Jueves 14/01/16 Precios de los importadores y exportadores

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China Exports Most Deflation To The US Since December 2009
Tyler Durden's picture
Submitted by Tyler D.
01/14/2016 08:51 -0500


The December import price index report from the BLS showed a modest deterioration at the headline level: declining by 1.20% this was fractionally better than the expected decline of -1.40% however a notable drop from last month's -0.50%. While most of the December decrease was attributable to falling fuel prices, nonfuel prices continued to trend down as well, with Import prices ex-fuels dropping 0.3% (after falling 0.2% in Nov), suggesting the rest of the world continues to export substantial deflation to the US.

Annually, the pace of declines also picked up modestly dropping "only" -8.2% from a year ago, higher than the -9.5% slide in October. Import prices have now seen an annual decline for 17 consecutive months starting in July 2014. Fuel prices decreased 9.5 percent in December, following a 3.5-percent drop in November. The December decline was the largest 1-month fall in the index since a 12.7-percent decrease in August and was led by a 10.0-percent drop in petroleum prices. Natural gas prices also declined in December, falling 6.8 percent.

Before blaming only sliding commodity costs for the continuing collapse in import prices, read this: prices for nonfuel imports fell 0.3 percent in December and have not recorded a monthly advance since the index rose 0.1 percent in July 2014. Lower prices for nonfuel industrial supplies and materials; foods, feeds, and beverages; and each of the major finished goods categories all contributed to the overall drop in nonfuel prices. The price index for nonfuel imports declined 3.4 percent over the past year, the biggest calendar-year drop since the index was first published in 2001.

And while the trend of US trade partners exporting deflation either across the Atlantic or Pacific continues, one name continues to stand out.

China.

As the BLS reported, the price index for imports from China edged down 0.1 percent in December and has not recorded a monthly increase since the index rose 0.1 percent in December 2014. Import prices from China declined 1.7 percent in 2015, the largest calendar-year decrease since the index fell 1.8 percent in 2009.

In other words, just like in the aftermath of the Global Financial Crisis, China has found the perfect escape valve for its unprecedented excess production (now that its own economy can't fit it in) - dump it in the US.

Nowhere is this more visible than in the following chart showing the Chinese import price index dropping by 1.7% Y/Y, the most since December 2009.



Expect China to continue flooding the US with deflation especially since as we showed before, there is only one thing it can do with all that excess production of aluminum, steel and all other commodities: export it to whoever will buy it at (or below) dumping prices.

[Fenix]

JPMorgan Just Did Something It Has Not Done In 6 Years
Tyler Durden's picture
Submitted by Tyler D.
01/14/2016 10:52 -0500

Yesterday we reported something disturbing: a small regional bank, BOK Financial, announced that it had underestimated its exposure to energy loans, or rather loan, issued by just one company, and as a result its previously forecasted provision for credit losses of $3.5 million to $8.5 million would be insufficient, and due to the unexpected loan impairment it would have to take a dramatic $22.5 million in credit losses." As a result BOKF stock crashed and is now trading at levels not seen since 2010.

The reason this is troubling is because as we said yesterday "banks have taken every possible opportunity to assure investors they all overly provisioned for any potential losses stemming from their exposure to impaired energy loans."

Clearly when it came to at least one lender this was not the case. And now the attention shifts to all the other banks, which brings us to the first big bank to report earnings earlier today, JPM.

Earlier we spread the company's financials and showed that while revenues had barely grown, and in the all important Investment Banking and Trading division revenues actually declined (offset with big cuts to compensation expenses, read bonuses), something else stood out: when skimming through the company's loan loss reserve disclosure, we found that in Q4 JPM did something it hasn't done in 6 years: for the first time in 22 quarters, or since March 2010, JPM actually increased its loan loss provisions by $89 million, instead of reducing this amount.

Indicatively, after peaking at $38.2 billion in Q1 2010, the amount of loan loss reserves had declined by $24.7 billion (an amount that went straight to JPM's net income line) through Q3 2015, before rising for the first time in 6 years in the fourth quarter.

What happened?

As JPM disclosed in its earnings presentation, it had taken a "reserve build of ~$100mm driven by $60mm in Oil & Gas and $26mm in Metals & Mining" within the commercial banking group."

In other words, after half a decade of smooth sailing, Jamie Dimon is starting to get concerned. This is what he said during the JPM earnings call:

JP MORGAN'S DIMON SAYS NOT WORRIED ABOUT BIG OIL COMPANIES, PROVISIONS ARE INCREASED AGAINST SMALLER ENERGY FIRMS

So JPM is not worried about big oil companies for now, but by implication it is worried about "smaller energy firms." The problem is that "smaller energy firms" account for about half of the production and the leverage in the US shale space, and many US banks - if not JPM - are directly exposed to them.

Which brings us back to the original question: if a regional bank like BOK Financial was slammed by just one loan (to what we can only assume was a smaller energy firm), where does the buck stop, and how many other regional, or even big, banks, are woefully underreserved in their exposure to energy loans. And most importantly, how long before the impairments and charges currently targeting smaller firms finally shift to the bigger ones: how underreserved is JPM for that eventuality?

As for the rest, earnings season is just getting started: we expect to find just who has been far more busy managing investor expectations instead of actually provisioning for soaring loan losses in the coming weeks. Remember: increasingly more managers are predicting that up to a third of US energy companies will go bankrupt if oil fails to rebound from current prices. And that is an eventuality no bank has provisioned for.

[Fenix]

The Asian Axis Of Junk Debt Evil
01/14/2016 12:00 -0500

Submitted by Jeffrey Snider
You almost have to marvel at the resilience shown in leveraged loan pricing over the past nearly month. Prior to the Fed’s rate decision on December 16, the leveraged loan market, as with the rest of the junk bubble, was sinking fast and furiously. Since then, however, despite great financial turmoil all over the world, and even in the places which had shown strong correlations to leveraged loans before (JPY, notably), the S&P/LSTA Leveraged Loan 100 has hung in there. Perhaps Janet Yellen’s influence still holds for something in these smaller spaces, instilling a bit of confidence (though no true buying vigor) to avoid at least the onrush of further selling.

As enticing as that possibility might be to the conventional recovery narrative, I think in practice it more so conforming to something like fractal symmetry. In general terms, the selloff that preceded this pause was the largest and most intense yet, so it is easily within the realm of expectation that the counter-effect would be balanced.

SABOOK Jan 2016 Junk SPLSTA Lev Loan 100 SABOOK Jan 2016 Junk SPLSTA Lev Loan 100 Recent

As each successive selloff wave intensifies, the reset immediately thereafter seemingly gains a little more of the calendar. The current trend worked out to 18 trading days lasting through yesterday. It might be too early to dismiss today’s lower price as an end to that pause, but the indications that another selloff wave is building are too numerous to dismiss. Apologies to Yellen and the FOMC, but I don’t think it was ever going to be that easy.

Starting with the junkiest of the junk, the triple-hooks, there really wasn’t much of a retrace at all nor even really a pause through December. While there was something of a brief respite after the terrible blow up in late November and the first two weeks of December, the implied yield on the BofAML High Yield Master II Index is now at new “cycle” highs again and still rising. The last time we saw 18.68% here was September 25, 2008; the very edge of the 2008 panic. This is not to say that this segment of high yield expects something similar in financial terms, only that the probability of a similar economic outcome in devastating junk obligors can no longer be ignored.

SABOOK Jan 2016 Junk BofAML CCC Longer SABOOK Jan 2016 Junk BofAML CCC

The Master II Index, by comparison, has a ways to go to catch up in that view but it, too, has returned to the selloff trend. That much was seemingly determined by of all things the Russian ruble, which provides significance in terms of the relationship between the junk bubble and general “dollar” liquidity.

SABOOK Jan 2016 Junk BofAML Master II RUB

Beyond those, we saw new lows in the retail junk proxy, the ETF HYG. That was also true of another liquidity proxy, the mortgage REIT index mimic REM. Like the ruble and the Master II, the close relationship between HYG and REM tells us a lot about the financial relationship between economic expectations and general perceptions of “money” availability to put them into effect. I think that correlation also details the assignment of credit cycle expectations as a function of that liquidity.

SABOOK Jan 2016 Junk HYG SABOOK Jan 2016 Junk REM SABOOK Jan 2016 Junk REMHYG

All of that raises an intriguing question that is somewhat chicken and egg. While Chinese financial conditions were terrible to the point of near disaster, junk bonds were, on the whole, almost inconceivably placid at the same time. But now that Chinese factors regarding the likely Asian “dollar” state have gone on and gone so far, it appears as if the US junk bubble can no longer idly withstand it. Again, all indications here are for renewed selling and participation in the “run.” Does that mean the Asian “dollar” is driving the junk bubble?

SABOOK Jan 2016 Junk CNY HYG

In looking at it more closely, it seems along those lines as if that might be the conditional setting; with China and Asia more cause to the junk effects. It’s not nearly as strong a correlation (above) as that between CNY and WTI, but there is enough to offer that kind of suggestion even if it doesn’t answer the divergence in December. In the end, it may not matter as, again, more and more indications are picking up building pressure directed toward renewed selling. Whether from China and the Asian “dollar” is not abundantly clear, but high yield may soon be heading for CNY regardless.

[Fenix]

En segundo plano quedó un dato peor de lo esperado sobre el mercado laboral en el país, ya que las solicitudes semanales de subsidio de desempleo subieron en 7.000 la semana pasada y se situaron en 284.000.
Las petroleras Chevron (5,03 %) y Exxon Mobil (4,52 %) lideraron las ganancias entre la inmensa mayoría de los treinta valores del Dow Jones, por delante de General Electric (2,87 %), Microsoft (2,85 %), Intel (2,60 %), Pfizer (2,44 %) y Merck (2,25 %).
También subieron Caterpillar (2,23 %), Apple (2,19 %), Johnson & Johnson (1,93 %), Walmart (1,81 %), 3M (1,77 %), Verizon (1,63 %), Goldman Sachs (1,51 %) o JPMorgan (1,48 %) mientras que al otro lado de la tabla solo bajaron Home Depot (-1,48 %) y Nike (-0,46 %).

estrategia.cl


Publicado el Jueves, 14 de Enero del 2016

[Fenix]

If This Was 2016's "Bullard Sticksave" Moment, This Is What Stocks Will Do Next
Submitted by Tyler D.
01/14/2016 - 12:13

Was today, the 2016 equivalent of Bullard's infamous October 2014 "QE4" market sticksave? We don't know, but we do know that there is an uncanny resemblance between the market's action before Bullard's October 2014 "QE4" comment... and the market over the past few weeks. But the real question is what happens next, and if October 2014 is any indication then we are in for a massive "rip your face off" rally.


Norway's Black Gold Fields Are A Sea Of Red - A Real-Time Map Of Crude Carnage
Submitted by Tyler D.
01/14/2016 - 12:16

Norway is in trouble. As we have detailed previously (here, here, here, and here), the world's largest sovereign wealth fund has begun liquidating assets (after its largest quarterly loss) as the nation faces recessionary fears (key data deterioration as oil stays lower for longer) with expectations building (despite denials by the central bank) that ZIRP (or even NIRP) is coming. Why? Simple - as the following real-time map shows - every one of Norway's oil fields are currently underwater!

So You Want To Be A Citadel Trader: Here Are The Requirements
Submitted by Tyler D.
01/14/2016 - 12:43

* Advanced training in Computer Science, Computer Engineering, or other related fields
* Extensive programming experience with strong object oriented design skills and fluency in C, C++, or Java
* Expertise with algorithms and data structures
* Demonstrated ability to communicate complex ideas in a clear, concise fashion
* Ability to thrive in a complex, fast-paced, and highly technical environment

[Fenix]

JPM Warns "Sustained Closes Here Would Not Be Welcome" - What The Charts Say
Submitted by Tyler D.
01/14/2016 - 13:15

JPMorgan's 2016 Outlook for the S&P 500 Index favored a continuation of a broad and volatile range into the first half of the year, below 2,100 and above 1,820-1,870 longer-term range support. While the unexpected early-January weakness has not violated the Oct 2014 and Aug 2015 lows and other support parameters near that area, the nature of the current decline raises some concern for what has been a constructive longer-term view.


Poor 30 Year Auction Concludes Weekly Issuance With Sliding Bid To Cover, Weak Indirects
Submitted by Tyler D.
01/14/2016 - 13:12

Yesterday's 10 Year auction was, despite the concurrent pricing of the world's biggest bond deal in the face of AB InBev's $45 billion issue, a blockbuster, with demand off the charts in every possible way. However, today's just concluded sale of $13 billion in 30 Year paper left quite bit to be desired.


Presenting Turkey's "Vicious" Depreciating Currency Cycle
Submitted by Tyler D.
01/14/2016 - 13:35

With Erdogan calling (loudly) for lower rates and 5 of 7 MPC seats opening up between April and November, some fear Turkey may eschew policy normalization leading directly to what Morgan Stanley calls "a vicious cycle" of a depreciating currency, rising inflation, and lower real policy rates.

[Fenix]

Creditors Accuse Portugal Of "Unfair, Populist Short-Cut" In €2 Billion Bank Bail-In
Submitted by Tyler D.
01/14/2016 - 14:16

"The new Portuguese administration is not the first government to resort to asset confiscation and populist expediency. Venezuela and Argentina also belong to this club. The important distinction is that Portugal is a eurozone member state, and its systemically important banks are regulated by the ECB."


Complacent Correction Cause For Concern?
01/14/2016 14:30 -0500

Via Dana Lyons' Tumblr,

Despite recent stock market carnage, the reaction by the VIX has been a relative yawner.

Well, the New Year hangover continues. Another day, another drubbing in the stock market. With indices pushing double digit losses just 8 days into the new year, it certainly seems reasonable to expect some panic on the part of investors. However, at least based on one metric, market participants have remained relatively calm – even unprecedentedly so.

The metric we are referring to is the VIX, or the Volatility Index on the S&P 500. The VIX, a.k.a., the “Fear Gauge”, measures the expected volatility of the index. During times of crisis, or even a garden variety stock market decline, one can expect the VIX to rise. That has indeed been the case during the current stock weakness. However, based on the magnitude of the S&P 500′s decline, the VIX has risen by a historically small amount.

Specifically, the S&P 500 has now dropped over 9% in the past 2 weeks. Despite that, the VIX has risen to just 25.22. Since 1987 (the VIX’ inception was in 1986), there have been 129 days on which the S&P 500 was down as much as 7% over the past 2 weeks. Today’s VIX reading is the lowest of any of those days.


image



So what gives? Is this a sign of relative complacency despite the sharp market losses? That is a reasonable thesis, especially upon quantitative examination. Looking at the prior 128 days that showed a 2-week S&P 500 decline of at least 7%, just 15 had a VIX reading of less than 34. Now, this 34 level is an arbitrary number, but it seems about as good a delineating level as any. Here are the previous days matching those conditions:

10/15/1987
8/4/1998
8/5/1998
2/21/2001
9/10/2001
7/2/2002
1/17/2008
1/22/2008
3/10/2008
7/1/2010
7/2/2010
7/6/2010
8/4/2011
8/5/2011
9/1/2015

In general, these occurrences led to further weakness in stocks. Indeed, despite the big drop already, these conditions often marked a point closer to the beginning of a decline than an ending. Whether it was immediately (e.g., the crash in 1987, September 2001 or early August 2011) or a few weeks and months later, further weakness was the norm. The 2010 dates really represent the exception as the market would rebound immediately. Excluding that period, however, here are some statistic on the S&P 500′s performance going forward.

image

As you can see, the results don’t paint a very rosy picture, despite the fact that the S&P 500 has already taken its licks. So does the “complacency” explanation hold water here. We’re not sure – nor do we really care. All we really care about are the cold, hard numbers. And if history is any guide, investors, who have demonstrated a rather complacent reaction to the decline so far, may very well get a wake up call before this slump has run its course.

[Fenix]

Bullard Bounce 2.0 - Stocks Surge By Most Since September; Bonds, Dollar Flat
Submitted by Tyler D.
01/14/2016 - 16:47


Could China's Housing Bubble Bring Down The Global Economy?
01/14/2016 17:30 -0500
Submitted by Charles Hugh-Smith

Who's going to buy the tens of millions of empty flats held as investments?

I've been writing a lot about China recently because it's becoming increasingly clear that China's economy is slowing and the authority's "fixes" are not turning it around. That means the engine that pulled the global economy out of the 2009 recession has stalled.

Many people see China's slowdown as the source of the next global recession, but few seem to realize the extreme vulnerability of China's vast housing market and the many knock-on consequences of that market grinding to a halt.

I've just completed a comprehensive review of China's housing market, and now realize it's much worse than the consensus understands.

The consensus view is: Sure, China's housing prices are falling modestly outside of Beijing and Shanghai, but since Chinese households buy homes with cash or large down payments, this decline won't trigger a banking crisis like America's housing bubble did in 2008.

The problem isn't a banking crisis; it's a loss of household wealth, the reversal of the wealth effect and the decimation of local government budgets and the construction sector.

China is uniquely dependent on housing and real estate development. This makes it uniquely vulnerable to any slowdown in construction and sales of new housing.

About 15% of China's GDP is housing-related. This is extraordinarily high. In the 2003-08 housing bubble, housing's share of U.S. GDP barely cracked 5%.

Of even greater concern, local governments in China depend on land development sales for roughly 2/3 of their revenues. (These are not fee simple sales of land, but the sale of leasehold rights, as all land in China is owned by the state.)

There is no substitute source of revenue waiting in the wings should land sales and housing development grind to a halt. Local governments will lose 2/3 of their operating revenues, and there is no other source they can tap to replace this lost revenue.

Since China authorized private ownership of housing in the late 1990s, homeowners in China have only experienced rising prices and thus rising household wealth--at least until very recently, when prices dipped as the government tightened lending standards and imposed some restrictions on the purchase of flats as investments.

Though it's difficult to quantify the "wealth effect" the rapid rise in housing valuations supported, it's widely acknowledged that upper-middle class household spending has increased as a direct result of housing's wealth effect.

Though few dare acknowledge it, prices in desirable first-tier cities urban cores are completely unaffordable to average households. Average flats in Beijing now cost 22X annual household income -- roughly six times the income-price ratio that is sustainable (3 or 4 X income = affordable cost of a house).

Far too many observers use housing prices and sales in Beijing and Shanghai--a mere 3.5% of China's population and housing stock--as the basis of entire nation's housing market. This is akin to judging America's housing market on prices and sales in Manhattan.

So while sales are soaring in Beijing, they're falling 26% in the 2nd, 3rd and 4th tier cities.

Though it is widely known that China's household wealth is concentrated in housing, the extent and consequences of this concentration are rarely discussed.

Much has been made of the $3+ trillion losses households have suffered as China's stock market bubble collapsed. But given the relatively insignificant role financial assets play in household wealth, these losses are modest compared to the far larger loss of household wealth that will occur as housing deflates from bubble heights.

Many people claim the estimated 65 million empty flats held as investments by the middle and upper classes in China will be sold to new buyers in due time. But these complacent analysts overlook the grim reality that the vast majority of urban workers make around $6,000 to $10,000 annually, and a $200,000 flat is permanently out of reach.

They also overlook the extreme concentration of wealth that goes into every purchase of a small flat byt households that really can't afford the cost: the entire extended family's wealth is often poured into the flat, and money borrowed from friends and relatives or even loan sharks.

The other problem few Western analysts consider is the impaired nature of much of China's housing stock. Millions of units constructed in the early 2000s were hastily built and are now degraded. Newer buildings are not maintained, either, and there is a strong cultural preference for new homes, not existing units. (The government doesn't even keep track of resales/sales of existing homes; whatever minimal data is available comes from private brokerages).

In other words--who's going to buy the tens of millions of empty flats held as investments? What is the market value of flats nobody wants to buy or cannot afford to buy?

China has a demographic problem as well. The generation now entering the work force is much smaller than the generation that bought two or three flats for investment. There simply aren't enough wage earners entering the home-buying years to soak up this vast and growing inventory of empty homes.

China's stated intent is to move from a fixed-investment/export dependent economy to a consumer economy. But if we consider what happens when housing slows or even grinds to a halt, we realize the impact on incomes, wealth and consumption will be extraordinarily negative, not just for China but for every nation that sells China vehicles and other consumer goods.

[Fenix]

The 'Real' Price Of Oil Is Below $17
Submitted by Tyler D.
01/14/2016 18:00 -0500

"You see a big destruction in the income of the oil and commodity producers," exclaims on analyst but, as Bloomberg notes, while oil prices flashing across traders' terminals are at the lowest in a decade, in real terms the collapse is considerably deeper. Adjusted for inflation, WTI is its lowest since 2002 and worse still Saudi Light Crude is trading at below $17 (in 1998 dollar terms) - the lowest since the 1980s...

Slumping prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

In fact, while sub-$30 per barrel oil sounds very scary, Saudi prices would be less than $17 a barrel when converted into dollar levels for 1998, the year oil sank to its lowest since the 1980s.



Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said in an interview with Bloomberg Television.

* * *

So while prices are very low any description, never forget about inflation - The Fed won't!


The "World's Most Bearish Hedge Fund" Crushed It In 2015
Submitted by Tyler D.
01/14/2016 - 18:31

"Your fund made 5.6% net last month, to finish the year up 20.45% net. Gains came from the short book.... Your fund remains long bonds, short equities."

[Fenix]

"Markets Crash When They're Oversold"
Submitted by Tyler D.
01/14/2016 - 19:00

When markets begin a "bear" cycle, they can remain in an oversold condition for extended periods. There is an important 'truism' to remember - "Markets crash when they’re oversold."


"Markets Crash When They're Oversold"
01/14/2016 19:00 -0500

Submitted by Lance Roberts
Peddling Fiction

On Tuesday, as I watched the President’s State of the Union Address, the President made the following statement.

“Anyone claiming that America’s economy is in decline is peddling fiction.”

While I certainly understand the need to put a positive spin on the current economic backdrop during your last SOTU address, there is a good bit of misstatement in that comment.

The President is correct when he stated that the impact of technology on wage growth and jobs was not a recent development. It is, in fact, an impact that has been occurring since the 1980’s as shown in the chart below.

GDP-Avg-Growth-Cycle-011416

While the big driver of the decline in economic growth since the 1980’s has been a structural change from a manufacturing based economy (high multiplier effect) to a service based one (low multiplier effect), it has been exacerbated by the increase in household debt to offset the reduction in wage growth to maintain the standard of living. This is shown clearly in the chart below.

GDP-Debt-LivingStandard-011416

The problem for the President is that while sound-bytes of optimism certainly play well with the media, the average American is well aware of their current plight of the lack of wage growth, inability to save and rising costs of living.

The decline of economic growth is, unfortunately, a reality and an inevitable outcome of decades of deficit spending and debt accumulation. Can it be reversed? I honestly don’t know, but Japan has been trapped in this cycle for 30-years and has yet to find a solution.
Here’s Real Fiction – Low Oil Prices

Over the last couple of years, economists from Wall Street, to the Federal Reserve, to the White House have repeatedly made the following statement:

“Falling oil prices are great for the consumer as it gives them more money to spend.”

I have written many times over the past couple of years, as oil prices fell, that such was not actually the case. To wit:

“The argument is that lower oil prices lead to lower gasoline prices that give consumers more money to spend. The argument seems to be entirely logical since we know that roughly 80% of households in America effectively live paycheck-to-paycheck meaning they will spend, rather than save, any extra disposable income.



The problem is that the economy is a ZERO-SUM game and gasoline prices are an excellent example of the mainstream fallacy of lower oil prices.

Example:

* Gasoline Prices Fall By $1.00 Per Gallon
* Consumer Fills Up A 16 Gallon Tank Saving $16 (+16)
* Gas Station Revenue Falls By $16 For The Transaction (-16)
* End Economic Result = $0

Now, the argument is that the $16 saved by the consumer will be spent elsewhere. This is the equivalent of ‘rearranging deck chairs on the Titanic.'”

Increased consumer spending is a function of increases in INCOME, not SAVINGS. Consumers only have a finite amount of money to spend and whatever “savings” there may be at the pump, it gets quickly absorbed by rising costs of living – like health care.

Most importantly, the biggest reason that falling oil prices are a drag on economic growth, as opposed to the incremental “savings” to consumers, is the decline in output by energy-related sectors.

Oil and gas production makes up a hefty chunk of the “mining and manufacturing” component of the employment rolls. Since 2000, when the oil price boom gained traction, Texas comprised more than 40% of all jobs in the country according to first quarter data from the Dallas Federal Reserve.

The obvious ramification of the plunge in oil prices is eventual loss of revenue leads to cuts in production, declines in capital expenditure plans (which comprises almost 1/4th of all CapEx expenditures in the S&P 500), freezes and/or reductions in employment, and declines in revenue and profitability.

The issue of job loss is critically important. Since the financial crisis the bulk of the jobs “created” have been in lower wage paying areas such as retail, healthcare and other service sectors of the economy. Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc. In fact, each job created in energy-related areas has had a “ripple effect” of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants and retail.

Simply put, lower oil and gasoline prices may have a bigger detraction on the economy than the “savings” provided to consumers.

Why do I remind you of this basic economic reality – because it only took the Federal Reserve 18-months to figure it out. In a recent speech San Fran Fed president John Williams actually admitted the truth.

“The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy. It turned out the world had changed; the US has a lot of jobs connected to the oil industry.”

No S*^t!
Markets Crash When Oversold

Earlier this week, I discussed the oversold nature of the market and the likely of a “bounce” to “sell into.”

“With all of the alarm bells currently triggering, the initial ‘emotionally’ driven response is most likely an urge to go look at your portfolio statement and start pushing the ‘sell’ button. Don’t Do It!



On a short-term basis, prices oscillate back and forth like a rubber band be pulled and let loose. Physics state that a rubber band stretched in one direction, will initially travel an equal distance in the opposite direction when released.



Take a look at the chart below.”

SP500-MarketUpdate-011216

“In particular note the top and bottom portions of the chart. These two indicators measure the ‘over-bought’ and ‘over-sold’ conditions of the market. As with the rubber band example above, you will notice that when these indicators get stretched to the downside, there is an effective ‘snap back’ in fairly short order.



With the markets having issued multiple sell signals, broken very important support and both technical and fundamental deterioration in progress, it is suggested that investors use these ‘snap back’ rallies to reduce equity risk in portfolios.”

I reiterate this point because the market continued to slide on Wednesday which led to several comments about the inability of the markets to get a sellable bounce. There is an important “truism” to remember.

“Markets crash when they’re oversold.”

Let’s step back and take a look at the past two major bull markets and subsequent bear market declines.

SP500-MarketUpdate-011416

(Note: I am using weekly data to smooth volatility)

The top section of the chart is a basic “overbought / oversold” indicator with extreme levels of “oversold” conditions circled. The shaded area on the main part of the chart represents 2-standard deviations of price movement above and below the short-term moving average.

There a couple of very important things to take away from this chart. When markets begin a “bear market” cycle [which is identified by a moving average crossover (red circles) combined with a MACD sell-signal (lower part of chart)], the market remains in an oversold condition for extended periods (yellow highlighted areas.)

More importantly, during these corrective cycles, market rallies fail to reach higher levels than the previous rally as the negative trend is reinforced. All of these conditions currently exist.

Does this mean that the markets will go straight down 20% without a bounce? Anything is possible. However, history suggests that even during bear market cycles investors should be patient and allow rallies to occur before making adjustments to portfolio risk. More often than not, it will keep you from panic selling a short-term market bottom.