Weekly Article 12-05-2018
It has been a wild week for just 2 days of trading so far. It appeared that we may be in line for a rally on Monday morning in the stock markets. In looking back, it appears to me that there was a short-covering rally because many believed the news of at least a temporary truce between China and the USA in the trade war would lead to higher economic activity and may have lifted the markets.
It became apparent later in the day that the “rally” was not as robust as anticipated. By Tuesday all of the excitement was erased when the major indexes were down 3% across the board.
I have written many times in the past about how the trading systems will always work in a rising market because as the momentum of the market is up the algorithms and trading programs are “programmed” to buy. This leads to higher prices.
As markets are declining the same programs, following the momentum, are “programmed” to sell. The one thing that many either haven’t thought about or have just discounted is where the buyers may come from in this situation.
Most of the declines took place when the S&P 500 hit a technical level that implied that the trading systems should reduce risk (sell). It appears to be a cascading decline on the daily chart.
Another reason that may have caused initial panic is that the yield curve has inverted. The 2 year note on December 4th. was over 2.8% and the 5 year note was at 2.7%. The 10-year yield was just above 2.9%.
This is not indicative of a healthy market.
In addition, there appears to be plenty of stress building up in the corporate debt market that is not going unnoticed. It was noted on Money GPS that 12% of global companies are “Zombies”. In this context a “Zombie company” is a company that cannot even service its debts with operating earnings.
In other words, these companies have to rely on cheap and reliable credit to stay afloat. Rates are rising and this should make everyone’s level of interest rise.
In an article by JT Crowe in Money And Markets : FDIC Chair: Start Preparing For Next Market Crash, “McWilliams (Jelena McWilliams- head of the FDIC) The business of large and risky business loans that has the attention of regulators and lawmakers on Capitol Hill. Last week, the Federal Reserve released a report flagging growth in nonfinancial leveraged loans and warned that “credit standards appear to have deteriorated over the past 6 months”. “The Office Of The Controller of The Currency, the third major bank regulator, similarly reported that leveraged lending has suffered from “eased underwriting standards” and warned banks to be mindful of the direct and indirect exposure to corporate debt markets”
Of course, we see none of this on the financial game shows but it appears to me that we should also be mindful about what our exposure to corporate debt is. We should also be aware if any companies that we may own stock in would be affected. Remember, the first losers in a default will not likely be bondholders but stockholders.
Another victim of tightening credit could be those who are using margin to invest. Keep in mind that the margin today dwarfs the margin in 2000 and 2007. If brokerages decide that they have to tighten the margin requirements this could lead to a lot of forced selling that would likely lead to more forced selling. Remember, there is no trading or investment theory when there is a margin call. If you don’t have cash to add the margin clerk will liquidate assets to pay off your loan with no thought given to the value you are receiving or what kind of asset they are selling. Historically, the most liquid assets get sold off first- maybe some of your best assets.
Meanwhile, gold and silver, which I opined a few months ago as they were falling, may have been a signal for the markets going forward. They have been not only hanging in there but actually rising. This could be because of many reasons. One thing that is surprising is that open interest in the metals collapsed last week and historically this has been a bad sign for the price in the near term. This time it appears it is a bit different so far.
It could be that word is getting around about all the countries wanting their gold back and major purchases by those “in the know” like central banks, major banks, countries and the 1 percenters, or it could simply be that many are waking up to the fact that all might not be so well.
I see an American Aircraft Carrier is going to the Persian Gulf after Iran launched a missile. I see riots spreading throughout Europe as the citizens are well aware of the state of the economies over there despite the massaged numbers and happy talk from their “leaders”. Greece, Italy, France, Belgium, Spain and Portugal to name a few where the population is getting fed up with “austerity”. Of course, it is only austerity for common folks- those at the top still keep getting more and more. This is leading to the riots that are becoming commonplace now. “When people lose everything- they lose it!” Gerald Celente- Trends Journal
It appears to me that the trials and tribulations experienced earlier this year in emerging markets are making their way to the developed markets.
I happen to support President Trump and am pulling for him because I believe he is pulling for us. However, it appalls me when I hear we have an economy that is the best it’s ever been. If that were so why would Ford be laying of 25,000 workers? Why would GM be laying off thousands? Why would retail stores be closing in record numbers? Why are people more indebted now than at any other time in history? Why are home sales slowing and prices falling (I don’t think you have seen anything yet- I expect Real Estate to fall hard and be a screaming buy in the not too distant future). Sorry Mr. President- I’m not buying it and it appears many others are coming to the same conclusion.
I also have to wonder if the $21 trillion missing from HUD and the Dept. of Defense from 1998-2015 is only the tip of the iceberg and that our “money” may be far more debased than anyone could ever imagine. (Dr. Mark Skidmore- Michigan State) This is one of my main reasons for buying metals because nobody can conjur them up out of nowhere. It is nobody else’s promise to pay. It is generally accepted as payment anywhere in the world.
Maybe those same central banks, major banks, countries and the one percenters are all wondering the same thing and are acting accordingly.
In any case it appears to me that hard assets are an important component of any investment plan going forward. If the central banks actually do what they say they are going to do and stop QE I believe you should “look out below!” If they relent and keep “printing”, propping and buying all sorts of assets then I believe it is only a matter of time before people will realize that they don’t want to part with real stuff for pieces of paper. Many around the globe have already come to that conclusion. It is no coincidence that almost every area of the world has numerous countries (Even in Europe) that are trading outside the dollar in bilateral trade and setting up their own payment systems to bypass the US-controlled SWIFT system.
The world is changing and it is changing fast.
Mike Savage, ChFC, Financial Advisor
2642 Route 940 Pocono Summit, Pa. 18346
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