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Dow Plunges Below 17,000! What's Next?

Thursday, August 20, 2015
Money and Markets
YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON’T GET FROM WALL STREET
You can also access this issue on our website.
Dow Plunges Below 17,000 Amid Latest Global Crisis! What's Next?
Market Roundup
Dow -358.04 to 16,990.69
S&P -43.88 to 2,035.73
NASDAQ -141.56 to 4,877.49
10-YR Yield -0.05 to 2.084%
Gold +$24.30 to $1,151.30
Oil -$0.16 to $41.11

By Mike Larson

I’ve never held a tenge coin or bill in my hand. I doubt you have either, unless your travel plans or work responsibilities have sent you to Kazakhstan.

But overnight, the Central Asian nation that does a lot of trade with Russia and China delivered another emerging market shock. It abandoned its currency peg, and in the blink of an eye, the tenge plunged 23% to an exchange rate of 257.2 per U.S. dollar. That means every one of its citizens just lost almost a quarter of their purchasing power — in an instant.

The move came within hours of news from the International Monetary Fund (IMF) regarding the Chinese yuan. The IMF said the yuan wouldn’t be added to its basket of reserve currencies for at least a year, and maybe longer. That move is another kick in the teeth for China’s markets and China’s currency, and it clearly opens the door to more depreciation.

These developments set off yet another round of carnage across world markets. South Africa’s rand currency dropped to its weakest level since 2001. Turkey’s lira plunged to an all-time low. And Malaysia’s ringgit sank to yet another 17-year low.

Getting that tenge feeling all over.

That, in turn, helped push the U.S.-traded iShares MSCI South Africa ETF (EZA) to an 18-month low. The iShares MSCI Turkey ETF (TUR) and the iShares MSCI Malaysia ETF (EWM) both sank to their lowest levels in more than six years.

The bulls on CNBC say you don’t have to pay attention to this stuff. They claim it doesn’t matter. But obviously these events are starting to weigh on investor sentiment and capital market pricing. The S&P 500 fell sharply today, and it is banging away at downside technical support with more vigor. At the same time, more and more sectors are continuing to wilt.

Some will argue the worst is behind us, and it’s time to go bargain hunting. But despite today’s sharp decline, I’m still seeing few signs of outright panic. Yes, people are starting to come around to the cautious, negative view I started adopting months ago and raising cash. But they aren’t selling very aggressively yet. The major averages are down just a handful of percentage points from their recent peaks.

Heck, volatility as measured by the VIX fell to near multi-year lows just a couple of weeks ago. And in the 17-18 area, it’s still far, far below several panicky peaks seen in previous crises both big and small.

“It’s NOT too late to sell down some exposure.”

So I do NOT believe it’s too late to sell down some exposure, and take protective steps. That’s what I’m doing, and once again, I think it’s a smart move for you too.

What about your thoughts? Ever held a tenge in your hand, much less heard of it? Do you think we should just ignore what’s happening in far-flung parts of the world like Kazakhstan? Or is the cumulative pressure of all these falling dominoes going to prove too much for U.S. stocks? What about the economy here? Is it going to get hit by these developments in Asia and elsewhere?

These are critical questions. So please do share your answers over at the  Money and Markets website.

Our Readers Speak

The economy, stock market, oil prices and Big Pharma – those were just a few of the topics you were discussing online in the past 24 hours.

Reader Billy offered this view on the big picture: “As we have said before, we are seeing worldwide deflation take the upper hand despite more than $15 trillion of fiat-based, paper-based money, debt and derivative printing. Canaries are all over the coal mine. This could be the worst set up for a deflationary crash in decades. It’s THAT bad.”

Reader Mike S. said he knows where he’d put the blame for the current mess, noting some historical parallels. His take: “The concentration of too much money in too few hands has occurred twice in the past 100 years. First in the run up to 1929, and second in the run up to November 2007.

“Interestingly, BOTH where periods of Republican domination and high speculation because of the absence of laws prohibiting that kind of trading. There was a really good law enacted in 1933 that forbid that kind of trading. It was called the Glass-Steagall Act.

“It was brought by a Democrat majority in 1933 and it worked really well to stop a re-occurrence of 1929. Unfortunately, it was removed by a Republican majority in 1999.”

Meanwhile, on a different health-care topic, Reader Tommr said: “Don’t we all ‘love’ the way Big Pharma invents ‘disorders’ and then comes up with a pill to treat them? What a huge SCAM!”

And on the strength in housing, Reader Bob S. said: “I see a lot of remodeling being done, both by home owners and those who buy, renovate, and rent or resell. With loan rates for those activities low but predicted to rise, I suspect many are doing those projects now before they rise.”

Finally, in response to a couple comments about oil, Reader Jim said: “We seem to be stuck in a cycle where heavily indebted oil companies keep producing more oil to try and maintain cash flow to service debt. At the moment it looks like we may have a long way to the bottom. I’m not sure it’s an investable trend, however.”

Thanks for weighing in. To try to hit as many of these topics as possible, here is what I would say:

1. The market looks sick. Much sicker than a few months ago. That’s why I’ve been urging caution for a few months now, and why I actually just sent out yet another actionable Flash Alert to my Safe Money subscribers today.

2. The repeal of Glass-Steagall proved to be a big mistake. Then during the housing and credit market bubbles, we had an utter lack of oversight and regulation by bought-and-paid-for government officials. They were looking forward to cushy jobs in the private sector after putting in their time in government, and their inexcusable behavior helped exacerbate the last crisis.

3. Oil and oil stocks offer tremendous value – the most I’ve seen since the mid-1980s. But global economic weakness and the Saudi refusal to push a production cutback through OPEC is obviously weighing heavily on prices anyway.

I bagged some nice profits in the energy run up between December-January and the spring. Since then, I’ve been taking active steps in the model portfolios I guide to hedge energy risk and cut exposure. But I’m still holding on to some longer-term names that should ultimately prosper hugely from a longer-term recovery. Hopefully that makes my thoughts on energy crystal clear.

If you have any additional investment ideas, questions, or comments you’d like to share on these or other topics, don’t hold them in. Share over at the website so your fellow investors can benefit.

Other Developments of the Day

BulletJust days after privately held Sprout Pharmaceuticals won FDA approval for its female libido pill Addyi, Valeant Pharmaceutiticals (VRX) said it would buy the company for $1 billion. Valeant has been an active deal-maker, and is projecting sales of as much as $11.1 billion as a result.

BulletReal estate values in New York have been surging, prompting yet another round of fast-money flipping in commercial property. Previous buyers are cashing out to lock in windfalls much earlier than expected, while new buyers are paying ridiculous prices to snap up buildings that are yielding near-record lows.

Bloomberg reports that a whopping $29.4 billion in deals were closed in the first six months of 2015 alone on the island of Manhattan. I’m sure this will end even better (cough, cough) than the mid-2000s frenzy fueled by too much easy money. Aren’t you?

BulletI’ve described an increasing amount of bond market turmoil in recent weeks, and said it was a key warning sign for stocks. Now, there’s another troubling signal coming from fixed income: Future inflation expectations are tumbling.

So-called TIPS spreads that measure the difference between yields on nominal Treasuries and yields on Treasury Inflation Protected Securities are plummeting. That’s a sign bond investors are worried about future growth, falling commodities, and potential recessions in many parts of the world. As a matter of fact, the 10-year TIPS spread is within a basis point or two of five-year lows.

Should we be even more worried about the future, given the plunge in future inflation expectations? What about the frenzy in New York real estate? Is that a troubling sign? Let me hear about it over at the website.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

For more information and archived issues, visit www.moneyandmarkets.com.

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