Friday, October 23, 2015 |
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Will Latest Central Banker Blitz Work ... When All Others Failed?
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By Mike Larson | |||||||||||||||||||||||||
It
started yesterday when European Central Bank President Mario Draghi and
his pals didn’t cut rates, but DID strongly hint they would act later
this year. Among the options he put on the table: An extension of
Euro-QE beyond its current expiration date of September 2016 … an
expansion of the type and quantity of bonds the ECB will buy … or even a
cut in interest rates deeper into negative territory. The bank’s
deposit rate is currently minus-0.2%.
That caused the euro to plunge by two
full cents against the U.S. dollar. It also lit a fire under the Dow
Industrials — even as junk bonds barely budged, oil was basically
unchanged, the Russell 2000 badly lagged and many key financial and
health-care stocks languished.
So
does this mean happy days are here again, and that asset prices will
climb into the clouds? Is my call for an overall weakening trend in
stocks, interspersed with very sharp, short-term bear market rallies,
off base?
First, you have to ask why
the ECB is taking even more steps just six months or so after it
launched Euro-QE. The answer is pretty obvious: Because the program was
an abject failure! It didn’t boost European growth, nor did it boost
European inflation, with prices falling 0.1% in September.
Second,
you have to ask how a further dollar rise would be positive. The
surging dollar has helped crush revenue and profit at a wide swath of
U.S. multinationals, not to mention put downward pressure on commodities
and resource stocks. So any additional gains driven by a new round of
euro depreciation will only make a bad problem worse.
Fourth,
markets have come a long way in a short period of time … but
simultaneously haven’t accomplished much at all. Consider: While the Dow
Industrials have jumped 1,600 points in just a couple of weeks, they’re
only back to where they were in August. If that’s all we can get out of
a huge round of global policy easing, what does that say about the
underlying problems facing markets and the economy overall?
Finally,
every previous round of easing in the early and middle stages of the
bull market prompted huge rallies in everything. This time around, we’re
seeing huge divergences by asset class, sector, currency, and economy.
That only serves to underscore the paradigm shift I’ve highlighted — that the law of diminishing returns is a major, new challenge for investors.
So sure, we’ve rallied more than I expected in the short term. And there are a small handful of stocks out there I still like,
as I mentioned the other day. But I seriously doubt that another round
of the same medicine that repeatedly failed in the past will push an
incredibly old, divergent, and fundamentally challenged market back into
bull territory.
Now,
let me hand you the floor. Do you think the latest moves by the ECB and
PBOC are game changers? Or are they just more of the same kinds of
actions that haven’t worked in the past? Do you think this is an
oversold rally, or the start of a move to new all-time highs in the
indices? Are the problems in China worse or better than generally
assumed, and what does that mean for the stock market outlook?
Here’s the Money and Markets website link — put it to good use this weekend and I’ll do my best to address your comments on Monday.
Are
companies maximizing shareholder wealth in a wise fashion, or are
executives just padding their pockets? Are stocks going to continue to
rally, or are there warning signs out there that point toward renewed
volatility ahead? Those were a few of the questions you tackled online
in the past 24 hours.
Reader Regis said: “I think what Yum Brands (YUM) and Credit Suisse (CS)
are doing are the beginnings of a long tragic condition that exists in
the worldwide marketplace. I personally expect the condition to spread
rather quickly over the next six months.”
Reader Steven
added: “I get the impression that those who manage corporations do so
for their own interests and take the shareholder and stakeholder along
for the ride. The only way we ever know about the outcome of their
decisions is the stock market’s response in the form of share prices. I
know that it would be a bit much to ask for, but how about a greater
focus upon fiduciary duty to the company, shareholders and stakeholders
as stewards who are accountable rather than farmhands whose only job is
to milk the (cash) cow?”
Reader Kirk
also shared this perspective: “It’s been my experience after 30 years
in corporate America that half of the publicly traded companies are run
by executives that depend on fear rather than ideas and leadership, and
the result is a ‘play it safe’ mentality that crushes innovation.
“My last 15 years were with a company
that went through four mergers, countless reorganizations, and whose
net effect was the destruction of $10 billion in value and Chapter 11.
Nevertheless, the 3 CEOs that oversaw this train wreck (and their
minions — they always have their ‘A Team’) walked away with millions.
Shame on me for not getting out sooner.”
When it comes to the behavior of the market, Reader H.C.B.
said: “Big European banks are in trouble and don’t know what to do. Who
is next? Could it be that U.S. banks are eventually headed for the same
troubles as Credit Suisse and Deutsche Bank, only with no ‘Plan B’? It
sure is looking like we could be next.”
And Reader Jim
added: “Another reader recently pointed out quite correctly that the
market isn’t the economy. The stock market has certainly been juiced
with free money, but I think you would have to admit that real economic
growth is not all it should be.
“I do not think the U.S. economy is
in very good shape at present. But I do think the macro situation has so
deteriorated that none of the politicians can fix it, and both parties
are responsible.”
Thanks
for weighing in. Obviously, we’ve seen a bit more rally in the markets
than even I anticipated. But additional easing measures are clearly
doing next to nothing for the real economy, even as they’re juicing
asset prices again. And even there, I would point out the “juicing”
effect is less robust than what we’ve seen from past rounds of monetary
steroids. That tells me my forecast of diminishing returns from QE is
panning out.
Those are my views anyway. You may think differently, and that’s fine — let me hear about it at the website using this link.
● You’d
think that plunging commodity prices would enforce production
discipline on producers around the world, and that their cutbacks would
help fuel a future recovery. But as the Wall Street Journal noted today, many companies have gone on overproducing despite price declines.
Why?
Because their costs are dropping sharply too, and because they still
need to bring in cash to service debts. That could prolong the
already-lengthy downturn.
● The
strongest hurricane in the history of recorded weather is closing in on
the Mexican coast. The National Hurricane Center clocked winds of a
whopping 200 miles per hour for Hurricane Patricia, and forecast
landfall later today somewhere south of Puerto Vallarta. The storm will
rapidly fall apart when it hits the mountains of Mexico, but its
remnants will likely cause heavy rains and flooding over Texas in a
couple days.
● Republican
representative Paul Ryan looks set to succeed John Boehner as Speaker
of the House after securing a pair of endorsements. The Wisconsin
legislator hasn’t sounded enthusiastic about the position, but appears
to be taking the position for the greater good of the GOP.
Will
commodity producers ever find religion and cut output? Is the latest
batch of technology sector earnings enough to turn the market tide for
good? Any thoughts on whether Ryan will make a better speaker and face
of the Republican Party? Head over to the website and let me know.
Until next time,
Mike Larson
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Sunday, October 25, 2015
Will Latest Central Banker Blitz Work ... When All Others Failed?
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