The ‘Mad King’ and a cast of market-killing characters seem to have ‘murdered’ Santa and his often annual rally gift for Wall Street, as the US and the world generally start to look like the TV series Game of Thrones!

After the S&P500 lost around 7% for the week, the plotting and manipulating from the White House has created the worst December for stocks since, wait for it, the Great Depression!

Let me assure you that even with the US set to slow down to say 2% plus growth from earlier forecasts of 3% or so growth in 2019, the magnitude of this current sell off, which is starting to look like a crash instead of a correction, should not be as big as it has become.

And this morning’s latest dramas out of Washington make the case, so you won’t be surprised to learn that stocks are down again on the New York Stock Exchange. Overnight, stock market influencers didn’t want to buy shares, with the President hanging tough on demanding funding for his Mexican wall, which the Democrats won’t support, so a Government department shutdown looms!

I would have called this an “only in America” event but mad ‘stuff’ seems to be on the menu globally. All this follows the President’s surprise decision to pull out of Syria, which flabbergasted his allies and then his Defence Secretary, General James Mattis piled on the drama and negative intrigue for stocks by resigning, citing differences with the President.

To show you how much stirring of the uncertainty pot Donald is involved in, look at his tweet overnight: “The Democrats, whose votes we need in the Senate, will probably vote against Border Security and the Wall even though they know it is DESPERATELY NEEDED. If the Dems vote no, there will be a shutdown that will last for a very long time. People don’t want Open Borders and Crime!”

This followed a week when the Fed boss, Jerome Powell, totally misread the stock market, with his comments after the central bank raised official interest rates on Wednesday. It wasn’t the rise but the failure to say, “…if the economy does not need two rate rises next year, well, we won’t do them.” It wasn’t time for the usual Fed-speak, as the market needed to hear a steady, balanced voice and they virtually got a central bank boss from Hollywood casting, who was out of touch with the real world.

And if you think I’m too harsh, look at this side-story from overnight. Believe it or not, stocks were up for a time when New York Fed President John Williams said “the central bank was listening to the market, and could re-evaluate its outlook for two rate hikes next year.” (CNBC)

Yep, it took them a couple of days to work out that this market sell off, not helped by Mr Powell, needed a non-mad voice to help see Wall Street that there is an overreaction to the current madness in the USA and worldwide. Need reminding? Well try these:

• The trade war.
• Government shutdown.
• China slowdown.
• Brexit and the UK Parliament’s rejection of the exit deal.
• Italy and the EU squabble over budget issues.
• Donald’s surprise Syrian exit.
• Donald’s Government shutdown for this real life Mexican standoff.
• OPEC and Saudi’s crazy silencing techniques of the media and a plummeting oil price.
• The correction of stock markets that could turn into a crash!

Need I go on?

CNBC has created a list of mad market developments:

• The Nasdaq lost 8% on the week and is now 22% below its record reached in August, and is now a bear market.
• The S&P500 lost 7% for the week and on Thursday hit a 14-month low. It’s now down 17.8% from its record high.
• The Dow lost 6.8% and nearly 1,655 points on the week.
• The Dow and S&P500, which are both in corrections, are on track for their worst December performance since the Great Depression in 1931, down more than 12% each this month.
• The Dow is on track for its worst month since February 2009.
• The Russell 2000, which tracks the performance of stocks of smaller companies, is on pace for its worst month since October 2008 and also fell into a bear market this week.
• Both the Dow and the S&P500 are now in the red for 2018 by at least 8%.

And locally we add to the madness, with the revolving door of Prime Ministers and Bill Shorten’s policies, which could hurt both the stock market and the housing market at a time when we just don’t need confidence-killing policies. And then there’s the Royal Commission and APRA’s impact on bank share prices and bank lending.

Did I say that this was like a market-version of a Game of Thrones?

And with all this going on, we’re heading to the bleakest December quarter for stocks in seven years!

The S&P/ASX 200 Index closed at a two-year low of 5467.6 points on Friday, after falling 0.7%. And I loved this optimism from the AFR: “Without a miracle, local shares will post their worst quarter in seven years on December 31, down 12 per cent so far with no circuit breaker in sight.”

That’s so spot on. We needed a circuit breaker this week and I wrote in Switzer Daily that we were dependent on two men, Jerome Powell and Donald Trump, to come up with some Santa rally plays to turnaround market sentiment but they let the team down.

And while Powell can be forgiven as he’s a central banker, Trump is someone who can’t afford to go to the next polls with a stock market crash and recession on his CV but he madly keeps playing his Art of the Deal, hard-bargaining tactics violin as Wall Street looks like it’s starting to burn.

I’d love to say he will become rational and stick to his positive stuff that stimulated the US economy and sparked up stocks but this guy is unreadable. So I can’t be optimistic, apart from arguing that the economic stories in the US and Australia scream that we don’t deserve stock sell offs of this kind.

And if you think I’m being too hard on Donald and all the other players in the US and around the world, see what Fred Smith, the CEO of Fed Ex told us, as his company’s shares dropped 10% on Wednesday, after downgrading expected earnings.

“And I’ll just conclude by saying most of the issues that we’re dealing with today are induced by bad political choices, making a bad decision about a new tax, creating a tremendously difficult situation with Brexit, the immigration crisis in Germany, the mercantilism and state-owned enterprises in China, the tariffs that the United States put in unilaterally.”

I rest my case that we’re in a Game of Thrones madness phase of global politics, which has a serious economic and market implication!

What I liked

• Employment rose by 37,100 in November, after a revised 28,600 increase in jobs in October (previously reported as a 32,800 increase in jobs). Full-time jobs fell by 6,400 but part-time jobs rose by 43,400. Economists had tipped an increase in total jobs of around 20,000.
• Unemployment rose from 5% to 5.1% in seasonally-adjusted terms but the rise was for the best reason because the participation rate rose to a record high! In trend terms, the jobless rate fell from 5.2% to a 6½-year low of 5.1%.
• The Federal Government is projecting a $5.2 billion underlying cash deficit (0.3% of GDP) for the current financial year (2018/19). The May 2018 budget had forecast a deficit this year of $14.5 billion. A budget surplus of $4.1 billion is now expected in 2019/20.
• The Commonwealth Bank Business Sales Indicator (BSI), a measure of economy-wide spending, rose by 0.8% in trend terms in November – the 21^stmonth of sales growth. Spending continues to grow at a faster rate than the 0.4% average long-term monthly pace.
• The weekly ANZ-Roy Morgan consumer confidence rating rose 0.1% to 117.8. The index is comfortably above the average of 114.3 held since 2014 and above the longer-term average of 113 held since 1990.
• The Housing Industry Association reports that detached house sales rose 3.6% in November – the biggest lift in 13 months and to 5-month highs.
• The US leading index rose 0.2% in November, while the forecast was 0.1%
• US existing home sales rose 1.9% in November to a 5.32 million annual rate (forecast 5.2 million).
• US housing starts rose by 3.2% to a 1.256 million annual rate in November (forecast 1.225 million). Building permits rose 5% to a 1.328 million annual rate (1.259 million forecast).
• Italian banks rose 2.1% after the European Commission reached a deal with Italy over the 2019 budget.

What I didn’t like

• The Philadelphia Federal Reserve manufacturing index fell from +12.9 to +9.4 in December (forecast +15).
• As widely expected, the US Federal Reserve’s Open Market Committee (FOMC) increased its target range for the federal funds rate by 0.25% to 2.25-2.5%. This was the ninth increase in interest rates of the current monetary policy tightening cycle and was acceptable, if the Fed Chairman had got his script to the market right.
• The oil price fall.
• The Empire State manufacturing index for the state of New York fell from +23.3 to +10.9 in December (forecast +20).
• The National Association of Home Builders housing market index fell from +60 to +56 in December (forecast +61).
• Retail stocks fell after a sales warning from British online fashion retailer, ASOS. Shares in ASOS fell by 37.5% after cutting its forecasts, noting that November sales were “significantly behind expectations”.

Another case of madness

Shares of Goldman Sachs fell 2.8% this week. Reuters told us that “Malaysia filed criminal charges against the bank in connection with an investigation into suspected corruption and money laundering involving the sovereign wealth fund 1MDB”.

Seriously, curve balls are being thrown in so many mad arenas that it’s only rational that sane, shorter-term assessors of stocks are throwing up their hands and selling, waiting for some sanity to prevail – globally!

Top Stocks – how they fared:

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

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