Free markets want to "clear":
3)Allocate resources efficiently
Creative destruction, but very deflationary!
Just the opposite, governments and central banks want to perpetuate the current status quo-economically and politically. Both have, governments and central banks, gone to great lengths- with deficit spending and easy monetary policies in these aims. Potentially very inflationary.
However, since 8/14 when the FED's balance sheet and monetary base started shrinking and the QE3 program was getting close to its end the FED stopped feeding the world the supply of $s it was use to feeding off of. That reduced "juice" has tilted the world balance towards deflation. In addition, because of government's resistance and interference they has been retarding the cleansing "clearing" dynamic of free markets-supply destruction has been slow. China especially is keeping alive vast industries that cannot operate based on economics alone. Saudi Arabia and others continue to produce oil at rates that drive prices lower than replacement costs.
So it all gets back to the FED. How much pain, some of it the good creative destruction kind, will occur before they intervene? Until they do, deflationary forces will continue to win out:
1)World GDP estimates will continue to fall
2)The ability of governments, businesses and individuals to service their $ denominated debts will get tougher
3)Debt overhang at all private and public levels absorb cash flow, leaving less for investment
If you have the answer to when the FED does their "reversal" and to what extent they begin to ease-then you will know, within days, when the reflation trade begins. Until then, its 1600-1800 for the S&P 500.
The FED's Labor Market Conditions Index came out today, 1/11, as it always does the Monday after the BLS's jobs number and it was at 2.9. The FED revised higher 11 of the last 13 months, so Dec's 2.9 matched Oct's 2.9, both highs since Feb 2015-Oct was previously 2.2.
Implication, according to the FED's model, labor conditions are even stronger than their previous readings. This reinforces my view the FED will not ease until, at least, two soft jobs reports. Of course, it is my view as with many others, that the BLS is grossly over estimating labor strength as not only are the absolute number of jobs being reported is high, but the mix is of poor quality:
1)multiple job holders (2-3 part-time jobs) are being reported as a "full" time job
2)Higher paying jobs are being lost and being substituted for much lower paying service jobs
3)Seniors are going back to work-lower paying service jobs-in record numbers because they cannot earn any money on their savings
Until the FED eases and while the DXY remains strong, S&P 500 estimates will continue to come down-GS lowered on Friday from $120 to $117-and bouts of selloffs, due to lack of $ liquidity will continue.
Since they raised interest rates and tightened monetary conditions by lowering the monetary base and free bank reserves and increased its reverse repo program:
1)2yr10yr spread has narrowed from the low 130s to an 8 year intra-day low today of 117-the bond market implying that inflationary expectations are falling as are GDP growth estimates
2)Commodity indexes continue to make new decade+ lows
3)The DXY is higher
With little hope the above trends will reverse as the FED continues to communicate they will continue to tighten-the game of "chicken" is getting more dangerous. The big question is how much "pain" will the FED inflict on financial and real markets before they reverse course. My thought is still, they will "ease" after the 2nd poor jobs number-so we are still 2-3 months away.
Within today wholesales inventory report, for the month of November, auto inventories were up 12.5% y/y with inventory to sales at 1.78, up from Oct's 1.77, and a high since 2009. Recall that Dec car sales were actually soft at 17.3 annual rate vs expectations of 18.2 million annual rate. One can only conclude is that vehicle dealers are sitting on more inventory than they would like-so AN's comments can be expanded to the vast majority of dealers. Implication, orders to mfgers are going to fall y/y for the 1stH of 2016.
Otherwise, across the whole economy inventories are up 2.2% y/y and sales are down 4.6% y/y. Inventory overhang is going to be a drag on GDP growth the 1stH of 2016-assuming the economy chugs right along. If there is a negative shock, then a recession is the cards. Slowing sales will lead to lower orders, leads to layoffs, leads to lower sales-a self reinforcing negative loop.
No, I was not the big bid! I still think the broader averages are going lower as China needs to devalue their currency another 10-15% and the FED may not "ease" until later in the year-having been stubborn and playing a game of "chicken" with the US and world economy.
A 25% sell off of the S&P 500 from the top pulls the average back down to the 10/2007 high. I give it 10-15% chance that could happen.
I bought some today at $7.25. After the close the division of HELE that KTCC makes products for had a good Q, otherwise I have no new insight on SMT and its Dec Q.
Let me review my bearish scenario. The US has been importing deflation (monthly import prices have been falling at a 3% annual rate for most of 2015. Therefore, if the FF rate is .25-.5%, then real interest rates are 3.25-3.5% because prices are falling at a 3% rate. With the 10yr at 2.2%, the yield curve is inverted-which leads to recessions as it is a sign of tight money.
The monetary base peaked in the fall of 2014, as did the FED's balance sheet. Hence, the FED has been tightening since just before QE3 ended. That is why:
1)Commodity indexes are making 13-16 year lows
2)World GDP growth is slowing
3)Industrial America is in recession
4)The DXY is near 12 year highs
The FED has not been supplying enough $s to the US and world economy to enable faster world GDP growth and to comfortably service debts based in $s. China is important because if they continue to weaken their currency-finally on CNBC today there was commentary that they have another 10-15% to go, taking the Yuan to 7.25-7.60 from about 6.6-China will continue to export deflation to the US. The FED has to ease to bring the DXY down-it was 76 in 7/14 vs 99+ today-and to bring down interest rates:
1)the 2y down to .25-.5%
2)10 yr down to 1.50%
3)3mo and 6mo negative interest rates
The market will bottom before the above happens, as it will anticipate, but until the FED starts growing M2 at a 9-10+% annual rate for months-imported deflation will continue to keep our interest rate curve inverted.
Having warned, for weeks, the US macro backdrop had been getting weaker and that stocks would follow-sell the rallies and raise cash-how much more is there to go? I think alot further down as China will continue to devalue the Yuan-exporting deflation to the US and earnings estimates will continue to be lowered. Last fall there was a rally off the august lows because, in my view, the FED pumped up M2 from a 5% annual rate in early August to 9%, starting in mid August (China devalued 8/11) through the 3rd week of Sept-stocks rallied till early Nov.
The FED could do the same this time, but like last time (by the end of Nov M2 was up only 2% annual rate) their short term addition of liquidity didn't make for a sustainable rally.
Ultimately, I think China has got to get their Yuan down to 7-7.5/$ vs 6.59 now-that will take months. Ultimately, the FED is going to have to start to ease-I think they wait for at least two soft jobs numbers-that make take months. So I'm waiting and looking for a 20% selloff, which gets the S&P 500 close to 1700.
Railroad numbers out for the week end 1/2/2016. Vehicle railcars were down 5.1% y/y. Now the last week of Dec is not an important week, but should the y/y decline continue, then auto company shutdowns will not be too far behind and layoffs will occur at suppliers-a pillar of GDP growth topples over.
DXY ended 2015 at 98.70, currently it is around 99.50-yet gold is up each day in 2016. Also the spread between the Feb, April and June contracts has narrowed from $1.10 April higher than Feb and $1.30 June over April to less than a $1.00 for both contracts today 1/6. Implication: the contango is narrowing and if the spot price gets higher than futures contracts then that implies scarcity for physical gold and should lead to higher prices-even if the DXY continues higher. Of course higher DXY will continue to put downward pressure on the US economy-all sectors: mfging, services and wealth.
So far into 2016, it is good to be long "chaos". Given the psychologically damaged, habitually lying leadership of much of the world, it should continue to be good to be long "chaos" (gold/silver).
Always nice to read that may comments are confirmed by the "market" soon thereafter. Today AN commented that:
1)Dec sales were soft industry wide
2)Inventories are too high
3)They will be taking down their orders over the 1st and 2nd Q
4)Incentives are up, such that gross profit/car were down $250-$300/car-hence AN's EPS will miss expectations
So it looks like one of the "engines" of 2015's GDP growth will not exist for 2016 as industry sales will be flat to down. My thoughts again, if extremely easy financing tightens, then industry sales will absolutely fall vs 2015.
Also of note, apartment vacancies were up in the 4thQ for the 2nd Q in a row, with commentary that it is taking longer to lease up new projects. Well, one of the big "engines", the last 3-4 years has been multi-unit construction. Should that sector turn flat to down-single family home construction has already turned lower-then just where is 2016 GDP growth going to come from?
As we enter 2016, industries that have been producing jobs, auto related mfging and construction, now look to turn flat to lower-with a time lag. It has been my position the FED will not "ease" until it sees two lousy jobs numbers. The odds just increased that sometime in the 1stH of 2016, job softness will occur.
Ironically, since the BLS has been over estimating jobs for years, because of overly optimistic seasonal adjustments and a positive birth/death business formation model (when it has been negative since 2010-will continue to report higher job growth that what the economy is really generating-keeping the FED from easing a few months longer than they should. Unfortunately the FED's delay will hurt the economy even more and the FED will have to ease with greater intensity.
Came in very weak at a 17.3 million annual rate vs expectations (GS) of 18.3 million and Nov's 18.2. For the year 2015, annual sales did hit a record of 17.47 million vs 2000's 17.4 million. However, adjusted for population, 2015 was not a record.
Part, perhaps a big part of the "strong" year was extremely easy financing. For example, a friend of mine went into a dealership, a few days ago, and was offered 7 yr paper at 2.9% interest rate on a 5 yr old car. Dealerships can do this because they can repackage those loans as securities to sell to yield starved investors-same model as the housing bust of 2008-2010.
If the FED continues to raise rates, tipping the US into recession, those securities backed by auto loans will see massive defaults. Move over, auto sales will drop to 14-15 million annual rate vs 17+ million. Housing has started to roll over, autos will follow down hard as dealers have too much inventory to begin with.
Mgt paid $6.77 on average in the 3rd Q. Perhaps, just as important, is mgt could have "warned" today if 4thQ results were going to be short of guidance. Since they did not, I am expecting results slightly stronger than the 3rd Q.
CS came out today with research that they expect gold mining production is going to fall 4%/yr over the next 3 years. I've read other research that had predicted that production would fall 3% this year, but did not have out year forecasts. Also, China, with their Shanghai Gold Exchange, will launch their own gold contract, denominated in Yuan, in April. The SGE is a physical deliver exchange, unlike the Comex, so may set up a situation where strong physical demand will influence prices in the West where spot prices will be higher than futures prices. This is known as backwardation, which implies "scarcity"
Since making a double low in Dec, around $1045, gold has been a modest uptrend. Perhaps, more importantly, miners have been doing better than the metal itself as all miners sell in $s but many have mines in countries with weak currencies vs the $-lowering their costs and increasing their margins. Gold/silver miners may just surprise w/r to earnings this year as the "market" is not weighing this dynamic. Also important, and a indicator of a sustained gold rally, is that the GDXJ has been outperforming the GDX which has been outperforming the GLD.
I've been bullish on gold/silver for some time, it has not worked well in the last year, however with the supply of $s and indeed all paper currencies up consistently 6-10X the supply of gold, the price of gold should continue to rise vs all paper currencies. M2 will be up 6% or so this year, similar to 2015. whereas the supply of gold will be up 1%. This "math" favors gold/silver moving higher in price even if the DXY moves higher because that just implies that other currencies supply are greater than M2's 6%.
Opening of the SGE contract could be a catalyst. Look for continued out performance of of GDXJ over GDX and for the futures contracts to go into backwardation.
In years previous, China, Japan and OPEC countries were large buyers of treasuries. Alas, with poor economic conditions in those countries, they are now net sellers-which will send US interest rates higher-a larger budget deficit will put upward pressure on interest rates as well.
For example: the spread between the US 2yr and the German 2yr hit a multi year high the other day at 142 BPS, dito for the UK 2yr at 46 basis points. Of course, as US rates rise, that will draw into the US net savings from other countries, pushing the $ higher-which will keep the industrial part of the economy in recession.
At some point in time, the soft US econ data will put a lid on rates, but the 10yr could get to 3% first. Falling earnings estimates along with higher interest rates are not a good backdrop for US stock indexes.
At some point the FED will have to ease to get the US $ down and interest rates down-it is just a matter of how much "pain" will be inflicted on markets and main street first before they make their move-either QE or Operation Twist 2.
I suspect we have completed the bulk of institutional window dressing as micro-cap funds purge some of their holdings. Individual tax-loss selling may continue through the last 4 trading days next week.
Within the Durable good orders, released 12/23, communication equipment orders were up 3.7% in Nov after a 2.3% increase in Oct. Also Jefferies upgraded CIEN earlier in the week. Although the direct correlation is weak, both data points point to better orders and expected orders from the big wireless companies-increasing the odds that scanner sales got a bump up in the 4th Q and will do better in 2016 vs 2015.
At $4.40, if you take the net/net of $3.50/share, the business was selling for .14 PSR-PSRs under .5 are cheap for mfgring companies.. Cheap for any kind of business, but very cheap for a profitable, positive cash flow business in an expanding industry. Still, mgt has to perform and 2015 was a major disappointment, but then that is what creates opportunities.