The Satanic Market Drop

  • So this is what a pullback looks like
  • Why this pullback is healthy… and a bigger pullback wouldn’t hurt
  • Trade war risk amps up — not with China, but with Europe
  • “Nutella riots” bring out the worst in French bureaucrats
  • Readers up in arms at talk of raising the gasoline tax

Should we call it “the market of the beast”?

When all was said and done Friday afternoon, the Dow Jones industrials had dropped 666 points.

We hope you didn’t react by selling everything on the open today. After all, the S&P 500 bottomed at the 666 level on March 9, 2009. Even after last week’s drop, the S&P has more than quadrupled in the last nine years.

S&P 500

By the way, the 666-point drop doesn’t even crack the top five of bad days for the Dow, as measured by the number of points lost.

It was shaping up to be another ugly day today before the open — Dow futures down 300 points. But as we write, the drop is a mere 80 or so, to 25,440. Heck, the Nasdaq is slightly in the green.

At least now we can put all the chatter about “It’s been X number of days since a 3% pullback” behind us.

The last time anything like that happened was shortly before Election Day 2016. Maybe, if you look closely, you can spot it on that chart.

The next target, if you want to think of it that way, is a 5% pullback — which happened in June 2016, right after the “Brexit” referendum in Great Britain. That would drag down the Dow to 25,270 — another 170 points below this morning’s levels.

Beyond that is a “correction” of 10% or greater. That last happened in late 2015-early 2016 as the market freaked out about the Chinese carrying out a “stealth” devaluation of the yuan. That would knock down the Dow below 24,000.

For perspective, the Dow broke above the 24,000 level for the first time on Nov. 30 — barely two months ago.

“Corrections are good,” says Agora Financial “quant” Jonas Elmerraji, who launched a proprietary trading platform to much success last year.

“Corrections help shake out the weak hands when making money in the stock market starts getting too ‘easy.’ They’re absolutely required for a rally to stay intact.

“So the selling we’re seeing here isn’t unexpected. Instead, the ‘risk-off’ trading we’re seeing is 100% human nature.

“The whole time this stock market’s been ripping higher, we’ve all been told that the crash is coming right around the corner. Top calling has been front and center on everyone’s minds everywhere from CNBC to The Wall Street Journal.

“It only makes sense a 3% retracement from all-time highs has been enough to rattle investors.”

The sell-off notwithstanding, “the outlook for corporate earnings — and the American economy at large — has scarcely looked better,” says Alan Knuckman from his post in the Chicago options trading pits.

Of course, corporate accountants can easily game their earnings figures. But sales totals are a lot harder to fudge, and as Alan reminded us last week, 80% of the S&P 500 companies that have reported so far this earnings season have beaten analyst estimates on sales. (By the way, Alan has a new earnings-season trade lined up for Wednesday. He’s batting 1.000 since he began recommending these trades in early October. Access here.)

And the economy? The big economic number this morning is the ISM nonmanufacturing Index — a measure of the service economy. It rings in at 59.9 — one of the best readings in the index’s 20-year history, and way higher than the “expert consensus” was counting on.

For perspective, The 5’s voluminous archives reveal that 10 years ago today, this number registered an epic one-month collapse — from 54 to 41. Any number below 50 indicates a service sector that’s shrinking, not growing. And 10 years ago today, we were two months into the “Great Recession” of 2007–09.

Back to the present: “The way I see it so far,” says Alan, “stocks are just giving back some gains after a nearly straight-up move going back to November… Don’t be surprised to see stocks soar in the next few weeks.”

As we continue to write, the Dow’s losses have begun to accelerate and the Nasdaq is now in the red.

At 25,333 the Dow is less than 70 points away from 5% pullback territory.

Treasury yields continue to inch upward, the 10-year now 2.86 — another four-year high. Gold is holding steady at $1,333 — which is impressive because the dollar is showing a bit of strength again today. Crude has tumbled below $65 for the moment.

It’s another rough day for cryptocurrencies. Nearly all of the top 50 cryptos are down double digits, with bitcoin at $7,409. We’ll dive into some of the whys and wherefores tomorrow.

The likelihood of a new trade war just jumped significantly. And we don’t mean the U.S. versus China, but rather the U.S. versus Europe.

Six months ago, we told you about new economic sanctions the United States was imposing on Russia. The sanctions crack down hard on companies involved in financing Nord Stream 2 — an offshore natural gas pipeline that would carry Russian gas to Germany.

Germany needs lots of gas — to stay warm in the winter and especially to wean its power grid off the nuclear power plants that are scheduled to be shut down by 2022. If the Germans can’t get Russian gas, they have to get liquefied natural gas shipped on tankers — at immense cost — from the United States.

The leading LNG player, Cheniere Energy (LNG), spent nearly $4 million on lobbying in 2016. Clearly its efforts paid off.

Except that now the Germans have decided, “Screw it,” and granted a permit for construction of Nord Stream 2 anyway.

True, other countries still have to sign off as well — Finland, Sweden and Denmark — but Germany is the big kahuna in the European economy. “Nord Stream 2 said it has fulfilled all requirements and expects permits to be issued by other countries in time for construction to begin as scheduled in 2018,” reports the Reuters newswire.

Helping kick-start the process — supply hiccups in Great Britain and Norway, and a pipeline explosion in Austria. “It just reminded people that Europe is still vulnerable when it comes to energy,” Moscow-based analyst Chris Weafer tells the New Europe newspaper.

Even if Washington doesn’t take any countermeasures, it’s clear the Europeans aren’t snapping to Washington’s tune anymore. This is what an empire in decline looks like.

In the wake of France’s Nutella riots last month, the French government is — surprise, surprise — looking to impose new regulations.

As you might recall, one of the country’s grocery chains offered a 70% discount on the chocolate-hazelnut spread — setting off scenes reminiscent of Black Friday sales in the United States a few years ago.

As you can imagine, French elites are worked up about all this: “Solidarity no longer [has] a place in France,” a sociologist told Le Parisien, adding that such a ruckus is unimaginable “in Germany, where common sense exists more.”

Speaking of a lack of common sense, the French government has proposed a “law for a balanced commercial relationship in the agricultural and food sector, and for healthy and sustainable food” — which, stripped of the lofty language, amounts to a prohibition on selling goods at a loss. Discounts of more than 34%? Banned. Buy-one-get-one-free deals too.

“To throw dismayed bargain-hunting grocery shoppers a bone,” says the Grub Street website, “the government’s agriculture minister also adds that this bill will help lower France’s food waste.” Uh-huh…

To the mailbag, where the chatter in Washington about raising the gasoline tax — one way to pay for a $1.5 trillion infrastructure plan — has readers up in arms.

“Haven’t these guys yet learned that an increase in gasoline tax results in all prices going up and the increased cost of transportation/shipping then being blamed for it?” writes one. “It makes no economic or even logical sense to justify an increase based on the fact the tax hasn’t been increased since 1993. Very poor excuse.”

“No need to raise gas tax,” says another. “Just cut the spending on nonproductive activity that encourages and funds sloth and redirect the funds to infrastructure.”

“How will the government raise revenue for this $1.5 trillion mega-project?” writes a third. “That’s more than a little fuzzy. Cut the defense budget — clear as a trillion-dollar bell!”

The 5: We keep hearing about some combination of federal, state and private-sector funds to make it all happen. But most state governments are strapped for cash, and those that aren’t still need to set money aside for their stupendous pension obligations.

Meanwhile, anytime we hear talk of “public-private partnerships,” your editor’s hand defensively reaches for the wallet. Usually that’s code for a scheme to extract even more money from the productive classes and channel it toward favored cronies.

“Obviously, the advocates of a higher gas tax are ignoring electric transportation expansion if he wants to raise gas taxes.

“Shouldn’t all vehicles have to pay for road use, not just those that use gas or diesel? Seems to me it makes more sense to be taxed based upon miles driven on the roads. With the ‘’internet of things,’ vehicle mileage can be tracked and reported with one’s taxes. Options would include quarterly usage payments instead of paying once a year.”

The 5: For God’s sake don’t give them any more ideas about how to amp up the surveillance society any more than it is already!

Oh, and starting in 2020, California will tack on a $100 surcharge to the annual vehicle registration fee for zero-emission cars.

“Does Rep. Shuster actually believe that Congress can ‘fool all the people all the time’?” a reader asks of a Pennsylvania congressman who wants to raise the gas tax.

The reader has a bone to pick with Shuster’s statement that “If you pay money at the pump, it goes in the Highway Trust Fund. So it’s not coming to Washington and being spread out over all these different programs…”

Counters the reader: “The U.S. government set up and mandated the funding at the people’s ‘paycheck’ of the Social Security Trust Fund, which became the poster child for funneling money through a public trust to the coffers of the government for whatever purposes on which the spendthrifts in Congress choose to spend it.

Trust me, we folks on Main Street ain’t gonna put up with this ad infinitum.”

The 5: You are absolutely correct. As we pointed out in 2014, Congress routinely raids the Highway Trust Fund for day-to-day government expenses in the same way it does the Social Security “trust fund.”

Worse, about 40% of “highway” trust fund revenues are diverted to mass transit, bicycle paths and other transportation projects unrelated to highways.

“Sorry to say that I have grown very tired of all the so-called videos (most of which are actually audios) that drag on forever eventually getting to the point,” a reader writes about many of our sales messages.

“You are not the only guilty party, however. This seems to be a very popular format used by many to try to sell you a product or service.

“A word to the wise. Myself and many other professionals lose interest after about two minutes and simply click away. We don’t have time as professionals to sit in front of the computer for what seems like forever to get the information for whatever it is you’re selling. Keep it short and to the point and you will have a much better return.

“Hurry it up, boys. We are all very busy!”

The 5: The complaints about “boring, long-winded videos” are a recurrent theme as we acquire new readers. So recurrent, we can almost set a watch by it.

Alas for the impatient, the old direct-marketing saw about “the more you tell, the more you sell” still holds true. It was true back when we sent 24-page promotions via the U.S. Postal Service and it’s true now in the era of the “video sales letter.”

We test “long copy” versus “short copy” every so often. Almost always, the long copy wins.

We don’t know why. We only know what works. And so it goes…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Whelp, now the Dow is down nearly 400 points on the day. At 25,149 we’re now solidly into 5% correction territory. On the way to 10%?

Maybe, but you can spot two 11% corrections in a six-month span during late 2015 and early 2016. It was not the end of the world.

Yes, this bull market is long in the tooth, and it will come to an end. We are on alert for the early warning signs. We’ll keep you posted…

P.P.S. Yikes, the selling has accelerated big-time. As we’re about to hit the send button, the Dow is down 1,500 points on the day. That 24,000 correction level? We’re there now… in only six trading days.

We’re back tomorrow to peel the onion…

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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