US MARKETS BACK OFF AT NEAR NEW HIGHS
Nothing new has really happened in the last week. Markets in the US seem reluctant to break in the new high ground. Earnings continuing weak. Europe and China have somewhat stabilize. The Federal Reserve seems more worried about world economies, than even I am. In spite of recent stabilizing moves by central banks and the calming of US and world markets, the Federal Reserve seems reluctant to increase interest rates. If they don’t do it in June, there is apparently something bothering them, that has not made the general news yet.
Teflon markets near new highs! It is possible that the US markets have dodged another bullet as it did in February 2016 and as it did earlier in August 2015. Since February lows, US markets have rallied 13%, (mostly on short covering.) Oil prices are once again above $40 and US markets are close to breaking above November 2015 high and their all-time high. European and Asian markets have recovered much less and are closer to their February lows then they are to their November highs. However, if the S&P 500 can break above 2,131 only 50 points higher than the current price, my Bear Market scenario may be in question. The breakout point for the NASDAQ is 5,231, and the current price is 4,944. The breakout point for the Dow is 18,352 with its current price at 17,920.
Nothing but bad news, but still the markets are higher. 1)Bank of America and Wells Fargo Bank have posted lower quarterly earnings can announced that they have increased their reserves to cover them from the stress energy companies.2) The Fed and the FDIC has announced that most of the largest banks are still too big to fail and do not have adequate plans for a 2008 type economic disaster. 3) The Wall Street Journal has reported that there are approximately $147 billion in questionable loans that banks have on their books. Citicorp Bank of America J.P. Morgan Wells Fargo and Morgan Stanley have over 50% of these loans unfunded. 4) As an example of the problem, the largest coal producer Peabody Energy, has just filed bankruptcy. There have been similar filings by Arch Coal Incorporated, Alpha Natural Resources, Patriot Coal Corp and Walter Energy Incorporated. 5) The IMF is worried about splitting risks in emerging markets. I quote from the April 14 Wall Street Journal, “the ballooning debt of giant companies in fast-growing economies is of particular concern, because of their close ties to banks as well as national governments. In China, for example $1.3 trillion of corporate loans, one seventh of the total are owned by companies whose profits don’t cover their interest payments, a problem that could trigger banks losses equal to 7% of gross domestic product.”
CNN MONEY ESTIMATES 1ST QUARTER S&P EARNINGS TO BE DOWN 7.9% For the first quarter the S&P 500 companies are expected to plunge 7.9%. Wall Street is bracing itself for the deepest decline in earnings since 2009. This has the potential for upsetting a rather fragile applecart. Low-priced oil and a strong dollar deserve a chunk of the blame for this bleak profit outlook. However, even if energy earnings were excluded, S&P 500 profits are still expected to decline 3.7%. Tech companies are bracing for a 5.9% decline. It will be interesting to see how the bank’s earning go as J.P. Morgan and Citicorp will report earnings next week. Look out below!
BOOKS TO READ
- The Age of Stagnation by Satvajit Das. This book explains the failures of central banks to stop an economic and financial catastrophe. His solution is austerity, which seems unlikely to happen
- The Only Game in Town by El-Erain. He believes that central banks cannot avoid a financial catastrophe with monetary policy alone and needs fiscal policy to aid the economy. With Republican Congress, this does not seem possible.
- Dark Money and the rise of the radical right, by Jane Mayer. This book explains how economic growth is unsustainable if eighty people own 50% of the world’s wealth and 1% of people own more than the 90% of wealth in the US. (dah!)
- The Fourth Industrial Revolution by Klaus Schwab. This book shows what a wonderful world of technological wonders awaiting us once we get through this economic and financial catastrophe. EVENTUALLY, the only problem is, once Artificial Intelligence has access to unlimited knowledge in the cloud and is able to reproduce itself, silicon based intelligence will not need carbon based intelligence The next step in evolution?. However, that’s a problem for another day.
- Don’t’ forget the classic THIS TIME ITS DIFFERENT by Carmen Reinhart: It tells the story of eight centuries of Financial Folly. Each time after a catastrophe, such as the Great Depression or 2008, economists agree that it could never happen again. Who could be so stupid as to let six banks control 70% of the US assets (to big to fail) and allow all the economic growth to go to the 1%, while eighty people own 50% of the world’s wealth? NAH!
I believe we need to do three things. 1) Eliminate Citizens United and reinstate Glass–Steagall and enforce Dodd Frank. The corporations and Wall Street are running this country. A recent survey has shown that even if 100% of the population believes in an issue, it is only the donor influence that matters. 2) Eliminate gerrymandering. Today in Congress there are actually one more million votes for Democrats than Republicans. However because of gerrymandering Republicans rule and are assured of being reelected. 3) Start four year election terms for the House of Representatives and set term limits. Maybe there is a #4 which is to speak out.
THE LONE BEAR LETTER 310 ISL #700 Problems still in China. The Federal Reserve chair Yellen, has called for a more cautious forecast for the economy and therefore it appears that any additional interest rate increase will be delayed. The markets loved it, as treasury yields dropped and stocks rose. Yellen appears to be worried about the world economies especially China, where debt has gotten out of hand at 2.5% of GDP. Of course, China’s premier Lie Kegiaing has said publicly that China’s growth rate is secure. In reaction, Pen Am securities announced that the government is relaxing its decree against shortselling. Since then, the, Chinese stocks and fall approximately 2%. The continued weakness of China is the unknown factor. China is a controlled society, socially and economically. One third of its industry’s is directly government controlled, with the rest under the threat of the direct control. For instance, the person in charge of regulating the Chinese stock market Xiao Ganghas, has just been fired. He is being blamed for the 40% drop in the Chinese stock market and criticized the People’s Bank of China when they said that they would let banks sell trouble loans to investors. Moody’s and S&P have cut China’s credit rating to negative over debt concerns. The People’s Bank of China has warned that lending to corporations is on the high side, compared with the overall size of the Chinese economy. China’s corporate debt has been on a spending binge. I believe this is unsustainable and the reported growth of China is unreliable.
As stated above, Moody’s and now S&P have changed the ratings on Chinese government bonds from neutral to negative. In addition there is a warning about the viability of China’s credit rating. China has been decreasing its bank reserve requirements five times in a row. Government debt is now 40% of GDP up from 32% and foretasted to rise to 43% of GDP. (as above total China’s total debt now stands at 2.5 years of GDP.) Foreign-exchange reserves are down $1 billion. Cash outflows are estimated to be about $1 trillion as Chinese investors scurry away from their homeland. China continues to be a continued problem in world markets. Their growth rate of 6% is being questioned. China’s three largest state banks reported no earnings growth and big jumps of 40% in non performing loans. this has the potential for a full blown world wide crisis. Is the breakdown of their economy, an indication that the worldwide economy will start to break down?
IN THE US It appears the economy in the United States is slowing down. Fourth-quarter 2015 showed almost a negative growth figure. First-quarter growth in 2016 has been reduced from above 3% to forecasts under 2% growth. Federal Reserve Chairman Yelled is obviously worried about slow US economic growth and problems in both Europe and especially China. We continue to believe that economic growth United States is being slowed by all the income growth going to the top 1%. Latest reports show that only one family the Waltons, have more wealth than the bottom 40%. The most recent Economist Magazine cover showed the upper 1% standing on top of their money with the guarded barb wire fence around it, with the caption, “WINNERS TAKE ALL“” The election is getting perverse with Republicans talking about each other’s wives instead of issues. Donald Trump has called for the use of nuclear weapons against Muslims and North Korea while stating that women who have abortions should be punished. It’s all going downhill fast.
THE END OF DODD-FRANK! Dodd- Frank regulations were put into effect to classify a certain large banks and non-bank institutions as deserving of increase capital requirements and greater scrutiny by calling them “to big to fail”. However a judge of the Federal District Court for the district of Columbia overturned MetLife’s designation as too big to fail, raising questions about how regulators determine ‘to big to fail’. This decision could also sway future rule making efforts that are systematically important to guard against another 2008 near collapse of the global financial system. As is pointed out, in the book, THIS TIME ITS DIFFERENT, mistakes are continually made over and over again, without lessons learned.
Terrorist worries! Markets worldwide were stunned by the terrorist acts in Brussels. These attacks in Europe have far-reaching effects as individual European countries disagree with immigration policies. Brexit, the exit of Britain from the European Community, increase the odds of a potential exits with terrorists attacks. In the US, Donald Trump wants to stop all immigration of Muslims in the US and has suggested torture, ground troops and nuclear weapons to stop the Islamic state and added a nuclear threat to North Korea! Ted Cruz has suggested Carpet bombing and extra police vigilance in Muslim neighborhoods. The net result of all this is uncertainty. Markets dislike uncertainty.
CORPORATE STOCK BUYBACKS THIS YEAR, A RECORD $150 BILLION. Stock markets worldwide are up about 13% from their February lows. I believe most of buying has occurred because of Central Bank stimulus, continued low interest rates (-0% some places) and corporate stock buybacks this year that are a record $150 billion. If it were not this stimulus, I believe the market would be down some 20% at this point. Problems continue in China where the People’s Bank of China said that they would let banks sell trouble loans to investors. China’s corporate debt has been on a spending binge. In order to keep China’s economy humming, China’s total debt now stands at 2.5 years of GDP. I believe this is unsustainable and the reported growth of China is unreliable.
BANKS WORLDWIDE STILL TROUBLING! A US judge in Manhattan has rejected throwing out a rate rigging lawsuit against 14 largest banks. As reported by Reuters news, the judge refused to throw out a private lawsuit accusing the 14 banks of rigging an interest rate benchmark (ISDAfix) used in the $553 trillion derivatives markets. That’s right folks, I said the $553 trillion derivative markets. That dwarfs the problem of derivatives 2008, that almost brought the banks to their demise. The Credit Suisse bank has announced a 6000 employee layoff. J.P. Morgan is doubling its reserve oil loan losses $1.3 billion. I do not believe this is nearly enough. However it does give an indication of the changing landscape of the way the public is looking at loan losses from energy-related companies. The news is out. The banks the United States, China and in Europe are holding billions of dollars of loans that will probably default. US Banks have built up their assets due to differential between low interest rates and the rates they can charge the public. As I have said in previous market letters, “ Banks have built up their assets on the backs of the middle class. In cooperation with the Federal Reserve, Interest rates are at virtually at zero, penalizing savers and retirees and weakening the middle class as banks make huge profits from consumers who pay high rates on credit cards and small businesses on loans. Because banks can borrow at almost nothing, whatever they charge above zero is pure profit. Auto and mortgage rates are 3% or 4%,( there are $1 trillion of subprime auto loans), industrial loans are between eight and 12% (growth down 11% this year ) and credit cards are anywhere from 15% to 29%.This is high-way robbery and this is weakening middle-class consumers, small businesses and retirees, with the result, as I have said many times, ‘All boats will sink!” This loan reevaluation by J.P. Morgan is just the tip of the iceberg. world wide, Russia is bailing out its national banks as it severely reduces it reserves and Brazil and Venezuelan are facing financial collapse! We are not done dodging bullets!
My ‘canary in the mine’ Deutsches Bank bottomed at $15.38 in February and went to a high of $19.04 per share, 9 still down 70% in the last 2 years) is now at $17.29. The Wall Street Journal has reported that “When Donald Trump needs a loan, he chooses Deutsches Bank.” While most big banks have shunned Donald Trump the Deutsches Bank has been a steadfast financial backer of the Republican presidential candidate. Just one more reason to mistrust their judgment.
MARKETS CELEBRATE 7 YEAR ANNIVERSARY OF BULL MARKET/SELL In the last seven years since March 9, 2009, the Dow has risen 160%, the S&P 500 up 194% and the NASDAQ up 311%. This is the third longest running Bull Market since World War II. However, there is an Elliott Wave 7 year cycle to worry about that calls for a market top now. Earnings for the S&P 500 are only up 148% compared to the 194% rise of the S&P index. Earnings in the fourth quarter of 2015 for the S&P were down 32% or $23.25 and were only up $7.52 in the first quarter of 2016. US markets made their all-time highs in May 2015. Since then there were two drops of over 10%. Since May of 2015 US markets are down 7%, Chinese markets are down 40%, European markets down 16%, emerging market markets down 21% and commodity prices down 21%.
There appears to be a respite in our bear market predictions. Oil prices are back to thirty-eight dollars a barrel and banks have admitted the problem of unsecured debt by oil and natural resource companies. China has reduced its growth predictions and Europe seems to once again be stimulating its economy. Many think that the worst is now behind us. However, I believe that this rest period will be temporary.
Investment strategy/Sell rallies
I don’t tell the market what to do. The market tells me what it is doing. The Dow Jones industrial average broke its August 25 low of 15,666 in February by closing at 15,660. This was the last major index or average to not break below August lows. All major indexes and averages worldwide have now broken below their August 25 lows and we are officially in a BEAR Market.
My forecasts for 2016 call for the Dow Jones Industrial average to be as low as 14,688 to 12,000, the NASDAQ to be as low as 4,000 to 3,000 and the S&P 500 to be as low as 1,560 to 1,400 because (See previous market letters)
|Current 4/14/16 noon||Dow||NASDAQ||S&P 500|
|Foretasted Trend||DJIA||NASDAQ||S&P 500|
|Long Term||Bear Market||Bear Market||Bear Market|
|Breakout Points||DJIA||NASDAQ||S&P 500|
|Short Term Up (Resistance)||17,918||5,156||2,110|
|Short Term Down (Support)||16,865/15,845/15,484||4,468/4,267/ 4,209||1,978/1850/1829|
|Int. Term Up (Resistance)||18,352||5,231||2,131|
|Int. Term Down (Support)||/15,370 /14,688/ 13,377||3,986/3294||1,560|
|Long Term Up (Resistance)||18,352||5,231||2,134|
|Long Term Down Fibonacci Support||50%12,000
2008 LOW 6,627
2008 LOW 1,204
2008 LOW 666
|10 Treasury LOW 1.60%Now1.90%||Gold 1,242||Oil 26.59 low Now 43.23|
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com