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19 March 2016: Current Market Update (Preston’s Newsletter)
By Preston Pysh
So how about that recent market! In the last three weeks we have seen central banks around the world do some “amazing” stuff. Sweden Cut Rates, the People’s Bank of China (PBOC) did a $1.5 billion injection, the PBOC did another Yuan Devaluation and $54 billion injection, the PBOC did another $49 billion Injection, The ECB cut rates and added more QE, Norway cut rates, The Reserve Bank of New Zealand cut rates, and the US FED cut the number of interest rate hikes for 2016. This was all in the last three weeks. Other than that, it was business as usual I guess (pardon my sarcasm).
So when I look at the recent activity in the market, I think we are really starting to see some interesting things happen. First and foremost, what have the recent earnings looked like? When we ask this very fundamental question, we can see profit margins continuing to contract and premiums hold steady at nearly 25 X the profit. Historically speaking, this is a very high multiple to pay. Does this mean it can’t go higher – of course not. What it does mean is you might be assuming a lot of risk by owning stocks (in the US) at the current prices. When prices are this high compared to the earnings, you’ll likely see only a 4% return (annually) over next ten years.
Now, the thing on everyone’s mind is oil. In my last post (about a month ago), I said that Stig might be executing a better approach at acquiring equity in this deeply depressed market by increasing his position each month. If you plan on owning it for the long-haul, it will eventually play-out in your benefit. The only risk in doing this play is if things get worse, you don’t want to be holding individual companies that are highly leveraged. When we saw the central bank completely fail to raise rates this past week, most people around the world saw the FED might be out of rounds in the chamber. When that happened, you saw oil come screaming back into the $40 range. If the FED continues to signal a weaker position with raising rates, you’ll continue to see the dollar weaken and oil (and all other commodities) get stronger. This is a very difficult position to forecast and I would say the odds are nearly 50/50 on what might happen next. Like I wrote in my last post, if you plan on owning oil for a long period of time (i.e. 5 years), then don’t try to time this thing. My personal decision to continue to wait might be a poor choice because I might miss out on a great opportunity.
With all of that said, here’s what I’m looking for in the coming months. I think that the FED’s decision to weaken the dollar has put enormous pressure on Europe and Japan. I think they will fight back (more devaluations), but I’m not sure how or with what mechanism. European banks are in a very scary position. With the ECB lowering rates and doing more QE, they will not be profitable in 2016. This pressure could potentially have a negative impact globally if things continue to get worse. I’d like to say I’m an optimist in the near term future, but that’s definitely not the case. With the dollar weakening (at the present time), commodities have gained strength and it has put a lot of relief on US Banks and lenders that provided capital to the commodities complex. Now, $40 oil isn’t something that’s sustainable for most American/Canadian companies, so it’s not like they are out of the woods yet, but it’s an extremely interesting twist to the pressures we have seen over the past year.
-Preston
