Brexit from London

On June 25th, while in London, I had the pleasure of joining David Asman on Fox News to discuss the meaning of Thursday’s vote to leave the European Union. The view of Brexit from London has been stunning. All those who underestimated the British sense of self-confidence and desire for sovereignty or who were over-confident in the betting odds giving only a 25% change of leaving, are now paying dearly for that confidence. The shock amongst most in the financial sector in London is palatable, with the lights burning bright in most offices all weekend, as portfolio managers, investment bankers and traders work to get their arms around just what this means for them and their clients.

What this means for the US

Pundits in the US are trying to calm markets buy assuring them that this won’t over overly impactful for the US as the UK, the fifth largest economy in the world, only accounts for roughly 3.8% of world GDP, according to estimates for 2016 from the International Monetary Fund, versus the United States, which accounts for around 25.4%. But that misses that this is not just about the UK, but rather about the future viability and success of the European Union, whose GDP is nearly the same as the US. With the tumultuous and highly contentious presidential election cycle in the US,  about 50% of the world’s economy is now experiencing a high level of political uncertainty within the context of an already weak global economy. That is a strong headwind to growth for everyone.

The most immediate impact of Brexit for the US likely a continued increase in the strength of the dollar, which is great for American tourists abroad, but a challenge for American multinational firms that export their products and/or services. The strong dollar will also impact emerging markets that have a good deal of debt denominated in U.S. dollars, acting as a headwind to those economies as that debt becomes more expensive. The uncertainty of how this all will pan out means transactions and contracts between companies in the European Union and with companies outside of the union may be put on hold or cancelled entirely – more headwinds to growth.

Many today are harshly criticizing the Brexit leadership for not having a clear plan for what to do if their side actually won, but the reality is that kind of a plan was literally impossible. A plan would have required having some clarity on how agreements would be worked out with, primarily, other European nations. The leadership of the rest of the European Union had every reason to assure the UK that, “Fine, you want to leave us! Then we will refuse to play with you anymore!” as they desperately wanted the UK to stay. But now that the decision has been made, and after time soothes the many bruised egos a bit, real conversations can begin.

Impact on European Union

The bigger issue here is that the European Union has not delivered on its promises to all who joined. Many countries are suffering in ways that were not expected, with internal tensions rising with every passing year of weak economic growth, high unemployment (particular among the youth) and supercilious finger-wagging from the stronger nations at the weaker ones. As hope for a recovery fades, desperation is rising and the belief that those in Brussels are a cure is shifting to suspicion that they are instead the disease. One of the greatest lessons of political history from the dawn of nations is that the further the decision-makers sit from those affected by the decisions, the poorer the quality of the decision. History shows that the more people that are forced into one size-fits-all solutions, the poorer the end result, often times with dramatic actions to break those bonds.

Those countries in the European Union that have been struggling to reignite their economies post-financial crisis will be closely watching as the events unfold for the UK, placing a lot of pressure on everyone involved. European leaders find themselves in a catch 22. On the one hand, they will be better off having strong trade relationships with the UK, but on the other hand they don’t want other nations that may be contemplating their own exit to see the UK benefiting from this move. Expect more threats, grandstanding and predictions of doom and gloom before this breakup drops from the headlines around the world.

Better Retail Data Doesn't Guarantee Fed Rate Hike

On May 13th I spoke with Neil Cavuto on the Fox Business Network about the impact of the recent retail sales report on a potential rate hike by the Federal Reserve.  My concern is that employment isn’t nearly as strong as the headlines would lead one to believe. FoxBusiness.com wrote an article about my discussion as well as some points made by my co-author for Cocktail Investing, Chris Versace, which you can read here.

In the fourth quarter of 2015, productivity declined by 1.7% then fell again in Q1 by 1.0% while labor input rose 2.5% and non-farm business output averaged around 1%. That means from last October through March, the aggregate hours worked outpaced production 2.5 to 1 – obviously that is unsustainable.

If we look at Challenger’s reported layoffs for the first four months of 2016, we see they were up 24% over the first four months of 2015 and the highest we’ve seen since 2009. In April alone layoffs were up 35%, so the pace looks to be accelerating.

This is the fifth quarter of falling sales and the fourth quarter of an earnings recession, what exactly would drive more hiring when the employees companies currently have are delivering declining productivity?

The three month moving average for retail sales is still at recessionary levels AND today, 47% of Americans don’t have enough savings to cover a $400 emergency! How’s that recovery working for you?

Elle On RT's Boom Bust Talking June Rate Hike

On May 4th I spoke with Ameera David on RT’s Boom Bust about the likelihood that the Fed will hike rates in June. We discussed the ongoing earnings recession facing companies, the continued decline in top line revenue and how that will affect the recent uptick we’ve seen in wage pressures. We also talked about the impact of the Brexit vote on any hike in June and what we can learn about the global economy by looking at what’s happening in China.

Santa Rally on Its Way?

On December 17th, I appeared on air with Stuart Varney to discuss a potential year-end rally in the stock market after the Fed’s rate hike came in around what was expected. I think a year-end rally is unlikely, and expect to see weakness in the stock markets as we move into 2016. We’ve already had three quarters in which revenues for the S&P 500 have declined and two quarters in which earnings have declined. We are seeing signs of weakness in the economy and the Fed’s rate hike impacts interest rates going forward.

One of the biggest factor pushing stock prices higher has been corporate buy backs, in which companies buy back their own shares, often issuing debt to do so. Think of just how destructive it is for a company to borrow money to buy back shares that then fall BELOW the price at which the company bought them! We are also seeing companies buy back shares while executives are selling their personal holdings – always something to look at if you are considering buying shares in a company. Higher interest rates make it more difficult for companies to issue debt in order to buy back shares and without corporate buy backs, we would have seen a net outflow from the equity markets. Tough to have prices go up when more people are leaving the stock market than buying into it!

Talking Fed Rate Hike with Maria Bartiromo

Talking Fed Rate Hike with Maria Bartiromo

With the Fed rate hike decision looming, on December 15th I had the great pleasure of being on Mornings with Maria (Bartiromo) for the entire three hours of her show. She is one incredibly talented and elegant woman, not to mention my new level of respect for being able to sit on set for three hours straight, starting at 6am. That meant being at the studio by 5:15am, which naturally demanded plenty of coffee; a beverage choice I came to understand as a serious oversight around the 1 hour 45 minute mark!

But I digress…

With the Fed’s decision and a rate hike hitting the markets the next day, there’s was plenty to discuss concerning the wisdom of to hike, or not to hike.  There are signs of the economy weakening, with many indicators at levels not seen outside a recession: 3 month moving average for retail sales, Durable Good orders, and manufacturing is in contraction.

For those who say manufacturing doesn’t matter… the ISM Purchasing Manager’s Index very closely correlates to year-over-year changes in the S&P 500.. and it is flashing warning signs. The chart below shows the ISM Purchasing Manager’s index versus the year-over-year change in the S&P 500 – think there might be a relationship!?

2015-12 ISM v SP500

All that being said, with how much the Fed has been talking up a hike, we’ve hit the point where the Fed must act or lose enormous credibility.

Speaking with Wall Street Journal Chief Economics Correspondent Jon Hilsenrath and Wilmington Trust Chief Economist Luke Tilley

Speaking with Savita Subramanian

Growth or Trust

This morning I had the great pleasure of joining Maria Bartiromo in studio for the last hour of her show on Fox Business. We discussed a wide range of issues from the Federal Reserve to removing the restrictions on oil exports, but given where we are in the election cycle, the subject of Hillary and her emails naturally came up.  The question is, should voters focus on growth or trust?  We spoke with Don Baer, former President Bill Clinton Communications Director, about what he thinks are the key issues for voters.

Spoiler alert – I disagreed!  Shocking I know, me, having an opinion…

The economy is facing some enormous challenges with the number of job openings continuing to be at record highs, while at the same time more and more people are giving up and leaving the workforce, thanks to a deeply structural skills mismatch.  We have a tax code that is so insanely complex that more people are employed in the tax preparation industry than in the auto industry – not exactly a recipe for a productive economy!  We have a regulatory regime that has become so burdensome that many small business owners simply give up or never even get their idea off the ground.

All that being said, I cannot evaluate a political candidate based solely on what they say.  Hillary Clinton put our nation’s security at risk based on her claim that it was more convenient for her.  For the love of Pete!  You carry a purse!  Cell phones aren’t that big and you have an entourage that could carry them both for you should you choose.  Many of the rest of us manage to survive the horrors of carrying two mobile phones.  Her excuse sounds pretty weak to me, which leaves me wondering what the real reason was and calls into question my ability to trust what she says.  So even if she did have compelling ideas for improving the economy, how could I know she’d follow through. The rest of the nation already views those in D.C. with well place suspicion, we don’t need more reasons to doubt the legitimacy of those we elect to govern.

Clinton Email – the final straw?

This morning I had the great pleasure of joining Stuart Varney and his team for an hour in New York. One of the topics we discussed was the fallout Hillary Clinton is facing over her use of a personal server for communications in her capacity as Secretary of State.  She claims she used a personal server so that she didn’t have to carry two phones. Seriously?  And she wants to be President?  She is going to risk national security for her personal convenience yet believes she’d be a great leader of the most powerful nation on earth?  Where does one start?

Chinese Market Crash: Opportunity or Disaster

On July 8th I spoke with Charles Payne about the Chinese market crash and what it means for investors.  Much of the pullback has been by actions taken by China’s government, starting in January, to reign in what was viewed as excessive use of leverage in the equity  markets.

Frankly, most investors having anything to do with China should do so in a limited fashion or a small portion of the overall portfolio and view it as a trade. The reality is that China is and will be for the foreseeable future highly volatile for many reasons. Most importantly, it is a decidedly opaque market. While the nation’s leaders are giving ample lip service, and may be quite honestly working to improve the veracity of financial reporting, it still has a long way to go. It is very difficult to consider, at least from this far away, money put into Chinese shares an actual investment in part because it is tough to have a high level of confidence concerning the value of the underlying company when confidence in the validity of the information reported is at best questionable.

Second, unlike most other major stock markets around the world that are dominated by professional money managers, retail investors account for around 85% of the trades in China. According to The Economist, almost 8 million new retail trading accounts were opened in the first three months of 2015 alone. In April regulators increased the number of accounts an individual can hold from 1 to 20, which led to a whopping 4 million accounts being opened on average every week since then! On top of that, during the 2007 market crash, Chinese investors were not able to buy shares on credit. Over the past few years, rules were relaxed such that officially a 2-to-1 leverage ratio was allowed, although with some creativity, investors could manage much more leverage.

Since the beginning of the year the government has taken multiple steps, such as increasing cash requirements for margin accounts and placing restrictive controls on attempts to circumvent rules around the use of leveraged trading to reign in what it feared was excessive leverage, culminating in a move on June 12th to again tighten controls that started the profound sell off. Since then the government has reversed course by taking steps ranging from reducing the amount of cash required for margin accounts to pushing government owned companies and their executives to actively buy shares in order to halt the slide. The future inclusion of Chinese stocks in emerging market indices will undoubtably increase demand over time, which will be a tailwind to stock prices, but investors would be well served to expect any investments in the nation to be highly volatile and most definitely not a core portfolio holding.

 

RT Boom Bust with Erin Ade talking about the Fed, Greece and Italy

On May 28th, I appeared on RT’s Boom Bust  with Eric Ade, talking about about the Fed, Greece and Italy.

For some time the Fed has been talking about raising rates, but the stream of economic data we’ve been seeing doesn’t give the FOMC, (Federal Open Markets Committee) much of an argument for raising rates.  Employment gains have also been exceptionally deceptive, with much of the gains in low paying industries.  However, if the Fed doesn’t raise rates, that significantly reduces the arrows in their quiver if/when the U.S. goes back into a recession, which given the normal business cycle timeline, would be reasonable to expect in the near-to-mid term.  That being said, with all the manipulations in the markets and the economies since the financial crisis, nothing is “normal” and the unreasonable has become the reasonable.  The single most important price in the economy is the price of money.  Once that is no longer priced freely  by the markets, which is impossible with all the interest rate manipulation by central bankers everywhere, the price of everything else gets seriously distorted.

We also discussed the prevailing narrative I wrote about in an earlier post surround Greece and the potential Grexit, which is based on the assumption that the nation’s problems stem from a workforce that is either lazy, stupid or worse.  Finally we discussed how much of what is happening in Greece, is present elsewhere in the world and in particular causing much of the economic angst in my second home, Italy.

 

Stocks Down in January – what does it mean with Neil Cavuto

All the major US market stock indices closed down in January.  Now I don’t put much stock, (pun intended) in correlation myths such as what the market’s movements in the month of January means for stock prices for rest of the year.  What I do look at is what is causing stocks to move in any particular direction.

I look at measures such as the Baltic Dry Index (which measures shipping costs for dry bulk commodities such as minerals and metals, grain and other food) hitting a 28-year low. That’s a serious warning sign!

Earnings growth expectations are being revised lower, but at Friday’s market close the S&P 500 was trading at 16.4x 2015 earnings per share of $122.05. That’s more than a tad rich for what is shaping up to be contracting earnings in the first half of the year, which in our view puts even more pressure on earnings expectations for the back half of the 2015 in order to growth expectations of 4.4% per FactSet.

On top of that, the strengthening dollar is causing serious problems for a lot of large companies. For example, the S&P 500 companies earn roughly 27% of sales abroad. The weak global economy coupled with the appreciating dollar and falling oil has led companies such as Caterpillar (CAT), Procter & Gamble (PG), and Pfizer (PFE) to disappoint analysts last week. Pfizer reported that nearly all of its 3.3% revenue drop was due to the strong dollar while Caterpillar also cited reduction in construction in oil-producing regions, weak demand from mining companies along with a 12% decline in retail machinery sales.