Well the FOMC meeting is finally done. No rate hike in March. 2 rate hikes envisioned this year vs 4 targeted earlier. Stocks, commodities and gold surged.
Next thing to look at will be the Q1 2016 GDP, March employment numbers (seasonally adjusted again?) and of course the earnings season.
This earnings season will see bigger provision for credit losses in banks and greater distress among energy companies. The brief respite in oil price will do little to help as banks have already reduced much of the companies' revolving credit lines in order to pare their (the banks') credit losses. The number of bankruptcies is expected to swell in Q2 (Just yesterday Peabody Energy announced they might have to seek bankruptcy protection).
This could see the S&P being hit hard,igniting a downtrend, led by energy companies and banks.
The S&P has already had 3 quarters in succession of falling earnings, yet despite this, it continued to rally higher. The EPS beats were due to aggressive share buybacks by the companies and little to do with improvement in the top and bottom lines. Also the divergence between non GAAP and GAAP earnings has widened to record. It is "remarkable" that investors continue to ignore the GAAP figures and continue to pile in based on the artificially inflated EPS, non GAAP earnings and the misleading Debt to EBITDA figures.
The worrying trend is that the companies are borrowing to buy back shares just as when the shares are at historic highs. How silly is that? Apparently NOT, when senior management are cashing out their options!
If that is no cause for concern, then maybe the P/E ratio which crossed the 23.5x earnings (Source: Zerohedge) vs the 10 year average of 14.1x and 5 year average of 13.8x.
As at the end of 2014, the S&P companies owed US$1.27 for every US$1.00 earned. No doubt the amount owed must have risen substantially, given the amount of borrowed money used in buybacks throughout 2015 and 2016.
With falling revenue and profit, how will any of the debt be repaid? The Fed perhaps have just given them the green light to borrow more and at the end, the day of reckoning MUST COME.
Thursday, March 17, 2016
Saturday, March 12, 2016
THE US RALLY - HOW LONG WILL IT LAST?
It is interesting to note that the US stock market has rallied for the fourth week, coming off a February bottom that caught everyone by surprise. A sign of a rampaging bull. Really?
It really baffles me that the rally has been against a backdrop of weak fundamentals, namely:
1) US corporate earnings fell for a third quarter in Q4 2016. That's three quarters in a row, a clear sign of a earnings recession
2) The PMI for manufacturing and services are in contraction mode
3) Jobs numbers which are continually and seasonally "adjusted" but point to the fact that more minimum wage jobs were created rather high paying skillful jobs
4) Continued growth in global debt
5) Poor GDP numbers - So the Q4 GDP was revised up to 1% from 0.4%. That vs the GDP of 3% - 4% n the 1990s without any QE!
Perhaps it has a lot to do with the rise in the price of oil which rallied almost 47% off their lows. But based on what fundamentals? A freeze in production which is already at record levels? With US being a major producer not being involved in the "talk" and now warns OPEC that production will resume production at a blistering pace once oil reaches US40 per barrel? The only fundamental that I know of is that Supply is outstripping Demand and as long as that occurs, any rally has more to do with hope than fundamentals.
Oil price will continue to rally eventually but not until the costly producers are out of the equation. This could happen very soon - by the first half of the year - as many of these costly producers are already financially distressed.
Despite poor earnings we continue to see the rally in the US indices. This is mainly due to the following:
1) A huge short squeeze as investors and hedge funds made bets that the major indices, oil, commodity and financial stocks would trend lower going into 2016. The rise in the price of oil and other commodities caught everyone off guard.
2) EPS "beat". A beat that is masked by write backs from previous provisions, share buybacks which increased the EPS despite falling net profit, and lower estimates. In fact for the past few quarters earnings estimates have been reduced. So beating a reduced estimate is worth cheering?
3) A wave of corporate buybacks after the market fell to its February lows. Here in lies the danger. Companies are borrowing money to buy back shares just as when they (the shares) are still in their highs against a backdrop of falling net profit. Won't this burden the company further? Apparently not to the senior management who cashed out their share options.
4) Continued hopes for stimulus after stimulus whenever the market tanks or when poor economic data prevails. More QEs, ZIRP and NIRP only creates more money and thus greater currency debasement. Assets price will grow but it is artificially inflated. Bubbles are artificially created. Price discovery is lost.
At some point, people will watch the actions of the Central Banks in disbelief and move into precious metals. This is when the people has lost all faith in the policy makers and price discovery will come back disastrously.
The coming week will be interesting. Here's what to look out for:
1) The 4 week long rally is now in overbought territory. It might go up further with the anticipation that the Fed will not raise rates in the coming meeting, or the language of the Fed changes to accommodate further easing down the road.
2) Any of 1) above, will lend support to the price of precious metals, and we could see a gold and silver rally as the US$ weakens.
3) Oil rally will likely to discontinue as the March 20 "talk" between OPEC and Russia becomes a none event. Iran has already indicated it will not attend. Also focus will return to oil storage capacity as it hits critical levels.
Of course, the Fed could surprise everyone will an interest rate hike, and this will put a stop on all rallies - the stock market, commodity and precious metals (albeit temporarily). There will be a rush into treasuries. However the impact in the economy will be severe. After a reactionary fall, precious metals like gold may regain its positive momentum as it is the ideal hedge against inflation. This is reminiscent of the 1970s - 1980 where gold rallied more than 300%, and event which coincided with interest rate spikes.
The above are just my opinion. You are encouraged to do your own research.
It really baffles me that the rally has been against a backdrop of weak fundamentals, namely:
1) US corporate earnings fell for a third quarter in Q4 2016. That's three quarters in a row, a clear sign of a earnings recession
2) The PMI for manufacturing and services are in contraction mode
3) Jobs numbers which are continually and seasonally "adjusted" but point to the fact that more minimum wage jobs were created rather high paying skillful jobs
4) Continued growth in global debt
5) Poor GDP numbers - So the Q4 GDP was revised up to 1% from 0.4%. That vs the GDP of 3% - 4% n the 1990s without any QE!
Perhaps it has a lot to do with the rise in the price of oil which rallied almost 47% off their lows. But based on what fundamentals? A freeze in production which is already at record levels? With US being a major producer not being involved in the "talk" and now warns OPEC that production will resume production at a blistering pace once oil reaches US40 per barrel? The only fundamental that I know of is that Supply is outstripping Demand and as long as that occurs, any rally has more to do with hope than fundamentals.
Oil price will continue to rally eventually but not until the costly producers are out of the equation. This could happen very soon - by the first half of the year - as many of these costly producers are already financially distressed.
Despite poor earnings we continue to see the rally in the US indices. This is mainly due to the following:
1) A huge short squeeze as investors and hedge funds made bets that the major indices, oil, commodity and financial stocks would trend lower going into 2016. The rise in the price of oil and other commodities caught everyone off guard.
3) A wave of corporate buybacks after the market fell to its February lows. Here in lies the danger. Companies are borrowing money to buy back shares just as when they (the shares) are still in their highs against a backdrop of falling net profit. Won't this burden the company further? Apparently not to the senior management who cashed out their share options.
4) Continued hopes for stimulus after stimulus whenever the market tanks or when poor economic data prevails. More QEs, ZIRP and NIRP only creates more money and thus greater currency debasement. Assets price will grow but it is artificially inflated. Bubbles are artificially created. Price discovery is lost.
At some point, people will watch the actions of the Central Banks in disbelief and move into precious metals. This is when the people has lost all faith in the policy makers and price discovery will come back disastrously.
The coming week will be interesting. Here's what to look out for:
1) The 4 week long rally is now in overbought territory. It might go up further with the anticipation that the Fed will not raise rates in the coming meeting, or the language of the Fed changes to accommodate further easing down the road.
2) Any of 1) above, will lend support to the price of precious metals, and we could see a gold and silver rally as the US$ weakens.
3) Oil rally will likely to discontinue as the March 20 "talk" between OPEC and Russia becomes a none event. Iran has already indicated it will not attend. Also focus will return to oil storage capacity as it hits critical levels.
Of course, the Fed could surprise everyone will an interest rate hike, and this will put a stop on all rallies - the stock market, commodity and precious metals (albeit temporarily). There will be a rush into treasuries. However the impact in the economy will be severe. After a reactionary fall, precious metals like gold may regain its positive momentum as it is the ideal hedge against inflation. This is reminiscent of the 1970s - 1980 where gold rallied more than 300%, and event which coincided with interest rate spikes.
The above are just my opinion. You are encouraged to do your own research.
ECB - MORE QE + DEEPER INTEREST CUTS
Well after much criticisms in the December meeting, Draghi has come back with a vengeance. On the outset the package by the ECB looks formidable. But will it spur the EU's economy and bring it back from the brink of yet another deflation?
If we look at Japan, the NIRP has been rather unsuccessful. In what was intended to lower the value of the Yen vs the US$, and in the process ignites Japan's export and fuel growth, we instead saw the Yen appreciating against the US$. Much remains to be seen in Q1 2016 whether the NIRP has successfully pulled Japan out of a potential recession.
Worst still, more than US$5T of Japanese bonds are yielding negative returns. With total debt that is in excess of 500% of GDP and a rapidly changing demographics which could impact upon Japan's future tax revenue, how can Japan ever pay off this huge amount of debt? Were Japan to stop borrowing, it would take 16 years of tax collection to pay off the debt load.
Despite a good observation of Japan (Heck, Japan has implemented countless QEs over the last 25 years and they are still in a deflation cycle), the ECB continues to adopt the same rules from the same playbook.
Likely, it will prompt people to pull money out from the banks just like what happened in Japan where safety boxes were sold out! It could also prompt the people to invest in precious metals since having zero interest return is still better than negative returns.
So if people save more, what will happen to consumption - the driver of economic growth?
Should this happen, then it is a conclusive proof that the people have lost complete faith in the ECB.
The EU is faced with a multitude of problems. Besides the deflationary pressures, the EU is also facing a migrant crisis, which is causing some disunity among the various fractions within the union, the southern countries which continue to face severe economic and financial crisis, most notable Greece and Italy, and a potential BREXIT come June, all of which could result in dramatic shifts within the union.
This could be a trying period for the ECB and EU, as a group of German banks is adamant in voicing support for the ECB's policies, and the EU is being confronted by a wave of nationalism and patriotism within several of its member countries that depart from the EU's agenda.
Will what the ECB embark on be any different from Japan? I have my doubts and I would like to be proven wrong, because being right scare the hell out of me.
If we look at Japan, the NIRP has been rather unsuccessful. In what was intended to lower the value of the Yen vs the US$, and in the process ignites Japan's export and fuel growth, we instead saw the Yen appreciating against the US$. Much remains to be seen in Q1 2016 whether the NIRP has successfully pulled Japan out of a potential recession.
Worst still, more than US$5T of Japanese bonds are yielding negative returns. With total debt that is in excess of 500% of GDP and a rapidly changing demographics which could impact upon Japan's future tax revenue, how can Japan ever pay off this huge amount of debt? Were Japan to stop borrowing, it would take 16 years of tax collection to pay off the debt load.
Despite a good observation of Japan (Heck, Japan has implemented countless QEs over the last 25 years and they are still in a deflation cycle), the ECB continues to adopt the same rules from the same playbook.
Likely, it will prompt people to pull money out from the banks just like what happened in Japan where safety boxes were sold out! It could also prompt the people to invest in precious metals since having zero interest return is still better than negative returns.
So if people save more, what will happen to consumption - the driver of economic growth?
Should this happen, then it is a conclusive proof that the people have lost complete faith in the ECB.
The EU is faced with a multitude of problems. Besides the deflationary pressures, the EU is also facing a migrant crisis, which is causing some disunity among the various fractions within the union, the southern countries which continue to face severe economic and financial crisis, most notable Greece and Italy, and a potential BREXIT come June, all of which could result in dramatic shifts within the union.
This could be a trying period for the ECB and EU, as a group of German banks is adamant in voicing support for the ECB's policies, and the EU is being confronted by a wave of nationalism and patriotism within several of its member countries that depart from the EU's agenda.
Will what the ECB embark on be any different from Japan? I have my doubts and I would like to be proven wrong, because being right scare the hell out of me.
Monday, March 7, 2016
US JOBS REPORT - NOTHING WORTH CHEERING
The US added 242,000 jobs in February 2016. On the surface it looks good but dwell deeper and you'll find some alarming figures:
1) More than 80% of the hobs created are minimum wage jobs.
2) Falling revenue from income tax, which means most of the new jobs created are lower income jobs.
3) Manufacturing and mining continue to lose jobs - jobs which are high pay.
4) Average weekly wage dropped 0.7%.
The Treasury is facing lower receipts from income tax, form the employee level and at the corporate level. Lest we forget, the S&P 500 companies are facing earning recession.
Saddled with the fact that the debt level continue to rise amidst falling tax revenue, the situation in the US has become more dire.
1) More than 80% of the hobs created are minimum wage jobs.
2) Falling revenue from income tax, which means most of the new jobs created are lower income jobs.
3) Manufacturing and mining continue to lose jobs - jobs which are high pay.
4) Average weekly wage dropped 0.7%.
The Treasury is facing lower receipts from income tax, form the employee level and at the corporate level. Lest we forget, the S&P 500 companies are facing earning recession.
Saddled with the fact that the debt level continue to rise amidst falling tax revenue, the situation in the US has become more dire.
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