HSBC's negative 3.4% GDP number coincides almost exactly with my view that, with the strong $ the US has been importing about 3% deflation-which make the effective FF rate 3%+ vs 0-25%. The FED has starved the world of $ liquidity since the end of QE3. World GDP has rolled over since then, so have earnings and job growth. Easing by BOJ, PBOC and ECB have not been enough to counter the FED's tightening.
The FED has to ease and they have to ease big. With stocks rallying, in recent days, the bigger the potential dissappointment should the FED delay what they have to do. Net/net the FED is still paying a game of "chicken" with the US and world economy.
Adjusted EPS beat estimates $1.49/share vs $1.45/share consensus estimates. What were the real numbers? Operating income was down 40% y/y on sales down 7.4% y/y.
Along that theme, HSBC came out with analysis today that world GDP, measured in $s, was negative 3.4% in the 1st Q. It confirms what I've been saying all year. With the $ so strong, US companies are selling into a negative GDP environment-making top line growth extremely hard for multinationals.
A year ago, the DXY was in the mid to high 80s. So, it won't be until the 1st 2016, if the DXY stays below 95, that the $ won't be a headwind for earnings. Even then, it won't be a tailwind until the DXY gets closer to 90.
The FED, is going to have to ease substancially, before US multinationals will get back to top line growth. Until then, expect poor GAAP earnings, negative top line and more layoffs as corporate America looks to cut costs to maintain earnings.
Chief economist of BofA, Michael Hartnett, came out with comments in recent days expecting:
1)Fiscal stimulus by western countries
2)QE type programs by the PBOC in a
"last big reflation push"-basically what I said is going to happen a month ago. What to buy? gold/commodities and "Main Street" vs Wall Street.
In China, 10/13, the PBOC expanded their "CAR" program-Collateral Asset Refinancing Program-which allows banks to pledge assets to secure loans from the PBOC. Although not directly QE, it has been described as a "back door" or "quasi" form of QE.
As far as massive fiscal stimulus programs in the US, it would make sense to "buy" votes with infrastructure, defense, education and other programs. The Repubs will have their "pet" projects and the Dems will have theirs. In is my view, the "market' is sniffing out such a policy shift in 2016, which would increase aggregate demand and increase S&P 500 earnings. Therefor weakness, in commodities should be bought. I think the next best opportunity will be in Nov, when China devalues again-to keep the US from raising rates in Dec-so they can sell their treasuries at higher prices and buy commodities at lower prices. The "market" may relive the "fear" of August all over again, to sell across the board, but create bargains for others.
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After looking at pcti’s website we couldn’t think of many other companies with a “ceo corner”. Particularly, companies this small and with such an unremarkable performance. Nevertheless, you’d think it would be a place for the ceo to articulate his latest thoughts on the company to investors and employees. Then again, pcti seems to operate in its own “corner” of a parallel universe…
In the first update to his "corner" since 2013 and right after the latest set of poor quarterly results and share price drop, the ceo enlightens us with a new post (http://www.pctel.com/pctel_content.cgi?id_num=379) to tell us all about his cousin’s Broadway musical. Needless to say it makes you scratch your head…but who knows, it probably makes for some good company-paid entertainment…
Anyhow, in drawing contrasts between pcti and “startups” and the “foundation of the United States”, we are treated to raw irony, doubly. And the oddities don’t end there. While no manager other than the ceo seems to be depicted anywhere in pcti’s website, each of these posts is actually graced with two large pictures of -wait for it-, the ceo and his signature. Again, it all makes you scratch your head.
Just over the last few weeks diverse major companies like United and Dupont ousted their ceos because of performance related issues. It’s reassuring to see how the market enforces discipline and focus in publicly traded companies. However, you also have all these minuscule companies where uncounted numbers of incompetent "managers" are not held accountable.
We have already gone over the stock. In well over a decade, pcti’s price has gone basically nowhere –other than quite down recently- One would assume that’s why the ceo too the token “salary cut.” However, a couple of weeks later, he gets a minimum of $1M in new shares that vest twice as fast and with a dividend that happens to roughly match the alleged salary reduction.
As if all this was not enough, is pcti managed on the basis of an ego trip?!
Every Q, the FED revises its data for the prior Q. The FED took down its prior measures of M2, and M2 was down $47 billion w/w, so now 10 week annualized growth fell from 9.2% last week to 6% this past week. As a consequence, I have been harvesting gains in oil/NG/gold/silver positions-taking out "trading shares" but keeping core shares.
A not often data stream, "import prices" came out today and was down 3.1% y/y for all imports. Several weeks ago, I posted that the "defacto' FF rate was close to 3% because the the strong $ has the US importing deflation. So, for the FF to be a real interest rate of close to 0, the it would have to be -3% vs its current 0-.25% range. Or another way to look at it, with imports at -3%, and the FED at 0%, the real FF rate is 3%. Why is this useful? To me it is a gauge of how much the FED has to ease before the US economy regains upward GDP momentum.
In the future, there must be some combination of:
3)Lower interest rates or QE
4)Higher oil prices
5)Perhaps FED balance sheet and monetary base growth
to get import prices up, and nominal GDP closer to 6% vs under 4% now.
The FED is going to to dragged "kicking and screaming" into the next "easeing" cycle. Their delay will increase the risks the Chinese will have to devalue their currency again-setting off another round of importing deflation. Ultimately, fiscal stimulus will have to become a big part of the world's revival out of its current slowdown.
The combinations of monetary easings, by multiple central banks, and fiscal stimulus by larger countries-US, China, Germany, UK and Japan-will be very powerful "juice" for the S&P 500 to get to 2500-3000 over the next two years.
Right now, its all on the FED.
Oil/NG/gold/silver have bottomed-although gold will need a few days to churn through $1145-$1155 resistance. Alot of "data", in recent days/weeks, have turned bullish:
1)M2 growth above 8% annualized rate
2)JPM calling out the FED has been too stingy, identifying "$ funding shortage...FED should ease"
3)Weak jobs number and 6-yr high layoff notices for the 3rd Q
4)Much larger trade deficit, exports down 6% y/y, 2% m/m. Trade deficit is only going to increase as imported oil will continue to increase as domestic production falls. This will lead to a weaker $ over time.
5)Increased Russia involvement in Syria will increase oil risk premium-Russia will to talk to OPEC if OPEC calls for oil meeting
6)Silver and gold contracts on Comex rising on up days and falling on down days-volume validates price trends-Comes registered inventories of gold at all time lows. Silver coin demand worldwide surging leading to price premiums above 40%-normal 10-15%.
Oil/NG/gold/silver stocks should be accumulated on weakness as I expect multi-year bull run for gold/silver and oil/NG to be up 40-50% from recent lows in 6-12 months.
Over the weekend, JPM published comments that note a "$ finding shortage...stingy FED sowing the seeds of the next financial crisis... FED should lower interest rates or do QE"
This is what I've been discussing since the beginning of the year. JPM commented that one "market" measure of $ funding shortage is expressed in FX markets-the value of the $ is just too high. I'll repeat again, the DXY has got to get below 95 and keep going lower.
good news. DXY weaker and so are interest rates-bought RF and ONB today. Consistent with a prior post, I expect Oct jobs to be softer than Sept. Yes, the FED is behind the curve, they are behind in easing.
M2, up annualized rate of 8.25% the last 21 weeks, up 9.2% annualized the last 10 weeks. Yet, the FED has to do more to to supply $s to the world. Those that have been looking for QE4, including me, have been handed significant evidence to reinforce their view with today's jobs numbers.
Ultimately, I'm looking for the 10yr to get to 1.75%, perhaps to 1.50% When the FED starts to "ease" overtly, interest rates will start to rise, along with inflation expectations. Still, until the FED eases overtly, they still are playing a game of chicken with the US economy and the rest of the world.
Euro-zone PPI was -.8% m/m and -.2.6% y/y for the month of August. Prices falling in the EZ. PPI has been down 40+ months in a row in China, prices falling in Japan. These countries, along with others with weak currencies are exporting deflation to the US. The "solution" is very simple. The FED has to increase the supply of $s to the world massively to get the DXY down, inflation up, commodities up,debt service capability up.
Today's soft Sept Jobs numbers will be followed by even softer numbers for the month of Oct. The FED is behind the curve. They are way behind in easing.
Since gas demand has been up y/y consistently 3-5%, at some point soon, oil inventories will start to drop quickly as imported oil will substitute out declining domestic production. For example, daily imports since mid Aug having been trending 7.5 mb/d or more consistently vs consistently under 7.0 mb/d earlier in the year. US oil production peaked in April
The opposing axis's are: Russia, Iran, Syria vs Saudis, US and Qatar. Another way to look at it, Russia is backing the Shiites and the US is backing the Sunnis-ISIS are Sunnis. With Iran now having active military support from Russia and the US continuing a neo-isolationist policy, US allies S.A. and Israel are in panic mode.
1)Iran will take over Iraq at a faster rate
2)Increased Saudi military spending will force them to seek higher oil prices
3)Israel, feeling more isolated, may have to attack Iran nuclear facilities
4)Risk premiums for oil will have to go up
Of course this can all be retraced back to BO's decision to withdraw troops from IRAQ, setting up a power vaccum, filled by Qatar and Saudi supported, ISIS to protect Sunnis in IRAQ. This gambit failed to get the US back into IRAQ in a big way, but backfired by defacto "inviting" Russia to help clean up the ISIS mess-that is their "cover" anyway. Russia's influence in the Middle East will grow immensely while the US's will continue to wain. Russia and IRAN want higher oil prices-they will keep pushing their interests until acted upon by a significant opposing force. The US does not have the "balls", the Saudis may try but fail.
With US oil production falling just about every week and inventories only seeming to be very high, the reward/risk for oil is looking good.
I say oil inventories are "seemingly" high its is because, oil produced in the US shows up as inventories right away vs oil imported doesn't show up until it goes through customs. In recent years, US increased production, has substituted out about 2 million barrels/day of imports. With imports taking an average of 30 days to traverse to the US, inventories are higher by about 60 million barrels than "normal" because domestic production show up in inventories quicker than imports. With inventories about 90 million barrels higher than the 5 year average, the real inventory overhang is 30 million barrels.
With overt action by Moscow in Syria, the Middle East becomes more of a powder keg. Going back to post WW1 agreements, the borders drawn then had little basis in reality vs the geographies of tribes and religious groupings. Those borders are being redrawn. Obviously alot of people are going to die and have died in the process.
Other implication, Russia and Iran, in their process to squeeze and eventually take over Saudi Arabia, want and must have higher oil prices. The notion that oil prices are going to stay low, (below $50) for years just will not happen because of Middle East politics, wars and elevated supply risks. As a consequence, I think oil bottomed 8/24 at $37.75 intra-day. With that in mind, on days of oil weakness, I have been buying NA based oil/NG companies-WPX, SM, RRC, SWN are my favorites now. I'm warning up to: SU, DVN and BBG.
Now, there are alot of good NA asset based oil/NG companies to chose from. If an investor takes any kind decent time frame, longer than 12 months, they will make money just about all of them. Just buy good balance sheets and/or well hedged into 2016.
Alot of bad news (macro-econ) is out and there is more to come. However, I am getting more constructive as I think the "market" will view "bad" news as good news-more QE from the ECB/BOJ more fiscal and monetary stimulus from the PBOC and more easing out of the FED (even if they raise rates as long as M2 keeps growing at 8%+). Not only will bad news be good news, but good news will be good news as indications of a turnaround in China Inc will likely show up in coming months from the cumulative steps they have taken since last year.
I do think oil/NG has bottomed, some regional banks have bottomed and some microtech are worth buying into the end of the year are worth buying as well. Still looking for a weaker DXY, before buying tech in size.
In the meantime, GS took down their estimate of S&P 500 EPS, for 2015, from $114 to $109 or down 3% y/y. Until the FED starts to ease aggressively, I am expecting 2016 estimates to consistently come down as well.
Two market measures of future expectations of inflation hit 6 year lows yesterday and today. On 9/28 the 10 yr TIPS spread hit 1.40%, today the 5 yr TIPS spread hit .98%. Couple that with central banks from Taiwan, Norway and India have all lowered interest rates in the last week-India by 50 BPS last night, and an investor can conclude that world growth is slowing and deflationary forces are rising. In my view, this is all because the FED has been stingy with the supply of $s the world needs.
This has been partially reversed, in the last 21 weeks, as M2 has been up 18 of those 21 weeks, but monetary "eases" operate with a lag. Still, the FED needs to do much more, quietly or overtly, as I expect macro-econ to continue to be soft. Bottom line, whatever FED members have to say, they must increase the supply of $s to the world to get the DXY below 95 and moving lower, before the world economy can see accelerating growth.
Waiting on UPL-but bought WPX and SM today.
Quietly, the FED has been increasing liquidity as M2 is up 18 of the last 21 weeks-with the last 6 weeks up on average about 8% annualized rate. Also, the FED balance sheet has been up about $10 billion/week the last two weeks. 1-3 month treasuries have been trading in in and out of negative territory. Bloomberg's China financial conditions index has turned positive the last two months-the first time in two years. In summation, financial conditions are getting better, but macro-econ news is still going to be soft for the next several weeks to 2-3 months.
Point being, if the FED and PBOC continue to "ease" then the market bottoms in Oct or Nov. When, as I don't think its an "if", the US prints a soft jobs number (best early chance is Oct's numbers-out early Nov), all talk of interest rate rises will be gone-the FED will have to talk QE or ZIRP.
DXY, hit a double top last week at 96.60. When it gets below 95, and looks to stay below 95, while stocks are still falling and the FED continues to "ease"-will be an excellent backdrop to buy the market's pessimism.
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