This Week in Barrons – 10-16-2016:
“The U.S. dollar is taking no prisoners.”
The dollar index continues to climb higher, and that has ominous implications for the stock market. The firing of a daily ‘squeeze’ has taken the dollar index from 94 to 98 in a very short period of time. The weekly and monthly ‘squeezes’ still waiting to fire, give us a recipe for continued dollar strength relative to all of the other currencies. The last time a monthly ‘squeeze’ fired (2 years ago) we gained 20 points. Therefore, when this one fires it could be a disaster for a lot of currency markets – taking down the Canadian Dollar, Australian Dollar, Euro, and British Pound to name a few. Commodity prices will also be trashed, and a lot of industries depend upon stable commodity prices such as food, oil and mining. Gold is a little dicey because as uncertainty increases – so does the price of gold. But to be safe, buy gold in Euros – because the Euro will go down faster than the price of gold. A cheaper currency is good for many places including the European Union – because it makes their exports ‘cheaper’ in U.S. dollars. The real issue is ‘emerging economies’ where they still pay their debts in U.S. dollars. With the value of the dollar rising, they will need to pay more in their local currency to equal the same number of U.S. dollars. It’s similar to having an adjustable rate mortgage in a rising interest rate environment. So a significantly stronger dollar will destroy emerging economies.
One reason for the dollar moving higher is that the market is adjusting to a December FED interest rate increase. Interest rate moves happen over decades, and as rates rise – bond prices fall. This trend is reflected on the graph below showing bond prices since 2008.
For the last couple of decades, rates have been steadily moving lower – all the while bond prices have increased. The good news is that bonds will predict catastrophic failure (before it is reflected in the economy) by taking out the trend line shown on the graph. The bonds and dollar move conversely – that is to say as the dollar increases in value the bonds will go lower. Therefore, when the dollar explodes higher, bonds will break the trend line, and that will foretell increased market volatility.
Rick Santelli of CNBC remarked: “It’s incredible for me to think that there have been 100 FED meetings and only one rate increase”. SF suggested that our FED could even be monitoring the wrong elements. Rather than measuring elements that include ‘fictitious adjustments’ – why not simply report only the real numbers and allow our experts to draw their own conclusions. For example: on Friday the retail sales number came in much LOWER than expected; however, an undisclosed ‘seasonal adjustment’ turned this disaster into a 0.6% GAIN.
The second reason that the dollar is moving higher is that major sovereign wealth funds are experiencing a ‘lack of confidence’. The U.S. is the most ‘liquid’ market in the world; therefore, if you’re in charge of a $100B sovereign wealth fund, you need to have some of your fund invested in the U.S. With the current ‘lack of confidence’ and the currency unwinding that is going on, the dollar is going higher simply because there is nowhere else to hide. Wealth funds are simply buying dollars due to their low-risk and high liquidity.
The dollar exploding higher exposes stock market risk. With Amazon rising from $34.68 in 2009 to $824 today and Google moving from $123 in 2009 to $804 today – there is a legitimate question of how much higher can these stocks go? A higher dollar hurts U.S. stocks because companies will not be able to sell their goods and services overseas (due to their higher prices) – causing revenues and profits to decline. The higher dollar will also reinforce an exodus in U.S. manufacturing.
Ms. Yellen, just ask yourself a simple question: Are U.S. tax revenues covering government spending (yes/no)? If the answer is ‘yes’ – then raise interest rates (which will naturally slow down the economy). If the answer is ‘no’ (our tax revenues do not even come close to covering government spending) – then how can you raise rates? The good news is that all of the numbers are regularly on display at: http://www.usdebtclock.org.
“The market’s momentum & fundamentals are gone – it’s just a leap of faith”
We all know that the real reason that this market hasn’t fallen apart is due to our friendly Central Banksters. It’s no longer rumor that the Swiss National Bank owns $80B+ of U.S. stocks, or that the Japanese Government owns over 50% of all stocks on the Japanese exchange. Central Banksters are in a unique position of being able to print money out of thin air, and use it to buy up futures and stocks. A well-timed futures buy (using a few billion in ‘funny money’) can turn a falling market into a roaring blast higher.
Tuesday we saw earnings warnings from Alcoa, Wal-Mart and Honeywell. The market fell under the S&P’s 2144 support level and through 2140. The last bastion of hope was the lower end ‘trend line’ of 2135, and we lost that on Friday. This is a clear signal that this market is tired. It's been jabbed with cattle prods for months. Each time that it weakens, it is forced higher on the low volume Central Bankster strategic buys. It desperately wants to correct. But because it’s been propped it up for so long, any time it looks ready to fail – everyone is looking for the Central Banksters to step in and save it. I don't trust this market at all. Technically losing 2135 on a closing basis means that we're going to see 2120 soon. Lose that and its 2100, and probably much lower. On the upside, we need to see them get past 2145 on a closing basis for me to think there's any chance of stringing a few up days together. But non-spectacular earnings coupled with a FED rate hike in December all but guarantee a ‘toxic sludge combo platter’.
But what about the election? Once the election is over, our Central Banksters do NOT have to keep the market UP any longer. If Trump were to win, the market could fall like a rock – sending a message to all that Trump's ideas are all wrong. But what if Hillary wins? I think that the Central Banksters will no longer go out of their way to hold the market up, and will allow a prolonged melt down. The U.S. suffers from ‘normalcy bias’ – the idea that since nothing bad has happened – it won’t.
On Friday the SEC's 2a-7 rule went into effect. The timing of this is interesting as it is a post-2008 ruling that effects what happens to money market funds when a lot of people would like to withdraw their funds at the same time. Money market funds are mandated to keep their NAV (Net Asset Value) at par ($1 = 1 share). This can be difficult on a large scale – especially in this negative interest rate environment. Fending off too many people trying to withdraw their money will create enormous stresses on the system. This new rule allows the NAV to ‘float’ which ultimately means that money invested in a money market fund could actually lose value. The whole reason people park money in money market funds is because it is safe. But wait, it gets worse. The rule states that in “times of excess stress” funds can HALT redemptions completely for 10 days. CFO’s are already moving their money into Government treasuries – that are NOT subject to the new rule including the redemption halt rule.
For J. Q. Public, who utilizes a money market as a part of his 401k strategy – the most important element of that money market fund now becomes LIQUIDITY. For example: if you’re a fund manager running 401K's for 5,000 companies – in the past you could utilize any money market fund because they were all simply required to meet the NAV test. With a floating NAV, it would be easy for a particular money market fund to throw up the ‘halt redemption’ sign, and keep people from getting their money for a period of 10 days. So liquidity becomes the most important test.
The timing of this rule is interesting to me along with it being another way to get more people to buy into Government treasuries. I wouldn't be terribly nervous, except that it is just one more in a long string of reasons why our financial system is creaking and groaning.
Make a New Year’s Eve resolution to review: http://www.usdebtclock.org on a regular basis. An interesting figure is that Total Unfunded US Liabilities (including Social Security, Medicare Parts A, B and D, Federal Debts held by the Public, and Federal and VA Benefits) currently exceed $103.8 Trillion.
I continue to get questions on gold and silver. Allow me to take another view of this from a more technical perspective known as the ‘Elliot Wave Theory’. I recognize that there are appropriate times to buy gold and silver and appropriate times to sell it. Right now, I believe we are being given another low-risk opportunity to buy gold mining stocks and potentially double our investment again over the next year. By using the VanEck Vectors Gold Miners ETF (GDX) as the representative chart for this market, I view the rally off the lows earlier this year as the 1st Wave in the initial phase of a new bull market. That would mean this current pullback would be classified as a Wave #2. Targets for these second waves are often the .500-.618 retracement region of the prior Wave 1 rally. That places our GDX bottoming region between $19.80 and $22.10. We are currently at 22.99. As long as this 19.80 to 22.10 region holds as support, I am looking for Wave #3 to take GDX to at least the $51 region over the next year, with the potential to even extend toward the $60 region. This ‘technical’ theory deals in probabilities rather than absolutes. Therefore, the first test the market must pass is to have GDX remain over $19.80 for the next 10 days. Any break down below that region significantly lowers the probabilities for this pattern set up. However, if we do hold that support, and strongly break out over the August highs, the probabilities increase that we will be heading over $50 quite quickly. So, rather than listening to the news or theories about the election, approach the market from using probabilities – so that you can make the appropriate investment decision once you see how the market reacts over the next 10 days.
From a more fundamental view there are a couple things you could do. (a) You can sell your $20k investment for $70k and walk away with a smile and a $50k profit. Or (b) examine the news:
- Last week we had gold go down due to a billion-dollar paper gold flush – perfectly timed for when the Chinese gold exchange was closed.
- Physical silver demand continues to out-pace supply – especially with the continued emphasis on cell phones and solar energy.
- ‘Silver stackers’ continue to buy silver eagles and bars, and supply-demand situation is actively engaged in a tug-of-war with the higher dollar.
- The world is shifting away from the U.S. dollar as its reserve currency to the SDR. China has been allowed into the SDR, and at some point I expect them to begin backing a small percentage of their Yuan with gold. Once they do that, there will be a mad scramble for gold – because it will have the legitimacy of becoming ‘money’ again.
- FXE – November Puts (bet on the Euro moving lower),
- NVDA – look for a move from 65 to 69,
o ‘Short term’ should continue to move higher simply due to the over concerns of supply and demand.
o When oil gets between $55 and $60 per barrel, it will become more impacted by the dollar.
- With the impending Rate Hike:
o Financials should rally,
o Bonds should continue to roll-over and die,
o The U.S. Dollar should move higher,
o Tech stocks look tired, and
o Consumer stocks like Starbucks and Disney – look stronger to the downside due to higher oil prices.
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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