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      01-14-2019, 11:59 AM   #54

Drives: E46 M3, E90 M3
Join Date: Jun 2007
Location: Los Angels, Ca.

iTrader: (0)

There seems to be a lot talks whether it is the market or the economy? I think it's not either or but they are both of the same. One cannot separate one from the other. Think of it as the mind and the body (I learned from watching the Matrix lols). Sometimes one is more important than the other and vice versa. So the question to ask is given what's going on, which is more important in the near future? Back in 2017 and 2018, I think it was the fundamentals that drove the market, but toward the end of 2018, I think the market probably got a bit ahead of itself and we had a large correction during December. At the time, people were saying well it was just sentiment, but it turned out to be based on fundamentals due to the January earnings and we all have seen what happened. So what will happen now? I think the market has it correct that China trade and the FED will drive the market, but their concerns seem to be misplaced in the micros. They got it right at the 30 thousand foot level but they got it all wrong in the details.

So during 2017 and 2018, a lot of corporations probably had a large build up in inventory and labor resource in anticipation to the large growth ahead. So I guess their balance sheets are a bit bloated at the moment, but it's not a big deal as long as their fundamentals are sound. AAPL announced that they already cut iPhone by 10%. So even with their bloated balance sheet, it's only a matter of time before they can work off their excess. I don't think the economy will care much. But the problem is the market does not know how growth in China or China trade will affect corporate earnings. I don't think it's trade because going from 10% to 25% of 200bil dollars is not that big deal. I think it's more fundamentals than just trade. China was able to grow that much because they intentionally leverage up their economy to the point of overheating (much like the mortgage crisis), but their low cost manufacturing has run its course. They can't just leverage up forever without any new catalyst. So what's next? Can they compete with the world other than low cost manufacturing? Most of the low cost stuffs are already being made in Vietnam or surrounding south east Asia countries. Personally other than low cost made in China Walmart stuffs, I have no wish of buying anything from China. So the next story is waiting to be told with respect to China economy.

The other unknown is the FED but as I said the market or at least from what I heard has got it all wrong. Everybody was talking about either rate hikes or rate cuts. I don't think a .25 point here and there will derail the market. There may be a philosophical shift in the FED. There is currently a $4tril on the FED balance sheet. I can't imagine there is any will to add any more to it. Jay Powell has said he sees the FED balance sheet will be substantially less than it is right now (although we don't know what's the time line ... another unknown). I think that's where the market doesn't know which side Jay Powell will ultimately be on and that's where all the recent volatility came from? Will Jay Powell be more like Yellen or Volcker? Maybe something in between?

So what will be next? Fire or ice? My bet is on ice.