1. who is brave enough to catch a proverbial falling knife?
2. US industrial activity is contracting and the consumer will soon follow
3. the plunge in crude will lead to further cuts in capex and a profit downturn across many industries
4. China’s economy is slowing and the RMB will soon be devalued
5. share prices need to fall further to offer an attractive risk-adjusted return given heightened economic and market risks
Markets need to retreat from dependency on central bank stimulus which they falsely believe provides the magical elixir that fixes all economic and financial market woes.
“Better to preserve capital on the downside rather than outperform on the upside”
- Stronger than expected decline in GDP Growth & weaker economic activity
- China in a major meltdown its government is not capable of stopping
- Major deflationary pressures forcing commodities down & credit spreads up
Is the economy as strong as some say it is?
We are told bank earnings and revenue are under pressure from a slew of “tough markets” but what makes those markets so untenable in the first place?
US manufacturing PMI printed a preliminary 52.7 for January, boucing from the 38-month lows of December and above expectations as output and new business improved (somewhat aberrantly given every other indication). This is still the 2nd lowest print for US manufacturing since October 2013. It's not all great news though as job creation dropped to 4-month lows "softer overall employment growth reflected a wait-and-see approach to staff recruitment at the start of the year and, in some cases, the need to focus on efforts to reduce costs."
- Stocks, oil soar as Draghi the dove tames global bears (Reuters)
- Massive snowstorm poised to wallop U.S. East Coast (Reuters)
- Oil Rises in Biggest Rally Since August Amid Volatility Surge (BBG)
- Nikkei spikes more than 900 points after rebounds overseas (Japan Times)
- China's Working-Age Population Sees Biggest-Ever Decline (WSJ)
- Oil Is `Trade of the Year' for Citigroup After Iran Export Surge (BBG)
- U.S. Payment of $1.7 Billion to Iran Raises Questions of Ransom (WSJ)
"There is hope of more stimulus in March and potential for even more stimulus in Japan and China, so if we get concrete positive economic news the rebound could last into next week,” said John Plassard, senior equity- sales trader at Mirabaud Securities. “I told my clients to fasten their seatbelts and wait for better news, and this is finally happening."... "The turnaround in sentiment came amid signs central banks may be prepared to act after $7.8 trillion was erased from the value of global equities this year on China’s slowdown and oil’s crash."
When the FOMC is deliberately manipulating asset prices and credit spreads... collateral damage is inevitable.
It's official. More than 50% of the "wealth" effect created from the 2011 lows to the 2015 highs has been destroyed (despite the world's central banks going into money-printing overdrive over that period). Almost $17 trillion of equity market capitalization has evaporated in just over 6 months with over 40 global stock indices in bear markets...
"At this point we think that the negative feedback loop between market performance, volatility and the real economy (wealth effect) is becoming a significant risk for the S&P 500... as some assets are near the top and others near the bottom of their historical ranges, we are obviously not experiencing an asset bubble of all risky assets, but rather a bubble in relative performance: we call it a Macro-Momentum bubble."
We have seen this pattern before, and it did not end well. While the most mainstream indications of China's "stability" are droned on about as indicating some level of control (i.e. Yuan volatility suppression), the fact is that no matter how hard China tries to centrally plan the entire world, segments of the credit market are screaming "uncontained."
The good news for bulls is that some signs of capitulation are beginning pop up. Thus, we would not be terribly surprised to see the pendulum swing to the bulls favor, at least over the short to intermediate-term. However, beyond that, the troubling longer-term warning signs remain, including perhaps an ominous 1973 analog.
In the most blatant and open admission of direct manipulation, China's Vice President Li told a room full of Davosian elites that China is willing to keep intervening in the stock market to make sure that a few speculators don’t benefit at the expense of regular investors. Following last night's largest liquidty injection in over 3 years (and subsequent plunge in Chinese stocks), it appears the Chinese economic/market "bucket" has more holes than the intervention 'hose pipe' can handle.
Things are looking increasingly shaky for central planners around the globe.