The markets are starting to churn and returned some much-needed volatility.
European stocks sold off sharply on Tuesday and U.S. markets followed
suit but snapped back on Wednesday. Stocks were under pressure again yesterday
and resulted in another flood of money to the safety of Treasury bonds.
“Right now there’s tons of leverage in the system. A lot of
people have borrowed a lot of money. So, when something goes wrong, and
it will, it will result in dramatic effects to the downside. The coming
avalanche will wipe out a lot of people who can’t afford a 70%,
80%, or 90% drop,” said John Del Vecchio, Forensic Investor, April
5, 2016, He went on to say, “Margin leverage stands at just under
$436 billion. Just a few short months ago there had never been a time
where nominally it had been higher. But, let’s look at recent history
and put this in perspective. The most important thing to note: margin
debt has now just crossed below its own six-month moving average.
This means the debt bubble could just be starting to burst.
Year-to-date, the S&P 500 is 0.29%, according to CNN Money, April 8,2016,
Thanks to Dent Research, here is our weekly information roundup ending the week on April 8, 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.
U.S. Factory Orders Dropped 1.7%… More than reversing the 1.2% gains in January, factory orders resumed their
What it means – Factory orders have trended lower since late 2013, which is part of the reason that GDP growth remains constrained. A look at the sub-sectors doesn’t provide any relief, since most areas contracted. Orders for core capital goods, which excludes spending on aircraft and military stuff, fell 2.5%.
I noted last week that the Atlanta Fed’s GDPNow estimates first-quarter growth at around 0.6%. This latest report dragged the estimate down to 0.4%.
This is good news for bonds, since it should keep the Fed on the sidelines a little longer.
Minutes of the Latest Fed Meeting Indicate no Rate Hike in April… The sentiment wasn’t unanimous, but the majority of members signaled reluctance to raise rates in the face of global financial risks.
What it means – The minutes confirmed what Chair Yellen said last week, so there were no surprises, but I think something is missing from the analysis. When the Fed discusses global risks, it’s not just about economic activity, but also includes currency manipulation.
If the Fed raises rates, the dollar should move higher, making our exports even more expensive for the rest of the world. Right now, the euro and yen are trading at their strongest levels of recent months, which hurts their own exports. So, it’s very likely that the ECB and the Bank of Japan will devalue their currencies in the coming months, which makes the dollar stronger. It's possible the Fed doesn’t want to take action just before other central banks have to make their own moves. Either way, expect a stronger U.S. dollar in the months ahead.
Eurozone Unemployment Falls a Tick to 10.3%… Germany has the lowest rate at 4.3%, while Greece sits at the top with 24.0%.
What it means – Once in a while, it’s worth reviewing unemployment on the continent so that we keep their economic situation in perspective. Along with Germany, unemployment in France at 10.2%, Italy at 11.7%, and Spain at 20.7% round out the top four economies in the bloc.
Other than Germany, the largest countries in the Eurozone are still suffering, and now all of them can add the migrant crisis to their list of woes. The Eurozone isn’t fixed, their banks still hold billions of non-performing debt, and the ECB can’t solve the issues with negative interest rates.
Crude Oil Inventory Dropped 4.9 million barrels to 529.9 million… Oil in storage dipped from record highs, but remains tens of millions of barrels above the long-term average.
What it means – The price of oil had fallen steadily before the inventory report, which promptly sent the price of crude up 5%. The yo-yo moves probably have more to do with the low nominal price – in the upper $30 range – where a buck represents several percentage points. With Saudi Arabian officials stating that any production freeze must include Iran, and Russia now pumping more oil than at any point since the collapse of the U.S.S.R., there doesn’t seem to be much of an appetite in foreign markets for cutting back. Here at home, the rig count keeps dwindling. We’re now down to 478 in the U.S., down from 1,110 last year.
With production running high overseas, expect inventory to grow, and more U.S. producers to drop out.
Japanese Yen Falls to 108 per U.S. Dollar… The yen, which touched 125 per dollar last June and sat at 121 in January, is up more than 10% this year.
What it means – This is everything the Bank of Japan and Prime Minister Abe don’t want. As noted above, the stronger yen makes Japanese exports more expensive, which cuts into corporate profits and lowers the possibility of higher wages. Unfortunately for Japanese officials, the yen keeps strengthening even after the central bank introduced negative interest rates. This shows the limit of central bank intervention, and the powerful draw of a stable currency in an uncertain world. Japan is the developed country least likely to experience inflation, so it’s a good place to park idle cash.
But this doesn’t solve Japan’s economic woes. For that to happen, government officials think their currency must drop. Expect more Japanese monetary policies aimed at driving down the yen.
Alibaba, the Online Chinese Marketplace, Surpassed Walmart as the World’s Largest Retailer… According to their own press release, Alibaba generated more retail revenue last year than the giant American company.
What it means – It might sound like Alibaba is taking over the world, but that’s not the case. The company reported that it accounted for 10% of Chinese retail revenue. In a country of 1.37 billion people, where roughly 620 million still live in rural areas, it makes sense that an online retailer would become a huge provider. Delivering packages to far-flung locations is cheaper than opening kiosks in the countryside. This is still a noteworthy milestone, but it’s more a sign of the rise of Chinese domestic spending than anything else.
Puerto Rico Passes a Law Allowing the Territory to Temporarily Halt Debt Payments… The territorial government passed a measure that allows the governor to declare a moratorium on debt payments until January of 2017.
What it means – U.S. lawmakers had been, and still are, working on new laws that would give Puerto Rico a way out of its financial mess, but apparently, that’s not good enough for the island.
Instead, they decided to pass a law that directly contradicts their constitution, which calls for the payment of general obligation debt before any other payment, including other debts or expenses, such as payroll, pensions, etc. There is no question that the new law is illegal, but the territorial government will have to be sued by creditors in its own court system. That could take a while. Investors holding Puerto Rican bonds will take the hit. If you own a tax-free bond fund, scour the latest filings to see if you own any Puerto Rican debt.
Next Week – The week of April 11 includes reports on retail sales and industrial production in both the U.S. and China. Personal income taxes are due on the last business day of the week, April 15.
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