OVERNIGHT

China has some big problems and two of them are industrial over production and a glut of property. Despite recent government efforts, investors appear unconvinced that their government's latest move will solve them.

In overnight trading the WSJ reports most Asian stock indexes fell with few exceptions.

Shares in China fell Tuesday as investors met Beijing’s latest efforts to boost its economy with skepticism.

The Shanghai Composite Index fell 0.5% to 3623.56, although it remains at its highest levels in almost a month. Analysts say they are unconvinced about the feasibility of Beijing’s latest economic blueprint after an annual economic conference wrapped up Monday.

Japan’s Nikkei Stock Average was down 0.1%. The benchmark was lower for the third-straight day, bringing its losses to about 3% since the Bank of Japan announced adjustments to its easing program last Friday.

Hong Kong’s Hang Seng Index was down 0.1%, while Australia’s S&P/ASX 200 was flat and South Korea’s Kospi fell 0.1%.

A communiqué of the Central Economic Work Conference, released by China’s official Xinhua News Agency Monday, showed that Chinese leaders next year aim to tackle long-term problems haunting the world’s No. 2 economy, such as persistent industrial overcapacity and a property glut.

STAY DILIGENT

Here is a good, succinct discussion of some of the potential problems going into 2016.

marctomarket.com/2015/12/four-drivers-of-investment-climate-in

We have touched on all of them several times--China's transition to domestic consurmerism versus buying everything in sight; the fungibility of commodities and emerging markets, where you see one the other is close by; the dollar and the yuan; the latest Wall Street betnoir term, divergence; the EU and Japan and you can add the Tawain central bank that eased the money supply to a long list of others; the Fed, interest rates and their impact.

There is little doubt the strong U.S. dollar and the spreads in the bond market it creates are worth watching. Of import too is it's impact on the earnings of multinationals. Then there is gold, the one relic much of the investment community loves to hate.

So where will the surprises come from and what might they be? The EU, heaven forbid, given another tragic terrorists attack could become a smoking hot political cauldron of separatism, spreading the fear and further doubt about EU viability.  And the same this election year in the U.S. Though it's hard to see how, inflation might also surprise. Those easy money spigots were open for a long time and in several places.

With China apparently declaring it's no longer the commodities buyer of last resort and the Fed opting, at least for the nounce, to purchase a ticket on that train, who knows what could happen? So enjoy the read and stay diligent in 2016.

FEDERAL RESERVE LEADERSHIP

We realize that when we post or share stories like this one from The Daily Bell, a libertarian site, people will roll out their usual barrage of epithets, it comes with the territory. People assume we belong to this or that group snd so forth. We don't.

We are not hate mongers of any sort. There is an old Hollywood western movie, now a classic, famous for one line: "Prove it." We are simply in search of the truth, not the mostly doctored up, managed stuff MSM coughs up daily.

In this article it mentions Americans "struggle to pay for food and shelter." To that we would add healthcare. Truth, real truth, is suppose to be palatable to all sides, at least the airing out and search for it. Once upon a time the stock market indexes were held up by what was called The Nifty Fifty. The meme then was you could buy them and hold them forever. Today, it's The Nifty Few holding up the ceiling.

There's some tough talk in here. But the truth is hardly ever soft. In our years of studying and being in the markets, more than a kernel, to those who wish to take their blinders off. Our experience may not invalidate yours. But in no way does yours invalidate ours in a so-called free, open society. And in no way is it a violation of any hate speech, hate mongering or zero tolerance of today's of dangerous PC code.

Anthony Wile: Are there other reasons for this hike now that we are not hearing about? 

Jay Taylor: Yes, I think so. In addition to having some firepower for future rate decreases and to try to maintain some credibility, I think the preservation of the petrodollar is a main concern. Both China and Russia have not tried to hide their hatred for the petrodollar, which 
has enabled the U.S. to engage in systematic theft of global resources. The Chinese and Russians have been dis-hoarders of the dollar and have been piling into gold. Reportedly, the Russians have been building their gold stockpile as they sell their oil to China not for dollars but for gold. The BRICS are systematically setting up their own banking system to compete with the petrodollar system that has been the heart of the Anglo-American and NATO world post World War II. So raising rates has the effect of making the dollar somewhat more 
desirable vis-a-vis the even more pathetic global currencies.  

Anthony Wile: Overall, has the Fed been doing a good job managing the economy? Can the Fed manage the economy? 

Jay Taylor: The idea that a group of people can better manage markets than the collective and spontaneous wisdom of millions of market participants is as ridiculous as believing in the tooth fairy. Why in the world have we not learned anything from the experience of the Soviet Union? Not only has the Fed not been doing a good job, they have been systematically destroying capitalism by disallowing price discovery of capital. Not only that but they have been involved in bailing out criminal banks that lied and stole during the housing bubble. Not only is the Fed a complete failure in terms of doing what it is supposed to do, it is also a criminal organization made legal by criminal politicians. 

Anthony Wile: What's your impression of Janet Yellen? Is she in charge? Are others? 

Jay Taylor: The shareholders of the Fed – the money center banks are in charge. She, like the president of the U.S., is merely a well-indoctrinated puppet.

 Anthony Wile: What's your impression of the Fed these days? Is it losing credibility? Is it damaged in the eyes of the public? 

For the answer to that question you'll have to read the article. 

thedailybell.com/exclusive-interviews/36700/Anthony-Wile-Jay-Taylor-Fed-Leading-Us-Into-Global-Insolvency 

Jay Taylor: Of course, in my eyes and in the eyes of most Austrian economic thinkers, the Fed has been losing its credibility for years. It was created supposedly to reduce the business cycle. But history shows, starting with the Great Depression, that they have only served to exacerbate the business cycle by creating endless bubbles. Not only that; they have destroyed the purchasing power of the U.S. dollar by something like 97% since the Fed's birth in 1913. The only question remaining is how long will it take before Pinocchio's nose is so long that the whole world sees it as the fraud that it is? - See more at: http://www.thedailybell.com/exclusive-interviews/36700/Anthony-Wile-Jay-Taylor-Fed-Leading-Us-Into-Global-Insolvency/#sthash.UJEU096O.dpuf

Jay Taylor: Of course, in my eyes and in the eyes of most Austrian economic thinkers, the Fed has been losing its credibility for years. It was created supposedly to reduce the business cycle. But history shows, starting with the Great Depression, that they have only served to exacerbate the business cycle by creating endless bubbles. Not only that; they have destroyed the purchasing power of the U.S. dollar by something like 97% since the Fed's birth in 1913. The only question remaining is how long will it take before Pinocchio's nose is so long that the whole world sees it as the fraud that it is? - See more at: http://www.thedailybell.com/exclusive-interviews/36700/Anthony-Wile-Jay-Taylor-Fed-Leading-Us-Into-Global-Insolvency/#sthash.CEbUpDt3.dp thedailybell.com.

Jay Taylor: Of course, in my eyes and in the eyes of most Austrian economic thinkers, the Fed has been losing its credibility for years. It was created supposedly to reduce the business cycle. But history shows, starting with the Great Depression, that they have only served to exacerbate the business cycle by creating endless bubbles. Not only that; they have destroyed the purchasing power of the U.S. dollar by something like 97% since the Fed's birth in 1913. The only question remaining is how long will it take before Pinocchio's nose is so long that the whole world sees it as the fraud that it is? - See more at: http://www.thedailybell.com/exclusive-interviews/36700/Anthony-Wile-Jay-Taylor-Fed-Leading-Us-Into-Global-Insolvency/#sthash.CEbUpDt3.dpuf

Jay Taylor: Of course, in my eyes and in the eyes of most Austrian economic thinkers, the Fed has been losing its credibility for years. It was created supposedly to reduce the business cycle. But history shows, starting with the Great Depression, that they have only served to exacerbate the business cycle by creating endless bubbles. Not only that; they have destroyed the purchasing power of the U.S. dollar by something like 97% since the Fed's birth in 1913. The only question remaining is how long will it take before Pinocchio's nose is so long that the whole world sees it as the fraud that it is? - See more at: http://www.thedailybell.com/exclusive-interviews/36700/Anthony-Wile-Jay-Taylor-Fed-Leading-Us-Into-Global-Insolvency/#sthash.CEbUpDt3.dpuf

Jay Taylor: Of course, in my eyes and in the eyes of most Austrian economic thinkers, the Fed has been losing its credibility for years. It was created supposedly to reduce the business cycle. But history shows, starting with the Great Depression, that they have only served to exacerbate the business cycle by creating endless bubbles. Not only that; they have destroyed the purchasing power of the U.S. dollar by something like 97% since the Fed's birth in 1913. The only question remaining is how long will it take before Pinocchio's nose is so long that the whole world sees it as the fraud that it is? - See more at: http://www.thedailybell.com/exclusive-interviews/36700/Anthony-Wile-Jay-Taylor-Fed-Leading-Us-Into-Global-Insolvency/#sthash.kSxDMFou.dpuf

Jay Taylor: Of course, in my eyes and in the eyes of most Austrian economic thinkers, the Fed has been losing its credibility for years. It was created supposedly to reduce the business cycle. But history shows, starting with the Great Depression, that they have only served to exacerbate the business cycle by creating endless bubbles. Not only that; they have destroyed the purchasing power of the U.S. dollar by something like 97% since the Fed's birth in 1913. The only question remaining is how long will it take before Pinocchio's nose is so long that the whole world sees it as the fraud that it is? - See more at: http://www.thedailybell.com/exclusive-interviews/36700/Anthony-Wile-Jay-Taylor-Fed-Leading-Us-Into-Global-Insolvency/#sthash.kSxDMFou.dpuf

CHILLOUT AT YOUR OWN PERIL

What didn't happen is usually as important if not more so than what did. Each year around this time we get projections and expectations about the market. There's no shortage of them. And there never will be.

For 2015 many were calling for 10 percent or better returns and near double digit increases in earnings of the S&P 500. Other surprises included the Fed's paralysis about hiking interest rates and just how low oil prices could go.

For a while the market celebrated those plunging oil prices, but if every cloud has a silver lining, every silver lining has a cloud, as an investor associate likes to remind. And as has been noted by many, the 45 percent drop in oil prices in 2014 didn't prevent a follow-up 30 percent decline so far in 2015.

Like a room full of measles, that can be contagious. See the current junk bond market and the panic there that now exceeds not just those highly-margined, peripheral producers who borrowed cheap money heavily and depended mightily on such to make a profit.

And a funny thing happen to consumers on the way to lower punp prices, a so-called beneficiary of those plummeting energy costs.

American consumers are getting a windfall of billions of dollars a week thanks to low fuel prices. The U.S. economy has little to show for it.

The price of a gallon of regular gasoline fell to $2 nationally Sunday and was well below that in much of the country, AAA said, marking the lowest price outside of a recession in more than a decade. As a result, Americans reaped more than $100 billion in savings this year alone, or about $550 per licensed driver, according to the motorists group. 

When gas prices began plummeting last fall—they were above $3.50 a gallon as recently as August 2014—many economists predicted the savings would act as a giant tax cut by jolting long-weary consumers into stronger spending and pushing up sluggish economic growth.

Instead, the economy remains mired in the slow-growth trajectory that has marked the economic expansion over the past 6½ years. Consumer-spending growth outside of gasoline has decelerated, advancing 3.8% from a year earlier in October, far slower than the comparable 4.9% gain in October 2014, according to Commerce Department data. Consumer spending accounts for more than two-thirds of U.S. economic output, according to the WSJ.


Another surprise has been the strength of the U. S. dollar and the havoc it been causing. The greenback is up 22 percent over the past two yeas with what many expect more strength to follow in 2016. For evidence of the damage check out multinationals and emerging markets.

The dollar is a major component of the divergence meme and the uncertainty and fear associated with that. Most commodities are dollar denominated, thus part of the reason countries like China want to un-peg from it. Spreads on sovereign bonds, especially at the long end, are also impacting dollar strength as the U.S. flashes growth hopes around the globe.

This might be seen as economic blaspheming but so be it. The strong dollar quite likely has hoodwinked the Fed into miscalculating low inflation. It's not nearly so low as any honest, straight forward, unfiltered man or woman on the street in Middle America would prove.

Healthcare costs are soaring, if you think not ask those who've seen a doubling or tripling in their premiums since Obamacare. Or ask employers facing ever-rising prescription drug spending costs for their employees. According to the WSJ, quoting a benefits consultant, "Nationally, employers' pharmacy costs are rising about 9.5% this year and will go up 10% in 2016."

“This is a tsunami,” said John Bennett, president and chief executive of Capital District Physicians’ Health Plan in Albany, N.Y., a nonprofit insurer with corporate clients. Pharmacy costs are “the single biggest driver of our medical inflation in the last few years.”

Recall prescription drugs were touted as a way to hold down costs by cutting down on the need for in-patient care or hospitalization. Recall also the usually loser here is the patient and the quality of services  received. Employers respond because push leads to shove.

In tackling them, employers are becoming more aggressive. Many have expanded requirements that doctors obtain advance approval from health-plan administrators for certain costly drugs, a practice called prior authorization. For instance, about 89% of employer health plans now mandate prior authorization for certain anti-inflammatory drugs for diseases like rheumatoid arthritis, up from 61% in 2007, according to survey by drugmaker EMD Serono Inc.

Another increasingly common strategy is “step therapy,” which requires that patients be treated with lower-cost drugs before the health plan will pay for a more expensive option. This year, about 69% of employers had step-therapy rules, compared with 56% in 2011, according to the Pharmacy Benefit Management Institute, a research organization. 

A newer tactic is pursuing supply contracts that cap annual price increases for drugs at a set percentage, says Jim DuCharme, CEO of Prime Therapeutics, a pharmacy-benefits manager that negotiates such deals.





Here's another chart about inflation. The bottom line is every cloud has a silver lining and every silver lining has a cloud. Forget that at your own peril. Now that the Fed has come up with a new way to tamper with things in the future, however, a foolproof way we are told, we should all just take a deep breath and chill out.

SENTIMENT INDICATOR

This time of year there is a lot of sentiment in the air, the well known so-called "Goodwill and peace on earth" to all supposedly among them.

So what's the sentiment in the market among investors given the Fed's long awaited recent interest rate hike? Well, according to the latest American Association of Individual Investors survey, it's not so cheerful. Apparently, only 24 percent consider themselves bulls, only the 10th time since the bull market started in 2009 that percentage has dropped below 25 percent, according to the latest issue of Barron's.

Some will say it's a good contrarian indicator. Maybe and maybe not.

The Standard & Poor's 500 has gained 7.9% on average during the six months after a sour survey, only slightly better than all six month periods, Barron's noted, quoting data from an investment group. This suggests that during this bull market, at least, individual investors have not been the 'Wrong Way' Corrigans that they have the reputation for being.

KEEP THE CHINESE DEVALUATION IN VIEW

The chart below is from marctomarket.com/2015/12/great-graphic-large-yuan-devalution and it  covers what we have noted in our latest financialspuds.blogspot.com/2015/12/overnight about the situation of the Chinese economy. Its is still a beggar thy neighbor move whatever you call it.

Obviously, there is no consensus among economists. As Chandler notes: We suggest that China has merely confirmed what it has been doing.  The close link between the yuan and dollar prevents China from pursuing a more independent monetary policy. The removal of accommodation by the Federal Reserve, which is widely expected this week, is not appropriate for China, though the data over the weekend (industrial output, retail sales, and fixed asset investment) suggests the world's second largest economy may be stabilizing. 

We all now know what the Fed's actions were last week. And as we noted in our previous post, financialspuds.blogspot.com/2015/12/managed-numbers, you need to keep your eye on which approach Chinese officials take, further devaluation or what.

THE TECHNICAL SIDE

 
If you're of a technical bent when it comes to the market, you might find this article of interest.

marketwatch.com/story/technical-analysts-are-spotting-a-bullish-signal-in-the-sp-500-2015-12-18

Technicians pay lots of attention to things like price and volume. They also focus on trends and moving averages and less so on more abstract terms like value. You could say, at least in their view, they try to omit much of the noise like P/E ratios and earnings and sales otherwise known as fundamentals.

Their world in brief consists of charts and moving averages and so on. Over the years there's been many well known technicians, people like Marty Pring, John Murphy, Marty Swartz and a host of  others to. Numerous to list here. Some were well known for their writings, others their trading prowess.

Even with Friday’s selloff, the S&P 500 index is on the verge of passing into territory interpreted by market technicians as a bullish indicator.

As the article notes, there something called the "golden cross." It's an indicator based on  50-day and 200-day moving averages and when to reaches or crosses certain points. The important point to keep in mind here is it's an indicator. Indicators are not infallible, but certainly of interest.

The S&P 500 SPX, -1.78%  is less than a point away from a so-called “golden cross,” when the index’s 50-day moving average crosses above its 200-day moving average. In fact, golden crosses occurred with the Dow Jones Industrial Average DJIA, -2.10%  on Wednesday and the Nasdaq Composite IndexCOMP, -1.59%  on Dec. 8.

Currently, the S&P 500 is down about 20 points, after Thursday’s 31-point selloff. The S&P 500 saw a so-called “death cross,” when the 50-day moving average fell below the 200-DMA, on Aug. 28.

In data compiled by Dow Jones, a golden cross on the S&P 500 has only happened 22 times since 1970, and of those occurrences, the index traded higher 19 times, or 86% of the time, a year later. The last time a so-called golden cross occurred on the S&P 500 was Jan. 31, 2012, according to Dow Jones data.

While historical data is no indicator of future performance, data shows that of the last six times a golden cross occurred on the S&P 500, the index was up 12.4% on average a year later. Going back to 1970, that average drops down slightly to a 11.3% gain one year later.

Shorter term, the tendency of the S&P 500 trading higher falters a bit but is still encouraging.

Using the data going back to 1970, the S&P 500 traded higher 73% of the time three months after the cross with an average gain of 4.8%, and traded higher 59% of the time one month later for an average gain of 1.7%.

MANAGED NUMBERS

For a long time we hinted at what lots in the media seemed not to want to believe: that China's growth figures, to use a kind term, we're being managed.

Back in the double-figure-GDP growth days, there was probably less of it going on though even then one had that apocryphal feeling that comes from listening more to one's intuition than intellect, most likely a characteristic not much appreciated in our numbers-crunched madness today. (See Federal Reserve Bank).

Now, however, managing them seems much more necessary to damp down all kinds of unrest, political, social and otherwise. Another tip off in our view is the government announced shift from growth to domestic consumption. That China plays a hard game of beggar thy neighbor is undeniable to all but the entrenched.

Another perhaps kinder term, one frequently heard on the Street, is massaged. Either way, they're hardly to be trusted. And neither for that matter are those of any government. Part of  the difficulty is just the magnitude of the job. Another part is just plain old obfuscation. People in power usually like to stay in power. Some will try to twist that into an egregious violation of the PC code.

It isn't. Ask yourself this: Why would Wall Street, tobacco, big pharma, banks, to name but a few, be the only atolls of pollution in an otherwise ocean of purity? The answer is simple: that ocean of purity doesn't exist, private or public. In today's issue of Barron's, barrons.com/emergingmarketsdaily/2015/12/18/7-emerging-markets-to-watch-in-2016-bric-matters, they name seven emerging markets to watch in 2016. Here's what they write about China.

China: GDP figures are increasingly seen as “managed” by the government rather than an accurate reflection of the economy. Should growth slow faster than expected, expect more stimulus: we see room to cut local interest rates and/or increase government spending further. One possible stimulus we hope not to see is a sudden, material devaluation of the Chinese renminbi (five percent or greater as a one-off step). During the prior four years, while the renminbi (RMB) has weakened about 1.1% against the dollar, it has climbed about 20% against a broad basket of key trading partners … [The iShares China Large-Cap ETF (FXI) is down 13% this year.]

We're not basing our conclusions on one example, to be sure. As we noted above, it's been in the discussion for some time. Suggested in this evaluation by Barron's is a play, one way or anther.

OPPORTUNITY HERE?

This article from Barron's falls into the silver-lining category concerning the recent turmoil in high-yield bonds. Interest rates may have just gone up, but capturing yield is still an important part of the investing scenario.

High-yield fears grow as default wave spreads,” screamed the Financial Times. 

“Typically you get this kind of stuff when you’re close to the bottom,” he observed about the high-profile events hitting the market, notably the shutting of the Third Avenue Focused Credit Fund. That spooked investors even though that fund delved into much more speculative credit than the typical junk fund.

The bright side of the junk storm is that it has restored some measure of value to the market. Kaufman says he’s buying intermediate-term bonds of a company he likes, which originally were issued with yields in the 5%, but now yield in the 8% range as a result of a price drop of about 15%. (He’s mum on the name but says it’s in the tech sector, and nowhere near the oil patch.)

Spreads to be sure are important.

Spreads — the extra yield paid on lower-grade securities to compensate for their higher risk — have increased markedly. The Bank of America Merrill Lynch high-yield index is 709 basis points above comparable Treasuries, up sharply from this year’s tightest level of 438 basis points in early March and 335 basis points at the cyclical trough in June 2014. (A basis point is 1/100 percentage point.)

That’s not extreme undervaluation, given the expected rise in defaults, he says. Starting with a yield of 8.14%, and deducting forecast credit losses of 4.71% (defaults after taking into account recoveries of principal), leaving an expected return of 3.43% over the next five years. To be sure, those defaults are likely to be concentrated in those trouble spots of energy and other commodities.Deft managers have been avoiding those sectors. 

In fact, the trouble spots actually could be still be situated in officially investment-grade companies, according to Cliff Noreen, president of Babson Capital Management, with $223 billion under management, including $40 billion in global high yield. Those sore spots include Glencore and Freeport-McMoRan ( FCX ), which already are trading as junk even though the ratings agencies haven’t confirmed that. 

At a 700-basis-point spread, Noreen thinks investors are being compensated for the risks, which he says are more technical than fundamental. That’s especially the case for high-yield closed-end funds, which he says afford investors the opportunity to buy into an out-of-favor asset class at 10%-20% below their market values. To be sure, part of those discounts reflect the market’s haircut because of the funds’ leverage, which could hurt as the Fed raises short-term rates.

barrons.com/articles/oversold-junk-bonds-pay-10-and-offer-growth 

INCOME JUST GOT HARDER TO FIND

On the subject of inflow and outflow, especially given the junk bond turmoil, here are some interesting numbers. Not only do they tell what investors are doing, but they give some inkling of where they're going.

Cash still pays next to nothing. Sure it's nice to have if you think a selloff-rebound in equities is imminent. But income is still hard to find.

Elsewhere emerging-market debt funds saw outflows of $2.2 billion, the biggest in 15 weeks, and have now suffered outflows in 20 of 21 weeks. And investors withdrew $3.3 billion from investment-grade bond funds, the second-biggest weekly exit in two years.

As for Treasury and government funds, the outflow amounted to $300 million, but money has exited nine of the past 10 weeks.

On the equity side, U.S. stock funds suffered outflows of $4.2 billion, while inflows to Europe slowed to $600 million. Another $1.3 billion came out of emerging markets, the seventh-straight week of outflows. More:

One wants to tread lightly here, but that doesn't mean there are not opportunities. Do yhour homework.


marketwatch.com/story/bond-investors-abandoned-ship-this-past-week-2015-12-18