WASHINGTON, May 3, 2015 – At this point in early May, anyone who’s even tried to predict the current direction of stocks in 2015 looks like the victim of one of those pie fights that were the comic highlight in many a Three Stooges film. No matter who starts the pie fight, everybody gets pied in the end. And that’s just the way most investors are feeling as we settle into that always-dreaded month of May, 2015 edition.
Trading this year has alternated between dramatic up days on low volume and catastrophic down days on big volume. And yet, the averages have been going essentially sideways since the turn of the year. Every time Wall Street bulls crow about the averages hitting new highs, they are frequently rewarded, often within 24-48 hours, with an even more dramatic Wile E. Coyote-style cliff dive.
The Maven generally avoids making predictions about the overall market action in any given week or month. That’s because anyone who does so—particularly this year—is going to end up looking like he’s just been through a massive pie fight with Larry, Curly and Moe.
What’s been going on? According to one of several informational sites we subscribe to,
“The conditions remain the same as weak economic data dukes it out with ongoing Fed induced bullish liquidity. . . . This activity, now global, continues to frustrate many investors who yearn for more normality from policies that have led to financial engineering by companies including massive stock buybacks and debt financed M&A activity. Therefore companies aren’t investing for future long-term growth vs. short-term stock price growth.
“Eventually this will catch up to them in a negative way.
“These issues remain an ongoing tactical frustration, given the 2015 trading range.”
That’s about right, and it’s important to pay attention. While the Fed is looking for a way to get out of its increasingly counterproductive easy money policy, stocks continue to trade on earnings numbers that are approaching outright falsity.
The rich guys running big companies want their stocks to continue going up, both to increase their own incentive bonuses (as if they don’t get paid enough) while keeping “activist investors” (read: other rich guys) from creating ploys to “enhance shareholder value,” meaning their own.
By dividing flat or declining earnings into fewer and fewer shares on the open market, a great many companies create the illusion of higher and higher earnings—something that would appear less obvious if they weren’t taking all those shares off the market.
This creates a false sense of recovery. Which, of course, the Fed applauds since that’s the game they’ve been trying to engineer. The problem is that, sooner or later, today’s absurd stock prices will hit the fan and be exposed for what they are: phony (but legal) accounting tricks.
Worse, the huge numbers of publicly traded American companies playing this game are creating an even worse future fate for themselves and for us. By buying back their own shares with cheaply borrowed (and taxpayer-provided) cash, they’re essentially eating their seed corn. All the money spent on these buybacks, or at least some of it, would normally be going into R&D projects to create greater profits for new products to be introduced at future dates.
Right now, though, it seems that only Apple (symbol AAPL) is doing this, even in the midst of being forced by that great humanitarian, Carl Icahn, to “create shareholder value” by borrowing money at low rates to buy their stock back by using the company’s immense cash hoard. Which, arguably, could be used to create more new products or to buy small companies that may already have one.
We’ll all pay for this sooner or later when dozens of American companies start to stumble, having bought back all the stock they could afford.
But for now, the most pernicious effect of this phenomenon is that investors are increasingly mistrusting the prices at which company stocks are currently trading. With no real way to know whether current earnings figures are fake or truly meaningful, there’s no way to figure out if a given stock is a good value or not.
Until this situation is cleared up, trading action is likely to stay next week just the way it’s been—no clear direction. Or, worse, a big drop or big jump in the averages followed just a couple of days later by an equal or greater reverse.
No matter what the perma-bulls and perma-bears choose to gasbag about this week on CNBC, the bottom line is that it’s all blather and nobody really knows.
This week’s trading tips
We’re going to hold our fire for the most part, while carefully watching the action in copper and in the oil patch, in preparation for some possible action.
Something scared the Fed and the Eurobank a couple of weeks ago when oil hit its low point and when the dollar got quite close to reaching parity with the euro. Since that time, however, the buck has lost the big mo and has lost 7 cents vs. the euro, moving from circa $1.07 to the euro to nearly $1.12 around Friday’s close.
In currency trading, these are huge, huge moves over a short period of time, indicating that the governmental parties involved decided the dollar had strengthened too much, too fast.
It’s hard to discern where the boys want the dollar to go, but parity likely ain’t it. For the short term, with the dollar in a mode of forced weakening, oil and commodity prices have been firming impressively, which is why we’re keeping an eye on both.
We remain in Calumet (CLMT) , having dumped Kinder Morgan (KMI) after it went ex-dividend last week because we didn’t like the action. We may add an oil ETF back into the portfolio this week, perhaps USO or USL, or maybe the double-long UCO, although we haven’t had good luck this year with leveraged ETFs, given the very short period of time they’re being given to run.
In any event, copper—a major commodity that needs to show some recovery—has been doing just that lately, and this is something that may become a trend. In which case, our play here would be JJC, the copper ETF, and, possibly, international copper miner Southern (SCCO).
As far as everything else is concerned, watch out for bonds, REITs and utilities. They could be in a downtrend, although the REITs may already have suffered enough damage. We’ll just have to start watching things again Monday morning to see what’s playing next at the Bijou.