It was yet another rough week for the markets. Through the Friday close, the Dow and S&P both lost 2.2% while the Nasdaq plunged 3.4%. We would have thought gold would do well in the volatility, but ended up with a loss of1.4%. Oil again hit the lowest level in over a dozen years. The U.S. oil – WTI – fell 9.7% on the week to close at $29.70 per barrel. In a rarity, the international Brent oil closed below the U.S. oil, falling to $29.11 per barrel.
Source: Google Finance
We saw a few bright spots in the market this week, but two sharply lower days kept stocks in the red. There was very little news driving the market, too. Instead it appears to be that push-pull that occurs when buyers and sellers are fighting over the direction for the market, often at market pivot points.
Selling was particularly strong on Friday, but we aren’t reading too much in to this. The U.S. markets are closed on Monday while the rest of the world remains open. This is important to note because a GDP report from China will be released on Monday, so U.S. traders will not be able to react if it is bad. Therefore, they sell now and save themselves that risk.
At least, that’s what we believe caused the unusually large amount of selling.
As for the events of the week, corporate earnings began rolling in. While it’s far too early to get an idea of the earnings picture, Factset estimates earnings will fall 5.5% over the fourth quarter, making this the first annual decline in earnings since the financial crisis (you’ll hear this phrase a lot in this newsletter)
Economic data this week reinforced the concern of slower growth. Retail sales fell in December, making it the worst December since the financial crisis (there’s that phrase again). It also made 2015 the worst year since the financial crisis (and again). This is all the more worrisome when we consider the drop in gas prices that should free up some money for other spending.
Manufacturing data was poor, as well. Industrial production fell for yet another month while manufacturing in the New York region fell to the worst level since the recession (and yet again).
While manufacturing makes up a small percentage of our economy – about 10% – it is indicative of the broader economy. As you can see in the chart below, it often tends to foreshadow a recession.
Selling was particularly strong on Friday, but we aren’t reading too much in to this. The U.S. markets are closed on Monday while the rest of the world remains open. This is important to note because a GDP report from China will be released on Monday, so U.S. traders will not be able to react if it is bad. Therefore, they sell now and save themselves that risk.
At least, that’s what we believe caused the unusually large amount of selling.
As for the events of the week, corporate earnings began rolling in. While it’s far too early to get an idea of the earnings picture, Factset estimates earnings will fall 5.5% over the fourth quarter, making this the first annual decline in earnings since the financial crisis (you’ll hear this phrase a lot in this newsletter)
Economic data this week reinforced the concern of slower growth. Retail sales fell in December, making it the worst December since the financial crisis (there’s that phrase again). It also made 2015 the worst year since the financial crisis (and again). This is all the more worrisome when we consider the drop in gas prices that should free up some money for other spending.
Manufacturing data was poor, as well. Industrial production fell for yet another month while manufacturing in the New York region fell to the worst level since the recession (and yet again).
While manufacturing makes up a small percentage of our economy – about 10% – it is indicative of the broader economy. As you can see in the chart below, it often tends to foreshadow a recession.
Source: DoubleLine Capital
All this volatility has many again looking to the Fed for help since – heaven forbid – the market actually has to stand on its own. On this subject, there was a great interview on Bloomberg this week with Jim Rogers – a famed investor with an exemplary track record – which captured our thoughts on stimulus and how it is the wrong approach to fixing the economy. Unfortunately the interview aired at 4am EST, so only early-risers and insomniacs (or both) caught the interview.
Our technology skills leave much to be desired, but we’ll try to embed that interview here. We’ve added a transcript, too, as an added measure (and emphasis our own).
Our technology skills leave much to be desired, but we’ll try to embed that interview here. We’ve added a transcript, too, as an added measure (and emphasis our own).
Time: 1:00 into the video clip
Interviewer: How concerned are you that the Fed may have to cut rates this year?
Rogers: Well, I suspect that when things go bad, the bureaucrats in Washington are going to get scared and they say “We will save you, we will save you.” They’re going to get calls from all over Wall Street saying the world is coming to an end.
If the market goes down 13% or 7% - you pick the number - they’re going to call the Fed and the Fed is made up of bureaucrats and academics who don’t know what they’re doing and they’re going to panic. They’re going to print [money], try to lower interest rates, they can take us to negative interest rates, I don’t have any confidence in the Federal Reserve of the United States, at all.
Time: 1:40
Interviewer: Is the biggest risk in 2016 for investors a chance for a mishap from a central bank? And which one is it? Which one has more at risk?
Rogers: It’s the United States central bank. These are the ones who have been lowering interest rates for nearly a decade now. These are the ones who said were going to print money till the cows come home. They started this. Other central banks around the world joined in. They started printing money too.
The United States President and Congress raised debt through the roof to astronomical levels, so everybody else in the world has done this too. All of this policy, which is madness in any kind of historic context, is started in Washington DC. And the rest of the world is copying us. And we’re all going to have to pay the price for it sometime in the next few years – probably the next year or two.
Time: 4:52
Interviewer: You are very concerned about Europe. Is this because the BrExit concerns (Britain leaving the Eurozone), or does this go back to oil and the lack of inflation? There’s a point where Europe actually becomes Japan, and that’s not something anyone would welcome.
Rogers: The whole worlds going to become Japan at the rate we’re going! They drive down these interest rates to absurd levels. People who save cannot get returns on their investment, then the whole world becomes Japan.
Japan has had 26 years of lost decades now. Europe is already going that way. I’m worried about the whole world. The United States is the largest debtor nation in the history of the world. This cannot go on! This madness cannot go on!
I don’t know where in any history book can you find where this kind of policy is sound.
Time: 5:52
Interviewer: Is it too late to reverse course?
Rogers: I don’t think we have much ammunition left at this point. U.S. has already run up huge debts. European countries have. Japan is coming to the end of its possibilities. They can print more money, but the debt is staggering there. And China doesn’t have enough money to bail us out anymore.
If you look back at the early nineties when the world had this kind of problem, Scandinavia let people go bankrupt and they started over. After a year or two of pain, they had a great couple of decades. Japan went the other way and Japan has had 26 years of problems.
In the early 1920’s we faced a similar problem and actually raised interest rates and the government balanced its budget, setting off a decade of explosive growth.
So history shows that the policies we’ve been perusing cannot last and will not solve the problem. The only way you solve the problem is you let people who make mistakes go bankrupt. Competent people come in, take over the assets, reorganize, and start over. We’re not doing it that way. We’re saying, nobody can go bankrupt, nobody can fail. This is horrible economics, it’s horrible morality, not that politicians care about morality, this cannot work, and will not work.
Next Week
Corporate earnings really pick up next week as we hear from some big names, like IBM, GE, and a number of banking companies. Economic data will relatively quiet, with reports on housing and inflation at the consumer level (CPI).
Like this week, these reports aren’t likely to have much impact on the market, but odds are the market will be volatile anyway.
Investment Strategy
Above we discussed why the market has been under pressure. We feel the market is at an oversold level, making it an attractive time to buy – at least for the short run. We do like to see the market stabilize first and not try to catch a falling knife. It would be very troubling to see the market decline further from here as it signals more trouble ahead.
This trouble may be the longer term concerns we’ve had finally coming to the forefront. Since much of this rally has been on the back of the Fed’s stimulus, fundamental problems were ignored. They become more apparent now as stimulus is pulled back. It’s great that the market is now able to stand on its own, but it won’t always be pretty.
Bonds prices rose (so yields fell) on the weakness in stocks this week as investors sought safety. Prices have been in this range for months now and we continue to believe they will stay in this range for the foreseeable future. A weak economy and demand from overseas will keep bond demand high (which keeps prices high and yields low).
Bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. They have not done well recently as a record supply has kept prices low. Therefore, we keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues and when more stimulus looks likely and falling on the opposite.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets. However, the stimulus programs in Europe and Japan do make for interesting investments, as long as the currency effects are hedged.
Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
