THE TREND

 There's an old Wall Street saying the trend is your friend.

Well, the trend in oil as yesterday's selloff left little doubt is down. How far down remains, like most of these affairs, anyone's guesswork. Hitting a 12 year low yesterday, the comparison birds flocked to get their reports to media. We're 12 days into the new year and the price of oil has dropped every day.

Three major investment banks, according to the WSJ, warned it could soon crash through $30 a barrel. That hardly at this point seems like a brave, brilliant forecast. It's Wall Street, Jake! The squeeze is on. Marginal companies that borrowed heavily to make a buck during the party now face a dilemma: borrow from their credit lines if they have any left or cut costs. Cutting jobs is a major means of cost cutting. So much for those recent doctored up job reports.

 A third option is what's on the minds of investors every day: a growing list of bankruptcy filings. If one is savvy enough to separate the viable from the nonviable, there's most likely a tanker train of black gold riding there. There's another squeeze here many are apparently unaware of. Some firms are able even with these prices to make money owing their more efficient wells, a fact that helps keep the oil glut going.

Recently, a big player in the sector sold a hoard of shares in an over-subscribed offering to the public. And as always happens those with the resources will wait for more carnage to exercise an often forgotten market rule that's as old as markets.

When you're hurting, things are bleak, only fools and the naive pay your asking price. When you have to sell, vultures find their carrion. It's called nature or let nothing go to waste.  Bankruptcies are at least in part for those with the resources about picking up assets on the cheap. They are also if left unimpeded by the regulatory crowd the market place allowing natural price discovery. So every cloud, as the saying goes, usually does have a silver lining for someone.

The trend is indeed your friend--until it isn't anymore.

OVERNIGHT

We're less than two weeks into the new year and the Shanghai Composite after dropping 5.3% is now down 15% so far.p in the year. The Chinese fallout is proving to be anything but local as currencies, energy and stocks are feeling the pain.

Oil in the U.S. hit a 12 year low and stock after dropping early in the trading session Monday rallied to close slightly higher. After a holiday Monday Japan's Nikki 225 hit a three month low and is down 8% so far in the new year.

The WSJ reported: Elsewhere, the Australian S&P/ASX 200 XJO, -0.14%   fell 0.1%, South Korea’s KospiSEU, -0.21%   was flat and Hong Kong’s Hang Seng Index HSI, -0.65%   rose 0.2%. In Japan, where markets were closed for national holiday Monday, the Nikkei Stock Average NIK, -2.71%   tracked Monday’s regional losses, falling 2%. The Chinese yuan continued to stabilize Tuesday, though the central bank guided the currency slightly weaker. Earlier, Chinese authorities fixed the yuan at 6.5628 per U.S. dollar compared with 6.5626 Monday. China’s onshore yuan, which can trade 2% above or below the fix, last traded at 6.5733 per dollar, weaker than 6.5695 at Monday’s close. The currency reached a five-year low of 6.5956 last week.

Gold finished off 0.1% at $1,095.70 a troy ounce. Prices have bounced by more than 3% year to date as investors seek safety amid the China volatility. Like it or not Wall Street continues to note the Chinese situation as for now it represents the wildcard until the yuan stabilizes and investors get a better fix on  the volatility and what regulators there will do.

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AUTOPSIES NOT NEEDED

Call it kick the can, turning a tone-deaf ear to the Pied Piper or whatever you want. It's always the same and China is no different.

For what it's worth a group of UBS economists noted that China's current projected growth is for 6.2%. However, they postulated that if it fell to 4%, certainly a possibility, not a guarantee, it would hack 0.5% off U.S. growth, nearly 1% of Europe's and more than 2.5% off of Japan's growth. Figures that hardly conjure a picture of isolation.

Only to those who want you to believe it's different this time like those who claim what goes on in Chinese markets stays there. Just recently, a not so subtle effort to aggrandize more financial turf, the Fed is putting out feelers--some would call them warnings--about implementing a 40-year old global rule about margin. Of course, as always, they're doing this for our benefit.

Here's today's WSJ description of the move, but for those who know, as pointed out, their margin history, it's an extension of power and control, not simply restoring the old rule.

WASHINGTON—The Federal Reserve is dusting off a legal power it has largely ignored for four decades, a move that could significantly expand the Fed’s influence over financial markets.

Margin requirements—rules limiting what portion of stocks or bonds can be purchased through borrowing—are moving up the Fed’s to-do list as officials fret about whether they have adequate tools to suppress dangerous asset bubbles that could lead to another financial crisis. They also allow the Fed to exert influence on all financial firms, not just banks.

A little-noticed global agreement recently paved the way for the central bank to move forward with plans to alter margin requirements. Under the accord announced Nov. 12, regulators representing 25 economies agreed to adopt rules similar to ones the Fed is developing, a united front intended to prevent financial firms from moving transactions offshore in response to tighter Fed rules.

First we create those massive bubbles and then we suppress them. And they way we do that, folks, is give them more powers. That's sounds like a party most of us would like to call our own. There a subtle point buried therein and it's about those who want to foster the idea that what happens stays in China, "a little-noticed global agreement." That 25 nations are concerned about a massive meltdown puts the lie to the China isolation meme and if that doesn't frighten you, the term regulators from 25 economies should. We hope they didn't include any from Greece.

Whether you recognize it or not, this is a close cousin the the recent inversion uproar. Make no mistake this is a circling of the wagons, a tightening of the global garrote around your financial liberty and freedom. Sit on your hands too long and you won't need an autopsy.

BRANDED DRUGS AND NEW YORK NANOSECONDS

The Fed keeps looking for that mystical, elusive 2% inflation.

Look no further, boys and girls, than the pharmaceutical sector. Drug prices on branded drugs since last month jumped 9-10%, according to today's WSJ. "Drug Firms Ring in Higher Prices" is the story headline, a play on the old New Year's saying: "Ring out the old and ring in the new."
Well, from the looks of it, and we'll get to this later, these drug monsters don't always wait until the new year to roll out price increases.

One of the media's constant memes about deflation is the absence of pricing power. Look again no further than the drug makers. What's been nearly a news avalanche of  negative publicity against drug companies--remember it's an election year--and their high prices, especially their prescription ones, to those who need them, you can bet they can find 2% inflation and way more.

Besides hurting people with these higher costs they bring out those know-it-all, we'll-fix-it-all bureaucrats and politicians who then pass legislation these drug firms claim they deplore and stifle business and the whole cycle begins again.

Here's one of our favorites, mostly for its display of pure altruism, from the Journal article. Vanda  Pharmaceutical rang in the new year by hiking the price of it new drug to treat a sleep disorder in "blind people 10% to $148,000 a year." No doubt an industry mouth piece will note how small that market is. But--and this is a huge but--since the drug's 2014 introduction the once-daily dose is "now 76% higher," the WSJ reports.

Now, back to those who don't wait for the new year to ring in price increases. Amgen, the manufacturer of Embrel, an anti-inflammatory to treat rheumatoid arthritis, hiked the price 10% last May and just four months later, September, added on another 8%. The average weekly cost of treatment, according to the Journal, is $704 or about $36,000 a year.

The real sinister part here, however, goes on behind the scenes. Drug company lobbyists slipped money into political pockets to stop the progress of any and all alternative medicine efforts to address these maladies. The FDA, a friendly cousin of the industry, recently went after the private makers of Kombucca, a fermented tea some use for medicinal purposes, because of it ETOH content. The story there is orchestrated scare tactics against the tea have mostly failed, so we'll go after a substance that is regulated and comes from fermentation, alcohol. Our fermentation is okay, but not yours.

One industry wag attempted to explain away the price hikes, saying: the raises are "...our way of insuring that we can survive and develop these programs and bring these new innovative drugs to market." Taking just the case of Vanda, a 76% hike in the cost in less than two years, is a pretty decent amount of surviving in an environment where even the vaunted Fed with all it's computer resources can't find 2% inflation.

It's one we feel for sure most of us whether we use these products or not would opt for in a New York nanosecond.

WHEN IS A BUBBLE A BUBBLE?

The Chinese bubble that many applauded and actually turned their gaze the other way in hopes of keeping other bubbles afloat. Here's a chart from ZeroHedge.com.

 

THE CYCLICALS

We wrote earlier about weak sectors in 2015. Here is an interesting chart from crossingwallstreet.com
about the declining cyclicals.


 Energy (black), Materials (blue) and Industrials (red). 

As the editor, Eddy Elfenbein, notes: "Industrials have held up the best, but that may not last."

OVERNIGHT

China shares faded again in overnight trading.The WSJ reported:
China shares slid Monday, and losses in other regional markets deepened, as a rout that knocked trillions of dollars off global stocks last week ricocheted back to Asia. The Shanghai Composite Index fell 2.4% to 3109.95 and the smaller Shenzhen Composite Index was last down 3.5%.

Shares in Hong Kong sank to their lowest in roughly 2½ years. The Hang Seng Index was off 2.5% at 19952.63, on track to close below 20000 for the first time since June 2013. A gauge of Chinese firms listed in the city fell 3.5%.
  
Australia’s benchmark S&P/ASX 200 was down 1.3%, and South Korea’s Kospi fell 0.7%. Japan’s market was closed for a national holiday.
Worries about weakness in the Chinese yuan and how authorities convey their market expectations continue to unnerve investors. 

Earlier the PBOC, to quote a story on Reuters, "guided the yuan" to a new midpoint fix of 6.5626 to the buck, a bit higher from Friday's midpoint of 6.5636. Monday morning it traded against the U.S. dollar at 6.5805.

Meanwhile Goldman Sachs put out a report saying :
China shares slid Monday, and losses in other regional markets deepened, as a rout that knocked trillions of dollars off global stocks last week ricocheted back to Asia.
The Shanghai Composite Index fell 2.4% to 3109.95 and the smaller Shenzhen Composite Index was last down 3.5%.

Shares in Hong Kong sank to their lowest in roughly 2½ years. The Hang Seng Index was off 2.5% at 19952.63, on track to close below 20000 for the first time since June 2013. A gauge of Chinese firms listed in the city fell 3.5%.

China's currency has already dropped quite a bit in the new year, but the yuan is still headed "meaningfully" lower this year, Goldman Sachs said.
The dollar will be fetching 7.0 yuan by year-end, up from 6.5807 currently, Goldman Sachs forecast in a note Monday.
 
That "reflects the combination of a view that Chinese policymakers are likely to be comfortable with modest (our forecast implies about 2.5 percent) depreciation against the CFETS (China Foreign Exchange Trade System) basket, and that the U.S. dollar is likely to appreciate further against other currencies in 2016." 

China's central bank lets the yuan spot rate rise or fall a maximum of 2 percent against the dollar, relative to the official fixing rate.












C

BE CAREFUL OF THOSE NUMBERS

A local financial talk show host with an apparent decent-sized audience was trying to convinced his listeners recently that energy was the only sector in the market down in 2015. "Name another one," he challenged his listeners.

Conveniently or otherwise, he left out mining and materials. Now the guy's a broker or financial planner in his real full time life and the threat of a huge market sell off and another recession won't be peachy for his business or any others among the sell-side crowd. At least for the segment we heard he left out those FANG stocks that propped up the averages much of last year.

He also glossed over all the stock buybacks and artificial support from the M&A frenzy. He rolled out the usual criticism of anyone who questions the excesses of this bull market, calling one and all fear mongers. He then played an excerpt from a recent television interview with the King of Gloom and Doom, Mark Faber. Our point here is not to defend Faber; he's capable of defending himself.

Going into this year he might want to look at another sector. Consumer discretionary companies. From Reuters today we get this.

Consumer discretionary companies, which led S&P 500 gains in 2015 and have had the second-highest average profit growth rate of any sector over the last five years, are more pessimistic than usual going into the quarter. That is despite the benefit of lower gasoline prices for consumers. Consumer discretionary stocks rose 8.4 percent last year, thanks in large measure to Netflix (NFLX.O) and Amazon.com (AMZN.O), the year's best S&P performers.

While consumer discretionary fourth-quarter profits are forecast to be up 8.4 percent, that is below the 13.6-percent growth that was forecast only three months ago, according to Thomson Reuters data. Twenty-five companies in this sector so far have warned and none gave positive guidance, the highest number of negative forecasts since at least 2006, according to FactSet. In a typical fourth quarter, only two-thirds of earnings pre-announcements in this group are negative.

Two of the above mentioned companies are FANG members. Next week begins the street's fourth quarter earnings reporting and, from what we read, the prospects are hardly spot on unless you prefer down trends. 

An earnings recession - two quarters of declining profits - would be led by the usual suspects, energy and materials companies. But its severity may depend on consumer discretionary companies, which have been warning about profits at an unusual pace.

Now the guy was bragging up the lower gas prices and how much it helped consumers, especially citing their spending over the holidays.

By comparison, overall 85 S&P 500 companies guided below analysts' estimates for the quarter and 26 issued positive guidance, roughly in line with recent quarters, FactSet data showed.
Macy's (M.N) this week cut its earnings outlook for the second time and blamed a fall in sales on unusually warm weather that kept consumers from buying coats. It also cited the strong dollar.

Companies that have warned also include L Brands (LB.N), GameStop (GME.N), Starbucks (SBUX.O), Target (TGT.N) and AutoNation (AN.N). Specialty retailers have given the most negative guidance, while 17 companies in the sector have cited the strong U.S. dollar as a reason behind the lowered outlooks, FactSet said. As earnings forecast come down, some strategists say the expected boost to consumer spending from lower energy prices may have been overblown. Consumers still have debts to pay down.
That overblown spending could turn out to match another recent overblown indicator, those December job numbers.
reuters.com/article/us-usa-results-warnings 
 

OTHER VOICES

Back in the Hippy days a lot of Hippy jokes made the rounds. One of the them was about a Hippy standing at the intersection of Broad and Wall in the financial district snapping his fingers as people flocked past. Finally, one inquisitive guy stopped to asked.

"What are you doing, " he asked the Hippy?

"Scaring away elephants, the Hippy responded.

"Man, there isn't an elephant within a thousand of miles of this place," the man shot back, in disbelief.

"Works doesn't it," the Hippy said.

There's always an opposing point of view. Both sides always claim theirs is the one based on the facts. That's why we post one our our features, other voices. You can decide. Here's another voice: Negative or otherwise, perma bear or otherwise

One rare quality you almost never see when it comes to Wall Street is being open minded to being opened minded. It's almost as rare as crunch birds.

Connecting the Dots

Readers frequently accuse us of being “negative” or “depressing.”

Yesterday, one even charged us with fanning the fires of fear and fright to sell newsletter services. We deny it. Fear doesn’t sell financial services. Ask Goldman. Wall Street sells greed, not fear. It promises profits, not losses. It offers dreams of wealth, not nightmares of poverty.

Besides, when you see prices falling, you just go to cash. You don’t need expensive trading advice. At the Diary, we monger neither fear nor greed. Our only mission is to try – feebly… humbly… uncertainly – to connect the dots.

Of course, the dots are many… and they are everywhere. Like a Rorschach test, we risk seeing only what we want to see. But you can’t see anything if you don’t look. So, we squint… we strain our eyes. And what do we see?

A top!

And then what?

A secular downturn, when stocks will go down – or nowhere – for the next 10 years. If we’re right, a lot of fortunes, jobs, reputations, and mojos will be lost. Defaults, depressions, disruptions, deflation – we’ll probably see a little of them (or a lot!).

Many dear readers find this unappealing; and they mistrust our motives. They seem to think that because we see clouds on the horizon, we must want it to rain!

But wait… They are right. That is the pattern we’ve been looking for!

This parched earth needs a good soaking… and a healthy wash. But if readers think this is “negative,” they should blame themselves, not us.

They are looking at the glass as half empty; we only see the part that is full of St. Emilion Grand Cru 2006. 

Debt and Claptrap

Look on the bright side…

If we’re right, you’ll get a lot more for your money in the stock market 10 years from now. Not only that, but also much of the debt and claptrap that now strangles the system will have been purged.

Greenspan, Bernanke, and Yellen will finally be regarded as the rascals and flimflam artists they really are. Businesses that should have gone bust in 2008 will finally hit the wall. And the speculators, bankers, and bamboozlers who should have been bankrupted in the last crisis will finally get what’s coming to them in the next one.

businessinsider.com/why-economic-depression-may-not-be-bad-2016-1?

Not all elephants are pink.

TWEAK AND TWIDDLE

There's an old saying go with what you got. The other side of that coin is sometimes you have no choice. Those market commentators who after China's circuit breakers came unglued twice last week, before officials retired them, focused on Friday's job report to paint a rosy picture in all the surrounding market gloom. Here's an example.from MarketWatch.

One of the few bright spots for the U.S. economy remains the employment situation. Friday’s jobs report for December showed a 292,000 increase in non-farm payrolls, a combined upward revision of 50,0000 to October and November, and an unemployment rate steady at 5%, the cycle low.

Those job numbers for December were up 40% from what most observers expected. That's not a misprint, 40%. And as noted above, the October and November numbers were increased by 50,000.  And just for emphasis the unemployment rate remained, conveniently, steady at 5%.

Are we the only ones who suspect tweaking and twiddling here? We don't think so. Here's just one example, there are others. Like yin and yang, when it comes to trusting government numbers, when you see tweaking, twiddling ain't far behind.

Here’s a newsflash that CNBC didn’t mention. According to the BLS, the US economy generated a miniscule 11,000 jobs in the month of December.

Yet notwithstanding the fact that almost nobody works outdoors any more, the BLS fiction writers added 281,000 to their headline number to cover the “seasonal adjustment.” This is done on the apparent truism that December is generally colder than November and that workers get holiday vacations. 

Of course, this December was much warmer, not colder, than average.  And that’s not the only deviation from normal seasonal trends. The Christmas selling season this year, for example, was absolutely not comparable to the ghosts of Christmas past. Bricks and mortar retail is in turmoil and in secular decline due to Amazon and its e-commerce ilk, and this trend is accelerating by the year.

So too, energy and export based sectors have been thrown for a loop in the last few months by a surging dollar and collapsing commodity prices. Likewise, construction activity has been so weak in this cycle—-and for the good reason that both commercial and residential stock is vastly overbuilt owing to two decades of cheap credit—–that its not remotely comparable to historic patterns.

Never mind. The BLS always adds the same big dollop of jobs to the December establishment survey come hell or high water. In fact, the seasonal adjustment has averaged 320,000 for the last 12 years! More:
davidstockmanscontracorner.com/newsflash-from-the-december-jobs-report-the-us-economy-is-dead-in-the-water/ 

Here's another from this week' edition from Barron's.

THE DECEMBER EMPLOYMENT REPORT , released Friday, further confirmed that the U.S. economy is more than weathering the various storms.

Nonfarm payroll employment rose by 292,000, far more than the consensus expectation of 200,000. With upward revisions of 50,000 to prior months, the third quarter saw average monthly gains of 284,000, 2015’s best quarterly performance. The unemployment rate held at 5%. As seen in the chart, contrary to the myth that the labor market is characterized by the “gig economy”—self-employed workers on contract to companies like Uber—self-employment as a share of the total has been falling through this expansion. Job growth has mainly come from full-time wage-and-salary positions.