You Know Things are Falling When...
...when the stock market's decade-long bottom trend becomes its new top trend and then it can't even make it back up to that line as a top trend.
We're sloughing away now, and it can be a long slide to the bottom or endless side-winding of big ups and downs that go nowhere, just as the market has now gone nowhere for fifteen months.
Yes, if you bought in January, 2018, (when I said the market would fall) and held, you have made nothing (unless you did well on dividends)! If you continue to hold, the odds are you will do worse than nothing; but, hey, you did get to enjoy a heck of a roller-coaster ride. If, on the other hand, you sold in January of 2018 and put your money in cash, you made 2% a year with worry-free smooth sailing every day of the year. Here's the proof on stocks:
Those who held in January, 2018, are right back to where they started. Of course, if you sold at every peak, including the January 2018 peak, and bought at the bottom of every trough, you made a lot of money; but that is easily figured out in hindsight. Hats off to you if you did! I hope my predictions fir last year on when the selling points would hit helped you. For me, I just got out and avoided the turbulent ride to nowhere, because I'm not as good at knowing the bottoms as I am the tops, and I'll let the dust settle one more time.
The cost of getting high on nothing but hopium (a term I borrowed from David Stockman), as I described in two recent articles, is that, when the false hope clears the air and sober minds prevail, the return to normal can be violent, so get ready:
“It’s tin hats on and battening down the hatches for a fair bit of volatility for the next few months,†said Tony Cousins, chief executive of Pyrford International, the global equities arm of BMO Global Asset Management.
The China syndrome is a meltdown
Trade talks now dominate the market in daily surges and tumbles that are increasingly more down than up as the reality that China is not in the least bit ready to cave in begins to chip its way through the denial that I've been writing about, as I said reality was likely soon to do.
The recent Huawei stock dive was a prime example. I'm sure the Trump administration wanted to look tough, but they wound up retracting most of their Huawei ban in less than three business days to postpone the full ban for 90 days because the stock market's micro-chip, micro-panic was more than Trump was willing to risk. Oops. The market sighed relief Tuesday when the ban was lifted, but then went right back to settling again on Wednesday and fell off a little bluff on Thursday. Upward momentum is GONE!
Do you think Wilbur Ross's partial withdrawal of the Huawei ban is going to put the market at ease long term, or is the gravity of the trade war going to keep sinking in? I think investors are just starting to fear the truth: this is a long-term war of attrition. China has no intention of fading. In fact, President Xi Jinping gave his people a pep talk this week to remember "the long march" that the Red Army made because they are about to be called to another long march for the good of their nation.
Moreover, on Thursday,
China’s Ministry of Commerce said that the U.S. had to reverse its “wrong actions†before negotiations could continue.
“Both the U.S. and China appear to be preparing for a prolonged period of trade conflict,†wrote analysts at Nomura in a note on the standoff. “We think domestic pressures and constraints will drive both sides towards further escalation,†they warned. “Without a clear way forward during an intensifying 2020 U.S. presidential election, we see a rising risk that tariffs will remain in effect through end 2020.â€
Remember, China carried the global economy for years when the US couldn't. China's economy was already a concern before the trade war hit because it has built too many uninhabited cities and roads to nowhere. China's recent 200-billion boost to its economy barely evoked a sneeze. So, the world economy will get no help from China.
US companies will be hit hard if China retaliates in kind for the banning of Huawei, which is only on temporarily on ice. Goldman Sachs says Apples earnings would take a 29% hit if the Chinese retaliate by banning the almighty Apple in the same way the US just tried to ban Huawei. And why wouldn't they since Huawei and Apple are direct competitors in China?
Of course, China has already retaliated for tariffs with a trash ban, which has American cities up to their armpits in recyclables they can not longer process. According to JP Morgan, China is is no mood to deal with any of our -- in their view -- trashy business right now:
Relations between the U.S. and China have become so strained that the chance of a Chinese firm doing a deal in the U.S. are virtually nil, according to the top tech banker at JPMorgan Chase & Co. “If you’re a Chinese company, there’s no way in hell you’re buying anything in the U.S., not even the trash can, for the foreseeable future,†Madhu Namburi, head of technology investment banking at the New York-based bank, said.
What a difference now between how analysts were talking about hope for the trade war last week and just the opposite this week! Did you notice the total pivot? (The message here, however, has been consistent; and didn't I just note that the level of utter lunacy in the hope a week or two ago meant that reality was likely to break through the nation's peak denial in a hurry?) Trade-war reality was better accounted for in these headlines this week than it has been by the mainstream media in past weeks:
"We Will Beat America Out Of Its Wits": China Trade War Song Goes Viral
Trader: Occam's Razor On Trade War "Leaves No Choice But To Be Bearish Stocks"
Xi Warns 'Prepare For New Long March' As Beijing Braces For Drawn-Out Trade Fight
If you're still hopeful about trade talks, since Trump promised again on Friday a deal could happen soon, just note that even his treasury secretary, Steven Mnuchin, said this past week there are no scheduled talks with China on the calendar. That hasn't changed.
The market is slow but is starting to catch on and is starting to price in the long wait:
“Markets are pricing in the harsh reality that trade tension is more likely to linger than quickly be resolved as had been the consensus expectation anchoring sentiment until late April.... In addition, the fact that Wednesday’s Fed minutes indicated no rush to cut rates isn’t helping, nor is seemingly endless Brexit uncertainty.â€
That repricing is likely to be a tidal shift because the market was strongly leaning the other way in pricing; although, in terms of flow, money was leaving the stock market for weeks. Now pricing has to follow. So, I think stocks are now in for a rough ride.
Held in the stockade
Having recovered from the stock plunge that was triggered by Huawei's ban when the ban was given some reprieve, the Trump administration decided to kick the market in the knees again later in the week by banning another major Chinese tech company, Hikvision, the world's largest and most oddly named maker of video surveillance equipment. After all, why not double down on banning Chinese high tech after Huawei went over so well with the market and with getting China to the table?
I mentioned earlier this week one of the highlights in my first Premium Post, which laid out the forces that would be driving the economy all year. Another one of those forces was the stock market. While I did not, at that time, repeat a crash prediction like the one I scored last year, I did say the market would bring a huge amount of economic turbulence all year:
Taking Stock in the Year of the Bear: The stock markets of this world are only bits and pieces of that vast economic landscape over which these dry, cold winds are starting to howl, but what happens in the markets has a big impact on the overall economy, so the two often are conflated. 2018 closed as the worst year in stocks since the Great Recession with the worst December since the Great Depression ... with the S&P sitting on the bear barrier and with the Nasdaq and Russel 2000 decidedly in bear country. This has transformed the market’s decadal dynamics from “buy the dip†to “sell the rip.â€
While this article is about headwinds that face the economy as a whole, the stock market, itself, is already positioned to be a source of major turmoil to the general economy. Twelve-trillion dollars in global stock value has evaporated, leaving the world to feel twelve-trillion dollars less wealthy. That effects the whole economy. We are at a tipping point where any further erosion in stocks will start to damage banks, which have been hit the hardest so far, and other companies to where dominoes start to fall.
Up-and-down chop is making the market feel woozy, and the chop is being made worse by mysterious algorithms with their occulted self-taught formulae running the trade.... This bear cub, born out of the worst December since 1931, is already a storm rocking the economy....
Prediction: The cub is coming out of hibernation and is about to grow up. The first quarter's entirely unmerited, euphoric rise in stocks has paved the way for the second quarter's volatility. Because China trade problems and all the other global problems have not been properly weighted by the market, which has chosen to believe a greater trade war will be averted, the market is poised for another collapse.
May has morphed into the month in which the US market is repositioning itself to brace for the reality that the trade war will last longer than investors were originally willing to believe. There is a lot of mistaken pricing to rearrange.
Bloomberg reported on Thursday that strategists at Goldman Sachs, Nomura and JPMorgan Chase & Co. are among those who have shifted a Sino-American trade war to baseline expectation from just a possibility.
You may recall that I spent the first part of this month pounding my point that the market's position on trade was insane in articles titled sequentially, "Hopium Floats, and That’s How the Market got High on Friday," and "Market Loses its Hopium-Induced High, Falls Four Weeks Straight." I noted that, when delirium in the market is that extreme, reality is likely to crash in quickly and severely. Now Goldman et. al. are catching on to how foolish the market really was. (You see, you can read it here first, or read it from the experts a week or two later in the mainstream press when they start to get it. That is the way it has been since the lead-up to the Great Recession.)
Even this Friday showed evidence that denial is still strong, though we see it breaking up, when Trump merely tweeted -- without offering a shred of reason -- that the trade war could end in a deal soon. Stocks shot up at the opening only to slumber away the day to lower levels as perhaps a little more sanity prevailed.
Even one of the mainstream writers I like surprised me on Friday by writing there has been no evidence of irrational exuberance in the markets. (I won't name him because he is generally right on, but seriously, how much more evidence could you ever find? And what could be a greater peak of irrationality than bulls not seeing the market is irrational, even as they are starting to fall off its summit?)
Trump was clearly just vainly talking the market up because he wears the market as his badge of success. There was no basis for believing his statement. A hundred times before he has been dead wrong about the trade war being easy, but once again that didn't matter at all because the market heard what it wanted to hear. That is the very definition of "irrational" -- to act on something because it is what you wanted to hear even though it has no basis in fact. Trump gave no reasons to back up his proffered hope.
Insanity is doing the same thing you have done and that has failed over and over, believing the results this time will be different. The facts are Trump's batting a thousand for being wrong about how soon a deal will come. As noted in this article, China stated many times this week that it won't be soon if they can help it! Trump has them really pissed off, and they are not about to roll over and lose face. They've made that clear, but the hopium addled market found Trump more convincing because it wanted to.
Even on Friday,
Chinese state media ... accused the U.S. of seeking to “colonize global business†with moves against Huawei and other Chinese technology companies. There was no word from either side on progress.... At a daily briefing Friday, foreign ministry spokesman Lu Kang accused American politicians he didn’t name of “fabricating various lies based on subjective presumptions and trying to mislead the American people.â€
Nevertheless, the whole stock market did finally seem to be catching on this week. The Dow closed for its fifth consecutive down week while the other two major indices closed for their third consecutive weeks down. For the Dow this became the longest period of weekly losses since 2011 in the belly of the Great Recession. Numerous analysts wrote that this week's downward move happened because of repositioning toward the reality of the trade war. And, so, the month of May is now shaping up to be the worst May in seven years. (Again, since the Great Recession.)
The stumble for stocks across the globe comes as investors are placing bets that a U.S.-China trade pact between the world’s largest economies may take far longer than originally anticipated — a view that is causing a more deliberate reassessment of prospects for corporate earnings and global economic growth.
Trade concerns weighed on appetite for stocks, spurring demand for government paper. Gao Feng, spokesperson for China’s Ministry of Commerce, said trade talks could only continue if the U.S. corrected its actions, and that the U.S. crackdown on Chinese companies was threatening global supply chains.
“Investors are still coming to grips with the idea that we’re going to be living with some kind of tariffs, and they definitely aren’t pricing in 25% tariffs on all Chinese goods,†he added. “So it is one step forward, two steps back because the market is still trying to figure out the impact of all this....†Recent weak economic data this week out of Europe, Japan and the U.S. will prove a headwind for stock investors going forward, wrote Tom Essaye, president of the Sevens Report.... “Focus remains on the U.S.-China trade conflict, but global growth is the real concern and we need to see global and U.S. data stabilize, and soon, otherwise trade will no longer be the market’s primary concern,†he wrote.
Yields across the board on US treasuries plummeted on Thursday as more money fled from stocks to treasuries, knocking the Dow down another 400 points shortly after its open on Thursday, taking out its 200-day moving average as an important and now former line of support, while the NASDAQ plunged 2% intraday (-157 points). The Dow tried near the end of the day to recover above its 200-day moving average but failed to make the grade.
Back to bondage
Back in January when I wrote that Premium Post, I noted that higher yields in treasuries had been sucking money out of stocks, which was, in turn, creating some equilibrium by bringing yields down a little. Now money is pumping out of stocks like blood out of a broken artery because the market is getting its legs shot out from under it so often that the Red China flow of money out of stocks is lowering bond yields again.
The ten-year on Thursday dropped to its lowest yield (2.322%) in a year and a half, causing a renewed inversion between three-month treasuries and the ten-year and bringing the much watched 2s-over-10s down to its narrowest 16 basis-point spread away from inversion. Concern became wide spread because all treasury yields from the 10-year down are now lower than the Fed's most basic Fed funds rate, another form of inversion that has typically preceded major recessions. As you can see, the last times that happened was before the Great Recession and the dot-com bust.
US stall speed not far off
I noted in a previous article that, while US GDP growth for the first quarter looked good in its headline number, it was actually quite weak below the surface. Now Deloiite Touche offers a similar perspective:
The US government released its first estimate of economic growth in the first quarter, and the headline number was very strong.1 But financial markets were not terribly impressed.2 Why? Because, despite a strong headline number, the details of the report revealed weakness in the economy. Specifically, the report showed that important components of the GDP such as consumer spending and business investment grew only modestly.... Rather, growth was driven by inventory accumulation....
Remember that I noted here last summer how GDP growth, which had come in over 4% in the second quarter of 2018, would fall in the third quarter because the growth was due mostly to inventory building in the face of the tariffs; then the third quarter came in just above 3%? I had also said the third quarter would still get some help from inventory building because the first phase of tariffs was not implemented until partway through the third quarter. So, I said the next quarter would be notably worse. Predictably, GDP in the fourth quarter dropped down into the pathetic 2% range.
There may again be some inventory building going on in other industries now that Trump is talking seriously of imposing tariffs on all other industries that do business with China at much higher rates; but that lift, resulting in inventory builds, does not represent true growth. It just brings future sales that were going to happen anyway forward in order to save money on tariffs. That will, again, result in a decline in later quarters from which that business has been drawn.
Another prediction: We're going to start seeing GDP growth fall away in a morose manner after the next phase of tariffs are in place. Remember that the first round of tariffs affected far fewer products and were priced at only 10% and were mostly not passed on to the consumer. The next round affects everything from China at more than double the last tariffs (25%), and will mostly be passed on to consumers. While economists are predicting one a small decline in GDP based on numbers, I predict a much larger one because economist are not factoring in the knock-on effect all of this will have on business uncertainty (resulting in holding off any expansion plans) on stocks because investors hate uncertainty, and the repercussion on the "wealth effect" when stocks fall, and on consumer sentiment as a result of all of that.
Confirmation: A day after I wrote the above paragraph -- as I'm working on this article over the course of a few days -- JP Morgan revised its GDP forecast down from 2.25% growth to 1.0%, which they explained as follows:
“The April durable goods report was bad, particularly the details relating to capital goods orders and shipments. Coming on the heels of last week’s crummy April retail sales report, it suggests second quarter activity growth is sharply downshifting from the first quarter pace, †the economists wrote.
Meanwhile the Atlanta Fed has its estimate set at 1.3%.
Thursday’s PPI manufacturing and services data ... was also surprisingly weak.
The Markit manufacturing purchasing managers survey that came out this week also fell to a nine-and-a-half year low at 50.5 from 52.6 in April. That is the lowest it has been since 2009. Service industries, which had been keeping things up as manufacturing dropped, now also fell.
New orders declined for the first time since August 2009 due to weaker demand and hesitancy among clients–both domestic and international–to place orders, according to IHS Markit. “The fall in new business was only fractional, but signaled a marked turnaround from the solid rise seen in April,†the firm concluded in a report.... As demand fell, service companies, which employ about four-fifths of all U.S. workers, also scaled back on hiring. Employment growth fell to a 25-month low. Companies are less optimistic of a rise in output over the coming 12 months, with business expectations falling to their lowest measurement since July 2012.
New home sales also dropped (-6.9% MoM, compared to an anticipated drop of -2.2%) just as existing home sales had earlier this week. However, year on year, new home sales were up; though existing home sales were down year on year. Not only were home sales down 14 months in a row, but they were expected to actually be up 3% because of interest rates that are now lowering again. Economists were wrong by a long stretch ... again! The housing picture was slightly mixed this month, but overall still a drag on the economy.
Home Depot growth slowed down because housing is doing poorly, and so its stock fell a little. (Home Depot, of course, chose to blame wetter than usual weather. Alas, weather never seems perfect enough for numbers to simply be what they are.) Home Depot also noted a $1 billion impact due to tariffs. Lowe's shares fell a lot (-12%, no doubt to be blamed of wet weather).
Like home-building stores, Kohl’s, shares sank 11% due to a fall in sales that was worse than expected (and couldn't as easily be blamed on wet weather). Penny's was down again, looking like it plans to join Sears in a race to see who can bury their heads in the peat at the bottom of the swamp first. The venerable Nordstrom dumped 9.3% after reporting worse than already dismal expected earnings and declining sales.
Ford announced additional layoffs (7,000 globally) after the layoffs it already announced. Tesla, of course, is falling off the planet for its own internal reasons and has been downgraded by Morgan Stanley from their worst-case scenario of $97 per share to ten bucks a share.
“Tesla doesn’t matter. They are simply the DeLorean’s of the modern age,†Blain wrote. “If you own one, stick [it] in a garage and wait… Tesla was good while it lasted.†His concern lies with the broader impact of Tesla’s failure. “Have you ever watched a house of cards collapse? Sometimes a corner or a side comes down, and it can be sort of fixed,†he said. “Sometimes the whole thing just gets blown away.â€
His point? Not that Tesla could come down like a house of card but that Tesla's demise could bring down the entire high-tech house of cards because, just like the house of cards that came down in the dot-com crash, high-tech stock values are, again, built on the faulty premise that tech companies never have to make profits because they are just so sexy:
Blain pointed out that the “Modern Disruptive Tech†price model could ultimately be undone if one of its high-profile companies, like Tesla, implodes. What’s MDT? He explained the thinking behind it with this quote: “We don’t have to pay dividends or make profits because we are a disruptive company that’s triggered a paradigm in demand and made ourselves a monopoly – therefore it’s all in our stock price.... The MDT model requires the stock to retain the confidence of the capital markets to keep it capitalised — Tesla has now lost that confidence,†he said, adding that there “will be massive†consequences in the tech sector should MDT collapse.... In other words, if/when faith in MDT is lost, the whole U.S. market, which takes its cue from tech, will feel the pain, “and that’s when this will get very interesting.â€
US stocks, almost hilariously are still being called a "bull market" by some truly unsavvy people; yet this "bull" has bucked along to nowhere for 15 months now (since its January, 2018, plunge, even factoring in its recent meteoric rise (now falling again) after it became a bear market in December. All year we've seen more money moving out of stocks than in. If you like riding actual bulls in rodeos, this is real fun.
When will the rally stop? We can't take any more rallies like this. They're killing us in death by a thousand stock-certificate paper cuts. (Don't worry. It's over! Of course, there is always the possibility of being saved soon by a war-time economy.)
While my "recession by sometime this summer" prediction at the start of the year could be premature, we are certainly moving in a recessionary direction. I knew that was a brazen prediction when I made it because no one else was making it, but it still has wings to fly.
A Brexit without an exit, except for May
Brexit keeps getting uglier -- this week in particular -- and it is tearing Britain apart as it has already torn Prime Minister Theresa May apart, who was forced to resign in tears and sobs on Friday or get ripped out by her roots. She staked her administration entirely on an endlessly failing attempt to create a Brexit without an exit. Her government collapsed in pieces around her over the past week because her charade failed when her final attempt at getting a deal was shredded..
Her latest and most significant defector, Leader of the House of Commons Andrea Leadsom, brought May's house down by writing in her resignation on Thursday ...
I do not believe we will be a truly sovereign United Kingdom through the deal that is now proposed.
A second referendum would be dangerously divisive ... undermining our union.
There has been such a breakdown of government processes.
... a complete breakdown of government t responsibility.
Euro zoned out
This week's Brexit uproar played out fiercely in EU elections that were taking place in the UK at the same time. Brexiteer Nigel Farage's new Brexit Party and the hard-right UKIP (United Kingdom Independence Party) surged into the lead across the UK. It appears the EU government is about to take a turn toward a rise in power of nationalists, fed up as electorates are with the imposed failures of globalists.
Within the narrower Eurozone, Germany's Deutsche Bank, one of the world's largest and oldest banks and also the US presidential bank of choice, is within a sneeze now of declaring bankruptcy. Share prices have declined over 40% in the past year, and they were already low, putting it in a state comparable to WAMU (Washington Mutual) within days of that bank's collapse.
Deutsche Bank's stocks on Thursday dropped to $7.07 a share, which these days beats 7.37 MAX. Deutsche's CEO promised Thursday to make painful cuts to keep the bank flying ... and keep his job as captain of the wobbly aircraft that is on a flight path to ground. Nothing to see here folks, just the Hindenburg bouncing around near pointy objects and torches.
Dark Towers: The Inside Story of the World's Most Destructive Bank
The Ifo Institute for Economic Research’s German business sentiment indicator fell, while surveys of eurozone-based purchasing managers underlined the lingering weakness in the manufacturing sector.
It would appear the Eurozone is suffering from the deterioration of US-China trade relations. Because those are hurting China economically, they are hurting European exports to China. One might have thought they would benefit European trade with China, but not so far.
Oil, all slicked up with nowhere to go
Oil also hit a bad patch this week, too, skidding down into the high 50s per barrel. Oil took the sharpest one-day plunge it has seen in months. While the cause was due to a build in oil inventory, the build was said to be due to a drop in demand, not due to increased output. The drop in demand was said to be related to the trade war and the global economy. As I wrote in my Premium Post at the start of the year ...
Prices below $50 a barrel cause companies in the oil industry to collapse and jobs to be lost in those regions and stocks in all those companies to plummet and their bankers to shudder. We’ve just entered that danger zone where low oil can cause the economic engine to seize up. One has to also consider the causeof falling oil prices. This time around it is not due to OPEC over-production in an attempt to shut out US shale drillers, as it was last time, but due to declining demand; so the prices are indicative of what is already happening to the general economy, which will begin to show up in GDP numbers.
Though oil climbed out of that for awhile this year, that has now proved spot-price on. Barron's summarized the current oil price decline into the 50s as follows:
The escalated trade war and global economic slowdown have been raising concerns that demand could weaken, which seem to have overshadowed the supply constraints caused by OPEC’s production cuts and rising tensions in Iran, Libya, and Venezuela. West Texas Intermediate crude futures registered its largest one-day decline in 2019, falling 5.7% to settle at $57.91 per barrel.
So, everything is sliding now in the direction I've said it would be in my first Premium Post of the year, and the velocity of the avalanche is growing daily.
[Sign up as a donor by the end of May at the $5 level or more, and I'll make sure you can view my original Premium Post, "2019 Economic Headwinds Look Like Storm of the Century," and you won't miss any others. The next one will be about the Fed's shifting sentiment toward a cashless society based on the Fed's own recent words.]