Thursday, January 15, 2015

Weak Stocks

There was no rally off of support today. There was the beginnings of a rally about an hour before the close, as there usually has been lately, as the buy orders are placed by the funds, but the buying was weak and was met and ultimately overwhelmed by selling into the close of trading, leaving the averages sitting on the recent lows.

Todays news was the surprise move in the Swiss franc precipitated by the Swiss Central Bank announcing that they would no longer keep the Swissie pegged to the Euro. The SF rallied up 20% at the peak of the move, settling up about 14%. If you are a stranger to currency moves let me explain. A 1-2% move in any currency is a big move, so todays move was historic.  A few months ago the Swiss had a referendum on the question of whether to require their central bank to buy more gold as a reserve since the Swiss people seemed to be getting tired of their currency declining and the higher prices they had to pay, as well as the usual difficulty saving in your own currency if it is continually debased. Common people understand that at some point the currency becomes worthless and it is a good idea to have some assets that retain some value as a hedge.

This move will surely impact investors around the world. But the story will continue to play out over coming months. Just yesterday a European Supreme Court ruled that it was legal for the European Central Bank to purchase assets on the open markets. This is and will debase the Euro, and the Swiss central bank was in danger of going broke trying to maintain the currency peg. A debased and devalued Euro is thought to be the medicine that will finally stimulate the Euro-zone and give their imports a shot in the arm. It may give the world a shot in the arm as well, as all those cheap Euros are available for worldwide investment. Over the last decades it has been the Yen carry trade, then the US Dollar carry trade, and now the Euro carry trade?

My thoughts are on what a strong US Dollar does for the U.S. It makes imports less expensive so we can consume more imported stuff. But it hurts exports. And exports are how a country gets the cash to spend on the imports, unless it borrows the money. And we aren't in a borrowing mood anymore. Thus the conundrum. A strong dollar also buys more shares of stocks, so the price should come down, and the price of the exporters' stocks will come down if export sales decline. And I don't think that the savers in the U.S. are in favor of doing what the Swiss did today. Their currency went up but their stocks went down. That would not go over well in this country. So we, as a herd will continue to chase the paper prosperity, in the end. When the going gets tough we will demand the easy button.

Another point is that if stimulus is expected to work in Europe, investment money will flow that way, not toward the U.S. as has been the case for some years now.

If these macro events unfold then the U.S. will slow and stocks will continue to weaken and the Federal Reserve will be forced to initially back off of the plan to raise interest rates and ultimately what? They have interest rates at zero. They have purchased trillions in assets. What could they do next? About the only thing left to do would be to drop cash from helicopters. Mr. Bernanke never got the opportunity to do that, but perhaps Ms. Yellen will. (Google "helicopter Ben")

And this is why, over the long run, assets will hold value and paper will become increasingly worth less.
There is a "race to the bottom" in the world currency markets. Every country in the world wants to put their own people to work by making them competitive. "Competitive" meaning working for less compensation. And the sly way to do this is by making the paper they get paid in worth less.

Here is a price prediction of the next stock declines:

I will probably be wrong. I am about 1/2 the time.
But the danger is increased.

If a wolf was prowling in the neighborhood, I would sound the alarm. Maybe the wolf would just wander away and no harm done. But I want my friends to know when the wolf is around so they can keep the children close to the house. They don't have to keep the kids close if it is too much bother, but at least they know the risks.

Good Day.
Control your risk! Do you get that?
Control your risk.
A wise trader, Richard Russell, said "He who loses the least.................WINS!"


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