The market has been back sliding for about a month now. Most of this action is directly related to the ongoing fourth quarter earnings reports that show no growth in the fourth quarter of 2014. Investors are expecting the first quarter to be a no growth quarter as well since forward looking statements by those reporting are pessimistic. There is also the perception that the second quarter 2015 will have similar no growth prospects. So much for the Obama turn the page recovery he was pushing in his latest State of the Union address.
Frankly we are not surprised as we have stated all along this was a no growth economy. Political economy policies of high deficits and high regulation is for the first time in 4 decades producing declining numbers of small businesses, which are the growth engine and job production incubator of our society. Financial engineering of the Federal Reserve which since Fall of 2015 has come to a stand still in that the Fed is no longer printing money by adding to their trillion dollar plus balance sheet. However note that the Fed has not stopped reinvesting maturing US Treasury bonds of their 4 trillion dollars of holdings.. In effect the stoppage of Fed printing money increase has resulted in the lack of earnings growth as noted in the current earnings reports. Artificial growth is just that.
A no growth politically restrained economy with no continuing of the increase of money printing means no GDP increases and no more of the asset inflation we have had now for 6 years. In essence no reason for stock prices to continue their upward trend as well. Stock prices will likely continue the January 2015 backing and filling for the foreseeable future. Note that most stocks have not actually gone down much, excepting for those which are highly interest rate sensitive. The interest rate sensitive stocks such as insurance companies and banks are treading water going backward since most investors believe that interest rates are headed lower and those corporations will feel the strongest pinch in lower earnings.
Here is something you can count on going forward. There will NO interest rate increases in 2015 and 2016 by the Federal Reserve. Chair Janet Yellin, who made the unheard action of meeting with ONLY Democratic US Senators just this week, now knows that the economy is too weak for a increase this year and surely will not do so in 2016 due to the her desire of keeping a Democrat in the White House next term. You heard that news here first . So with that info we can rest assured that the economy will stay flat and the mega sized corporations will continue to reinvest their no growth but steady profits into more stock buyback's and higher dividends.
Note that there is absolutely no wage growth and that is due to the lack of wage pressure since there is still huge pools of unemployed who can be employed cheaper. Add in the millions of illegals who are about to get green cards and there is no chance for wage growth for years going forward. The Federal unemployment report is as all know not showing the large numbers of unemployed who have dropped out of the work force and out of those government reports. So with no wage growth and no job growth we continue a stalled economy with many living off government benefits and seeing no hope for the future. All this will continue to contribute to the no growth scenario.
Investing in this environment is difficult, but not impossible, if you stay with the politically favored companies. For instance if you had taken our suggestion last year and bought some Nuveen North Carolina Premium Fund, symbol NNC, you would not only have enjoyed the monthly 5% tax free dividends, but at the end of 2014 enjoyed a nice capital gains distribution and in January 2015 a big 4% move in the traded value of the shares. Interest rate deflation makes tax free bonds more valuable. The shares still selling for more than a double digit discount to net asset value likely have more gains ahead. If you are investing for retirement keep those funds in mega and large cap stocks. If you are stock picking try Apple which seems to be immune to a downturn as we suggested in one of our 2015 predictions. Nothing like owning a stock in a business where there are millions of addicted users who will pay anything for the next upgrade in play toys.
A real concern going forward is that the Federal Reserve mistakes even the smallest of up ticks in wage growth or prices as growth and thus thinks inflation is at hand. The result would be the two pronged policy changes. One, the end of reinvesting of maturing US Treasuries and two, a quarter point up tick in Fed interest rates. That would in our opinion be the death nail for this no growth economy. The danger is greatest later in 2015 since that would be the last chance for Fed action before the 2016 election year when as we noted no rates will be move upward due to election year concerns. Any up tick in rates would reward those holding banks and insurance companies, which currently are selling at give away prices of below 8 PE's. PRU, JPM, and MET are outright bargains for long term holdings right now. There of course is the opposite fear that the Fed will keep zero interest rates too low so as to keep their gun out of bullets if there is a real downturn due to geo-political events. Add in at some point there is real concern of an all out currency war as too many nations have zero interest rates and resort to devaluations to help their economies. Danger, danger Will Robinson, only fools or those willing to take huge risks invest in any stock outside the top 50 mega caps and there only those favored by Obama and Democrats. US Treasuries are equally dangerous as when the Fed begins dumping their trillions bonds values will crash.
We have positions in all securities mentioned, except US Treasuries.
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