Hello again,
Our (from my newsletter) Scorecard:
Gain for November 2015: +20.94%
Gain for October 2015: +11.21%
Loss for September 2015: -0.11%
Gain by 9/1/15: +18.09%
What’s new since the last edition:
Now we are in December 2015 and most December months are very good for the market-historical trend. Many people are expecting the Santa Claus rally to hit during the last part of December. It is a well-known ‘secret’ on Wall Street is that analysts rarely come out with bad news in December as that could spoil the ‘nice holiday mood’ and bring down Wall Street bonuses; so they wait till January to come out with bad news. On 12/18/15, Janet Yellen of the Federal Reserve is expected to announce the first interest rate hike since the recession of 2008. Unlike in September of 2015, the market is expecting this Fed increase. We can see this from the increase in bond yields as well as the rise in the dollar. Even though the employment report was strong, there are other indicators showing that some segments of the economy are slowing down-manufacturing for example. In my opinion, the Feds as a face saving gesture, might increase rates but limit it to 0.125%; instead of the 0.25% expected by most. Banking stocks should do well in a rising interest rate environment. Most of all this will lead to a lot of volatility in the stock market. David Kostner of Goldman Sachs is predicting that S&P 500 would end at 2100 on 12/31/2016; since it is at 2091 on 12/1/15, they are expecting the market to move within a narrow range in 2016-as it did in 2015. He was correct about 2015 though. My feeling is that the market might move up in December 2015 and then see a severe decline in early 2016. On 11/13/15, CNBC, Art Cashin, UBS Floor Manager for the NYSE stated that most major banks are short on corporate bonds. That could be a self-fulfilling prophecy and lead to the bond crisis we all feared. On 11/12/15, on CNBC, Wells Fargo reported that they see a severe drop in transportation equipment and usually that is a sign of a pending recession. Let us take a look at some of the sectors:
· Financials- This sector cannot move up till the Feds raise rates
· Energy- In a deep recession due to lower demand and excess supply
· Other commodities-In a deep recession due to China and other economies.
· Industrials-In a deep recession; mainly due to China shifting to consumer based economy.
· Exports, Tourism and foreign investments- Declining sharply due to the strong dollar
· Healthcare-Which has been strong for a long time is showing weakness due to price gauging by some pharmaceutical companies
· Utilities- Expected interest rate hikes is killing this industry
As the US economy heads towards ‘full employment’ (5% unemployment rate considered to be full employment with inflation under control), the consumer is doing well and the US consumer is about 70% of the US economy. Wages are rising so the Federal Reserve is concerned about ‘wage push inflation’. We see this in rising home and apartment prices. If oil and commodity markets stop being deflationary, we could see the inflation rate spike up and then the Feds will have no choice but raise interest rates significantly. Auto revenue would set a record for 2015. Most analysts believe that this trend cannot last and 2016 would not be so friendly for the autos. However what was pleasantly surprising was that as it happened with the US economy since 2009, in the Eurozone, the auto industry is doing very well. This is a sign that the European economy is on the rebound. Interest rates going up in the US and the rising US dollar is not good for the US car industry but rising employment and wages in the US would drive up demand. As of 12/1/15, GM P/E at 13 and Ford P/E at 12, these are cheap stocks.
On 11/30/15, Bloomberg reported that an army of index funds and ETFs at Vanguard have been taking $20 Billion from the rest of the financial industry and for the past 11 months alone they have seen a net inflow of $365 Billion. In the future, when these funds and ETFs see redemptions, you will see good stocks falling rapidly because they belong to these funds. Be ready for buying opportunities!
For the past few months I have been writing about hedge funds and drug companies who are in to price gauging and Valeant (VRX) was one of the worst culprits. Their share price dropped from $250 to $70 within 5 months. On 11/6/15, CMBC announced that the CEO of Valeant took a personal loan from Godman Sachs on his holdings and when he could not make his margin call, Goldman Sachs sold one million of his stocks! Divine justice!
On 11/22/15, there was an interesting article in Barron’s and it was an interview they had with Larry Jeddeloh, editor of the ‘Institutional Strategist’ and here are the highlights:
· Saudi Arabia is negotiating defense deals with Russia
· China is negotiating oil deals with Saudi Arabia to pay in Yuan and not in US dollars.
· Saudi Arabia is running a 20% deficit on their current budget
· Russian defense contracts for Saudis and the others in the Middle East
· Oil (WTI) to go down till 1/1/16 and then rise to $70 or $80 in 2016.
· China is building a highway from China to Europe
· IMF including the Chinese Yuan in SDRs will make central banks buy Yuans and the value of the Yuan will go up.
· If the S&P 500 go over 2125 in 2015, it will squeeze the shorts and the market would sky rocket during the last few weeks of 2015
· A bear market for stocks in 2016
· Optimistic on gold as China will have the world’s biggest exchange for gold in Shanghai. Gold will go up to $2,700.
Technical analysis or chart analysis is the best way to get the direction of the market. According to some technicians (Barron’s, 11/30/15) the chart of the S&P500 reminds the chartists of 2007 but they do not think that it is in our immediate future. In my opinion, we might see a bull rally during the next few weeks and a volatile, bear market in 2016.
I wish you all a Merry Christmas and a Happy New Year.
Lalana Fernando
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