Saturday, February 6, 2016

Is Smart Money Bracing for a Recession?

Its no secret than many emerging market economies are currently in disarray due to the collapse in oil and other commodities they export.  The Chinese stock market is in chaos, Argentina Peso crumbling, Venezuelan experiencing shortages of basic goods, Russian Ruble being chopped in half, Brazil iShares MSCI index is at a mere $20 compared to $100 in '08, Baltic Dry index is hitting lows, Middle-East on fire, and any informed person could list additional examples.  Sorry if I belabored the point, but its an important one because - here in the US - the media and politicians tell us everything is OK: "don't worry, citizen, just keep investing in US market index funds because unemployment is only 5% and low oil means more discretionary spending by consumers - happiness and joy!" 

The tale of the tape tells a different story.  Where is Wall Street putting money in reality?  What I have noticed in US stock prices is that non-cyclical "safety" stocks like JNJ, PG, Kellogs, AT&T, Altria, Clorox, Phillip-Morris, General Mills, Waste Management, Coke, and Pepsi are more or less near 52 weeks highs despite an overall decline in the US markets and virtual meltdowns overseas.  Gold is up 7.29% in the last 30 days despite the ongoing slump in commodity prices generally, indicating to me that the buying is to protect capital rather than as a speculative bet or generic hedge against inflation.  Stocks that are down are the big industrial and commodity companies (Alcoa, US Steel, Ford, GM, Deere, Caterpillar, ADM, Freeport-McMoran, etc), discretionary retail stocks such as clothing (several big earning disappointments in that category - The Gap and Nike among others currently getting hammered) and personal electronics including Best Buy & Apple, and of course financial/bank stocks down significantly over the last year as well (BAC, MS, WFC, NY Mellon, etc).  Twitter, Outerwall, and GoPro are getting annihilated. Yes there are many other stocks you could point to that are merely wriggling sideways or inching upward, but the overall picture demonstrates to me - nonprofessional that I am - that smart money is bracing for a recession, possibly even deflationary recession. 

You don't buy Clorox, gold, short-term Treasuries, and cigarette companies because you are expecting record profits in corporate America.  You buy that stuff to make it through to the other side of a depression with hopefully most of your principal intact.   The Silver Squirrel says keep burying shiny acorns for winter!!!!!!

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