MARKET DOWN 3% FROM IT’S ALL TIME HIGH.
So, what’s the problem? It’s a combination of a couple of things including the effect of the strong dollar on US corporate earnings, China’s decreased business Outlook, the price of oil is once again below $50 a barrel and the Fed is once again implementing stress test on banks.
First, let’s talk about US greenback the US dollar is trading at a 12 year high against the euro in an eight year high versus the Japanese yen. In one way this is a very positive indication that the US economy in the United States is much healthier than Europe, Japan and other parts of the world. It will be great news for overseas travelers. There is talk among traders that the euro could reach parity with the dollar very soon. Currently the euro is worth about $1.07. Investors are worried that American firms that generate a big chunk of sales abroad are likely to get hit with a report earnings. Microsoft, IBM, Procter & Gamble, Johnson & Johnson, and Caterpillar are just a few of the many blue-chip firms that have recently warned about what a stronger dollar will do to their sales and profits this year. It is hard for these companies to hedge against cheaper prices. Companies like General Motors and Ford, may find it tougher to compete with European carmakers on their home turf, if the dollar continues to show strength. KATIE Nixon, chief investment officer for wealth management at the highly respected Northern trust Chicago believes that earnings for the S&P 500 will only increase 3% this year “the speed of the change in the value of the dollar has surprised many. The impact on the competitive side is harder to hedge.” The dollar could appreciate even further now that the European Central Bank is finally buying bonds through a quantitative easing program and the DAX is making new highs at 11,800 up almost 3% today.
The price of oil, continues to bother investors as a trades below $50 a barrel and today is $47.60 a barrel down $.69 for the day. A Goldman Sachs report published this week reiterated their forecast of $40 a barrel is still a possibility. The lower price of oil continues to have an effect on such oil-producing countries as Venezuela, Brazil, Russia and oil-producing companies. There is also an effect on states budgets that depend on oil production taxes to meet their budget, such as Texas, Oklahoma and Louisiana. Our concern continues to be about the bonds that these countries, companies and states have issued and their ability to make interest payments and balance budgets. As a side note China’s breathtaking growth is slowing and the latest economic news from China only added to the believe that the slowing is accelerating. The recent producer price index in China showed manufacturers are struggling to make a profit.
Back in the United States, US markets took a nose dive on Friday after a strong US jobs report stirred rumors that the Federal Reserve would raise key interest rates perhaps by June. The current low interest rates have helped to drive the six-year-old bull market. There was concern that once interest rates start up again, the bull market could end. The CN and monies fear and greed index is shifting towards fear. A week ago it was at 71, but now is drop back to 48 the once popular Shiller PE index shows stocks are valued at levels last seen right before the 2008 financial crisis. You can see that chart on the Shiller P/E index in previous Investment Strategy Letters #619.
|Breakout Points||DJIA||NASDAQ||S&P 500|
|Short Term Up (Resistance)||18,288||5,008||2,119|
|Short Term Down (Support)||17,147/17,0000||4605/4,5455||1,991/1,9733|
|Int. Term Up (Resistance)||18,974 See Fibonacci Projections above||5,002 See Fibonacci Projections above||2,486 See Fibonacci Projections above|
|Int. Term Down (Support)||15,855 /15,356 /14,688||4,166 3,986/3294||1,820 /1,560|
|Long Term Up (Resistance)||18,974||5,132||3,044|
|Long Term Down Fibonacci Support||50%12,000 62% 10,750||50%2,958 62% 2,555||50%1,390 62% 1,177|
|10 yr Treasury 2.11||Gold 1,149||Oil 47.77|