Is There Another Gasp?
It appears the economic data is starting to roll in which supports the weakness in global equity markets. But, as I've mentioned before, stock markets should not be confused with economics. One of the best time to hold stocks was during the Great Depression. So, are the global bulls finished or will we get another great rally somewhere? Is there a last gasp in any area where global liquidity is attempting to find a home. It appears there are a few areas which are still the object of hot money's desire or at least not yet feeling the wrath of that hot money. They appear to be 1) Large cap, high dividend paying equities in the US and Europe, 2) Oil and 3) China.
While I believe any equity market fall will likely take no prisoners, so far, large cap dividend stocks are holding up quite well. The problem is the dividend yield across the board is pathetic. So, what we consider as high dividend yielding stocks are paying rates which are very low on average. An example is JPM, JP Morgan Chase, which is paying a little over a 3% dividend. For a company that may show 5-10% long term growth, I expect to be paid more than 3% in dividends to hold through the ebbs and flows. These dividends were quite adequate when short term rates were 1% but not at 5 or 6%. While the S&P 500 PE may be relatively moderate historically, being paid to hold those stocks is far from moderate. It's down right awful. Because as earnings may wax and wane, I am more confident in holding stocks that may pay me 5-7% dividend to offset those fluctuations. Anyone find many stocks with a 5-7% dividend? I really find large cap stocks the lesser of many evils as opposed to an attractive investment right now. Historically, the S&P dividend yield is near the low end of the range set over the last 100 years. That does not bode well for this asset class in my opinion.
So, that leaves China and oil. China is seeing alot of speculation in real estate and stocks due to the "bet" the yuan will revalue against the dollar in my opinion. Much of that money is not of Chinese origin. And, while international equity markets are all correcting this year, China's equity market is making new highs. Before everyone gets excited, last year as emerging markets were going through the roof, China's equity market was falling. So, it is hardly an accurate barometer. It is more likely still being driven by the fascination that one fifth of the world's population is modernizing and is now the land of milk and honey. This is a total fallacy that I will write more about in another post.
So, what's left? Oil. As oil continues to rise, it acts as a global tax on every person in the industrialized world. Oil today set an intraday high record as traders are once again enthusiastic that consumption numbers were quite good. Never mind that oil supplies are rising to levels I would consider verging on glut. But, oil stocks and oil are still "working" for global traders and it is really the only area really working. Isn't that a fine representation of a healthy economy? Technology isn't working, healthcare isn't working, biotech isn't working, finance isn't working, retail isn't working, housing isn't working, manufacturing isn't working but, hey, we can still drive oil and oil stocks up. That's working! We have the potential, although I wouldn't call it highly probable, that the hot money will end up concentrating in the one market that is still performing. So, there is some possibility oil could make new highs as traders pile into the one place they can make their big paychecks to buy their new Ferraris or homes in The Hamptons.
Oil has had no effect on the economy at $40-50-60 or 70 so why not drive it to $80 or $90 or $100? Could this be the final gasp of global liquidity? Oil traders will only relent when they absolutely know they have killed the global economic growth because only then will demand slacken significantly. By then, we'll all be bathing in oil.
While I believe any equity market fall will likely take no prisoners, so far, large cap dividend stocks are holding up quite well. The problem is the dividend yield across the board is pathetic. So, what we consider as high dividend yielding stocks are paying rates which are very low on average. An example is JPM, JP Morgan Chase, which is paying a little over a 3% dividend. For a company that may show 5-10% long term growth, I expect to be paid more than 3% in dividends to hold through the ebbs and flows. These dividends were quite adequate when short term rates were 1% but not at 5 or 6%. While the S&P 500 PE may be relatively moderate historically, being paid to hold those stocks is far from moderate. It's down right awful. Because as earnings may wax and wane, I am more confident in holding stocks that may pay me 5-7% dividend to offset those fluctuations. Anyone find many stocks with a 5-7% dividend? I really find large cap stocks the lesser of many evils as opposed to an attractive investment right now. Historically, the S&P dividend yield is near the low end of the range set over the last 100 years. That does not bode well for this asset class in my opinion.
So, that leaves China and oil. China is seeing alot of speculation in real estate and stocks due to the "bet" the yuan will revalue against the dollar in my opinion. Much of that money is not of Chinese origin. And, while international equity markets are all correcting this year, China's equity market is making new highs. Before everyone gets excited, last year as emerging markets were going through the roof, China's equity market was falling. So, it is hardly an accurate barometer. It is more likely still being driven by the fascination that one fifth of the world's population is modernizing and is now the land of milk and honey. This is a total fallacy that I will write more about in another post.
So, what's left? Oil. As oil continues to rise, it acts as a global tax on every person in the industrialized world. Oil today set an intraday high record as traders are once again enthusiastic that consumption numbers were quite good. Never mind that oil supplies are rising to levels I would consider verging on glut. But, oil stocks and oil are still "working" for global traders and it is really the only area really working. Isn't that a fine representation of a healthy economy? Technology isn't working, healthcare isn't working, biotech isn't working, finance isn't working, retail isn't working, housing isn't working, manufacturing isn't working but, hey, we can still drive oil and oil stocks up. That's working! We have the potential, although I wouldn't call it highly probable, that the hot money will end up concentrating in the one market that is still performing. So, there is some possibility oil could make new highs as traders pile into the one place they can make their big paychecks to buy their new Ferraris or homes in The Hamptons.
Oil has had no effect on the economy at $40-50-60 or 70 so why not drive it to $80 or $90 or $100? Could this be the final gasp of global liquidity? Oil traders will only relent when they absolutely know they have killed the global economic growth because only then will demand slacken significantly. By then, we'll all be bathing in oil.
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