Economic Booby Traps
- A ridiculous rally: Two pitiful reasons to bid up two major stocks
- Subprime auto loans: Another symptom of the “too much stuff” economy
- How following a Wall Street “rule” can deny you 2,010% gains
- A different take on the “secret sauce” of Michael Bloomberg and his terminals
- Bouquets and brickbats from readers as The 5 recovers from “Snowzilla”
“Wall Street never predicts a recession,” says a blunt-as-usual David Stockman this morning.
“And that’s basically why the stock market goes up for five–seven years on a slow escalator, and then plunges down an elevator shaft during several quarters of violent after-the-fact retraction when an economic and profits downturn has already arrived.”
As we write this morning, the Dow industrials are up 225 points, at 16,112. That’s enough to erase all of yesterday’s losses. Helping pull up the Dow are conglomerate 3M (MMM) and consumer products titan Procter & Gamble (PG). Both reported earnings this morning.
MMM Is up nearly 5% at last check. According to Reuters, MMM “reported a better-than-expected quarterly profit and backed its 2016 forecast.”
What made the difference? A big bump in sales? A new-and-improved Post-it note?
No… MMM cut 1,500 jobs in the fourth quarter to save $130 million pretax this year.
How about PG, which is up nearly 3% as we write? Well, it reported a 2% gain in “organic” sales. That’s not a special line of health and beauty products; it’s a financial term of art that “strips out the effects of currency moves, acquisitions and divestments,” as The Wall Street Journal delicately puts it.
In other words, it’s an accounting trick. But in the real world, the strong dollar means PG’s earnings are now forecast to fall 37 cents a share — more than triple its previous forecast of 11 cents a share.
The numbers from MMM and PG spotlight how “there are plenty of economic booby traps hiding in plain sight,” David Stockman goes on.
“Yet the sell side was out over the weekend with noisy chatter about stocks now being on sale at a discount, and that selective buying of the dip is once again in order.
“According to these Keynesian Kool-Aid drinkers, the U.S. economy is doing ‘just fine’ because job growth is robust, real wages are rising and the consumer is fixing to commence a shopping spree at any moment now.”
But you don’t have to look hard to find “economic booby traps” — assuming you look in the right places. David’s found a big one in auto sales.
We’ve kept a wary eye on subprime auto loans for nearly three years. The situation is reaching a breaking point not unlike subprime mortgage loans back in 2007–08.
“During the last 12 months,” David tells us by way of update, “retail sales of autos were up 6.1%, or by $65 billion. But then again, auto loan paper outstanding was up by nearly $90 billion!
“That’s right. Auto lenders — especially the legions of subprime nonbank operations that have sprung up with junk bond financing — have been extending credit to anyone who can fog a rearview mirror.”
Since auto sales began to recover in mid-2010, auto credit outstanding is up $340 billion. That’s a full 90% of the $375 billion in auto sales.
Sooner or later, the uptrend is destined to end — just like cash-out refinancings for homes was destined to end in 2007.
“Like then,” says David, “the pool of creditworthy borrowers has been depleted, meaning that it is only a matter of time before the debt-fueled auto boom of recent years goes pear-shaped.”
Don’t get us wrong: A crash in auto sales won’t trigger the next recession and market meltdown. The auto market is only a fraction of the housing market’s size. But it’s a symptom of an economy that’s rapidly stalling out.
It comes back to a point we made here on Friday about something pointy-headed economists call “inter-temporal smoothing” — what you or I might call “pulling demand forward” from the future.
Subprime auto loans, made possible by easy-credit policies at the Federal Reserve, don’t produce lasting economic growth. “They just steal sales and output from future years,” says David, “thereby booby-trapping the Main Street economy with recession risk that the Keynesian Kool-Aid drinkers refuse to recognize.
“The world economy is actually going to shrink for the first time since the 1930s,” David believes.
As he’s explained here periodically, there’s literally “too much wealth” out there, thanks to central banks pulling demand forward from the future. Too many cars, too many idle American oil wells, too many empty skyscrapers in China. There’s more “stuff” than the world is going to need for years, or even a decade.
That’s the lesson of MMM’s earnings this morning, made possible not by prosperity but by cutting payroll. That’s the lesson of PG’s falling sales once you account for the strong dollar. Wall Street might be saying “buy” this morning… but reality is sure to set in sooner or later.
David reminds us that in June 2008, “no Wall Street banking house was predicting a recession, yet by then the Great Recession — the worst economic downturn since the 1930s — was already six months old.”
After the market closes on Thursday, David anticipates a major earnings shock — one that Wall Street might be unable to sugarcoat. “I believe one company’s management could drop a bombshell on unsuspecting investors,” he says.
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In the meantime, Wall Street is waiting with the proverbial bated breath for another earnings announcement — from Apple. It comes after the close today.
Traders are jittery about whether we’ve reached “peak iPhone.” And with good reason. How many Chinese are willing to shell out $803 (at today’s exchange rate) for a base-model iPhone 6s?
But that’s not why Apple’s on our mind this morning. “Take a look at this chart,” says our new acquaintance we introduced yesterday, the one we’re calling Trading Guru X. “Would you buy this stock?”
That’s a 446% leap from the spring of 2003 to the spring of 2005. “Would you buy it after it has gone up so much?” Trading Guru X asks.
“Most people would think, No way. It’s in nosebleed territory. This stock is expensive. It will reverse and crash soon.
“And that’s why most people don’t get rich in the markets.”
Because look what happened after 2005, when The Wall Street Journal was saying, “Apple shares look expensive.”
“That’s a gain of 2,010%,” says Trading Guru X, “enough to turn a small retirement account of $50,000 into more than $1 million.”
But to make big gains like this, you have to be willing to break one of Wall Street’s sacred “rules.” Otherwise, you end up like the poor folks we described yesterday who thought gold stocks were so cheap they couldn’t get cheaper.
More from Trading Guru X as the week goes on…
It’s not just stocks in the green today: Gold sits at $1,118 — a level last seen in October. And crude is roaring back from yesterday’s sell-off, a barrel of West Texas Intermediate up 5.5%, at $32.06.
Even Treasuries are hanging in there, the bid on the 10-year just above 2%.
“You’d have to go back quite a few years to find that $1,500-a-month Bloomberg terminal you write of,” says a note we got from hedge fund manager Erik Townsend. “They’re above $2,000 now, and that’s just for the platform, before you start paying for market data subscriptions, without which the thing is basically useless.”
Yes, I was going off a very dated memory. I should’ve consulted with our accounting folk!
We got into the matter yesterday of how Michael Bloomberg made his billions. Economics blogger Robert Wenzel says in the ’80s, Bloomberg secured access to an “inside quote” on Treasury securities no one else could.
“My take is different,” Erik writes. “Bloomberg is successful because he knew his market. He was dealing with finance guys — notoriously, the most computer-illiterate imbeciles on the planet.
“The whole business model is to assume the customer is just way too stupid to use the damned thing, so they have an absolutely incredible ‘help desk’ whose real purpose is to hand-hold seriously rich and self-important finance guys through simple computer tasks that their grandchildren view as trivial but which continue to elude them.”
As a onetime software entrepreneur, Erik assures us the Bloomberg terminal “to be without a doubt the most pathetic malengineered piece of software I’ve ever encountered. It has more than 2,000 functions, and there’s literally almost NO documentation.
“The way it works is you call your Bloomberg sales rep and tell him what you are trying to accomplish. Then he uses his human network of Bloomberg guys inside the company to find somebody who knows how to use the function you require. Then that guy calls you on the phone and holds your hand through using it.
“All of this is supported by a special ‘Bloomberg Keyboard’ with colored function keys (something the rest of the computer industry considered dated by the late ’70s). The keyboard replaces hard-to-grasp concepts like the ‘Enter’ key and labels them ‘GO’ instead.
An ingenious device to separate the wealthy from their money every month…
“What about the segment of the market that has at least grade-school-level computer skills, who want to simply use an online help system to help themselves and not have to wait for a bunch of human networking to occur inside the Bloomberg organization before they can answer a simple question?
“The reason Mike Bloomberg is a billionaire is precisely that he’s astute enough to recognize that demographic simply doesn’t exist within his target market. Bond traders need hand-holding and colored function keys, else computers are just too hard for them to grasp! It’s pretty pathetic.”
“Dave, considering Bloomberg’s history on the Second Amendment,” writes one of our regulars, “I think the NRA could muster enough votes from members, family and friends, hunters, etc., to defeat him if he got on the ballot in 2016.”
The 5: If it were a two-way general election, yes.
People forget, but one reason Al Gore lost the close race in 2000 was his vocal anti-gun rights stance. It probably cost him the electoral votes of Arkansas, Tennessee and West Virginia — which Clinton won in ’96. Had Gore won those three states, Bush would’ve lost in the Electoral College and Florida would’ve never been an issue.
This year, if it’s a three-way race? (Or four-way, if the GOP powers that be deny Trump and he too runs independent along with Bloomberg?) Who knows? It’s going to be awful no matter what.
“Wimps,” says the subject line of an email after we described how much of yesterday’s episode was produced from home offices amid a 29.2-inch snowfall in Baltimore.
“Thirty-four inches Friday, 34 inches shoveled out Sunday. Went to work Monday.”
The 5: We don’t know where you’re from, but your editor understands the sentiment. I grew up in the Chicago area — where snowfall can take down mayors, as it did in 1979. I’ve lived in even snowier places, like Denver and Buffalo.
Baltimore? It’s a different animal. Only 20 inches or so falls in a typical year. The alley to our parking lot is still nearly impassable today, and many parking spaces are piled high with snow. But we press on.
“Dedication. Vitality. Our current central government has neither. Our nation has both and more to spare! I mark with admiration the dedication of your staff to show up or be there as necessary to continue your efforts.
“My employer follows the central government’s Office of Personnel Management (OPM) attendance requirements, and we have just gotten notification that the central government is again closed tomorrow (Tuesday, the 26th). And glory be, I do not have to report for work tomorrow!
“How can we as a country manage to continue living without these marvelous disfunctionaries at their work stations pulling the necessary levers of control such that the rest of us mere civilians/citizens manage to breathe in and breathe out?! I say we have them come in every other day and cut their pay in half! Just a start, and just sayin’.”
“While I am thankful that your proofreaders/fact-checkers made it through your Baltimore snow OK,” writes our final correspondent, “I am even more thankful they are able to help us poor hoi polloi here in flyover country navigate the even heavier blizzard of lies, propaganda, misinformation and bloviations from the co-opted lamestream media.”
The 5: Everyone needs a purpose in life. And hey, it’s up to 48 degrees out!
The 5 Min. Forecast
P.S. As indicated above, even in a hypothetical four-way presidential race — Rubio, Trump, Bloomberg, Clinton — it doesn’t matter. They all want more of your money! More of your privacy! More control of your life!
Here’s how you can keep what’s yours and make 2016 the best year of your life. Click here to learn how to receive this complete guide FREE for a limited time.