Recession: Simple Reason Why It Could Be Here By End of 2016
Profit Confidential
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Recession: Simple Reason Why It Could Be Here By End of 2016 The U.S. economy is stalling and a recession by late 2016 or early 2017 is a strong possibility.
The Bureau of Economic Analysis (BEA) reports that the U.S. economy grew at an annual pace of 1.2% in the second quarter of 2016. At the same time that it reported second-quarter 2016 growth, it also revised first-quarter growth downward from 1.1% to 0.8%. The chart below shows the year-over-year change in quarterly U.S. gross domestic product, commonly referred to as GDP. Notice the trend since the first quarter of 2015? Economic growth in the U.S. economy has been decelerating since then. (A recession is technically defined as two consecutive quarters of negative GDP.) I believe the declining economic growth the U.S. is experiencing will continue for one major reason: consumer spending, which makes up two-thirds of the U.S. economy, is in bad shape. I expect consumers to continue pulling back on spending.
The chart below shows the inventories-to-sales multiple of all businesses in the U.S. economy. At the very core, when this multiple declines, it means businesses are keeping their products "off the shelves" because consumers are buying their goods. Conversely, when the inventories-to-sales multiple increases, it means companies are stockpiling more inventory because sales are soft.
The chart above is frightening. It says consumption in the U.S. economy is at its lowest level since 2009—that was just after the last recession.
What happens if the U.S. economy goes into a recession in late 2016 and early 2017? Will the Federal Reserve be able to do something about it? Yes, it could. Sure, the Fed has exhausted all the traditional tools it has to revive the U.S. economy. However, it could follow in the footsteps of the Bank of Japan or the European Central Bank (ECB) and go negative on interest rates while printing even more new paper money. Should our central bank adopt any of the actions described above, the price of gold bullion could easily move to the $2,500-an-ounce level. I have been talking about the opportunity in the shares of quality gold miners for at least three years now. I continue to see them as attractive at their current price levels as a recession could be exactly what they need to push them even higher. | |||
Has Groupon Stock Finally Bottomed? Groupon Inc (NASDAQ:GRPN) stock has been a disaster since day one. Shares went public on November 4, 2011, hit their all-time high of $31.14, and then closed the day just off their low at $26.11. That fateful day set the precedent that defined the trend going forward. From peak to trough, GRPN stock lost 93% of its value—not exactly a confidence-inspiring performance.
I could probably continue rambling on about the poor performance of GRPN stock, but that is not my intention. Instead, I am here to be the bearer of good news. It might be hard to even fathom using "good" and "Groupon" in the same sentence when referencing an investment, but that's just it—I have reason to believe the tide has changed and Groupon could be a good pick to keep on your radar. The following chart illustrates the downtrend that has dominated the shares of GRPN stock: A downtrend has dominated GRPN stock since November 2011. The downtrend line (highlighted in blue in the chart above) is created by connecting the peaks on the chart. A downtrend is defined by lower lows and is confirmed by lower highs. It can easily be identified as the price moves from the upper left to the lower right of the chart. This is a clear example of some bearish price action.
The first piece of good news is that GRPN stock finally broke above its downtrend line on August 3, 2016. The pattern of lower highs and lower lows has ceased and, in theory, this action suggests an end to the bear market. I will even go as far as suggesting a new bull market. Apart from the optimism created from the broken downtrend, there are a few other key factors that are confirming this trend reversal.
In the chart above, I highlighted the volume bars in green. The significance of the volume is that it reaffirms the dominant direction of the share price. In a bullish trend, trading days that close higher should be confirmed with higher volume, and trading days that close lower should be confirmed with lower volume.
The chart above clearly shows that volume spiked as shares surged higher and dropped off as the share price declined. Buyers are becoming a greater share of the participants, which defines and propels the trend forward. The recent surge in price that broke the downtrend line is also accompanied by an increase in volume. Volume is in fact confirming the trend break. We have further confirmation of the trend break from the on balance volume (OBV) indicator. This indicator uses volume to compute buying and selling pressure. It is produced by cumulatively adding volume on up days and subtracting volume on down days. This indicator is used to confirm the current trend. In February, GRPN stock went on to make a new low. The OBV did not confirm this new low by making a new low, making this the first sign that a trend reversal was in the making. The current surge higher in share price has been confirmed, as the OBV is making higher highs. This is just another tool investors can use to confirm a reversal. The downtrend line that dominated trading in GRPN stock since it first went public has finally been broken. I will be patiently awaiting a setup pattern that will give way to a possible target price for GRPN stock. The bottom line on Groupon stock is that there is now reason to be optimistic, as the performance going forward may surprise a few. |
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New Market Indicator Says Bullishness Overdone I would like to share with you the birth of a brand new kind of stock market indicator—an indicator that, if correct, suggests that the "good old days" for stocks may be coming to an end quicker than we think.
Whether my new indicator will pass the test of time, I do not know. But I do think it is as valid as any other indicator and is well worth keeping an eye on. I call it the "expanding car indicator" and right now—in spite of growing unemployment, economic chaos, soaring medical/food costs, and a total lack of organic corporate growth—it is still flashing "bull." Or at least it seems to be. However, as I will explain, with this particular indicator, all may not be what it seems... Here is how it works. Let's start with a similar (but different) non-traditional indicator. Look at the infamous "skirt" or "hemline" test. Pundits noticed that during the "Roaring Twenties," just before the Big Crash, that skirts were getting shorter and shorter. Through the thirties, forties, and fifties, against the cautionary backdrop of depression and war, skirts grew longer and longer. So, when times are bullish, hemlines are shorter; when they are bearish, hemlines are longer. The indicator is that simple. This indicator is even taught in courses for financial advisors and seems to have successfully passed the test of time. (Source: "The Skirt Length Indicator," Investopedia, last accessed July 4, 2016.) (Critics of the theory suggest that it is no longer valid since, in the current bull market, women no longer wear predominantly skirts and dresses. Those who support the theory, however, say the core of the indicator was never about the skirt; it was really about the daring behavior, the "devil may care" flaunting of visible assets. The indicator still works, they say, simply substitute the notion of a short skirt with today's yoga pants, a garment more often seen outside yoga classes than actually in them and more often revealing things rather than hiding them.)
So, now that I have your attention, you are no doubt wondering, how does the "expanding car" theory work? Well, let's travel back in time for a moment to the early sixties. This was the period when the baby boomers, known for their daring and unconventional attitudes, were just entering puberty and preparing to ultimately take an unsuspecting world by storm. While these youngsters were discovering chemical stimulants and rock music, their parents, who were children of the War Era, were as conservative as extra starch on a white shirt. While dad went to work (usually) in a suit and tie, his children were heading to school wearing Madras shirts, sideburns, and bellbottoms. The economy of the time reflected this clash of cultures. In the early sixties, there was a sense of unease (remember the Bay of Pigs?) and the markets reflected this. Inflation was minimal, yields were solid and unwavering, and stock growth was respectable yet conservative. People were economical. Value was primary. Excess was shunned. In 1963, Oldsmobile introduced a small economy car called the "F-85." It was functional and durable and really nothing to get excited about. The length of the car—this was an economy car, after all—was precisely 188 inches. Over the next decade and a half (approximately), the world went nuts. Opposing social forces (Vietnam on the one hand, the Beatles on the other) split people apart. The baby boomers came into their own. So did Women's Lib, birth control, and free love. McDonald's, which had opened in the fifties, began its rapid expansion of something the pundits would later call "fast food." IBM was establishing itself as a force to be reckoned via something it called the "mainframe." And TV had become so powerful a force of persuasion that if it did not happen on TV, it did not happen at all. By 1977, that F-85 model (which now had a new, sexier, name—the "Cutlass") had grown to 207 inches—a gain of more than 10% in 14 years—with an accompanying increase in weight and a decrease in miles per gallon. It no longer looked or drove like an economy car, but that did not stop the buyers. Everyone was partying like it was...1977? Except that there was very little actual partying going on. The truth was that rampant inflation early in the decade accompanied by a fourfold increase in the price of oil (as a result of ongoing shenanigans in the Middle East) had left the West in a state of delayed shock. Sure, Olds was heavily advertising a bloated and oversized version of its 1963 original, but no one was buying it—literally. By 1978, the car companies (then, as now, always a little late to the party) realized they had to do something to make up for their overly optimistic ways. The Japanese were now in the market. "Corollas"—Toyota had been in the U.S. since the fifties!—were being snapped up by U.S. buyers like hot dogs at a home game. So in 1978, Oldsmobile had a brainstorm. Let's make the Cutlass (formerly the F-85) a leaner and lighter car, then sell it as a combination economy/luxury vehicle...? And indeed it did. The leaner and meaner 1978 Cutlass had a length of 188 inches. If that number sounds familiar, it is because—wait for it—the "new and improved" Cutlass was exactly the same length it had been when it first debuted in 1963! The model—and indeed the entire economy—had come full circle. All this is important because your writer has noticed that, as the markets today get progressively crazier and continue to shed whatever scant reason they started with, the very same thing is happening today. Let's look at the Honda "Civic," one of the most popular cars in the world. (So popular that, when I said "Let's look at the Honda Civic," you were probably thinking, no problem, I can just go outside and look at the one in my own driveway!) Here is the average length of a Honda Civic over the last four decades: 1976 – 139.0 inches From these numbers, we notice two things: First, the people at Honda have been messing with your head. What started off as a small economy car (just like the Cutlass did in 1963) has morphed into a seriously bloated set of wheels. Second, the actual amount of growth in this specific "expanding car" is significant. The Honda Civic has silently grown more than 30% (WOW!) when no one was looking—along with the economy, consumerism, car leases, easy money, central bank interference, and you name it. For those of you who find this indicator intriguing, I should quickly mention another aspect of it. Remember how in 1978, when GM "lowered the boom" on its rapidly expanding line of "economy" cars and made them small again, they were actually responding to events that had happened a year or two earlier...? Because the car biz is capital-intensive and involves such a complex supply chain, this new indicator I am showing you tends to be a trailing indicator, not a leading one. In plain English, that means that although the indicator is still flashing "bull," the fundamentals of the market might have already begun to turn. The car companies just haven't figured that out yet. But now you have... |
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