The Standard & Poor’s 500 Index knifed through its lows from the August crash at 1,867 earlier today, before staging a partial recovery this afternoon. The Dow Jones Industrial Average and Nasdaq Composite Index also sold off sharply, but didn’t quite get through their intraday August lows at 15,370 and 4,292, respectively.
On the other hand, the Dow Transports and Russell 2000 Index bid adieu to those support levels a couple weeks ago. The Russell just hit the lowest since July 2013, while the Transports tanked to the lowest since October 2013. As a matter of fact, the iShares Transportation Average ETF (IYT) is down more than 11% year-to-date — less than three weeks since New Year’s Eve.
For its part, crude just keeps getting cheaper and cheaper. The U.S. benchmark price of a barrel of oil sank as low as $26.19. We haven’t seen black gold this low since all the way back in 2003. The United States Oil Fund LP (USO) has lost around 54% in the past year.
|The yen has benefited from the panic, as have U.S. Treasury bonds.|
Where is all that money going? How about Treasury bonds! Long bond futures prices surged by another point and a half in the early going, while the iShares 20+ Year Treasury Bond ETF (TLT) hit its highest level in five months. Yields on 10-year Treasuries breached 2% to the downside.
The Japanese yen also took off like a rocket, pushing the CurrencyShares Japanese Yen Trust (FXY) to its highest level in a year. That’s because the yen is used to fund so-called “carry trades,” those in which investors borrow loads of cheap money in one currency and re-invest those funds in higher-yielding assets elsewhere in the world. When market panic sets in and asset prices plunge, they’re forced to unwind those trades before they get wiped out — a process that can send the yen surging in value.
I sincerely hope you were prepared for this carnage. My warnings in Money and Markets have been crystal clear dating back to last spring, and I’ve been sharing several protective strategies that you can use to insulate your portfolios from tumultuous times like these.
Or better yet, I hope you’re turning this market chaos into a huge profit opportunity. Subscribers to my Interest Rate Speculator service have had the chance to bag profit after profit since the summer — including two more hefty gains today on a vulnerable European bank and a reeling U.S. brokerage stock. As always, losses can and do happen, and past performance is no guarantee of future success.
In the meantime, where do we go next? Well, we’re obviously getting more and more oversold in the short term. That means we’re likely to see more rally and bounce attempts like we had Tuesday of this week and Thursday of last week. Indeed, we had an intraday bounce today, with the Dow rallying from minus-566 to minus-249.
|“Investors are taking advantage of bounce rallies to unload stocks at better prices.”|
But unlike the rallies we saw in the six-plus year bull market from 2009 through early 2015, those rallies aren’t turning into powerful V-shaped moves to new highs. Investors are instead taking advantage of them to unload stocks at better prices, or to re-load short positions.
You know when I last saw that pattern play out? During the bear markets of 2000-02 and 2006-08. Investors have clearly lost faith in the ability of funny money to prop up asset prices for more than short periods of time, not to mention confidence in the economic and inflation outlook.
So until that pattern changes, make sure you’ve shifted your thinking and approach to the markets. You can buy cheap, relatively safe stocks on big dips … but you have to remember to then follow up by selling into big rips. You can’t just count on a rising bull market tide to carry your shares to new highs and beyond.
If you’re more aggressive, go a step further. Hedge your downside risk or target downside profits by adding inverse ETFs or put options into big rallies. They can pay off handsomely in times like these.
Above all, please stay safe. We’ve seen two major bear markets in the past 16 years — bear markets that wiped out vast amounts of wealth. If this is truly the third great bear of this young century, you don’t want to suffer those kinds of losses again. Taking some protective steps will ensure you don’t.
There was a lot of great discussion on the inflation vs. deflation fight, as well as the latest machinations in the Middle East online. So I’d like to get to as many comments as I can.
Reader Margaret H. said: “I agree that we are experiencing deflationary winds and that the economy is already in, or heading for, a recession. However, that does not mean that we won’t get inflation down the road. I think we need to be prepared for both.”
Reader J. said: “Deflation is more seriously entrenched than perhaps we want to admit. Fewer jobs for people mean less spending by all. No signs of that changing what with robotics coming on stronger each year.”
Reader Mike C. put the blame for the deflationary wave squarely on China, saying: “I have a hunch that China has much more to do with the deflationary storm that is brewing than most believe. China over the last two decades, and especially the last decade, has been on a building and spending spree like we’ve never seen before. One example is the construction of multiple large, essentially unoccupied cities.
“China also managed to stockpile cash over that same period, mostly through currency manipulation that allowed their very cheap goods to flood world markets. My hunch is that they overdid it. The consequences of all of this are the drops in demand for commodities and raw materials. We are just sniffing the early winds of what this deflationary period will bring us.”
But Reader Ivano pointed out that deflation does have its benefits. His take: “Bring it on! That is deflation. Lower fuel, food, housing, transportation, replacement components, recreation, medicines, etc. Phony S&P 500 inflation has not, and never will, employ the middle class. It only fills the wallets of the top one percent.”
As for the prisoner deal with Iran and the lifting of sanctions, Reader Chuck B. said: “Remember, it was the minority Sunni dictatorship of Saddam Hussein which launched the Iraqi invasion of Iran in 1980. He was probably egged on and partly financed by the Saudis, who wanted to hamper Iran’s competitive oil industry.
“And if foreign sailors appeared ready to endanger a U.S. base, I hope we would behave much as the Iranians did. Once they realized it was an innocent incident, they promptly behaved in a civilized manner and released the sailors and their boats.”
On the other hand, Reader Jim said: “Iran has been almost solely responsible for every war in the Middle East over the last 100 years. They simply do it by proxy by funding virtually all of the terrorists in the Mideast.”
And Reader Ted F. said: “Iran doesn’t have to start wars to stir up trouble. They have gotten into the proxy war game, supplying terrorists in Yemen, Lebanon, Syria, and a host of other countries. They supply weapons and money, same as the Saudis, but to the other side.
“The Iranians and the Saudis are supporting half a dozen brush wars and long-term terrorist activities. The rockets Hezbollah and Hamas fire into Israel either came from or were manufactured from Iran or Iranian designs.”
Lastly, Reader Lorenzo C. said any deal that keeps the U.S. mostly on the sidelines is a good thing. His view: “Our country has lost too many lives and too much treasure trying to control and police the world. If we can manage the Middle East situation with regional powers counter-weighing one another, this is way better than sending our troops into every conflict.
“A negotiated settlement is not a sign of weakness. Did we get all we wanted? No. But neither did the Iranians.”
Thanks for weighing in on these important issues. The re-emergence of Iran as a major oil exporter is clearly roiling the energy markets, and the cost of waging proxy wars against Iran is putting immense budgetary pressure on Saudi Arabia. From a financial markets perspective, that means more turmoil will be coming our way from the Middle East this year.
As for the deflation/inflation battle, it’s obvious which side has been winning so far. Now I’m closely watching to see if we get a major upside breakout in the Japanese yen, one that would likely coincide with a major breakdown in long-term interest rates. We’re right on the verge of those kinds of moves, and they would clearly signal that a fresh deflationary wave is washing over the markets.
Any other ground I didn’t cover here that you’d like to? Then don’t hold it in. Share your thoughts online in the discussion section below.
Debt, debt, and more debt. By driving rates into the gutter, global central banks helped encourage massive “hot money” flows to risky corners of the world in search of higher yields. Now that liquidity is drying up, commodity prices are plunging, and foreign currencies are in freefall, those debts are coming home to roost, according to the Wall Street Journal.
Standard & Poor’s said emerging market-based corporations are defaulting on their debts at the highest rates since 2004. Roughly $500 billion has flowed out of EM countries in the past year, driving yields up for borrowers around the world.
The pressure on foreign, commodity-reliant countries is getting so bad, that Saudi Arabia just banned trading in options on currency forwards, according to Bloomberg. Investors had been using those cheap instruments to speculate on the possibility of the country abandoning its currency peg.
The Saudi riyal is fixed at a conversion rate of 3.75 per U.S. dollar. But investors know that peg is getting harder and harder to maintain. That’s because plunging oil prices are causing the nation’s budget deficit to blow out, forcing the Saudis to liquidate tens of billions of dollars in reserves to plug the gap.
Taliban terrorists gunned down 22 students, faculty, and guards at a Pakistani university in the nation’s northwestern region. The Taliban had previously attacked a school only 25 miles away in 2014, killing 145, and a separate suicide bombing earlier this week killed 11.
So what do you think about the emerging market debt crisis? How about the move by Saudi Arabia to ban bets against its currency – will it succeed or is it a desperate measure that’s doomed to fail? Any thoughts on the ongoing declines in crude oil? Let me hear about it in the comment section.
Until next time,