NEW MUST READ BOOK: THE END OF ALCHEMY
Mervin King, the former governor of the Bank of England argues that, 7 years after the worst economic crisis since the Great Depression, “nothing fundamental has changed.” Most academic and media narratives, he writes, focus on symptoms, of swelling personal debt, the housing bubble, misdeeds of banks. However, the underlying PROBLEM is a system of banking greed to convert riskless deposits into long-term risky investments (loans to oil companies for example, See below), all the while assuring depositors that they can redeem their money at any time. King points out that, in the 19th and 20th centuries, banking crisis’s occurred almost once a decade. Preventing the next one “requires radical reforms” including obliging major banks to maintain enough equity to stay losses without taxpayer support.
CNN REPORTS 40 OIL COMPANIES LOST $67 BILLION LAST YEAR. The crash in oil prices last year caused combined losses in 40 publicly traded US producers of $67 billion. Many of these companies are exploring bankruptcy filing. These companies are highly leveraged and this may still mean trouble for the large banks that are still too big to fail. Exxon lost its AAA rating today. Saudi Arabia announces that is going to sell part of its stake in Aramco. The rats are leaving the ship.
The central banks have done everything they can to stop deflation. The results are that many corporations in Europe are issuing bonds and financing themselves at close to zero interest rates. Unilever ever sold bonds today at a zero coupon rate. Sanofi SA sold over $500 million worth bonds maturing in 2019 with a yield close to zero. What this means is, central banks cannot stop deflation.
CNN MONEY ESTIMATES 1ST QUARTER S&P EARNINGS TO BE DOWN 7.9%. First quarter GDP growth only 0.5% 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.
4/25/16 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.”
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.
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.
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 $18.29. 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.
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 5/2/16
|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%Now1.86%||Gold 1,296||Oil 26.59 low Now 44.92|
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