In July, we recently put out an advisory with a negative view of the stock market. Since then, our level of concern has risen dramatically. We now believe that a much more significant, prolonged bear market and U.S. economic recession are likely.
Current Views & Recommendations
a) The sell-off will accelerate.
b) Daily bouncebacks will occur, offering investors the hope that the bottom has come.
c) Interim short-term (dead cat) bounces are typical in a systemic long-term sell-off.
d) Equity values will remain depressed for an extended period of time.
e) Investors should shift to a market neutral (zero beta) strategy, and re-enter risk markets after an extreme sell-off when stocks are trading at levels that will be a once-in-a-decade opportunity.
In 2015, we became concerned with the disparity in values amongst sectors and industries. Energy stocks for example were in a full-fledged correction while the glamour and momentum stocks such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) were soaring and continued to be seemingly unaffected.
We observed a similar phenomenon in 2008 when the financial stocks began to sell off and commodity producers and industrials continued to rise. We were in a commodity super cycle that showed little signs of abating or so we thought. What followed was a widespread crisis, which destroyed demand in all sectors.
People Who Know
As a firm, our financial advisory group has worked for over 1,000 privately-held companies including some of the country's largest trucking companies, high-end auto dealers, real estate developers, fast food franchisees, IT firms, banks, agricultural producers, commercial airlines, ocean cargo companies, etc.
Over the years, we have found that our clients are our best sources for gaining insights into the real economy. That is, we go directly to the people selling the products, building the parts, moving the freight, serving the meals, flying the planes, etc.
Conversely, we find that the information from economists, major brokerage houses or financial news talking heads is always too late to be actionable. Thus, we go to the people in the real economy.
Banks Not Lending - Our clients that own banks indicate that they are entering a risk aversion mode similar to 2008-09.
High-Yield Bonds have sold off, and in some cases, become illiquid, as was the case with the Third Ave. mutual funds ceasing redemption several weeks ago. No bid can be found in many cases for high-yield bonds at this time, rendering them illiquid.
Autos - We work for five of the top luxury auto dealers in the countries, and despite the headline news about the health of auto sales, they are seeing sales far off rather dramatically despite deep discounting.
S&P Revenue Growth - Reported revenues have weakened, and in some case, declined due to a strong dollar, stagnant wage growth, and a cautious consumer.
Oil - The impact of the collapse of oil prices has yet to make its way through the system. Feeder industries, such as (1) industrials that make pipes, value, fittings, etc. (2) homebuilders, (3) consumer product and service companies, and other serving sectors will see significant defaults and bankruptcies.
Freight - We work with several of the largest private trucking companies. All are complaining about much less product and cargo moving through their facilities.
Minimum Wage - Our client who owns over a substantial fast-food franchise is experiencing substantial wage pressures, and believes that a bump in the minimum wage would cause it to consider exiting the business.
Airlines - Our client who owns a prominent airline is closing out a record year with the benefit of lower fuel costs.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.