- “No easy way out” for the Fed
- Why the market peaked five months ago
- Feds contract out next-generation bomber … and our readers profit
- Oil: $50 is the new $60
- Gold gets off the dime… the Fed versus legalized pot… the long-gone days of working your way through college… and more!
By the time you read this episode of The 5, the Federal Reserve will have issued its every-six-weeks policy statement.
Hardly anyone is expecting the Fed to raise its benchmark federal funds rate. The rest of the world has come around to something Jim Rickards forecast last November — no rate increases during 2015.
“There is no doubt that the Fed wants to raise interest rates,” says Jim in the latest issue of Rickards’ Strategic Intelligence. “But wishful thinking is not a policy… If they raise rates now, in a weak global economy, they will cause a recession at best and a panic at worst.
“There is no easy way out for the Fed — it’s too late for that,” Jim goes on. “The Fed has to keep rates at zero to prop up a weak economy and hope that the asset bubbles don’t burst before the economy regains momentum. Right now that looks like a losing bet.”
Jim remains of the opinion that the Fed will move toward easing policy come next March. It will do so via the route of reviving “forward guidance.” That is, the Fed will once again say it’s “patient” in waiting for the right time to raise rates, depending on the economy’s performance. Or similar language.
[Ed. note: Jim managed to be right all year about the Fed’s rate policy with the help of a “secret key.” Used properly, this technique can generate gains of up to 1,616%.
Be advised that in the recent past, government agencies have tried to outlaw information about this “secret key.” So we can’t guarantee how much longer this presentation will remain online.]
Stocks are rallying on this hump day, and for once it’s small caps leading the way.
The S&P 500 is up nearly two-thirds of a percent as we write, at 2,078. But the Russell 2000 is up 1.25% at 1,159.
The S&P 500 companies as a group are setting up for their first back-to-back quarters of falling earnings since 2009.
Of the companies that have reported so far — about one-third — FactSet reports the combined earnings decline works out to 3.8%.
“If you want to know why the market peaked in May, this is your answer,” says Chris Mayer. “The market seemed to figure out around then that earnings were about to shrink. And at the moment, next quarter will also be one of earnings declines. FactSet says earnings growth isn’t expected until the first quarter of 2016.
“That’s a problem because growth is what the market is all about. It’s what helps fuel rising price-earnings multiples and stock prices. In this market, growth is getting harder to find.”
Indeed, the current environment, “has the feel and taste of a late-cycle bull market,” Chris suggests.
“Even anecdotally, there have been an awful lot of blowups of late. There is Glencore, the giant commodity trading firm, whose shares are down nearly 90% since their listing in 2011. There is Valeant, the giant Canadian pharma stock, down 58% from its highs in July and August.
“There are not small firms. And there have been plenty of others. At the end of September, about half of the S&P 500 stocks were down 20% or more from their recent highs. That 20% is the hurdle many typically use to declare a bear market.
“If there is good news, it is that not all sectors turn in the same scorecard. Energy has been particularly awful and can’t get out of the bunker. But the telecom group has been in the fairway for both quarters and earnings are still growing there. There is room for stockpicking.”
Among today’s big winners — Northrop Grumman (NOC), up 6.3% on news it’s won a major defense contract, accurately forecast by our own Byron King.
NOC got the nod from the Air Force to build the Long Range Strike Bomber — sometimes called the B-3. “LRSB will replace our mighty and venerable B-52s,” Byron explains, the ‘newest’ of which rolled out of a construction shed in 1963 (no typo).
“LRSB will also likely evolve to take over missions now conducted by B-1 bombers, all of which date to the 1980s.
“Air Force plans to acquire 100 LRSB airframes, at a baseline cost of $550 million each.”
Northrop’s LRSB design under wraps, as seen in a Super Bowl commercial…
So NOC has won a $55 billion contract — overcoming stiff competition from a consortium of two other defense giants, Boeing and Lockheed.
It was Byron’s educated guess NOC would win. In late August, he recommended Military-Tech Alert readers buy NOC call options. This morning, he recommended selling those options for a gain of more than 150%. Not bad for three months.
“I’m still OK with holding basic NOC shares, though,” he hastens to add. Ditto Boeing and Lockheed, despite losing the contract. “We don’t need to hold a bake sale or anything. Share prices for both companies have been up in recent days, due to strong fundamentals and rising earnings.”
Crude is rallying hard after the latest inventory numbers from the Energy Department. The numbers are up, but not as much as last week. Thus a barrel of West Texas Intermediate is up nearly 6% at $45.68.
But the “lower for longer” oil thesis of our Matt Insley remains intact.
“U.S. shale production is more economic than everyone thinks,” he says. “As the dust settles in the U.S., it will be abundantly clear that many drillers will keep drilling at $50 oil. News flash: We’ve seen prices below $50 a lot this year. And while production is pulling back, there’s no sea change in the works. Many companies are simply getting used to the lower prices. They’re cutting costs, focusing on sweet spots and increasing efficiencies.
“Where I once believed that producers would wait to hedge at $60-70… we may start seeing more hedges come in at $50. To me, that’s exactly why it’s been tough for crude to break above the $50 level recently. Anytime we get close, the sellers come out of the woodwork and drive the price down.”
Meanwhile, oil-producing nations overseas continue pumping full out — especially the world leader. “If you’re Saudi Arabia and your cost of oil is $10-20 per barrel (if that), you can afford to produce as much oil as possible. Every barrel is still going to make you money.
“Add it all up and low prices are here to stay for the time being. And in the short-to-medium time frame, I wouldn’t be surprised to see even lower prices than the $45-50 range we’ve seen lately.”
Gold is showing signs of life after sitting near support the last three trading days.
At last check, the bid is up nearly $14, at $1,180. And only some of that movement can be chalked up to dollar weakness. The euro, for instance, is up a mere quarter percent, at $1.107.
The Federal Reserve — what a buzzkill. That’s all we can think after the Fed asked a federal judge in Denver to dismiss a suit brought by the Fourth Corner Credit Union.
The Fourth Corner Credit Union was set up last year to cater to Colorado’s pot industry, now generating $700 million a year. But it can’t open its doors without the Fed’s blessing… and the Fed refuses to grant it on account of pot still being prohibido under federal law.
Says a Fed motion, “The court would not entertain other such attempts — such as if Colorado enacted a scheme to allow trade in endangered species or trade with North Korea in derogation of federal laws, and then chartered a credit union to handle the finances for companies conducting such illegal trade.”
And so the business of recreational weed — while legal in four states and D.C. now — remains a cash-only business.
“Last year,” says The Denver Post, “the U.S. Treasury Department issued rules for how banks can accept pot money. But the Federal Reserve now says marijuana proceeds can’t go into the banking system.”
Unless the judge rules otherwise, the various “pot stocks” out there remain little better than lottery tickets…
“Due to a high college entrance exam score and bad high school grades, I barely, on scholastic probation, got into the University of Washington,” writes a reader as our generational food fight earlier this month has evolved into reminiscences of how folks got through college in the days before student debts became de rigueur.
“That would never happen now … foreign students with 4.0 grade points and tons of family-sourced money (often hard won by their relatives) have totally pushed aside state resident kids with little money and average admission scores.
“I put myself through college by working nights, weekends and holidays as an apprentice draftsman at a Boeing drafting hall set up for engineering students near the university. That couldn’t happen now. That drafting job, and the facility I worked in, have long since gone the way of the dodo bird. Even with the job, tuition is now so high that I could never have made it through without big loans coming to me from somewhere.
“To save money, I lived at home and had a 30-minute (each way) daily car pool commute to the university. These days, Seattle traffic is so congested and prone to lengthy accident-caused snarl-ups that commuting would be problematic to the max, even if realistically doable at all. The solution, on-campus living, would have incurred expenses that would have further impoverished me.
“All said, it seems that the heroic deeds we college kids of the ’60s routinely accomplished are well beyond most anyone’s current superpowers. The times have been a-changin’.”
“Your reader from Texas writing about his son’s college experiences,” writes our final correspondent, “forced me to actively decipher the various school acronyms.
“Being from California, I am not fluent in Texas school names — anyhow, seems to me TCU is definitely selling a brand, versus UT, whose Austin campus I like a lot.
“That said, reader should be grateful intelligence is a strongly heritable trait (despite opposite posturing by the politically correct) and so the boy got the smarts of his parents!”
The 5: Your editor maintains a delicate balance in editing readers’ letters — trying to adjust for clarity without altering the intended meaning.
But I have no excuse in this case: People who follow college football readily recognize the acronym TCU, but not everyone follows college football!
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Ten days and counting…
That’s how much time is left before an announcement that will alter the course of medicine forever. Millions of Americans and their families could be spared years of anguish… while a handful of early investors will make a fortune.
Details to follow in the days to come. But if you’re eager to learn more right now, here’s where to go.
