This
Week in Barrons – 3-26-2017:
“What we’ve got here is… a Failure to Communicate”
… Warden – Cool Hand Luke
The parallels between the film ‘Cool Hand
Luke’ and the drama that played out between President Trump and his Republican
partners in the U.S. House of Representatives last week was uncanny. For those of you who don’t know the movie,
‘Cool Hand Luke’ was an anti-establishment film which was shot during the
Vietnam War era, in which Paul Newman’s character (Luke) endures physical
punishment, psychological cruelty, and complete hopelessness. Luke refuses to observe the established
pecking order among prisoners, and quickly runs afoul of the prison
leadership. Luke is constantly
outmatched by a much larger opponent, but his tenacity and perseverance earn
him the respect of the prisoners and eventually the guards. Luke continues to confront ‘the Man’, and his
sense of humor and independence prove to be both infectious and inspiring to
the other prisoners. Luke’s struggle for
supremacy peaks when he leads a work crew in a seemingly impossible but
successful effort to complete a road-paving project in less than one day. In a fit of anger, the Warden has Luke fitted
with leg-irons and delivers a warning speech to the other inmates, explaining:
“What we’ve got here is a failure to communicate. Some men you just can’t reach. I don’t like it any more than you.”
I sat patiently on Friday as President Trump
(the Warden) cancelled his healthcare bill in the 11th hour. He played his ‘game of chicken’ with the
‘Lukes’ of the Republican party – and he lost.
Trump then proceeded to point fingers and cast blame at everyone except
himself – which tells me that we will see this behavior again. Someone needs to inform President Trump,
there are 3 C’s in any management style: consideration, co-operation, and
communication. At last count, he’s
definitely missing 2 out of 3 – and the remaining one is a bit suspect.
As the movie progresses, Luke continues to
go outside the bounds of the Warden’s acceptable behavior, and more prisoners
begin to live vicariously through Luke.
At the end of the movie, Luke dies – but the Warden is also
replaced. So Donald, you’re on the road
to success – if you’re trying to single-handedly rejuvenate the Democratic
party and get yourself impeached along the way.
But understand your failure is not only due to substance, but also due
to your lack of consideration, co-operation, and communication.
Let’s discuss for a minute the elephant in
the room – health insurance. Admittedly,
I know enough about insurance to be dangerous.
I have automobile insurance. In
case of an ‘unforeseen’ event (accident), the insurance kicks in and pays for
the issue. But here’s the catch. If I don’t maintain the car, and the oil
levels get too low and I blow-up the engine – my insurance does nothing. My insurance is there to cover unexpected
events such as accidents – it is NOT there to cover any maintenance items such
as: tires, gasoline, water pumps, etc.
It is insurance, and it's at a very reasonably priced.
And then there is ‘health insurance’ which
really isn’t insurance but more like an ‘extended service contract’ that I
would purchase on my car to extend the manufacturer’s bumper to bumper
warranty. I differentiate insurance from
an extended warranty. Webster’s online dictionary defines insurance as: “An
agreement in which a person makes regular payments to a company, and the
company promises to pay money if the person is injured or dies, or to pay money
equal to the value of something (such as a house or car) if it is damaged,
lost, or stolen.” So, it’s obvious to me that on the
healthcare side of things – we’re potentially defining ‘insurance’ the wrong
way. I also tend to think that we
seem to want ‘society’ to pay for our health maintenance rather than just our
injuries. It seems to me that the reason that health insurance is so
expensive is because we're using it for maintenance – instead of its initial
job of just getting you through an unexpected event like a broken leg or a
surgery.
To use a child analogy, I have 2 children
and as babies they both needed a ton of check-ups and shots. Every time my wife and I would take them to
the pediatrician’s office, we would hand them our insurance card, and the
insurance company would pay most if not all the costs. Looking back I ask myself, why is insurance
paying for those ‘maintenance’ items – rather than focusing on making a better
solution for the event / emergency (ER) conditions? Currently healthcare is being thought about
as a complete ‘bumper to bumper’ forever warranty surrounding anything that can
happen in your life. What if we
separated health insurance into 2 buckets: events and extended warranty? Would we encourage more choice, lower costs,
and improved quality of life? After all,
the latest healthcare bill lacked both style and substance because it tried to
do too much. Wouldn’t it be a novel idea
to ‘repeal and replace’ with something that made a lot more common sense?
The Markets:
3C’s = Consideration, Co-operation and Communication
Factually this week:
-
Sears questioned
how long they can continue to be a “going concern".
-
Payless Shoes
just filed for bankruptcy.
-
Corporations
that have much LOWER revenues today than 5 years ago include: Caterpillar with
42% less revenue today than in 2012, Exxon with 46% less, Chevron with 52%
less, IBM is down 23.5%, Merck is down 16%, GE is off 17.4%, and Proctor &
Gamble is down 22% from 5 years ago – along with selling-off 43 of its brand
divisions.
-
Global investor
allocation to stocks hit a two-year high of 48%.
-
34% of fund
managers (highest since 2000) think equities are overvalued.
-
44% of fund
managers think emerging markets are undervalued.
-
The 10-year U.S.
Treasury yield will have to rise above 3.5% before a bear market in stocks
ensues.
-
37.7% of
adult-aged U.S. individuals are not working.
-
Used car prices
have fallen the most and the fastest since the ‘08 crash,
-
JP Morgan did
not have a single losing trading day in 2013, 2014 and 2016, but did lose money
on 2 days in 2015.
-
World stocks are
their most expensive in 17 years.
-
The combined
wealth of the world’s billionaires ($7.4 Trillion) FELL for the first-time last
year (3.7%) since 2008.
-
659 companies
cut or eliminated their dividends last year.
-
Since January,
insider sellers out-numbered insider buyers by 7 to 1.
-
The G-20 meeting
ended with the U.S. refusing to compromise on the phrase “Resist all forms of
protectionism”.
-
Ford missed
earnings, and warned that their annual estimates may come in 50% LESS than
anticipated.
-
Ally Bank told
us that auto loan delinquencies are spiking higher, and
-
Yet another
interest rate ‘rigging’ investigation drew to a close with 3 major banks (HSBC,
JP Morgan, and Crédit Agricole) being fined over $500m for collusion. Combine this some new reserve requirement,
and look for the financials to potentially be under pressure this week.
Watch for the Trump administration to pursue
a weak dollar policy in response to Germany’s threats of legal retaliation to
our proposed BAT (Border Adjustment Tax).
If the we can’t improve our excessive trade imbalance through a tax or
tariff program, then look for the U.S. Dollar to be the mechanism that The
Donald utilizes to get the world’s attention.
As Ford’s CEO said last month: “Currency manipulation is the mother of
all trade barriers.” A weak U.S. Dollar
could suddenly throw manufacturing and many other exchange items in our favor –
and it would be easier to implement rather than getting a BAT through
congress.
With Friday’s healthcare bill failure, there
is now doubt shed upon President Trump’s ability to raise the debt ceiling,
reform the tax code, nix regulations, and put thru an infrastructure
package. I think the reality of all of those issues has finally
risen to the surface. Even the
perma-bull Tom Lee has stated that the market moved higher in anticipation of
all that happening and if it looks like it won't happen "stocks will NOT
reward you from here”.
We are in such uncharted water that we might
as well be on another planet. We have
hit our debt ceiling and Democrat Chuck Schumer is already saying that if Trump
doesn't back down from defunding Planned Parenthood – he’s going to rally his
Democratic warriors to block any debt increase.
We have enough money via taxes to last us into July, but by late July
various Government departments are going to have to close if the debt ceiling
is not raised.
Then of course we have North Korea. Various military people I know have told me
that they expect us to attack North Korea and we will take out their military
and their leadership. They believe that
Sec. Tillerson's statement that the time for diplomacy is over and 15 years of
talks have failed – is a prelude to "We're going in".
That all adds up to a large wall of worry
that the market has to climb: Obamacare,
debt ceiling, tax reform, decreased regulations, infrastructure spending, North
Korea, and soggy economic ‘hard data’.
Add to that the fact that we remain below the Trump highs of 20,750 on
the DOW and 2,350 on the S&P – and that makes this a pretty tense time in
market-land. Please, proceed with
caution.
Tips:
This past week the SPX (the proxy for the
S&P) exceeded its expected move for the first time since December. When the healthcare bill was pulled, market
volatility increased in anticipation of this coming Friday’s GDP number.
-
The expected
move for the SPX this coming week is $36.
It’s currently sitting at $2,344.
Subtracting $36 from this takes us to about $2,300. If we break below $2,300 this week – “it’s
all over but the crying”.
-
Watch the bonds
(/ZB and TLT), if they continue their upward momentum, “duck and cover” because
that will mean stocks will be moving lower.
-
With the Nasdaq
sitting virtually unscathed in this market, the shorting opportunity is in the
QQQ’s this week.
A potential recipe for
investing to the downside:
-
I make sure the
stock has closed under its 21-day EMA (Exponential Moving Average) for 2 days
in a row.
-
I also make sure
that the stock is in a ‘squeeze’. The
‘squeeze’ is an explosion of energy that happens when a stock’s Bollinger Bands
move back thru their Keltner Channels.
-
A stock will
also move higher when there is co-operation from their sector and from the
corresponding index. [i.e. A squeeze on
a stock + a squeeze on the co-operating sector + a squeeze on the co-operating
index is forecasting a very powerful move].
-
It’s also true
that a squeeze on a stock + a squeeze on the sector move the stock
substantially.
-
Therefore, the
goal is to find sectors and stocks (and potentially indexes) that are all in
‘squeezes’ – such as the SPY (S&P index), the XLP (consumer products
sector), and PG (Proctor & Gamble).
-
To produce this
list, write a scan that tells you when a sector is under a squeeze, and use the
chart above (that lists the top 5 holdings in each sector) to find the
corresponding stock(s) that are also under a similar ‘squeeze’.
Secondly, when has a stock
finished its move?
-
Due to weekly
institutional buying, stocks move in 1 standard deviation increments 70% of the
time.
-
Virtually ALL
stocks will stop moving after hitting the following week’s standard
deviation. So, setting an automatic sell
after next week’s standard deviation move would be an excellent strategy.
For example:
-
I found Proctor
& Gamble (PG) was in a squeeze that was firing short,
-
I then
immediately looked at XLP (the corresponding sector) – and found that it was
also in a squeeze that was firing short.
-
Then I
immediately checked the SPY (the corresponding index) – and found that it was
in a squeeze that was firing short.
-
Therefore, I
think you can invest safely on the short side of PG, XLP and SPY.
-
I normally buy
the Delta 70 put option, and sell a corresponding put credit spread to pay for
the trade.
Notice below, the SPY index
(on the top graph) is caught in a downward channel and has had 2 closes below
its 21-day moving average (two red candles below the white line). I’ve included the lower graph of the Japanese
Yen moving higher because it is more co-operating evidence – supporting a SPY
move to the downside.
For next week watch:
-
The financial
sector (XLF) needs to bounce to $24, otherwise the entire SPY could move lower
with it. Doug Kass of Seabreeze Partners
writes: “Group stink has never been more conspicuous than in the financial
sector.” He likes: Lincoln Financial
(LNC), Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BAC), Citibank
© and JP Morgan (JPM) – all to the downside.
-
If the
transportation sector (IYT) goes lower – so will FDX, CSX and NSC.
-
If the biotech
sector (IBB) moves lower – so will CELG, BMY and AGN.
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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