After a brutal first two weeks, we shaved 1417 points – more than 8% – off the Dow. The S&P 500 has already dipped below my 2016 year-end target of 1875-1900, and I see that (for once) I was actually too optimistic! Well, either my 2016 year-end target came 11 ½ months early or my 2015 year-end target came two weeks late.
Either way, I’m going to give you my new revised forecast (click here to go straight to that).
First, I recently got this comment from a reader about the apprehension she has about the coming year, and what she’s doing about it.
“I lost in 2000 and 2008. I will not lose this year…
I have already made my move thanks to you.” ~ O.
Very glad to hear that, O.
This market is going down for the reasons I’ve laid out many times for you – too much global debt centered in China and commodities and bad policy by the Fed and other central banks. As I said last week, this is not a drill, and it is not over.
I’ve been warning people to get out of the market all last year and giving you specific recommendations to profit. People need to read Sure Money because they are getting the straight scoop here. I encourage you to forward these emails to your friends and family.
If you haven’t already “made your move” like O, here’s what I’m recommending now.
We’re Going Lower – Here’s How Much Lower
The sectors that led the way down, energy and basic industry, are in deep distress. The average yield and spread on the energy sector is 17.26% and 1,444 basis points, respectively, while the average yield and spread on the basic industry sector is 14.01% and 1,172 basis points, respectively.
Investment grade spreads have also blown out to 167 basis points from 120 basis points a year ago. It has become much more expensive for Corporate America to borrow, which means that the days of borrowing endless amounts of money to buy back endless amounts of stock are over.
In view of the fact that stock buybacks and quantitative easing (QE) were the two props holding up stock prices, the markets are likely heading lower – likely much lower.
Treasuries acted as a safe haven as the stock market fell apart last week. The yield on the 10-year Treasury dropped to 2.03%, and the yield curve moved to its flattest level since 2009.
A flat yield curve indicates a slowing economy. Treasury yields would likely be lower but for the fact that China has been selling part of its huge reserves in order to bolster its markets, which have dropped more than 20% from their 52-week highs and have clearly embraced the bear.
China is in serious trouble with little sign that conditions will improve anytime soon.
The question is whether China and its commodities bubble will take down the world like the United States and its housing bubble did in 2008. Nobody can answer that question with certainty, but we do know that there is more debt and more geopolitical instability today.
On the flip side, U.S. banks are much better capitalized and in a much better position to handle a global sell-off. For the moment, the most likely scenario is that markets continue to sell off but that we experience something less severe than 2008. But that could still mean large losses for investors.
I am lowering my 2016 S&P 500 forecast from 1,875 to 1,900 to 1,650 to 1,750, which means that I expect the market to hit those levels sometime in 2016. Investors should reduce or eliminate their equity exposure and wait for better days.
My overall forecast, that we are headed straight down, now diverges even more widely from Wall Street’s “expert” predictions.
The truth is, we are in a bear market – more than 50% of SPX stocks are now down 20% or more from their 52-week highs – and it is now a question of how loud the bear growls. I think we have at least another 10% down. The question is whether we just really crash to something like 1500.
Right now, the best way to look at this is in stages – the next stop is 1650-1750. Then we’ll see where we are.
We will revisit my 1650 target if we hit those downside levels.
|WHERE WE ARE NOW
To repeat what I have written before, here is where things stand from where I sit:
- Oil prices will soon head into the $20s and take a long time to recover.
- Low oil price are bad for the economy.1
- Actual inflation is much higher than reported by the government.
- S&P 500 earnings estimates for 2016 are too high.
- The S&P 500 will drop significantly in 2016 (beyond what has already happened).
- The high yield bond market will not bottom until late 2017 or 2018.
- The Fed will not raise rates by more than 25 basis points in 2016 (if at all).
- Treasury yields will drop and the yield curve will flatten.
Get Out of Equities
It’s tempting to see this big drop as a “buy the dip” opportunity. I do not recommend buying stocks right now. Get out of equities, or greatly reduce your exposure. There is no reason to sit and try to pick up nickels in front of a steamroller.
The key is, you should not be buying stocks in this bear market and you should be really careful here.
Junk has a lot further to fall, the yuan is probably going a lot lower than people think, and oil is going under $25 and the question is whether it breaks $20.
This also means the Fed doesn’t raise rates again this year and probably has to take back its Dec hike and, if markets really drop, start more QE. We could be headed to a very dark place.
There are places to put your money, however.
Last week, I advised my readers to buy puts on VRX and GLEN, which are still collapsing. (I think GLEN is about to get downgraded – CDS are now trading at 1200!) There’s still time to get in on those trades.
Some credit-related stocks that I am focusing on now are the publicly-traded private equity firms (BX, KKR, APO, ARES, CG, and FIG), which are off 40-50% from their 52-week highs. These stocks are likely headed significantly lower as the credit cycle continues to deteriorate. Buying these stocks at the bottom of the last cycle proved to be enormously profitable and will likely be a good move again, but I would wait for them to drop by another 30-40% as I expect them to do.
Don’t Rush to Buy Gold
I know, I know. Not what you expect to hear from me. (And to be honest, I just picked up a few more coins myself.)
But the truth is, gold still remains out of favor because investors are slow to catch on to what’s really happening. Cash first. There’s no hurry to buy gold right this minute.
This market has a lot further to fall, and I want you to be prepared. Move slowly, think carefully, and stay tuned to Sure Money.
We are in the early innings of the unwinding of the largest credit bubble in history. The Super Crash is just beginning.