This Week in Barrons – 10-9-2016:
Asset managers are killing themselves for returns … Chris Wiles @ Rockhaven Capital
What if the FED secretly wanted to eliminate ALL of the ‘active’ asset managers and hedge funds? Moves by our FED to eliminate the natural business cycles (recessions) through asset inflation – making stock selection and asset allocation less relevant – make more sense. It’s an easy playbook: a) lower rates, b) trigger a reach for yield, c) cause a rise in asset prices, and then d) wait for the ‘wealth effect’ which will rebuild corporate balance sheets and reignite our animal spirits.
But if it were that simple, then why (after 90+ months of zero interest rates) is GDP growth being lowered to 1.6%, and growth in corporate earnings and productivity still negative? Unfortunately, growth is not measured in stock prices, but rather by innovation, and by the ability to manufacture and deliver goods more efficiently. Hedge funds and ‘active’ investment managers have always played key roles in this process by allocating capital to those successful firms, and limiting the capital flowing to the unsuccessful. This is the basis of capitalism. Our FED’s model not only ignores these creative/destructive forces, but works against them. For example: if you doubled the value of all of the homes in the U.S. overnight – you would not increase productivity. In fact, you just reduced the incentive for any home owner to improve their property if they know that it’s value will double without any additional investment or care.
Unfortunately, this may get worse before it gets better. Ms. Yellen, in her talk last Thursday said: “It could be useful if the FED had the power to actually buy corporate stocks and bonds.” Spoken like a true central monetary planner. Obviously our FED’s efforts are not working, so in her mind – we need to do MORE of the same. It’s like she doesn’t even realize that she’s ripping the heart out of the capitalistic machine – or does she?
On another front, why are 40 million Russians currently going through disaster preparation drills?
- It started when the U.S. wanted Syrian President Bashar Assad out of power because Syria (a Russian ally) refused to allow QATAR to run a natural gas pipeline over their land in order to supply natural gas to Europe – thereby eliminating Russia from supplying their energy.
- The media called Assad a "ruthless dictator who abused his people."
- Qatar & Saudi Arabia funded mercenaries to make it look like a ‘civil war’.
- Assad asked Russia for help, and Russia sent in equipment & troops.
- Russia uncovered terror groups (ISIS and Al-Qaida) earning $100m/month stealing and transporting stolen oil from Syria into Turkey and selling it.
- Russia stopped the terror groups by bombing the convoys carrying the stolen oil, but this also limited the profits of certain Turkish government officials including Turkish President Erdogan.
- U.S. aid continued to flow to the ‘rebels’ in the effort to overthrow Assad, until it was made public that the ‘rebels’ the U.S. was funding were actually ISIS and Al-Qaida terrorists.
- When that news hit, the U.S. stepped up its response, and had coalition aircraft attack the Syrian Army, killing 62 and wounding 100.
- The U.S. claimed that the attack was a mistake, but when the Russians called an emergency meeting of the UN Security Council – without any explanation, U.S. Ambassador Samantha Powers simply walked out.
- Russia then publicly stated: "We have come to the terrifying conclusion, that the U.S. is actually supporting the ISIS terrorists."
- Russia attacked a well-known Terrorist Operations Center. Among the dead terrorists were three dozen uniformed military officers from the United States and Turkey. What were uniformed officers doing inside a Terrorist Operations Center?
- Shortly thereafter the Syrian army reclaimed their largest city Aleppo – due in large part to air support provided by Russia.
- The U.S. (sensing a complete failure in their efforts to oust Assad), told Russia to stop or it would cut-off cooperation.
- Yesterday the U.S. cut-off diplomatic cooperation with Russia, and is now allegedly planning an outright military attack to achieve its goal of ousting Syrian President Assad.
- In response, Russia has moved its S-300v4 surface-to-air missile defense system into Syria. This means that Russia can effectively ground all US aircraft operating in Syria simply by turning-on the S-300v4 system.
- Most recently, Poland and Romania became home to U.S. missile defense systems designed to shoot missiles out of the sky.
- U.S. / NATO said the systems are there to protect against launches from Iran. Unfortunately, the radar stations are aimed east / northeast at Russia instead of south/ southeast at Iran.
- Russia made clear that if those missile defense systems went active in Romania and Poland, Russia would take action.
- The U.S. / NATO made the systems active two weeks ago.
- Remember, Russia was asked to help Syria, and has permission from the Syrian government to be in that country.
- The U.S. did not ask for permission, and does not have it.
- The U.S. does not have a declaration of war OR any authorization for the use of military force by Congress.
- The U.S. does not have a UN Security Council resolution to be in Syria.
This highlights why Syria is so dangerous. We are one downed jet or one tactical nuke away from a war with a nation that we do not want to be at war with. Putin is regularly attacked by the media and by Hillary. Heck, the DNC blames their hack on Putin. That’s what is called ‘carpet bombing’ the people into believing that the "U.S. is good, and Russia is bad." We live in dangerous times. Let’s hope calmer heads will prevail.
- U.S. economic growth was again revised downward to only 1.6% for 2016.
- Corporate earnings are set to decline for the 6th straight quarter.
- The Shiller 10-year P/E is 26.7x, and price-to-sales levels are comparable to 1999 – right before the recession.
- Honeywell, PPG and Wal-Mart all warned of lower sales. And when Wal-Mart can’t do well – no one can do well.
- Currently 33% of the worlds sovereign debt ($12T) is under a negative yield condition. FYI there is a strong argument to be made that negative interest rates are deflationary.
- Construction spending fell into contraction for the first time in 5 yrs.
- Last week we were told that the U.S. had agreed to cut the fine against Deutsche Bank (DB) to $5B from $14B. The problem however is that they didn't even start negotiations, and the rumor was floated simply to stop a market collapse.
I’m seeing this a lot, whenever the S&P’s get to 2144 – something happens to change its direction. On September 29th the low of the day was 2145. On October 4th we put in a low of 2144. Last Thursday we tried to come out of the gate green, but still fell right to the 2144 level. On Friday we were on our way to a pretty ugly session with the S&P’s down 12 to that 2144 level, but then buying started and we ended the day at 2153. Clearly the line in the sand is 2144, followed by 2140.
Call me crazy, but whenever the market is soggy and looking like it's finally going to roll over – the Central Banksters rush in with money and/or rumors or both. They don't try and shoot for all-time highs any more, they're just happy moving the market sideways in a range between 2144 and 2170. I can give you 200 reasons why the lower limit should be broken, but I can only give you 1 reason why this market should push higher. But that one reason is a big one – the fact that every Central Bankster is buying stock to save the world from recession.
This week I received many questions about gold. Jason Goepfert (President of Sundial Capital Research) said: “When gold is trading above its 200-day average, it advances at an annualized rate of 12.7%.” Gold briefly dipped below its 200-day moving average last week and Goepfert found: “When this happened 50% of the time it led to a protracted bear market in the metal. But in the other 50% of the occurrences – it led to almost immediate, and sustained, gains as we can see from the table below.” So the good news is that we will know the answer to the gold dilemma very soon.
Finally, on Friday a 2005 video was released showing Donald Trump bragging about how being a star made it easy for him to ‘make moves’ on women. The language got a little ‘salty’, and the democrats went crazy condemning it. At virtually the same time, ‘hackers’ released thousands of emails from Hillary's campaign manager and from her Wall Street talks. In them was more proof of:
- Her selling ‘pay for play’,
- Her calling half the nation functional illiterates, and
- Her making it clear that gun manufacturers should be held liable for anything that their owners did.
On one hand we have an 11-year-old tape of ‘Donald the Playboy Trump’ getting caught talking locker room trash, and on the other we have Hillary "I’ve never sent or received a confidential email" Clinton being deceitful and downright scary. The ‘Establishment’ wants no part of Trump. The ‘Deplorables’ want Trump no matter what. It’s possible that Wall street looks at this last Donald event as proof Hillary will win, and they rally the market this week. But there's still no trend. Big up days are followed by two more days of selling. Sitting quietly or day-trading is the only game in town until a trend establishes itself. Be careful.
I also received a lot of e-mail surrounding my AG and NDG stock picks. I recommended purchasing AG back at $3 per share. Today AG is $8 per share, but recently was as high as $20 per share. And at $20 per share, an initial investment of $20k had turned into $240k. But AG (like the rest of the miners) had gone up too high – too fast, and was overdue for a correction. But I did not think that the mining sector would fall below its 200-day moving average. A large part of this mining ‘shake-out’ was as a result of what was going on in the currency markets. Between the Japanese yen and the British pound sterling, gold has fallen below $1,300 per ounce. On the trade, we are still up about 270% for the year – so don’t go jumping out of any open windows just yet. I fear that there will be a post-election pull-back, and that Hillary (the presumed winner) will push us into a war with Russia over Libya, Iraq, or Syria. For all of those reasons, precious metals continue look attractive to me on a fundamental basis. But maybe the world erupts into unicorns and puppies, the global recovery takes hold, and gold and silver sink back to their lows. If you’re still in the play:
- And AG remains below its 200-day moving average, then cash in half – let the other half run – playing with the house’s money.
- If Gold bounces and follows the emerging markets higher (as the above chart suggests) – stay in and hold on for a wild ride.
As far as NGD goes, Gold is currently trading at $1,259 per ounce, and traders are saying that the line in the sand for Gold is $1252. A close below $1,252 and $1,100 could be right around the corner – causing me to get out of the NGD position.
I’m going to continue to nibble on: AG, AUY, CDE, FCX, FFMGF, FSM, HL, NGD, PAAS, PGLC and SAND – knowing that they could have a little more downside until moving higher.
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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