RF's Financial News: September 2016

Sunday, September 25, 2016

This Week in Barrons - 9-25-2016

This Week in Barrons – 9-25-2016:

“I’ve lost faith that our FED can find the right way out of this mess”… Bill Gross

Thoughts:

For the past week or more, I’ve had the luxury of being outside the U.S. – looking in. Last week’s actions had the DOW closing around 19k with an operating economy resembling Mexico. I guess it could be worse – our DOW could be at 100k with an economy resembling Syria. But who will ‘Find the Right Way’ out of this mess?

Will our FED ‘Find the Right Way’ out? Unfortunately, our own Federal Reserve badly damaged their own credibility this week by deciding to leave the federal funds rate unchanged. The FED did tell us that they decided to wait for more evidence while: (a) the job market strengthened, (b) the economy picked up, (c) household spending grew, but (d) business fixed investment remained soft. The FED’s own dot chart showed a median forecast for only one 2016 rate increase. Their own ‘National Activity Indicator’ showed its 19^th consecutive month in contraction – making it the worst non-recessionary streak in 49 years. So it shouldn’t surprise you to learn that people with functioning brain cells like Bill Gross and even CNBC’s Steve Liesman were dumbfounded with the FED’s lack of movement and came out and said: “The FED has made fools of themselves. Yes, Bill and I knew that they may not raise rates, but we didn't think they would lower their rate forecast by 30% over the next 3 years. That was stunning!” Marc Faber even suggested that the central banks will just continue to print and buy real estate, stocks, bonds, and junk bonds until they own the world. Conclusion – it’s doubtful our own FED will ‘Find the Right Way’ out.

Will our Banks ‘Find the Right Way’ out? This week we heard Congress question Wells Fargo’s CEO on creating millions of fake accounts by using existing accounts as the base, and then charging those innocent new accounts overdraft fees, credit card fees, etc. It was comical except for the fact that the CEO will NOT go to jail, and the mastermind of the plan received a $125m bonus. Only in American banking can you get rewarded for screwing tens of thousands of people. So it’s doubtful our Banks will ‘Find the Right Way’ out.

Will our FBI ‘Find the Right Way’ out? Remember when FBI Director Comey decided NOT to indict Hillary concerning the e-mail scandal? My feeling at the time was that he knew if he took it to the Department of Justice for an indictment, all of the information would be sealed as evidence, and the public would never have known what happened. The Huffington Post recently ran an ‘obituary’ on ‘Why Hillary Clinton LOST the Election’ and their reason #8 was: “James Comey - He might as well have indicted her for real, like he did in the court of public opinion. He was extremely careless.” FBI Director Comey knew exactly what he was doing. The only way he could let the American public make up their own minds was to NOT indict her, and let the information out. Even the Huffington Post realizes that now. Maybe the FBI will ‘Find the Right Way’ out.

How about WAR? Desperate times call for desperate measures. For approximately 4 years now, I've been suggesting that the elites would like nothing more than to start a war with a major player. This past weekend a horrifying event took place. We were 4 days into a brokered ceasefire in the Middle East when “a U.S. led coalition bombed the Syrian Army with phosphorus bombs - killing more than 60 soldiers and wounding more than 100. The U.S. pretends it was an accident, and that the timing was a coincidence." How on earth could the U.S. intelligence error so badly as to bomb the Syrian army and civilians? And why would the U.S. be the nation that violates a cease fire? After all, I thought we were the good guys? There is NO doubt that this was a ploy to pull Russia into a hot exchange with the U.S. A ‘hot exchange’ with Russia would cause people to forget about our fraudulent FED's monetary policy. Our FED could swing into emergency mode, print more trillions for the war machine, and no one would bat an eye. As the economy would continue to crumble, the FED could blame everything on the war. If you wish to learn more about the struggle in Syria (that is not flattering to the U.S. Government) – please review the following video: https://www.youtube.com/watch?v=c8JppJyVxYU

How about the Debate: On Monday night at 9 pm, it is estimated that 100m people are going to tune in to watch Donald Trump face off against Hillary Clinton. To put this in perspective, the MOST popular Super Bowl received 114m views – so this event is indeed the Super Bowl of political face-offs. Last December I predicted that Donald Trump would win the primaries, and that Hillary Clinton was in much poorer health than most realized. But I also made another prediction that: "If Hillary puts on a poor showing in the first debate, the DNC (Democratic National Committee) will pull her. They will say that she's had some form of pneumonia relapse, and will substitute a different candidate (presumably Joe Biden) in her place.” Now, I still believe that.

Bring your popcorn and a stiff drink. The U.S. Super Bowl of Debates kicks off Monday night. And YES – I’m counting on one of these two individuals to ‘Find the Right Way’ Out of this mess.

The Market:

Thanks to ES for his charts.

This week was clouded in more volatility with our spineless FED deciding not to hike rates, despite telling us that all of the ingredients for a rate increase were there. That same FED continued to tell us that they are not political, but just not willing to rock-the-boat ahead of The Obama Legacy.

This triggered a two-day market romp higher, taking the S&P from about 2140 to a high of 2180. Then on Friday, some of the air came out of the balloon, and we faded back down 12 points – closing at 2164.

So what now? The high is 2190, and the recent low was the intra-day low of 2120. When markets get volatile, you stop looking for trends (because there are none), and you look at ‘levels’. With a close at 2164, we are above the important level of 2160. If we don't let 2160 slip away, we will try and inch higher toward the top of the range. But, if we close under 2160, then there’s no real reason that we couldn't quickly sink right back down to the 2140 level.

The other level is the 50-day moving average of 2169. If we close back above that, it lends credence for our markets moving to new all-time-highs. But of course a lot is going to depend on what happens Monday night. If Trump does really well in the debate and Hillary does not, it might initiate a risk-off selling event in the market. Wall Street and the establishment do not like Trump, and they won't enjoy seeing their appointed queen do poorly.

What this all boils down to is that we're going to have a lot more chop. There is no real trend, and after trading sideways for almost 3 months – all that has happened is that the sideways trading range has expanded. For 40 days the range was 2160 to 2190. Then the range widened to the downside to 2120, and looked frail before they rescued us and got us back up over 2160.

With the election looming, and with the dangerous situation in Syria percolating – expect more up and down chop. Keep your position sizes low, and don't be afraid to take profits. Until we break out of the range, each day could go either way. Take care and enjoy the Debate. It ought to be interesting.

TIPS:

Currently I’m out of everything except gold, silver and oil:

- 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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Sunday, September 18, 2016

This Week in Barrons - 9-18-2016

This Week in Barrons – 9-18-2016:

UberX – the newest self-driving car system launched in Pittsburgh, PA this week.

Thoughts:

Jobs vs Profits?

This week UBER introduced its self-driving car in Pittsburgh, PA. – https://youtu.be/pmofgf-Y3Mc. The ‘self-driving’ revolution will not be without carnage. Not the ‘car-crash’ kind of carnage, but rather the ‘loss of jobs’ kind. A government official said: “The magnitude of this problem is breathtaking, to the tune of at least 4.1M jobs. That includes: taxi drivers, chauffeurs, truck drivers, and other ride-share vehicle drivers. These ‘working’ drivers are NOT easily switching to another profession such as writing software. There’s certainly no room for them in manufacturing. The fast-food sector is becoming automated, as are many other jobs including writing blog entries for major wire and news services. This type of change is always happening faster than society is prepared to deal with, but we’re not even talking about this particular revolution!”

There will naturally be delays, setbacks, and gruesome accidents involving autonomous vehicles. There will also be those people who will call for an end to self-driving cars, and there will be other people that simply refuse to get into them. But make no mistake about it – it IS happening. What I find amusing is that the company leading the way is UBER. Isn’t UBER the same company that was preaching community involvement, kum-bay-yah, and chanting ‘Work when you WANT to – not when you HAVE to’. I guess the rhetoric will have to change to: ‘Profits beat Jobs’ and ‘Cash makes no Enemies’ – because the savings associated with fewer drivers will far outweigh the cost. Drivers and fuel are the two largest expenses for every transportation company, and human drivers (unlike their autonomous replacements) need to sleep and take vacations.

This week even Ford Motor Co. rolled out plans to expand into robo-taxi fleets and other autonomous-car services. The #2 U.S. auto maker said that the move into robo-fleets will deliver 20% profit margins once completed. That is far higher than the low single-digit returns typical for car manufacturers, and will help Ford become less exposed to the U.S. auto industry's boom-bust cycle.

But it’s UBER that is expected to benefit the most from the autonomous advancements. I listened to them mouth the words: “We believe ride-sharing will be a mix — with services provided by both drivers and self-driving UBERS.” But when a passenger is faced with paying half-fare for a driver-less vehicle, I’m betting that the autonomous driving UberX wins hands down.

UBER drivers are concerned about this choice as well. They are worried about losing their jobs to a software program. The founder of the Independent Drivers Guild in NYC (which represents 35,000 UBER drivers) said: “We don’t expect UBER to move into driver-less cars in New York City anytime soon, but they can expect we would launch an aggressive campaign, the likes of which they have yet to see, to halt such a move.”

This week UBER started its self-driving pilot program in Pittsburgh by outfitting Ford Fusions for its ‘most loyal’ users when they request an UberX ride. For the time being, the car comes with a human sitting in the front seat to take over if something goes wrong. https://youtu.be/pmofgf-Y3Mc.

The Markets:

We may or may not be at the beginning stages of a bear market, only time will tell. What we do know for a fact is that the current bull market is looking a bit old and overvalued.

The future of DB – Deutsche Bank (Germany's largest and most troubled lender) went from bad to worse last week when the U.S. Department of Justice (DOJ) fined them $14B to settle an outstanding probe into the company's trading of mortgage-backed securities during the financial crisis. Despite this fine being eerily similar to the EU’s $14B tax-avoidance penalty to Apple, the DB CEO immediately came out swinging, saying: “We have no intention of settling these potential civil claims anywhere near the number cited. The negotiations are just beginning, and I expect that they will lead to an outcome similar to our peer banks which have settled at materially lower amounts." DB’s stock tanked on the news, and is once again approaching its all-time lows. Factually, BofA reached a similar $17B settlement in 2014, and Goldman agreed to a $5.1B settlement earlier this year. As the WSJ reported, due to the recent European hostility involving AAPL shares, the DOJ may be unwilling to budge. According to a JPM analyst, an agreement exceeding $4B would pose serious questions about DB’s capital positions and force it to ‘build additional litigation reserves’. The move also put a hit on other banks such as Monte Paschi (the oldest bank in Italy) that went limit down and was halted for trading.

This week Goldman came out and downgraded the S&P saying it's too high and too risky. There are numerous ways to look at valuation but Warren Buffet’s – ‘total market capitalization as a percentage of GDP’ is probably as good a place to start as any. Today, Warren’s calc is showing that there have been only two other times when stocks were THIS overvalued in history – once in 1998 (before a 60% crash) and again in 1929 (before an 80% crash)! It’s also telling us that if you purchased stocks today – your expected annual return for the next 12 years would be about 1% per year.

This week, retail chain store sales fell almost 5% - a reading not seen since 2009. I’m wondering how (if we were truly ‘at full employment’, and experiencing rising wage growth) would we be seeing retails sales puke like that.

And just this week Donald Trump was on a CNBC call – again hammering on the FED for keeping the market up to make Obama look good. My point here is that because of the heat from Trump, and Hillary getting negative attention over her health – might the FED toss in a hike just to prove they don't care about the politics of the season? It is possible. Remember job #1 at the FED is to keep their own jobs. Trump is shining a flashlight on them, and they're scattering like roaches. We will know the interest rate answer on Wednesday, and the common thinking is that interest rates will remain the same. And between the retail sales numbers crashing, productivity dying, and regional FEDs reporting new all-time lows – it is clear that on a fundamental basis they can't hike.

But as we all know, fundamentals no longer apply because ‘free money’ is the market driver. And that is why this Wednesday is so challenging.

- There's a chance that the FED is saying: “Hey, this guy Trump might pull this off, and he's already giving us heat for blowing bubbles and inflating the stock market. Maybe we ought to move rates up a quarter point, just to show we're doing something". The stock market would NOT like it, but it would have ZERO effect on the true economy.

- The ‘fly in the ointment’ here is that on September 21, the Bank of Japan is ALSO meeting. Reuters had the following to say: “The BOJ has three easing tools: buying more bonds, buying riskier assets, and deepening negative rates. At next week's review, the BOJ will likely signal markets that cutting rates would be the more preferred future option as it directly pushes down short- to medium-term rates that have the biggest impact on corporate borrowing costs. The BOJ will also consider reducing purchases of super-long government bonds to give financial institutions such as insurers and pension funds a better environment for earning returns, the sources said.”

So we know that our FED is on a bit of a hot seat over Trump. They must make believe that they aren't politically motivated, and would never defer a rate hike because they were supporting Obama. We also know that Central Banksters play ‘tag – you’re it’ a lot. In other words, they work in concert with each other. Is it insane to think that the Bank of Japan (BOJ) would really go crazy, and push their rates deeper into negative territory, AND expand their bond and asset buying? And based upon THOSE BOJ actions, could there be enough ‘carry trade’ between the U.S. and Japan that our FED could hike a quarter point without any major shake-up? Of course, because the market doesn’t care WHERE it gets its free money – as long as someone is pushing down rates and flooding the world with cheap money. If our FED knows what the BOJ is going to do (and that’s very likely), then I do think that they could raise rates here while using the QE push from Japan to keep things propped up.

If it was ONLY the FED meeting on the 21^st, then I would absolutely agree that our FED would not be doing anything. But with the BOJ still terribly desperate to make something happen, there's a chance that they will come out with a new manner of QE, money printing, negative rates, etc. If this happens, then the ‘carry trade’ would indeed offset any damage done by the FED.

What is a ‘carry trade’ you ask? In its simplest form, it is a strategy in which an investor borrows money at a low interest rate (in one environment / country) in order to invest in assets that are likely to provide a higher return (in another environment / country). This strategy is very common in the foreign exchange market. So if the BOJ were to move their rates even lower, you would see ‘carry traders’ borrowing cheap Yen (Japanese currency), and putting it to work in the U.S. by buying equities that pay a strong dividend.

That little trick would accomplish several things:

- 1^st, it would enhance the illusion of U.S. strength: “We must be strong because the rest of the world is cutting and we're hiking rates.”

- 2^nd, it would give our FED the ability to NOT look like Obama's pet. And

- 3^rd, it would keep stocks elevated, instead of falling like a rock.

This is my only ‘logical’ explanation for our FED tossing a quarter point rate hike upon us. But for Wednesday, I think it’s too close to call.

- If the BOJ only gives what it has already promised, then our FED will take a pass and no hike.

- If the BOJ goes nuts, then I think our FED will slip in a quarter point rate hike.

This past week, after testing 2,120 as a low for three days in a row, we ended the week at 2,139 on the S&P’s. So after 42 days of doing nothing, the last 6 sessions have brought us some awfully large moves. The two elements in play are the actions of the U.S. FED, but the more important move could be those of the BOJ. All of that will get resolved on Wednesday, when our FED and the Bank of Japan will announce their new policy decisions. Depending upon what the BOJ does, will determine whether we're going to run back to new highs, or if 2,120 is going to fail, and we'll be face planting 2,100. 2,120 on the S&P is the line in the sand that they desperately want to defend. As long as we stay above that, there's a chance for an upside rally on any given day. I'd be cautious around the 2,160 level because that should act as an upside resistance.

This should end up being an incredibly interesting week.