Friday, January 15, 2016
Deep Thoughts on the Securities Markets
After the worst start to the year, nearly ever, it’s not easy to be bullish. Yet at the same time after such a phony sell off, for seemingly no valid reason, with no recession looming, and after such a sharp and high magnitude sell off, it’s hard to be bearish.
The alternative of fixed income has two problems, one the yields are pathetic (see tickers TLT, IEF, TIP, AGG, LQD, HYMB, etc.), and two if you pick high yield (PCY, EMB, HYG, JNK, SJNK, SHYG, etc.) it’s all plagued with some kind of linkage to oil and default risk. Perhaps, the JPM EMBI (ticker EMB, and very similar PCY) will get really smashed and could represent a really great bargain if it were to drop severely from here, thanks to oil and the refreshed and renewed perception of default risk rising in e.g. Russia? If the JPM EMBI really gets beaten up, I’ll be watching it closely for an entry point.
All the respectable wall street brokerages are touting stocks, as who would put their capital into fixed income at these pathetic yields?! They’re all touting GDP growth accelerating in 2016, they’re forecasting EPS growth, a stronger labor market, stronger real estate, and they cite low oil, low interest rates, and low inflation. I’m starting to think there could be a bear market, just because everyone else seems to be thinking this way. Even just recently many analysts and experts and chief economists were saying everything would be alright. Only BlackRock’s Fink said today on CNBC that he believes the market could drop by another -10%, and then would represent a great buying opportunity.
At least the Atlanta Federal Reserve is getting more and more bearish by the day, click here for their GDP Now Forecast. Even Bullard seems to have toned down his hawkishness.
Here’s something to think about. The DJIA was at roughly 10,000 in mid to late 1999, it’s now 2016, over 16 years later, and the DJIA closed today (1-15-16) at 15,688; This means the annualized rate of return on the DJIA has been just +2.798% per year, for over 16 years! Isn’t that pathetic?
It gets worse… If you annualize the return of the Nasdaq Composite or the Nasdaq 100 from March of 2000, it’s a negative return! The Nasdaq 100 was at 4,816.35 on March 24, 2000. Today, January 15, 2016 the Nasdaq 100 closed at 4,141.08, literally down by -16% in nearly 16 years.
On March 10, 2000 the Nasdaq Composite closed at 5,134.52, today it closed at 4,488.42, down by -12.55% over the nearly 16 year span.
On March 10, 2000 the 30 year Treasury bond yield reached +6.19%; It’s clobbered the DJIA and the Nasdaq returns since then.
The ’00s were nuts. First there was the roaring 90s and the dot-com bubble of 2000 through 2002. Then there was the real estate debacle of late 2007 through 2009. Today, everyone acts as though the bogeyman is going to get the markets. The markets sure haven’t returned their historical annualized returns over the last 16 years.
So, I’m starting to become bearish. Now I’m no Nostradamus, and I’ve been wrong before, and I hate to “bet against” America. I’ll tell you why I’m getting nervous, in a dozen reasons.
- Everyone is trading stocks as though they’re some basket of 50% oil (see tickers USO and OIL), 50% chinese stocks (see FXI, ASHR, ASHS), and leveraged another 50% on U.S. energy sector shares (see XLE), and maybe leveraged some more on tech and biotech (see tickers QQQ and IBB). This means the markets are absolutely collapsing, and rapidly, and have nothing to do anymore with fundamental analysis, nothing to do with GDP growth, EPS and/or revenue growth, or price to earnings multiples or price to book multiples. Perhaps not even technical analysis, which indicated a false golden cross on many indices just weeks ago. Everyone just literally looks at the price of oil, and somehow the markets are nearly matching oil’s move, every day lately. The fear mongering, war mongering, and negativity has taken over. Terrible volatility and negative sentiment are sweeping the markets worldwide, the USA included. Volatility has been increasing. There is stunningly negative market psychology right now. It’s the panic of 2016! It’s turned entirely into “crazy town,” as CNBC’s Jim Cramer would say and characterize it. Sell offs aren’t seen as buying opportunities anymore, they’re seen as the norm, and more selling is what investors are practicing. Look at the astronomical rise in the biotech sector?! Despite it’s nearly -30% sell off, it looks to me like it might go lower, before it goes higher; If the biotech indices ever go higher again. Transports are down significantly from their high, but are still up for three years very very nicely. Some REITs are down by -20, to -30, to -40 percent.
- The capital markets have become recently an enormous wealth destruction device for people to inflict pain on themselves and others financially, by panic selling (and/or shorting), driving prices lower. This is exactly what causes the markets to drop by -390 points, or by -2.39%, as they did today. God forbid any investment that actually makes money.
- I’m starting to think the only time worth coming back into the stock market, is after a recession is officially declared, and discussed on the front page of the newspaper, not anytime before that.
- The markets are quickly (very very rapidly) going from correction territory to bear market territory. The large cap indices are now eleven to twelve percent off their highs, the mid cap indices are down roughly by seventeen percent, and the small cap indices are down by roughly twenty two percent. Know most bear market selloffs last in duration about 15 to 21 months, and the markets peaked around May of 2015, so that means that August of 2016 through February of 2017 will likely be rock bottom on the markets (so mark it on your calendar); and prices of e.g. the S&P500 could be by then roughly -30 to -37% off their peaks. Over the past several bear markets, the S&P500 dropped by -37%, so buyer beware!!!
- There are literally tech stocks, and biotech stocks with PE multiples of over 100! Some may have been up by more than +100 percent from just a year or two ago, and still may be that lofty; Gravity is starting to win, and gravity is down, not up.
- Did you know the government is expropriating profits and income away from Fannie Mae and Freddie Mac? Just like the corrupt governments in africa all over the place that steal from businesses, the U.S. government is taking tickers FNMA and FMCC’s income, and has for years, when will this stop?!
- Some people think the stock market is rigged by high frequency machines, that it’s all electronic trash, and that someone is or has pulled out the magic carpet from underneath the stock markets which was supporting it. That might be a great analysis. It seems as though stocks are falling like a ton of bricks pushed out the back of a cargo plane from 35,000 feet.
- Some people think the entire stock market moves with the presidential cycle, and is effectively on an eight year cycle. They think they can look at their calendar and reposition their portfolio based on what the calendar literally indicates. They remember the last debacle in 2008, which they blame on the election, not on reckless banks lending to fools with no income, no jobs, no assets, etc. They would never associate the last terrible huge bear market sell off with the collapsing housing market, nor would they admit that they likely believed their own home and their neighbors home was declining in value each year! There is no method of valuing real estate, it is worth whatever you believe it’s worth. Hell, maybe people will start pretending their homes are worthless again?!
- The U.S. government acts as though it should pat itself on the back, and that so should everyone else, because it has narrowed the deficit down to just half a trillion dollars annually. This is actually totally obscene and inept, and ignorant, incompetent, and illiterate or something! $500 billion to $1 trillion dollar deficits crowd out investment, crowd out borrowing, and incite credit crunches. Every debt and currency crisis began from a government which borrowed too much. It disallocates capital. Deficits are bad! Deficits do matter, despite what Dick Cheney has told us all! There is nothing good from reckless government spending, as though there’s no tomorrow. No one should lend to the fools, so don’t buy treasuries. Every currency crisis and debt crisis, and total default and economic collapse and financial catastrophe is precipitated by reckless government waste and spending as though there’s no tomorrow. This is the U.S. government’s motto lately! Like over the last forty or fifty or sixty years or more!
- There’s a terrible demographic shift and storm looming for the USA (and in other developed nations). Basically, no one is having children at the rates they used to in the past, thanks to birth control pills. Since 1960 the birth rate and fertility rate have fallen off a cliff; and the age of first marriage has zoomed through the roof. This actually matters, because all the generous entitlement programs like social security, medicare, and Medicaid all need a population of workers to support the system. We even need workers just to work and pay taxes. These systems have looming issues, thanks to the medical sector’s genocide and birth control pills. So, it will be a good one. There are some economists projecting trillion dollar deficits as the norm, thanks to the drop in the birth rates and fertility rates; All in the name of female empowerment. There could be defaults and/or terrible enormous deficits in the developed 1st world in the future. Sure seems to me like bringing in a bunch of immigrants (to combat a very low fertility rate and birth rate) from central and south america totally obsessed with drugs, drugs, drugs, drugs, and more drugs probably isn’t a good idea. Even the DEA and FBI act like drugs are legal, and that federal laws do not anymore supersede state laws or municipal city ordinances (think about Mendocino County California, and Colorado). The catering to druggies is absolutely nuts! We are paving the way to lawlessness and generations of drug abusers. Sure seems like the president and attorney general and department of justice are sympathetic to drug users.
- Interest rates on fixed income are totally inadequate. To be frank, in the mid to late 1990s treasury yields were paying seven percent or more, and everything else paid higher yields. Today’s rates at the short end of 0.25% are not even funny, nor is the 30 year treasury bond rate of 2.81%. Fed funds should be at 4.75%, not zero, and not ever negative; Thirty year treasury bond rates should be 198 basis points higher. To me that’s nearly fraud or theft to have taxable rates at nearly zero. No one should lend money to anyone at a rate of 2.81%. I guess it beats the negative rates observed in europe right now.
- When will sanity return to the markets? Low and lower oil is actually great for consumer spending and consumer sentiment, and acts like a tax cut. The energy sector is really just 2.59 to 6.4 percent allocation of the stock indices, and oil has been in decline for over 9 years now, after it reached literally 145 or more per barrel. Oil is going down thanks to a supply side shock of over production, it’s not a demand side shock. Low and lower oil is great for everyone, except OPEC and the energy sector. The energy sector’s fixed income are not huge. The energy sector is dominated by just a few companies, and they’re not going to be bailed out. They should all go bankrupt, from their gross overproduction and stubbornness. Lastly, the energy sector is only roughly 10% of the junk bond market.
Bernhardt Capital Management LLC 