This
Week in Barrons – 9-18-2016:
UberX – the newest self-driving car system
launched in Pittsburgh, PA this week.
Thoughts:
Jobs vs Profits?
This week UBER introduced its self-driving car in Pittsburgh, PA. – https://youtu.be/pmofgf-Y3Mc. The ‘self-driving’ revolution will not
be without carnage. Not the ‘car-crash’
kind of carnage, but rather the ‘loss of jobs’ kind. A government official said: “The magnitude of
this problem is breathtaking, to the tune of at least 4.1M jobs. That includes:
taxi drivers, chauffeurs, truck drivers, and other ride-share vehicle drivers. These ‘working’ drivers are NOT easily
switching to another profession such as writing software. There’s certainly no room for them in
manufacturing. The fast-food sector is
becoming automated, as are many other jobs including writing blog entries for
major wire and news services. This type
of change is always happening faster than society is prepared to deal with, but
we’re not even talking about this particular revolution!”
There will naturally be
delays, setbacks, and gruesome accidents involving autonomous vehicles. There will also be those people who will call
for an end to self-driving cars, and there will be other people that simply refuse
to get into them. But make no mistake
about it – it IS happening. What I find
amusing is that the company leading the way is UBER. Isn’t UBER the same company that was
preaching community involvement,
kum-bay-yah, and chanting ‘Work when you WANT to – not when you HAVE to’. I guess the rhetoric will have to change to:
‘Profits beat Jobs’ and ‘Cash makes no Enemies’ – because the savings associated
with fewer drivers will far outweigh the cost. Drivers and fuel are the two largest expenses for
every transportation company, and human drivers (unlike their autonomous
replacements) need to sleep and take vacations.
This week even Ford Motor Co. rolled out plans to expand into robo-taxi
fleets and other autonomous-car services.
The #2 U.S. auto maker said that the move into robo-fleets will deliver
20% profit margins once completed. That
is far higher than the low
single-digit returns typical for car manufacturers, and will help Ford become less
exposed to the U.S. auto industry's boom-bust cycle.
But it’s
UBER that is expected to benefit the most from the autonomous advancements. I listened to them mouth the words: “We
believe ride-sharing will be a mix — with services provided by both drivers and
self-driving UBERS.” But when a
passenger is faced with paying half-fare for a driver-less vehicle, I’m betting
that the autonomous driving UberX wins hands down.
UBER drivers
are concerned about this choice as well.
They are worried about losing their jobs to a software program. The founder of the Independent Drivers Guild
in NYC (which represents 35,000 UBER drivers) said: “We don’t expect UBER to
move into driver-less cars in New York City anytime soon, but they can expect
we would launch an aggressive campaign, the likes of which they have yet to
see, to halt such a move.”
This week
UBER started its self-driving pilot program in Pittsburgh by outfitting Ford Fusions
for its ‘most loyal’ users when they request an UberX ride. For the time being, the car comes with a human
sitting in the front seat to take over if something goes wrong. https://youtu.be/pmofgf-Y3Mc.
The Markets:
We may or may not be at
the beginning stages of a bear market, only time will tell. What we do know for a fact is that the current
bull market is looking a bit old and overvalued.
The future of DB –
Deutsche Bank (Germany's largest and most troubled lender) went from bad to
worse last week when the U.S. Department of Justice (DOJ) fined them $14B to
settle an outstanding probe into the company's trading of mortgage-backed
securities during the financial crisis. Despite
this fine being eerily similar to the EU’s $14B tax-avoidance penalty to Apple,
the DB CEO immediately came out swinging, saying: “We have no intention of
settling these potential civil claims anywhere near the number cited. The negotiations are just beginning, and I
expect that they will lead to an outcome similar to our peer banks which have
settled at materially lower amounts."
DB’s stock tanked on the news, and is once again approaching its all-time
lows. Factually, BofA reached a similar $17B
settlement in 2014, and Goldman agreed to a $5.1B settlement earlier this year.
As the WSJ reported, due to the recent European hostility involving AAPL shares,
the DOJ may be unwilling to budge. According
to a JPM analyst, an agreement exceeding $4B would pose serious questions about
DB’s capital positions and force it to
‘build additional litigation reserves’.
The move also put a hit on other banks such as Monte Paschi (the
oldest bank in Italy) that went limit down and was halted for trading.
This week Goldman came out
and downgraded the S&P saying it's too high and too risky. There are numerous ways to look at valuation
but Warren Buffet’s – ‘total market capitalization as a percentage of GDP’ is
probably as good a place to start as any.
Today, Warren’s calc is showing that there have been only two other
times when stocks were THIS overvalued in history – once in 1998 (before a 60%
crash) and again in 1929 (before an 80% crash)! It’s also telling us that if you purchased stocks
today – your expected annual return for the next 12 years would be about 1% per
year.
This week, retail chain
store sales fell almost 5% - a reading not seen since 2009. I’m wondering
how (if we were truly ‘at full employment’, and experiencing rising wage growth)
would we be seeing retails sales puke like that.
And just this week Donald
Trump was on a CNBC call – again hammering on the FED for keeping the market up
to make Obama look good. My point here
is that because of the heat from Trump, and Hillary getting negative attention
over her health – might the FED toss in a hike just to prove they don't care
about the politics of the season? It is possible. Remember job #1 at the FED is to keep their
own jobs. Trump is shining a flashlight
on them, and they're scattering like roaches. We will know the interest rate answer on
Wednesday, and the common thinking is that interest rates will remain the
same. And between the retail sales
numbers crashing, productivity dying, and regional FEDs reporting new all-time
lows – it is clear that on a fundamental basis they can't hike.
But as we all know, fundamentals
no longer apply because ‘free money’ is the market driver. And that is why this Wednesday is so
challenging.
-
There's a chance
that the FED is saying: “Hey, this guy Trump might pull this off, and he's
already giving us heat for blowing bubbles and inflating the stock market. Maybe we ought to move rates up a quarter point,
just to show we're doing something". The stock market would NOT like it, but it
would have ZERO effect on the true economy.
-
The ‘fly in the
ointment’ here is that on September 21, the Bank of Japan is ALSO meeting. Reuters had the following to say: “The BOJ
has three easing tools: buying more bonds, buying riskier assets, and deepening
negative rates. At next week's review, the
BOJ will likely signal markets that cutting rates would be the more preferred
future option as it directly pushes down short- to medium-term rates that have
the biggest impact on corporate borrowing costs. The BOJ will also consider reducing purchases
of super-long government bonds to give financial institutions such as insurers
and pension funds a better environment for earning returns, the sources said.”
So we know that our FED is
on a bit of a hot seat over Trump. They must
make believe that they aren't politically motivated, and would never defer a rate
hike because they were supporting Obama. We also know that Central Banksters play ‘tag
– you’re it’ a lot. In other words, they
work in concert with each other. Is it insane
to think that the Bank of Japan (BOJ) would really go crazy, and push their rates
deeper into negative territory, AND expand their bond and asset buying? And based upon THOSE BOJ actions, could there
be enough ‘carry trade’ between the U.S. and Japan that our FED could hike a quarter
point without any major shake-up? Of
course, because the market doesn’t care WHERE it gets its free money – as long
as someone is pushing down rates and flooding the world with cheap money. If our FED knows what the BOJ is going to do
(and that’s very likely), then I do think that they could raise rates here while
using the QE push from Japan to keep things propped up.
If it was ONLY the FED
meeting on the 21st, then I would absolutely agree that our FED
would not be doing anything. But with
the BOJ still terribly desperate to make something happen, there's a chance that
they will come out with a new manner of QE, money printing, negative rates, etc.
If this happens, then the ‘carry trade’
would indeed offset any damage done by the FED.
What is a ‘carry trade’
you ask? In its simplest form, it is a strategy
in which an investor borrows money at a low interest rate (in one environment /
country) in order to invest in assets that are likely to provide a higher
return (in another environment / country). This strategy is very common in the foreign
exchange market. So if the BOJ were to move
their rates even lower, you would see ‘carry traders’ borrowing cheap Yen
(Japanese currency), and putting it to work in the U.S. by buying equities that
pay a strong dividend.
That little trick would
accomplish several things:
-
1st, it
would enhance the illusion of U.S. strength: “We must be strong because the rest
of the world is cutting and we're hiking rates.”
-
2nd,
it would give our FED the ability to NOT look like Obama's pet. And
-
3rd,
it would keep stocks elevated, instead of falling like a rock.
This is my only ‘logical’
explanation for our FED tossing a quarter point rate hike upon us. But for Wednesday, I think it’s too close to
call.
-
If the BOJ only
gives what it has already promised, then our FED will take a pass and no hike.
-
If the BOJ goes
nuts, then I think our FED will slip in a quarter point rate hike.
This past week, after
testing 2,120 as a low for three days in a row, we ended the week at 2,139 on
the S&P’s. So after 42 days of doing
nothing, the last 6 sessions have brought us some awfully large moves. The two elements in play are the actions of
the U.S. FED, but the more important move could be those of the BOJ. All of that will get resolved on Wednesday,
when our FED and the Bank of Japan will announce their new policy decisions. Depending upon what the BOJ does, will determine
whether we're going to run back to new highs, or if 2,120 is going to fail, and
we'll be face planting 2,100. 2,120 on
the S&P is the line in the sand that they desperately want to defend. As long as we stay above that, there's a
chance for an upside rally on any given day. I'd be cautious around the 2,160 level because
that should act as an upside resistance.
This should end up being
an incredibly interesting week.
TIPS:
The pinning plays worked beautifully on AAPL, FB, TSLA, NFLX, and
BABA. Currently I’m out of everything
except gold, silver and oil – awaiting FED resolution Wednesday.
-
AG, AUY, CDE,
FCX, FFMGF, FSM, HL, NGD, PAAS, PGLC and SAND.
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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