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by Al Martin

Global Equity Markets: Heading for Recession? Or Just a Correction?

(1-28-16) The markets have been on a roller coaster ride since the beginning of the year. What does this mean? It’s an overbought market coming into the first of the year with Price/ Earnings ratios way above historic averages, earnings falling down and global growth forecasts slowing. A lot of investors were short – and they stayed too long. They got flushed out in last week’s short-covering rally, but as always short-covering-led rallies create fresh shorting opportunities from higher prices.

      We have had a correction in the market up until last week. The S&Ps traded down to 1800. We had a full blown correction and in most of the world’s markets as well.

      There are different corrections and it depends on how you frame it – 10% corrections, 20% corrections and 30% corrections. Classically in a bull market, we had a 20% correction. Now it depends on whether the lows, in the S&Ps and in the planet’s markets in general, are going to be able to hold or not.

      We have not yet entered a recession even though you see more and more people now forecasting a recession. A recession is simply 2 negative quarters of GDP (Gross Domestic Product which is defined by Investopedia as “the monetary value of all the finished goods and services within a country’s borders in a specific time period.”

      You’d have to have some bad GDP numbers in the last quarter when final revisions come out later this week – but we haven’t had – at least in the United States – 2 negative quarters of GDP.

      So there has been a correction and an ensuing short-covering rally which is the purchase of securities to close out a short securities position – as there always is after a correction – and now the short-covering rally is over. And now it’s time to get short again…

      In another definition, this is a “situation in which traders have sold securities that they didn’t own, expecting prices to continue falling. When the trend reverses, they must ‘cover their shorts’ by purchasing back what they sold, often at a loss. Because many traders are buying, prices rise, resulting in a short-covering rally.”

      We rode it down the first time and then we’ll ride it down a second time. Now you get a chance to short the S&Ps again right around the 2000-2010 area, which is the same place we were shorting them before. They broke 170 points. Now we’re back to that very same shorting area.

      It’s the same thing with the Oil, which broke 12 year lows. There was a big short-covering rally in the Oil last week and now it’s time to short the Oil again.

      In other words, don’t be fooled by last week’s rally. It was just a short covering rally in what was admittedly an oversold market. The rally corrected that oversold condition and we are back in overbought territory. This is particularly true in the Oil.

      Also the Chinese stock debacle is a legitimate concern which China has been able to paper over because of its $3 trillion reserves. How you look at a country’s foreign reserves you look at it as a percentage of total currency outstanding, otherwise known as the M2 money supply. The much vaunted $3 trillion reserve that the Bank of China has is only about 16% of their total money supply. The number sounds like a lot but when you put it in relationship to the total amount of currency outstanding, frankly it isn’t that much.

      Every country measures their total amount of money outstanding the same way using the same metrics which is called the M1, M2 or M3 money supply, M3 being the broadest measure, which includes debt instruments outstanding issued by that government in their own currency not in foreign currency. However the most important metric is what a country’s M2 money supply is – the total amount of currency printed outstanding.

      The most important issue here is that China’s $3 trillion surplus is touted by the financial shills in media which is such a huge number, but if you look at it in relationship to China’s total amount of yuan outstanding and the amount of bad debt in the Chinese economy which is at least $2 trillion, then that reserve doesn’t seem so large anymore.

      Lest we forget -- more than half of all publicly traded companies in China are so-called “zombie companies,” which means they are being financially supported by the Chinese government. They are being kept alive through government money hence the name “zombie companies.” The companies are still in business and there’s nominal management but the companies would not be in business if it were not for government support.

      In conclusion it’s likely that global equity markets are going to move lower and it is likely that global GDP is going to be less this year than had originally been forecast and it is likely that Price/ Earnings ratio both in the United States and in global markets are going to contract. Equity prices are going down. There are all sorts of guesses about the price of oil and where it stops, maybe $20. However that’s all guess work because Saudi Arabia & Friends are keeping the market oversupplied by a million barrels a day and there’s no sign of that letting up.

      Oil remains a short sell particularly now at $30 which represents a tremendous shorting opportunity at current levels and investors should be largely out of oil stocks. We’ve already seen half of all the oil stocks traded on the planet have lost their dividends in the last 6 months. And it’s likely we’ll see more of that.

      Stay tuned…

    * AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.



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