When I was in the investment business, we were taught that the most important factor driving the stock market was corporate earnings. The stock market has essentially been on a tear higher since February 11, 2016. So, earnings must be doing pretty good, right? Wrong.
Reuters reported this week that Commerzbank, one of Germany’s biggest banks, is examining the possibility of hoarding billions of euros in its vaults rather than paying the negative interest rates the European Central Bank charges for parking it with them. Commerzbank is part-owned by the German government. This move would represent a major protest against the ECB’s ultra-low interest rate policy which have been criticised by German Finance Minister Wolfgang Schaeuble. Schaeuble said in April that the ECB’s record low interest rates were causing “extraordinary problems” for German banks and pensioners.
As I stated last week, I am waiting for the gold correction to end so I can increase my holdings of gold and gold shares. I don’t think we’re there yet.
The Kansas City Fed Labor Market Conditions Indicators (LMCI) are two monthly measures of labor market conditions based on 24 labor market variables. One indicator measures the level of activity in labor markets and the other indicator measures momentum in labor markets. A positive value indicates that labor market conditions are above their long-run average, while a negative value signifies that labor market conditions are below their long-run average.
The Bureau of Labor Statistics (BLS) released its May jobs report this morning and the world was shocked to learn that the U.S. economy only produced a net additional 38,000 jobs last month. That wasn’t the only bad news. Total nonfarm payroll employment for March was reduced down from 208,000 to 186,000 and April was revised down from 160,000 to 123,000 for a combined 59,000 jobs less than previously reported. Over the past three months, job gains have averaged only 116,000 per month.
Stocks are way overvalued and over bought. Yes, the breadth has been good in the latest rally but I see the equities potentially failing, right here, right now. Earnings fell for the fourth quarter in a row and the economy is clearly slowing down. Could the major indices move up another percent or two and set new all-time highs? Sure. But I see less than 5% upside and at least 50% downside. That’s not a game I want to play.
Gold is the perfect anti-asset…anti-stocks, anti-bonds and anti-financial assets generally. When financial assets are strong, gold is generally weak and vice versa. When financial assets are highly valued, the smart contrarian play is to sell financial assets and buy gold. When gold is relatively highly-valued, the smart play is to sell gold and go long stocks. The correct measure is the relative value of these assets.
Would you invest in my business if I decided not to put my own money in? That’s the story in corporate America where CEOs are net sellers of their own stock and capital investment continues to fall.