Thursday, January 21, 2016

And we're not talking about moonshine...

Mason jars in the backyard better than the markets for now

by GS Early

More than 100 years ago, a trio of dedicated financial mavens took Charles Dow’s collection of 255 essays from his days as founder and editor of The Wall Street Journal and built a technical theory on how the markets and the economy operate.

While the theory is comprised of only six tenets, it’s not exactly light reading. And whether it actually works has been debated for the past century. But there is one aspect of Dow Theory that makes it an elegantly simple market barometer.

Basically, by looking at how the industrials and the transports are faring, particularly relative to each other, you can get a good idea what’s happening.

The industrials are a group of 30 bedrock companies like 3M, Caterpillar, Home Depot, American Express, Nike, Wal-Mart and Verizon. The transports are basically the 20 major air, rail and trucking companies that move the goods from the factories to the stores: FedEx, J.B. Hunt, Delta, CSX, Matson, Union Pacific, etc.

Well, the Dow Jones industrial average is down about 2 percent year to date. The Dow transports are off almost 20 percent. And the transports are at eight-month lows at this point.

The crazy thing is that with energy prices so low, it should be a shot in the arm for the transports, since their main cost is usually fuel.

Also, if the economy is doing so well that the Federal Reserve thinks we need an interest rate rise, how is it that both these industry groups — the engines of the U.S. economy — are worse off than they were a year ago?

Dow Theory operates from the simple concept that when the economy is good, industrial companies are making things for consumers and businesses. Transports are then shipping them to where the demand is.

However, what we’re looking at here is an economy that isn’t just barely growing; it’s one that’s reversing. This would also explain why gold rallied when the Fed raised rates and strengthened the U.S. dollar.

Usually when the markets back the dollar, it spells doom for gold and silver. But the opposite happened this time around. The price of precious metals was more evidence that, as novelist Ray Bradbury titled one of his books, “Something wicked this way comes.”

Stay away from the markets until we see how fourth quarter earnings are faring with companies. This economy is not doing as well as it appears on television. Things are likely to get bumpy, and there’s no telling what will happen if the wheels start coming off this economy in early 2016. So stick to cash, gold, even bitcoin or Mason jars in the backyard — anything outside of the mainstream financial system — for now.


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