Trump: This is going to hurt me more than it hurts you

The chart below depicts container traffic at the Port of Los Angeles, the largest volume US container port. Loaded inbound containers (blue), measured in twenty foot units or TEUs, have far exceeded loaded outbound units (red) for a number of years. What is noteworthy is that the ratio of loaded outbound to inbound containers has deteriorated from 48% to 38% over the last 6 years.

Port of Los Angeles Container Traffic

Imposition of tariffs has not reversed this. In fact the opposite. Stats for July 2019 show an 8.7% increase in inbound traffic and a 4.0% decrease in outbound traffic, while the ratio of inbound to outbound containers fell to a new low of 34%.

S&P 500: Flight to safety

10-Year Treasury yields are near record lows after Donald Trump’s announcement of further tariffs on China. The fall reflects the flight to safety, with rising demand for Treasuries as a safe haven.

10-Year Treasury Yield

Crude found support at $50/barrel. Breach would warn of a new down-trend, with a target of $40/barrel. Declining crude prices reflect a pessimistic outlook for the global economy.

10-Year 3-Month Treasury Spread

The S&P 500 found support at 2850. Rising volatility warns of increased market risk. A test of support at 2750 remains likely.

S&P 500

Declining Money Flow on the Nasdaq 100 reflects rising selling pressure. Expect a test of 7000.

Nasdaq 100

The Shanghai Composite Index broke support at 2850. A Trend Index peak at zero warns of strong selling pressure. Expect a test of support at 2500.

Shanghai Composite Index

India’s Nifty is testing support at 11,000. Breach would offer a target of 10,000.

Nifty Index

Dow Jones Euro Stoxx 600, reflecting large cap stocks in the European Union, is testing primary support at 368. Strong bearish divergence on the Trend Index warns of a double-top reversal, with a target of 330.

DJ Euro Stoxx 600

The Footsie is similarly testing support at 7150. Breach would offer a target of 6600.

FTSE 100

I have warned clients to cut exposure to the market. It’s a good time to be cautious.

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.”

~ Jesse Livermore

S&P 500: Treasuries reflect flight to safety

10-Year Treasury yields plunged below 2.0% on Donald Trump’s announcement of further tariffs (10% on $300bn) on China. The fall reflects rising demand for Treasuries as a safe haven in these turbulent times.

10-Year Treasury Yield

The spread between 10-Year and 3-Month Treasuries recovered above zero. This is a bearish sign: recession normally follows the recovery and not the initial inversion.

10-Year 3-Month Treasury Spread

The S&P 500 retreated below 3000 on Trump’s announcement, strengthening the bearish divergence signal on Twiggs Money Flow which warns of a correction. A test of support at 2750 is likely.

S&P 500

The Russell 2000 ETF (IWM) is expected to test primary support at 145. Small cap stocks have lagged the S&P 500 this year, highlighting risk aversion.

Russell 2000 Small Caps Index

Dow Jones Euro Stoxx 600, reflecting large cap stocks in the European Union, is similarly headed for a test of primary support at 365. Strong bearish divergence on the Trend Index warns of a reversal.

DJ Euro Stoxx 600

Falling commodity prices reflect market concerns for the global economy. A Nymex Light Crude breach of $51/barrel would signal a primary down-trend. Declining peaks on the Trend Index warn of selling pressure.

Nymex Light Crude

The DJ-UBS Commodity Index is similarly headed for a test of support at 75. Breach would signal a primary down-trend. A peak near zero on the Trend Index warns of strong selling pressure.

DJ-UBS Commodity Index

Dr Copper, often used as a barometer of the global economy, has breached primary support at 5800, signaling a decline. Again, a Trend Index peak below zero warns of strong selling pressure.

Copper

Employment stats for July have improved slightly, with Average Hourly Wages growth easing to 3.3% (Total Private).

Average Hourly Wage

And annual payroll growth ticked up to 1.5%

Employment Growth & FFR

But weekly hours worked are declining, warning that real GDP will decline further, after printing 2.3% for the second quarter.

Real GDP & Weekly Hours Worked

I have warned my clients to cut exposure to the market. It’s a good time to be cautious.

“Price is what you pay; value is what you get.”

~ Benjamin Graham

Gold rallies as the Dollar retreats

A tall shadow on the Dollar Index warns of selling pressure. Breach of the new support level at 98 would indicate a test of the rising trendline at 96. A Trend Index peak below zero warns of selling pressure. A weakening Dollar will increase demand for Gold.

Dollar Index

Spot Gold is testing resistance at $1440/1450 after consolidating above short-term support at $1400. A Trend Index trough above zero indicates buying pressure. Breakout above $1450 is likely and would offer a short-term target of $1500/ounce.

Spot Gold in USD

ASX: Iron ore plunges

Iron ore spot prices plunged from $120 to $106.50/tonne in two days. Penetration of the rising trendline is highly likely and would warn of a strong correction. A spike up is often followed by a spike down.

Iron Ore

The ASX 200 retreated from its 2007 high at 6830. Penetration of the rising trendline is now likely and would warn of a correction. The first line of support is 6350, with stronger support at 6000.

ASX 200

We have increased the level of cash in our Australian Growth portfolio.

Be wary of investing in a rigged market

The S&P 500 recovered above 3000, suggesting another advance, but bearish divergence on Twiggs Money Flow warns of (secondary) selling pressure.  Further tests of new support at 2950 are likely.

S&P 500

Falling commodity prices warn of declining global demand.

DJ-UBS Commodity Index

Declining crude prices reinforce the warning.

Nymex Light Crude

While in the US, the Cass Freight Index formed a lower peak. Follow-through below the previous trough would warn of a down-trend and declining activity.

Cass Freight Index

Capital goods orders, adjusted for inflation, continue to decline.

Capital Goods Orders

Housing starts are steady but declining building permits warn of a slow-down ahead.

Housing Starts and Building Permits

Craig Johnson of Piper Jaffray says odds of a recession are growing:

“The bond market has already priced in two rate cuts at this point in time, and potentially part of a third,” Johnson said. “History has always said that bonds lead equities and we need to listen to that message. I think that’s what the smart money is doing…I guess we can’t seem to quite get off of the monetary train that we’ve gotten ourselves onto, and I don’t think it’s quite so simple.”

S&P 500 PEmax

Trailing price-earnings (PEmax) are above 20, historically a warning that the market is over-heated. The biggest buyers of stocks are the companies themselves, through buybacks. The Fed is expected to cut rates while employment growth is still strong. Price signals are being distorted.

Be wary of investing in a rigged market. It’s a good time to be cautious.

“It is optimism that is the enemy of the rational buyer.”

~ Warren Buffett

Iron ore tailwinds lift the ASX

Further increases in iron ore prices are predicted. Enrico de la Cruz at Mining.com reports:

Singapore-based steel and iron ore data analytics firm Tivlon Technologies is keeping its price forecast of $150 a tonne by October.

“We expect the launch of infrastructure projects in China to peak in the third quarter and further uplift demand for steel,” it said in a note.

Narrow consolidation is a bullish sign, suggesting another advance.

Iron Ore

The Materials index continues its up-trend. A Trend Index above zero would signal increased buying pressure.

ASX 200 Materials

Financials continue to test resistance at 6450 but face headwinds from the housing market and construction.

ASX 200 Financials

The ASX 200 is testing its 2007 high at 6800. A rising Trend index indicates buying pressure. Penetration of the rising trendline on the index chart is unlikely but would warn of a correction.

ASX 200

We maintain a high level of cash in our Australian Growth portfolio because of expected headwinds from housing and construction.

Gold: The rally continues

The Dollar Index is testing resistance at 98; breakout would offer a target of 100. The stronger Dollar has softened demand for Gold.

Dollar Index

Silver is retracing to test its new support level after breakout above $16. Respect of support at $16 would signal an advance to $17.50. Gold and silver tend to move in unison.

Spot Silver in USD

The Gold Bugs Index, representing un-hedged gold stocks, is retracing after a strong rally. A correction of short duration would be a bullish sign, suggesting another advance.

Gold Bugs Index

Spot Gold continues to consolidate above short-term support at $1400, indicating buying pressure. Upward breakout is likely and would offer a medium-term target of $1500/ounce.

Spot Gold in USD

S&P 500 selling pressure

The S&P 500 is retracing to test its new support level at 2950. Bearish divergence on Twiggs Money Flow warns of (secondary) selling pressure. Breach of support would warn of a correction to test primary support at 2750.

S&P 500

Sector indexes are approaching a watershed moment, with Autos rallying to test their descending trendline.

S&P 500 Automobiles

Retail is also headed for a test of its rising trendline after making a new high.

S&P 500 Retail

Even Semiconductors have recovered to test their 2018 high at 1450.

S&P 500 Semiconductors

I still believe it’s a good time to be cautious.

“Be fearful when others are greedy and greedy only when others are fearful.”

~ Warren Buffett

Buybacks are hurting growth

Preliminary Q1 results from S&P Dow Jones Indices show S&P 500 dividends and buybacks continue to exceed reported earnings in the first quarter of the current year.

S&P 500 Buybacks, Dividends & Earnings

While this could be a spill-over of offshore funds repatriated as a result of the 2017 Tax Cuts and Jobs Act, companies have distributed more than they earned since 2014 (Q4). That leaves nothing in reserve for new investment or increases in working capital, both of which are necessary to support growth.

In my last post I highlighted that before-tax corporate profits, adjusted for inflation, are below 2006 levels and declining. Reported earnings for Q1 2019 on the above chart (preliminary results) are only 3.5% higher than the same quarter in 2018. If we strip out inflation, estimated at 2.0%, that leaves only 1.5% real growth.

S&P 500 earnings per share growth for Q1 2019 is marginally better,  at 6.1%, because of stock buybacks.

S&P 500 Earnings per share Growth

But the S&P 500 buyback yield is 3.49% (Source: S&P Dow Jones Indices). On its own, that should boost eps growth by 3.6% (1/[1 – 0.0349] – 1 for the quants). There seems to be 1.0% missing.

S&P 500 Earnings per share Growth

Warren Buffett has pointed this issue out repeatedly for the past 20 years:

“…We will repurchase stock when it falls below a conservative estimate of its intrinsic value. We want to be sure that when we repurchase shares that the remaining shareholders are worth more the moment after we repurchased the shares than they were before.”

If stock is repurchased at above intrinsic value then shareholders will be worse-off. The company receives a poor return on its investment in much the same way as if it had over-paid for an acquisition.

Here is a simple example:

If a company is trading at 100 times earnings and achieving 20% organic earnings growth per year, it is most likely over-priced. Now that company buys back 10% of its own stock (numbers are exaggerated for illustration purposes). Earnings will stay the same but earnings per share (eps) increases by 11.1% (the inverse of 90%).

If the same funds used for the buyback had been invested in a new project with a modest 5% initial return on investment, earnings would have increased 50% (and eps likewise).

The larger the buyback yield, the more that growth is likely to deteriorate — especially when earnings multiples are dangerously high.