Week in brief: January 22

January 25, 2016

Last week's action was as welcome as a college care package from Mom. With the Dow up 0.79 percent and the Nasdaq leaping 2.29 percent. After seeking out and touching the August 24th, 2015 low, stocks rocketed higher.
Stocks had become so oversold by every comparative metric that they were due a bounce. Regardless of whether they ultimately tangle another eleven rounds with the Grizzly Bear.
Analysts note that the beatdown to start the year has been historic. There has never been one like it. The Civil War. Two world wars. The Spanish flu epidemic. The Great Depression. Even the Credit Crisis. The beginning of 2016? Unique.

So, emblazon this month into your brains. A stretch of market history that will long be studied and feared. Not typically the kind of history you want to experience personally, but you don't always get a choice.
Question remains, why the epochal onset to the new year?
Since World War II, every U.S. recession has been foretold by steep declines in industrial production, corporate profits and the stock market.
Today, those omens appear to have realigned.
Industrial production peaked in December 2014. Having declined 10 of the last 12 months. Corporate profits peaked in the summer of 2014. Having fallen five percent as of Q3 last year. Stocks have fallen viciously since mid-December.
While many U.S. economic indicators portend sustained and grinding progress, fears have been elevated due to the lack of overseas growth.
The International Monetary Fund forecasts European growth of 1.7 percent. And growth in China, the world's second-largest economy, will likely fall further this year. As will Russia and Brazil.
The bright side? The U.S. jobs market, still the best recession indicator of all, has not flashed trouble signs. For 50 years, every recession has sent the number of jobs lower by one percent. Nor have jobs ever declined that much outside of a recession.
Current figures show jobs growing briskly, up 2.7 million over the trailing year. Explaining why many economists believe the U.S. can avoid a recession.
The indicators we follow have not, of yet, revealed any recessionary signals over the next six to nine months. But the three primary omens discussed above give pause. And merit considerable attention moving forward.
At least 40 stock markets worldwide have entered bear territory. The UK was the latest to fall. India is close. As are Australia and the Czech Republic. New Zealand and Hungary have offered the strongest resistance, with losses less than 7%.
We've oft mentioned that bear markets are a time to focus on capital preservation. Resist urges to buy the dips. As well as the impulse to think it's all over when the market posts a short-term recovery. Fact is, the biggest advances in history have occurred during bear markets because of heavy short-covering.
So, when do you get back into the markets, six-shooters blazing?
The easiest approach may be to wait for the S&P 500 to cross back above its 12-month moving average. And then remain above that Mendoza Line for two consecutive months. Exactly what transpired after the 2008 bear market sent the S&P 500 back above the 12-month average in July 2009 at around the 1,000 level. After which the bull market ran for another six years.
Meantime? Stay calm. Don't panic. Don't jump in at these levels. Nor sell everything. Let the market show its hand. As one dead fish said to the other: let's just go with the flow...
In the Middle East, Iran is once again a global player. Thanks to a U.S.-led nuclear pact, Iran agreed to put on hold its nuclear weapons ambitions for 10 years. In return, they receive more than $100B in frozen assets. And the ability to flood global energy markets with oil. Which has been sitting in tankers on the Persian Gulf.
Rumors have it that Iran plans to sell cheaply in order to pick up market share. Meanwhile, the mullahs continue to test new missiles. Continue to wage a proxy war against U.S. troops and allies throughout the Middle East. And hope to send all of their adversaries to the American School of Negations. As Iran feels like a poker player after a really good night.
The losers?
1) America's shale energy sector. Having already been knocked to the mat, it now must contend with gobs of additional oil inventory being sold at deliberately inexpensive prices. In fact, some analysts believe that this may be the straw that breaks the camel's back. Bringing about the bankruptcy of any number of shale oil producers.
2) The American Economy which, having already lost a number of energy sector jobs that accounted for many of the actual career positions created the last seven years, will now have to weather multiple rounds of job losses as further shale-energy companies cut costs or shut down.
3) American industry, which is seeing its fledgling renaissance placed on hold. And will be left out of the upcoming Persian gold rush as Iran's autocrats council businesses to favor Europe and other channels in all dealings.
The ink had hardly dried last week when Europe's Airbus sold 114 planes to Iran. America's Boeing? Zero.
4) Future American generations, who will contend with the same Iranian mullahs and fundamentalist mentality atop a much stronger economy and so an emboldened Iranian Republican Guard.
5) Every traditional American ally throughout the Middle East, who will contend with a strengthened Islamic Republic seeking to become the region's primary hegemon.
Otherwise, everybody wins.
Present-Day Puritans
Historian Forrest McDonald, who died Jan. 19 at age 89, writing in a 1999 Commentary magazine symposium on the results of the 1998 midterm elections:
Still-to turn to the editors' second question-there can hardly be room to doubt that the nation has undergone a grave decline in its moral standards. Relativism and permissiveness have won; "sensitivity" toward the behavior of others, no matter how despicable, has won; the notion that self-esteem is more important than achievement has won.
Many reasons for the decline can be adduced, not least among them being the intrusiveness into our lives of the corruption that pervades Washington. Earlier, the Grant and Harding administrations were corrupt, but the scandals had virtually no impact upon society; the federal government had nothing to do, for example, with the way parents raised their children. Now, by contrast, the government pokes its nose into everything, including standards of morality. To cite but one kind of instance, the Catholic church's charities and the Salvation Army, which have been traditional carriers of religion and morality as well as of succor, now refrain from espousing religion and morality, lest they lose their government funding.
It is federal money that corrupts: take their money and they own you. Most people probably know this but are willing to take the money anyway. I once heard Frank Sinatra say on a talk show that it was easy enough to get along with the Mafia. "Just don't ever let them do you a favor." The same advice applies to the federal government.
Nevertheless, despite the general moral decline, I would insist that there is no widespread neo-Puritan impulse among conservatives. It is leftists, not conservatives, who are Puritans, who want to make people over in accordance with their views-in myriad ways, ranging from stamping out smoking to imposing correct thought; and that has been true since Rousseau. They constitute the most serious threat to our cherished freedoms.
Weekly Results
Major markets finished up last week. The DJIA rose 0.66%, the S&P 500 gained 1.41%, and the NASDAQ grew 2.29%. Small cap stocks rose 1.28%. And the 10-year Treasury bond yield gained 1 basis points to 2.05%. Gold rose $9.12 per ounce, or 0.84%.

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