Kirkpatrick’s Monthly Overview The monthly publication of The Market Strategist April 29, 2016
Table of Contents
Long-term technical model
The Bond Market...............................................2 The Stock Market..............................................2 Commodities.....................................................4 Foreign Stock Markets......................................6 The Dollar..........................................................7 I’m now back from my two months in the Florida Keys and getting used to the 40-degree temperatures in Maine. The indolence developed from warm weather, sunshine, and humidity has long worn off, leaving me with a new spark of enthusiasm for analyzing the markets. May is the time of year for market tops on a seasonal basis, and my strong suspicion is that this May will be no different than the historic norm of “buy in the Fall and sell in the Spring.” Of course, evidence must be stronger than a stock-market, bumper-sticker slogan. And it is. Indeed, it is always remarkable to me how at market tops, first, that they take so long, and second, that they escape the notice of so many investors, even when the fundamentals are screaming warnings. I read in the WSJ today about the corporate buy-backs and takeovers financed by low interest rates, a process now called “financial engineering.” The theory is that borrowed money at low rates can finance expansion or buy-backs that increase the reported earnings per share without producing any more product. Of course, the eventual end comes when the interest rate rises or the stock market declines and debt becomes a costly burden without substantial collateral or production to work out of it. The oil companies have just experienced this financial contraction from an assumed intractable price going sour. The last time a
similar financial fad occurred it supposed that rather than issuing stock that pays nondeductible dividends, a corporation should borrow in the bond market to finance new business (takeovers) because the interest paid on the obligation is deductible. The ultimate absurdity was that theoretically an unlimited amount of debt could be assumed without risk, thus confusing financial risk with default risk. A fad is an interesting phenomenon. Its antithesis is a trend, which is desirable in investing and trading, whereas a fad is not. A fad invariably begins with a sharp rise and ends in a devastating fall. If the current “financial engineering” is a fad, it will inevitably end like all others, and will thus likely be the cause and result of the stock market’s demise. Like all investment prognostications, however, the proof is in the market reaction. Currently, the evidence in the market is that a large decline is overdue. All we need is the confirmation from the market. It will begin slowly and end quickly. Charlie
www.charleskirkpatrick.com • kirkco@capecod.net • © 2016 Kirkpatrick & Company. Inc. All Rights Reserved • April 29, 2016 • Page 1