What's real and what's hyperbole
The chase by Frances Horodelski:
The bears playbook will be much in evidence today and I can hear their growling everywhere. The Dow futures are down more than 400 points at 7:30 a.m. ET. Here is the tally from last week: The Dow down 5.82%. The S&P 500 down 5.77%. The Nasdaq down 6.78%. The S&P/TSX down 5.63%. All ten sectors in the U.S. were lower last week led by Energy (-8.65%) while in Canada it was similar carnage but healthcare led the way (-9.43%) and there was one bright light – telecom +1% on the week. Golds too outperformed with a positive week, with 20 out of 21 members higher led by Alamos Gold (+21.5%) and the sector higher by 6%. Canadian banks which will be much in focus this week with third quarter reports, also had a dismal week with group down 4.7% led lower by Canadian Western Bank (-9%). Year to date the group is down 11.89% with Home Capital and Canadian Western Bank shareholders feeling the most pain (-44% and -32%, respectively). But no bank was spared – all ten components are down on the year. The yield on the Canadian Bank index is 4.33%.
As I said last week, this is one of the most anticipated corrections in years. Most expected theChinese stocks to fall after a speculative feeding frenzy that took the market to ridiculous levels of valuation. Most thought a correction of some magnitude would be “healthy” and many portfolio managers were waiting for the opportunity to buy. Most didn’t expect it to happen in one or two days. Orderly declines are much more healthy than disorderly ones – this one is turning disorderly. Remember that the margin clerks rule when markets collapse like this (now down almost 600 points on the Dow).
So there will be bears. But let’s highlight the bulls’ playbook for fun. Corrections happen and we’re in one. They aren’t great but let’s look at some of the things that could point to something decent ahead. Earnings in the second quarter (excluding energy) showed a decent 10+ gains for S&P 500 companies. The American economy continues to grow (and the Atlanta Fed GDPNow gauge has been showing an acceleration of expectations albeit still modest). Jobs are plentiful and the jobless rate has fallen. The number of millennials has surpassed the number of bombers in the American population have the potential for more homes, more cars and more consumption generally. The Fed remains accommodative (remember the balance sheet isn’t shrinking, they remain committed to re-investing maturing bonds and rates – with or without a hike – are exceptionally low. The CNN fear/greed index is at FIVE (paralytic fear). The amount of damage underneath the averages is severe including more than 80% of NYSE and TSX listed stocks down trading below their respective 50 day moving averages. Stocks are relatively expensive (compared to their own history) but still not outrageous (the bears love the charts that show stocks are the third most expensive compared to 1929 and 2000). The S&P is trading at 16.65x forecasted earnings while the TSX is at 16.8x. The ECB remains committed to “whatever it takes” and continues to buy some $65 billion worth of bonds per month. There is no credit crunch here folks – the leading cause of recessions historically (I know it is always different this time but still important to watch what matters). While all fingers are pointing to China, their ability to soften any blow is mighty (the PBOC’s reserve ratios are at 18.5% compared to the Fed’s 0.25%). According to the latest insider reports, insiders are decidedly bullish with sellers:buyers at 7:1 versus 25:1 in June (insiders on average tend to be sellers rather than buyers given options and significant components of compensation related to stock).
Now if you want to get bearish, there are no shortage of reasons (including the technical picture which always can be convincing when trend lines are broken). Unfortunately, they seem to me to be the same reasons on a loop – Fed, Europe and China. This week it is China. Remember to step back and focus on what is real and what is hyperbole. There will be a lot of the latter today. It used to be when the world was a mess, the world flocked to the U.S. dollar and U.S. treasuries. That isn’t happening as traders are buying the Euro, the yen and the Swiss Franc,
There will be news. Like the Iranians who are intent on shipping oil at any price. There are earnings this week (Best Buy tomorrow and Gamestop and Tiffanys on Thursday). There will be economic data releases including U.S. housing tomorrow, durable goods on Wednesdayand a second look at U.S. Q2 GDP on Thursday.
This not a time to be a hero but it is also not a time to panic. Take a hard look at each and every company in your portfolio and put your bear hat on. Do the numbers under the most uncompromising of scenarios – and see what will remain standing. Hold fast. And hold onto your hat. For months strategists have been forecasting heightened volatility. We’re there now. September is the worst month of the year seasonally – but maybe September came a month early. At BNN we’ll try to cut through the noise and provide clear-headed analysis. Stay with us.
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