On the heels of the Dow surging 185 points, today King World News is pleased to share Bill Fleckenstein’s year end wrap as we head into 2016!
By Bill Fleckenstein President Of Fleckenstein Capital
December 23 (King World News) – I have been a bit more vociferous recently about the fact that I think some sort of violent break to the downside is just ahead of us…
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Bill Fleckenstein continues: And though I’ve talked about certain data points related to market action, e.g., the narrowing leadership versus the multitude of stocks that have been bashed (a phenomenon I have noted that is associated with the late stages of the topping process), I haven’t really talked much about the macro- and corporate-oriented economic data, mostly because it hasn’t really mattered except for specific companies that have stumbled. There has been an intense effort, it would appear, to hold up names that have fared reasonably well so far, despite news that would suggest that plenty of companies are in trouble. Thus, I would like to delve into that subject a little more.
Missing In Action
Yesterday GDP was reported at 2%, which was not a shock, but we need to harken back to Q1 and Q2 when the data was disappointing and the majority of investors expected a big rebound in Q3 and Q4. At the time I said that was unlikely, even though the prevailing wisdom was quite bullish about economic prospects. Nonetheless, the Q3 data did not support that bullishness, and I suspect Q4 will be just as bad, if not worse.
In addition yesterday, existing home sales were much worse than expected and retail sales have been weak for some time. So it is quite difficult to find an area of strength here in the U.S. that seems capable of powering the economy forward. We must also remember that North America has been the strongest part of the entire global economy. Europe was weak before the Paris terrorist attacks, the price of oil has hampered oil exporters around the world, and Asia has been slowing. Thus, if the U.S. is slowing, which it is, economic and stock bulls are going to be shocked soon, given that expectations are so high about what the economy is supposed to deliver next year. (All one has to do is take a look at the number of expected Fed rate hikes to see that people are quite optimistic.)
A Tuesday Case of the Mondays
One area of strength in the U.S. has been the corporate sector. However, yesterday Steelcase shocked its investors and the stock price declined about 20% after it was forced to admit that Q3 and Q4 were and will be worse than expected on declining orders year over year (thanks to Fred Hickey for pointing this out to me). In addition, the company’s CEO stated, “At the same time, order growth in the U.S. furniture industry has slowed, as has overall U.S. business capital spending. Our orders and pipeline at the end of the quarter showed fewer large projects than last year.” He also noted that those customers who tend to cut back first during recessions were doing so and that the slowdown seemed to accelerate in the second half of the third quarter and early December. Obviously, the Fed’s misreading of the economy and the view that things were picking up has been incorrect, as is the expectation of any sort of economic re-acceleration.
Tech land has been a strong sector, where stock prices have held up even though there is no real end-demand growth in PCs, tablets, TVs, smartphones (other than Apple, which is now seeing its expected unit sales cut on a near-daily basis). Autos have been a decent end market, but now that industry is showing signs of slowing as well, given that there have been a few hiccups in the subprime auto financing food chain. The lone bright spot in tech, i.e., the data center buildout, has seen order cutbacks, and last night Micron noted that its data center business has slowed. So if that’s true, which corroborates other data points, one can conclude that expectations for virtually everything in tech are too high. Thus, we are set up for a real slaughter sometime in Q1, as there is no “there” there relative to what so many are counting on.
Disconnecting the Dots
Nonetheless, none of that seems to matter to the tape, as virtually the entire chip sector — which is going to be the sector that is most vulnerable to the end-market slowdowns we are seeing — continues to levitate. Apple’s stock price has fallen pretty consistently ever since the 6s rollout, expectations have been gargantuan in terms of unit sales, and dead fish continue to cut their estimates, but none of the companies that are Apple suppliers have seen their estimates cut. This includes Texas Instruments, Cirrus Logic, NXP Semiconductor, Avago, Skyworks, Qorvo, and Analog Devices, which are all vulnerable, as are all the semiconductor equipment suppliers.
Elsewhere in tech land — and this may be one of the reasons for the problems at Steelcase — the venture funding and unicorn discovery business is seeing valuations drop as IPOs have stopped. So perhaps some newer businesses are not throwing money around the way they once were.
I have never seen end markets deteriorate so drastically, with unit estimates for a key player like Apple cut so much, while none of the suppliers’ stock prices have been impacted much at all. It is one of the bigger disconnects I’ve seen in an age (over the last 15 years) of many disconnects. I pass all this information along as food for thought for people who are capable of operating on the short side or buying puts, but also for others to back up my contention that the economy is weak, the Fed has erred, and the stock market is on borrowed time. Those conclusions also have implications for the FX market and the metals as well. When the history books are written I think 2015 will go down as one of the bigger economic fantasies of all time.
Straight Out of Kitchen Nightmares
I have said this before, but I will say it again: you could not have created a better recipe for more trouble if you had specifically tried. Though in 2005 to 2007, when the financial system loaded itself up with leveraged, low-quality real estate paper during the real estate bubble, it was a more explosive powder keg than what lies before us (as debts have now been piled up at the government and corporate level). Thus, this next debacle we face will most likely not be led by huge problems in the financial system.
Turning to the market action, last night’s reporting companies (Micron and Nike) were both lower. Nike’s good news apparently was not quite good enough and Micron was forced to project a loss for next quarter. Speaking of disconnects, it was only a few quarters ago that Micron was $35 and the thesis was that, since memory was now a duopoly (or some variation of that theme), pricing would never collapse, Micron would never lose money again, and it would never earn less than at least a couple of bucks a share. That whole idea has been shredded, though it was fervently believed by most tech investors.
I raise that point because we are seeing similar uninformed decisions about other semiconductor companies as, in addition to having all the problems of a late economic cycle and slowing end markets, many of them have taken on boatloads of debt as well.
In any case, today the market ground higher all day, gaining around 1%, as nothing I just discussed currently matters and the indices continue to be drawn mindlessly higher. Away from stocks, green paper was mixed, oil managed a 4% bounce, fixed income was lower, and the metals were mixed, with silver slightly higher and gold a touch lower.
The Wrap on the Rap
As this is the last column of the year, I wish everyone a Merry Christmas, Happy Hanukkah, and Happy New Year. We’ll be back at full strength on Jan. 4, 2016. While this has been a difficult year for people who think one and one makes two, I believe that 2016 is going to be drastically different.
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