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Weekly Hotline



John Dessauer’s market review and update as of Wednesday February 21, 2018

 We are still in South African waters. Last night we sailed from Port Elizabeth and headed for Durban. In Cape Town we learned about exports from that region. Cape Town has a large agricultural region. Exports from that region are a major part of the local economy. For many decades Europe has been the primary buyer of exports from Cape Town. In the past few years that has changed. China has become a major buyer of agricultural exports from Cape Town.

Port Elizabeth is an industrial city, often called the Detroit of South Africa. Similar to Cape Town, Europe has been a major investor in Port Elizabeth. And like Cape Town, Port Elizabeth is benefiting from major investment from China. We saw a site where a new assembly plant is being built. When finished in 2020 it will be the largest auto assembly plant outside of China.

Chinese economic activity in South Africa has no direct connection to the US stock market, but it does have a significant indirect connection. Through the early 1990s the United States was the dominant player in the global economy. I remember the saying that if the US economy caught a cold the global economy got pneumonia. Now there is another major contributor to the global economy… China. That is a positive for all participants in the global economy because it means there is a greater economic pie for all to share. The mechanism through which we share is international trade. That is why President Trump’s protectionist moves are of such concern. He has imposed tariffs on solar panels and washing machines. China is retaliating by imposing limits on imports of styrene. The US is the major world producer of styrene. So some American workers will benefit from Trump’s tariffs and others will suffer from a decline in exports of styrene. Protectionist measures may seem politically beneficial, but that is illusionary. History has taught all nations that protectionism does not work; it ends up harmful to all involved. Hopefully, President Trump will learn from China’s move that protectionist policies are a bad idea.

As expected the stock market’s official “correction” has given short sellers and other pessimists something to talk about.

“Do you honestly believe today is the bottom?” said Jeffrey Gundlach, known as Wall Street’s Bond King, last week, who had been warning for more than a year that markets were too calm. Gundlach had been particularly vocal in his warnings about the VIX, Wall Street’s “fear gauge,” which tracks the volatility implied by options on the S&P 500.

 Veteran short-seller Bill Fleckenstein, who ran a short fund but closed it in 2009, said that “last week’s action was an early indication that the end of bull market is upon us.”

Fleckenstein said there was a lot of money in the market with no conviction behind it, for example, buying index funds and ETFs just “to be part of the party” which was an element of “hot money.”

“Last week was just the preview to the bigger event that we’ll see this year probably,” Fleckenstein said. Fleckenstein also said he is not short at the moment - although he did make “a couple of bucks” last week shorting Nasdaq futures. He said he is looking for an opportunity to get short again. He said he has “flirted with the idea of restarting a short fund.”

The stock market’s decline was fueled by worry that inflation might rise and that interest rates might go higher than expected. However, even though there have been some signs of higher inflation, major stock market indices have already recovered about half of their losses.

Rick Rieder, BlackRock’s chief investment officer of global fixed income, said: “The market should never have gone down 10.5%.” He noted that inflation, while up a bit, remains low. That is the point. The stock market acted as if inflation were above 5% and rising. Instead, the reality is that inflation might reach the Federal Reserve’s target of an annual rate of just 2%.

In my view, as I wrote last week, the “correction” is a healthy pause, while stocks wait for quarterly earnings result. We won’t get a lot of results until April, but just the other day Cisco Systems, NASDAQ, CSCO, $44.33, reported quarterly earnings that comfortably beat all expectations. If Cisco is the start of first quarter earnings, then we will soon have fundamental support for more than a full stock market recovery. However, results from one company do not make a trend, even though Cisco is a broad based globally involved technology company. But, the Cisco news is definitely positive for technology stocks. It won’t be long before we start getting more quarterly earnings results. Our best strategy is to stay invested and be patient.

            The United States is still a leader when it comes to keeping global economic growth alive and well. The cost of energy - oil in particular - is a key component of economic growth. Consumers and economic growth were burdened when oil prices were over $100 a barrel.

“Oil price rises have come to a halt and gone into reverse” wrote the International Energy Agency in its most recent monthly report. The Agency added: “The main factor behind this is booming US oil production. For now, the upward momentum that drove the price of Brent crude oil to $70 per barrel has stalled.”

Oil fell from $115 a barrel in 2014 to $35 at the start of 2016. The steep fall in the oil price drove OPEC and Russia to come together and agree to cut production in hopes of driving the oil price higher. Initially they were successful. The oil price rose from an average $44 in 2016 to $54 in 2017 and $70 recently. Higher oil prices created an opportunity for US shale producers. They are not a party to the OPEC - Russia agreement, which has been extended to the end of this year. In just three months to November, crude output in the US increased by 846,000 barrels a day. IEA (International Energy Agency) said, at that rate the US could soon overtake Russia to become the global oil production leader.

Shale production is controversial. There are concerns about the long term effects of using a high pressure mixture of water, sand and chemicals to release the oil deep underground. However, the benefits to the US and consumers worldwide are so great that it makes sense to continue shale production and continue developing the technology to reduce the risk.

I will have the next market review and update for you one week from today on Wednesday February 28, 2018. 

 All the best,                                                                                                               

John Dessauer                                                                                                            

©February 2018