RF's Financial News

Sunday, December 11, 2016

This Week in Barrons - 12-11-2016

This Week in Barrons – 12-11-2016:

Are we trying to pick a winner, or just going all in?

Thoughts:

This week was the 20^th anniversary of the phrase: ‘Irrational Exuberance’, and it couldn’t have come at a better time. The markets are pricing-in a perfect first 100 days of a Trump Presidency. This is drawing in more and more retail investors, and as the retail investor begins to become more involved – the professionals are taking profits and moving to the sidelines. The retail investors are cashing in their fixed-income chips, and doubling down on economically sensitive equities – failing to recognize that global financial markets are extremely complex, and virtually unpredictable.

CW (of Rockhaven Capital Management) pointed out a recent coin flipping experiment performed by Professors Victor Haghani and Richard Dewey. It seems that the professors built a coin that had a 60% chance of landing heads-up, and a 40% chance of landing tails-up. Each of the participants in the study had an advanced finance or economics background, or was a young financial industry professional. The participants (made to resemble the average educated retail investor) were given $25 and told: (a) to play for 30 minutes, (b) to bet as much as they want on each toss, and (c) to quit after they win $250. They knew the rules, and even knew that ‘heads’ had a 60% chance of winning. The results were stunning:

- 28% went bust,

- 5% ended with less than $25,

- 32% had between $25 and $100,

- 14% finished with between $100 and $250, and

- 21% maxed out at $250.

It seems that:

- 28% of the pool of young, educated, financial professionals actually lost everything in a simple game that was massively rigged in their favor.

- 30% of the participants actually bet their entire bankroll on a single flip giving themselves a 40% chance of being completely wiped out.

- And even though the probabilities were quite clear and the optimal strategy would be to NEVER bet on ‘tails’, 50% of the participants bet on tails at least 5 times (each) anyway.

The lesson to be learned is that when the retail investor enters the market – the market is closer to the end than the beginning. Keep some of your chips in reserve, and place your bets only where the probabilities are in your favor.

The Market:

“Should I stay, or should I go?” … The Clash

Since the day Trump got elected, it's like the world swallowed a huge dose of ‘feel good’ medicine. Business confidence went from 38% to 65%, consumer confidence hit new highs, and the stock market is acting as if the up-coming year will be nothing short of amazing. We are experiencing the most powerful post-election run-up in history due to a convergence in:

- November through January being the strongest market period of the year,

- The normal post-election market run-up, and

- Our citizens believing that someone is actually working for them again.

But this rally is different from both the Internet bubble that ended in 2000, and the housing bubble that ended in 2008. This is a rally rooted in: credit, debt, hope, and outsiders. In 2000, the entire run-up was based on the idea that profits didn't matter because we had just given birth to a new technology called the Internet. The 2007 fiasco was a study in fiscal unsustainability – as $600k homes were being sold to minimum wage employees. Both market collapses were fairly predictable. But this time, we are soaring on the hopes that trillions of dollars in debt can be recouped by changing so much policy that companies come back to the U.S., hire workers, pay them more money, and we actually work our way out of this mess. After all, we are $20T in immediate debt, and over $100T in debt due to unfunded liabilities. The ‘gotcha’ here is that we are still a functioning nation. The $64M question becomes: Can we continue to thrive as a nation, halt the ‘Mad Max’ scenario, and slowly dig our way out over the next 15 years? I still think some form of global reset must come into play because mathematically debts that can't be repaid – won’t be repaid.

Market experts will tell you that markets look forward and price in elements 6 to 12 months in advance. But where were these same pundits warning of a market collapse in November of 2007 when the S&P and the DOW were putting in all-time highs? Because just 10 months later the DOW was down over 7,000 points from 14,000 to 6,600. The current market is way out over its ski's, and it wouldn't take much of a hiccup to yank it sharply lower. Both graphs below (the AAII Bullish Sentiment indicator and Professor Shiller’s CAPE market valuation ratio) are flashing cautionary pre-2008 and pre-2000 signals. But this market has minimal overhead resistance, so how far it runs is anyone's guess.

Under President Trump there are several, generic market trends:

- RATE Increase(s) – The FED meets on Wednesday, and it’s fairly clear that a rate hike is coming. I’m looking for only one more in 2017.

- DOLLAR Strength – This increases earnings of companies that sell ‘into’ the United States – like global mining and materials stocks (ETF = PICK).

- INFRASTRUCTURE Fiscal Stimulus – Spending over $1T over 10 years on infrastructure will match China’s $2T infrastructure spend (ETF = IGF).

- TAX Cuts – By cutting the corporate tax rate from 35% to 15%, every effective 7% tax reduction – raises S&P earnings by 9% (ETF = SPY).

- REGULATION demise – Fewer regulations will lower costs and boost the profits of the energy industry across the board (ETF = XLE).

- TAX Repatriation – By enacting a 10% overseas tax rate, 79% of those new corporate profits will be used for stock buy-backs (ETF = XLK).

Before we drink too much ‘Kool-Aid’, SF sent me a Washington Post article showing that Senior Defense Department Officials suppressed a study documenting $125 billion worth of administrative waste at the Pentagon out of fears that Congress would use its findings to cut the defense budget. The report, which was issued on January 2015 by the advisory Defense Business Board (DBB), called for a series of reforms that would have saved the department $125 billion over the next five years.

Again, maybe this romp higher is just the stock market's reaction to Trump’s ‘No B.S.’ style of leadership. But be careful, because what the market is reacting to right now – may or may not come to pass – and that’s the big gamble.

Tips:

Many of you have written asking me what websites I review on a constant basis – here are some of the financial ones:

- Forexfactory.com = I appreciate its trading calendar.

- Finviz.com = It has a great stock scanner and heat map for day trading.

- Miningfeeds.com = It has information on all of the metals.

- IFTTT.com = I use it to send myself free reminder texts on anything.

- TradingEconomics.com = I use it for global economic information.

- Stocktwits.com = I use it to measure bullish and bearish sentiment.

- Oanda.com = I like their heat map for longer term currency trades.

Barrons came out with a ‘Top 10 Favorite Stocks for 2017’ list and it includes: Alphabet / Google (GOOG), Apple (AAPL), CitiBank (C), Delta Airlines (DAL), Deutsche Telekom (DTEGY), Merck (MRK), Novartis (NVS), Toll Brothers (TOL), Unilever (UL) and Disney (DIS).

Not to be out done, an analyst community came out with their own top 10 list comprised of: Mallinckrodt Pharma (MNK), Endo Pharma (ENDP), Hanesbrands (HBI), Edwards Lifesciences (EW) Mylan Pharma (MYL), Allergan Pharma (AGN), Alexion Pharma (ALXN), Activision (ATVI), Salesforce.com (CRM), and NRG Energy (NRG).

Over this coming week I’m watching:

- SPX – if it breaks over 2261 it could run all the way to 2300,

- IWM – a move over 141 could signal another turn higher,

- SPX’s Put / Call ratio is under 0.7 signaling a fair amount of call buying. This is often a cautionary flag showing that there are no buyers left to buy – leaving only ‘sellers’ in the stock. And more sellers than buyers often predicts a ‘top’.

- WYNN and LVS – sell Put Credit Spreads because all of the panic sellers have vanished over the Macau news,

- CMG – bought a Call Credit Spread on a move downward to 370,

- PLAY – sold a Put Credit Spread and bought a Call Debit Spread – looking for a move up to 60,

- TSLA – bought a Call Debit Spread – looking for a move up to 195,

- FB – bought a Butterfly – looking for a move to 120,

- For this Wednesday’s FOMC meeting, I am buying straddles in: Gold (GLD), Bonds (TLT), the Euro (FXE) and Goldman Sachs (GS). I’m looking for the market to display a ‘Buy the Rumor, Sell the News’ behavior. I’m looking for a rate increase this week by the FED – which will spark an initial run higher in the financials and the dollar, and an initial drop in bonds and gold. This spike higher will allow me to sell the financial and dollar straddle calls, and sell the gold and bond puts. Then profit taking will allow me to sell the financial and dollar puts, and sell the corresponding calls in gold and bonds.

- This past week we had the VIX (the market volatility indicator) moving higher along with the markets. This simply signals increased nervousness surrounding the markets. It’s not impossible for this to happen – just rare.

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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Sunday, December 4, 2016

This Week in Barrons - 12-4-2016

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 17^th, 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 24^th, 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 1^st, 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 4^th), 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 4^th 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.