Thursday, November 9, 2017

Stock Market Overview -- Updated Economic Conditions

Key turning point for employment numbers? 

The September employment situation showed a loss of 33,000 non-farm payroll jobs, the first decline since September 2010.

The decline could be mostly caused because of the recent hurricanes; however, both July and August revisions reflected an additional loss of 38,000 jobs. After revisions, job gains have average just 91,000 over the past three months.

There was a steep employment decline of 105,000 in food services and drinking places, likely reflected by the impact of hurricanes Irma and Harvey, but the question remains if we are at a key turning point, since this area of employment can reflect overall changes in economic conditions.

Is the Bureau of Labor to Statistics (BLS) altering wage data? 

The recent BLS employment report showed an annual increase in average weekly earnings up a whopping 2.9%, above the 2.5% expected, and above the 2.5% reported last month. On the surface, this was a great number, as the 2.9% annual increase was distorted by hurricanes, and was the highest since the financial crisis.

However, it becomes clear that the BLS altered the numbers, and may have simply hard-coded it's spreadsheet with the intention of goalsetting a specific number.
The average weekly earnings for goods producing and private service-producing industries, which are the only two subcomponents of the total private line hourly earnings were at -0.8% and -0.1%, respectively. The BLS reported that somehow the total of these two declines were an increase of 0.2% -- what fabrication!

This undermines not only the labor inflation narrative, but it puts into question the rest of the overall labor data, and whether there are other politically-motivated, goal-setting "spreadsheet" errors.

Companies announcing spinoff, a corporate action that typically occurs at major stock market tops. 

Corporate executives are grasping to keep shareholders happy, as they continue to announce plans to shed or consider spinning off current business units.

The number of completed US spinoffs increased to near-term peaks in late-1999 and early-2008, just before or around the last two major stock market tops. A bear market begins when stocks fall 20% or more from a recent high -- a decline not seen, since this bull market began in March 2009. 

The current high valuations support spinning off or divesting assets, especially when equities are highly valued and additional growth is difficult or improbable.

Completed spinoffs in the US rose to 88 in late-1999 and dropped off to 80 in early-2000, when the dot-com bubble burst, and fell to 55 in 2001. Furthermore, the number of completed US spinoffs rose from 24 in late-2007 to 30 in early-2008, before dropping to 17 in 2009, when stocks hit their lowest point during the financial crisis.

The total value of completed US spinoffs by year has also tended to climb just around stock market tops and before the market crashes.

The value of US spinoffs completed in 2000 nearly tripled from the prior year to $97 billion, and roughly double from 2006's level to $170 billion in 2007, just ahead of the financial crisis. In 2008, the total value edged lower to about $166 billion, before dropping to $54 billion in 2009.

The total value completed deals has once again started to pick up, reaching a recent high of $177 billion for 43 completed US spinoffs in 2015.

The value of spinoffs this year are still below where they were in the prior two years, but it's still too early to determine whether this past week's US spinoff announcements of an additional $23 billion will continue the rest of the year and into 2018.

Some have argued that spinning off nonessential business units helps a company focus, while allowing the spinoffs to generate profits more efficiently.

Spinoffs maybe back again; however, divestitures (including spin off and sales) are being driven by the need for companies to return to their core area of competence, and creating more focus on their strategic goals. The market is expecting and rewarding companies for their actions, just like they did in the past, before or at major stock market tops.

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The stock market information discuss has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. The stock market overview was issued for informational purposes, and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This overview is based on information obtained from sources believed to be reliable, but are not guaranteed to be accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in this stock market overview. Recipients should not regard this overview as a substitute for the exercise of their own judgment. Any options or opinions expressed in this stock market overview is subject to change without any notice and Wavetech Enterprises, LLC is not under any obligation to update or keep current the information contained within. Past performance is not necessarily indicative of future results. Wavetech Enterprises, LLC and its stock market overview accept no liability for any loss or damage of any kind arising out of the use of any or all parts of this information.

Thursday, August 17, 2017

Stock Market Overview -- Current Economic Conditions

Bubble in real estate rentals and overall real estate market. In 2017, the ongoing apartment building boom in the United States will set a new record of 350,000 new rental apartments in buildings, with over 50 units each expected to hit the market -- three times the number of units that came online in 2011.

Deliveries in 2017 will be 20% above the prior records set 2016, based on data going back to 1997. Between 1997 and 2006, before the financial crisis, annual completions averaged 212,000 rental apartments, but 2017 will be 62% higher than those levels.

Furthermore, there is a high-rise crane craze in Seattle, but that's nothing compared to New York and Dallas, that are adding 27,000 and 25,000 units, respectively. Chicago is adding 7,800 units, despite a shrinking population and rents declining by 19%.

Fannie Mae and Freddie Mac are financing this rental housing boom, which made 53% of all apartment loans in 2016, down from their combined 68% market share in 2012. So, their conservator, the Federal Housing Finance Agency (FHFA), recently eased the lending caps, so they can make even more loans.

Fannie Mae and Freddie Mac are particularly dominant in garden apartments and in student housing, with 62% and 61% shares, respectively. The two agencies remain the largest mid-/high-rise lenders, but only hold 35% of the market.

Government Sponsored Enterprises (GSEs), such as Freddie Mae, guarantee commercial mortgages on apartments buildings, and package them in Commercial Mortgage-Backed Securities. Therefore, both taxpayers and banks are on the hook for these obligations.

Currently, the logic is to "build them and they will come" -- first renters, then, complex buyers.

Venture-Capital and Private Equity firm's are pushing developers to build more as fast as they can, who are all under the illusion that there's at least four more good years left in this cycle and are scrambling to purchase new sites. The supply of apartment units hitting the market in 2018 and 2019 will even be larger. For example, in Seattle, there are 67,500 new apartment units in the pipeline.

However, while no one was paying attention, the prices of apartment buildings nationally, after seven booming years, peaked last summer, and have declined 3% since then, with transaction volume of apartment buildings plummeting. And, asking rents -- the main point, because they pay for the whole construction -- have now flattened.

As usual, cheap money entices developers to over do it, and the fall will be just as painful.

The "lower for longer" interest-rate environment has largely fueled this rental and real estate bubble, as investors flee volatile markets in search of safe havens, and the December 2016 rate hike is beginning to send shockwaves through the broader markets.

Are we already in another recession? It appears we may have just entered a recession, which is defined as being two or more quarters of negative Gross Domestic Product (GDP) growth, which has been the case, when adjusted for inflation. The eight-year long "recovery," the weakest on record, has rolled over into another recession.

The real world economy numbers have been softening:
- Auto/light truck sales: either down or off a cliff, depending on how much the numbers have been inflated.
- Restaurant/dining sales: down, worst collapse since 2009.
- Tax receipts: down.
- Retail sales: flat, stagnant or down, depending on the sector, and if the numbers have been adjusted for inflation and loss of purchasing power.
- Rents in the high-rent regions: finally softening after years of relentless increases.
- Consumer debt: hitting new highs.
- Corporate profits: stagnant or down, when stripped of gimmickry.

Employment often tops out just before the economy rolls over into recession -- the last gasp of an expansionary phase.

There are several fundamental reasons why we might be in a recession that manages to avoid the official definition. There are observers that feel the economy never really exited 2008-2009 recession.

Those observers look at the fundamentals, not the stock market, which has been held up as a proxy for the real economy, when in fact it is only a proxy for the official selection of the market as the "signifier" of economic vitality and prosperity.

Recessions are supposed to clear the financial deadwood -- failed enterprises are liquidated, borrowers who are in default forced into bankruptcy, and bad debt is wiped off the books through the acceptance of losses.

These "clear the deadwood" dynamics were suppressed through this so-called recovery, from 2009 to 2017. Rather than accept painful losses, the authorities saved bankrupt banks and encouraged an artificial economy in which borrowers and enterprises are kept alive through low-cost loans, and the masking of default via financial trickery. For example, non-performing student loans are not labeled "in default," but are placed in a special category of "forgiveness," without actual write-downs of the debt.

Households are being offered 0% loans, since they can no longer pay interest on the new debt. Corporations sell near-zero interest yield bonds to impressionable investors, if they need to roll over debt.

Federal agencies, such as FHA, are offering near-zero down payment mortgages and guaranteed private lenders against any losses for households that can no longer afford to buy homes.

Taxpayers will fund another $100 billion bail-out, when these agencies get in trouble, due to the horrendous costs of encouraging un-creditworthy borrowers to take on debt that they simply cannot afford.

Full-time jobs, productivity, and profits are all subpar. Wages for the bottom 95% have gone nowhere since 2000, when adjusted for inflation. Households can no longer afford more debt, unless it's at near zero rates of interest.

Full-time employment -- the foundation of consumer spending and borrowing -- has barely moved in eight years. Part-time workers can't afford to buy homes or vehicles.

Wealth and income can only be generated in the real world by increases in productivity, but in this so-called "recovery" productivity is tanking.

In essence, this "recovery" economy is living on large amounts of new debt that can't be serviced. Eventually employment declines, forcing employers to trim cost by cutting positions, hours worked, etc., due to weakening sales, profits and tax receipts.

Eventually borrowers give up trying to service un-payable debts, close their doors, and the illusion of "growth" collapses in a heap of corrupted numbers and false "signifiers."

The "recovery" game will shift to massaging GDP, so it shows even 0.1% level of positive growth every quarter. This artificial economy can be kept alive indefinitely, and Japan is a perfect example, but it's not a healthy or vibrate opportunity-type economy. It is a sick economy of fake narratives and statistics, where the government will continually surprise with revised GDP, so that it remains positive.

Summary and Conclusions. Central banks have totally taken over the financial markets, by setting short and long-term market interest rates, which affects the valuation of all assets, directly impacting the stock, bond, and real estate markets. 

These actions prevents the economy from properly re-balancing. Markets experience this re-balancing with a  "common cold," when they go through various crashes, corrections, and recessions, which come now and then to clear out the system and make it healthier.

Therefore, the more prolonged before this happens, the more unhealthy the system can become. The more Central Banks push down interest rates -- to prevent recessions, making the world seem risk-free -- the more everybody speculates. The longer the stock market and real estate goes up, the more people ask: Why am I working so hard? And, why don't I get rich speculating?

This rampant speculation has lead to the formation of the biggest bubble in 2017, possibly in history, which will likely wipeout trillions of dollars in the process!

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Wednesday, June 7, 2017

Stock Market Overview and Prevailing Economic Conditions

There are a number of technical and fundamental concerns for the US and global economies, which are not being clearly or fully disclosed by the various Government reporting agencies and the media.
The Real Employment Situation: The recently released employment number for the month of May 2017, on the surface, showed disappointing non-farm payroll gain of 138,000 new jobs, and less than expected wage growth, even though the unemployment rate dropped to an all time low of 4.3% for all the wrong reasons.
The underlying data within this report reveals even more troubling trends, such as in addition to the number of employed workers dropping by 233,000, the composition of these jobs raise even more red flags, because in May 2017 the US lost 367,000 full-time jobs, offset by the gain of 133,000 part time jobs -- representing the biggest drop in full-time jobs since June 2014.
The only positive aspects within the report was that there were 30,000 new jobs added in the food services and drinking places, but, unfortunately, the manufacturing jobs, once again, declined by more than 1000.
As mentioned, the headlines state that the US has enjoyed 80 months of continuous job growth, with unemployment hitting 4.3%, the lowest since 2001; however, there is more to this "strong" number than viewed by the untrained eye.
The Birth and Death Rate Employment Model: A full 93% of the new jobs reported since 2008, 6.3 million out of 6.7 million, were added through the business birth and death model, a highly controversial model, which is not supported by the data. On the contrary, all data, on establishment births and deaths, point to an ongoing decrease in entrepreneurship.
Nearly 90% of the jobs created in the past decade were nothing more than a "statistical" adjustment in some Bureau of Labor Statistics (BLS) models.
The BLS introduce the birth/death adjustment, in order to account for jobs created or lost by new business formations or bankruptcies each month. This started during the Reagan administration, since President Reagan felt the Bureau was under counting the jobs that his administration had created. The birth/death model used to have a terrible name, "the bias adjustment factor." This adjustment is computed using a model based on probability-based sampling methodology.
Before 2003, few jobs were added through the adjustment, despite the fact that net business formations were much stronger during that period. However, during the 2007 to 2009 recession, the birth/death adjustment continue to add a lot of jobs -- 904,000 jobs were added in 2009 alone. We would assume, through the great recession, when business defaults skyrocketed, that the birth and death adjustment would be a net negative and subtract from the overall jobs numbers, instead of adding to it. 
Furthermore, it turned out that a full 30% of jobs created since 2010 or 4.5 million out of 15 million jobs were added via the birth/death adjustment. It is also interesting to note that 40% of the jobs added in 2016 came through the adjustment.
The reason the BLS wanted to include this adjustment was a perception that they were under counting jobs created through new start-up business formation, which has not been the case. There are multiple studies that have tracked a consistent decline of new business creation, and the deteriorating entrepreneurial environment in the US.
Weak Economic Growth, 1930s vs. Present Decade: The rate of economic growth over the past 10 years is exactly equal to the average rate that the US economy grew during the 1930s. Perhaps this fact shouldn't be surprising, because we already knew the previous administration was the only President in history not to have a single year when the economy grew by at least 3%. Of course, the mainstream media continue to push the perception that the US economy is in "recovery mode," but the truth is that the current era has far more in common with the great depression than it does with times of great economic prosperity.
The average annual rate of Gross Domestic Product (GDP) growth, from 1930 to 1939 was 1.35%, and from 2007 to 2017 was as well annually averaging 1.35%. The 1930s, of course, had their big ups and downs, but the average rate of economic growth during that decade was exactly the same as we had seen over the past 10 years.
This past decade's $10 trillion in deficit spending has produced possibly the worst economic growth as measured by GDP in our nations history, perhaps even slower than during the great depression. This stagnant, new normal, low growth economy is leaving millions of working age people behind, who have given up even trying to participate, with many doubting the attainability of the American dream.
The Federal Reserves next Rate Hike: It is highly expected that the Federal Reserve will raise interest rates, once again, in mid-June 2017, and begin the long process of unwinding it's $4.5 trillion portfolio of government debt known as the "balance sheet." Lower than expected inflation might stop the Fed in their tracks, a possibility that is being priced into the various bond markets.
Substantially lower-than-expected inflation would be a significant hurdle for the central bank in it's objective to normalize a benchmark rate kept near zero for much of this post financial crisis economy.
The Fed officials are writing off the recent soft first quarter GDP economic numbers as "transitory" -- their go-to term for fluctuations that don't meet their preferred economic expectations.
As mentioned, the bond markets is already reflecting a much more cautious tone than the Fed regarding growth, with the benchmark 10-year note yielding just 2.18% -- a proxy for GDP plus inflation, and is thus indicating a slow growth pattern ahead.
The Approaching Recessionary Inverted Yield Curve: The compression of yields, between the short-dated and long-dated duration government debt, also mention within our latest YouTube video posting, is troubling and pointing towards a more cautious Federal Reserve.
Long-dated yields have refused to move higher, even as the Fed signals an intent to unwind it's bloated balance sheet later this year. This means a flatter yield curve has the risk of inverting, if the Fed continues to push the fed funds rate higher -- a major concern, since all recessions, over the past 50 years, have been presaged by an inverted yield curve. Also, 10 of the last 13 Fed hiking cycles in interest rates have been "miscalculations" that ended in recession.
Banks Consumption of Bad Debt: Another concern is banks all over the world have been taking on far too much bad debt that keeps turning into more nonperforming loans, especially in countries like Greece and Italy. These banks, instead of restructuring those loans to let their stock and bond holdings cover the losses, are restoring it with "financial magic tricks."
The further these national governments fall into deep debt, the higher their debt-to-GDP ratio rises, with examples all over the world, including ratios above 1000% in Europe.
Bank stocks all over the world have seen historical collapses since 2008, and you don't have to look further then Deutsche Bank in Germany to see a possible approaching crash evolving.
The response to global debt crisis, since 2008, has been to pump more free money and stimulus into the system, to keep our financial institutions from imploding, which is an unrealistic strategy for the long term.
It is simply not feasible to fight a debt problem with more debt, since the restructuring of debt is healthier in the long term, despite the short term pain.
The first trigger of the global debt crisis is going to come from Europe, where the banks and the economy are the weakest. Italy will become the next Greece, since it is simply too big to bail out. Most likely, after that, there will be a domino effect, with China following, where there is basically no stimulus plan that will be able to cover it's severe debt situation.
Key Indicators for Changes in the Economic Landscape: There are five, possibly six, key indicators to monitor, regarding a real estate market lending collapse, subsequently affecting prices, and a substantial decline in the stock market.
First, the stock market will be the catalyst or trigger for everything else, including affecting real estate valuations, and could occur when small caps are not confirming a new high, compared to large-cap stocks, especially in the US, which happened in the final stages of the stock market rally in early October 2007. 
Second, a more sudden drop in jobs growth in the US, like recently, is another indicator that our workforce is actually declining, that we have been simply hiring back the lost workers of the 2008-2009 recession.
Third, more baby boomers are going to naturally retire and leave the workforce, leading to less consumer expenditures and demand for various goods and services, which actually peaked in late-2016.

Fourth, slowing used car sales are another indicator of a downturn, which peaked last year, outlined, in detail, within our latest YouTube video posting .
Fifth, stock valuation will adjust for very slow growth, both in GDP and earnings, is another worrisome sign, with growth in the first quarter being only 1.2%, and the second quarter will likely be adjusted to much lower levels, from the current projection of 3.7% to less than 1%, in the near future.
Sixth, there remains a possibility that Trump could resign in the months ahead, due to the frustration of being unable to implement all of his various proposed campaign promises for long-term economic growth, since he would not want to be referred to as a failure or be held responsible for the next recession. Trump, unfortunately, will discover that selecting and appointing corporate board members is much easier than trying to deal with already-elected government officials in both the House and the Senate, even though the Republican Party has majority control in both houses. 
Five of the six indicators have already occurred or are very close to confirming in the near future. The sixth indicator is one that remains a possibility that could also derail both the stock market and real estate market.
The Alternative Solution: In summary, there are alternative investment strategies for investors, when preparing for the upcoming crisis. We are determined to help investors avoid financial ruin that will affect the majority in the next substantial stock market and real estate market decline. 
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Friday, February 24, 2017

Stock Market Overview

There are multiple warning flags, including confirmation from our various technical and economic business cycles, indicating that the multi-decade bull market in stocks could be in the process of ending, possibly in the very near future.

One of the warning flags is the level of margin debt on the New York Stock Exchange, which are the loans that banks and brokerages make to investors, while using their stock and bond holdings as collateral.

In November 2016, margin debt reached all time highs of $507 billion, and has been hovering close to those levels for the past few months -- illustrating the fact that the market is addicted to debt.

There is precedent for a high level of margin debt preceding a stock market collapse. It peaked in March 2000, just before the stock market top and a subsequent 49% decline. And, it peaked again in July 2007, a few months before the market top in October 2007, which saw a stock market decline of 57%.

Furthermore, the percentage rise in margin debt over the latest bull market is 193%, exactly the same increased from 2002 to 2007, when the financial crisis began and a subsequent major stock market decline.

The problem with margin debt is that it causes a cascade effect -- as the markets fall, investors get margin calls on their loans and have to sell stocks as well as other investment vehicles like real estate, to maintain their margin-to-equity minimum requirements.

As long as the stock market is going up, margin tends to go up as well, which, unfortunately, is exacerbated to the downside in bear markets.

Another warning flag, previously mentioned in our January 27th 2017 Wavetech's Private Wealth Management Newsletter Blog," is the Federal Reserve's quantitive easing stimulus, and corporate stock buybacks programs have artificially supported the global stock markets for the last few years; however, their effectiveness is diminishing or no longer exist. 

Economic conditions are vastly different today, with the new Trump administration, compared to the beginning of the 1982 bull market in stocks, through the Regan era. 

For example, Reagan had virtually no government debt ($1 trillion or 6% of GDP), the flexibility and effectiveness of lowering interest-rates, as well as reducing tax rates, resulting in strong economic growth, between 6% to 8%. 

Trump, on the other hand, has inherited vast amounts of government debt ($20 trillion or 105% of GDP), and already low interest rates. Additionally, lowering tax rates even further may create some short-term growth, but will not reduce the already-ballooning level of government debt. There is fierce opposition in the US House and Senate for raising the debt ceiling limit, which will have to be voted on in mid-March 2017. These reasons and other uncertainties are making either a economic recession or depression an eventual reality.

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Friday, January 27, 2017

Stock Market Overview

Our current analysis of the various technical and economic market cycles, including evaluating psychological levels of "greed and fear," indicate that the multi-decade bull market in stocks could be ending, in the very near future.

The Federal Reserve's quantitive easing stimulus, and corporate stock buybacks programs have artificially supported the global stock markets for the last few years; however, their effectiveness is diminishing or no longer exist. 

Economic conditions are vastly different today, with the new Trump administration, compared to the beginning of the 1982 bull market in stocks, through the Regan era. 

For example, Reagan had virtually no government debt ($1 trillion or 6% of GDP), the flexibility and effectiveness of lowering interest-rates, as well as reducing tax rates, resulting in strong economic growth, between 6% to 8%. 

Trump, on the other hand, has inherited vast amounts of government debt ($20 trillion or 105% of GDP), and already low interest rates. Additionally, lowering tax rates even further may create some short-term growth, but will not reduce the already-ballooning level of government debt. There is fierce opposition in the US House and Senate for raising the debt ceiling limit, which will have to be voted on in the coming months. These reasons and other uncertainties are making either a economic recession or depression an eventual reality.

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