Week in brief: January 15

January 18, 2016

Stocks were beaten, mugged and left for dead last week. Culminating in Friday's venal act of cruelty, which saw the Dow lose 2.3 percent. And that followed a rebound off of the day's lows. Not to be outdone, the Nasdaq sank 3.1 percent. Eradicating the index's 2015 gains. And equating to what has been the worst start to a year for stocks on record. Energy. Financials. Tech. Healthcare. An equal-opportunity pummeling.
Today, a measly 40 of the S&P's 500 stocks are up in 2016.
For months, we've said that 1,867-1,881 on the S&P 500 would represent the Maginot Line. Having served as support for the index seven times over the last twenty months. Friday saw the index drop well below there. Only to slowly crawl off the mat during the final 15 minutes of trading. Like a prizefighter struggling to beat a ten count. Leaving the index, as the final bell went off, sitting like a cat on a fence. Right at 1,881.
An impressive display or fortitude. But not enough to negate the ominous signs.
Particularly worrisome? Small stock behavior. They've broken support. Fallen past levels at which they might have bounced. And as small caps tend to do the lion's share of their business domestically, they serve as the canary in the coal mines regarding consensus opinion on U.S. economic growth.
This has occurred while economic indicators continue pointing towards tepid domestic growth, but growth all the same. Representing another totem of how far the public's faith in the stewards of the economy has fallen.
Jeffrey Gundlach manages the Doubleline Total Return Fund, a fixed-income fund and one of the few we utilize. A prescient forecaster (that's rarefied air), Gundlach's forecasts merit attention. Regarding 2016, he stated the following:
"Now is not the time to be a hero," he said. "This is a market where you don't make a lot of money. You try to protect your capital and then play another day."
Gundlach cited numerous problems facing the global economy. Including recession risk, weak energy prices and competitive devaluations. The core issue, he said, is that the large, developed economies will not grow fast enough to support high growth globally.
"This is the centerpiece of the problem that is facing the markets today," he said. "Without economic growth potential in the high-growth economies, there just isn't enough growth to go around."
Which leads us to the Fed. Given the lack of global growth, we cannot help but ask: what are they thinking? Why so intent on raising rates given capital market volatility, the energy bust and deflationary trends -- all against the uncertain backdrop of an election year?
A few years ago, the public thought the Fed was infallible. Today, many believe it to be impeachable. Representing another breach in the public's trust.
Some of our more respected analysts believe the recent rate hike (12/16) will ultimately be seen as a policy error. As the Fed's insistence on rate normalization fuels the collapse in commodity prices.
How?
When rates rise, the dollar strengthens. As the dollar strengthens, commodities become cheaper. As commodity prices cheapen, the companies dealing in those commodities weaken. As those commodity companies weaken, the countries in which they're located are hurt. Most of these nations being emerging market countries. So explaining the vicious collapse in those economies.
True, the commodity chaos will sow the seeds for the next commodity boom. Before then, however, we will likely sit through a massive commodity bust.
In the oil patch, things continue worsening. As crude closed beneath $30 per barrel for the first time since 2003.
Reports abound of crude-laden rail cars sitting in rail yards. Parked there because American refiners are buying more crude from foreign suppliers. Meaning, even as U.S. production has fallen since April 2015, the U.S. crude pipeline is backing up even further. With the supply glut, U.S. oil simply has no place to go. And with Iran soon to come online? The situation can only become more infected.
The Gulf of Mexico has become a parking lot for tankers. Cushing is bursting at the seams. And loaded rail cars are sitting idle. Which means gas prices will fall further. Having plummeted in the Midwest from $4 per gallon to $1.79 per gallon at the year's inception. We may see $1 gas again.
In theory? Should be great for the economy. At least for gasoline consumers like airlines, drivers, truck manufacturers, Disney and the refiners. Conversely, energy producers and the states they call home will be apoplectic. This includes frackers, energy banks, North Dakota, Texas and its real estate industry, West Virginia, Pennsylvania, and all of the related service companies therein.
Some analysts are calling for $15-20 oil. We believe $25 a safe bet. And with Saudi Arabia seeking to sell part of its crown jewel, Aramco, the Kingdom will have the resources to temporarily meet its overextended financial obligations. Which translates to a "lower for longer" view on oil prices.
Bottom line? As of today, the S&P 500 has descended below the Maginot Line (1,867-1,881). Should it close the week below that level, we believe the market can head lower from there. We've repeatedly discussed the need for a contingency plan. Well, it may be time to "break glass in case of emergency." We've begun to put contingency plans in place. Which does not mean selling everything and going to cash. As that is just as likely to hurt than help.
The market is due for a near-term bounce. But there remain a myriad of headwinds in the form of causal economic events and poor public policy serving to drag markets lower. Further, a lack of global economic leadership has rendered the ship helpless, navigating difficult seas, without a true captain.
Tread cautiously, my friend.
Caveat Emptor, Suckers!
Years ago, Cornell economists determined a correlation between lottery sales and poverty rates. Anyone buying gas last week saw it with their own eyes.
Last week's Powerball Lottery jackpot reached $1.6B. Appears there were three big winners. And millions of losers.
The untold story remains the government's willingness to pray on naïve, impoverished Americans who view the lottery as their best chance for prosperity.
Across the country, gas stations and convenience stores saw mobs of hopeful consumers lined around the block. All seeking a chance at untold wealth. Sadly, their chances of winning stand at an impossibly low 1 in 292 million. Translation? Lottery players have a better chance of being hit by an asteroid (1 in 74.8 million). Or crushed by a vending machine (1 in 112 million).
Yet, that doesn't prevent state and federal governments from advertising the lottery. Couching games of sheer dumb luck in hopeful terms that belie the true statistical impossibilities. Even as families with little-to-no means spend way too much for a chance at -- a statistical impossibility.
Concurrently, as the government fleeces millions for billions ($), the same government will not permit sports betting, for-profit fantasy sports sites, or for-profit poker. Even though these contests provide significantly better odds of winning than does the lottery.
The message? Nobody can fleece the poor and middle class but their governments. With an ambition crushing welfare handout, an entrepreneurial spirit stifling tax mandate, or an outright mugging like the Powerball Lottery. Even as profits don't go where you think they do (here). And it represents nothing more than a manipulative money-grabbing scheme targeting paycheck-to-paycheck Americans (here).
Shame...
The Good
Consumer sentiment rebounded and beat expectations... High yield debt stress remains contained to the energy sector... Fed Beige Book was solid on employment and housing - though it did reflect soft manufacturing... The JOLT or quit rate - the rate at which people leave jobs under the belief they can attain a better paying job, continues to rise...
The Bad
Initial jobless claims rose to 284k... Retail sales dropped 0.1% in December... Equaling a mere 2.1% gain for the year in the weakest performance by consumers since 2009... Industrial production fell a larger-than-expected 0.4% in December over November... U.S. freight volumes are falling for the first time in three years... Wal-Mart is firing 16k workers and closing 269 stores globally... The Atlanta Fed's GDPNow estimate for Q4 GDP growth dropped to just 0.6%... Which is well below the mainstream Fed expectation of 2.0% to 2.5%... L.A. Port traffic declined...
Weekly Results
Major markets finished lower last week. The DJIA fell 2.19 %, the S&P 500 lost 2.17 %, and the NASDAQ declined 3.34%. Small cap stocks dropped 3.68%. And the 10-year Treasury bond yield fell 8 basis points to 2.03%. Gold lost $15.02 per ounce, or 1.36%.

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