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Thursday, January 07, 2016

Financial Review

Worst Ever

DOW – 392 = 16,514
SPX – 47 = 1943
NAS – 146 = 4689
10 Y – .02 = 2.15
OIL – .74 = 33.23
GOLD + 15.40 = 1110.20

The Chinese stock market was open for about 15 minutes; stocks dropped 5%, triggering circuit breakers, or rules that suspended trading. When trading resumed, it was all downhill and that triggered another level of circuit breakers, shutting down trading for the day; 29 minutes in total, the shortest session in Chinese market history.

Circuit breakers are a new idea for Chinese markets; they have only been used since Monday, the start of the New Year. Trading was halted on Monday for 30 minutes. We have circuit breakers in place on Wall Street, and the idea is to allow a cooling off period when stocks are in freefall. In the US, trading is halted temporarily after declines of 7% and 13% in the Standard & Poor’s 500 Index, and only suspended for the rest of the day if losses reach 20%.

In China, it only seems to make investors more nervous and they scramble to sell before getting locked out. After the trading halt, Chinese regulators decided to scrap the circuit breaker rule for the foreseeable future.

The Shanghai Composite Index finished down 7% at 3,125, bringing its losses over just four trading days to 11.7%. It is on track for the largest weekly loss since the week ended Aug. 21. Stock markets fell across the region: Hong Kong’s Hang Seng Index was down 3.1%, the Nikkei Stock Average lost 2.3%, Australia’s S&P/ASX 200 dropped 2.2% and South Korea’s Kospi was down 1.1%.

What’s triggering the panic selling?   The selloff was sparked after the central bank cuts its yuan reference rate by the most since August. China’s foreign reserves dropped by a record $108 billion in December as its defense of the yuan becomes costlier. The economy is decelerating to its slowest annual pace since 1990, but that’s been known for some time.

Analysts are predicting a 6.5% economic expansion this year, but the continued slide in the yuan is weighing heavily on investor sentiment, as it suggests all the government’s stimulus efforts aren’t working. A currency devaluation is seen as a last-ditch effort to boost exports, and the fear is China won’t be able to maintain its growth targets. Global equities have lost $2.5 trillion in value in the first three trading days of the year. It’s the worst start of a New Year for stocks since 2008, and we all remember that year.

Actually, with today’s losses, this is the worst start ever for the S&P 500 – ever.  Earlier today, George Soros compared the current market to 2008, and said the market is now “facing a crisis and investors need to be very cautious.” And then he went on to describe all the things we’ve been telling you about for some time here on the Review.

Of course the big question is where stocks go from here. Stocks are in a downtrend. The S&P 500 is down over 8% from its May high, but the average stock in the larger S&P 1500 was down 24% from its high as of yesterday’s close, according to new research from Bespoke Investment Group.

A bear market is defined as a decline of 20% or more, meaning the average stock has already reached. The S&P 600 Small Cap Index is down 27.6% from its 52-week high. In the midcap S&P 400, the average decline is 23.6%. The S&P 500, the benchmark for US stocks, hit a record high close of 2130 on May 21st, or about 8%. But the stocks in the S&P 500 have seen an average decline of just over 20%.

Now the reason for the discrepancy between the index and the average stock in the index, is that the indexes are weighted to give greater importance to the larger stocks, and a few of the larger stocks have performed very well; specifically, the FANG stocks: Facebook, Amazon, Netflix, and Google/Alphabet.

The S&P 500 is trading below its 200 day moving average and the 50 day moving average. The next significant levels of support at 1867, the lows set back in August. Likewise, the Dow Industrials are below the 50 and 200 day moving averages. And we are heading into earnings reporting season with expectations for a 4.7% decline in fourth quarter earnings, which would be the third consecutive quarter of declining earnings.

And while any single day of trading isn’t likely to tell you where stocks are headed, trading in the month of January can give you a pretty good clue about the rest of the year. The idea is called the January Barometer, devised by Yale Hirsch, the founder of the Stock Trader’s Almanac, in 1972.

Simply put, if the Standard & Poor’s 500 index ends January with a gain, the odds favor a rising stock market for the year. But if stocks end January in the red for the month, there is a very strong probability the year will finish negative. According to Jeffrey Hirsch, the son of Yale and the current editor of the Almanac, “The January barometer has registered eight major errors since 1950 for an 87.7% accuracy ratio.”

The January Barometer is not a guarantee of performance for the year, just a look at probabilities. And it is still too early to say whether January will be positive or negative. And even if January shows losses, it doesn’t mean you should sell everything; it would just be an alert telling you to be cautious, make sure you have an exit strategy, and make certain you know just how much risk you’re willing to take.

Oil futures in New York slid to the lowest in 12 years with West Texas Intermediate dropping as much as 5.5 percent in overnight trading. Volatility in the oil market may increase today as tensions in the Middle East rise following Iran’s accusation that Saudi Arabia was responsible for a missile attack on its embassy in Yemen. Oil closed down 2.2% at $33.23. By the way, I paid $1.80 a gallon the other day to fill up the tank. When oil was trading at $100 a barrel, (in other words 3 times more than today) the price for a gallon was not $5.40. The oil companies are still ripping us off at the pump.

According to the World Bank, the global economy will sputter along this year as China’s slowdown prolongs a commodity slump and contractions endure in Brazil and Russia. As a result, the international institution cut its forecasts for the third straight year, predicting 2016 growth to fall by 0.4 percentage point to 2.9%. With regards to the U.S., the World Bank decreased its 2016 prospects to 2.7%, down from 2.8 percent from June, citing the dampening effect on exports from the surging dollar.

Late yesterday, the Federal Reserve released the minutes from the last FOMC meeting. Today, Richmond Federal Reserve President Jeffrey Lacker today said the Federal Reserve might need to raise interest rates more than four times this year if oil prices stabilize, the dollar stops appreciating and inflation surges toward the U.S. central bank’s 2 percent target. Lacker’s comments are in-line with Fed vice-chair Stanley Fischer, which would indicate fed funds rates at just over 1% by the end of the year.

So, on one hand we have markets in China dragging down markets around the globe, even though the economy in the US is decent. Nobody thinks the U.S. or European economies are in high gear, and bears point to weakening corporate profits and tighter monetary policy by the Federal Reserve, but this doesn’t look like 2008 in the broader economy.

The number of Americans who applied for new unemployment benefits in 2015 fell to the lowest level in 42 years. This week’s figures show 277,000 people filed initial jobless claims in the seven days running from Dec. 27 to Jan 2. That is down 10,000 from an unrevised 287,000 in the prior week.

In a separate report, global outplacement consultancy Challenger, Gray & Christmas said U.S.-based employers announced plans to cut 23,622 jobs in December, the fewest since June 2000. That was down 24% from November and the lowest December job-cut total on record.

The Department of Labor will report on December payrolls tomorrow morning; the consensus estimate is for somewhere around 205,000 to 215,000. This should be a major tell on whether the Federal Reserve is on the right track or whether their forecasts are nothing more than hooey.

Yahoo is working on a plan to cut its workforce by at least 10% and it could start the process as early as this month. The layoffs, which would result in more than 1,000 people leaving the tech giant, are set to affect the company’s media business, European operations, and platforms-technology group. The move also follows Starboard Value’s letter to Yahoo yesterday, which took aim at CEO Marissa Mayer, her leadership team, and raised the prospect that a proxy battle may be on the way.

Macy’s had a tough Christmas. The department store chain says it will eliminate about 4,500 jobs, or about 3 percent of its work force, in a major restructuring drive designed to save about $400 million.  Macy’s said sales at its Macy’s and Bloomingdale’s stores fell 4.7% in November and December.

Here’s the latest Consumer Electronics Show news: BlackBerry has unveiled plans for building autonomous car software to capture a piece of the ballooning industry. The company wants to extend its QNX software (already used by automakers to build in-car entertainment systems) to self-driving technology, and plans to launch the product in the second quarter of 2016.

CES attendees also saw General Motors show off its Chevrolet Bolt, the automaker’s newest electric vehicle that has a range of 200 miles. The Bolt is likely to be priced at $38,000 and cost around $30,000 after the federal $7,500 income-tax rebate for electric car purchases.

 Meanwhile, Volkswagen assumes it will have to buy back about 115,000, cars in the United States as a result of its emissions crisis. The rest of VW’s 500,000 U.S. vehicles will need major refits, incurring significant costs for parts and a long stay at the garage as sections of the exhaust must be reconstructed and approved.

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