Many of you know that around this time of year I journey to New York City for the Christmas tree lighting and the Friends of Fermentation (FOF) Christmas party; this year was no exception. However, it sure did not feel much like Christmas in Manhattan. The temperatures were in the 50s and 60s, so the top coat I brought was never used. Such warm climes brought about thoughts of the much discussed topic, “global warming.” Plainly the El Niño weather pattern has left the Northeast warmer and other parts of the country dryer and/or wetter. This has investment implications for businesses like the publicly traded ski resorts (not much snow), auto parts suppliers like O’Reilly Automotive (ORLY/$248.93/Strong Buy) that should benefit from bad weather, or GrubHub (GRUB/$24.03/Outperform) that is expecting that rainy days will boost its dinner deliveries. In fact, pest control company Rollins (ROL/$26.39) has already forecast more “bugs” are coming by noting “warmer, wetter conditions favor pest activities.” As written by Thomson Reuter’s journalists David Randall and Jo Winterbottom, “Worldwide, El Niño brings drier weather to Southeast Asia and Australia, with drought that can shrivel crops. India is having its first back-to-back droughts in nearly three decades, depressing its rice output and corn production, the government said in its latest crop forecast. In southeast Asia, the hot weather caused by El Niño could lower palm oil output and push prices up more than 13 percent by March or April, according to prominent industry analyst Thomas Mielke.” In fact, it was a severe El Niño that is responsible for the term “core inflation,” which excludes food and energy prices in its inflation figures for those of you who don’t eat or drive.
It was in the early 1970’s when an El Niño weather pattern caused torrential rains in Chile. Those rains caused Chile’s Atacama Desert, the driest non-polar desert in the world, to turn to mud. Since said desert lies between the Andes Mountains where copper is mined, and the Pacific coast, the copper could not be transported to Chile’s ports causing copper prices to surge. Further exacerbating the inflationary bias, the rain runoff spilled into the Humboldt Current. The Humboldt Current flows from the southern tip of Chile to northern Peru and extends about 1000 klicks off the coast into the Pacific Ocean. It is also responsible for about 20% of the world’s “fish catch,” mainly consisting of sardines and anchovies. For the uninitiated, those fish have many uses, like being dried and then crushed to be used in animal feed. The heavy rain runoff changed the saline content in the Humboldt Current causing the “fish catch” to collapse, which sent the price of feed stock for animals soaring with a concurrent rise in the price of beef, hogs, etc. At the same time OPEC was jamming the price of crude oil with the OPEC oil embargo. A stumped Arthur Burns, then chief of the Federal Reserve, consequently asked his minions how to remove the price of food and energy from the inflation figures. P-r-e-s-t-o, “core inflation” was born, which excludes the costs of food and energy, but I digress.
In Florida they say, “If you don’t like the weather, wait a minute,” and the same can be said of the stock market! Indeed, last week the stock market “rigged for heavy weather” as it lost ground to leeward with each jibe causing the S&P 500 (SPX/2012.37) to close down by 3.79% for the week. This was quite unexpected by me for I had noted the huge buildup of the market’s internal energy was likely going to be released to the upside in the ebullient month of December. Silly me, for when the SPX broke below its 2070 – 2080 support level I wrote “they” would then “gun” the SPX toward its recent reaction low of ~2042. Failing that would lead to a downside test of the often mentioned 2000 – 2020 support level. Sure enough, that is exactly what happened. Many reasons were offered for the weekly wilt. Some suggested it was the Chinese renminbi’s abrupt slide. Others attributed it to the collapse in the credit markets. Still others maintained it was the “gating” (staggered redemptions) of Marty Whitman’s junk bond fund and Stone Lion Capital’s (manages $1.3 billion focused on junk bonds) suspension of redemptions by investors that spooked the markets. For whatever reason, stocks stunk last week with the SPX falling below its November low (the D-J Industrials have not fallen below their respective November lows), the NYSE Advance/Decline Line breaking its support level, sector rotation moving to the defensive, the whiff of deflation raising its ugly head, and crude oil tagging multi-year lows. To this crude oil point, I was on CNBC’s Closing Bell last Thursday and wrong-footedly, once again, said, “I think crude oil bottomed two days ago.” Clearly, not as good as my “call” on the same station the morning of August 24, 2015 that, “The stock market is bottoming today!”
The stock slide left the S&P 500 (SPX) lower by 79.32 points (-3.79%) for the week and resting below its 50-day moving average of 2056.21 for the first time since early October. In fact, it left all of the 15 indices I monitor lower for the week with the worst “hit” coming to the D-J Transports (-5.4%), which is interesting action given crude oil’s 10.98% weekly decline. Commodities did not fare much better, with a sea of red across the board. Hereto the hits were massive with the two worst being natural gas (-14.90%) and heating oil (-14.69%), again largely due to the unseasonably warm weather. Like the indices, all of S&P’s 10 macro sectors closed lower on the week, and in a statistical oddity, all of the S&P’s (98) sub-industries were negative. Undeterred, Barron’s trotted out Wall Street’s best and brightest to forecast for the new year.
Of the ten stock market strategists interviewed, the highest 2016 target price for the S&P 500 was 2500, with an earnings estimate of $125, while the lowest target was 2100. Coincidentally, five of the group had a price target of 2200. However, most of the portfolio managers (PMs) I met with last week were not as optimistic. My friend Craig Drill, at Drill Capital, termed himself a “wary bull.” While at Craig’s office Philip Bobbitt stopped by. The noted author, professor of jurisprudence at Columbia University, and terrorism expert discussed the state of the state saying that terrorism will never end and that we must not play into the hands of the enemy. The good folks at Schroders were also cautiously bullish. Bob Kaynor, co-manager with Jenny Jones, manages the Schroder U.S. Opportunities Fund (SCUIX/$22.66) and Schroder U.S. Small and MidCap Opportunities Fund Investor Shares (SMDIX/$11.09). He noted that it is important to get the entry price of any investment right. He likes homebuilders because “birth rates” have turned up and “financial buyers” have switched to real home buyers in their 30s. He therefore also likes the “home fix up” stocks. The PMs at Cohen & Steers were equally cautious, but were pretty bullish on the real estate investment trusts (REITs), a view shared by our own real estate analysts. They like the self-storage, apartment, multi-family, and data center spaces. They also favor the high yielding REIT preferreds, a complex long favored by us.
The call for this week: The long awaited FOMC rate ratchet is on queue and we look for a trading bottom coincident with that event. The equity markets are massively oversold, support levels are at hand, and everyone is bearish. Friday’s Fade did nothing to upset the bullish bias except continue the broad and volatile sideways corrective pattern from October’s upside explosion. So while it is natural to read negativity into Friday’s drop, it is entirely in keeping with the bullish scenario. This morning all is quiet on the western front with Chinese Industrial Production and Retail Sales both beating estimates, while in Europe EMU Industrial Production also beat estimates, leaving the pre-opening S&P futures flat.