Iron ore prices are crumbling…

Many investors watch the price of iron ore closely. As the main ingredient in steel used to build skyscrapers, bridges, and other infrastructure, iron ore prices are a key economic indicator.

Yesterday, the price of iron ore plunged 3.4%. The price fell to $42.97 per metric tonne, its lowest level since 2008. Iron ore prices have declined a staggering 39.7% this year.

A huge global surplus is one reason iron ore is tanking. Last week, Financial Times reported that the industry has an oversupply of about 170 metric tonnes.

•  Declining steel demand suggests the global economy is slowing…

China accounts for about 46% of global steel demand. It’s on pace to use 5.7% less steel this year than last year. Financial Times reports that Chinese steel demand is expected to fall again in 2016.

China is using less steel because its economy is slowing. Last year, China’s economy grew at the slowest pace since 1990.

•  Copper is also flashing a warning sign…

The price of copper hit a six-year low last month. It’s fallen 27% this year.

Copper is used in everything from smartphones to air conditioning units to plumbing parts. Like steel, the price of copper is a key indicator of the health of the global economy.

•  Commodity prices have dropped across the board this year…

Lumber and oat prices have both dropped 25%. And the price of oil has fallen 22%.

Last week, the Bloomberg Commodity Index, which tracks 23 different commodities, hit its lowest level since 1999. It has declined 22% this year.

•  Meanwhile, U.S. manufacturing activity just hit its lowest level since the Great Recession…

On Tuesday, the Institute for Supply Management said its manufacturing index fell to its lowest level since June 2009.

The index fell from 50.1 in October to 48.6 in November. A reading below 50 means the U.S. manufacturing sector is shrinking.

The index has now fallen for five straight months. Last month was the first time it dipped below 50 since 2012.

Weak commodity prices are one major reason behind the plunge in manufacturing activity. When commodity prices are weak, companies buy less drilling, mining, and production equipment from manufacturers.

•  The railroad industry also suggests the U.S. is in an “industrial recession”…

Orders for new freight cars plunged 83% last quarter. It was the largest quarterly decline since 1988.

Railroads move goods and materials across the country. If the industry is ordering fewer rail cars, it likely means economic activity has slowed.

•  Major U.S. manufacturers are bracing for an economic slowdown…

In October, leading U.S. industrial firms Caterpillar (CAT), 3M Co. (MMM), and Cummins (CMI) all reported significant declines in sales and earnings for the third quarter. All three companies now expect sales for 2015 to be lower than originally projected.

All three companies also announced massive layoffs recently.

•  The bull market in U.S. stocks is losing momentum…

From March 2009 through December 2014, the S&P 500 gained 204%. This year, the S&P has only gained 1.5%. And even that tiny gain overstates how well U.S. stocks have performed this year…

On Friday, Financial Times explained that nine giant companies are propping up the S&P 500 this year. The nine stocks are Google (GOOG), Microsoft (MSFT), Amazon (AMZN), Facebook (FB), Netflix (NFLX), Priceline (PCLN), eBay (EBAY), Starbucks (SBUX), and Salesforce (CRM). Investment research firm Ned Davis calls them the “Nifty Nine”.

If the Nifty Nine were an index, it would be up 60% on the year, according to Financial Times research.

The Nifty Nine is propping up the rest of the market. That’s because the S&P 500 is weighted by company size. Bigger companies influence its performance more than smaller companies.

For example, Google is the second-largest company in the S&P 500. It’s up 43% on the year. Amazon is the sixth-largest company. It’s up 117%. Facebook is the eighth-largest. It’s up 35%.

However, the median S&P 500 stock is down 12% from its 52-week high, according to Business Insider.

•  In a healthy bull market, a large percentage of stocks “participate” in the rally…

Today, the number of rising stocks is dwindling. Just a few large companies are propping up the market.

We recommend investing with caution right now. If you hold stocks, make sure they’re companies that will do OK in an economic downturn. You should also avoid expensive stocks, which often fall hardest during major selloffs.

You might also consider hedging your portfolio by shorting (betting against) vulnerable stocks. And we recommend having a good amount of cash on hand, and owning a significant amount of physical gold.

These simple steps could keep you from going broke during the next major downturn. They will also give you “ammo” for the next buying opportunity.

Chart of the Day

The Nifty Nine are very expensive…

Today’s chart compares the price-to-earnings (PE) ratios of the Nifty Nine stocks with the S&P 500. The higher the PE ratio, the more expensive the stock.

eBay is the only stock cheaper than the S&P 500. Meanwhile, Facebook, Salesforce, Netflix, and Amazon are many times more expensive than the S&P 500. The PE ratios for Netflix and Amazon can’t even fit on the chart below.

On average, stocks in the Nifty Nine trade at a 746% premium to the S&P 500…

The current bull market in stocks is one of the longest in U.S. history. It’s about 30 months longer than the average bull market going back to World War II. At this stage, we suggest you invest in stocks with a great deal of caution.


Justin Spittler
Delray Beach, Florida
December 01, 2015

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