar to the subject (Earnings Exposed!). Earnings at U.S. companies are rolling over, with a few winners, like Facebook, and an awful lot of losers.
Here's an interesting note on Apple. When the company announced disappointing results, analysts fell all over themselves to explain how great the company is and why their financials are misunderstood. They said small investors are simply too ignorant to understand the value of the company, which is what drove down Apple’s stock price. What self-serving tripe.
Small investors don’t take down big stocks like Apple. That’s the work of institutions. And they did so for a very good reason. When the largest company on the stock exchange by market cap tells the world that their number one product (iPhone) is losing steam, and their number two (iPad) and three (iMac) products aren’t gaining ground, investors should be worried. Any new product, or newversion of an old product, would have to earn tens of billions of dollars to make a difference to Apple’s bottom line. That’s a tall order.
As for Amazon, the company is hard to pin down. It typically plows almost all of its profits back into growth, but over the last couple of quarters, it has been declaring earnings. Even though Amazon reported record revenue and profits, analysts expected more. The stock was punished after hours.
Puerto Rico Misses Deadline for Renegotiating its Debt… The Commonwealth failed to reach an agreement with creditors by last Friday, so now the talks will start over. Puerto Rico has already missed payments.
What it means –This is what I’ve been harping on for years. Government entities pledge their “full faith and credit” when borrowing money, but they don’t mean it. When times get tough, they look at their constituents, employees, and retirees, then at their bondholders, and make a choice as to where they will spend their cash. You earn no points for correctly guessing they spend on constituents, employees, and retirees.
Bondholders have to sue for what is rightfully (even if cold-heartedly) theirs, and even then they can lose, which is what happened in Detroit. The longer the standoff continues, the less cash there is to go around, so bondholders end up losing even more.
This is why bond research is so incredibly important. Investors can’t rely on what politicians say — as if that needed reiteration — and they certainly can’t take bond ratings at face value. If you own municipal bonds, take a hard look at your portfolio and assess not just the paying ability of each issuer, but also the likelihood that the borrower will follow through.
The Bank of Japan (BoJ) Surprised the Financial World with Negative Interest Rates… After pledging just a week ago that they would not use negative rates, BoJ officials announced plans to charge commercial banks for new deposits.
What it means – Things are really getting weird now. The BoJ joined the European Central Bank and several Northern European central banks in charging for deposits. So far, there is little evidence that the policies work. But the BoJ had to do something. The country’s stuck in a low/no growth and inflation environment, and money leaving China is washing up on its shores. This drove the yen higher, making exports more expensive.
The surprise move by the BoJ sent the yen spiraling lower, back over 120 per U.S. dollar, and goosed equity markets. We’ll see if it lasts.
The European Commission (EC) Threatens to Suspend Open Borders with Greece… Citing lack of required documentation of many refugees, the EC informed Greek officials that they would suspend the nation's inclusion in the Schengen free travel zone of the European Community in three months if Greece fails to take corrective action.
What it means – Northern Europeans are furious at Greece for not documenting all refugees as required. The process includes fingerprints and travel document verification, as well as noting the country of entry if the immigrants are sent back at a later date.
Greece, already overwhelmed by financial woes, has simply waved through hundreds of thousands, if not millions, of immigrants, who are then free to roam among the 26 countries in the Schengen free travel zone. In response, several of Greece’s neighbors instituted border checks on an ad hoc basis. The EC wants to institutionalize the efforts.
Unfortunately, closing Greek borders would make travel more difficult for everyone else wanting to visit the country – like business travelers and tourists – as well as immigrants. This could further hurt tourism, which is one of the bright spots in the otherwise dark Greek economy.
Some people point to this as evidence of the failure of the EU experiment. It isn’t. Instead, it points out one of the flaws of the treaty that created the EU – infallibility. The treaty calls for an irrevocable assumption of the euro, which implies an irrevocable decision to join the EU. Greece lied and cheated to get in, but there’s no way to kick them out. The EU has some growing up to do.
American Universities Took in Record $40.31 billion Last Year… The richest universities, such as Stanford and Harvard, dominated the list of recipients.
What it means – Why do they still charge tuition? With endowments worth more than $30 billion and modest student populations, there's only one reason such institutions still charge a nickel of tuition – they want to spend the funds elsewhere.
University officials (several of whom I’ve argued with on this topic), counter that they provide financial assistance to more than 70% of their students, with only the relatively comfortable families paying published tuition rates. That supposes that every family has an obligation, if able to contribute to their children’s education. I agree with this, but if true, it means that every university has an obligation to provide education at the lowest cost possible.
For schools like Harvard, Stanford, and a host of others, their lowest possible cost isn’t zero. Even if they invested their endowments in simple U.S. Treasury bonds, they could actually pay students to attend and still grow their portfolios. Amazingly, this never enters the conversation.
Unfortunately, as long as alumni and foundations contribute to universities, they won’t change their ways. They will still clamor for more cash, build bigger monuments to themselves, and keep administrative employment at high levels. Students and their families who pay, many times using borrowed money, as well as adjunct professors who don’t get paid, are the ones who suffer.
Amherst University Kicks Unofficial Mascot Lord Jeffrey Amherst to the Curb… Driven by student protests over Lord Amherst’s anti-Native American views, university officials decided to remove any official reference to him. They did not, however, ban groups such as alumni from using “Lord Jeffs,” as he is known.
What it means – While Rome (our economy, employment, the middle class, cost of education and healthcare) burns, some of the brightest minds in the country focus on unofficial mascots. Is there any historical figure that’s agreeable to everyone? Lord Amherst certainly wanted to kill Native Americans, as he was a British Commander in the French and Indian War. I’d imagine a few Native Americans wanted to kill the British, but I never see a protest about it.
Eventually, every college will use tadpoles (The Mighty, Mighty Tadpoles!) as their mascots. These fledgling life forms aren’t offensiveand haven’t been on the planet long enough to be harmful. Once they’re frogs, they eat insects, so then they’re out!
Next Week – The first week of February includes many minor economic reports, along with U.S. factory orders. But there is one big announcement, the U.S. Employment Situation on Friday. With weekly jobless claims inching higher, investors will be watching this report even closer than usual.
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