This Week in Barrons –
12-18-2016:
“Virginia - Is there really a Santa Claus rally?”…
Francis Pharcellus
Thoughts:
I have never seen a time
when:
-
Our FED has kept
short-term interest rates at 0% for 8 years,
-
German and
Japanese bonds have traded at negative yields,
-
Our 10-year
Treasury yields have DOUBLED in less than 6 months,
-
The Chinese
readily admit to stealing a U.S. Navy underwater drone,
-
Our President
blames another nation for election tampering, and vows to get even,
-
Our
President-elect is getting this much pushback,
-
The battle
between white-hats & black-hats within the CIA, FBI, and NSA is so open,
-
And our electors
are getting 4,000 e-mails a day asking them to toss the election to Hillary?
Last Friday, the White House
gave a live press briefing covering their beliefs on Russia’s tampering with
our Presidential election, and how they are going to retaliate. This is alarming because it is NOT some
alternative news site writing a blog post, but rather our CIA and White House
vowing retaliation. This wasn't even something designed to make Donald
Trump look bad. On the contrary, there
is something going on here. After all, our markets were supposed to
crash:
-
When BrExit hit
– but within days we were at all-time highs,
-
When Trump won
the Presidency – instead we made new highs, and
-
When Italy voted
NO – but we proceeded to hit another all-time high.
The level of uncertainty
surrounding what and who to believe is higher than when Lehman Brothers
collapsed, and as high as it was immediately following 9/11.
I understand that the rally
in equities has been inspired by pro-business proposals from President-elect
Trump – including tax cuts and looser regulations. These proposals are expected to stimulate
economic growth, increase interest rates (and inflation), and push bond yields
past their 2014 highs. Some experts are
even comparing Donald Trump to Ronald Reagan.
And while their incoming policies may bear a strong resemblance –
unfortunately the economy and the markets they inherited are vastly
different. The table below is courtesy of Mike Underhill of Capital
Innovations:
As we morph from a
governmental run society, back to a more business focused one – realize that
the role of our Central Banksters will decline, and capitalism / freedom will be
rejuvenated. However, along with this
rejuvenation comes a much wider range of potential outcomes, and a much larger
band of uncertainty. This range wouldn't be so bothersome if we weren't
already in the seventh year of an economic recovery, the stock market wasn’t at
all-time highs, and interest rates weren’t coming off seven and a half year
lows.
Santa – let’s put that rally
on hold for the time being, shall we?
The Market:
Historically speaking the
week before Christmas generally sees relaxed, downward action in the
markets. After that, we often get a
Santa Claus rally from the day after Christmas into the first week of
January. Our last December rate increase (2015) caused a market sell-off
that lasted well into February 2016. I think that January and February
2017 selling makes sense as well, but with a twist. I think (with these last remaining weeks) we
nurse the market toward DOW 20k into the New Year. And then I suspect that once the DOW gets its
20k hat, we will see a rotation out of the DOW and S&P and into the
NASDAQ.
DoubleLine Capital's Jeff Gundlach is calling for the market fall to begin around Inauguration Day (Jan. 20)). He also cautions that a 10-year
Treasury yield in the 2.75% to 3% area – would create problems in the financial
and liquidity arenas.
Many pundits are calling for
precious metals, and healthcare to be the highest performing sectors in
2017. The reasons for a rise in precious
metals include:
-
Inflation: U.S. and Chinese policies will cause
inflation, and result in fund flows into gold.
If President-elect Donald Trump cuts taxes, adds an estimated $7.2T to
the federal debt, promotes additional spending on Social Security,
Medicare/Medicaid, and infrastructure – higher inflation will follow. The Chinese have initiated spending $2T on
infrastructure, and in the past 3 months’ zinc and copper prices have risen by
25%.
-
Demand: In 2017, Chinese and Indian jewelry demand
will continue to recover. Jewelry demand
was weak in 2016 due to several non-repeatable factors: (a) curbs placed on
Chinese gold imports, (b) tax hikes on Indian gold imports, and (c) a currency
conversion crisis in India. Hong Kong
retailers are already reporting a 25% rise in gold jewelry sales.
-
Price: The paper price will have to come closer to
the physical price for gold. Two weeks
ago, the price for a physical ounce of gold in India was $3,000 / ounce (vs.
the $1,200 paper price). The physical
price of an ounce of gold is currently $50 higher than the paper price on the
Shanghai gold exchange. These will
converge over the coming weeks.
On the equities side of
things, nobody is wearing the DOW 20k hat just yet, but it’s not from lack of
trying. The markets have tried three
times this week to get up and over 20k, but each time reality came into
play. For example, Honeywell and other
large industrials warned that their earnings were going to miss estimates, and
then guided their earnings estimates lower for the next several quarters.
I think we will see DOW 20k
sometime after Christmas, and before the second week of January. However, when we hit 20k – I will begin to
short this market. Earnings season
starts January 11th, and the reality surrounding our economy will
begin to sink in. This hopium rally has
been fun, but I think we will see quite the correction.
To all, I wish you the very
best Christmas. Enjoy the season, your
families – and the feelings that they bring.
Tips:
- Bank of America (BAC): A month ago BAC was trading at $17. It has experienced a 35% move higher (to $23) over the past month. The stock is expected to move at most $1.80 (either higher or lower) over the next 30 days. BAC’s $6 (3 standard deviations) move over the past 30 days had a less than 1% chance of statistically occurring. I’m looking for a decline in BAC, and am buying the (Delta 90) January $25 PUT options or the February $26 PUT options. In either of these cases, the risk vs reward is dramatically in your favor.
- 10-Year Treasury Notes (TXN): The interest rate on the U.S. 10-Year Treasury note (TXN) is currently 2.61%. Over the past several weeks our bonds (/TN) have been sold hard, and recently the seller has surfaced. The seller is China. Japan is now our largest international U.S. Bond holder. The interesting part of the story is that the Chinese sold our U.S. bonds (right after the election) to support their own currency, pay off their own debts, and plug holes in their own banking system. They are NOT buying U.S. stocks with those funds. Bonds are ‘ripe’ for a bounce here, and if we get that bounce in bonds – look for stocks to stop moving higher.
- DOW Transports ($DJT): The DOW transports have rallied from 8,000 to 9,500 in the past 30 days – and what has changed in transportation? Nothing. As the transports begin to pull back (and they started last week), they often act as a leading indicator for the general stock market.
R.F. Culbertson
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!
Disclaimer:
Expressed thoughts proffered
within the BARRONS REPORT, a Private and free weekly economic newsletter, are
those of noted entrepreneur, professor and author, R.F. Culbertson,
contributing sources and those he interviews. You can learn more and
get your free subscription by visiting: <http://rfcfinancialnews.blogspot.com>.
Please write to Mr.
Culbertson at: <rfc@culbertsons.com>
to inform him of any reproductions, including when and where copy will be
reproduced. You may use in complete form or, if quoting in brief, reference
<rfcfinancialnews.blogspot.com>.
If you'd like to view RF's
actual stock trades - and see more of his thoughts - please feel free to sign
up as a Twitter follower - "taylorpamm" is the handle.
If you'd like to see RF in
action - teaching people about investing - please feel free to view the TED
talk that he gave on Fearless Investing: http://www.youtube.com/watch?v=K2Z9I_6ciH0
To unsubscribe please refer
to the bottom of the email.
Views expressed are provided
for information purposes only and should not be construed in any way as an
offer, an endorsement, or inducement to invest and is not in any way a
testimony of, or associated with Mr. Culbertson's other firms or
associations. Mr. Culbertson and related parties are not registered
and licensed brokers. This message may contain information that is
confidential or privileged and is intended only for the individual or entity
named above and does not constitute an offer for or advice about any
alternative investment product. Such advice can only be made when accompanied
by a prospectus or similar offering document. Past performance is
not indicative of future performance. Please make sure to review important
disclosures at the end of each article.
Note: Joining BARRONS REPORT
is not an offering for any investment. It represents only the opinions of RF
Culbertson and Associates.
PAST RESULTS ARE NOT INDICATIVE
OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN
WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS
(INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE
FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE
RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS
AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING
INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Alternative investment
performance can be volatile. An investor could lose all or a substantial amount
of his or her investment. Often, alternative investment fund and account
managers have total trading authority over their funds or accounts; the use of
a single advisor applying generally similar trading programs could mean lack of
diversification and, consequently, higher risk. There is often no secondary
market for an investor's interest in alternative investments, and none is
expected to develop.
All material presented
herein is believed to be reliable but we cannot attest to its accuracy.
Opinions expressed in these reports may change without prior notice. Culbertson
and/or the staff may or may not have investments in any funds cited above.
No comments:
Post a Comment