Happy New Year?
The global stock selloff is intensifying today without input from China, off for the week for New Year's.
Concern over the failure of Opec to reach a deal to boost oil prices is the ostensible trigger for another round of selling which has hit not only oil-related shares, but also ones from sectors offering alternative energy: nuclear, solar, and battery s systems. The rot is spreading to other commodity shares.
Meanwhile, concern over bank exposure to emerging markets, its pricey credit default swaps, and the dropping German “bund” yield have pushed down Deutsche Bank shares by 4.35%. Europe-traded stocks fell to levels last seen in 2014, after a sixth day of decline. We update our sovereign wealth note.
Worry has also boosted the price of gold which now has risen 11% YTD.
Yet China is not free from all blame. Sunday it updated information of outflows from its reserves in Jan. which shrank less than forecast to $3.23 trillion, still a 3-yr low.
US yield stocks like Williams Cos and Targa Resources are plummeting. Despite relatively upbeat US economic indicators, Wall Street is being hit by hurricane winds from Europe about a recession in US markets, taking down the “FANG” tech favorites of last year and other stocks which gained in 2015.
More for what this means for paid subscribers follows with news and trades from the Nether-, Switzer-, Fin-, and Po-lands, Chile, India, Norway, the USA, Australia, Argentina, Israel, Great Britain, and Italy. Including a sale and a buy.
Portfolio Tables Updated
Visit www.global-investing.com to view our tables. The closed position one shows how a stock priced for Cuban tourism, yield, and low-aviation fuel was zapped by Zika. I didn't know that was coming when we recommended buying Panama's Copa Holdings, CPA. Use the printer-friendly button to more easily view spreadsheets on a laptop or cellphone.
The CPA proceeds were redeployed into a position I feel better about after reading tomorrow's Barron's, also in Latin America. Two positions which had become garbled over the past months were restated to reflect reality, one up and one down.
The magazine also interviewed a fund manager who, like your editor, is buying Australian bonds, which we do through Aberdeen Asia Pacific Income, FAX, a closed-end fund. And Chris Dietrich at Barron's writes up the charms of bank preferred stocks, unfortunately via ETFs rather than buying directly.
Barron's also echoed my report based on Canadian sources on why there is a link between oil prices and stock markets. Our report focused on oil exporters while Barron's discussed the more complicated role of Chinese evasion of exchange controls, not as obvious from the statistics. With Chinese growth slowing and crackdowns on corruption money is fleeing the Middle Kingdom. But it is not fleeing because of lower oil prices.
Linking the sovereign wealth fund exits from global stocks to China outlfows is not really as insightful as what we published last week from the Toronto Globe & Mail. But at least Randall Forsythe (and he says Mr. Dietrich) tried to explain the connection.
More for paid subscribers on the top tip and corrections.
Cloudy Crystal Ball
The crystal ball is cloudy.
Nobel economist Paul Samuelson famously wrote: “the [US] stock market has predicted 9 of the last 5 recessions.” Today Wall Street is in a tizzy over the confusing data which came out before the opening and what the ambiguous January figures mean for future corporate profits, inflation, and interest rates.
Stocks rose before the jobs report came out and then wobbled. The number of new hires was way below forecasts, at 151,000. However, the unemployment rate fell below a magic number (to 4.9%). And the annualized monthly wage growth grew 5%, well above forecasts. Ambiguity hurts.
Brent crude oil futures fell 7 cents, 0.2%, to $34.39/barrel, a second day of lower monthly contract prices, triggered by Saudi Arabia cutting what it charges for crude in Europe. Gold fell 0.9%, or $1 to $1156.50 per oz, after rising Thursday by 1.42%. Both are up substantially in February. The drop was triggered by the imminent weekend and the US numbers, plus good German order data.
After the dollar was crushed all week, our Greenback rose, not against the Redback (because China has shut down for New Year's Week) but against the euro and the pound sterling.
If you suffer from data overload today, you are not alone. We are not day traders among other things because it is really hard to forecast what will come next, even if you are a Nobel prize-winning economist.
Your editor's reply about his Jan. 31 article about “deja vu all over again”, which was “capitulation?” was quoted by Joe Shaefer in the latest Investor's Edge, as he picked new defensive shares to buy. At end-January he was all about exiting positions.
He said he wasn't sure if what I wrote him was a rebuke, question, or comment.”
My much-heralded post earlier this week on Sovereign Wealth Funds and Oil was reprinted today at www.talkmarkets.com. If you want to forward it, do not copy and paste from your email account but respect The Globe and Mail (Toronto) copyright and send your contacts to http://www.global-investing.com, our website, or to the reprinter:
More for paid subscribers today including another stock pick, mainly because I had a bunch of bonds come due this month. We have news from Canada, Switzerland, Denmark, Mexico, Ireland, Pakistan, the French Caribbean and France, the Netherlands Caribbean and home, Spain, Kenya, Honduras, Britain, Israel, and South Korea today.
Are you a potential victim of whaling? This is the latest scamming technique which does not depend on mass emailing to lure people into sharing financial data. Instead, using lists which can be bought for legitimate marketing purposes, fake e-mails and even postal letters are being sent to both money managers pretending to be from their customers, and to customers pretending to be from their money managers. They key is to copy the logos and headings they use, which can often be found on Internet social media.
With these simple tricks, the gonifs sometimes succeed in getting people to head for their friendly local Western Union office to wire some loot to them.
A day of less writing today, after my efforts to help bring to attention the reasons why oil prices move stock markets yesterday. I was thanked by readers on both sides of the pond for bringing Canadian analyst David Rosenberg's work published by the Toronto Globe and Mail to their attention. The real hero is Martin Ferera, our man north of 64'40, who found the article and got us reprint rights.
By yesterday's close, the greenback had lost 1.9% against the loony, quite a jump. The C$ accounts for 9.1% of the dollar forex index DXY). This matters to us investors in our neighbor to the north, discussed for paid subscribers below. We exited dollar bull positions at the end of 2015 and last month because of concerns that the Fed-linked US$ rise was overdone. Today the DXY is down another 0.6% so far , and gold gapped up again $1105/oz.
Today we have two corporate reports, a modest number for this time of year and a new stock recommendation, plus much news from Africa, Brazil, Mexico, Britain, Spain, Hong Kong, and Argentina.
Sovereign Wealth Funds & Oil
Our Canada reporter today recommends an article from the Toronto Globe and Mail “ by the ever- thoughtful David Rosenberg - a Canadian national treasure!” It addresses the mystery of why oil prices and stocks are falling in tandem. Here are extracts from Rosenberg's article:
“Many a pundit [says] the slide in oil prices is negative for the global economy. The action in the stock market, after all, rallied all the way from the early-2009 lows in oil up to the mid-2014 highs. There seems to be a tight positive correlation now between oil and the stock market whereas in the past the relationship was inverse. [I]n past cycles, lower oil prices were a bullish factor for equities. [N]ow the action in the stock market has led many to believe that a recession is around the corner.
“The link between oil and the stock market is actually less about fundamentals and more about fund flows – specifically the activity of global sovereign wealth funds. At last count, there were seven oil-dependent countries that control nearly $4-trillion (US) of assets, 54% of the global tally. These wealth funds channelled their petrodollars across the world’s equity markets during the bull run in oil, why there was a tight positive link between crude and stock prices.
“This movie is now running backward. Those who claim that 'break-even' price levels on Middle East oil are in single digits only look at covering direct production costs and ignore fiscal break-even levels. As per the International Monetary Fund, the fiscal break-even oil price for Saudi Arabia is nearly $96 a barrel (hence a 20% deficit-to-GDP ratio); $68 a barrel for the United Arab Emirates (deficit of 4% of GDP); and $58 a barrel for Qatar (budget gap of 1.5% of GDP).
“Estimates [say that], as of the end of 2015, 56% of the assets [of] sovereign wealth funds came from the oil and gas related projects. [A]nd up to 10% of the total money invested was in global markets. [Now] many governments, in the Gulf, Africa, and Asia, have to draw down reserves to cover their gaping fiscal deficits.
“The Saudi Arabian Monetary Agency (the kingdom’s investment arm) has withdrawn in the order of $70-bn from external managers in just the past six months to meet social spending requirements. Qatar, Kazakhstan and Norway are in similar predicaments. Norway (the largest sovereign wealth fund in the world) reportedly has shed $1.1-bn of its equity holdings ($58.5-bn in total). Abu Dhabi cut $300-mn from its $3.6-bn exposure to U.S. equities.
“So the stock market is telling us nothing about the economic outlook; rather, the sudden sell-off in the past two months represented one giant margin call as the petrodollars deployed into equities during good times are reversed. Oil-reliant governments around the world draw down sovereign wealth fund assets to finance their budgetary shortfalls and support their fledgling economies. [T]he equity market decline is really telling us more about the run-off at sovereign wealth funds than anything nefarious about the economy, especially the US economy.”
David Rosenberg is chief economist at Gluskin Sheff & Associates and writes a daily economic newsletter Breakfast with Dave. (Source: TheGlobeandMail.com)
Another take on oil price trends from Bloomberg which cites Goldman Sachs forecasts of a sharp 7% drop in US shale output during 2016, 620,000 barrels/day.
The US recently has produced about 9.4 mn bbls/d, according to the International Energy Authority which separately predicts that non-Opec oil supply will drop by 600,000 bbls/d this year.
The head of Opec, Abdalla El-Badri expects that output from non-members will fall by 660,000 bbls/d. Forecasters seem to agree that shortages will lead to oil prices rising sharply in H2.
Industry experts concur. In a Bloomberg TV interview yesterday BP plc CEO Bob Dudley said: “We will see higher prices” with “supply and demand tightening in the second half” after a “tough and choppy” first half with a surplus of oil.
Bloomberg worked out that oversupply caused a 30% drop in West Texas Intermediate and a 35% decline in Brent crude, the two world petroleum benchmark prices. It quotes an interview with Dominic Schnider, head of commodities at Hong Kong's UBS unit: “we need to see supply giving up and I thank that falls to the US.” A rise of 30-35% will take oil prices to $40+/bbl.
Moreover, it is not just US shale that will be shut-in or delayed. Other oil producers also will cut production. Russian oil output may fall by 150,000 bbls/d or 1.3%, according to Sanford Bernstein analysts. Iraq, without forecasting output, predicts that oil will hit $50/bbl this year and the United Arab Emirates also expects less oil glut. (Source: Bloomberg.)
The argument for going global is not just about lower US shale output. The head of the NY Fed, Bill Dudley, is talking down the greenback. It has reversed course upward today against sterling, the euro, and even the negative-interest-bearing yen. Our dollar is down 1.44% today against the Canadian loony.
The big news at 2:24 pm Wednesday is that after a whole week my phones are up and running again in mid-Manhattan in the 21st century. I just got called by the monopoly owner of the line, Verizon. Now they will not stop telephoning me to tell me how they got the line back, so far 3x. Blog goes out before I pick up the phone again.
More for paid subscribers today about oil and its impact on finance, plus two annual reports and other goodies.
Forecasts and Recoupling
Writing for his firm www.llewellyn-consulting.com, a former senior economist of the Organisation for Economic Cooperation and Development considers forecasts. He sounds somewhat like the late Yogi Berra about forecasts about the future:
“Many important decisions – macroeconomic, policy, corporate, military – have to be taken in respect of a future that is intrinsically unknowable. But there is no ducking the issue: decisions have to be taken. Even the decision not to take a decision is a decision. So: how best to go about taking decisions that will come into effect in, or even affect, the future? Basically there are three possibilities.
“One possibility is to forecast what that future will be. But it is a mistake to place much weight on [any forecast number] when the absolute error for OECD economies is o[n] the order of 1 percent.
“At turning points, when accurate forecasts would be the most useful, errors tend to be even bigger: the year-ahead OECD-GDP forecast made in Dec.2008 was 3 percentage points, and following the first great oil shock of 1973-74 it was 4.
“This is not to say that forecasting is pointless. A forecast assessment provides a consistent quantitative framework for thought, in which outcomes are conditional on identified judgements. Moreover, forecasts [give] the forecaster early warning when something is going on that is not understood. But there is no avoiding the fact that economic forecasts generally offer a poor guide to the future.
“Moral: base your decision on a forecast whenever you must, but look at past errors. To the extent that forecasts often do not provide an adequate basis for decision-making, an alternative is to assess the probability of different possible outcomes or decisions; and multiply that risk by an estimate of the potential consequences.
“Assessing the cost of potential consequences can be difficult, but fruitful. For example, commonly heard on trading floors before the 2008 crash was 'The chances of this happening are only one in a million.' Even true, however, the appropriate riposte would be 'But what if it did happen?' If the answer was 'catastrophe' then it would be wise to avoid the action.
“Moral: no decision should be taken without a risk assessment of the potential consequences. “Unfortunately, these two issues become [greatly] more difficult when the system is complex. Models of even moderate complexity, when shocked, often exhibit extreme, even chaotic, behaviour in ways that could not have been forecast and were not expected ‒ including by the person who built the model. “Examples are legion. Recent ones include the developments after the invasion of Iraq; and the cascade of financial and economic events following the collapse of Lehman Brothers.
“Moral: avoid allowing key variables in complex systems to go outside historical experience.”
Yesterday's market closed barely dented by the renewed drop in the oil price, leading some experts to say this new linkage was now ended. The decoupling was ended in spades, with markets tumbling.
Moreover today Chinese stocks and the reniminbi rose but it made no difference. It snowed as people headed off to their home villages from Guangzhou (formely Canton.)
Before turning to our stock portfolio I wanted to let you know that the website I helped launch, www.talkmarkets.com, now has over 500 contributors. Contributors are paid in shares, but I also invested money to become an angel investor for the site.
It has now closed a major partnership deal with Thompson Reuters which will host all its headlines (for clicking to) at no cost to talkmarkets. It also won the “Best Stock Site of 2015” award.
The startup is now publishing 100 articles/day and has 17,000 registered users, including some of you. Now it has to boost its editorial team and needs more angels. If any readers want to find out more, please send me an e-mails (my phones are down) and I will put you in touch with www.talkmarkets.com so you can become an angel investor too.
More for paid subscribers from Britain, Israel, Italy, India, Canada, France, Brazil, The Netherlands, Th Dutch Antilles, Belgium, and Finland.
China Hits Capitalism Again
Is this a Marxist plot against capitalism? Another bad day for the Chinese economy has zapped Wall Street after afflicting European markets. Eventually the capitalist world will realize that the Chicoms have no idea of how to open up a controlled economy. Today the official purchasing manager's index for Jan. came in at another low 3-yr, this time of 49.4. That means orders were lower again sequentially. It is the 6th decline in a row.
The imminent start next weekend of the great Chinese migration home for New Year's means the number is not necessarily a mark of imminent recession and the Chinese govt continues to put out happy-clappy if lower growth forecasts.
Elsewhere European PMI levels were relatively buoyant, at 52.3 while British PMI surprised on the upside at 52.9. US levels were 52.4. Because of revisions, the numbers are better used as indicators of direction than as absolutes. In the olden days, Chinese official PMI figures were always considered over-optimistic and were corrected by mid-month data from HSBC, a bank. Now the Beijing figures have been made more accurate, and China and the world have been made to suffer for this.
Charles Payne, the NY broker and TV personality, has concluded that “we've just seen about a perfect double bottom for the Dow Jones Industrial average. Now there's resistance around 16500 and the big breakout point is 16750.” The DJIA opened at 16453.63 today and fell as low as 16299.47. It is currently 16379.46, all below the resistance level cited by Mr. Payne, who is an African-American chartist who gets more attention than some others, but a chartist all the same. And being a broker he is naturally bullish. More on TV personalities for paid subscribers below.
It may be connected or just have something to do with the Iowa caucuses, but the gold price is up again. We use gold as a counterweight to stock price movements.
Today's blog is late as I am trying to get our corporate telephone lines back up before Feb. 10 when Verizon proposes to fix them. More on VZ and telephones today partly because of this toil. (I am using my cellphone for business which wastes time. I do not want incoming calls on my smartphone or I will get nothing done.) I am in mid-Manhattan in the 21st century! I was thinking I might take off for some tiny French or Portuguese village to get competitive phone service.
I also filed a complaint with the New York State Public Services Commission. Which also wastes time. We have news also on oil, drugs, bank-insurance companies, cars, iron ore, and funds.
Portfolio Tables Updated
But current subscribers can view the performance of our stocks last week. Except for two sectors, everything we own went up. Was this gold (which also is going up) or merely glitter?
I am reminded of the old UK television program: TWTWTW, which stands for that was the week that was. The big question now is if that weekly gain will repeat itself in the current week. If I knew the answer I would not be writing a newsletter in return for subscription revenues. More for paid subscribers follows:
Japan and MICK
Factoids. By the waters of Babylon, there we sat down and we invented tacking geometry over time, about 1600 years before it was supposedly discovered. The Babyonians were watching Jupiter in the skies, AKA the god Murdoch, no relative of Rupert who just reappointed his son James back into managing a chunk of the empire after letting him go during the UK hacking crisis.
King Tut's wet nurse's mummy has been found. She also was his sister. Nobody besides his sister was good enough to be pharaoh's wet nurse (or wife.) You can go to the Velasquez exhibit to see what that leads to.
Now for the real news:
The latest acronym for emerging market investors is MICKs, which stands for Mexico, India, China, and (South) Korea. It replaces BRICS because of the rotten outlook for Russia and Brazil. Take any such mnemonic with a tablespoon of salt. But note that we are presently over-invested in 3 of the quarter, but not China.
Japan surprised the world by imposing negative interest rates to try to end the decades-long deflation in its economy, after a 5:4 vote at the Bank of Japan. It also will lower rates further to trigger inflation and growth if needed. This came after pre-move central bank denials even at Davos, which is usual.
Bond yields in Japan crashed after the CB headed by Harukiro Kuroda decided to charge banks for placing money with the Bank of Japan. Annual yields on 20-yr bonds fell to 0.82% and 10-yr ones to 0.11%, levels not seen since the start of this millennium. Bank stocks fell but the Tokyo market overall decided that this was a good thing for stocks, and they rose there. Euro markets and Britain also rose.
For some reason this triggered an attack on central banks by Marc Faber, who earlier was dropped by the Barron's Roundtable. Rupert Murdoch is also behind Fox TV refusing to do a deal with The Donald over who would moderate yesterday's debate.
The Chicago purchasing managers index for Jan. came in at 55.6, showing a strong economy. Whether this applies for the whole USA will be known next week.
More for paid subscribers follows from Bermuda, Brazil, Britain, Colombia, Denmark, Ireland, Japan, Panama, South Korea, and The Netherlands, including two annual reports.
Cheap Oil Bad!
OPEC good; cheap oil bad.
Lance Roberts, chief investment strategist of STA Wealth Mgm today points out why falling oil prices are bad for the economy. “The knock-off economic impacts are job losses through the manufacturing sector and all other related industries” among which he includes real estate (at least in Houston.)
“Every high-paying oil service job accounts for up to 4 downstream just-as-well-paying jobs.” He cites construction in particular. He was writing in talkmarkets.com (link: www.talkmarkets.com/content/us-markets/3-things-fed-error-houston-re-no-bounce?post=84088)
What we have to do is forget the oil politics of the 1970s. Then OPEC quadrupled oil prices and caused global economic havoc and derailed economic development in poor importer countries.
Forty years on, perversely, the problem is OPEC's failure to control output and keep oil prices from free-fall.
So today the news that Russia (not a member of the oil producer country cartel) is engaged in talks about a Feb. production cut resulted in oil futures rising nearly 8% and stock markets booming a bit less. The talks apparently involve everybody cutting oil production by 5%, according to a Russian press wire, Interfax, quoting energy minister Alexander Novak.
"It looks more and more like this is the first sign of surrender in the global production war,"Phil Flynn, a senior market analyst at Chicago's Price Futures Group told Bloomberg. "With capital expenditure slashed and energy projects killed a 5% cut would get the market in balance." OPEC issued a denial immediately, but it would do that.
(Interfax is a notorious transmitter of internet viruses so I cannot confirm this. Dow Jones is skeptical but the market is not.)
Gong hei fat choy. Feb. 6-7 marks the start of the Chinese Year of the Monkey, and New York's festivities will be moved from Chinatown in Lower Manhattan and Flushing in Queens. The dragon drag will come to Madison Avenue in east Midtown and Uptown this year in a bid to get more business from round-eyes.
The chief architect of Abenomics, Akira Amira, has resigned as Japanese finance minister after charges of corruption, which he denied.
More news today from another batch of reporting companies in Sweden, Britain and Singapore, and news from Ireland, Israel, Italy, Norway, Australia, Myanmar, China, India and Pakistan. It is another day with many reporting companies.