This Week in Barrons –
11-27-2016:
Thoughts:
Remember when:
-
Everyone thought
BrExit would never happen,
-
That the Chicago
Cubs would never win the World Series, and
-
The Donald would
never be elected as U.S. President?
The good news is you’re not
alone, as most of the betting parlors got it wrong as well. The bad news is that many people have not put
this event behind them. Police officers
are being shot by ‘distraught’ Hillary fans.
Corporate CEOs are being fired for saying that they are going to KILL
Trump. And just this week Jill Stein
(the Green Party’s nominee for President) announced that she had raised $5m to
recount the ballot boxes in Wisconsin, Michigan and Pennsylvania.
When Trump won, my very
first thought was: “This ain’t over". I remember when Jill Stein (on
October 12th) said: “A vote for Hillary is a vote for
War". I guess that Ms. Stein
(within a couple weeks) went from being afraid of Hillary – to praising
her. She also put up a web site,
proclaimed that the voting machines were hacked, and raised enough money to
recount the votes in 3 states.
If they ‘find’ an extra
couple hundred thousand ballots for Hillary, can they actually pull the win
away from Trump? I don’t know that
process, but it certainly looks like they're going to try. And what about
the financial ramifications? After all,
the market has been soaring on the idea of Trump cutting taxes and raising
infrastructure spending. Hillary wanted
to RAISE taxes. I think if the election
results were reversed, we would see a 20% market pullback – eliminating all of
the post-election gains and then some.
I'm not saying that this is going to happen, but the website, the
donations, and the hard push from the left to take back the country are all
real.
Maybe this will all fizzle
out and calmer heads will prevail, but with $5 million being raised in a couple
weeks to meet the requirements – this is pretty scary stuff.
The Market...
As SF reminded me:
-
The US economy
and inflation have grown an average of 2% per year for the past 16 years. Unfortunately, our debt has risen almost 350%
faster than our economy – at a 6.8% annual rate.
-
Under President
Obama, Government debt levels have doubled, unfunded liabilities are over $100
Trillion, and our debt to GDP ratio has grown to almost 121%.
-
Private and
business debt is over $67 Trillion, and over 400% of GDP.
-
And lest we
forget, out of the 300M total U.S. population: 95M are missing from the labor
force, 2M people are in prison, 43M are living in poverty and receiving food
stamps, 57M are Medicare enrollees, 73M are Medicaid recipients, and 31M are
still without health insurance. Source: www.usdebtclock.org
All of this debt is
unsustainable, and can’t be paid back.
The American people want: jobs, tax cuts, a balanced budget, low-cost
education, and universal healthcare. But
it’s not clear how we cut taxes and achieve a balanced budget. Or how we increase the defense budget,
maintain Medicare and Social Security, and address healthcare, welfare and
immigration – without boosting our debt to ridiculous levels.
After all, Trump is
proposing to cut the corporate tax rate from 35% to 15%. But corporations (with deductions) already
average around a 17% tax rate. So, going
from 17% to 15% will not make all that much of a difference in corporate
earnings. This is especially true given
the fact that corporate earnings (since 2012) have only grown by 2.6% per year,
and Wall Street (using current stock prices) is projecting a 2017 earnings
growth rate of over 20%. Excuse me, but
I really don’t see anything close to 20% earnings growth in the 9th
year of an economic expansion, with the dollar strengthening, and inflation
rising.
Trump also promises massive
increases in infrastructure and military spending. Thanks to Chris Wiles of Rockhaven Capital
Management for putting together the following graphics showing how $2.63
Trillion of ‘Mandatory Programs’ will be allocated. And since Trump didn’t mention any cuts, it’s
safe to say that this pie isn't decreasing any time soon.
And then there is Trump’s
$1.15 Trillion budget for ‘Discretionary Programs’. The military accounts for 54% of
discretionary spending, and if that increases along with infrastructure
spending – it’s safe to assume that the entire ‘discretionary’ spending pie
will also get larger.
The current budget deficit
is about $616B, and will only grow larger with increased spending and
additional tax cuts. Oh, let’s not
forget that interest rates are
beginning to rise.
As for the immediate stock
market direction, what in the world is going on? How long will this ‘low volume – melt-up’
continue? The market is moving higher
strictly on the ‘hopium’ of Trump creating a monetary explosion. Day
after day, the volume of stock market transactions goes down, all the while
stocks are moving higher. A healthy
market has stocks moving higher on increasing volume – showing the world that
more and more people are bidding and coming into the marketplace. Stocks moving higher on lower volume, means
that people continuing to leave the party.
Some red flags to this market are:
-
The markets have
broken through major resistance levels and moved higher - institutional
participation has been lacking.
-
Excessive
bullishness by the financial media.
-
Retail investors
are becoming more bullish, and are beginning to chase an already over-bought
market. Historically this is a sign that
the end is near.
-
The Dow Jones
Industrial Average has risen too high too fast – signaling a ‘blow off top’.
-
The smashing of
bonds (as yields spike) along with the continued pullback in gold, and emerging
markets is a huge red flag.
-
And FED
Chairperson Janet Yellen making it clear that she will raise rates in December
– should serve as a large dose of caution to the markets.
Veteran trader Mark Cook
sees the market moving higher from here, but not by much. “I think we are going to see a lot of
inflation. The way that Trump is wired
is that inflation is beneficial. The
stock market doesn’t like inflation.
During the Reagan years, after the election there was a huge rally, only
to go down substantially once he got into office. The table is set for quite a correction for
2017.” And a well-known market
forecaster Tom DeMark is predicting
as much as an 11% decline for the S&P: “If there is going
to be a plunge, it should happen within the next two or three weeks.”
There was supposed to be an
OPEC meeting on November 30th that would include some non-OPEC
nations as well. They were trying to
(once again) get some oil production cuts in place – in order to push oil
prices higher. As recently as today,
Saudi Arabia suggested that the meeting may be on hold as they make sure that
all of their own OPEC members are on board with the production cuts. I suggest that even with Iraq and Iran
balking at the idea, we will get some sort of a deal this week. This OPEC announced deal should strengthen
the oil market, and extending the overall market ‘melt up’. If the meeting does not happen, then oil will
fade and put a dent in the mindless romp higher.
Also, the impending voter
recount in 3 states could derail the markets.
The last situation that
could put a pause in the markets is the December 14th FOMC meeting. At this meeting, the FED will announce that
they will raise interest rates ¼ of a point.
I fear the ‘buy the rumor, sell the news’ scenario. In other words, even though a rate increase
is widely expected – I’m looking for the markets to pullback when the FED
actually does it.
One thing is certain, just
14 sessions ago the S&P stood at 2083 – barely hanging on to its 50-day
moving average. Friday, we closed 130
points higher at 2213. That pace reminds me of 1999, and NO it can’t go
on forever. So, if OPEC announces a deal
on November 30th, our market will climb higher, and I would start to
lighten up ahead of the FED meeting on the 14th of December. If OPEC does NOT come away with a deal, I
would begin to lighten up, and want to be out of almost all trades by the time
the FED meeting rolls around.
Tips:
History tells us that every
single time for the past 100 years, whenever there has been a change from a
2-term President – the economy fell into a recession 6 to 12 months
later. History also tells us that every single U.S. recession (except for
one with explainable circumstances) occurred around an election. So, between the history of revolving
Presidents, and the that fact that only 1 time has the market run for longer
than this current expansion – odds say that this isn't a new leg higher, but
rather a blow off top and the beginning of a market decline.
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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