RF's Financial News

Sunday, December 18, 2016

This Week in Barrons - 12-18-2016

This Week in Barrons – 12-18-2016:

“Virginia - Is there really a Santa Claus rally?”… Francis Pharcellus

Thoughts:

I have never seen a time when:

- Our FED has kept short-term interest rates at 0% for 8 years,

- German and Japanese bonds have traded at negative yields,

- Our 10-year Treasury yields have DOUBLED in less than 6 months,

- The Chinese readily admit to stealing a U.S. Navy underwater drone,

- Our President blames another nation for election tampering, and vows to get even,

- Our President-elect is getting this much pushback,

- The battle between white-hats & black-hats within the CIA, FBI, and NSA is so open,

- And our electors are getting 4,000 e-mails a day asking them to toss the election to Hillary?

Last Friday, the White House gave a live press briefing covering their beliefs on Russia’s tampering with our Presidential election, and how they are going to retaliate. This is alarming because it is NOT some alternative news site writing a blog post, but rather our CIA and White House vowing retaliation. This wasn't even something designed to make Donald Trump look bad. On the contrary, there is something going on here. After all, our markets were supposed to crash:

- When BrExit hit – but within days we were at all-time highs,

- When Trump won the Presidency – instead we made new highs, and

- When Italy voted NO – but we proceeded to hit another all-time high.

The level of uncertainty surrounding what and who to believe is higher than when Lehman Brothers collapsed, and as high as it was immediately following 9/11.

I understand that the rally in equities has been inspired by pro-business proposals from President-elect Trump – including tax cuts and looser regulations. These proposals are expected to stimulate economic growth, increase interest rates (and inflation), and push bond yields past their 2014 highs. Some experts are even comparing Donald Trump to Ronald Reagan. And while their incoming policies may bear a strong resemblance – unfortunately the economy and the markets they inherited are vastly different. The table below is courtesy of Mike Underhill of Capital Innovations:

As we morph from a governmental run society, back to a more business focused one – realize that the role of our Central Banksters will decline, and capitalism / freedom will be rejuvenated. However, along with this rejuvenation comes a much wider range of potential outcomes, and a much larger band of uncertainty. This range wouldn't be so bothersome if we weren't already in the seventh year of an economic recovery, the stock market wasn’t at all-time highs, and interest rates weren’t coming off seven and a half year lows.

Santa – let’s put that rally on hold for the time being, shall we?

The Market:

Historically speaking the week before Christmas generally sees relaxed, downward action in the markets. After that, we often get a Santa Claus rally from the day after Christmas into the first week of January. Our last December rate increase (2015) caused a market sell-off that lasted well into February 2016. I think that January and February 2017 selling makes sense as well, but with a twist. I think (with these last remaining weeks) we nurse the market toward DOW 20k into the New Year. And then I suspect that once the DOW gets its 20k hat, we will see a rotation out of the DOW and S&P and into the NASDAQ.

DoubleLine Capital's Jeff Gundlach is calling for the market fall to begin around Inauguration Day (Jan. 20)). He also cautions that a 10-year Treasury yield in the 2.75% to 3% area – would create problems in the financial and liquidity arenas.

Many pundits are calling for precious metals, and healthcare to be the highest performing sectors in 2017. The reasons for a rise in precious metals include:

- Inflation: U.S. and Chinese policies will cause inflation, and result in fund flows into gold. If President-elect Donald Trump cuts taxes, adds an estimated $7.2T to the federal debt, promotes additional spending on Social Security, Medicare/Medicaid, and infrastructure – higher inflation will follow. The Chinese have initiated spending $2T on infrastructure, and in the past 3 months’ zinc and copper prices have risen by 25%.

- Demand: In 2017, Chinese and Indian jewelry demand will continue to recover. Jewelry demand was weak in 2016 due to several non-repeatable factors: (a) curbs placed on Chinese gold imports, (b) tax hikes on Indian gold imports, and (c) a currency conversion crisis in India. Hong Kong retailers are already reporting a 25% rise in gold jewelry sales.

- Price: The paper price will have to come closer to the physical price for gold. Two weeks ago, the price for a physical ounce of gold in India was $3,000 / ounce (vs. the $1,200 paper price). The physical price of an ounce of gold is currently $50 higher than the paper price on the Shanghai gold exchange. These will converge over the coming weeks.

On the equities side of things, nobody is wearing the DOW 20k hat just yet, but it’s not from lack of trying. The markets have tried three times this week to get up and over 20k, but each time reality came into play. For example, Honeywell and other large industrials warned that their earnings were going to miss estimates, and then guided their earnings estimates lower for the next several quarters.

I think we will see DOW 20k sometime after Christmas, and before the second week of January. However, when we hit 20k – I will begin to short this market. Earnings season starts January 11^th, and the reality surrounding our economy will begin to sink in. This hopium rally has been fun, but I think we will see quite the correction.

To all, I wish you the very best Christmas. Enjoy the season, your families – and the feelings that they bring.

Tips:

Bank of America (BAC): A month ago BAC was trading at $17. It has experienced a 35% move higher (to $23) over the past month. The stock is expected to move at most $1.80 (either higher or lower) over the next 30 days. BAC’s $6 (3 standard deviations) move over the past 30 days had a less than 1% chance of statistically occurring. I’m looking for a decline in BAC, and am buying the (Delta 90) January $25 PUT options or the February $26 PUT options. In either of these cases, the risk vs reward is dramatically in your favor.

10-Year Treasury Notes (TXN): The interest rate on the U.S. 10-Year Treasury note (TXN) is currently 2.61%. Over the past several weeks our bonds (/TN) have been sold hard, and recently the seller has surfaced. The seller is China. Japan is now our largest international U.S. Bond holder. The interesting part of the story is that the Chinese sold our U.S. bonds (right after the election) to support their own currency, pay off their own debts, and plug holes in their own banking system. They are NOT buying U.S. stocks with those funds. Bonds are ‘ripe’ for a bounce here, and if we get that bounce in bonds – look for stocks to stop moving higher.

DOW Transports ($DJT): The DOW transports have rallied from 8,000 to 9,500 in the past 30 days – and what has changed in transportation? Nothing. As the transports begin to pull back (and they started last week), they often act as a leading indicator for the general stock market.

Remember the Blog: <http://rfcfinancialnews.blogspot.com/> Until next week – be safe.

R.F. Culbertson

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 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.