This Week in Barrons – 2-7-2016:
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!
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.
- 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.
- 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.
- 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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