This Week in Barrons – 3-26-2017:
“What we’ve got here is… a Failure to Communicate” … Warden – Cool Hand Luke
The parallels between the film ‘Cool Hand Luke’ and the drama that played out between President Trump and his Republican partners in the U.S. House of Representatives last week was uncanny. For those of you who don’t know the movie, ‘Cool Hand Luke’ was an anti-establishment film which was shot during the Vietnam War era, in which Paul Newman’s character (Luke) endures physical punishment, psychological cruelty, and complete hopelessness. Luke refuses to observe the established pecking order among prisoners, and quickly runs afoul of the prison leadership. Luke is constantly outmatched by a much larger opponent, but his tenacity and perseverance earn him the respect of the prisoners and eventually the guards. Luke continues to confront ‘the Man’, and his sense of humor and independence prove to be both infectious and inspiring to the other prisoners. Luke’s struggle for supremacy peaks when he leads a work crew in a seemingly impossible but successful effort to complete a road-paving project in less than one day. In a fit of anger, the Warden has Luke fitted with leg-irons and delivers a warning speech to the other inmates, explaining: “What we’ve got here is a failure to communicate. Some men you just can’t reach. I don’t like it any more than you.”
I sat patiently on Friday as President Trump (the Warden) cancelled his healthcare bill in the 11th hour. He played his ‘game of chicken’ with the ‘Lukes’ of the Republican party – and he lost. Trump then proceeded to point fingers and cast blame at everyone except himself – which tells me that we will see this behavior again. Someone needs to inform President Trump, there are 3 C’s in any management style: consideration, co-operation, and communication. At last count, he’s definitely missing 2 out of 3 – and the remaining one is a bit suspect.
As the movie progresses, Luke continues to go outside the bounds of the Warden’s acceptable behavior, and more prisoners begin to live vicariously through Luke. At the end of the movie, Luke dies – but the Warden is also replaced. So Donald, you’re on the road to success – if you’re trying to single-handedly rejuvenate the Democratic party and get yourself impeached along the way. But understand your failure is not only due to substance, but also due to your lack of consideration, co-operation, and communication.
Let’s discuss for a minute the elephant in the room – health insurance. Admittedly, I know enough about insurance to be dangerous. I have automobile insurance. In case of an ‘unforeseen’ event (accident), the insurance kicks in and pays for the issue. But here’s the catch. If I don’t maintain the car, and the oil levels get too low and I blow-up the engine – my insurance does nothing. My insurance is there to cover unexpected events such as accidents – it is NOT there to cover any maintenance items such as: tires, gasoline, water pumps, etc. It is insurance, and it's at a very reasonably priced.
And then there is ‘health insurance’ which really isn’t insurance but more like an ‘extended service contract’ that I would purchase on my car to extend the manufacturer’s bumper to bumper warranty. I differentiate insurance from an extended warranty. Webster’s online dictionary defines insurance as: “An agreement in which a person makes regular payments to a company, and the company promises to pay money if the person is injured or dies, or to pay money equal to the value of something (such as a house or car) if it is damaged, lost, or stolen.” So, it’s obvious to me that on the healthcare side of things – we’re potentially defining ‘insurance’ the wrong way. I also tend to think that we seem to want ‘society’ to pay for our health maintenance rather than just our injuries. It seems to me that the reason that health insurance is so expensive is because we're using it for maintenance – instead of its initial job of just getting you through an unexpected event like a broken leg or a surgery.
To use a child analogy, I have 2 children and as babies they both needed a ton of check-ups and shots. Every time my wife and I would take them to the pediatrician’s office, we would hand them our insurance card, and the insurance company would pay most if not all the costs. Looking back I ask myself, why is insurance paying for those ‘maintenance’ items – rather than focusing on making a better solution for the event / emergency (ER) conditions? Currently healthcare is being thought about as a complete ‘bumper to bumper’ forever warranty surrounding anything that can happen in your life. What if we separated health insurance into 2 buckets: events and extended warranty? Would we encourage more choice, lower costs, and improved quality of life? After all, the latest healthcare bill lacked both style and substance because it tried to do too much. Wouldn’t it be a novel idea to ‘repeal and replace’ with something that made a lot more common sense?
3C’s = Consideration, Co-operation and Communication
Factually this week:
- Sears questioned how long they can continue to be a “going concern".
- Payless Shoes just filed for bankruptcy.
- Corporations that have much LOWER revenues today than 5 years ago include: Caterpillar with 42% less revenue today than in 2012, Exxon with 46% less, Chevron with 52% less, IBM is down 23.5%, Merck is down 16%, GE is off 17.4%, and Proctor & Gamble is down 22% from 5 years ago – along with selling-off 43 of its brand divisions.
- Global investor allocation to stocks hit a two-year high of 48%.
- 34% of fund managers (highest since 2000) think equities are overvalued.
- 44% of fund managers think emerging markets are undervalued.
- The 10-year U.S. Treasury yield will have to rise above 3.5% before a bear market in stocks ensues.
- 37.7% of adult-aged U.S. individuals are not working.
- Used car prices have fallen the most and the fastest since the ‘08 crash,
- JP Morgan did not have a single losing trading day in 2013, 2014 and 2016, but did lose money on 2 days in 2015.
- World stocks are their most expensive in 17 years.
- The combined wealth of the world’s billionaires ($7.4 Trillion) FELL for the first-time last year (3.7%) since 2008.
- 659 companies cut or eliminated their dividends last year.
- Since January, insider sellers out-numbered insider buyers by 7 to 1.
- The G-20 meeting ended with the U.S. refusing to compromise on the phrase “Resist all forms of protectionism”.
- Ford missed earnings, and warned that their annual estimates may come in 50% LESS than anticipated.
- Ally Bank told us that auto loan delinquencies are spiking higher, and
- Yet another interest rate ‘rigging’ investigation drew to a close with 3 major banks (HSBC, JP Morgan, and Crédit Agricole) being fined over $500m for collusion. Combine this some new reserve requirement, and look for the financials to potentially be under pressure this week.
Watch for the Trump administration to pursue a weak dollar policy in response to Germany’s threats of legal retaliation to our proposed BAT (Border Adjustment Tax). If the we can’t improve our excessive trade imbalance through a tax or tariff program, then look for the U.S. Dollar to be the mechanism that The Donald utilizes to get the world’s attention. As Ford’s CEO said last month: “Currency manipulation is the mother of all trade barriers.” A weak U.S. Dollar could suddenly throw manufacturing and many other exchange items in our favor – and it would be easier to implement rather than getting a BAT through congress.
With Friday’s healthcare bill failure, there is now doubt shed upon President Trump’s ability to raise the debt ceiling, reform the tax code, nix regulations, and put thru an infrastructure package. I think the reality of all of those issues has finally risen to the surface. Even the perma-bull Tom Lee has stated that the market moved higher in anticipation of all that happening and if it looks like it won't happen "stocks will NOT reward you from here”.
We are in such uncharted water that we might as well be on another planet. We have hit our debt ceiling and Democrat Chuck Schumer is already saying that if Trump doesn't back down from defunding Planned Parenthood – he’s going to rally his Democratic warriors to block any debt increase. We have enough money via taxes to last us into July, but by late July various Government departments are going to have to close if the debt ceiling is not raised.
Then of course we have North Korea. Various military people I know have told me that they expect us to attack North Korea and we will take out their military and their leadership. They believe that Sec. Tillerson's statement that the time for diplomacy is over and 15 years of talks have failed – is a prelude to "We're going in".
That all adds up to a large wall of worry that the market has to climb: Obamacare, debt ceiling, tax reform, decreased regulations, infrastructure spending, North Korea, and soggy economic ‘hard data’. Add to that the fact that we remain below the Trump highs of 20,750 on the DOW and 2,350 on the S&P – and that makes this a pretty tense time in market-land. Please, proceed with caution.
This past week the SPX (the proxy for the S&P) exceeded its expected move for the first time since December. When the healthcare bill was pulled, market volatility increased in anticipation of this coming Friday’s GDP number.
- The expected move for the SPX this coming week is $36. It’s currently sitting at $2,344. Subtracting $36 from this takes us to about $2,300. If we break below $2,300 this week – “it’s all over but the crying”.
- Watch the bonds (/ZB and TLT), if they continue their upward momentum, “duck and cover” because that will mean stocks will be moving lower.
- With the Nasdaq sitting virtually unscathed in this market, the shorting opportunity is in the QQQ’s this week.
A potential recipe for investing to the downside:
- I make sure the stock has closed under its 21-day EMA (Exponential Moving Average) for 2 days in a row.
- I also make sure that the stock is in a ‘squeeze’. The ‘squeeze’ is an explosion of energy that happens when a stock’s Bollinger Bands move back thru their Keltner Channels.
- A stock will also move higher when there is co-operation from their sector and from the corresponding index. [i.e. A squeeze on a stock + a squeeze on the co-operating sector + a squeeze on the co-operating index is forecasting a very powerful move].
- It’s also true that a squeeze on a stock + a squeeze on the sector move the stock substantially.
- Therefore, the goal is to find sectors and stocks (and potentially indexes) that are all in ‘squeezes’ – such as the SPY (S&P index), the XLP (consumer products sector), and PG (Proctor & Gamble).
- To produce this list, write a scan that tells you when a sector is under a squeeze, and use the chart above (that lists the top 5 holdings in each sector) to find the corresponding stock(s) that are also under a similar ‘squeeze’.
Secondly, when has a stock finished its move?
- Due to weekly institutional buying, stocks move in 1 standard deviation increments 70% of the time.
- Virtually ALL stocks will stop moving after hitting the following week’s standard deviation. So, setting an automatic sell after next week’s standard deviation move would be an excellent strategy.
- I found Proctor & Gamble (PG) was in a squeeze that was firing short,
- I then immediately looked at XLP (the corresponding sector) – and found that it was also in a squeeze that was firing short.
- Then I immediately checked the SPY (the corresponding index) – and found that it was in a squeeze that was firing short.
- Therefore, I think you can invest safely on the short side of PG, XLP and SPY.
- I normally buy the Delta 70 put option, and sell a corresponding put credit spread to pay for the trade.
Notice below, the SPY index (on the top graph) is caught in a downward channel and has had 2 closes below its 21-day moving average (two red candles below the white line). I’ve included the lower graph of the Japanese Yen moving higher because it is more co-operating evidence – supporting a SPY move to the downside.
For next week watch:
- The financial sector (XLF) needs to bounce to $24, otherwise the entire SPY could move lower with it. Doug Kass of Seabreeze Partners writes: “Group stink has never been more conspicuous than in the financial sector.” He likes: Lincoln Financial (LNC), Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BAC), Citibank © and JP Morgan (JPM) – all to the downside.
- If the transportation sector (IYT) goes lower – so will FDX, CSX and NSC.
- If the biotech sector (IBB) moves lower – so will CELG, BMY and AGN.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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