We’re in the Eye of the Financial Hurricane

 Justin Spittler


American stores are hurting…

Two weeks ago, we pointed out that giant retailer Wal-Mart just had its worst year since 1980. Sales fell for the first time in 35 years. The company plans to close 269 stores.

Since then, retailers have announced a flood of ugly results, The Wall Street Journal reports.

On Thursday, Kohl’s Corp. said it would close 18 stores after reporting weak sales, while Sears Holdings Corp. is looking to sell $300 million in assets after reporting yet another loss. Best Buy Co. warned of weak demand for electronics, and shares of Restoration Hardware Inc. plunged as much as 29% Thursday after it blamed poor sales on a “pullback by the high-end consumer.”

Earlier this month, Kohl’s (KSS), another major retailer, reported that its profits fell 20% last quarter.

Profits for clothing company Ralph Lauren (RL) fell 29%. Profits for The Gap (GPS), another clothing company, plunged 33%.

Dispatch readers know retail stocks can give advance warning of economic problems. Consumer spending accounts for 67% of the U.S. economy. When folks start to cut back on buying clothes, furniture, and televisions, these companies feel it first.

• Retail stocks were hot over the past seven years…

The SPDR S&P Retail ETF (XRT), which tracks 100 U.S. retailers, surged 500% from March 2009 to July 2014. The S&P 500 only climbed 215% over that same time.

Since July, XRT has dropped 14%. It hit its lowest level since 2013 this month.

• Many huge U.S. corporations are losing money…

Industrial conglomerate General Electric (GE) lost $6.1 billion last year. Profits at Exxon (XOM), the world’s largest oil company, plummeted 58%. Profits for Caterpillar (CAT), the world’s biggest machinery maker, plunged 43%.

As of Friday, 96% of the companies in the S&P 500 had reported quarterly earnings. Based on those results, S&P 500 earnings are on track to drop 3.3% for the fourth quarter. This would mark the third straight quarter of declining earnings for the S&P 500. That hasn’t happened since the 2009 financial crisis.

• E.B. Tucker, editor of The Casey Report, called the end of the stock bull market in September…

E.B. warned that stocks and the economy were about to enter a “very tough time.” It was a lonely call...the S&P 500 had been rallying for six straight years. And the stock market was still very close to its all-time high.

But E.B. was right. The rally has died out. None of the major U.S. stock benchmarks have hit new highs since July. The S&P 500 and Dow Jones Industrial Average have both fallen 10% since hitting record highs last year. The tech-heavy NASDAQ has dropped 13%.

• We recommend investing with caution…

We think the risk far outweighs the reward in U.S. stocks right now. If you want to continue owning certain U.S. stocks, consider pairing each stock with a “short” position.

“Shorting” a stock is betting that it will go down. By adding shorts to your portfolio, you can make your portfolio “market neutral.” This means you don’t need the overall stock market to rise to make money.

Your long positions will make money when prices rise. Your short positions make money when prices fall. This strategy allows you to own stocks while greatly reducing the damage a bear market could do to your portfolio. We use this strategy in The Casey Report to help readers make money in any environment.

We also suggest you own a significant amount of cash and physical gold. As we often say, holding cash and gold will help you avoid big losses if stocks keep falling.

• Casey Research founder Doug Casey believes a major financial crisis is just around the corner…

We entered a gigantic financial hurricane in 2007. We’ve been in the eye of the hurricane since 2010. It’s a large eye, yes, but that’s in proportion to the huge size of the hurricane. I admit: I’ve been early on this, since the degree of what governments have been doing—with ZIRP, QE, and now the War Against Cash, is unprecedented. But we’re exiting the eye of the storm and going into its trailing edge. The global economy will be engulfed in the trailing edge of the storm before this year is over. There are many indications that this is starting right now, as we speak. And the second half of the storm is going to be much worse, much different, and last much longer than what we saw in 2008 and 2009.

If you share Doug’s concern, you’ll want to “crisis-proof” your wealth. Our new book—Casey Research’s Handbook for Surviving the Coming Financial Crisis—explains strategies that will protect you from a major stock crash, economic depression, or even a full-blown currency crisis. Click here to claim your copy.

• Moving along, important news in the oil market…

Dispatch readers know the oil market is a disaster. The price of oil has plunged 70% since June 2014. Earlier this year, oil hit its lowest level since 2003.

Yesterday, we explained how low oil prices have decimated shale oil companies. In short, few shale oil companies can make money at today’s oil prices.

• Shale oil stocks have collapsed…

The Market Vectors Unconventional Oil & Gas ETF (FRAK), which tracks 50 companies in the shale oil and gas industries, has plunged 65% since June 2014.

• Shale oil companies are starting to cut back on production…

The Wall Street Journal reported yesterday:

So after years of boosting oil and gas flows across Oklahoma, Texas and North Dakota, Continental Resources Inc., Devon Energy Corp. and Marathon Oil Corp. say they plan to pull roughly 10% less from the ground in 2016 than they did last year. EOG Resources Inc. joined the chorus Friday, telling investors it has curbed production and expects to pump 5% less oil this year.

This is a big deal. For months, we’ve been saying that the world has too much oil. But until now, most oil companies have refused to cut production. According to The Wall Street Journal, these production cuts could put a significant dent in the U.S. oil production by summer.

IHS, the consulting firm that held the energy gathering in Houston last week, is forecasting that U.S. oil output could fall from more than 9 million barrels a day to as little as 8.3 million barrels a day by this summer.

Chart of the Day

U.S. stocks are expensive.

Today’s chart shows the U.S. stocks’ CAPE ratio since 1900. The CAPE is similar to the popular price-to-earnings (P/E) ratio…with one tweak. The CAPE uses earnings from the last 10 years instead of just one year. This smooths out the impact of booms and recessions. It gives us a longer-term view of the market.

A high ratio means stocks in the S&P 500 are expensive. A low ratio means stocks are cheap.
You can see that the S&P 500 is about 47% more expensive than its historic average. Since 1881, the S&P 500 has only been more expensive three other times: before the Great Depression, during the dot-com bubble, and before the 2008 financial crisis.


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