The Bear Trap - February 3, 2015

Click Here for this Week's Full Letter - February 3, 2015

   

Greetings,

          We have only just started to see the effects of a bust spreading through the world’s energy complex. With earnings season underway, energy companies are announcing plans to slash billions of dollars in spending along with thousands of jobs. The counterargument to oil’s current drag on economic growth is that cheaper gasoline acts as a tax cut for consumers. As I’ve said previously, that’s only true if consumers take those savings and spend them, but they’re not.

          Visa’s (V) fourth quarter earnings call did a great job of quantifying the impact cheaper gasoline. Quoting from the conference call, ”US fuel prices are down ~30% since June. The drop amounts to ~$60/month for the avg. consumer according to our survey. Approximately 50% of the savings are being saved, 25% is being used to pay down debt and ~25% is being spent in other discretionary categories.”

          Remember, deflation increases real interest rates, making debt more expensive and cash more valuable. Therefore it makes perfect sense that 75% of the money saved through lower gasoline prices is not being redeployed back into the economy.

          It’s also not surprising that new orders for durable goods dropped substantially in December, breaking a major trend line in the process. December could prove to be a fluke, but the two times durable good orders broke lower in this manner it marked a top in the stock market. This is hardly the only reason to be bearish – more on that subject in the body of this week’s letter.

          I’ve maintained a relatively agnostic view of the stock market since launching this newsletter last July, but my outlook has grown increasingly negative. January is often seen as a bellwether month that indicates how the rest of the year will play out. The S&P 500 finished January down 4% in choppy trading, which could be the theme of 2015.

          This is not a fatalistic newsletter. I don’t think there will be a systemic crisis in the next six months. The Fed still has ammo to keep asset prices elevated if trouble arises. However, the downdraft in stocks and credit last October highlighted how quickly prices can fall without sufficient liquidity. I’ve written previously that the lack of underlying liquidity is the biggest risk in the market, and it would not surprise me if another “Flash Crash” occurred in the near future.

  

          There was more trading than usual in the Cup & Handle Fund last week, and returns were roughly flat. My outlook is bearish, but I should point out that I’m typically early to these trends and by no means is the portfolio positioned for the apocalypse. Instead, I’m maintaining some structural positions, keeping cash on hand and waiting patiently for the signals. I recorded a podcast with the American Monetary Association last week, and I’ll pass along the link once it becomes available. I’m also now focusing on the February investment letter, which won’t necessarily advocate a short sale – if you’d like to start receiving these letters click here.

Today’s letter will cover several topics, including:

  • The Apple Effect
  • Alarm in Singapore
  • Dire Predictions
  • Chart of the Week

    

With that, I give you this week's letter:

February 3, 2015

   

As always, if you have any questions or comments or just want to vent, please send me an email at mike@cup-handle.com.

Until next time, tread lightly out there,

Michael Lingenheld

Managing Editor – Cup & Handle Macro

Posted to Cup & Handle Macro Research on Feb 02, 2015 — 12:02 PM
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