Wednesday, May 4, 2016

My Report Card for the First Quarter: Circle 65

With over half of the S&P 500 companies reporting, earnings are going to be down almost 6%. The media shills constantly remind you that the market is within 2% of its highs. They shrugged off the first quarter GDP of 0.5% due to weather, holidays landing on the calendar, playing on turf at night, all the BS. I see a different picture.
Oil Bulls
I see them pushing oil higher than reality dictates. I predict a pullback between $34 and $36. Then, a slow consolidation at around $40 until something triggers a different response. I also see the market declining because many indicators that I look at are flashing danger. This earning season will be the fourth straight with declining revenues with each quarter getting worse. We have multiple industries that are under stress.
is suffering the most. The industry has lost 125,800 jobs to date and 66 coal powered plants are about to close. This is not all supply and demand aspects. Many CEOs just overspent like Congress. Peabody bought Macathur Coal for $5.1B, 'cause money was cheap. Alpha Resources CEO made the same mistake and put his company in debt of $7.1B for Massey Energy. Now, both companies can't service their debt. You can add a host of other companies like Walter Energy and in the first four months of 2016, there are 45 defaults. This is reflected in the ETF(KOL). It is down from 2012 of $33.47 to now, at $8.73. Consider this: while many companies went to bankruptcy court which should cause prices to rise, the opposite has happened. The only demand is for lawyers and a court date. Just ask Patriot Coal as they turn to see Peabody standing behind them in line. I almost forgot. Hard core energy segments aren't the only casualties. The alternative power sources felt the bankruptcy of Sun Edison and a few in China like Trina, however the Chinese court has the invisible hand of the state to help companies.
My Suggestions
on stocks are rare because I hate the idea of adding to anyone's pain. It is bad enough that I made a mistake. I don't want to add to anyone else's pain, but I feel for the people who purchased Alpha Resources which once sold for $60 a share and today, it is .02cents. Ouch! And yes, they are standing in the court room line.
Coal has its place in our economy, but the demand side is declining due to cheaper, cleaner burning, natural gas. Coal once accounted for 50% of our electric needs. Today, it is down to 33%. It will probably stabilize at 20%. Not good.
This large industry is passing and the oil industry is also under duress with many small firms in the court line and many more seeking not to fall to that level. In addition, many retail outfits are closing stores from Sears to JC Penny from GameStop to Aeropostale. This will eventually force many malls to close and loss of jobs. Not good. By the way, did I mention that Apple declared a loss? This is why I see a market pullback and a test of the August 2015 lows. When I was in high school, this would be a circle 65. This meant that I failed, but I was so close the teacher passed me, but circled the number to let me know that I needed to do better. Now you know what I mean by my title.
News Flash: Ultra Petroleum just pulled into the court room's parking lot and it took the last parking space as a few other cars circle the lot looking to park. Another car with a door sign, Midstates Petroleum is blocking the lane as it double parks, waiting for a space to open.
Across town, lobbyists from the Puerto Rican government seek to find a loophole to "stick" bondholders with their $70B in debt. Maybe a circle 65 was to high a grade?