Week in brief: April 8

April 11, 2016

Last week saw equities drift lower. Bringing the S&P 500 to post only its second weekly decline of the last two months. Ending up the worst of the last nine weeks. Market was up two days. Down three. Operating in the kind of vacuum that generally occurs the week before earnings season. Which kicks off this week.
Fundamental and technical outlooks remain murky. As the DJIA looks like it's on the verge of breaking below its recent uptrend. Clinging desperately to its 20-day moving average. Twice last week, it seemed ready to close beneath this critical line in the sand. Only to be saved both days by afternoon rallies.
Market breadth continues to narrow. With an increasing amount of stocks closing beneath their 50-day moving averages. The percentage of NYSE stocks beneath that level sits at 80 percent. And the number of attractive opportunities at this level continues to diminish.

By all appearances, the counter-trend rally that's lifted equity indices since mid-February appears to be exhausting itself. Don't be surprised to see markets drifting lower. Especially as Q1 earnings kick into high gear.
Economically, things remain somewhere between poor and blasé. Despite the best attempts to convince us otherwise.
The Atlanta Fed downgraded its GDPNow Q1 growth forecast to an anemic 0.1 percent. That's the lowest level its reached in years. And that poor showing comes despite three U.S. QEs, NIRP in Japan and Europe, record-low U.S. interest rates and the lowest gas prices since 2009. Housing has recovered. Auto sales sit near all-time highs. The unemployment rate allegedly sits at 5 percent. And the labor participation rate has risen of late.
Despite all that, the U.S. has zero economic growth... What gives?
The government's answer? A move to stop corporate tax inversions, the practice of U.S. companies to merge with foreign firms to escape the U.S.'s oppressive corporate tax rate.
The new law retroactively scuttled the Pfizer-Allergan deal. One that both companies had spent many millions of dollars putting together. Nor did they do anything illegal. One day, corporate inversions are a legal activity. Engaged in by companies around the world. The next? The government declares them illegal. As if the forbiddance of corporate merger inversions will promote economic growth. A complete non sequitur. Likely to have the opposite effect. As corporations become more timid in their plans to hire, grow and expand as they realize that those presiding over the landscape are perfectly intent to retroactively change the laws under which companies operate without a moment's notice.
Which perfectly summarizes why this government has been unable to catalyze any true and sustainable growth these last eight years. Even as the nation exited the deepest economic hole it had been in for half a century. Which is typically when the most dynamic, upward sloping growth patterns tend to occur.
As a result of the anti-inversion regulation, the current administration will likely be viewed as a even more anti-business than before. Throwing an even bigger wet blanket on the economy until November.
Nor can one blame the business community for believing its under attack. Not when presidential candidate Senator Bernie Sanders comes out claiming that GE is immoral. Does he really believe that? And who is Senator Sanders, a committed socialist, to pass such moral judgments? Perhaps, as socialism contends that the state is God, then he as a representative of the state reserves the right to make such moral proclamations?
On the earnings front, don't expect the tide to come in soon. Analysts expect the worst reporting season since 2009. Not to mention the fourth consecutive quarter of declining profits. S&P 500 earnings are forecast to fall 9.1 percent year over year. Ouch.
And while many analysts believe that earnings will snap back into form beginning in Q2, much of that hope springs from the ostensible belief that the energy sector will also be recovering at that time. A point of contention for which there are no guarantees.
Societe Generale's Albert Edwards, who tends to be bearish but remains quite sharp, warns that the current economic slump brings a U.S. recession more into view. Perhaps even this year. Add in the GNPNow forecast of zero growth, and it becomes hard to completely ignore him.
The market keeps recovering every time Yellen and the Fed governors say anything dovish. But if earnings growth, economic growth and an expansion of equity multiples are all completely lacking? Tell me, what's going to drive stocks higher?
Edwards agrees. Stating, "Recent whole economy profits data show that while the Fed plays its games, the economic cycle is withering and writhing from within. For historically, when whole economy profits fall this deeply, recession is virtually inevitable as business spending slumps."
Of course, the main stream media would have us believe that the economy is on the verge of going from third to fourth gear. Though that's simply not the case. The private sector has done everything it can to improve profit margins despite zero economic growth. Having been assisted by copious amounts of government intervention. Rounds of quantitative easing. But have such artificial infusions been beneficial? At some point, the torch fuel runs dry. And the wolves can no longer be kept at bay.
Now, on to something more interesting.
Call us captivated. The Panama Papers leak may turn out to be the story of the decade. As the yeomen's work done by the International Consortium of Investigative Journalists continues to reveal a vast spider's web of global shell games and chicanery conducted by the wealthy and well-connected the world over. This story cannot be ignored. And we believe it will continue to unfold, exposing even more in the weeks ahead.
On Wall Street, the banks may finally have to pay. For their sins and transgressions, that is.
Seven years after the Credit Crisis, the feds have managed to hit Goldman Sachs with a $5 billion settlement for its role in creating some of the asset-backed securities that blew up so many investors.
Criminal prosecution following the Credit Crisis has been severely limited. Only one bank executive has ever gone to prison. After $34.4 trillion in global wealth wiped out. And few of the major banks ever had to pay the piper. All those boards of directors. Making big bucks to oversea their companies balance sheets. Taking credit for every paper clip cut from the budget. Didn't see a single thing wrong as toxic derivatives began radiating poison into the market place.
Sadly, I don't know that we've really changed much in terms of those boards. Who hold themselves out as the Guardians of the Galaxy. But when the galaxy was falling apart, they didn't recognize it nor did anything about it.
The Goldman settlement is the sixth such deal reached between the DOJ and Wall Street's investment banks. And while it merely represents a glancing blow to Goldman's fortunes, it's satisfying to see these culprits make amends.
Even more interesting? That this settlement comes against the backdrop of the Panama Papers Leak. Because in 2008, companies like Goldman helped to usher in one of the greatest financial crises of the modern era. Then were bailed out by big government. On the backs of American taxpayers. And while you know that moguls, politicians and the global elite are playing these types of tax shell games -- games unavailable to or unnecessary for the great majority -- the Panama Papers Leak simply brings the sordid truth to light.
Shame that shareholders will again be responsible for covering the poor decisions of boards and executives. As opposed to forcing those directly responsible to atone. Because so long as boards and execs know that they will not be held personally accountable? Their behavior will not change.
The ruling class needs an idle public like sinners need saints.
Alas, let's step away from politics. Fiat currencies. Stocks. And other man-made trifles. Lately, one only need gold and oil to reap big gain. Gold has risen markedly since the Fed made its first rate hike on December 16th. And fossilized dinosaur goo hit 52-week highs last week. Both appear on the verge of sloughing off bear markets and striking out for much higher highs. And should that prove to be the case? Skin? Meet game.
As Mae West said, "Too much of a good thing can be wonderful." More on these potentially good things next week.
Weekly Results
Major markets finished down last week. The DJIA lost -1.21%, while the S&P 500 fell -1.21%, and the NASDAQ dropped -1.30%. Small cap stocks also fell -1.82%. The 10-year Treasury bond yield rose 5 basis points to 1.72%. Gold finished up $17.29 per ounce, or 1.41% last week.

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