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signed investors should be aware of entering 2016
Submitted by Alfred Neuman on
December 15, 2015 - premarket
Wall Street’s proclivity to create serial equity bubbles off the
back of cheap credit has once again set up the middle class for
disaster. The warning signs of this next correction have now
clearly manifested, but are being skillfully obfuscated and
trivialized by financial institutions. Nevertheless, here are
ten salient warning signs that astute investors should heed as we
roll into 2016.
The Baltic Dry Index, a
measure of shipping rates and a barometer for worldwide
commodity demand, recently fell to its lowest level since 1985.
This index clearly portrays the dramatic decrease in global
trade and forebodes a worldwide recession.
2. Further validating this significant slowdown in global growth
is the CRB index, which measures nineteen commodities. After a
modest recovery in 2011, it has now dropped below the 2009
level—which was the nadir of the Great Recession.
3. Nominal GDP growth for the third quarter of 2015 was just
2.7%. The problem is Ms. Yellen wants to begin raising rates at
a time when nominal GDP is signaling deflation and recession. The
last time the Fed began a rate hike cycle was in the second quarter
of 2004. Back then nominal GDP was a robust 6.6%. Furthermore, the
last several times the Fed began to raise interest rates nominal GDP
ranged between 5%-7%.
4. The Total Business Inventories to Sales Ratio shows an ominous
overhang: sales are declining as inventories are increasing.
This has been the hallmark of every previous recession.
5. The Treasury Yield curve, which measures the spread between 2
and 10 Year Notes, is narrowing. Recently, the 10-year benchmark
Treasury bond saw its yield falling to a three-week low, while the
yield on the Two-year note pushed up to a five-year high. This is
happening because the short end of the curve is anticipating the
Fed’s December hike, while the long end is concerned about slow
growth and deflation.
Banks, which borrow on the short end of the curve and lend on the
long end, are less incentivized to make loans when this spread
narrows. This chokes off money supply growth and causes a recession.
6. S&P 500 Non-GAAP earnings for the third quarter were down 1%,
and on a GAAP basis earnings plummeted 14%. It is clear that
companies are desperate to please Wall Street and are becoming more
aggressive in their classification of non-recurring items to make
their numbers look better. The main point is why pay 19 times
earnings on the S&P 500 when earnings growth is negative–especially
when those earnings appear to be aggressively manipulated by share
buy backs and through inappropriate charges.
7. The rising US dollar is hurting the revenue and earnings of
multi-national companies. Until
recently, multinational companies have enjoyed a slow and steadily
declining dollar from its mid-1980’s Plaza Accord highs. This
decline boosted the translated earnings of multi-national companies.
As the dollar index breaks above 100 on the DXY, multinational
companies, which are already struggling to make earnings from a
slowing global economy, are going to have to grapple with the
effects of an even more unfavorable currency translation. In the
long-term, a rising US dollar is great for America. However, it in
the short-term it will not only negatively affect S&P 500 earnings,
but also place extreme duress on the over $9 trillion worth of debt
borrowed by non-financial companies outside of the U.S.A.
8. Recent data confirms that the US is currently in a
The November ISM Manufacturing Index entered into contraction
for the first time in 36 months posting a reading of 48.6. This
is a decline from the anemic October reading of 50.1 and marked
the fifth straight month this index was in decline.
The Chicago purchasing manager’s index (PMI) came in at 48.7 for
November signaling contraction.
The latest Dallas Fed Manufacturing Business Index fell to -4.9,
from -12.7 in the preceding month.
The Empire State Manufacturing Survey came in at -10.7, a
fractional increase from last month’s -11.6, signaling a decline
in activity and registering close to the lowest levels since
The November Richmond Fed Manufacturing Index dropped 2 points
to -3 from last month’s -1.
9. Credit Spreads are widening as investors flee corporate debt
for the safety of Treasuries. The TED spread, the difference
between Three-month interest rates on Eurodollar loans and on
Three-month T-bills, has been on a steady rise since October of
2013; at the end of September it was at its widest since August of
2012 at the height of the European debt crisis.
10. The S&P 500 is at the second highest valuation in its history:
The Cyclically Adjusted Price-Earnings (CAPE) ratio, was19 in
November, a value greater than 25 indicates that the stock
market is overpriced in comparison to its earnings history. The
CAPE ratio has averaged 17 going back to 1881.
The Q RATIO, the total price of the market divided by the
replacement cost of all its companies, historically averages
around .68, but is now hovering around 1.04.
The P/E RATIO of the S&P 500 is around 19 – above the long-term
historic average of 15.
Total Market Cap to GDP ratio is 122, ten percentage points
above the 2007 level and eighty percentage points higher than it
was in 1980.
The Price to Sales Ratio for the S&P is 1.82. That is higher
than 2007, when it was 1.52 and is at the highest since the end
And finally, Advisors Perspectives chart of inflation-adjusted
NYSE Margin Debt and the S&P 500 demonstrates the profoundly
over-leveraged condition of the market. Margin debt in real
terms is now 20% greater than it was at the peak of the dotcom
If those ten warning signs weren’t enough to rattle investors…this
Fed is threatening to do something highly unusual; to begin a rate
hiking cycle when the global economy is on the brink of recession.
Ms. Yellen has virtually promised to raise rates on December 16th and
continue to slowly hike the cost of money throughout next year.
Investors should forget about the “one and done” rate hike scenario.
The truth is the Fed will be very slowly tightening monetary policy
until the fragile US economy officially rolls over into a
contractionary phase and the meaningless U3 unemployment rate begins
to move higher.
This current economic expansion is now 78 months old, making it one
of the longest in U.S. history. There
have been six recessions since the modern fiat currency era began in
1971. The average of those has brought the S&P 500 down a whopping
36.5%. Given that this imminent recession will begin with the stock
market flirting with all-time highs, the next stock market crash
should be closer to the 2001 and 2008 debacles that saw the major
averages cut in half.
Total U.S. public and private debt levels have climbed to the
staggering level of 327% of GDP, which is nearly 600% of Federal tax
revenue. Therefore, humongous debt levels and massive capital
imbalances have set up the stock market for its third major collapse
since the year 2000. Investors should proceed with extreme
caution now that the warning signs have been blatantly explained.
Articles, excerpts, commentary and reviews herein
are for information purposes and are not
solicitations to buy or sell any of the securities
mentioned. Readers are cautioned that every idea
communicated herein involves risk and uncertainties.
Opinions and predictions and may differ materially
from actual events or results.