Market Update January 31st, 2020
Today we're going to talk about political risk, we're going to talk about geopolitical risk, and of course, the virus, Fake...... not news. Fake GDP! Yes, it's all there. It's an interesting time to invest.
Let's get started!
Jumping right in to what keeps me up at night. First up, Market Cycles
When you're in growth mode, that is 1 and 2. In 2018, the fourth quarter, we were down here in the fourth cycle when things were slowing, etc. It got pretty ugly. Cycle 3, we entered In to the fourth quarter of last year, we've been there for a while, but let me tell you, we've seen a change, big change in the last week and we're seeing it based on our data and the bond market is totally showing this right now.
Earnings slowing, and continue to do so. Two hundred and eight companies still better than a couple weeks ago. But we're looking at 3% as far as earnings growth.
The percentage of U.S. listed companies that are losing money is close to 40%
One big tech company had 2 Billion less in sales. That is not a good thing, and again reaffirms why I think we're overstretched.
In 2019 50% of the returns came from two companies, now that is a big problem!
I have talked about how stretched the market is and how over priced we are right now.
Here is Semi Conductors. This is actually a good looking chart, if you go back to 2018 it is up 80%! But guess what... earnings per share during this time period where 5% lower. What a big disconnect!
The big story this year! The federal debt. What's going on here? They restarted this program back in September. It's surged to the tune of five hundred and fifty billion dollars, meaning the Fed has pumped money into the market. That is what has driven this market, the liquidity. Well, guess what???
They are slowing it down!
As a result of this, what is happening to the market right now? Let's see what they do. It's unprecedented to put this amount of money into the market from the Federal Reserve when apparently the economy is doing okay. This still continues to be the biggest story of 2019.
The Fake GDP
Why is it a fake number? They came out yesterday with a number of 2.1. Larry Kudlow and all his friends massage the numbers. Lets take a look at Consumption, which is really pretty bad. Now look at Exports, where do you expect exports? We have all these flat and negative numbers plus one point five. Absolutely no way, False number! The biggest reason why this is a false number is the inflation number. They put in a point 1.4 number, we were over 2 last quarter. The real GDP is point 3. I'm telling you, folks, you look at these numbers. These are all the factors that go in. That is a fake GDP number again and re-affirms are growth slowing story.
Moving on to the BIG CHARTS!
I'm going to start with the long term view. No changes as of yet. So long term signal as of today is positive.
Now, our next one here, the weekly view. Well, we are starting to see a little bit of. change here, we have a long way to go. But you see that turning over in the bottom chart, that's momentum. Right now when I look at this momentum, I see it going down, but still very much positive. So two of our signals right now are in fact, positive. Before I come to the the daily view, there are a couple of factors to consider.
We talked about the FED. You can see since they started slowing down liquidity the markets have also slowed down. Of course the big news right now is China, Kind of ironic the last video we did, we added a book series and we talked about a book on China, how you can't trust them. So one, I think the feeling is it's a lot worse than they are saying. They would not allow the CDC to come in. So how and why does that affect our markets? It's simple. They're one of the largest consumption users around the world and world GDP. When you see that Russia's cut off the border, we haven't yet. But there's a lot going on and it's going to affect the world economy. You cant forget to mention that China had a flat PMI manufacturing number this morning. They're in a world of hurt and that's going to spread around. I am always saying it's time to be nimble, not that I knew about that type of risk, you can't manage this type of risk. It happened so quickly.
Let's talk more about the diversification. Momentum's really turning down when you're above 16, we're almost 18 on the VIX, volatility index. You have be careful. Below 12 gives you the green light above fifteen and around fifteen means caution. We are definitely in a red light zone. I am really going to continue to watch this.
Take a look at the bond market. I mentioned previously, it is telling us something different.
Everyone said we are going to 3%, not us! I thought we were going to break below 1.50% n 10Year, we're getting really close. You see the trend, obviously we keep going down. So that tells you the bond market is agreeing with the lower growth, the lower GDP and the Fed is behind the curve..... again. The big thing this week is the yield spread. The first one we look at is 10 year Treasury, minus three month treasury. We went from .26 to zero - flat. That is a big move! Now, 10 year minus two year Treasury is .16. Another huge move. As a reminder, these are recession indicators. I am not saying we are there yet. Didn't see it before. Not seeing it now. But the bond market is definitely telling us something different.
We talked about the cycles and another confirmation of our signals. We talked about 2018, when we're in a fourth cycle, you see how bonds go down. Big, big, move, and this is when everybody thought, it was going to go way above 3%. In cycle 3 where we were, you're kind of flat. Doesn't do much of anything. Well, one of the confirmations is right here. Look at that breakdown in the last couple of weeks in treasuries confirming that we're moving into that fourth part of the cycle.
Wrapping things up with Sector spotlight!
When we look at sectors, we also tie that into our cycles, and there are certain investments, so right now we've gone from the fourth cycle to the third. Now we're back to the fourth. There are certain investments that work well in both of those. But those that were in three were based on inflation, which has gone straight up and now straight down. So this is the issue for any investor. Because of this, you look at the commodities index. One of the best places to be was oil. Then you had Iran, political and geopolitical risk and then you had the virus. So that is very difficult for any investor to manage. So for us, we looked at this, we started trimming based on the beginning of the week, our oil position, we will be out of it today, at the beginning of the week, we added to some sectors, again, that do really well in the fourth part of the cycle. You have to look at bond and bond proxies. We added our bond positions, bond proxies. I was pretty much to my highest allocation I'd like to be at. But you can look at REITS, Utilities, look at the last month.
Beautiful, right? Well, the market's gone sideways. Home construction's done really well because low rates, Health care has done really well. We will do well in the fourth cycle as well. So that's how we utilize these sectors.
another big one is GOLD. That's another position that I added to at the beginning of the week. To bring this all together, the market is so much more than the S&P and Dow, and this shows you why in the last two weeks... some people think I'm crazy. There is a method to this madness. I'm not all in the S&P. Yes, I have my largest position, but 20 percent is in our bond proxies, and then we have, depending on the allocation, the risk tolerance between 8 to 15 in those short term sectors.
Short term negative, obviously. Mid-term and Long term are positive. But debt, midterms, break it down. I anticipate a lot more volatility. You go back and look at SARS. It's a good time to move out. Make sure your positioned correctly with volatility clicking up.
Thanks so much for reading !