Wednesday, February 3, 2016

Stocks Got Crushed Again On Tuesday.........

Stocks Got Crushed Again On Tuesday

There was red all over the screen, all over the world, on Tuesday, as stocks got slammed, oil got slammed, it's biggest 2-day drop in years, and Treasuries rallied in a classic risk-off session. The Dow Industrials plunged almost 300 points today, while the S&P 500 gave up almost all of Friday's BOJ-driven gains. The Bank of Japan's unexpected rate cuts to negative are a desperate attempt to help out The Fed and to support the dollar at the expense of the aging Japanese population. 

These are NOT the kinds of reaction to central bank stimulus we used to see during the six-and-a-half-year bull market. Stocks that used to rally on stimulus, and bonds that used to sell off, are behaving exactly the opposite now. That is proof positive the stimulus isn't working, and classic bear market behavior. 

Now we have negative interest rates. It has been years since retirees anywhere have made any interest on safe investments. It pushes retirees into high risk investments in a quest for any kind of income. Not good. Retirees are now being shafted with low-to-negative interest rates and no return on their dead money unless they want to gamble in the stock market. Debt is reaching dangerous levels and we should all be very worried.  

How can business people be expected to conduct rational business plans when we have no idea what regulation or manipulation the government will throw at us or withdraw from us next? The free market should be left alone to work. Central planners screwing with the economy always make things worse! Investors are understandably nervous, stay cautious and stay alert.

Dow: 16,153.5, -295.6, (-1.8%)
S&P 500: 1,903, -36.4, (-1.9%)
Nasdaq: 4,517, -103.4, (2.2%)
WTI crude oil: $29.90, -5.5%

Recession risks are warning of 'severe' drop in the stock market. Investors need  to wake up to the idea that rising risks of a recession could send the stock market over a steep cliff. Based on current valuations, the prices of most stocks don't appear to have factored into a recession scenario, hence the downside should we see a recession could be rather severe. The shares of most companies could still easily fall another 50% or more from current levels. The second-half of 2015 was "clearly a profit recession" for S&P 500 companies. Sharply lower S&P 500 profits is a warning for stock investors.

EPS of the S&P 500 have declined 14% from their apparent third-quarter 2014 peak to the third-quarter of 2015. Over the past quarter-century, drops of such magnitude have occurred only in 1991, 2001-2002, and 2008-2009. Each drop coincided with substantial losses for stocks. The real challenge investors confront now, whether they know it or not, is what the longer-term growth rate of EPS will be. Prudent investors should be prepared for the next several decades to witness greater subsidies of low-wage jobs, higher taxes, more wealth redistribution, and lower returns on capital or investment.

US monetary conditions are the tightest since 2009, financial conditions the tightest since 2009, and as Moody's reports Tuesday, Liquidity Stress is at its worst since February 2010 - all forewarning of a notable rise in defaults in 2016... and what can the Fed do? This is the first time in 10 years that monetary and financial conditions are tightening at the same time.

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