Beer & Whiskey Pretty Risky, Whiskey & Beer Have No Fear

We are back; Spring Break and a family funeral have kept us away since March 14.

Risk, a word that means different things, in different situations, to different people: Risk may be working for a supervisor who has no clue what is going on and is evil to boot; Risk may be not taking care of oneself health wise; Risk may be watching John Travolta’s new face in the O.J. Simpson Trial on FX; as the Blog title suggests Risk may be drinking the wrong combination of beverage;  finally Risk may be trying to manage one’s finances in these economic times.

The three biggest risks to the economy over the past year have often been reported as the commodity plunge, China and central banks losing their effectiveness. Two of the three were recently cited by Morgan Stanley. In Morgan Stanley’s opinion, lower oil prices are not having as much of a positive impact as they have had over the past year. Additionally, the financial services firm worries about how much of an impact easy monetary policy will have going forward.

Based on these conditions, Morgan Stanley believes that the global economy is vulnerable to shocks, including ineffective moves by the Federal Reserve, European Central Bank and Bank of Japan. It also cited the refugee crisis in Europe and Turkey, the potential for Brexit, geopolitical concerns in the Middle East, and an impeachment scandal in Brazil.

Other risks not specifically mentioned by Morgan Stanley should also be considered. They include record global debt levels, China at overcapacity and overleveraged and massive derivatives exposure for Deutsche Bank AG (DB) and JPMorgan Chase & Co. (JPM). Risks also include the unknown impact of negative interest rates implemented by five central banks around the world and aging populations in the world’s largest economies, which is fueling deflation.

The investment brokerage expects global growth of 3% in 2016. This will be led by a slowdown in developed markets, especially in the United States, where it sees growth of 1.7% in 2016 and 1.6% in 2017. The International Monetary Fund also recently warned of a global recession, stating that risks have increased. This is despite the recent rally in equities. Last month, Citigroup Inc. (C) warned of the potential for global recession.

These are far from the only bearish opinions out there. While the next opinion doesn’t have quite the amount of exposure of Morgan Stanley, the IMF and Citigroup, his opinion is widely respected on Wall Street.

Chain Reaction - Dennis Gartman, the editor and publisher of The Gartman Letter, expects a chain reaction that doesn’t end up in a positive place. In his opinion higher oil prices indicate a strong economy, which will lead to interest rate hikes. When this happens, it will lead to reduced demand for equities and corporations will allocate more capital to growth than stock buybacks. He expects this to lead to a wider divergence between the real economy and the stock market, and that a growing economy will lead to further Fed tightening. This will weaken the economy and lead to lower stock prices.

That theory might be correct, but you can’t discount the theory that oil isn’t helping the economy and that instead it’s an effect of a weak economy. If this theory is correct the divergence between the real economy and the stock market is the opposite, which means the real economy is weak and the stock market is strong. This would explain why the Federal Reserve is so conflicted. It’s dual mandate is 2% inflation and full employment, but it won’t raise rates unless the stock market is behaving. As many of you know, if you remove Federal Reserve policy, the stock market would be nowhere near where it is today. A recent study showed that 93% of S&P 500 performance since the financial crisis was caused by the Federal Reserve. And if you’re paying attention to basic technical analysis, the 200-day moving average for the S&P 500 shows resistance at 2,025 and support at 1,820. That’s not a good risk/reward. Regardless of which theory is correct, neither lead to a bullish scenario.

The Bottom Line - The global economy is in poor condition. There is simply slowing growth around the world. Without central bank intervention, we would absolutely be dealing with a global recession (or worse) right now. The problem is that the more central banks offer support, the more debt is accumulated. That debt will eventually come due, which leads to a deleveraging process. You can’t allocate capital to massive deleveraging and growth at the same time, which only makes the deflationary scenario worse in the future. Either we deal with the pain now and limit the damage, or face a much bigger problem down the road.

IPO NO GO - First quarter ends with almost no IPO activity: In the first quarter, eight companies raised $700 million in initial public offerings, according to Renaissance Capital's quarterly review of the U.S. stock market. Those numbers are dismal in comparison to the previous quarter, when 32 companies raised $6.8 billion. It's a low the market hasn't seen since the 2008 financial crisis, according to the report.

CALIFORNIA DREAMING -- California Assembly passes historic minimum wage hike: A first-in-the-nation plan to gradually boost California's minimum wage to $15 an hour over the next six years won the Legislature's approval today after rancorous floor debates on whether the move would strengthen or harm families and the economy. Minimum wage hike will cost taxpayers $3.6B a year: The University of California, Berkeley, Center for Labor Research and Education projected the ripple effect of a $15 minimum wage on higher earners could raise pay for 5.6 million Californians by an average of 24 percent.

TESLA – the company that has never made a profit introduced this past week Tesla Model 3: Reserve now, drive later. North American reservations for Tesla Model 3 - the $35,000 electric sedan for the broad market – began Friday at Tesla stores. The Model 3 is expected to carry a $35,000 sticker price, not including federal and state incentives. CEO Elon Musk unveils the prototype in Los Angeles. Online reservations open April 1.

POLITICS 101 - June primary: California buckles up: Brace yourselves, Californians. The violent, vicious and volatile Republican political campaigns that have destroyed civility across parts of the South and Midwest are increasingly likely to cross the Sierra and spread vitriol in the Golden State.

TRUMP BRANDING: "incompetent Hillary" -- Trump appears to be adding a new line to his collection of signature insults, a list that includes 'low-energy Jeb Bush,' 'lyin' Ted Cruz' and 'Little Marco Rubio.' I think people will see I'm much more competent than she is,' Trump says,  'Incompetent Hillary doesn't know what she's talking about' ... [On his Twitter feed:] 'Incompetent Hillary, despite the horrible attack in Brussels today, wants borders to be weak and open-and let the Muslims flow in. No way!

Days until the Wisconsin primary: 1.

Days until the 2016 election: 218.

QUOTE OF THE WEEKEND - Maureen Dowd, "Trump Does It His Way": "You could hear how hard it was for Donald Trump to say the words. 'Yeah, it was a mistake,' he said ... 'If I had to do it again, I wouldn't have sent it.' I was telling him he lost my sister's vote when he retweeted a seriously unflattering photo of the pretty Heidi Cruz next to a glam shot of his wife, Melania. ...

"Given his draconian comment, sending women back to back alleys, I had to ask: When he was a swinging bachelor in Manhattan, was he ever involved with anyone who had an abortion? 'Such an interesting question,' he said. 'So what's your next question?' ... I pressed, how he could possibly win with 73 percent of women in this country turned off by him? He chose another poll, murmuring, 'It was 68 percent, actually."

STUFF TRUMP SAYS -- How Donald Trump sees himself: He considers himself a member of 'the lucky sperm club.' He trusts no one, and places a premium on revenge. ('If you do not get even, you are just a schmuck!') He treats every decision he makes 'like a lover,' sometimes thinking with his head, other times with other parts of his body, because it reminds him to 'keep in touch with my basic impulses.' And to make creative choices, he writes: 'I try to step back and remember my first shallow reaction. The day I realized it can be smart to be shallow was, for me, a deep experience.

JUST THE FACTS MA’AM - California crime on the rise: In California's 68 largest cities, violent crime jumped 11 percent in the first six months of 2015 compared to the same period in 2014. Among major U.S. cities, three California cities saw the largest increase in property crime in the country.

BIRTHDAYS THIS WEEK – Birthday wishes and thoughts this week to: C-SPAN (37); Doris Day (93) Carmel, CA; Gordie Howe (88) Dallas, TX; Jerry Lewis (90) Bel Aire, CA; Lara Logan (45) New York, NY;  Mike Love (75) Del Mar, CA; Reba McEntire (61) Houston, TX; Gene Shalit (90) Huntington, NY.

COLLEGE CHRONICLES – FILLING IN FEDERAL GRAD RATE GAPS: More than half of bachelor's degree holders attended more than one college - meaning they're not counted as completers in the federal graduation rate. But a new National Student Clearinghouse report [http://bit.ly/25nn8u6 ] for the first time breaks down by sector the progress and outcomes of all students in the fall 2009 cohort, not just first-time full-time ones. The presentation of the data is modeled after the Student Achievement Measure, a 600-institution initiative promoting better and more complete outcomes information; it shows what percentage of students dropped out, transferred and graduated, transferred and are still enrolled and so on.

- "Until now, there has been no way for institutions to measure themselves against their peers beyond the incomplete and misleading federal graduation rate," said Christine Keller, vice president of research and policy analysis at the Association of Public and Land-grant Universities. "As Congress looks to reauthorize the Higher Education Act, it should lift the ban on a national student-level data collection system so that the transparency of SAM is extended universally across higher education."

APPLE AT FORTY - At 40 years old, Apple is shooting for immortality: Apple, as it turns 40 on April 1, deserves more than its share of cake. It's earned all 40 candles. In corporate America, 40 has got to be the new 80. Companies don't live as long as they used to. Getting big does not guarantee there will be a future. In fact, as we have seen with many firms, the opposite is true. Success is more short-lived than ever. So how has Apple led the tech pack for so long?

FINAL FOUR LOOK AHEAD - North Carolina looks for 6th NCAA title against Villanova: North Carolina will look for its sixth NCAA championship when the Tar Heels meet the Villanova Wildcats, trying for their second, on Monday night. The Tar Heels (33-6) last won it all in 2009 and Villanova's only title came in 1985. Both teams advanced to the championship game with lopsided wins, but Villanova's was far more of a blowout than North Carolina's.

COLLEGE HOCKEY GAME OF THE WEEK – The Frozen Four: Thursday 4/7: #6 Boston College Eagles (28-7-5) vs #1 Quinnipiac Bobcats (31-3-7). Bobcats win 5 – 3. #7 Denver Pioneers (25-9-6) vs #3 North Dakota Fighting Hawks (32-6-4), North Dakota wins 6 – 2.

Final – Saturday 4/9: Quinnipiac 4 North Dakota 3.  Season to date (9-7).

THE SWAMI’S WEEK TOP PICKS –

Major League Baseball Preseason Picks:

American League: East – Toronto Blue Jays, Central – Kansas City Royals, West – Texas Rangers, Wild Card – Houston Astros, Detroit Tigers. Champs – Texas Rangers

National League: East – New York Mets, Central –Chicago Cubs, West – San Francisco Giants, Wild Card – Pittsburgh Pirates, Arizona Diamondbacks. Champs – New York Mets

World Series Champs – New York Mets

No Chance in Hell – Oakland Athletics, Colorado Rockies, Cincinnati Reds, Milwaukee, Brewers, Philadelphia Phillies, Atlanta Braves, San Diego Padres.

Season to date (30 -17)

SPORTS $$$ -- MLB average salary $4.4M after 4.4 pct rise: The Los Angeles Dodgers topped spending for the third straight season. The Chicago Cubs boosted payroll by $51 million, adding Jason Heyward, John Lackey and Ben Zobrist in an effort to win their first title since 1908. After beating the Cubs in the NL Championship Series and losing to Kansas City in the World Series, the New York Mets hiked spending by nearly $38 million. ... The New York Yankees, No. 1 for 15 straight years before the Dodgers' payroll surge, are second at $225 million followed by Detroit ($196 million), Boston ($190 million) and San Francisco ($173 million). The average for the 864 players on opening-day rosters, the disabled list and the restricted list was $4,381,980.

MARKET WEEK - The Dow closed out the first three months of the year in the green, after the worst start ever to a year. The Dow's quarterly comeback was its biggest reversal since 1933.U.S. oil prices were on the decline this morning, hitting their lowest levels in more than two weeks, on renewed worries of global oversupply. But crude was on track to post a strong quarterly gain.

With all the stock and oil volatility this year, gold has been the beneficiary, with prices heading for their best quarter in close to 30 years. The precious metal was modestly higher this morning.

The dollar index, against a basket of major currencies, which has jumped sharply over the past two years, was poised for a sizable first-quarter decline. The dollar was also under pressure this morning.

The U.S. stock market has taken off, but it has left behind an important passenger: the IPO (see above IPO NO GO). Major stock indexes have gained about 13 percent in the past seven weeks and are now in positive territory after a swoon early in the year. The market for initial public offerings, however, is in its slowest period since the first quarter of 2009 ... Analysts and traders warn that the second quarter may not bring much relief.

The sharp divergence is puzzling investors, who figure the two should move in the same direction. They said if the pace of IPOs doesn't accelerate, it could be a warning sign for the rally, a signal that investors haven't fully regained their appetite for risk. ... Meanwhile, the market environment could portend more pain for investors in private technology companies who have bought in at valuations that likely can't be reached in the public markets in the near term.

DRIVING THE WEEK - President Obama this morning meets with NATO Secretary-General Stoltenberg ... Minnesota Fed President Neel Kashkari holds a highly anticipated symposium on ending TBTF (more on which below) ... Senate Banking has hearing at 10:00 a.m. Tuesday on consumer finance regulation ... Voters hit the polls in Wisconsin on Tuesday with Donald Trump set up for a possibly big loss to Ted Cruz ... Ex-Im Bank has a meeting at 7:30 a.m. on Thursday ... Senate Banking has a CFPB hearing on Thursday at 10:00 a.m. ... ISM non-manufacturing at 10:00 a.m. Tuesday expected to rise to 54.1 from 53.4.

Next week: Jack Ass and the Words of the Month.

Until Next Monday, Adios.

Claremont, CA

April 4, 2016

#VI-36-298

CARTOON OF THE WEEK –Rob Rogers, Pittsburgh Post-Gazette