fbpx

Stocks Start Year With Biggest Drop in 84 Years – Ep. 128

  • The U.S. stock market opened the first trading day of 2016 with a bang, but not the type of bang the bulls were hoping for
  • The Dow was down 276 points-it was down as much as 450 points in the last hour of trading
  • In fact,we opened down 300 and change and we hung around the down 350 – 400, in fact down 276, at the close was about the best level of the day
  • The NASDAQ closed down around 104
  •  The Dow Jones transports continues to get crushed – the weakest index on the day, down 156 points
  • We’re now down more than 20% from last year’s high, officially in bear market territory in the Dow Jones transportation – and don’t blame this on weak oil prices because transports benefit from weak oil prices
  • This is all about weakness in the economy
  • A lot of the carnage was blamed on China because China was down 7% overnight, the worst first day of the year in the history of Chinese stocks
  • Supposedly the catalyst was a weaker than expected PMI in China – I don’t believe for a second that the market was down 7% based on that report
  • First, there were two PMI’s released, and one was slightly better than estimates and the one that was slightly below came in at 48.2 vs. expectation of 49
  • I think the Chinese market would have gone down regardless of the PMI numbers
  • The irony of it is that our own recently-released Chicago PMI on New Year’s Eve and our number was way worse than the Chinese number
  • We were expecting 50, an improvement from 48.7 – instead we went down to 42.9
  • Bad economic news in China creates a terrible response, but bad economic news in the U.S. and no one even cares!
  • Why, because the Fed tells us everything is awesome and we can ignore all the evidence that the economy is far from awesome
  • Singapore reported a 5.7% increase in GDP for its 4th quarter, yet that number is being discounted
  • Yet no one wants to believe the good news from foreign governments, and no one believes bad news from the U.S. because the Fed’s narrative is still out there
  • We got more bad economic news today: We got another PMI manufacturing number expected to be 52.8, it came in at 51.2
  • Even worse was the December ISM number – last month was 48.6 – it was expected to improve to 49.2-  instead, it dropped to 48.2
  • That’s a bigger miss than China, yet no one here cared
  • Also, construction spending was a huge miss: the consensus was for a gain of .7; instead we lost .4
  • It gets worse, because last month the gain was expected to be a full point
  • The numbers that came out today were so bad that the Atlanta Fed, who recently revised down its Q4 GDP forecast from 1.9 to 1.3 a week or so ago and today they went down to .7
  • In my last podcast, I said that soon the Atlanta Fed is going to take their Q4 GDP estimate below 1 and that is just what they did
  • We have a lot more bad economic data that is going to come out between now and the end of the month when we get the first estimate of Q4 GDP and there’s a pretty good chance that it will be negative, which is halfway to a recession
  • With a negative GDP in the 4th quarter, we have a better than 50/50 chance of having another negative GDP in the first quarter and that would put us officially in a recession
  • Just in time for the Fed to raise interest rates again – Not!
  • More people are coming to the same conclusion I have for a long time now, that the Fed had backed themselves into a corner and felt they had to raise rates regardless of the fact that the data didn’t meet their criteria
  • I knew that if the Fed raised interest rates that they would regret it because they would have to reverse their direction based on the weak economy combined with a weak market
  •  Interestingly, there has only been one year ending in “5”, going back to 1885 when the Dow Jones was down – that was in 2005
  • There hasn’t been a year prior to a presidential election where the market was down since 1939, during the Great Depression
  • We’re getting a lot of firsts, and of course, and today, the drop on the first trading day of the year was the biggest percentage drop on day one, in 84 years.
  • You wouldn’t have stuff like this happening if it wasn’t the beginning of a much bigger move
  • If the Fed were really going to raise interest rates as expected, the market would get crushed
  • I think the Fed is going to come to its rescue – the question is when will they change their rhetoric and how are they going to go about softening their stance
  • If you back at how the Fed eased, the first thing they did was to bring interest rates down to zero, and when that didn’t produce results they started Quantitative Easing – they did 1, 2, Operation Twist, 3
  • Now the Fed has decided to raise interest rates and afterwards they are going to shrink their balance sheet
  • To me that sounds backwards. Wouldn’t it be best to shrink the balance sheet when rates are still at zero?
  • Why is the Fed skipping the step of shrinking the balance sheet?
  • When you raise interest rates you diminish the value of your bonds
  • Because of Operation Twist, the Fed has a lot of long term government bonds on its balance sheet
  • What makes these bonds more valuable? Higher interest rates.
  • If the Fed intended to sell those bonds, wouldn’t they do it before raising interest rates, not after?
  • The only way to get out if this is to hold the bonds to maturity, but that will not reduce the balance sheet for 20 years or so
  • This is how we know the Fed is not sincere about shrinking the balance sheet it would do that before raising interest rates
  • In other markets, the oil market opened firmer, based on the tensions between Saudi Arabia and Iran, but it could not hold its gains
  • The rather muted rally quickly sold off, but I believe that a lot of speculators who are jumping short are going to get caught in a huge reversal when the dollar reverses
  • The dollar did not reverse today; it was down earlier but gained against most currencies by the end of the day
  • Gold was up all day, but surrendered early gained and ended up about $13
  • Gold stocks were among the only consistent winners throughout the day – they are still very cheap
  • The fact that there was a lot of “bargain hunting” at the close of the day today indicates that there is more down side to the market
  • Until the Fed changes this dynamic, I don’t see what will prop up this market
  • There is a lot of technical damage to this market
  • The denial out there is stronger than before early 2008
  • We are on the verge of a crisis that will be far more profoundly felt than 2008
  • What’s about to happen, we’re going to get a dollar crisis, a sovereign debt crisis
  • This will be profoundly felt by average Americans
  • When they realize that the Fed did not solve all the economic problems and that they are bigger than ever, all these trades that have been made under false assumptions will have to be unwound
  • Friday’s Non-Farm Payroll will be an important number because it might be bad, as the weekly unemployment numbers from New Year’s Eve showed the biggest jump in 10 months
  • This could be a huge number, and it could be the only number that the gold market and the currency markets might actually pay attention to
  • If we see a negative number in the Non-Farm Payroll, that will be a number the markets will not be able to ignore