The Stock Market Prediction Show is broadcast every Saturday night on YouTube to get you focused and ready for trading the week ahead. There’s some interesting cross-currents happening in the stock market and to ignore them could really cost you to lose a lot of money.
Notice that on the TICK chart, no institutional buying or selling was detected last week.
Wait, what?! The Federal Reserve said the economy was good. What are institutional traders waiting for then? If things are so great and the consumer is getting stronger and the economy is really taking off so much so that the Fed keeps raising interest rates, why aren’t institutional traders in the market and buying with both hands? LOL, right. Things are not that good and hiking rates when consumer credit card debt is at an all-time high, auto-loan and student loan debts are at all-time highs, is a recipe for disaster and we are already seeing default rates rising.
The reason that institutional traders are not buying US stocks with both hands probably has to do with the economic cycle. Jim Paulsen made the point on CNBC last week that the stock market did the best when Main Street was not doing the best and so the Federal Reserve was using accommodative policy. Now that we have Main Street finally doing a little better and the Fed is taking away the accommodative policy, the stock market is likely not going to do so well. ‘Good growth is no longer good for financial assets… It does raise profits, but it also raises the interest rate pressures, the cost pressures, the pressure of profit margins. It forces the Fed to restrict the money supply and liquidity conditions”. That’s really irrefutable logic IMO. Please keep in mind this important point: Bull markets don’t die of old age, they are murdered by the Fed.
Meanwhile we keep messing with Russia and poking the doggy and we continue to get bit in return. I believe Russia is getting cozy with Saudi Arabia to really stick it to our shale oil industry. The US is producing 11 million barrels of oil per day which makes us the biggest oil exporter in the world. Saudi Arabia and Russia have lost a lot of market share to the US. I think Russia is working with Saudi Arabia to increase oil production and to really stick it to our shale oil industry. The crazy thing is that President Trump is tweeting that he wants oil prices to come down probably because of the spiking PPI. Saudi Arabia and Russia could increase production thus hitting US oil production hard and then claim that they were just giving President Trump what he wanted, wink, wink.
President Trump has put 25% tariffs on $50 billion worth of Chinese exports. China has responded by putting on 25% tariffs on $50 billion worth of US exports which include soybeans, whiskey, orange juice, electric cars, salmon, and cigars, chemicals, medical equipment, and energy products like coal, crude oil, and gasoline. Next move is up to Trump. China wants to be most powerful superpower in the world and will fight a trade war to keep its growth projections to overtake the US by 2030 on track.
Trump’s steel tariffs and Canada’s retaliatory tariffs on steel, have made steel prices more than 50 percent higher in the US than they are in China or Europe. This is bad news for US companies that purchase steel to manufacture a product to sell in global markets like washing machines, air-conditioners, etc. Meanwhile, wave of counter tariffs hitting the US will continue to push PPI higher. The producers will pass on the cost to consumers and so then the CPI will push higher. The Fed will respond to higher CPI and PPI by raising interest rates faster and that’s how the next Recession hits.
Wholesale inflation for goods and services rose sharply in May. The increase was mostly due to higher oil prices. The cost of partly finished goods and raw materials both increased sharply last month and are rising at the fastest pace in years. Steel-mill products increased by 4.3%, the largest advance in seven years. Companies rushed to stock up on steel and related supplies after the Trump administration announced broad tariffs on foreign imports.
China Economy Slowdown
News came out on China’s economy last week that shows a major slowdown is taking place. China’s economic growth had slowed to multi-decade lows across industrial, infrastructure and retail.
Infrastructure spending has fallen to 6.1% growth in the first five months of the year. This is the slowest pace of expansion since the National Bureau of Statistics started the series in 1996.
Retail sales fell to 8.5% in May, its slowest pace in 15 years.
Now that the Chinese economy is increasingly under pressure, China will be less likely to make concessions to the US in the tit-for-tat trade war.
Global growth is slowing.
The ECB is still not going to raise rates because growth is slowing. Industrial production in the eurozone fell more sharply than expected in April. The Eurozone’s industrial production declined by 0.9% in April. It was the 4th month in the last 5 months that industrial production has fallen across the eurozone.
Currency Wars As US Dollar Likely Headed Higher
China and the ECB will delay hiking rates which will push up the value of the US dollar. The dollar will likely continue to gain in strength as these other countries currencies will continue to go down as these countries continue to keep interest rates low, while the Fed hikes rates.
The Federal Reserve increased short-term interest rates last week to the highest level in a decade. This move by the Fed is hitting home builders stocks hard.
United Capital Financial Advisers reduced its position in ITB by 57% in Q1 2018. ITB is on pace for its worth year since 2008. Not only are Federal Reserve rate hikes knocking off an increasing number of consumers from being able to finance a home, the cost of goods used in construction increased 6.4% in April at the fastest year-over-year rate since 2011. Prices surged for a wide range of building materials, including many that are subject to proposed tariffs, which is expected to further push prices higher.
Think about why home builders stocks are dropping. In a strong economy with consumer’s purchasing power growing, home builders can withstand many Fed rate hikes before demand for homes starts to slow. That is not the economy that we are in. Home builders stocks are already feeling the pressure which suggests how weak the economy really is. Even though rates are still at historic lows, the demand for homes is falling.