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THE BULL MARKET CONTINUES, BUT LONE BEAR SCENARIO IS STILL ALIVE

Today, the Dow Jones industrial average and the S&P 500 index broke above all new highs. Congratulations bull market fans, it is still a bull market. All appears well in Mudville. However, and somehow you knew I would say however, the bear market scenario that I outlined in my LONE BEAR LETTER has not gone away. The Greek settlement just postpones the inevitable for another four months and accomplished no more than just kicking the can down the road a little further. Greece eventually has to deal with its $200 billion in debt and its loan agreements with Germany.

Countries like Brazil, Venezuela and Russia are still in financial trouble because of lower oil prices.. The Brazilian oil company Petrobras has lost 60% of its market value since September and Brazil’s stock market has likewise plummeted. Also the Brazilian oil company OGX has filed for bankruptcy, making it, the largest corporate bankruptcy in Latin American history. The decline of the Venezuela currency’s the Bolivar, is having a big impact on American businesses. PepsiCo announced that it took $126 million last year because of the Venezuela currency devaluation. Coca-Cola lost over $660 million last year from its operations in Venezuela. A group of airlines said that the government owes them some $4 billion. Delta and American Airlines have drastically cut down to their flights to Caracas while European airlines like Lufthansa and Alitalia have cut all their flights to Venezuela. A year ago the unofficial exchange rate for the Bolivar was 84 Bolivar’s for one dollar. Today it’s 186 Bolivar’s to the dollar.

US retail companies are also having problems. The last quarter of last year saw a decrease in retail spending. Sports Authority is expected to default on a $300 million loan. Sports Authority has more than 450 stores in 41 states. RadioShack, which had over 5000 stores filed for bankruptcy early this month and plans to close about half of their stores. Two teen retailers, Wet Seal and Delia have also filed for bankruptcy since December. Other retailers including Sears holding, operator of both Sears and Kmart brands are also known to be facing their own cash crunch amid falling sales.

There has been a flurry of positive news lately, including good earnings reports, a cease-fire in Ukraine, higher oil prices above $52 a barrel, some accommodations with Greece and indications that the European Central Bank will try to stimulate the economy. I continue to believe that earnings will continue to deteriorate, the Ukraine cease-fire will not hold, oil prices are headed below $45 a barrel, Greece is a problem that will not go away and the stimulus of Europeans central bank is not enough to turn around a European deflationary scenario.   Fourth quarter productivity growth shows output per hour fell at a 1.8% in rate and was up 0.8% for all of 2014. That’s well below the average 2.2% between 1947 2014.

The Securities and Exchange Commission is scrutinizing bank’s efforts to appear safer to regulators and shareholders than they are. The agency is looking for important behavior related to how banks value complicated assets for transactions they used to shift risk to other entities. In the wake of the financial crisis that forced governments worldwide to bail out banks, global regulators are increasing the amount of capital that the lenders must hold in relation to their assets, by more than doubling the requirements. As public traded banks seek to conform to the new rules, their progress has become a common topic in disclosure to investors. While banks are allowed to enlarge it complicated transactions to help them comply, such as using derivatives and customer credit default swaps, that shift according to the SEC has risks for their financial well-being.

So, all is not as well in Mudville, as the markets are suggesting. As I said at the end of the Lone Bear Letter, “it is better to be too early, then too late”.

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