This Week in Barrons – 9-18-2016:
UberX – the newest self-driving car system launched in Pittsburgh, PA this week.
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.
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 21st, 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:
- 1st, 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.”
- 2nd, it would give our FED the ability to NOT look like Obama's pet. And
- 3rd, 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.
The pinning plays worked beautifully on AAPL, FB, TSLA, NFLX, and BABA. Currently I’m out of everything except gold, silver and oil – awaiting FED resolution Wednesday.
- 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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