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2016 - A Change Election?

by John Jazwiec

What do Bernie Sanders, Donald Trump and Ben Carlson all have in common? 

They are uncommonly uncommon. 

And people seem to want to "upgrade" to Obama 2.0.

Obama 1.0 presidential candidacy worked. But people seemed to have been let down by Obama 1.0 as a president. 

Nonetheless change is what people wanted in 2008 and they still want it again in 2016.

But the very same thing that upended Obama's rhetoric from Obama's governing - Congress and constitutional checks-and-balances - will still remain impediments in 2017 and beyond. 

It remains to be seen, whether fringe candidates, can move from the summer before the election to actually become president. Are they Obama? Or are they Ron Paul and Howard Dean?

Iowa was a bellwether in 2008. But Iowa, in most other elections, gave false signals.

What is clear though is that the populous is even more fed up with Washington than ever before. And resumes of past governing seem to be negatives; not positives. 

My own sense is that change in Washington is dependent on a "Reagan Revolution 2.0". Someone that not only wins the White House, but ushers in a new breed of congressman. 

Not career politicians and not the Tea Party or Occupy Wall Street. Rather people who run and swear an oath to support a new change president and his clearly-stated agenda.

Otherwise all of this "change" zeitgeist will either run out of steam fast or it will fail to change anything after the 2016 general election.


What The Fed Won't Tell You

by John Jazwiec

In short, they have run out of bullets.

They are trying to put some "clothes back on the emperor" by suggesting they may start to raise interest rates next month. 

But that is a nothing more than a bluff.

Why?

1. Lack of inflation. Inflation has been less than 2% this year. The Fed's target is 3%. Deflation, not inflation, is really their biggest fear. 

2. GDP growth. The Atlanta Fed is forecasting an anemic growth in GDP of just 1.3%. The Fed knows GDP growth is slowing to zero.

3. Corporate earnings. Earnings growth has been negative all year.

4. Interest rate deflation. Even with the Fed suggesting increasing interest rates, the spread between 10-year Treasuries and 30-year Treasuries is only 81 basis point. 2.19 and 2.92% respectively. The Fed can influence credit markets. But the credit markets ultimately decide interest rates. And for all the talk of raising rates all summer; it has not led to the credit market inflating interest rates.

The Fed - unlike other central banks - has two mandates: inflation control and economic growth. Any interest rate increase flies against convention and logic.

The Fed knows this. And they hope you don't.


US Stock Market IV - Why This Is No Bottom

by John Jazwiec

One would like to think that the US stock market's fall this week was based on valuations being too high.

But now it looks like, all that happened, was the laws of supply and demand.

After the big sell off on Monday, outflows from mutual funds on Tuesday, were the largest in eight years. 

As $19 billion was removed from mutual funds on Tuesday, the stock market had $19 billion worth of sell orders. With professional investors on vacation - August is their usual month off - it was incredibly difficult to find buyers. 

The phenomenon of a record number of sellers with a smaller amount of buyers likely caused the market to push down stock market prices even more on Tuesday. 

Then on Wednesday and Thursday, as the mutual fund sellers were finished unloaded their stocks, the stock market went up.

What does this mean? It's not good. Instead of the stock market - mostly driven by professional investors - beginning to correct itself - it was simply reacting to the laws of supply and demand. Meaning Wall Street hasn't changed its false bullish attitude. 

A stock market bottoms-out after complete capitulation. Only regular people capitulated this week by pulling money out of mutual funds. That's nothing close to complete capitulation. Hence no real bottom has been set and one should expect - as previously noted - continued volatility throughout September - and real downward pressure in October as corporations announce their earnings.


US Stock Market III - Negative Revenue Growth

by John Jazwiec

It is important to understand that the stock market is supposed to be based on the future of company earnings.

According to FactSet, the S&P is facing about a 2% decline in revenues.

Besides unsustainable PE ratios and stock buy backs, companies have been living with small revenue growth but have slashed costs to expand earnings at a faster rate than revenues.

But there are no more places to cut today. Also as the economy moves toward full employment, wages are likely to inflate.

Negative revenue growth on top of that - sans any new favorable macroeconomic drivers like cutting taxes - means there is simply no way earnings growth is possible.

Even as the market corrects itself and reaches historically normal PE ratios by stock value deflation; looking into a future of negative growth in profits means even lower stock value deflation.


Baseball - The Playoff System Doesn't Make Sense

by John Jazwiec

Under full-disclosure, I was briefly a Cub fan until 1984. Since 1984, I have looked at the Cubs like a bad reality show. Every stupid move is funny. Every hope and letdown is just fun to watch.

But as a data junkie, I still, to this day, check the standings.

Back in the day, the NL and AL, both had one pennant winner. They both played in the World Series.

Then the league evolved. Divisions. Inter-league. Four teams - three division winners and a wild-card - would play a large enough playoff (first 5 and then a 7 game series) - that the games should ferret out the better team and let them progress. 

I recently found out that now there are two wild card teams in the NL and the AL and they play a one game knock out? Not representative of a team (on any given baseball single game, the weakest team can beat the strongest team). Forget the second wild card nominee; the first wild card team has moved from a seven game series to a one game playoff. It doesn't make sense.

Look at the standings today. The two best teams are the Cardinals and the Royals. The next two are the Pirates and the Cubs. The former deserve to be a part of the mix. The latter are destined to a one game knockoff?

Now with inter-league play - how do divisions of only 5 teams make sense?

The Pirates and the Cubs should have a better chance than a one-game playoff. 

But the right systematic change - that needs to be enacted - is a hybrid old school simple ranking of NL and AL leagues - with the top four teams in each league playing a seven game series. 

However this year works, or even if the rules were magically changed, there is one thing I can be confident in saying. The Cubs will not win a pennant or a World Series.

It's just the stupid system that doesn't make sense. Let Cub Nation implode. Just let them do it in a fair playoff system.


Prediction Of A Dead Cat Bounce

by John Jazwiec

Look at any historical stock market chart. Nothing is linear. Only by looking at charts over a longer period than a day or week, really shows where the market is heading.

Everyone knows that at 18,000 the Dow was over-priced. I personally think it should trade at 12,500. 

This morning the market futures are up 3.3%, perhaps taking some of the sting out of yesterday's 3.6% drop. 

But I believe what you will now see is a lot of volatility - big swings up and down - until Labor Day. With the stock market making a definitive downward movement in October.

If today the market rallies, it is what investors call a "dead cat bounce". 

Regardless if I am wrong or right, this is not a safe entry point to buy stocks based on fair value. And the odds of the market going up 2,000 points is much lower than it dropping 2,000 points. There is just not enough reward for the risk of buying stocks today.

When should you think about buying?

When PE ratios for indexes average 14 or under. And after the market is definitely rising. No one can predict a bottom. But if (a) the market falls substantially and (b) an obvious bottom has formed; don't fret about the loss profits of not predicting the actual bottom and gladly give up - say 1,000 points - as safety insurance.


Now The "Why" Between The Disconnect Of The Stock Market and GDP Growth

by John Jazwiec

The post below notes the huge disconnect between the Stock Market and GDP growth.

The why is a little more complex, but one large factor is stock buy backs. 

A stock buy back program either uses its cash and/or borrows (at the prevailing low interest rates for a decade) with the net result being less shares outstanding and the stock price rising. 

I have repeatably noted that Apple's stock price growth has largely been based on stock buy backs. They also started by using their cash. But as noted a month back, Apple's subsequent borrowing for stock buy backs has left them with less cash than debt.

Also, 99 out of the S&P 500 hundred engaged in stock buy backs over the last decade.

Even though this financial reengineering is obvious - every dollar of cash on a balance sheet is worth only a dollar, but when turned into equity it is "automatically" priced at current PE ratios between 10 and 20X - investors have allowed this arbitrage to "automatically" happen by buying/pricing the stock accordingly and totally incorrectly. 

As of this writing - August 24th 2015 - it's not a matter of if stock prices are going to plummet - they will. The larger question is not even the price loss/hitting bottom point.

Rather the bigger question is the cause and effect of the stock market's collapse.

Said a different way, if GDP growth has been averaging 4% annually, and stock prices have to fall to end the disconnect, will GDP growth rates fall and contract from the effects of wealth destruction?

And if they do, it is more likely than not, stock prices will continue to fall, and in an emotional 180 degree way, overshoot the value of stocks now in a negative way.


US Stock Market II - It's Not About China

by John Jazwiec

Financial headlines are always overly simplistic by definition.

Today's massive drop in the US stock market is being blamed on China fears. That is nowhere near true and for three reasons.

Disconnect Of Stock Prices To GDP. From the end of the recession, annual US GDP growth (2010 - 2015) has been 4%. Actually it's been 3.97. But we will use 4% to make the math easier. If you divide 4% by four quarters, US GDP has grown by an average of 1% each quarter. Assuming the stock market was overly corrected in 2008-2009 and smoothed to 10,000, US stocks should be trading at 12,697. Not 18,000. And not 16,460 which is today's close. 

Liquidity. The Fed maintaining low interest rates and QE were doomed to fail. They were supposed to inject liquidity so that banks would borrow. All low interest rates have done is make the risk/reward ratio too insufficient for banks to make loans. All QE has done - what is not understood fully - is to buy loans from banks at higher prices in order to drop the yield (yield moves inversely with price), with only the banks being able to add cash to their balance sheets. Since the risk/reward level is too low, that bank cash has never been injected into Main Street. It has instead gone into stock market margin. The Fed has failed. It has failed because leaving the economy up to the Fed - which is controlled by banks by law - only is a hammer looking for a nail. Congress never did their part to fiscally stimulate the economy (lower tax rates and or increase spending). And no one in Washington has recognized or admitted the flaw of the Fed and found other ways to inject liquidity.

China. This doesn't even pass the snicker test. China imports very little from the US and it exports a lot. So US revenue demand impact from a Chinese meltdown is almost nil. And less Chinese exports should increase US manufacturing demand. China's meltdown is a red herring.

In this author's opinion, the stock market has to fall a lot more to be rational to buy stocks. And until Washington takes new action, I wouldn't buy at any level. Today's financial/fiscal structure was never and will never be sustainable.


US Stock Market - What Is Going On and August?

by John Jazwiec

If you have been reading this blog all year, you know I have expected a correction is US equities. All references are based on the S&P 500.

http://www.johnjazwiecblog.com/2015/02/more-disconnect-in-the-stock-market.html

Key takeaways from my February post - 

  • Corporate estimates of 2015 earnings growth twelve months ago, were 14.0%, lowered to 5.3% at the end of the year and are now -1.4%.
  • Historically high margin leads to corrections. With interest rates so low - the counter to investing in bonds with little return - is to borrow money and buy stocks.
  • This one I have constantly been harping on. If 75% of the US economy is based on consumption, retail consumption has been dropping, while the S&P has been rising. That's what I call a disconnect.
  • Construction growth rate has not been sufficient for the rise in the S&P 500.

Now for the critical news. This month's correction is no time to buy into. August is when "wealth" - not talking about rich, talking about wealth - is on vacation. 

The action usually happens after Labor Day and into September as corporations begin to pre-announce lowered earnings estimates.

But I do see a healthy need for a stock market correction. Which should be 10%. My only fear is so much margin leads to too much selling. And if that over-reaction happens - once again - debt will be the culprit. 


Iran Deal For Obama Haters

by John Jazwiec

There are four options on the table for the US in regards to Iran: do nothing, go to war for god knows what, let everyone else but the US pull out of sanctions, or get the most out of a deal. 

If the US approves the Iran deal, the option of war is not eliminated.

In the land of the Middle East/Persia, sometimes it's hard to keep track of bogeymen. The US toppled Iran's democratically elected president in 1953 and installed the Shah. The Shah was toppled by an Islamic regime. That regime wanted the Shah to be tried in Iran. Instead he was given asylum in the US. All of those events led to the hostage crisis.

After that things get murky. Iran was used by the Reagan administration for the Contra deal. Also under the same administration, the US first supported Iran in the Iran/Iraq war. Iran allowed US military aircraft to land in Iran during the Gulf War. They also did the same thing during the Afghanistan war. 

It is true that if you find the right group of US-haters in Iran, you can film them shouting "death to America". But you can find them also chanting the same anywhere in the Middle East.

It is equally true that in Iran and the Middle East you can find people enamored by American pop culture. 

Don't like their strict Islamic culture and brutal executions? Fair enough. But then you have to lump them with our "ally" Saudi Arabia. Don't like their financial support for Islamic radicals? Well, you have to lump them with our "ally" Saudi Arabia all the same. 

Iran Nuclear Fact - During the enrichment process, centrifuges are used to raise concentrations of U-235. For most power reactors in the West, uranium is enriched up to 5 percent. Bomb grade is above 90 percent and Iran had been processing ore to 20 percent enrichment. 

Iran Nuclear Fact - Iran has agreed to transform its deeply buried plant at Fordo (this facility is impervious to air attack) into a center for science research. Another uranium plant, Natanz, is to be cut back rather than shut down. Some 5,000 centrifuges for enriching uranium will remain spinning there, about half the current number. Iran has also agreed to limit enrichment to 3.7 percent and to cap its stockpile of low-enriched uranium at 300 kilograms, or 660 pounds, for 15 years. That is considered insufficient for a bomb rush.

Iran Nuclear Fact - The deal requires Iran to reduce its current stockpile of low-enriched uranium by 98 percent, and limits Iran’s enrichment capacity and research and development for 15 years.

For all the military hawks the Iran deal doesn't deny the US from military options. Especially if they cheat.

For oil - which is trading at $41 and plummeting - the oil futures market has already started factoring in the Iran deal to add to the glut of oil. 

Finally Iran - a Shia country - is fighting ISIS.

Simply put, Iran is no less a bogeyman than any other Middle East Country. The Iran deal has no downside. US leverage was waning. And the Obama administration got the best possible deal it could.


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From athletic scholar and satirist to computer programmer to CEO success, John Jazwiec brings a unique and often eccentric perspective to business and supply chain challenges. Exploring how they can be solved through the leadership and communication insights found in untraditional sources. This CEO blog demonstrates how business insights from books on history to the music of Linkin Park can help challenge and redefine “successful leadership.” Read Jazwiec’s Profile >>

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