General Markets: According to the Wall Street Journal, U.S. stocks suffered their worst month since August 2015 in January. The sector that took the worst hit this past month is the Biotechs (NYSE ARCA Biotech, -24%) which was one of the primary leaders of this recent bull market. Next in line of losers was the Banks (KBW Bank, -12.62) and then smallcaps (Russell 2000, -8.85), which indicates that major market participants are not in the mood for risk on trades or investments. Banks are leaders in bull markets and when the banks go south so does the market. Another way of putting it is if a business that has a monopoly on can creating money out of thin air (other than a central bank which is also an instrument of the large banks) and can increase its working capital by 90% using this ability can’t make money, then you know things are bad. The two sectors in the green for the month of January were the DJ Utility Average (+5.80%) and the PHLX Gold/Silver Index (+1.47%). This along with a big move to Treasuries in January, show that market sentiment is extremely negative and in this case, rightfully so.
The game is coming to an end soon and I say that rather than a bust in the current market bubble because this market reversal we are currently in is not just another run of mill start of a bear market after an almost seven year run up. The U.S. government has run up so much debt at this point that there are no more financial maneuvers, offers of protection, or threats that the government and their cronies can pull out of their magic bag of tricks to solve their current dilemma. The world has set up an alternative currency payment system that will bypass the U.S. dollar when it and what’s left of its economy start to collapse into freefall. Major U.S. vassals such as the EU and its adjunct partners are already in the midst of dire economic, debt, and social circumstances. Canada, a historically stable compatriot of the U.S. controlled world regime, is starting to experience serious food inflationary pressures in addition to the major hit its economy has taken from the low oil prices. Its long overheated real estate market in selected cities may be showing signs of reversal as well as global economic conditions deteriorate.
The world is becoming much more multipolar, both economically and politically, with emerging markets looking to throw off the yoke of U.S. imperialism and its resulting serfdom. Emerging markets realize that the clubs, both economically and militarily, that the U.S. government and its cronies have brought down on other nations repeatedly are being held by very weak hands now. They may still pay lip service to the self-appointed U.S. overlords and in many situations show considerable restraint in dealing with continual U.S. government transgressions into their business but that is because they know the U.S. regime is a teetering empire ready to fall under its own egregious overreach and heinous activities not including its insane and incompetent management of its financial affairs.
You can see this being played out in the world stock and commodity markets. The U.S. and European stock indices are far off of their highs now without any substantial economic footing to support a move back up to new highs. European stock indices have already broken through major areas of support and the U.S. indices look ready to follow. The DJ Transportation Average has already broken through major support without any indication of turning around. Its bull market high was made all the way back in the week of 11/24/2104 showing you that the U.S. economy has been in a long state of decline and recent economic data shows that the economy continues to grow worse despite what our delusional (or are they just lying? … like they do about most everything else) government may say.
As I have been saying in recent posts, selected emerging markets look close to turning around. They are mostly dependent on commodity and natural resource prices improving which is why they are called emerging markets because they do not have fully developed, reasonably well diversified economies in many respects. China is the exception in this case, as they have developed a very diversified economy with strong manufacturing capability. They are in the midst of transforming their economy into a more domestic consumer-based economy, primarily due to the global economic deterioration but also because of the increasing size of their middle class resulting from their economic success over the last few decades. Oil and natural gas have been showing signs of bottoming over the last two months, and if these markets continue to rise, then selected emerging markets like Russia, Brazil, and China (although for some different reasons as well such as the relative strength of its economy, inclusion of its currency as a reserve currency by the IMF this fall) will also rise. This will happen as the U.S. and European stock markets continue to decline as these countries have little of tangible and at this point, little of intangible value either. The governments of these countries are both economically and morally bankrupt (these two items do not necessarily go together but in this case they certainly do; many times economic bankruptcy is do due to stupidity, ignorance, declining economic environment, unexpected exigencies and surprises, and/or unsustainable financial practices).
Energy: The WSJ reports that U.S. crude oil prices were down 9.2% in January but are up more than 27% from a more than 12 year low on January 20 of $26.55. This is a very significant move up over the last 10 days of January indicating the strong possibility of bottoming action taking place. During Friday’s strong U.S. stock market move up, the PHLX Oil Service index was the strongest performer of all major U.S. stock indices, highlighting this sector’s recent strength. Friday’s strong performance was despite the strong move up in the U.S. dollar on that same day which usually moves inversely to oil related stocks. U.S. natural gas prices also had a strong move up on Friday of 5.64%, which again does not usually move in the same direction as the U.S. dollar. These latter two indications are showing the underlying strength in the oil and natural gas markets. If oil continues to move up to $39 and hold at or above that price for a few weeks, that will be a good indication that the bottom may be in place. King World News had a report from Citi analyst Tom Fitzpatrick this week that the current oil downtrend (-77%) is commensurate with previous historical oil downtrends dating back 30 years. At about current levels, a bottom is usually put in and sharp rallies of 100%+ typically follow. That would suggest a price rise to the low-mid 50’s. Even though percentage wise that would be a big move, those oil prices are probably not high enough for the high cost producers to be profitable. So the contraction of much marginal oil supply would still remain in place at those prices, possibly contributing to a further price rise as global oil demand remains at an all-time high primarily due the increasing demand from emerging markets and their populations. This does not take into account the appearance of an exogenous hit to the current market such as escalated tensions in the Middle East that could significantly decrease supply.
Currencies: The U.S. dollar made a big move up on Friday after the Japanese Central Bank lowered their interest rates into negative territory. This rise puts further pressure on U.S. exports and U.S. multi-national companies in already weakening economy. That the PHLX oil service index and natural gas prices rose so strongly on Friday as well leads me to believe that the dollar may not be as strong as it is purported to be.
Hedge funds like to trade currencies, bonds, and commodities because typically they trend very well when they move, much better than any stock market typically trends. This is the primary reason trend following trading systems are so popular with many hedge funds. The U.S. dollar has traded in a relatively tight range since the first week of March, 2015. This is longest and tightest range the dollar has traded in going back 20 years. This length of a range bound currency is unusual and an old saying in the markets is “what can’t go up, will go down”. If the dollar was as strong as it is purported to be, then it should have broken out of this range by now and continued higher. This lack of strength over the last several months is despite all the turmoil going on in the world over the last several months. I am expecting a false breakout of the dollar to higher levels but to no more than about 106 and then reverse to sharply decline in value. The dollar will bear close watching over the next several weeks and with the oil market showing significant signs of strength, things could get very interesting in the not too distant future.
European Banks vs. U.S. Banks: Major European bank stocks have never recovered during this seven year bull market and have traded basically in a sideways, range bound fashion or even downward during that time. Overall, their performance has been much weaker than major U.S. banks, which at times during this recent bull market have stage significant rallies and are still trading far above their lows of 2009. That said, U.S. bank stocks look very weak now as well, and for good reason with the huge derivative books of five of the major U.S. banks along with increasing exposure to the failing shale oil sector for many U.S. banks including regionals. Both European and U.S. banks hold many sovereign bonds of their respective country and these governments are mostly bankrupt or very close to it. Most banks are way overleveraged as standard practice of business and that is why there is such an unnatural emphasis on extreme growth to fuel this debt-based, funny money system. Expect more bad news for both European and U.S. banks as both economies continue to decline. Their beloved central banks will not be able to save them this time. These banks will take down many hard working, saving people and businesses in their coming demise.