This Week in Barrons – 4-3-2016:
Thoughts:
Ms. Yellen – What if we’ve been duped?
I wonder if we've been
duped? I just returned from the Mid-America Truck Show (MATS) where the
#1 topic was Donald Trump for President, and the most popular item was a “Make
America Great Again” hat. We’ve all
experienced the circus surrounding Mr. Trump, and how everyone is ganging up to
stop him. When the leaders of the Republican Party came on CNBC to tell
the voters that they have NO SAY in the nomination process – everyone was
outraged and Trump’s poling numbers increased.
Coincidence?
Years ago, the U.S. 2016
Presidential election was predicted to be Jeb Bush vs. Hillary Clinton. But no matter how hard Jeb tried, he couldn't
raise the eyebrow of a working hooker. While everyone was fine handing the election
over to Hillary, the Republicans had to find another person to work with. Rubio instantly came to mind, but there was
still this ‘problem child’ – Donald Trump to deal with. Trump just kept on winning elections and
debates.
The failure of Jeb Bush
pushed the Republican Party into panic mode.
But then they had their ‘Can’t Beat’em – Join’em’ moment. They decided to feign their repugnance of a Trump
Presidency, and keep the Dump Trump meme alive until it no longer drives people
straight to Trump. This allowed the
established Republican Party to appear Anti-Trump, all the while moving The
Donald up in the poles.
It will be easy to see if
I'm reading this correctly. If the
Republicans pull a fast one at their Convention and appoint someone else, then
it’s clear the establishment isn’t hiding their ambitions – and has
disassociated themselves with the people.
I don't think they'll do that, as it would cause massive disruption to
the Republican Party.
Even this past week a
reporter (Michelle Fields) filed a battery charge against Trump’s campaign
manager – Mr. Lewandowski. Ms. Fields
said that Lewandowski grabbed her arm and almost threw her to the ground, but
she regained her balance. She said that
it was the second most horrible thing in her life – after the passing of her
father. The video tape is all over YouTube. Piers Morgan and J.Q. Public are laughing at
this woman and saying: “Trump is being set-up – I’m going to support him.”
I’ve got to admit, 50,000
people visiting Louisville, KY this weekend – all talking and buying Donald
Trump paraphernalia – convinced me that it’s working. Be careful out there, the Donald may just
pull this one off.
The Market:
Factually:
-
The Atlanta FED
cut it’s annual GDP estimate from 1.9% to 0.6%.
-
The credit
ratings on the majority of corporations are LOWER today, than in 2009.
-
Corporate
defaults for all of 2008 were 42, and in 2016 are already 31.
-
There have been
8 bank failures thus far in 2016.
-
The foreign governments
that own the most U.S. debt are China ($1.25T), Japan ($1.1T), and the
Caribbean Banking Centers ($0.3T).
-
The rate of
Global Trade is now forecast to be 2%.
Global GDP is forecast between 3.1% and 3.5%. Most economists believe that unless Global Trade
exceeds 6% - a recession is on our immediate horizon. (https://www.imf.org/external/pubs/ft/weo/2016/update/01/)
As MJP suggested, our
Central Bankers have a real dilemma on their hands. Since 2009 (the last time there was any
governmental sense of fiscal responsibility), Central Banks have taken the
brunt of supporting the global economy via: low interest rates, quantitative
easing, forward guidance and now negative rates. But it seems that the economic relationships
that preceded the 2008 banking crisis may not hold today. For example: the
Phillips Curve. It has always shown a relationship
between unemployment and inflation. Presumably, as unemployment falls, inflation would
start to rise because businesses would compete for labor and correspondingly wages
would increase. This relationship has been
the basis for many a Central Bank policy. In fact in 2012, Ben Bernanke envisioned
an unemployment rate of 6.5% being a trigger for monetary tightening; when, in
fact, the first upward move in rates did not occur until December 2015 when the
unemployment rate was already at 5%.
Could it be that the best
measure for monetary tightening may not be the unemployment rate (which measures those on unemployment benefits),
but rather the labor force
participation rate (which calculates the proportion of those of working
age who are employed)? In the US, the
labor force participation rate has fallen from a peak of 67%
reached in 2000 – to 62.9% today. Everyone expected the labor force
participation rate (the percentage of people working) to increase as the unemployment
rate fell, but (unfortunately) the two have fallen in tandem. Are we making it too comfortable to remain unemployed? Would some of the unemployed rejoin the labor
force if wages were higher?
If we can’t trigger
monetary tightening off of the unemployment rate, can we trigger it off of
productivity? After all, we can measure the
average worker’s output, the average hourly workweek, and get a good estimate
of productivity. Unfortunately, we
continue to see weak productivity growth, which has most recently caused a downward revision in the GDP forecast to
0.6% in 2016. The weak productivity
growth could be caused by no real improvement in the speed of road transport
(congestion) or air transport (security checks) in the last 40 years. It could reflect household appliance technology
(refrigerators, stoves, dishwashers) remaining stagnant over the past 50
years. It could also reflect technological
industrial improvements reaching a time when:
-
Wage growth has
been so low that it’s currently cheaper to employ workers than to invest in new
technology.
-
Service-focused productivity
is just harder to improve. (For example:
a 10-minute haircut is not appreciably better than a 60-minute haircut).
-
The Internet’s technological
distractions (e-mails, tweets, and cat-videos) are reaching a point of reducing
office-worker productivity.
-
OR are we just bad
at measuring service-sector productivity, and later revisions may show that GDP
is higher (and inflation lower) than we thought?
In the meantime, I don’t
think our Central Banks know the answer as to when to tighten monetary
policy. In fact, it seems that the FED’s
ONLY job right now is to keep the stock market higher. Do you think it’s coincidence that on
February 12th (when the market was at its lows) – Jamie Dimon (head
of JP Morgan) declared that he was buying millions of his own stock. AND that Ms. Janet Yellen (on the same day)
called the ECB’s President Mario Draghi and the Bank of England’s President
Carney asking for a favor. Do you think
it’s coincidence that the market magically stopped going down on EXACTLY THAT day, and has made one of the most
incredible rebounds since 1933?
So our FED had their
buddies rescue what was turning into a market ‘crash’, and they engineered one
of the biggest monthly rebounds ever seen.
However, this doesn’t change the fact that our market remains at nosebleed,
over-bought, over-priced, and very expensive levels.
This week will start another
earnings season. And chances are good
that even with all the primping and fluffing of the various individual earnings
releases, these earnings comparisons are going to be ugly. The dilemma is that Wall Street tells us that
‘earnings move stocks’, and if earnings stink – then the market should fall
like a rock. But the market currently
moves on Central Bank purchases and stock buy-backs. However, corporations can’t buy back their
own stock because they are in the ‘black-out (non-buy-back)’ period surrounding
corporate earnings.
In terms of a prediction,
last week I thought they were going to keep us green for the week, and they
did. Now I tend to think we're going to
see some sideways chop with a downward slant. I believe that during the
next month we will be shown the final resolution to which direction this market
wants to move. Markets are either: (1) Quiet
and Trending – often grinding higher to the upside, (2) Sideways and Volatile –
this current phase always front-runs bear markets, or (3) Volatile and Trending
– which characterizes a downward market.
A market’s MONTHLY timeframe
dominate trends; however, it’s DAILY timeframe initiates reversals. We are currently in a monthly market
downtrend that was confirmed on February 12th, 2016 – coincidentally
– the same day that a massive daily reversal (uptrend) was initiated. I believe that over the next 2 to 3 weeks:
-
We will
experience a significant market pullback – whether we need to touch an S&P
reading of 2100 before it’s triggered is anyone’s guess.
-
Watch the rally following
the next market pullback. If it exceeds an
S&P reading of 2116 – then Ms. Yellen has decided to throw all caution to
the wind and we will take off to the upside and make new all time highs.
-
If (however) after
the next pullback, we do NOT exceed an S&P reading of 2116 – triggering a lower
low and leading this market downward quickly.
I think we are within 4
weeks of this signal. It will dictate
whether we go blasting into the stratosphere and become the next Venezuela (which
is my guess due to the Presidential election), or whether gravity takes hold and
we go down in a hurry.
TIPS:
Think about buying out of
the money, Delta 20 - Calls on some of the big boys running into earnings (and
selling before their actual earnings announcement):
-
GOOGL – Apr4 -
$810 calls for $8,
-
AMZN – Apr4 - $630
calls for $8,
-
NFLX – Apr4 -
$120 calls for $2.25, and
-
FB – Apr5 - $125
calls for $1.20.
I am:
-
Long various
mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,
-
Long an oil
supplier: REN @ $0.56,
-
Long GLD – Apr –
Call Debit Spread – 118 / 123,
-
Long NKE – Apr –
Call – 67.5,
-
Long POT – Stock
& Apr – Call 20,
-
Long SBUX – Apr
– Call – 55,
-
Sold TEX – Apr –
Put Credit Spread – 19 / 20
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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