This will be the year that will make even the most experienced traders' and hedge fund managers' heads spin. Huge losses will be taken by the biggest and brightest of them.
Why? Because the second act of the financial crisis of 2008/2009 is now coming home to roost, smacking the governments of the world as a result of all their policy mistakes of the last several decades. Turning markets inside out and upside down, for all of us, in a way that has not been seen since the Great Depression.
- Dow: 15,940.01, -227.22, (-1.41%)
- S&P 500: 1,881.44, -22.19, (-1.17%)
- Nasdaq: 4,470.54, -97.14, (-2.13%)
U.S. stocks moved back into the red Wednesday after the Federal Reserve left interest rates unchanged and said "economic growth slowed" since its last meeting in December. Inflation is expected to remain low in the near term," the Fed said in new, more cautious language, that suggests the central bank won't be quick to raise interest rates again.
Treading a fine line between losing all credibility and exposing their total devotion to the stock market, it appears the Fed is maintaining its delusion that everything will be fine as they unwind the largest and most experimental monetary policy of all time.
There is simply not a lot of optimism among big institutional investors this year. Every rally so far has been an opportunity to sell and overall sentiment is bad.
Central banks and the government have trained people to confuse credit with money. When people get a new credit line, they feel good. They spend it like money, same as our government does.
The difference is, Washington prints it. People have to pay it back. The real mess is just in the beginning stages.
Dip Buyers Will Get Clobbered: The US Economy Isn't Doing "Just Fine"
As of June 2008 no Wall Street banking house was predicting a recession, yet by then the Great Recession - the worst economic downturn since the 1930s - was already six months old, as per the NBER's subsequent official reckoning. Wall Street never predicts a recession. And that's basically why the stock market goes up for 5-7 years on a slow escalator, and then plunges down an elevator shaft during several quarters of violent after-the-fact retraction when an economic and profits downturn has already arrived.
Actually, it was already several years old if you concede that the phony housing boom of 2005-2007 was generating merely transient "statistical" GDP, not permanent gains in main street wealth. Even the movie houses now showing "The Big Short" have some pretty palpable reminders on that point——not the least being the strip club dancer who owned 5 residential properties, with two adjustable rate mortgages on each.
Martin Feldstein, a prominent Harvard economist once on many people's short-list to lead the Federal Reserve, has a simple message for the U.S. central bank: ignore the stock market.
In an interview, Feldstein said stocks are overvalued. Any signal from the U.S. central bank that it may pause from its plans to continue raising interest rates would only create the impression that there is a "Fed put" on the market. It is time to escape the unprecedented monetary policy that for a while stimulated demand – but then distorted prices and brought about the current corrections.
Low interest rates have led to a variety of risk-taking that could cause significant problems going forward. So the stock market got pushed up to a point where the price-to-earnings ratio is about 30% higher than it's been historically and we're seeing what that's doing in terms of falling equity prices and similar things are happening on high-risk debt. The stock market is very overvalued and we shouldn't be surprised that, at some point, it has to revert to a more normal level. Valuations are high, and that means future returns likely will be low. Valuations this high mean there's a higher probability of a large stock market downturn at some point. It's prudent to be mentally prepared for a meaningful decline. There's plenty to worry about.
Earnings Take A Dark Turn As Profit Warnings, Sales Misses Mount
S&P 500 on track for fourth straight season of negative sales, as earnings decline. The S&P 500 is on track for its fourth straight season of negative sales, the longest such negative streak since the four-quarter stretch from the fourth quarter of 2008 to the third quarter of 2009.
Earnings season took a dark turn on Wednesday, when the majority of companies reporting numbers for the December quarter missed on sales and lowered their outlook for the rest of the year.
This weakness in overall corporate earnings growth could bode badly for the broader stock market, as it represents the actual impact of geopolitical concerns, the slowdown in China, the weakness in oil prices and productivity. Earnings discount all the noise,It's the best unbiased view of what's going on in the global economy.
U.S. Steel Corp. sales fell 37%, Tupperware Brands Corp. sales fell 13%, State Street Corp. revenue fell about 5% and Cliffs Natural Resources Inc. revenue fell 54%. Fiat Chrysler profit fell 40%, Ferrari N.V. profit slid 34%, Novartis A.G. profit fell 57%, Hess Corp. said its loss deepened to $1.82 billion from $8 million a year ago and Norfolk Southern Corp. said it would cut 2,000 jobs and downsize its rail lines after profit tumbled a worse-than-expected 29%. Boeing Inc offered guidance for 2016 that fell way below current expectations, forecasting a slowdown in commercial airplane deliveries for the year. United Technologies Inc. missed revenue by a staggering $1 billion as all units suffered declines. Apple Inc.'s revenue miss from late Tuesday, the news was a grim reminder that corporate America is struggling to generate growth after years in which massive sums were spent on share buybacks instead of investing for growth.
The decline in earnings could hurt share prices more than it did last year. Why would you pay more for the same exact thing you got last year?
Their bear-case scenario for the S&P 500 is a drop to 1,700 by year's end, and their recession case sees the benchmark diving to 1,400. The medium-term risk-reward for equities has worsened significantly, in our view, and the risk of a downside economic scenario is far from adequately priced in. J.P. Morgan, also noted that during previous downturns, the S&P 500 normally fell an average of 29% versus the 11% decline the market has witnessed so far. These suggest the market has yet to hit bottom and that the risks associated with a potential economic slowdown aren't fully reflected in share prices.
In another note, J.P. Morgan warned about "overstaying one's welcome" in the recent stock-market bounce. J.P. Morgan warned that the market's tumult is far from over, and reiterated its call from earlier this month to sell into any gains. There is increasing risk that elevated volatility starts incurring enough technical damage to market psychology and spills over, negatively impacting investor, consumer and business sentiment, resulting in a lack of risk taking, and eventually creating a negative feedback loop into the real economy.
This all makes for a very unattractive equity backdrop.....
Caterpillar reported its latest monthly retail sales statistics and the numbers have never been worse.
Not only is the fourth, feeble and final dead CAT bounce in US sales officially over, with December US retail sales tumbling -10% Y/Y, after "only" a -5% decline in November and hugging the flatline for the past few months, but sales elsewhere around the globe were a complete debacle: Asia/Pacific (mostly China) was down -21%, EAME dropping -12%, and Latin America (i.e. Brazil) continuing its free fall dropping by -36%, but global retail sales just posted a massive -16% drop in the past month, tied for the worst annual decline since the financial crisis. Putting the annual drop in context, CAT sales dropped 12% a year ago, another 9% in 2013, and -1% in 2012, or four consecutive years of declines!
CAT has now suffered a record 37 months, or over 3 years, of consecutive declining annual retail sales - something unprecedented in company history, and set to surpass the "only" 19 months of decling during the great financial crisis by a factor of two in January!
While debating whether the US is or is not in a recession, one should also ask how much worse the global industrial depression will get?
In what is the first official warning to a central bank to no longer do what has been done so far for seven years, earlier this week Deutsche Bank came out with a startling presentation addressed to Mario Draghi, warning him explicitly that any more QE will not only not help stocks, but will actually push equities lower.
At Times Like These Always Remember
The financial service industry's Prime Directive is to exploit humanity's core drives of Greed and Fear. Financial service companies promise high returns (fulfilling our greed) that are low-risk, i.e. "safe" (placating our fear of losing our nest-egg). But the safety of many supposedly low-risk investments is illusory.
The risk is not actually near-zero; rather, the risk has been buried, masked or obscured, for the obvious purpose of persuading the marks (i.e. the investing public, non-financial institutions, etc.) that the promised gains are essentially risk-free.
Central banks have generated risk-on euphoria after every crash since 2000, but there is no guarantee the bloated balance sheets of central banks and plummeting profits of corporations can support a fourth expansion of manic risk-on to buy stocks.