• The U.S. stock market ended the week with a 2-day rally, in fact the Dow Jones closed better than 200 points today, to about 1690
  •  NASDAQ, even stronger, up 119, closing at almost back up to 4600
  • The rally actually began early yesterday morning, and not just in stocks
  • Oil had a huge rally, in fact, today alone, crude was up $2.72 back above $30, at $32.25
  • What sparked the rally was comments made by Mario Draghi at an ECB press conference that followed their official statement that they were leaving interest rates unchanged – they are already negative
  • Right about that time, the Dow futures were already down 100 points and it wasn’t looking good for the open of the U.S. stock market
  • But then, in Draghi’s press conference, he said there was no limit to what the ECB is prepared to do to generate more inflation in Europe
  • He strongly hinted that in the next meeting in March, they may announce additional stimulus
  • He saw the weakness in the markets and decided to take one for the Fed, because ultimately it’s the Federal Reserve who has to come out with the “Whatever it takes” comment” to shore up the markets
  • I don’t think the ECB is going to be enough, even if Japan joins the party, it won’t be a real party until the Federal Reserve shows up
  • This was enough to cause a small, short-covering rally
  • What’s interesting, though, about the Draghi comments, is that he specifically addressed the problems of low oil prices and low food prices
  • Do you think the population of Europe worries that food is too inexpensive?
  • Is it really so important that gas is more expensive in Europe?
  • None of these are real concerns, and the proof is, if they really wanted the prices to be higher, they could just adjust the Value Added Tax to increase prices to exactly 2%
  • Why print all this money, hoping that the result is higher gas prices?
  • The truth is, the price of gas and food in Europe is not the problem – Mario Draghi knows its not the problem
  • He wants to create inflation to prop up the equity markets
  • But the press takes Draghi at his word, that inflation is the problem
  • Stock prices are the prices they are worried about being too low
  • They also want more inflation to mitigate the effect of government-mandated higher wages
  • So the one motivating factor behind Draghi’s comments was not food or gas prices
  • Obviously lower food and gas prices help the European economy
  • All the markets went up on the hint that the ECB is going to further stimulate the economy
  • That proves that the only reason the stock market has rallied is because the central banks – it’s not about the fundamentals
  • The Fed will have to capitulate and acknowledge that more stimulus is coming
  • The press is focusing on the idea that the Fed will slow down its initial goal of 4 rate hikes in 2016
  • But that’s not enough
  • If the Fed tightens more slowly, and the ECB and Japan are easing, then the story is still about the tighter U.S. monetary policy vs Europe and Japan, which will continue to create the global problem of a high U.S. dollar
  • We aren’t going to get drunk on Europe’s liquor – we need our own bartender pouring the drinks
  • Is it enough to get a short-covering rally? Sure.
  • Nothing goes down in a straight line
  • We don’t know that Draghi will actually deliver stimulus in March. What if the price of oil goes up above $40/barrel before then?
  • Mario Draghi went out of his way to praise Janet Yellen, agreeing with the Fed’s December rate hike decision
  • Ironically, the U.S. economy is doing better than Europe, but the U.S. economic data is getting worse, and in Europe it is improving
  • By the time all the revisions are done, it is likely to come out that the first time the Fed raised rates in 8 years, we were already in a recession
  • Thursday’s weekly jobless number went up again to  293,000 vs an expected 275,000
  • This is the highest number of first time unemployment claims since July
  • The 4-wk moving average is now at 285,000 and the trend is moving up
  • This does not bode well for the January jobs number
  • This number is being ignored
  • We know how many jobs that were created were part time jobs
  • Also, the January Philadelphia Fed number came out as -3.5 from a downward-revised -10.2
  • Chicago Fed number came out not as weak as expected, at -.22, but the moving average went up
  • The only supposed good news was the big jump that we had in existing home sales, up 14.7%, but last month they were down 10-1/2%
  • The reason why we have these huge swings is because the government made it more difficult to close on a mortgage, delaying a lot of closings
  • I expect a lot of numbers to start dropping, reflecting the sentiment driving the drop in the stock market
  • I also expect a lot of layoffs in sectors such as retail and oil
  • The leading economic indicators for December came out today, a little worse than expected, at -.2
  • That ties the lowest LEI since July of 2012
  • The January LEI will come in quite negative, in light of the very bad first two weeks in January
  • So everybody is excited that there will be more money printing from the central banks
  • It’s not over until the Fed lady sings – Janet Yellen is going to have to join the chorus
  • Mario Draghi felt compelled to take one for the team; we have not heard a word from the Fed
  • The Fed has a credibility problem, which I projected
  • They can’t come out and ease, too, because they just tightened, so they will delay as long as possible admitting that they are going to ease, or do QE4
  • They will let the central banks to the heavy lifting to save face for the Fed
  • This is not going to work; the rally will fade and the Fed will be forced to say something
  • The economic data is going to keep getting worse. This snowball is already rolling downhill and there is not way to stop it
  • If she comes out and says something, “We’re going to pause in our rate hikes…” it will slow down the decline, it might even stop it for a while, but it will spark the decline in the dollar
  • The dollar is close to reversal right now; it’s just looking for a catalyst to go the other way
  • Ultimately, to stop the stock market from falling, it will take QE4, and I think there will be greater economic stimulus, in order to avoid bad economic news just before the election
  • So stay tuned for more podcasts, it’s going to get interesting