This Week in Barrons – 8-14-2016:
Wow … What a Day / Week / Month.
According to PNC’s chief economist, August can be summed up in one word: “sideways”. A 30-economist panel was surveyed and predicted that 2016 would end with: Inflation at 2.0%, Unemployment at 4.7%, GDP at 1.8%, Oil at $49 per barrel, Gold at $1,450 per ounce, and the S&P shedding about 30 points to end the year at 2150. Some saw aggressive monetary easing by the ECB taking the Euro down to 95 cents, and forecasting oil at $55/barrel due to Iran’s production capacity being too optimistic. The common sentiment was that there’s an “oversupply of everything” – from liquidity to debt to cheap labor. These oversupplies have helped to elongate economic cycles, and have broken down traditional connections between many indicators. The same 30-economist panel believes that increased market volatility comes with central bankers bumping up against the limits of monetary policy.
The economists also cited that over the past year investors have pulled $317B from actively managed funds and put $374B into passively managed funds. Thirty years ago passive funds accounted for 1% of managed assets, and today they are 35%. Remember, there is a tremendous amount of risk in a ‘crowded trade’. In 1999, the ‘crowded (risky) trade’ was the dot.com bubble stocks. In 2007, the ‘crowded (risky) trade’ was all financial companies tied to real estate. Today, the ‘crowded (risky) trade’ is in low-volatility, income oriented, passive strategies. Now-a-days market pundits recommend higher yielding dividend stocks, because historically they have held up better in a downturn. Unfortunately, historically these stocks were NOT the ‘crowded trade’. Today these stocks are SO ‘crowded’ that respected funds like Vanguard are closing their doors to new investors.
The 30-economists also pointed out that there is something fishy going on in the U.S. credit markets, and it may give stocks a temporary boost. “There has never been an August like this in the history of finance,” said Brian Reynolds, chief market strategist at New Albion. August (typically a sleepy month for corporate bond issuance) has seen record issuance in its first six days. For stock investors, this means that the debt-fueled share buyback craze is in full force. Companies sold $70B in bonds in the first 6 days of August - already more than half the normal monthly average issuance of $125B. Companies are aware of hungry bond buyers, among cash-flush public pensions in particular, so they’re more than happy to come to market now. Pension funds in particular are itching for yield, and are now allocating much of their cash to corporate bonds, even if they are typically a higher risk than government bonds. The U.S. public pension system has developed a $3.4T funding hole that will put pressure upon cities and states to cut spending or raise taxes to avoid Detroit-style bankruptcies. Along with cities and states, our public pension funds are also dramatically under-funded and face ‘grave difficulties’ according to Professor Olivia Mitchell at the Wharton School at the University of Pennsylvania.
This week I learned that the U.S. has entered into an exclusive contract with a real estate firm to sell 56 old U.S. Post Offices. The sale of these properties will fetch about $19B. A real estate sales commission of between 3-6% will be paid to the company of record: CRI. CRI belongs to a man named Richard Blum. Richard Blum is the husband of Senator Dianne Feinstein. Senator Feinstein and her husband stand to make between $950m and $1.1B on the sale of U.S. Post Office properties. How does a U.S. Senator from San Francisco manage to get away with organizing and lobbying such a sweet deal? Isn't this just like insider trading?
Finally, most economists agreed that the biggest question surrounds the Presidential election. The viewership for the two Conventions was between 23 - 29m viewers. Sept. 26 (the date of the 1st Presidential debate) will be 56 years (to the day) since the first televised general-election debate between John F. Kennedy and Richard Nixon in 1960. 66m people – all on grainy black and white televisions, watched that debate. This year I fully expect to see ALL of the viewership records broken. I've been hearing about ‘Debate Parties’ already being planned. Some estimates (that include global, live streaming) are calling for over 100m viewers. The digital numbers are quite illuminating:
- Facebook: Trump: 10.2m Likes / Clinton: 5.4m Likes
- Twitter: Trump: 10.6 million Followers / Hillary: 8.1 million Followers
- YouTube Live Stream: Trump: Averages 30,000 live viewers per stream / Hillary Averages 500 live viewers per stream
- Instagram: Trump: 2.2 million followers / Clinton: 1.8 million followers, &
- Reddit: Trump: 198k subscribers / Hillary: 24k subscribers / Hillary for Prison: 55k subscribers
On Thursday of this week, we saw the DOW, the S&P, and the NASDAQ all hit all time highs on the same day. Could history be getting ready for a repeat of 1999-2000? The perma-bulls say no. The people that either don't know, or won't admit why this market is at all time highs – say no. The smart money people that understand Central Bank buying, and 0% corporate debt borrowing to fuel stock buy-backs – say yes. The only unknown is when. It could be Monday. It could be a year from now.
Factually, this week we discovered that:
- David Tepper’s Appaloosa Hedge Fund suffered a Q2 loss of 33%.
- Over 70% of current market volume is taken up by Central Bank buying and by companies executing stock buy backs during the last hour of trading.
- 6 of the largest global investors, and the largest institutional banks have given the SELL signal to their clients.
o Goldman Sachs … “Stocks are a SELL”
o George Soros … “Sell stocks, buy more Gold"
o Marc Faber … “The market will crash 50% lower”
o Carl Icahn … “The public is walking into a trap, as they did in 2007."
o Andrew Smithers … “U.S. stocks are now about 80% overvalued”
- Productivity FELL 0.5% last month – it’s longest losing streak since 1979,
- Retail sales (excluding autos) FELL 0.3% last month,
- The Producer Price Index FELL 0.4% last month, and
- A falling stock market would be a systemic risk to Deutsche Bank, Italy's oldest bank, and several banks in Spain that are holding on by a thread.
- Macy's announced the closing of 100 of their 728 stores. Nothing says ‘strength’ like closing 100 stores – aye?
Economist Hyman Minsky believed that a financial crisis is caused by debt being financed with market stability. He broke debt into three buckets:
- Hedged (low risk) = interest and principal payments are made normally,
- Speculative (risky) = interest ONLY is paid, and the principal rolled into the future, and
- Ponzi (very high risk) = additional funds are borrowed to pay existing interest on debt. You are betting that the assets will appreciate fast enough that they can pay off the debt and interest.
Currently we are seeing a boom in Ponzi Financing, so much so we have even come up with a term for some of these companies that fall into this category: ‘Unicorns’. The U.S. Government meets the very definition of Ponzi financing:
- Their current interest ONLY payment is over $400B per year, and
- They’re borrowing over $500B per year just to meet their interest ONLY debt payments.
The next crisis will come sooner rather than later because we are: investing in Unicorns, house-flipping, having reduced income growth, experiencing horrendous job quality, debating the minimum wage (which tells you about the quality of jobs), and seeing increased debt financing.
We got here because we never deleveraged. Rather than taking the pain of the last housing crisis, the FED and government stepped in and (in many instances) rewarded failure: Freddie, Fannie, AIG, GM, and others were bailed out. Failure would have made us stronger by making risk a reality, and allowing us to respect it. By not allowing failure we only make the problem bigger. “You can choose to ignore the math, but in the end you can’t avoid it”…Chris Wiles.
We are seeing a concerted effort by all 55 Central Banks around the world to do anything and everything to keep markets higher. They're doing it by printing money out of thin air and injecting it into the financial centers. The IMF says the world's biggest nations are $60T in debt and growing every day.
Look at it this way:
- You’re XYZ company – in bad shape because your revenues have fallen for 2 years, and your earnings are fading each quarter. In ‘normal’ times, investors would look at your balance sheet, and head for the exits. Your stock would fall day after day, month after month.
- Now assume you’re the same XYZ company, with all of the same retail and institutional investors selling your stock because it is fundamentally flawed. The only change is that every month the Swiss National Bank gets handed another $60B in printed money and buys 5m of company XYZ’s shares. Then the Japanese Pension Foundation buys another 10m shares. And pretty soon XYZ’s shares are at 52 week highs – despite being only days from bankruptcy / failure.
As long as Central banks are going to print money and buy stocks – stocks can’t go down. This is a perverted market and at some point, something strange is going to happen. Be alert, and don't be afraid to take profits. I suspect that one day there's not going to be any left to take.
On a separate note, over the past 5 years I’ve laid out a path for the U.S. dollar to lose it’s sole Reserve status. 2009 was a wake up call to the hundreds of nations that got stuck with our bogus dollars. They then lobbied the IMF and World Bank to make the monetary system more equitable. Fortunately or unfortunately, the plan is coming together: http://www.worldbank.org/en/news/press-release/2016/08/12/world-bank-approved-as-the-first-sdr-bond-issuer-in-china?cid=EXT_WBSocialShare_EXT The World Bank will be the first issuer of Special Drawing Rights (SDR) bonds in China in September. I’m not patting myself on the back, but rather noticing that no one seems to be following this angle. The world is growing tired of the U.S. being the sole reserve currency, and the SDR's are the way they're going to get around it. Keep a close eye on the precious metals from September through the end next year. The precious metals could rise dramatically over the next 12 to 18 months because China’s currency (included in the SDR) is increasingly backed by more and more gold.
My attraction to the metals continues. Some relatively inexpensive ones are: FFMGF, NAK, BAA, AUMN, EGO, and FSM. I’m keeping it simple by being:
- Long various mining stocks and their respective call options: AG, AUY, CDE, FCX, FFMGF, FSM, HL, NGD, PAAS, PGLC and SAND.
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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