Financial Rumblings- February 12, 2016

I’m taking a vacation from my financial musings. I’ll return after the NCAA’s March Madness, well, the second round. Or more importantly, right after the next Federal Open Market Committee (FOMC) meeting: March 15-16.

As of this posting, the Dow Jones Industrial Average (DJIA) is up 244.25 or 1.56% at 15,904.43. I guess we are out of the woods- NOT! The stocks bounced as bank stocks were scooped up, in part because of the Deutsche Bank buying over $5 billion in bonds and WTI oil gained 10% or $2.63 to $28.84 per barrel. This I know will occur in the interim: stocks will yo-yo for a bit as people analyze and over analyze each bit of economic news; talking heads will wrestle with 5.0-4.9% unemployment, yet the feel of an economy that is much worse; economists will explain negative interest rates and the negative/positive impact for the global economy; politicos will focus on the Presidential race and the impact to Wall Street; and, everyone will realize that their taxes will soon be due, but why on April 18th and not on April 15th (answer: Washington, D.C. Emancipation Day).

Until then, like Glenn Frey and the Eagles sung: Take it easy, take it easy. Don’t let the sound of your own wheels drive you crazy.

Financial Rumblings – February 11, 2016

Lloyd Christmas: What do you think the chances are of a guy like you and a girl like me… ending up together?

Mary Swanson: Well, Lloyd, that’s difficult to say. I mean, we don’t really…

Lloyd Christmas: Hit me with it! Just give it to me straight! I came a long way just to see you, Mary. The least you can do is level with me. What are my chances?

Mary Swanson: Not good.

Lloyd Christmas: You mean, not good like one out of a hundred?

Mary Swanson: I’d say more like one out of a million.

[pause]

Lloyd Christmas: So you’re telling me there’s a chance… YEAH!

(Dumb and Dumber, 1994)

In the question and answer period of today’s Semiannual Monetary Policy Report to the Congress, U.S. Federal Reserve Chair Janet Yellen conceded there’s a chance of a recession.  “There is always some chance of recession in any year. But the evidence suggests that expansions don’t die of old age.”

I also don’t believe the U.S. is headed towards a recession this year, however, the headwind that the global economy has felt for some time, is finally being felt on the foreheads of those on Wall Street. The stock market, at the time of this report, is down 378.99 or 2.38% from yesterday’s close and now sits close to 15,386.82 -where I forecasted in August 2015 the market would be on August 30, 2015.  I know my timing was off, but I felt at the beginning of this year, the market would reach those lows, and lower, but by mid-year as companies begin to report Q2 earnings; the speed of this drop is amazing.

The expansion hasn’t died of old age, but it was never very spry to begin with. The U.S. GDP growth rate, per the U.S. Department of Commerce, for 2015 was the same as 2014: 2.5%. And, 2016 has been forecasted to be around that level as well. I still predict the economy will shamble along and the Federal Reserve will resist increasing the Federal Fund rate in March 2016, however, it should, for continuity, increase the rates in March.  What ultimately will get the world  humming again is what brought the great growth for the last six years: China. However, China is transitioning from a manufacturing economy to a service economy, thus the big building boom is gone. No more Summer Olympic Games or construction of buildings for the sake of building.

The bottom line is that the stock market will trade lower for the near term as it reluctantly accepts the new economic paradigm.

 

 

Financial Ramblings – February 9, 2016

“Some see the glass as half-empty, some see the glass as half-full.
I see the glass as too big.” George Carlin (Brain Droppings)

The George Carlin quote is apt for today’s variances from yesterday’s close as the market grapples with its view of the world economy: at the beginning of the day it was half-empty, down 1.04% (price of oil falling); by mid-day it was half-full, up 0.6% (Deutsche bank considering buying back Euros); and, at closing it was too big, down 0.2%(negative interest rates in the U.S. a possibility).

The market is finally seeing what I’ve seen and called for some time: the world economy is ill and the current stock market is overvalued and has not accounted for poor earnings in Q3 and Q4 of 2016. China’s economy has been slowing for some time, the U.S. economy-which is 2/3 based on consumer spending- is shambling along, and U.S. companies are producing products based on sales that will not be there given the lack of disposable income by the consumer and uncertainty in the economy-which is ironic as the unemployment rate is 4.9%.

I expect the market to bounce along as it magnifies each sliver of good news and comes back to reality with each spoonful of bad news.

Financial Ramblings – February 8, 2016

Wait for it, wait for it, …

At the time of this article, the DJIA was at 15,896.18, down 308.79 or 1.91% from Friday’s close. Last week, on Monday, February 1st, I stated that the DJIA would close on Friday 5th, at 16,200; I was incorrect: it closed at 16,204.97. My powers of prediction didn’t apply to the Super Bowl as I thought Carolina would win 25-20, however, if I had bet the spread and taken Denver at +6, then I would have been correct.

I just don’t see the world economy improving. China’s GDP will be above 6.50%, which, according to the Wall Street Journal, is the slowest growth rate in 25 years.  The PHLX Semiconductor index is down as well, about 3.27%; it is just another indicator to use when gauging the relative strength of the economy. The semiconductor industry is notorious for these cyclical periods- it’s not as constant as Moore’s Law, but there is a fairly consistent pattern. The pattern was recognized by Bill McClean, an analyst at IC Insights Inc., Scottsdale, AZ, in an article published on December 8, 2000 in the EE Times:

The stage is set for the next slowdown. The downturn portion of an IC industry cycle is usually triggered by global economic recession, IC industry overcapacity, or IC inventory corrections. In 2001, the IC industry will be affected by all three ‘triggers.

Substitute tablets and phones for PC’s and it’s easy to see why I’m not too rosy on this upcoming year and part of next year. If you follow my posts you can see how correct I’ve been in my economic assumptions. I’m still sticking to my guns that the market has a way to drop in the next half year: 15,386.82

Financial Rumblings-February 2, 2016

If the National Security Agency was monitoring for chatter on the word “recession” last month, they’d have a binder full of mentions, which would be right next to Mitt Romney’s binder full of mujeres. We’ll use the definition of a recession where there are two consecutive quarters of negative GDP growth-though this is not officially the definition used by the Bureau of Economic Analysis.

No, I don’t believe the U.S. will see a recession in 2016, but the U.S. economy will continue to shamble along like a “Walking Dead” zombie, not like a “World War Z” zombie. The unemployment rate is currently 5.0% -per the January 8th Labor Report, but it just feels like it’s much higher. In Southern California, there appears to be more people begging on the on/off ramps; more people sleeping in the doorways of buildings; more people needing assistance for food; and, in general, more hands out. I know Southern California is not the epicenter of the ills of the country, however, it is often said, “how California goes, so goes the nation.” Unemployment will increase  as companies begin to realize that their forecasted growth in income will not be achieved at the gross margin level, so they’ll have to begin to look elsewhere to make up the difference, and labor is always public enemy #1 or #2; it is usually one of the biggest expenses in the P&L. However, I don’t see this happening until the 3rd or 4th quarter of 2016; thus, the impact will be seen in 2017. And, since the U.S. economy is 2/3 based on consumer spending, it is easy to see the effect that a rising unemployment level has on the economy.

The Treasury Department’s hands will be tied because lowering the interest rate is now seen as purely symbolic- in part, because you’d expect the economy to be humming along by now given the easing of monetary policy for the past few years, thus companies will not invest in the company when the demand for their product is not there to justify increased expenses.

Those are my views. I’ve been somewhat spot on as Wall Street is slowly turning around to see the world through my Oakley polarized glasses-which are not very polarized given the 2016 U.S. economy is not very bright.

Financial Rumblings -February 1, 2016

When I lived in Colorado, it was said: If you don’t like the weather, wait an hour. That’s how I view the stock market of late: If you don’t like the direction of the market, then wait-perhaps, not an hour, but a couple of days or weeks.  Last week, for the first time the BOJ adopted a negative interest rate policy, and the market went up. Up to then, the sentiment was very dour, as oil prices were sliding fast, Apple’s outlook wasn‘t very rosy, and economists started to break out their harmonicas for the troubling global economy that lay ahead. But, then, the tune of “Happy Days Are Here Again” started to be played throughout the global markets because of the BOJ news, oil stabilizing, and people just like nuggets of good news- no matter how counter it is to the reality of the landscape.

I still believe the market, DJIA, will dip to the low-15,000’s, by August of 2016, because earnings growth will be deeply challenged by the poor global economy, and in particular, the weak U.S. economy.

For my very short term outlook, by the close on Friday, February 5th, the DJIA will be 16,200, or down 1.2% from Monday’s intra-day 16,396.93. By the end of February 2016, I expect the DJIA to be slightly below 16,000.