We have been “beating the dead horse,” but China stays front and center as their PMI (Purchasing Manager’s Index — an indicator of economic health of the manufacturing sector) contracted for the second month in a row. With the Communist Party pulling every trick in the book to keep their equity market propped up and preventing old-fashioned political unrest, they may have forgotten the importance of keeping their manufacturing numbers over-inflated. With China the largest consumer of, well, just about everything, the Government may have been too distracted with propping up the equity market to keep Chinese factories pumping out goods, and thus making the world think that everything is hunky-dory.
It is simple economics: If the manufacturing industry in the world’s largest economy is using fewer inputs, commodities’ prices fall…and guess what we have been seeing?
For all of those who are equity traders, the good Q2 and job numbers should have had the bulls running last week, however we no longer live in the four walls of America, and fear is starting to set in as the a Fed Rate hike could be around the corner. We will be watching the Fed closely, as with Canada falling in a recession and China, the rest of Asia and Europe on the brink of following suit.
The price of commodities (raw materials or primary agricultural porducts) tend to be a leading indicator, falling prior to recession. Commodities have had a hard run, falling across the board in the last year. Commodities are a direct reflection of the global economy, and as prices continue to fall, there is no surprise that the world economy is starting to cool and we may be nearing the end of the business cycle.
Over here in the Land of the Free and the Home of the Brave, Wall Street had a bumpy ride last week despite good Q2 earnings for most firms. Wall Street is finally starting to wake up to what those of us that follow the commodities market have been seeing, and despite strong Q2 numbers, the future picture is changing.
The American economy has been the bright spot of earnings reports from Q2. For firms that have little exposure to China and the Global Economy, we saw some good earnings as the American economy is enjoying cheap oil. The jobs data came in strong this week, with many American auto makers keeping plants running this summer as the Department of Labor reported that initial claims for unemployment fell to 255,000—the lowest number since November 24, 1973!
The all-powerful and mighty Apple took a haircut last week, despite making a Q2 profit of $10.6 Billion. They lowered their outlook and the company lost $60 billion of value overnight! To top it off, Amazon reported a profit for the first time ever and gained $45 Billion of value overnight, which was 96 times their total profits, which meant they surpassed the market cap of Wal-Mart. To say the equity markets are behaving irrationally is an understatement; that is why you need to learn and harness the power of the commodity markets.
Within the global landscape a Fed Rate hike at this late stage of the economic cycle is extremely risky; however Ms. Yellen may have no choice to but raise rates, since being caught in a recession with an interest rate near zero could be disastrous. We will be closely monitoring the Q2 GDP data and paying close attention to the Fed as a September rate hike could quickly derail the American economy as the bright spot of the world, but in the long run could be the coma that is needed to prevent death.
Today’s side Rant…
To my fellow Colts fans (and fans of truth and honesty), I think we were all hoping that Tom would get a lifetime ban for destroying his cell phone with 10,000 text messages, but at least the upheld suspension proves that maybe there is some hope in this world that rules are rules no matter who you are, how powerful you are, and how much money you have.