This Week in Barrons –
1-8-2017:
“Nobody knows where the market is going. It’s
your job to know what to do when it gets there.”… Raghee Horner
Remember when Mr. Spock was
the logical one. This week SF and I
attempted to put some logic around President Obama's Affordable Care Act and
the decreasing U.S. unemployment rate.
Was Obamacare (with its employer mandate) simply a piece of a larger
employment puzzle? What if Obamacare was
designed to decrease the unemployment rate?
Currently the U.S. has a large part-time workforce. FED Chair Yellen has talked about part-time
workers being at ‘very high levels’ during each of her last three press
conferences, at nearly every speech in the last six months, and in both of her
past two Congressional testimonies.
Excluding the Great Recession, the millions of Americans who work
part-time but want full-time jobs are at their highest level in 30 years. Experts believe the current number of
part-timers is a ‘new normal’, and can be referred to as ‘hidden unemployment’. These part-timers are OFF the unemployment
line – yet over 25% of them are living in poverty. Most part-timers are: (a) paid less per hour
than full-time workers, (b) will lose their jobs before full-time workers, and
(c) are given no health benefits or paid time off.
The key provision that ties
Obamacare to the unemployment rate is the one that requires employers to offer
health care coverage to employees who work 30 hours or more per week – or pay a
$2,000 per employee penalty. To avoid
paying the penalty or health coverage, companies like Walmart, Target, Home
Depot, and a host of others lowered the number of hours that employees worked
(making them part-timers). The number of
part-timers has seen over a 50% increase since the pre-recession years. I think that the mandatory insurance
provision within Obamacare contributed to the increase in part-timers. Correspondingly, I believe that repealing
Obamacare will have the ‘unintended consequence’ of INCREASING the unemployment
rate because: (a) In order to avoid the insurance mandate, employers would have
hired multiple part-timers instead of a full-time employee, and (b) Once the
insurance mandate goes away, employers will then return to hiring full-time
employees (rather than the multiple part-timers) – returning part-timers back
to the unemployment line.
Therefore, if Obamacare is
repealed/replaced without the employer mandate, then look for a decrease in the
number of part-timers, and the unemployment rate to rise.
Coincident with this, the Senate
is holding hearings on foreign cyber threats to the U.S. The hearings are producing a definite
‘Russians are Evil’ theme. The hearings
are telling us that the U.S. only DEFENDS itself, and does NOT attempt to
influence other nations. Political
scientist Dov Levin (a postdoctoral fellow at the Institute for Politics and
Strategy at Carnegie Mellon University) found that the U.S. attempted to
influence as many as 81 foreign elections between 1946 and 2000. Often covert, these efforts included everything
from CIA operatives running successful presidential campaigns in the
Philippines in the 1950s, Chili in the 1960s, and Haiti in the 1990s – to
leaking damaging information on the Sandinistas in order to sway Nicaraguan
voters in 1990. Dr. Levin’s data came
from declassified U.S. intelligence, Congressional reports on CIA activity,
academic research on U.S. intelligence, diplomatic histories of the Cold War,
and memoirs of former CIA officials. His
research shows that the U.S. targeted the elections in 45 nations across the
globe, and in the case of countries such as Italy and Japan, the U.S. directly
intervened. So it doesn’t appear that
the U.S. can play the cyber-victim card any time soon.
It
also doesn’t appear that this witch hunt against Russia is going to stop. Let’s
all hope that PM Putin bites his tongue during this provocation and remains
calm. We’ve been poking the Russian bear
in the eye for several years now, and Trump is the ONLY shot we have at not
going to war with another nuclear power.
I’m hoping that sanity prevails so that we can all: “Live long and
prosper.”
The Market:
It will definitely take more
than a few weeks to determine the true impact of a Trump Presidency, but it is
clear that the Stock and Bond markets have reacted immediately. U.S. GDP growth in 2016 is still expected to
be a meager 1.5%, with Global growth surpassing 3.1%. With tax cuts and less regulations, early
forecasts for U.S. GDP in 2017 have moved up to 2.5%. Recessions are almost never forecast, but we
average one every six years, and our last one was 7 years ago.
-
U.S. inflation
and protectionist threats have caused the global currency war to reaccelerate. A strong U.S. Dollar hinders U.S.
earnings growth, and may slow the FED’s planned rate increases.
-
Low earnings are clearly a function of low global GDP growth. With 50% of S&P revenue coming from
outside the U.S., the strong dollar will be a considerable head-wind to growth.
-
Watch the 3rd
party oil auditors for some shenanigans over the next 180 days. Cash strapped countries will see oil hit $55
a barrel, and then they will begin to flood the market with oil – dissolving
the production agreement and the price.
-
Watch copper as
it’s often the commodity used to predict growth and corresponding inflation.
-
Gold is
‘shortable’ as long as it remains less than $1,200 an ounce. Over that – the race is on to the upside.
-
Thanks to Chris
@ Rockhaven Capital for the following graphical display:
There is a ‘turnaround’
theme coming out of stock newsletters.
Below, I’ve compiled a list of recommendations from the ones that I
read:
-
Crocs (CROX)
= $6.85 – They have brought in new management with experience in shoes and
turnaround execution. They’re closing
unprofitable stores, and revamping distribution networks.
-
Oaktree
Capital (OAK)
= $37.50 – Since 2010, companies have issued high-yield debt at record
levels. With interest rates going up,
and a lot of the debt coming due – it will be harder for companies to refinance
that debt. Oaktree Capital specializes
in refinancing and restructuring debt, has funds available, and pays a 6%
dividend.
-
Royal
Caribbean Cruises (RCL)
= $82 – Even without economic growth, cruise lines like Royal Caribbean,
Carnival and Norwegian are benefiting from the aging population.
-
Amgen (AMGN) = $146 – Biotech stocks were hammered on fears of
government controlled drug pricing.
Amgen is one of the best in the space, and is trading at just 13 times
earnings. It has important drugs, a robust pipeline, and a boatload of cash for
stock buybacks, funding R&D, and paying a 2.7% yield.
-
Priceline (PCLN) = $1,466 – Priceline’s booking.com
is the top travel website. Europe
(because of its size and number of independent hotels) relies on booking.com to bring in guests.
Priceline’s strong hotel network makes a good competitive advantage and barrier
to entry.
-
Eaton
Vance (EV) = $42 – Bond
funds (like EV) have performed badly as of late, and investors favor ETFs over
managed funds. But if the indices stall after years of steady gains,
managed bond funds such as EV could once again have their day in the sun.
The mood of the analysts
continues to be rosy. I’m constantly
hearing how wonderful things are, and how the market is fine to buy now.
I still think the ‘powers that be’ want to get to DOW 20K for a couple days so
they can bring out the hats and high five each other. On Friday, the DOW made it to 19,999.63 – 37
cents away from DOW 20K. They had their
hats in hand, their kazoos tuned up, and the confetti ready – only to be
delayed once again. The question is: Did
we get ‘close enough’, or does it need to see an actual 20K print? I
think we will attain 20K and continue to consolidate around it – prior to
producing the next definitive move lower into a meaningful correction.
In 1999, it took us quite
some time to wobble around, and break through DOW 10K. The market is still ‘luring in’ January 401K
money. Tax selling hasn't hit yet, and
momentum is still on the side of the buyer.
After Inauguration Day, as earnings start to pour out, I think we will
see the market pull down. Because of the
market’s price and the large amount of ‘hopium’, I'm not a big believer in this
market – and am forever reminded of the Greenspan quote: “Markets can remain
irrational, longer than you can remain solvent.”
TIPS:
I’m reminded of a quote by
Doc Severson: “Tops are a process, and bottoms are an event.” This refers to the fact that a ‘topping pattern’
takes time to develop and execute – where a bottom can be signified by an event
such as BrExit or an election. The chart
below and on the left shows the past year, with the Russell ‘small cap’ index
on the top (purple line) leading the way higher, and the NASDAQ trailing. The chart on the right is the past week –
showing a dramatic role reversal with the NASDAQ leading the way higher and the
Russell falling.
With market and sector
rotations being as immediate and violent as they are, it might be wise just to
buy the big ETFs here. If we’re going to
hit 20K – then the DIA and the SPY should move in tandem. I think that the indices are safer than
individual stocks right now.
This past week there was a
rotation into technology. Keep an eye on
the semi-conductor ETF: SMH. I think
that the technicals are going to start improving in this sector, and if so –
the SMH could make a nice move higher in the near future.
I believe that a pullback is
coming because:
-
VOLATILITY is
extremely low,
-
BONDS are
rallying. This should cause the
financials (XLF) to sell off, but they have not (as of yet). Watch this over the next several weeks –
potentially coincident with their earnings announcement(s).
-
TECH is rallying
prior to earnings, but a STRONG DOLLAR will be a drag on their earnings.
-
The RUT (Russell
small cap index) could be signaling the future – again. In November, it foretold the markets moving
higher. If it continues moving lower, it
will bring the rest of the markets with it.
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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