No one can predict the future, but we have suggested that you prepare for a bear. “Analyst: Here comes the biggest stock market crash in a generation,” Fortune, on January 13, 2016. The source, Albert Edwards, strategist at Societe Generale says, “Do not be surprised if the US stock market plunges as much as 75%.” As Fortune notes, “That would be worse than during the financial crisis, in which stocks from their peak to trough dropped a brutal 62%.”
I have suggested here that the index to watch is the S&P 500. The number to watch for is where the market closes. As I have said, it is my opinion that when the market closes above 2100, that’s a good sign. If it stays below 2100 that’s a bad sign, as no one knows how low it could go. Stocks have broken well below 2100. In fact, as of this writing at about 2:00 PM EST, the S&P 500 was at 1875, off 2.50%. On January 8, 2016 the Wall Street Journal declared, “Stock market puts in its worst opening week ever.”
This is a time to be decisive and preserve your capital and/or make a move to a proven trading system that may profit from volatility and mitigate negative movements.
Thanks to Dent Research, here is our weekly information roundup ending the week on January 15, 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.
Stock Market Carnage Continues… Foreign and domestic equity markets keep falling. U.S. markets are down more than 10% from their highs, putting them in correction territory, while small-cap indices are down more than 20% and now firmly in bear markets.
What it means – If a person isn’t worried about the markets and economies of the world, he’s either six years old or a fool. Almost everything Harry Dent wrote about in Boom & Bust and Leading Edge is sitting on our doorstep: falling commodities, over-valued equities based on declining revenue and earnings, tepid consumer spending, stagnant wages, rising geopolitical concerns, exceptionally low interest rates, crashing junk bonds, and now falling stock prices.
For the moment, unemployment still looks good, but mostly for those who work part time or serve food. As for real estate, it’s still hanging on, but slowing down.
So far, it’s been a very ugly January. We have the components necessary for economic growth, but the washout in equity prices has to happen first.
Fourth-Quarter Earnings Expected to Decline 7.2%... A fall in fourth-quarter earnings would mark the third consecutive quarter of decline. Corporate revenue fell every quarter in 2015.
What it means – It’s easy to attribute crashing earnings and revenue to the energy sector. With oil at $30/barrel and gasoline under $2/gallon nationally, energy companies are in pain. But that’s not the whole story. In the fourth quarter, earnings fell in more than half the sectors of the S&P 500. The economic slowdown around the world and the strong U.S. dollar are weighing on U.S. markets.
John Del Vecchio covers this topic at length in Forensic Investor, and his upcoming online exclusive, Earnings Exposed, will dive deeper into the subject. If you’re fuzzy on how the pieces of the puzzle fit together, spend some time reading his work and watch out for more details in that interview next week.
Atlanta Fed's GDPNow Model Forecasts 2015 Fourth-Quarter GDP at 0.8%... In November, the model expected GDP near 3%, but as time went on and economic reports grew dim, the forecast fell.
What it means – In the first three-quarters of last year, quarterly GDP was 0.6%, 2.0%, and 3.9%. If the Atlanta Fed model is correct, then GDP for the year will grow by 1.82%. In fact, any reading under 1.5% for the fourth quarter will result in GDP for the year of less than 2.0%. Blah. Is it any wonder that most new jobs are part-time, that wages are stagnant, and companies would rather buy back their stock or increase dividends than invest in growth?
Every year since 2009 experts told us how great things would be in the next twelve months, and every year higher growth failed to materialize. This year will disappoint as well.
U.S. Budget Deficit Falls to 2.6% of GDP, or $478 billion… The U.S. budget deficit fell for the sixth straight year, but will likely rise this year and beyond as social payments and health care costs increase.
What it means – If you have any saved dollars, then raise a glass to yourself. You helped the U.S. government close its funding gap, even if you didn’t get a choice in the matter. Part of the falling deficit was a $97.7 billion payment from the Federal Reserve, representing its profits for the year. These are “profits” in the sense that the Fed received more than it spent, but they definitely weren’t earned. As Harry Dent puts it, “The Fed got the cash by printing money, buying bonds, and then sitting back and collecting interest. When they printed the cash, they took a little bit of value from everyone with accumulated dollars, like you and me.”
And it gets worse. According to Dent Research on January 15, 2016, “The Fed also transferred an additional $19.3 billion to the U.S. Treasury as part of the new highway bill. Congress thought it was a good idea to sweep some funds from the account used by the Fed to guard against bank losses.” Brilliant.
Without these two transfers, the budget deficit would have been $595 billion or 3.2% of GDP, according to Dent Research, January 15, 2016.
Oil Crashed to Less Than $30 per Barrel… That’s the lowest level since 2003. So far, no one seems to know where it will hit bottom.
What it means – As I wrote last week, the price of gasoline adjusted for inflation is almost at its lowest price in history. We’ve noted many times that this is great for consumers but tough for the energy sector, which was a big contributor to our paltry economic gains over the past eight years.
Economic sanctions on Iran will expire in the next couple of weeks, so expect a rush of all of that Iranian oil they’ve stored in supertankers to hit the markets. More supply is the last thing the world markets need, but they’ll get it anyway.
There may be a lot more bankruptcies across the oil field in the months ahead.
U.S. Retail Sales Down 0.1% in December, Flat Without Autos and Gasoline… The drop in the headline number was forecast but, excluding autos and gas, retail sales were expected to climb.
What it means – Last month closed out the weakest year for retail sales since 2009. The 2.1% gain in 2015 followed a 3.9% gain in 2014. This isn’t a recovery. This is what it looks like when consumers are simply holding on.
Analysts expected lower gas prices to fuel (pun intended) higher spending elsewhere, but that didn’t happen. Instead, consumers are saving, just like they’re supposed to as they age.
Unfortunately, when too many save, it slows down the economy. Without more kids, we could be in for an even longer economic slog. I will discuss the lack of births in developing nations in the February issue of Boom & Bust, so watch out for it.
Denmark to Seize Refugee Assets… The Danish government voted to confiscate assets of refugees valued at more than 10,000 kroner, or about $1,450.
What it means – I guess the big ads the Danish government took out in Lebanese newspapers describing lower benefits didn’t do the trick. Maybe a story about copying a Nazi program of taking valuables from refugees will make people think twice before they head for Denmark. Danish officials claim the comparison to the Nazis is off base. The Danes are simply trying to give the refugees a way to pay for their care. Right.
If that were the case, then why wouldn’t they sell refugee tickets for a set price instead of taking everything a person has above $1,500? If it walks like a duck and quacks like a duck, it’s a duck. They should just close the borders if they don’t want the refugees. Policies like this never turn out well.
The Swiss Canton of Zug Asks Citizens to Pay Taxes Late… Switzerland has negative interest rates, so banks charge clients for holding their funds. Zug officials asked its citizens to hold off on sending in what they owe so that the government wouldn’t have to pay the negative interest rate. The move could save the canton millions.
What it means – Welcome to the weird world of central banking, where officials desperately try to keep their currency low by imposing penalties for holding cash.
There have been other strange stories to surface, like homebuyers with interest-only loans in the Netherlands receiving credit each month instead of making payments, since their adjustable rate mortgages fell through zero.
All of this – and, of course money printing by other countries – is a desperate attempt to change the economic facts on the ground. We still have mountains of bad debt hanging around, and low consumer demand. Changing interest rates doesn’t affect either of those things.
The Chinese Government Supported the Yuan in Offshore Trading… The Chinese have always managed their currency on the mainland, but this week the central bank – through proxies – bought Yuan on the Hong Kong exchange. After falling 2.9% offshore at the start of the week, the Yuan rebounded by the same amount.
What it means – This might seem like a technical banking issue, but it is a big deal. For years, people have speculated about the Chinese yuan rising to prominence on the world stage. When the IMF added the currency to its SDRs last year (taking effect this October), the rhetoric went into hyper-drive. But part of becoming a usable currency in global trade is that the market must be free to find the right price compared to other currencies. Now that China has intervened in foreign exchanges, who can trust them to stay out of currency markets in the future? This is a huge setback for the Yuan.
On a side note, we’ve always dismissed the notion of the Chinese Yuan displacing the dollar. It would drive their currency higher; making their goods cost more. Who would want that? Today the strong dollar hurts U.S. exporters. What central bank would knowingly put that burden on its own economy? Oh, that’s right, ours would. Thank you, Federal Reserve, for higher interest rates in the face of an economic slowdown.
Chinese Trade Numbers Better Than Expected… Exports fell 1.4% last month on expectations of an 8.0% fall. Imports dropped 7.6%, "beating" expectations of falling 12.0%.
What it means – And if you believe that, then I have a bridge to sell you! We don’t know what the trade numbers should be, but these figures appear much rosier than economic activity would suggest. The import number, in particular, is suspect for a very specific reason. The Chinese are notorious for padding import invoices as a way of getting cash out of the country. Whether they are paying an affiliate company in another country or using a third party to funnel the cash, this is one of the major ways they beat capital controls.
With the Yuan dropping in recent months, everyone is rushing for the exits. The government limited the amount of money that can be legally taken out of the country. Suddenly, trade numbers are better! What a coincidence.
Next Week – The week of January 18 has some interesting economic releases, including Chinese GDP, U.S. housing starts, and U.S. inflation. There will also be a scheduled announcement by the European.
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