2/22-2/26/16 Charts of the Week

Over the last month the soft data released from the manufacturing sector has become rather repetitive, this time the weakness stems from the Richmond Fed Manufacturing Index which came in a -4 for the month of February…

Richmond-fed-mfg

The good news, if the research done by LPL and Bloomberg carries any weight, is that the stifling impact of a rising US Dollar may be coming to an end. This would be fantastic news for not just global businesses based in the US, but for the transportation sector as well.

DXY-headwind

One company that has suffered substantially during the recent market downturn has been Moeller Maersk, the same Maersk that Captain Phillips (portrayed by Tom Hanks in the film “Captain Phillips”) worked for. For those that are not aware, Moller Maersk is a Danish business conglomerate, much like General Electric is in the US.

Maersk

Maersk has suffered mainly from two of their divisions; their oil and gas exploration division and their international shipping division. We have spent countless articles focusing on the energy sector, so weakness in that division is well understood. In the transportation sector, Maersk has seen competition increase by 8%, while the amount of goods being transported has remained stable. Add competition and falling oil prices, and one begins to understand how Maersk’s stock has fallen nearly 50% in less than a year.

The most frustrating hypothesis I have heard, which has been repeated constantly, is that the downturn in oil has been responsible for the recent selloff in equities (even though the S&P 500 and Dow had a strong week given their year-to-date performance). Analysts will use charts like the following to claim that there is a positive correlation between stocks and the price of oil…

crude-v-sp500

How convenient that the timeline used above starts in 2009, when financial markets tanked and EVERYTHING bottomed out. Of course you will see some positive correlation between traditionally uncorrelated sectors during a time of such financial stress.

When we stretch the time line out a bit…

sp-500-and-oil-relationship

I would hardly note a strong positive correlation from that chart, only since 2009, which makes perfect sense given how depressed asset prices became at the market’s bottom.

The next topic involves the most hated “B-word” of all investors…bubbles. The term is often thrown around because it is fun and catchy to say, but real market bubbles are few and far between. For the purposes of this piece, we will assume that a “bubble” means an overbought and overvalued asset class. The following chart compares the returns of the Dow Jones Industrial Average from August 1921-May 1942, the gold rally from September 1971-January 1993, the oil run from December 1998 to present, and the Nasdaq’s gains from November 1990 to present. As you can see, the Nasdaq rallied faster and fell harder than any of the other asset classes, and it appear’s to be testing peak levels yet again.

bubbles

The bright spot continues to be the precious metals market. Once again, I must disclose that we have positions and have had positions in the precious metals mining sector for quite some time. Any readers that are interested in learning more about our strategy and outlook are encouraged to call us to schedule a free consultation.

The Philadelphia Exchange Gold and Silver Sector Index (XAU) seems to be forming a flag pattern. The index is up almost 60% since mid-January, so we would not be surprised to see a brief pullback as investors move some profits off the table, however the sector has been so badly beaten down that there may be upward movement still.

xau

To end this week I wanted to discuss 2 very important matters, personal debt and taxes. We all know that interest rates across the board are low at the moment, however that does not mean that we should be loading up on as much debt as possible. If consumers have a new credit card that offers 0% APR for 12 or 15 or 24 months, that is a great offer to take advantage of, but for God’s sake pay off the balance if possible! Just because rates are low doesn’t mean that they are insignificant. Most credit cards still charge about 15% interest on whatever balance they carry. That is why the following data is so startling…

credit-cards-v-emergency-savings

Along with that fact, realize that according to the same source, 25% of Americans are on the verge of financial ruin and 29% have absolutely no emergency funds whatsoever.

We are money managers whose primary objective is to help grow retirement savings by identifying attractive sectors to invest client assets in, but it is also our duty to help people understand their own financial make up and what they can do to better their personal balance sheet. Carrying significant debt at a young age for an extended period of time is a certain path to a rocky retirement.

The next topic involves taxes. As the November election nears, we are getting a better idea of which candidates have a shot at being elected, and what the hot button issues will be. For over a decade, the tax burden of the top 1% of earners in the US has been a major point of debate. I wanted to lay out some facts derived from the Tax Policy Center, a non-partisan research group out of Washington D.C.

Chart one is a large pie graph that is very self explanatory; 45% of Americans (due to having low or no taxable income, or receiving enough in tax breaks that they eliminate their tax liability) pay no federal income tax…

taxes

But what about the pesky 1% and all of their big shot corporate loopholes? Well, when we calculate the share of the federal tax burden and the tax bills paid per income class (divided into fifths), we note that…

taxes2

And on top of that…

taxes3

Often times, politicians will note that the wealthy take advantage of loopholes that limit their income tax liability. These same politicians do not factor in the effective rate of the wealthy, or in other words, their entire burden once you factor in W-2 income, 1099 income, estate tax, gift tax, etc. When we factor that data in, and look at the numbers in the tables above, I think we can all agree, let’s give the rich folks a break. They’re already paying for the meal, we don’t need to criticize their table manners as well.

That is all for this week, be sure to check in next week where we will follow up on the manufacturing sector, the energy sector and will take a look at whether the Dow and S&P 500 will continue to rise or if Jobless Claims, Mortgage Applications and the ISM Manufacturing Index will weigh on the indexes.

Happy trading!

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
« Back to the blog.