April 1st Weekly Recap

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(Article from Jordan Wirsz)


Savant Report Week End Summary

April 1, 2016
By Jordan Wirsz – Savant Investment Partners

AGRICULTURE
We’re going to start this week’s report off by digging into the global commodity meltdown, continuing with yesterday’s massive down day in the corn market, dipping futures below $3.50 for the first time in months. The big drop came after the U.S. Agriculture Department report showed farmers intend to plant 93.601 million acres of corn this spring, the third most since 1944. That forecast raised the prospect of adding more supplies to an already huge stockpile, sending corn prices into a tailspin and causing growers to question their seeding choices. This blow to an already depressed grain market is no doubt going to keep a lot of farmers up at night.
 
In recent months, I’ve written about the global commodity super cycle ending, and how many farmers are going to feel the stress from low crop prices. This drop came as no surprise to the Savant Report subscribers, knowing that there isn’t yet enough “blood in the water” to call a market bottom. Unfortunately, the blood is definitely going to start running at a faster pace with this break in the price of corn for those growers with any substantial part of their acreage planted with it.

May Corn Chart:
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The technical signs in the corn market aren’t very bullish. On yesterday’s drop, the ADX (market direction strength indicator) rose substantially, telling me that there is definitely both producers selling and short sellers in the market. The long term effects of the selloff have yet to be known but the possibility of hitting $3.00-$3.25 corn is very real. Its not just the price of corn, it is also the cost of storing it, and the high input costs that growers have to invest in the crops to be efficient and productive. The net sale cost of corn is definitely not just the gross sales price in the futures market. All around, this is a scary time for anyone in the agriculture business.
 
What is scarier than the current “tough times” that the farmers are feeling, is the idea that it may be this way for an extended period of time. Weather one bad year is enough, but two, three, or four in a row is literally devastating to their balance sheet and any available liquid capital. Now take into account lower land values and no real equity to leverage into the next year. This could get really, really interesting in a not-so-fun kind of way.

The saga of hard times in the agriculture business continues…

OIL
A picture says a thousand words:

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The chart above published by Bloomberg, but created by Harry Dent & Co. shows a long term technical breakdown in the price of crude. HOWEVER, I think Harry Dent gets a lot of things wrong, and $20, even $10 in the price of oil is one of them.
 
Harry Dent, the national “doom and gloom” headliner always seems to scare people into subscribing to her publications. About the only thing Harry Dent and I agree on, is that Australian real estate prices are poised to collapse. In 2010, Harry Dent said that home prices would not recover. In 2011, he told everyone to “sell all non-essential real estate”. In 2012, he said real estate was a “short”. Since, values have doubled or tripled in some cases. Now he is telling people that the real estate market is going to collapse in 2016…more garbage.
 
I know you’re asking, “why show a chart from Harry Dent if you think his opinion is garbage?” Simple: It’s a contrarian indicator. If prices collapse and Harry Dent says it will never recover. Boom! It’s time to buy.
 
Oil is down this week, now trading today at about $37 and bumping up perfectly against a support line. Technicals are showing that it is oversold, and I’m thinking its as good of a time as any to start picking the right stocks for the long haul of the energy cycle. Like anything, I don’t try to pick the bottom. That is virtually impossible. But it is reasonable to assume that the market has seen the bottom, and unlikely to go lower than the previous lows in the high $20’s. Somewhere between there and here is going to be a great time to buy for the long term. We’re only one or two geopolitical events away from $60 oil.
 
The asset price correlation of oil is concerning a lot of investors across the world. What happens in oil doesn’t necessarily always stay in oil.

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This week I had lunch with an old partner of mine who is now in the energy business, which he understands well. As the CEO of an energy company in Houston, I would hope he does. His comment to me during lunch was that “oil will never be the same.” The fracking revolution was exactly that – a revolution. The energy world changed forever. Even oil rich countries like Saudi Arabia are finding themselves in fiscal challenges over the oil conundrum. As the price of oil declines, so does their bank account.

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An interesting article in the LA Times was published this week, detailing how Saudi Arabia is buying land in California and Arizona for…no, not oil…WATER. Saudi Arabia is running low not only on cash reserves and oil revenues, but also on food. Saudi Arabia is now importing much of their food. The need to grow their food also comes with the need to for water to make it grow. This LA Times article is worth the read: http://www.latimes.com/business/la-fi-saudi-arabia-alfalfa-20160329-story.html
 
So maybe there is a silver lining for farmland owners in the southwestern U.S. with being able to sell the land (and water rights) to Saudi Arabia.
 
Really the net positive to low oil prices is the transportation sector. While airlines benefit from lower fuel costs, so does the average family:

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CHINA
The China saga is what it is. As I predicted years ago and as I have continued to predict, Chinese capital flow is going to run into the U.S. like there is no tomorrow. Take a look at Chinese capital takeover target in U.S. assets growth:

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Although the U.S. has its headwinds, I believe that foreign capital pouring into U.S. assets will keep any recessionary pressures mild.

STOCKS-EQUITIES
Well, I’ve been proven wrong last week and this week. The S&P continues to rise higher, above the trend line. The market “doesn’t care” that stochastics are overbought, and that this rally is long in the tooth.

BUT…I remain bearish in my conviction. And if I’m patient long enough, I’ll be right.
 
Here is a chart of the S&P not caring about my bearish sentiment:

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This is a perfect example of why I make a better investor than I do trader. Timing these things is incredibly difficult. It’s a guessing game, and some people are better at guessing than I am.
 
But the truth of the matter is, we are really overbought, and I believe we’re in need of a real correction badly. There is something happening right now that usually happens before or during recessions:

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This is bad news for stock market bulls. There is an increasing chance that we will see a recession in 2016 or 2017.

If you watched my podcast from yesterday, you’ll note that my forecast for 2016-2017 is still a 30% chance of recession. The chart above all but confirms that we are heading in that direction unless something changes between now and the next few quarters.
 
INTEREST RATES
The Fed knows we are teetering on the edge of a correction, or worse, a recession. Rates have held steady, and investors doubt that a rate change is coming at the next meeting. After this week’s comments, there is a surveyed implied probability of a rate increase of a measly 4.6% in April when the Fed meets again.

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Mark my words…the rate changes coming are going to be small, and gradual. Do not fear or fret over rising interest rates. I think rates have bottomed, and I expect rates to remain low for some time. REMEMBER: Rates and the prices of notes or bonds have an INVERSE relationship.

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Keep in mind, the rest of the world is becoming more and more important to our Fed’s policy going forward. Global economic issues are having a lot of impact on our monetary policy. Not that the U.S. hasn’t been important to the world at large from an economic standpoint, but with so much global financial chaos around us, we need to take into account the fragile state of our own economy and how factors abroad could uncover cracks in our own economy here at home.

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See my podcast yesterday for additional commentary on the rate forecast.
 
CURRENCIES
The U.S. Dollar has retreated off of the 1.00 index basis, to approximately .95:

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It took the Fed a couple of years to realize that US monetary policy can’t be managed in isolation. Global risks and the dollar are becoming increasingly important. While the Fed doesn’t have a formal target with respect to the strength of the US dollar, informally the dollar has become a third mandate (employment, inflation, and to some extent the dollar exchange rate).   

THE BOTTOM LINE

     

  1. Agriculture continues to hurt…don’t be bullish (yet) on the agriculture or commodity space.
  2. The S&P defies me. So be it. I’m still erring on the side of short. Even if the market rallied higher, I’m still of the belief that its overvalued and macroeconomics aren’t supporting current valuations.
  3. Time to dip your toe into energy.
  4. 95% chance that rates will stay steady at the April Fed meeting.

Until next week,

Jordan Wirsz


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