4/18-4/22/16 Charts of the Week

Last week equities remained flat amid mixed data from the manufacturing sector, the real estate sector and the energy markets, all leading up to this week’s FOMC meeting. Over the last quarter we have detailed numerous macroeconomic factors that are weighing on financial markets. This week, we wanted to break those areas down and show their respective influence on investor (and voter) behavior.

Debt

For nearly a year we have been commenting on how low rates have been a detriment to fixed-income investors, and how implementing low interest rates for this long are an uncommon financial engineering tool that central banks have been utilizing to prop up the global economy. Remember that a low bond yield means a high bond price, and in many parts of the world, debt prices are at historic highs as yields turn negative…

debt negative rates

 

GDP Share world negative rates

There is a term that many investors and economists use for assets that sustain highly inflated prices and growth for a substantial period of time: it’s called a bubble, or at least it used to be. Rather than call the debt market what it really is, financial pundits have been praising the ECB and the Federal Reserve for their loose interest rate policies, hoping that the economy will rebound after 6 years of minimal growth. Out of any sector in the global economy today, debt markets (which dwarf equities markets) are possibly the most concerning.

Equities

This may not come as a surprise to repeat visitors, but we have concerns about US equity markets. The Dow and S&P 500 are both within 5% of their all-time highs, but have returned 0% since December of 2014. As you can see, the 18,100 level on the Dow has been a consistent level of resistance.

dow resistance

Last week, FactSet released the following chart showing a “golden cross” in the Dow, or when the 50 -day moving average moves above the 200-day moving average. It is important to remember that this is not a science and these crosses do not always result in the start of a new trend, but you can bet that statisticians are watching these averages and prices very closely going in to tomorrow’s FOMC meeting.

Dow golden crosses

We also find it very concerning that hedge funds, or the “smart-money,” has been experiencing outflows at a significant rate…

hedge fund outflows

On top of that, margin debt (securities that investors have taken on loan from brokers to short them) is at a peak not last seen since the global financial crisis in 2008…

margin debt

If you believe what FedDashboard.com has to say, the Fed and their policies have been the major driver of the markets over the last 6 years. The only problem with relying on financial engineering is that it eventually fails, every single time. If financial engineering was a perfected art, we never would have had the Great Depression, Black Monday or the global financial crisis of 2008.

us equity market drivers

Energy Markets

Since fall of 2015 US consumers have been enjoying cheap gas, however the economy has seen little benefit. Savings from the pump have been applied towards existing debt rather than new purchases, and energy companies have been trying to save wherever they can, which has unfortunately led to consolidations and layoffs within the industry. While oil production peaked in mid-2015…

Drilling Rigs 2

It is astounding to see how far rig counts have fallen…

Drilling Rigs

Yet natural gas has seen little impact…

Natural Gas Production

Due to the exorbitant costs and risks of shutting down a well with the hopes of re-tapping it at a later date, many energy companies have elected to keep producing oil and store the product. The number of wells that are losing money are staggering…

Money losing wells

However, global supply keeps on growing…

worldwide oil output

Meaning prices are falling…

oil prices

We believe that the bottom may not be in for the energy sector, but there may be some significant investment opportunities in that sector down the road.

Explaining Voter Sentiment

This election year has had quite the contentious feel to it. That undertone comes from some deep-seeded frustrations of the American people. Leaving alone social issues and the populist message of some candidates, from an economic standpoint, the American people have every right to be angry.

The University of Michigan Consumer Sentiment survey is tracking downward, which is a bad sign for the retail industry…

consumer sentiment

According to our elected officials, the recovery is strong, employment is up and all is well, right? Wrong. The real median household income in the US has dropped over 7% since peaking in the late 1990’s, and CPI has risen considerably in that same time…

household income

As much as it sounds like a bad cable news talking point, the fact is that the middle class, the backbone of America, is indeed shrinking, while both the upper glass and lower class are growing…

rising and falling middle class

Our elected officials and federal economists need to be determining how to make the bottom 30% of the chart above shrink, and how to create more middle and upper class citizens. Unfortunately, very few policies seem to be addressing that problem, and have instead been enacted to keep financial markets stable…for now.

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.
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