This Week in Barrons – 4-3-2016:
Ms. Yellen – What if we’ve been duped?
I wonder if we've been duped? I just returned from the Mid-America Truck Show (MATS) where the #1 topic was Donald Trump for President, and the most popular item was a “Make America Great Again” hat. We’ve all experienced the circus surrounding Mr. Trump, and how everyone is ganging up to stop him. When the leaders of the Republican Party came on CNBC to tell the voters that they have NO SAY in the nomination process – everyone was outraged and Trump’s poling numbers increased. Coincidence?
Years ago, the U.S. 2016 Presidential election was predicted to be Jeb Bush vs. Hillary Clinton. But no matter how hard Jeb tried, he couldn't raise the eyebrow of a working hooker. While everyone was fine handing the election over to Hillary, the Republicans had to find another person to work with. Rubio instantly came to mind, but there was still this ‘problem child’ – Donald Trump to deal with. Trump just kept on winning elections and debates.
The failure of Jeb Bush pushed the Republican Party into panic mode. But then they had their ‘Can’t Beat’em – Join’em’ moment. They decided to feign their repugnance of a Trump Presidency, and keep the Dump Trump meme alive until it no longer drives people straight to Trump. This allowed the established Republican Party to appear Anti-Trump, all the while moving The Donald up in the poles.
It will be easy to see if I'm reading this correctly. If the Republicans pull a fast one at their Convention and appoint someone else, then it’s clear the establishment isn’t hiding their ambitions – and has disassociated themselves with the people. I don't think they'll do that, as it would cause massive disruption to the Republican Party.
Even this past week a reporter (Michelle Fields) filed a battery charge against Trump’s campaign manager – Mr. Lewandowski. Ms. Fields said that Lewandowski grabbed her arm and almost threw her to the ground, but she regained her balance. She said that it was the second most horrible thing in her life – after the passing of her father. The video tape is all over YouTube. Piers Morgan and J.Q. Public are laughing at this woman and saying: “Trump is being set-up – I’m going to support him.”
I’ve got to admit, 50,000 people visiting Louisville, KY this weekend – all talking and buying Donald Trump paraphernalia – convinced me that it’s working. Be careful out there, the Donald may just pull this one off.
- The Atlanta FED cut it’s annual GDP estimate from 1.9% to 0.6%.
- The credit ratings on the majority of corporations are LOWER today, than in 2009.
- Corporate defaults for all of 2008 were 42, and in 2016 are already 31.
- There have been 8 bank failures thus far in 2016.
- The foreign governments that own the most U.S. debt are China ($1.25T), Japan ($1.1T), and the Caribbean Banking Centers ($0.3T).
- The rate of Global Trade is now forecast to be 2%. Global GDP is forecast between 3.1% and 3.5%. Most economists believe that unless Global Trade exceeds 6% - a recession is on our immediate horizon. (https://www.imf.org/external/pubs/ft/weo/2016/update/01/)
As MJP suggested, our Central Bankers have a real dilemma on their hands. Since 2009 (the last time there was any governmental sense of fiscal responsibility), Central Banks have taken the brunt of supporting the global economy via: low interest rates, quantitative easing, forward guidance and now negative rates. But it seems that the economic relationships that preceded the 2008 banking crisis may not hold today. For example: the Phillips Curve. It has always shown a relationship between unemployment and inflation. Presumably, as unemployment falls, inflation would start to rise because businesses would compete for labor and correspondingly wages would increase. This relationship has been the basis for many a Central Bank policy. In fact in 2012, Ben Bernanke envisioned an unemployment rate of 6.5% being a trigger for monetary tightening; when, in fact, the first upward move in rates did not occur until December 2015 when the unemployment rate was already at 5%.
Could it be that the best measure for monetary tightening may not be the unemployment rate (which measures those on unemployment benefits), but rather the labor force participation rate (which calculates the proportion of those of working age who are employed)? In the US, the labor force participation rate has fallen from a peak of 67% reached in 2000 – to 62.9% today. Everyone expected the labor force participation rate (the percentage of people working) to increase as the unemployment rate fell, but (unfortunately) the two have fallen in tandem. Are we making it too comfortable to remain unemployed? Would some of the unemployed rejoin the labor force if wages were higher?
If we can’t trigger monetary tightening off of the unemployment rate, can we trigger it off of productivity? After all, we can measure the average worker’s output, the average hourly workweek, and get a good estimate of productivity. Unfortunately, we continue to see weak productivity growth, which has most recently caused a downward revision in the GDP forecast to 0.6% in 2016. The weak productivity growth could be caused by no real improvement in the speed of road transport (congestion) or air transport (security checks) in the last 40 years. It could reflect household appliance technology (refrigerators, stoves, dishwashers) remaining stagnant over the past 50 years. It could also reflect technological industrial improvements reaching a time when:
- Wage growth has been so low that it’s currently cheaper to employ workers than to invest in new technology.
- Service-focused productivity is just harder to improve. (For example: a 10-minute haircut is not appreciably better than a 60-minute haircut).
- The Internet’s technological distractions (e-mails, tweets, and cat-videos) are reaching a point of reducing office-worker productivity.
- OR are we just bad at measuring service-sector productivity, and later revisions may show that GDP is higher (and inflation lower) than we thought?
In the meantime, I don’t think our Central Banks know the answer as to when to tighten monetary policy. In fact, it seems that the FED’s ONLY job right now is to keep the stock market higher. Do you think it’s coincidence that on February 12th (when the market was at its lows) – Jamie Dimon (head of JP Morgan) declared that he was buying millions of his own stock. AND that Ms. Janet Yellen (on the same day) called the ECB’s President Mario Draghi and the Bank of England’s President Carney asking for a favor. Do you think it’s coincidence that the market magically stopped going down on EXACTLY THAT day, and has made one of the most incredible rebounds since 1933?
So our FED had their buddies rescue what was turning into a market ‘crash’, and they engineered one of the biggest monthly rebounds ever seen. However, this doesn’t change the fact that our market remains at nosebleed, over-bought, over-priced, and very expensive levels.
This week will start another earnings season. And chances are good that even with all the primping and fluffing of the various individual earnings releases, these earnings comparisons are going to be ugly. The dilemma is that Wall Street tells us that ‘earnings move stocks’, and if earnings stink – then the market should fall like a rock. But the market currently moves on Central Bank purchases and stock buy-backs. However, corporations can’t buy back their own stock because they are in the ‘black-out (non-buy-back)’ period surrounding corporate earnings.
In terms of a prediction, last week I thought they were going to keep us green for the week, and they did. Now I tend to think we're going to see some sideways chop with a downward slant. I believe that during the next month we will be shown the final resolution to which direction this market wants to move. Markets are either: (1) Quiet and Trending – often grinding higher to the upside, (2) Sideways and Volatile – this current phase always front-runs bear markets, or (3) Volatile and Trending – which characterizes a downward market.
A market’s MONTHLY timeframe dominate trends; however, it’s DAILY timeframe initiates reversals. We are currently in a monthly market downtrend that was confirmed on February 12th, 2016 – coincidentally – the same day that a massive daily reversal (uptrend) was initiated. I believe that over the next 2 to 3 weeks:
- We will experience a significant market pullback – whether we need to touch an S&P reading of 2100 before it’s triggered is anyone’s guess.
- Watch the rally following the next market pullback. If it exceeds an S&P reading of 2116 – then Ms. Yellen has decided to throw all caution to the wind and we will take off to the upside and make new all time highs.
- If (however) after the next pullback, we do NOT exceed an S&P reading of 2116 – triggering a lower low and leading this market downward quickly.
I think we are within 4 weeks of this signal. It will dictate whether we go blasting into the stratosphere and become the next Venezuela (which is my guess due to the Presidential election), or whether gravity takes hold and we go down in a hurry.
Think about buying out of the money, Delta 20 - Calls on some of the big boys running into earnings (and selling before their actual earnings announcement):
- GOOGL – Apr4 - $810 calls for $8,
- AMZN – Apr4 - $630 calls for $8,
- NFLX – Apr4 - $120 calls for $2.25, and
- FB – Apr5 - $125 calls for $1.20.
- Long various mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,
- Long an oil supplier: REN @ $0.56,
- Long GLD – Apr – Call Debit Spread – 118 / 123,
- Long NKE – Apr – Call – 67.5,
- Long POT – Stock & Apr – Call 20,
- Long SBUX – Apr – Call – 55,
- Sold TEX – Apr – Put Credit Spread – 19 / 20
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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