I was set to write a different note this morning. That was until the ill-fated economic readings came out of China last night.
Asian markets immediately sold off as the manufacturing PMI was a shade under “expectations” at 48.2 for December, from 48.6 in November.
Oddly, the sellers seem to have overlooked the services index reading which came in above expectations and well into “growth” territory at 54.6 (above 50 is perceived as a growth cycle).
China markets were halted as the 7% overnight loss limit was triggered and exchanges were closed for the rest of the day. I am not sure at all that this helps with the clearly still existent fear levels.
Same Old Fears
I was going to write about something related to the New Year and a fresh start – but markets are clearly infected with the same old fears: China, the Middle East, Oil and a general haze across the economic landscape – even as we ended the year with record earnings – though admittedly poor “growth levels” when including the energy sector reboot.
Call me a nut friends – but sometimes I don’t get it. I suppose this could be one of those times.
Futures are down pretty heavy this morning and are likely to kick-off not only a red ink day but the all too familiar minute-by-minute analysis about how the first hour, first day, first week and first month of a New Year tells you how the rest of the year will proceed.
Good God – what a way to start the fresh trading year – as I chuckle under my breath….and then down another handful of TUMS.
As our good friend Dr. Ed reminds us in his first morning note of the year, this year will likely include many things we witnessed last year.
Namely, mini-panic attacks as HFT traders and nervous-nellies work in concert to give back profits and trigger selling swoons.
These are likely to then be followed by what we saw last year – bounces that take back the selling levels and then eventually reach new highs.
As stated in some of your December morning notes, the odds favor a little more of the same until we lap a few of these problems.
Meanwhile keep the TUMS close and the patience even closer – looks like the New Year will kick off with a little tester right up front.
First, with so many expectations already falling to the paltry or bad side of the charts – the bell curve is pretty much set in stone.
Go home is the message, forget the stock market – it is a lost cause.
Oddly, history tells us that is a great way to start the process – as long as one is a long-term investor, able to stay focused on the long-term, big-picture facts of the matter.
Odds are high that earnings will be up this year in the US – a surprise for too many.
Look for a 5% to 8% gain over last year.
Add a little bit of a bounce in P/E’s as rates stay lower for longer and you get a nice little bounce in the markets as well – after the roller coaster phase is tied out.
Europe is also slowly – and I do mean slowly – turning the corner.
Recall from earlier notes, they went into the QE frying pan later than we did here – so expect the stay to be a bit longer as well.
We have far better demographics building in the US however and far too many still don’t include this factor in their thinking….
People Make Markets – Markets Just Follow
We have long been clear on our views of China – and they were not always popular. For years we have stated the numbers were not real – and we stated why.
The throwing of money into infrastructure projects worked to hide the severe demographic issues facing the government – as a result of the government. Their recent change to a two-child policy bodes ill for those thinking China will return to some rapid fire growth curve like before anytime soon.
They won’t – they were never really there t o begin with – BUT, this is OK. That is the other part being missed.
Energy and commodities have already been crushed. Soon (another few quarters), you will lap those horrible sectors and earnings will begin to stabilize and rebuild as companies restructure with smaller bases and starting from much smaller earning levels.
The key will be “hey, they are up year over year”. It will take some time but perceptions will change.
Keep This In Mind
The current US economy growing at a “paltry” 2% a year adds a Greece GDP ++ each year to the system
The current China economy growing at 3% to 4% a year also adds a Greece GDP ++ each year to the system
Net net – not too shabby at all – and that leaves out all the other countries on the planet.
Let’s keep this simple: the experts are telling us we should focus too much on “what’s now” and few are talking about “what’s next.”
You know me – I get uncomfortable in crowds and I am running low on TUMS.
Let’s stay focused instead, quietly on what’s next.
The Bottom Line
Looks like we will kick off the year with a mini-panic noted above….call it the first leg of the roller coaster this year.
We likely have a few – each one providing a step back to take advantage of as the year unfolds. This will pass – this section of the trail will wear itself out as the full force of what’s next hits the system.
Europe will slowly begin to turn.
China will adjust – painfully at times – but still growing at a pace that will produce steady – albeit, slower than perceived growth.
The US will get a new administration and it will be more friendly to business.
Energy and commodities will hit a turning point as painful as it has been. Those sectors will suffer through the restructuring we have noted for all of last year – but they will lap their worst performance.
Amazingly memories will fade as new long-term value is found and technology will eventually making oil profitable in the 20’s and 30’s – just as we noted here years ago.
Cap all this off with the bountiful demographic foundation in place (for decades to come)here in the US and you get a steady but boring growth curve which is set to surprisingly steepen very well over the next several years.
Let these gears fall into place and three to five years from now, odds are very high the masses will be shocked by how well the economy has recovered after all.