August 25, 2015

Interesting Times

Okay, a bit of an understatement, but the truth nonetheless. The day started with a precipitous fall in the Dow Jones Industrial Average of over 6.5%, followed by a bounce in part instigated by a comment from an unnamed media personality that received an insiders email from Tim Cook, the post Jobs leader of Apple Inc., and finished a day that looked to recover only to close at a loss of over 3.5%. He’s how I saw it.

Apple (AAPL)
Apple Inc. has come down nearly 30% from its recent high, and because if its massive presence in all three of the broad indexes (Dow, S&P500 and NASDAQ) the influence of its drop cannot be underestimated. More curious however was the letter containing a few comments regarding the new iPhone sales in China. Most notable measured the thirst of iPhone interest by the Chinese consumer as measured in rates of activation as well as the purchase. The news relieved investors enough to take Apple stock briefly into the green.

Not to repeat myself, but the news about Apple underscores an important fact of recessions, that being most people might pullback on going out to dinner, or seeing that new movie in the theater, but very few will stop buying toothpaste, baby shampoo and other personal and household products that in my opinion these days includes ones cellphone in general and iPhone specifically. This is true for any consumer driven economy.

Before the advent of digital investing, the short name for algorithmic speculation, of the broad markets, it was the open cry futures markets that served wide felt disruption to Wall Street. Needless to say the split second influence of these many systems all contributed today to a collision of orders and trade executions made more urgent on a Monday morning. The ability of the market to recover with equal speed lends some evidence to that idea. This could be a factor of the new economy, or the system needs to spend less time on JP Morgan and focus more attention on a new breed of ad hoc financial speculator.

No one can know if the market direction is near the end. It’s been four years since the last, therefore there is an especially strong demand for patience. Many have heard me comment that markets go crazy simultaneously but come to their senses one at a time. It is my opinion that we are experiencing correction, not a systemic event, and that the aforementioned comment will play out…again.

August 23, 2015

Bad Company

This has been a challenging week for the stock markets around the world and as yet another media frenzy challenges the collective patience of investors and observers alike it’s the latter that is usually hard at work discrediting individual companies such as this week’s shaming of Amazon (AMZN) for having a corporate culture that is too aggressive. Never mind that calling upon disgruntled employees to generate an article smells like an agenda, Amazon has well over 150 thousand employees worldwide and certainly among them there are those for whom the job isn’t a fit as well as those for whom it is. I can understand, while disagreeing with the argument, that work place behavior within an environment that sells for profit might appear unsavory to some. But in my experience many tedious jobs, for which my own has been cited, are not often not seen that way by those who are engaged in what I call a “labor of love”.  

So while the global markets are in turmoil I think there is more to be gained by following events such as:

China continues to seek ways to address the slowing of its economy. There is no suggestion yet of a recession, but the continuing decline in oil prices does suggest some credibility in economic predictions that mostly lean to a slowdown with a growth rate higher than the  western democracies but significantly lower than the average over the last 10 yrs. Some signs of stabilizing will have to be realized before the markets can truly calm down. In the meantime I have lightened up on emerging market exposure in accounts.

The Federal Reserve Board continues to show ambivalence among its members. Interest rates are going to rise, but in the meantime the Federal Reserve is sending mixed signals that aren’t helpful in the pursuit of market clarity. Since it’s been nearly 8yrs of no Fed activity many on the sidelines are predicting a rate hike in September. It can be said that the stock markets were ill positioned for such a move, therefore this week’s decline makes more sense, even if still uncertain.

Oil prices are obviously poised to outpace the normal bounds of necessity. And while I’ve spent much time writing about the potential benefits of lower energy prices, the current speculation of prices into the 20’s is bothersome. Maybe it’s because of the continued potential for manipulation on the Futures market or maybe it’s more for its contradiction to historical changes in the price of oil. I’ve watched those prices closely as an indicator of both global growth and inflation for 30 years during which the culprits to volatility were easy to trace. Recession made oil prices decline and wars, or threats thereof, made the price rise. The Middle East which has been a strong voice in the OPEC consortium has historically favored keeping prices low, in western logic to keep the consumer hooked. Only signs of stronger global growth will stop the current trend.

War posturing is currently in the news regarding the rising tone of rhetoric passing between North and South Korea. More than Ukraine or self-inflicted challenges facing Greece, I think this development is worth paying attention to, not because war is inevitable but because it could bring the type of distraction the current global market rout is hindering.

Much will be discussed over the weekend about what the market did and little about why. Picking on corporate America at the expense of following genuine news is consistent with the emotive style of our news services and in my opinion is getting tiresome. The markets are correcting and there are increasing signs that risk is showing some value. As of today all three major indexes are negative for the year. So far it is both brisk, since people jump to sell but procrastinate to buy, and widely felt in all sectors. I’ve ben raising cash and will look for opportunities to allocate it.

August 13, 2015

Chinese Food for Thought

China is not a democracy. I say that to draw attention to the potential loss of credibility when the government controls the release of information. That said, this week the currency devaluation (i.e. selling the Yuan in the open market) that is being credited to the Chinese government is being disseminated by the media as, you guessed it, a crisis, and therefore the reason the stock market is declining. Well, given my recent comments regarding the much needed relief of a market correction underway, I don’t agree, and the following is why.

China is not alone in acting in the best interests of its economy at the expense of its trading partners. In particular the need to underprice America, has been a crucial strategy in the goal to expand Chinese consumers with purchasing power. That goal took Chinese “urban” households from 4% in 2000 to 68% in 2012.* Basically the Chinese government could maintain what appeared to be a stable and free floating currency while “pegging” it to the US dollar that had been falling since the financial crisis. The outcome of the strategy was the US struggled along the last five years while the Chinese economy grew handsomely, until now.

Smaller economies generally benefit the most from pegging their currency to the US dollar. However the downside to this activity is the country gives up control of its monetary policy. This is part of the problem that faced Greece in its recent crisis. And as China has moved away from manufacturing and transitioned to a service based economy it has felt the cold winds of declining productivity and inflation. Engaging in this US style (think quantitative easing) endeavor makes sense when deciding what China hopes to gain by devaluing its currency. Not to assure what little is left of export but to stimulate inflation, a much need measure of economic growth. It’s for this reason that the press in its simplistic fashion points to recession in China and the ensuing rattle of the markets follow. The importance of grappling with this logic is as stated above, as long as the government controls information there is a lack of credibility that I believe hinders an accurate scenario let alone an accurate projection.

But if one looks at the US, an economy that’s still nearly twice the size of China as measured by GDP, the lack of inflation has kept the Federal Reserve on the wall even as other areas of the economy have shown improvement. The outcome, has been modest growth that has kept the consumer busy with distractions such as rising Healthcare costs and sluggish wage growth. In my opinion China is more likely to follow the same course, bumpier but also easier because of the added consumer slack and capital resources in its arsenal to fight recession. And if the currency issue continues to be blown out of proportion consider that there is little evidence that domestic consumers feel the impact on imports from currency fluctuation. The resulting drops in interest rates and the US dollar are not yet ready to be dismissed as sympathetic movements, although I believe they are. And as far what little the US exports to China and its trading partners I honestly don’t think the Chinese consumer is going to let a little thing like a cheaper Yuan get in the way of owning a newer iPhone than their neighbor. Some things never change.