Hi Again,
Happy New Year!
The last three months were brutal to the market. Our portfolio alone dropped close to 25%.
All kinds of analysts blame this and that but there is only one driver and that is the Federal Reserve
Bank (the Central Bank of the US). I have been warning of this for a long time. As Martin Zweig
coined it in the 1980s, “Do not fight the Feds”. That is the most important advice one could get
when it comes to market activity. There is always a time lag between policy implementation and the
effect it has on the economy. That is the trickster. Most of the time the Feds keep tightening for too
long and create an unnecessary deep recession and then they have to go to the other end of the
spectrum and loosen monetary policy too much. When Trump heard that the market was going
down due to interest rate hikes by the Federal Reserve, he asked his staff if he has the power to
fire the chairman of the federal reserve who he just appointed. Many past presidential advisors stated
that no other president would have asked that question. The Federal Reserve is independent so that
our monetary policy will be safe from politicians. Trump mush have assumed that if he fired the
fed chairman, the market would sky rocket. What would have happened if Trump fired the
fed chairman? If that was an option, Jimmy Carter would have done that in 1979. If the President
fired the fed chairman, all people all over the world will lose confidence in the dollar as the main
protector of inflation, the federal reserve will now be run by political stooges. The bond market is
much more bigger than the stock market and the bond market drives the equity market as well as the
foreign currency market, which is the biggest financial market. Such a move would drop the bond
market so much it could raise mortgage rates to over 20%. Equity markets all over the world could
drop more than 66% (technically the most a market could drop).Already analysts are saying that
there is a 35% probability of a recession and some are calling it a Trump Recession. There is a more
of a probability in 2020. Is this for sure?
Is it all gloomy for the future? No, not at all. It all depends on the Federal Reserve. The circumstances are such that we could have “Goldilocks” economy andmarket in the US-not too hot, not too cold. The Federal Reserve has been increasing interest ratesto cool down the economy as they believe that since we are at full employment, inflation is ready to raise its ugly head. The logic is that if we are at full capacity, then we have to pay more for capacity
which will passed to the consumer in terms of inflation.
If we wait to see signs of inflation then the Feds have to raise rates so high, we
could end up with a very severe recession. Already there are signs of the economy slowing down and
it is much worse in other countries. Trump’s tariffs scared investors so much Chinese market lost 2.5
trillion in 2018. China hit back hard and our technology companies, which have been carrying the
US economy are having a major slow down as it was evident from the Apple announcing a 38%
drop. Technology company revenues are heavily (70%) dependent on international sales. Due to
Trump tariffs, those companies will have a bleak future and the ripple effect could be seen all
over the economy. For example, expect real estate prices to drop around silicon valley.So how is this
all good for the market? Now if the federal reserve believe that the slow down that is coming due to
past actions is enough to cool down the economy, they might stop raising rates or even lower rates
which would be hugely beneficial for the market. Remember Martin Zweig’s golden words, “Do
not fight the feds”, the other side of the coin is when the feds are loosening monetary policy, buy
stocks and do not sell stocks!
A note of caution. This time around we do not have a point of reference when it comes to predicting
what might happen with an economic downturn or a recession; the reason is that for the first time
in history we had zero percent interest rates in the US and negative interest rates in Europe and
elsewhere so Corporate debt level is sky high and they cannot sell bonds at these rates to cover for
the existing or maturing bonds so we could see a calamity that we never thought possible. Even the
Managing Director of the IMF warned that this level of corporate debt is a huge risk to the world
economy. On the bright side, analysts believe that Trump tax cut is being used by companies to
reduce their debt level.
GE- Last month when I wrote my newsletter I was going to ask you to increase your GE holdings by buying 500 to 1,000 shares of GE but I made a terrible mistake of not doing it. My idea was to
Start buying at that stage and buy more as the share price dropped. Over the past 30+ days, GE share
Price rose by 24% !! Strangely the share price bottomed out at $6.66! Some people might call it the
Devil’s number but it is also fibanocci number used to measure the technical movements in a stock.
Better late than ever. I suggest that you buy 500 shares of GE and be prepared to buy more if the
Price drops further. When we buy 500 shares on 1/1/19, we bring down the average cost to the share
price on 1/1/19 which is $7.57 (down from $20)
Apple- Apple stock cratered 10 percent Thursday, a day after slashing revenue guidance in a rare acknowledgement of waning sales.. The stock ended trading at $142.19, its lowest price level since July 2017. The plunge makes for Apple's worst day of trading since January 2013, and it extends a painful year-end trend for Apple into 2019. The stock, which once traded above $230 per share, shed 30 percent in the fourth quarter of 2018. Thursday's losses push Apple's market valuation below $700 billion and behind the market cap of Alphabet to become the fourth most valuable publicly traded U.S. company — down from the top spot just two months ago. The company has lost $450 billion in market valuesince its peak of about $1.1 trillion last year. Apple cited longer upgrade cycles and headwinds in China as causing lower-than-expected iPhone sales. Apple now expects revenue for its fiscal first quarter to be as much as $9 billion lower than previous projections. It's the admission shareholders had been waiting for, after months of reported supply-chain cuts and a major shake-up to the company's sales reporting structure. Apple said in November it would stop reporting individual unit sales and revenue figures for its main product lines. As of Thursday's close, Apple has lost 17 percent in the last 12 months, and almost 40 percent since 52-week highs.(Sara Salinas,”Apple Suffers”,1/4/19)
Have a great month
Fernando