The significant sell-off on the first trading day of 2016 was, to me anyway, not a fluke but a forecast, and it’s not just the decline in the China markets. Like all sports, in the end the economy is all about the “fundamentals”; earnings, and current earnings do not support the massive corporate valuations in our markets and the growth in stock buy-backs; most of those were made with cheaply borrowed money, not real earnings! (take a look at the Cash Flow Statements in those Form 10’s the SEC keeps for all to see)
The forecast; on January 4th the Institute for Supply Chain Management said that its own index of factory activity fell to 48.2. Anything below a 50 is considered as a strong contraction signal! If factories are slowing down it must a be as a result of companies looking at future sales because no company wants to hold un-sold inventory and supply chains are very closely monitored and tracked.
If companies are slowing their outputs due to slower sales projections and inventory levels are not being increased then why would anybody need to ship their goods to market? Precisely, Wells Fargo and Morgan Stanley just reported that the nationwide orders for Class 8 tractors (the “18 wheelers”) has declined to 16,000 from a projected 22,000 to 25,000. That’s a real drop just since October 2015 of 36% or 59% from the same quarter of last year.
Not seeing buyers, stop manufacturing, no manufacturing, don’t need trucks to move anything, don’t need trucks, don’t need imported raw materials! The Baltic Dry Index tracks and reports the number of containers being moved on container ships. If you have lots of imports and exports you need to put them on ships, largely, if you have any kind of international commerce. Today it stands at 468 (their internal index) but to investors it means the number of containers and container ships in use today is at all time low! Deutsche Bank warned just this week that the index is at an all-time low…….Tyler Durden who writes for “Zero Hedge” has said that “A Perfect Storm is coming” due to the warnings by Deutsche Bank.
Deutsche Bank has also reported that the previously predicted improvement in the index and the rates that shippers were going to see this year has just not materialized. While dry-bulk carrying shipping companies generally keep about one year of operating cash on hand, but most are just not “well positioned for another leg down in asset values”.
No future sales, no need to manufacture, no need for trucks to move things, and no imports or exports so no need for ships. Future declining sales means future declining revenue and future declining earnings……real money in the bank, declining earnings means a real decline in the market value of the company’s stock, that’s your money. Ignore the hype, it is always about the fundamentals.
BYRON.RAMBO, MBA, EA