January 11th – January 15th Charts of the Week

Investors that were hoping for a break from the volatility of the first trading week of the year were met with more declines last week. Analysts are starting to come out from the woodwork and make rash projections (Dow below 10,000, oil at $10/barrel just to name a few), but we are focused on analyzing the hard data, and last week provided some very interesting finds…


The values in the second column were as of Wednesday, 1/13/16 and just show intraday trading, but look at those 2015 vs. 2016 returns, and we had only had 7.5 trading sessions for the year at that point! Arguments have been made that small cap stocks will lead market down trends, with large caps lagging as funds flow into those assets as they are perceived to be more safe. If that belief holds true, this could be just the start to a very ugly year for equities.


The declines in crude prices have been nothing short of astounding. If a 75% decline off of the all time peak doesn’t make your jaw drop, how about the futures prices dropping over 50% in 2015 alone? The roller coaster that is crude oil may not be done, but once the bottom is in there will be some amazing buying opportunities for oil producers as their share prices have been decimated (see the table above for reference). Oil is not alone though…


All commodities have been getting hit over the last 12-18 months. Look at the value in the top right corner in the table above. That ratio is that of the spot price of gold compared to that of the Philadelphia Gold & Silver Index, an index that follows 30 precious metals mining companies. A higher number means mining stocks are suffering, a lower number means that compared to the value of gold, stocks are getting more expensive. Historically (following the US abandoning the Gold Standard) that value has stayed between roughly 4 and 8, both of those being extremes one way or another. We have NEVER seen this number at these levels, which means that one of two things has to happen for this value to come back to a historical norm. First, gold prices could completely collapse. Secondly, mining stocks could rally. Considering the value of the metal has fallen over 40% while XAU has fallen over 80%, we see some value. Full disclosure, we have positions in the metals sector, and anyone with questions on our outlook are encouraged to call and set up an appointment with us (we do not charge for consultations or appointments).


The above chart shows that stocks in the Dow Jones Industrial Average, Transportation Average and Utility average are all forecasting declining PE ratios from 1 year ago. This means one of two things mathematically; either stock prices in those indexes are set for a strong correction, or earnings are expected to climb while the stock prices remain stagnant. I personally cannot name you a time in which a stock’s price has been entirely unresponsive to a positive earnings report (the 2 tend to move in tandem, at differing rates), but it could happen. Then again, forecasts are typically bunk reports anyways, as evidenced by…


My apologies if the chart is difficult to read, but it goes like this: earnings estimates for the S&P 500 going back to 2000 are displayed in blue, while the actual yearly performance of the S&P 500 is listed in red…and yes you will notice that not one single year since the Dot Com Bubble have “experts” provided a forecast for a negative yearly return on the S&P 500. Remember this when you hear economists making predictions on how high or low markets will go…they’re bogus.


Just for icing on the cake proving my last point, check out the chart above to see how bad estimates on the Russell 2000 missed.


While this chart has nothing to do numerically with the economy, it provides a unique snapshot at what the US job market looks like now. Look at all of those truck drivers…now imagine what happens when consumers stop buying goods and manufacturers show less demand for materials. Well…


The Inventories-to-Sales ratio is rising due to declining sales, and…


The manufacturing sector has been showing weakness from Q3 2015 to present, and…


Rising export prices mean US goods are not as attractive to foreign consumers, and demand drops.


If the US consumers slow down, and foreign consumers are not demanding US goods, that could be a catastrophe for the US economy and for US jobs. If the Fed is able to hit their inflation target, that may help in creating demand for goods, but the path we are on today is not one that leads to prosperity, we can confirm that much.

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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