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. Warnings of a slowdown in Europe, China and South America and ongoing conflicts between Russia and the Ukraine and problems in parts of the Middle East are being ignored. There are still plenty of warning signs that the stock market can’t keep this pace going. Nobel prize-winning economist Robert Shiller has noted that his metric to measure how expensive US stocks are, the Shiller P/E10   index, is back to levels not seen since the financial crisis. The P/E ratio for the Dow Industrial s is at about 17, whereas the P/E ratio for the NASDAQ is at about 30. All of these P/E ratios are high, but are not necessarily excessive. HOWEVER THE PERCENTAGE OF THE MARKET ABOVE REGRESSION IS 91% ( that is very high) AND 39% ABOVE REGRESSION OF P/E 10 ( well within the 5th Quintile)!  So bulls, enjoy your glory while it lasts.

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BRAZIL’S  PETROBAS IN TROUBLE Countries that are oil producers, like Brazil and Venezuela and Russia continue to be in trouble. Petrobas, (Brazil’s national oil company), has seen its stock fall some 53% since September 2014. The company’s CEO Maria Foster and five other executive directors resigned on Wednesday, amid news that the Brazilian media called the biggest corporate scandal in the country’s history. Federal prosecutors accused former executives of bribery and money laundering. The investigators said the managers ‘illegally diverted billions from the company’s account for their own activities. On the news Brazilian stocks fell 4%. Many Brazilians were optimistic that the hosting of the World Cup last summer would provide a windfall of tourist dollars. But the event became divisive as the government spent billions on a brand-new stadiums, while poverty continued to plague Brazil’s shantytowns. Petrobras, is billions of dollars into debt. Its bonds and derivatives are held by US mutual funds and banks. The crisis in the high-yielding bond market will come from somewhere, maybe Russia, maybe Brazil?

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 only 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. Big talk/no action expected!

INEQUALITY OF OPPORTUNITY WIDENS IN US The massive gap in college graduation rates between the rich and the poor is growing wider. Some 77% of students from wealthy families earned a bachelor’s degree by age 24 in 2013, compared to only 9% of those from poor families, according to a report from the Pell Institute and the alliance for higher education and democracy at the University of Pennsylvania. The divide has grown significantly from 1970 when 40% of rich students and 8% of poor ones graduated college. The study defined wealthy as families having incomes above $100,000 while poor families earn less than $30,000. Middle-class students also lagged behind their wealthy peers. Those in the middle class saw the graduation rates rise only 26% in 2013, up from 13% in 1970.  The Obama 2015 budget, calls for helping low income students to obtain two years of free community college, for those who qualify. However, there appears to be little chance that this will pass Republican controlled Congress

NOT EVEN NATE SILVER KNOWS Nate Silver, the great prognosticator of elections has thrown in the towel in trying to predict either the economy or the stock market. As I said in the Lone Bear Letter, metrics and analytics can’t do it. It stills takes the human mind to sift through all the written material and to be able to judge human psychology in order to predict the economy or the stock market. Then why did I predict a Bear Market? Sometimes in the human brain things come together like a combination lock and there was a loud click. That’s what happened for the Lone Bull Letter in 1981 when interest rates were 21% and everybody was bearish and I predicted the market would go from 1000 to above 10,000. I have a talent, for being able to read very quickly and to sensitize what I read. It’s just a human feeling when those tumblers fall into place and the lock opens. If you read Isaac Asimov’s Robot Series or his Foundation Series you know how difficult it was for Harry Sheldon, Nate Silver and Carl Birkelbach to predict the future.

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”.

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.


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