This
Week in Barrons – 12-4-2016:
“There
are decades where nothing happens; and there are weeks where decades happen.” … Vladimir
Lenin
Thoughts:
Since
the Trump election, maybe we haven’t had a decade’s worth of news – but clearly
something has dramatically changed.
-
On November 17th, the BIS (Bank of
International Settlements) issued an unexpected, stern warning that the surge
in the U.S. Dollar is causing a global financial tightening. “The U.S. Dollar is making the repayment of USD-denominated
cross-border debt increasingly more difficult, and is itself the new fear
indicator.”
-
On November 24th, the ECB (European
Central Bank) warned that: “More market volatility in the near future is likely. The potential for abrupt market reversals
remains significant amid heightened global political uncertainty and underlying
emerging market vulnerabilities."
-
On December 1st, U.S. Treasury rates
skyrocketed from 1.8% to 2.45%. This does
not bode well for stocks (especially those at record high valuations).
-
Today (December 4th), Italy will vote to amend
their constitution. A ‘No’ vote will
signal the resignation of their Prime Minister, increased market volatility,
and a potential challenge to being in the EU.
The most
unifying element around the globe remains our indebtedness to each other. The Congressional Budget Office reported that
during the last fiscal year the U.S. budget deficit jumped from $438B to $590B,
while U.S. business debt rose by $793B.
During that same time period, our total gross federal debt surged by
more than twice the annual budget deficit to $1.4 Trillion. According to www.usdebtclock.org, under the Obama
Presidency our national debt has
risen from $8T to $19.904 Trillion, with over $104 Trillion in unfunded liabilities. Even California (that wishes to secede from
the union) contributed less than 70% of its annual required pension
contributions during the past fiscal year.
Not accounting for risk, California’s unfunded liabilities are
approximately $170B – or 125% of their total tax revenues.
Often debt
distress is first seen via the automobile loan environment. And within that auto loan arena, both John
Oliver https://youtu.be/4U2eDJnwz_s and I agree on examining the subprime car
loan. Factually:
-
86% of all Americans commute to work via automobile.
-
25% of all automobile loans are of the subprime variety.
-
The average interest rate on a ‘Buy Here – Pay Here’ car
loan is between 19% and 29%.
-
The average default rate on a subprime loan is 33%, and
the normal default (repossession) timeframe is 7 months.
-
Banks like Santander and GM Financial are expanding their
sub-prime lending capacities. And just
like in the housing crisis – groups of subprime car loans are being bundled
together, and sold off in tranches to unsuspecting pension funds.
Recently, the number of delinquent, subprime
auto loans hit their highest level since 2010, with over 6 million individuals
at least 90 days late on their payments.
These graphs show an eerie data similarity to the 2007-2009 recession.
“The delinquency rate of subprime auto loans
is pronounced and worsening,” said researcher Andrew Haughwout. Consequently, auto finance companies that
specialize in subprime lending, as well as some banks with higher subprime
exposure are likely to be experiencing declining performance in their auto loan
portfolios. Because these loans are being
repackaged as bond-like asset-backed securities, the health of the subprime
market will also spillover on to the general credit-market as well. After all, subprime auto-loan losses
increased 19.4% in October – year-over-year.
But what else is new:
Central Banksters have forced investors into uncomfortable positions for years,
and have forced them to risk much greater amounts. The more liquidity that our Central Banksters
add to a market place, the more they disrupt the natural ebb and flow of the market
itself. Credit is beginning to tighten,
and traders are beginning to pull-back as November was the weakest month on
record for Treasuries.
And lest we forget,
credit is the lynch-pin of the Trump expansion plan. I can easily lay out a scenario where
everything Trump wants to do (no matter how noble) runs into problem after
problem as our global connectivity and cross nation debt levels and derivatives
rear their ugly heads. It’s within that
scenario that I see wicked and sharp market corrections that could result in
our market being cut in half.
The
Market:
As
SF mentioned: “If I were the incoming administration, I would destroy all of the
old numbers and myths – and create a new starting point.” After all, to get to DOW 19k we had to manipulate
everything from the way GDP is measured to the way we count the unemployed. We even modified our inflation calculation, and
the way companies are allowed to state earnings. Just about every number you hear lately has
been manipulated. This past week:
-
ADP
reported that 216K jobs were
created (above estimates), but then went back and CUT the October employment
number almost in half.
-
The Atlanta FED reduced its 4th quarter
GDP estimate from 3.6 to 2.7%.
-
The U.S. Dollar rose close to 13-year highs, while
the Chinese Yuan slumped to 7-year lows. Collectively, those events will force
deflationary pressures onto the U.S. economy.
- The December Jobs Report had the unemployment rate
falling to 4.6% - but only because an incredible 466,000 more people left the labor
market.
- The number of people NOT in the labor force have hit yet another
all-time high. How can we be at full
employment when over 95.1 million aren't in the workforce?
- In the last 3 months, 99,000 Full-time jobs LEFT the
economy, while 638,000 Part-time jobs were ADDED to the economy.
-
With one month left in the year, 90% of the stock
market’s gains have come in the past 3 weeks due to one of the largest sector
rotations of all time. New money is NOT
coming into the market, but rather existing money is coming out of ‘technology’
(such as Facebook on the left – see sudden red downturn) and flowing into
financials and industrials (such as Goldman Sachs on the right – see sudden
green upturn).
In bonds, November was the weakest treasury month on
record. Almost $2T came out of the bonds, and moved into the U.S.
Dollar and some into the stock market. The ‘magic level’ for bonds is
around 150. If bonds sell off below the
150 level in a slow and orderly fashion, the markets may be able to react
normally. If (however) the bonds
continue to sell off at their current rate, huge interest rate increases will
be triggered almost instantly. And while
interest rate increases are good for financials and banks (see map of the TNX –
the 10-year Treasury index below moving from 1.8% to 2.4% in a week), everything
else such as car loans and mortgages will be forced to a grinding halt.
Dramatic interest rate increases (such as the above)
cause: (a) corporate stock buy-backs to immediately disappear, and (b) the high-frequency
trading ‘carry trade’ to dramatically decrease.
What this
means is:
- High Frequency Trading (HFT) firms need
to borrow money to execute thousands of trades per second.
- As the cost of borrowing increases,
these firms will need to make more money on each trade.
- HFT firms will begin to cut-back on the
number of trades they are making, along with being more careful with each trade’s
profitability.
- Unfortunately, HFT trades comprise 70%
of the current market activity – and slowing that activity down will substantially
reduce the liquidity in the marketplace.
The interest rate
‘threshold’ for where it becomes difficult to make any money as a
high-frequency trader is around 2.5%. We
are currently sitting at 2.41% with bonds down around the 150 level. The
moment the HFT’s disappear – the S&P’s will be the first to feel the
pressure. And once the S&P index lacks
liquidity – then everything else will follow suit. On Thursday, we came
right down to the 150 level, and stopped on a dime. If bonds aggressively
break below 150, you will see precipitous selling in the S&P’s. The
specific companies within the S&P that will be sold first will be (just
like in 1999) the technology companies that are currently not making a profit,
followed closely by hardware companies where margins are razor thin. So going forward, watch the bonds ( /ZB ) and study the 150 level. If it breaks below that with authority, be
very careful.
So far it seems like energy, drillers and
transports are still looking strong. I
think they're putting too much faith in their announced oil-production
cut. History has shown us that OPEC
rarely cuts back as much as they promise. And it’s very tempting to sneak
in those extra barrels at the higher cost – until cheating and over-production
cause prices to fall to $8/barrel.
Evidently traders came
back from their Thanksgiving holiday not in the greatest of moods – as we
immediately traded lower. That’s not to say there were no big
winners. On the heels of
the oil announcement, some of the oil stocks that increased were: WLL, OAS and
HES. Likewise, the financials continued their
climb with Goldman Sachs leading the way. But other areas like biotech and technology
took it on the chin – with big names like Apple (AAPL), Amazon (AMZN), and
Microsoft (MSFT) losing money on the week.
Today, Italy will vote
on a Constitution altering referendum. A
‘Yes’ vote will allow the Prime Minister to appoint a new Senate, and move
Italy closer to the European Union. A
‘No’ vote will cause several members of their Government (including the Prime
Minister) to step down, and allow a more ‘right-wing’ party (that wants OUT of
the EU) to come into power. A ‘No’ vote
will also lead to mayhem over the next year – including questions over how
their largest banks will be capitalized.
If Italy’s talks toward exiting the EU were to accelerate, then France
would not be far behind, and the whole ‘one world order’ test tube that is the
European Union could come apart at the seams.
But with a ‘No’ vote, would U.S. markets plunge like they did
initially with BrExit, or would they soar to new highs like they did with Trump?
That’s a great question.
The line in the sand
with the S&P is 2190. If the S&P
remains above 2190, then this market rally has legs. If the S&P closes below 2190, then the
market rally for the next week or two is over.
Take care and be safe out there!
Tips:
Chris Brecher (one of the sharpest,
short-term, market tacticians out there) has compiled his list of market ‘shorts’
below:
I’m looking for:
-
A pullback in the
U.S. dollar – that you can play via FXE,
-
A pullback in
oil – AFTER it trades into $52.50/barrel.
You can play this via: UWTI, XLE or HAL,
-
Continued upside
moves in:
o Gold – holding above $1,178 potentially bounces to $1,245/ounce
– that you can play via GLD,
o Silver – holding above $16.61, bounces, and is
playable via SLV, and
o Copper – holding above $2.57, bounces, and is
playable via FCX,
- The Nasdaq (NDX)
moving higher if it gets over 4,771, otherwise look for a pullback to 4,650,
-
The S&Ps
(SPX) moving higher if it gets over 2,199.5, otherwise look for a pullback to 2,150,
-
The DOW moving higher
if it can get over 19,079, and
-
Facebook pulling
back to the 105 level.
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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