This Week in Barrons – 12-18-2016:
“Virginia - Is there really a Santa Claus rally?”… Francis Pharcellus
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?
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.
- 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.
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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