This Week in Barrons – 2-7-2016:
Thoughts:
Dear. Ms. Yellen:
We’ve been at this party
for 7 years. The S&P 500 has rallied
220% (12% annualized), and yes there were times when some stocks/sectors
exploded to the upside while others crashed and burned – but all in all – it’s
been a great party. I wanted to start
off by saying thank you Ms. Yellen, but now I think something is amiss.
My theory goes something
like this: In the depths of the Great Recession the Central Bankers decided
that massive injections of liquidity (in the form of low interest rates and
outright purchases of bonds (Quantitative Easing)) would have the affect of
pushing investors out of low yielding investments, and back into more risky
assets. The corresponding increase in
wealth from the already wealthy risk takers – would then trickle down into the
real economy.
But often times perception
does not go hand-in-hand with reality. The
rich did get richer, but instead of investing their new wealth into productive
capital – they choose to invest it in other (non-leverage able) assets like
real estate, art, and collectables. Other
investors chose ‘outright’ not to participate because the thought of putting
all of their hard-earned savings into assets that had experienced two 50% corrections
in the last 15 years – didn’t leave them wanting for more.
I think that Central
Bankers believe that there is an interest rate SO LOW that it will ultimately
result in explosive economic growth. I
think they believe that if they spike the punch bowl just one more time, the partygoers
will explode with rapture. Unfortunately there is NO proof that zero (or negative) interest
rates are spurring economic growth. Japan
has had zero interest rates for decades and their economic growth hovers around
zero. The Eurozone continues to flirt
with sub-one percent growth, and the U.S. (after trillions in monetary
stimulus) has had economic growth of only 2%. And therefore, in
order to gain more votes (and income), our government officials continuously
revisit the idea of increasing the taxes on the top 1% wage earners as their
‘go to’ method of political acceptance.
And after listening to
more Hillary and Bernie than I care to digest this week, SF and I dove into the
numbers surrounding increasing taxes on the top 1%. Factually:
-
All
of the136 million U.S. taxpayers earn $9 trillion in income, and pay $1.1
trillion in income taxes.
-
The
top 50% of all taxpayers pay 97% of all income taxes, and the top 1% already
pay 38% of all income taxes.
But let’s think of this a
different way:
- In 2016, the U.S. needs to come up with $4T to fund
its budget. Let’s look at taking more from
the top 1%’ers – and see how long those different chunks of income would keep
our government running. For example:
- the U.S. TOOK ALL of the profits from ALL of the
Fortune 500 companies – our government would be funded for an additional 60
days – through the end of February.
- If the U.S. TOOK ALL of the salaries from anyone
making more than $250,000 per year – our government would be funded through
July 10th.
- If the U.S. TOOK ALL of the property in Beverly Hills
and sold it at market value – we could stay solvent through July 29th.
- If the U.S. KILLED and TOOK ALL the money from all of
the billionaires, the government would be alive through November 10th.
- If the U.S. TOOK ALL of the Christmas spending
directly into its coffers – that would fund the government until December 25th
– Merry Christmas.
- And if the U.S. eliminated all foreign aid, we would make
it until December 30th.
- That would leave every man, woman and child to
contribute the remaining $44 per person to take us through the end of 2016.
- BUT – What Happens NEXT YEAR after we’ve effectively
killed the ‘golden goose.’ After all:
o
We’ve taken all
the profits, assets, holdings, salaries – every dime from the rich.
o
We’ve bankrupt
all of the Fortune 500 corporations.
o
Any ideas on what’s
left to TAX – so we can make it through 2017?
- Leave THAT up to the REPUBLICANS…Good answer – Good
answer!
The Market:
While talking to a ‘hedge
fund guy’ the other day, he asked me: “If you were managing a pension fund, how
would you prudently earn 7.5% on $48 billion – knowing that the world’s Central
Banks are moving toward negative rates?”
The issue is that these large pension funds can't earn anywhere near
their required returns, and therefore benefits to their pension holders are
going to be reduced. The ‘hedgie’ went
on to say: “Anyone showing you double
digit returns is using crazy leverage and getting lucky. Sometimes you just have to accept the fact
that there's no way to make money out there. There are times to reap and times to sow. This
is not a reaping time, this is a crying time." Below, is a mapping
of most of the investment alternatives against the Growth and Inflation Axis. It shows why ‘cash’ and ‘precious metals’ are
becoming increasingly more interesting.
Factually:
-
U.S. debt
reached a new $19 Trillion high this week.
-
Global
employment in the financial community continues to be reduced. Over half a
million jobs have been eliminated across the industry since 2008, and it's
likely to get worse this year as revenues stagnate.
-
January,
year-over-year layoffs jumped an incredible 42%.
-
Since January 1,
we've only had 3 days where the market didn't do a triple digit swing. In fact in that same period, the S&P has
risen three days in a row only once.
-
This past week
there were numerous rumors having Russia and OPEC meeting to consider
production cuts. Naturally all of the rumors
were untrue, and solely designed to keep the stock market afloat.
-
Unfortunately,
U.S. crude oil inventory supplies are above 500M barrels for the 1st
time since 1930.
-
And in a twist reminiscent
of the housing bubble, in 43% of home refinancings – homeowners are taking (on
average) $60,000 of ‘cash out’ of their homes just to make ends meet.
Today’s bulls and bears
are slashing furiously at each other. In
one corner we have Wall Street and the Central Banks, who want asset prices to rise
– so they can use those assets as collateral, and create more synthetic
derivatives. In the other corner we are
faced with the stark realization that the entire world is in recession, mired
in debt, facing depression, and has more investors pulling their money out than
putting their money in the market. As
proof positive of this volatility, during the past 10 sessions we have seen consistent
triple digit intra-day moves in the indexes.
But what about the ‘big
picture’ – Is the market going to move higher as CNBC suggests? In the
short term, the market could move higher, like the surge we saw from September until
November. But in the long term, we
should be headed considerably lower. Currently, the S&P is battling with trying
to keep its head above the August lows. We tested and held those lows in mid-January. On Jan 20th we had a close at
1859. We then ran up to a short-term
high of 1940 on Jan 29th, only to end back down at 1880 on Friday. What a wild ride.
I think that if we close
below 1859, the market is going to tumble quite a ways. But Friday’s close was above the 1872 support
level. So the question is: Does Friday's
close hold and we manufacture another bounce, or do we quickly re-test the
lows? The question is made more complex
by the ‘small to mid-sized’ investor having created a tremendous short position
– over $4B. Often the market tries to
confound and steal money from as many people as possible. If too many investors are long, the market
usually dips, and vice-versa. Right now
there are more outstanding shorts than there have been in a long time. This suggests that a short-term bounce higher
could be in the works. That’s what the
market tried back on January 29th with that 400-point up day – but it
fizzled out. The shorts did a lot of
covering, but once they were ‘flat’ there was no more buying pressure, and
without ‘new’ buyers the market stopped rising.
For 11 sessions we've been
trading sideways between 1872 and 1950. At
some point this box will fail. In the
longer term, I believe that we ultimately fail the lows, and the market sees
the 1725 area. But the next couple of
weeks are a crapshoot.
Unless something happens
with oil or in the Middle East, I'd expect a bit of a bounce on Monday. Unfortunately, since December the S&P has
only been up 3 days in a row – once. So
until a clear breakout or breakdown occurs, you have to either sit this one out,
or be very nimble – as dips are being bought and rips are being sold.
TIPS:
-
Equity market
internals are deteriorating, while fixed income has stabilized.
-
Global yields
have accelerated downward.
-
Corporations are
embracing financial engineering and M&A instead of capital investments.
-
Emerging markets
are struggling with the Chinese slowdown and the commodity meltdown.
-
Interest rates have
become the #1 variable. Low inflation
and low GDP growth means that interest rates may remain lower for longer. Currently deflationary fears are winning the inflation
battle.
-
Earnings are a
function of lower global GDP growth.
Earnings and revenue estimates are being revised downward with consensus
being for a 3% decline in 2016.
-
Investor
psychology (not fundamentals) is driving P/E ratios lower – all the while nervousness
is increasing. The (TINA) mantra: ‘There
is No Alternative’ is beginning to wear thin during this sell-off.
-
The only (TBD) ‘To
Be Determined’ factor is Consumer Confidence.
I am:
-
Long various
mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,
-
Long an oil
supplier: REN @ $0.56,
-
Long CSX, using
a Covered Call to generate income,
-
Sold COST – Feb
– Put Credit Spread – 144 / 142,
-
Sold RUT – Mar –
Call Credit Spread – 1070 / 1075, and
-
Sold SPX – Mar –
Call Credit Spread – 2025 / 2030.
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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