This Week in Barrons – 8-21-2016:
"A Day Of Reckoning Is Coming”… Carl Icahn
I spent this past week in Mexico, talking to and meeting entrepreneurs, reading the foreign press, and viewing the U.S. from a slightly different angle. The most discussed topic was our upcoming Presidential election. Everyone from waiters to taxi drivers to college students had the same two questions:
- Is Donald Trump insane?
- Why are we ignoring Hillary Clinton’s scandals, and her health issues?
There were several ‘Day of Reckoning’ newspaper headlines that caught my eye:
- Will NATO spark a U.S. vs. Russia War?
- Will Syria pit the U.S. against China & Russia?
- Will a South China Sea ‘test’ go awry, and a U.S. vs. China war erupt?
In fact, one of the students pointed out the ‘unfairness’ of the U.S. press by holding up a CNN headline: “Trump to use Heritage when vetting for the Supreme Court”. Now unless you read the CNN article – it sounds like Donald Trump would use someone’s history, lineage, ethnicity and race when selecting them to serve on the Supreme Court – yes? But by reading the article, you find out that Donald would consider applicants that have garnered good marks from the Heritage Foundation. The Heritage Foundation (founded in 1973) is a research and educational think tank whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. The student was NOT a supporter of Trump but rather wondering whether PR for his own small business should be more focused upon facts or upon gaining readership – because it’s clear to him that the U.S. favors the second choice.
Then someone asked about the world’s current financial experiment that includes low interest rates, negative yields on government debt, and quantitative easing. They cited RIT Capital Partners Chairman Lord Rothschild latest quote: “We have seen central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. It is impossible to predict the unintended consequences of very low interest rates, 30% of global government debt at negative yields, and quantitative easing on a massive scale. U.S. stocks have grown threefold since 2008 - with investments growing and volatility remaining low. However, the real economy didn't enjoy such a profit, as growth remains anemic, with weak demand, and deflation in many parts of the developed world. Many risks remain including: Britain's vote to leave the EU, the U.S. Presidential election, China's slowing economy, and global terrorism – a consequence of the continuing conflict in the Middle East.”
In my answer, I pointed out that global interest rates (including America’s 0.5% rate) are now the lowest in 5,000 years virtually ruining all pension funds and savings accounts. Sweden, Switzerland and Japan only turned to negative key lending rates as a mechanism for fighting deflation. But a ‘Day of Reckoning’ is coming because to quote Chris Wiles: “You can ignore the math, you just can’t avoid it.”
Factually last week:
- Caterpillar’s retail sales (a global, economic barometer) suffered its 2nd biggest plunge since the 2008 financial crisis,
- The Empire State FED reading was expected to show a +2.5 growth reading, but instead came in at -4.2 showing contraction,
- Cisco is laying-off 14,000 people / 20% of its entire workforce,
- Home Depot, Lowes, Staples and Target reported revenues and earnings that were disappointing. Target also warned for the rest of the year, and said that Apple product sales were down 20%.
- Mortgage applications fell,
- Annual mutual fund redemptions are running at a record $168B pace, and
- Corporate Insiders are SELLING (their stock) 19 TIMES faster than they are buying – a pace unheard of in recent history.
If you look at a chart of any of the indices (SPX, IWM, XLF, etc.), the common denominator is that their stochastics are beginning to roll over, and on many of them the MACD (advance / decline line) is sliding lower. If I had nothing else to go on, I’d swear that the markets would be heading lower. But unfortunately our friendly Central Banksters do offer us another way on which to judge. It’s simple. If the Central Banksters decide to buy, all of the fundamentals and techno jargon is worthless - because stocks will simply go up. Therein lies the issue. We belong lower, but if our Central Banksters won't allow it – it won't happen.
We learned this week that:
- George Soros doubled down on the short side of the U.S. market.
- Institutional investors are talking about an ‘unsustainable market’ and a ‘megaphone’ pattern that looks ripe for a market collapse.
- Headlines like: "Markets Are Ripe for a Black Swan Event", and “Why most Hedge Funds will NOT Survive” are everywhere.
However, the market is holding up in the face of all this doom and gloom. For the last 9 sessions the S&P has been trapped between 2175 and 2190 on a closing basis. It’s been over 2 months and the market is still ignoring: BrExit, poor earnings, lousy economic reports, more money sitting in negative interest accounts, a rabid election process, and the sound of war drums around the globe. Between the Central Banksters buying and corporate stock buy backs, stocks simply go up or hold their own. And this begs the question: When does this stop? OR Does it even have to stop?
I think that it does have to stop, but not because I’m against markets going up. It is perfectly legitimate for markets to levitate when you have a growing economy, growing employment, growing incomes, growing earnings, etc. That's exactly what markets should do, and they should reflect that growth with higher stock prices. The problem however is our current, undeniable market abstraction. Our market has gone up in the face of: FALLING earnings, FALLING incomes. Part-time jobs, INSANE healthcare costs, FALLING exports, and EXCESSIVE corporate valuations.
What would happen if the Swiss National Bank, the Japanese Pension Fund, and our Central Banksters stopped buying U.S. stocks? How long would it be, before there would be no buyers for any stocks offered? In my opinion the answer is ‘Not Long’, and if you remove those monster buyers, the DOW would be cut in half in less than a year. So, the only thing between the DOW at 19,000 and the DOW at 8,000 is the Central Banksters that print money out of thin air, and buy with no regard to price, earnings or sales. Can that go on forever? At some point, the population would catch that stocks were ONLY going up. Then the population would pile into stocks with ‘all they have’, and history shows us that is when our Central Banksters will sell, take profits, and trigger a market collapse.
Throughout history the elites have caused chaos, only to rush in and deliver the message that they are the only way out of the chaos. Create the problem, and then chose yourself to fix the problem. If the Central Banksters ever decide to SELL some of their stock holdings, I can virtually guarantee chaos. With that in mind, what if the game plan is to keep the market up and steady for Hillary, but if Trump wins have the Central Banksters crash the market, blaming his policies for the flight out of stocks? We're in a very strange time. A time where no one has ever seen:
- Negative interest rates (unique),
- Central Banksters buying stocks with printed money (unique), and
- Stocks going up in the face of a global recession (unusual).
The way the market is ‘walking sideways’ instead of correcting tells me that there is more upside coming. You'll want to participate, but please keep your position size small and take profits quickly. As one high ranking General remarked the other day "We're just one mistake away from WWIII". Lean long, but keep your finger near the sell button.
Some likely trades this week:
- Looking toward EA, NXPI, QUOT and maybe AMD to the upside,
- Looking at LRCX – it has 19% short interest (high), sitting at near 52-week highs, is a candidate for selling the October $18.50 or the January $18 straddle
- The metals have lived through a normal pullback in the past week and I continue to like: 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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Until next week – be safe.