Week in Brief: March 18

March 21, 2016

Last week saw bulls continue their assault on bears' fortifications. Pushing the S&P 500 up 1.5 percent. The Dow up 2.21 percent. And the Nasdaq up 0.98 percent.
The major catalyst? Appears that global central banks have gone "all in."
Following yet another recession last year, the Bank of Japan has already resorted to negative interest rates. China, sitting at its slowest growth in a quarter century, is devaluing the Yuan and adding further capital infusions into an economy attempting to transition from one that is export-driven to consumer based. And at close to zero growth, the European Central Bank (ECB) moved to further stimulate the eurozone economy last week. Cutting interest rates again while bolstering its quantitative easing (QE) program.
Desperate measures for desperate times? Could be. As much of the ECB's previous machinations have not been as effective as hoped. And ditto to those in Japan.
But last week? It was like a time machine. As we revisited those heart-warming episodes of the last seven years where central banks colluded to prime the economic pump. And equities responded like SeaWorld dolphins. Leaping high into the air for their just rewards.
Question becomes, how long can we play these games. For, as former Dallas Fed President Richard Fisher said on CNBC last week (here), it's as if "we injected cocaine and heroin into the system, and now we're maintaining it with Ritalin."
Out of central banks' efforts to push inflation ever higher comes a notable sidebar.
Commodities have been absolutely slain these last few years. And not just oil. But much of the entire commodity complex. As of Monday, the PowerShares DB Commodity Tracking ETF (DBC) had fallen 72 percent from its 2008 high. Today, it sits just above that level. But, the last two months have seen DBC jump 14 percent off its January 20th low. Could this be the start of a turnaround?
The average commodity bear lasts 521 days. While the average commodity bull lasts 824 days. The current bear has run from September 14, 2012 till a month ago. 1,245 days. For a decline of 51.7 percent. Amounting to the longest commodity bear market and second biggest bear market drop of the last three decades.
Commodities have not re-entered a bull market. But should DBC hit the +20 percent bogey in the days ahead? Then this rally could persist for months, if not years. And with central banks having already been casted as rally instigators, then this trendline will be worth watching.
Also interesting? Last Thursday, as the tech-laden Nasdaq fell even as the S&P 500 and DJIA rose. Why? Because the Nasdaq's growth-oriented lineup reach full valuation last year. And so far, it is being shunned in favor of dramatically undervalued commodity stocks.
U.S. Steel (X) has doubled since January 1. AK Steel (AKS) has jumped 80 percent. The Gold Miners ETF (GDX) has leapt 49 percent. Silver and gold have both headed higher. The global forestry and timber ETF (WOOD) has jumped 19 percent since February 11th. Sugar is up. Coffee is up. And after hitting a low of $26 in January, crude oil has climbed to $40.
Do these patterns persist? Perhaps. Point is, the market recently glanced around and saw too many people getting too pessimistic on everything within the commodity spectrum. So, while everyone was waiting for healthcare and technology stocks to jump up and reclaim the helm, the market did what it does best. Which was to reverse course and tear the beating hearts from anyone who'd just climbed aboard some bearish commodity trade.
Should the trend persist above the +20 percent level? Then we just may be able to call the bottom for the commodity bear. And one look at the disparity between the S&P 500 and the DBC commodity tracking index going back to 2013 tells all you need to know. The two have forged a 100 point divergence the last three years. In fact, since 1994 the S&P 500 is up 340 percent, while the CRB Commodities index is down 25 percent. When that trend reverses, look out.
Overseas, a large government-backed finance entity in China announced it was relaxing controls on Margin lending and cutting borrowing costs. Largely to support Chinese stocks. It has worked thus far. Chinese equities were up more than one percent for three straight days. Rallying 14 percent above the February 29th lows.
While Chinese stocks remain nearly 15 percent down year to date, the recent rally was unforeseen. And with global investors discounting China, and all other emerging markets for that matter, it's within the realm of possibility that these stocks could surprise everyone. Because when no one expects something to happen, it becomes more likely to occur.
Looking at domestic stocks, the recent surge higher belies the fact that domestic equities face more headwinds than tailwinds.
S&P 500 earnings were negative year over year in Q2 and Q3. And Q4 looks to be worse. The continuing decline will be largely attributable to energy, materials and industrials. But even with energy stripped out, Q4 earnings will be ugly.
Further, industrial production has clearly flattened the last six months. As have real sales. And while wage growth is improving, its still not what this economy needs to kick into higher gear.
So, while the below chart reveals that we're not headed into a recession, fact remains that stocks have no real immediate drivers to portend significantly higher values. Multiples, though not drastically overvalued, are not inexpensive. Earnings have plunged. And the vaunted U.S. consumer continues to await the long-discussed, missing-at-large wage growth needed to truly reflate the economy. Not to mention the idea that November's election will continue to throw a big, wet blanket atop the entire enterprise. For there's little markets despise more than uncertainty. And nothing emanates uncertainty like a U.S. presidential election.
Prognosis? More sideways, go-nowhere action ahead. Moreover, the VIX (the fear index) has recently wafted down to 12.5. A level last hit before Augusts' volatility spike when the S&P 500 dove to 1,867 and the VIX tripled in three days. Eventually careening up to 54.
If fear and loathing have dissipated that much, especially after the way 2016 began, then we might expect another bout of general anxiety to soon rear its ugly head. As an investor, don't ever forget that a complete lack of concern is usually cause for alarm.
Finally, to the nation's capital.
GOP presidential front-runner Donald Trump addressed the American Israel Public Affairs Committee. There, he read from prepared text, as opposed to his typical "off-the-cuff" style. The message, written by Jewish son in law Jared Kushner, was generally well received by the organization, among the nation's biggest Jewish groups.
Trump continues to lead GOP rivals in the delegate count. Holding 739 of the 1,237 required to win the nomination. Senator Ted Cruz remains in second at 465. With Governor John Kasich at 143.
Among Democrats, Hillary Clinton holds a commanding lead over Senator Sanders, 1,681 to 927.
Following Monday's attacks in Brussels, national security will likely muscle its way to center stage these next few weeks. Candidates capable of communicating a clear vision for the nation's defense will capture the electorate's attention as the tragedy in Belgium echoes in the collective imagination.
Finally, Russia unexpectedly announced that it was pulling most of its troops from Syria. Surprising observers the world over. Here's to hoping that the next American administration can learn something from Mr. Putin. Russia's Syrian presence illuminated multiple lessons on the projection of power. Lessons of which Western leaders would be well advised to be attentive.
In only six months, Russia managed to decisively tilt the region's balance of power. Showing that not every Mideast intervention descends into quagmire. And that, in short shrift, the Russians were capable of propping up two dictatorships. Assad's and Putin's.
Throughout that time frame, as The Wall Street Journal recently noted, the Obama administration has managed only to "take the side of history," casting "feckless and irritating aspersions on everyone." Nor was the Bush method any better. Going to war for sake of a concept (like democracy), and then hoping to find a competent, local champion.
Give Putin credit. Though a ruthless dictator, he's creative, not afraid to take a side, and willing to lead from the front. Which is more than America's allies would currently say of the U.S.
Stay tuned.
Weekly Results
Major markets finished up last week. The DJIA gained 2.26%, the S&P 500 jumped 1.35%, and the NASDAQ rose 0.99%. Small cap stocks gained 1.30%. Also, the 10-year Treasury bond yield fell 10 basis points to 1.88%. Gold finished up $4.87 per ounce, or 0.39% last week

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