First, the rogue nation North Korea claimed it tested its first-ever hydrogen bomb. That would be the first time the secretive, isolated dictatorship tested a hydrogen weapon, which is potentially much more powerful and threatening than the atomic bombs the country has tested in the past.
It’s impossible to verify leader Kim Jong Un’s claims, of course. The test may have involved a hybrid weapon with only a small amount of hydrogen-based material. But seismographs did register a 5.1 magnitude quake centered in North Korea last night, which would square with what happened during the last atomic test in 2013.
Second, China’s yuan currency suffered yet another sharp devaluation overnight. The official currency fix put the yuan at its lowest level in five years, down another 0.2% to 6.5314 against the dollar. But in the offshore currency market that is dominated by international investors and other market players, the yuan dropped more than twice as much.
|North Korea claims to have tested a hydrogen bomb. Do we have anything to fear?|
China’s surprise devaluation in August was a key catalyst for the U.S. market’s mini-crash. That’s because it signaled the Chinese economy is in even worse shape than expected.
It also ignited fears that we will see more liquidation of Chinese reserves. That would put downward pressure on foreign asset markets, especially since it comes at the same time that major Petrodollar nations are dumping stocks and bonds like mad to plug their yawning budget gaps.
Third, the benchmark price of oil overseas — Brent crude — dropped below $35 a barrel overnight. That was a fresh 11-year low.
We didn’t quite hit a new multi-year low here in the U.S. But we were less than a dollar away from it at today’s low. So let’s not split hairs. The pressure is still firmly on in the commodity market, with all its attendant consequences for the credit markets.
Then just one day after we discussed “Peak Auto” concerns in the U.S., the largest car dealer in the country delivered more worrisome news. AutoNation (AN) said sales rose 9% year-over-year in December … but only with the help of “significant retail discounts” that crushed profit. Per-vehicle profit was down as much as $300 in the fourth quarter amid a rise in discounting and glut in inventory.
|“It has been an ugly start to 2016.”|
Long story short, it has been an ugly start to 2016. The key question is whether the rest of the year will be just as challenging — or even more so.
I’m actually less concerned about “Black Swan” type events such as North Korea’s saber rattling. That country has been doing this for years to blackmail the rest of the world into providing aid and otherwise refrain from threatening it.
The real, underlying, financial challenges in China, in currencies and in commodities are much more serious over the long term. So is the major credit cycle turn that’s been underway since last spring. That’s why I continue to counsel a cautious investing strategy for your core funds — with elevated cash levels, downside hedges, and a distinct focus on higher-yielding stocks in non-economically sensitive sectors.
In my Interest Rate Speculator service, many of the vulnerable financial and other stocks I’ve been targeting on the short side have been breaking down, resulting in a nice run of profits over the past several months.
What’s going on in the auto industry? Will higher interest rates derail the economy? And where are stocks headed next? Those were just some of the questions you were debating over at the website in the last day.
Reader John said: “The reality of the auto industry is that in spite of its size, making and selling cars is incredibly competitive. Consequently, car manufacturing companies don’t make much, if any, money. In spite of its enormous size, it’s very hard to make an actual profit manufacturing automobiles. And the U.S. car makers have not shown themselves to be particularly good at what they do compared to foreign competitors, which hasn’t helped matters here in the U.S. at all.
“Furthermore our carmakers in the U.S. wouldn’t even exist at all were it not for government bailouts to cover up the fact that they have lost their shirts doing what they do. So when the auto industry is leading the economic charge, you really have to be suspicious about what’s up.”
Reader $1,000 Gold opined that carmakers actually make most of their money from auto lending, saying: “The money is in the financing, not the car. Anybody with a pulse has always been able to get a loan because defaults end up with a repo and a resale — which means another down payment and refi. The car is just collateral. This can go on indefinitely.”
Reader Dan also weighed in on the lending aspect of the story, offering this take: “I’m not sure why everyone is making a big deal about interest rates. They just raised by 0.25%, which is not significant. Over the course of two to three years, it might increase to where it was in 2007.
“So the interest rate is still low for loans to be affordable. With gas prices low, extra money is there to maintain good credit and people will buy bigger trucks. Ford (F) and General Motors (GM) are here to stay for the long term. They are not doomed.”
On the topic of the broader markets, Reader Gary said: “My portfolio continues to go down and I own top-name stocks. Price action is telling us to get short. Look for 1950 on the S&P in the first quarter. Wait until it drops and then load up the boat.”
But Reader Eagle495 said you may not want to start bargain hunting too soon. Here’s why: “My long-term SPY indicator went to a ‘Sell’ on the first trading day of January. While 2015 was basically a wash, this indicator went to a ‘Sell’ just after the tops in 2000 and 2007 … and to a ‘Buy’ shortly after the bottoms in 2002 and 2009.”
I appreciate all the opinions, including those I didn’t recap here. I believe the massive turn in the credit cycle that I’ve been writing about for several months will help stymie the flow of easy money throughout the economy. That includes the auto sector.
Specifically, investors will demand higher yields when they buy Asset-Backed Securities (ABS) in the secondary market. That includes securities made up of bundled auto loans. As those yields rise in the secondary market, it will force lenders to charge higher rates to their borrowers in the primary market. And that will help cool sales by pushing marginal buyers out of the market.
This is precisely the process that played out with Mortgage Backed Securities (MBS) when the subprime home loan market blew up. I think it’ll happen again. And yes, that is another negative for a broader market that is already struggling — even as we are getting oversold in the short term.
Any other thoughts you’d like to add? Then don’t hold them in. Hit up the comment section below and weigh in.
If I wanted to throw another market negative into the mix, I’d point out that tech darling/bellwether Apple (AAPL) is in freefall. The stock cracked a hundred bucks in the premarket, closing in on August’s intraday panic low. The catalyst was multiple reports lousy iPhone 6S sales and production cuts the firm is implementing to trim bloated inventories.
We’ve seen some weak economic data from the manufacturing sector, and concerns are brewing about weak retail and automotive sales. But the ADP Research Institute reported fairly strong jobs figures this morning nonetheless.
The private firm said the U.S. economy added 257,000 jobs in December, up from 211,000 in November and stronger than the average estimate of 198,000 from Bloomberg. The services sector added many more jobs (234,000) than the goods sector (23,000), and growth was fairly solid across all business size categories (small, medium, and large).
And if there’s anything you’d like to add to the health-care insurance debate, I’d love to hear about that below, too.
The Powerball jackpot is swelling like mad again after 17 consecutive drawings failed to produce a winner. Someone now has the chance to win around $450 million tonight if they correctly guess the five regular numbers and one Powerball. But don’t go out and spend the money yet. Your odds of winning are only 1-in-292 million.
Are Apple’s problems serious, or is this apparent sales slowdown just a blip on the radar screen? What about the latest jobs figures — do they show we’re sailing right through the foreign economic problems? Any thoughts on what you’d do if you won a cool $450 mil tonight? Let me hear about it in the comments section below.
Until next time,