RF's Financial News

Sunday, March 19, 2017

This Week in Barrons - 3-19-2017

This Week in Barrons – 3-19-2017:

“You can take this job and shove it.”… Johnny Paycheck (1992)

Thoughts:

Sometimes I wish I was just clueless and happy. I remember:

- When we didn’t like our own economic growth (GDP) numbers – so we changed the way we calculated GDP.

- When the banks were about to be declared insolvent – so we allowed them to change the way that they valued their assets.

- When the Chinese and Russians were NOT stockpiling gold, and the Saudis are selling their oil for dollars instead of gold.

- And when the unemployment calculations were done the ‘old fashioned way’ – that included the 92m who had left the workforce.

Last week we were told that the unemployment rate had fallen to 4.7%. We also learned that December of 2016 held the highest rate in 10 years for people quitting their jobs. So I asked myself: “Where are all of these jobs coming from?” The following chart shows job applicants vs job openings for various industrial sectors. Inside the professional, finance, insurance and healthcare services sectors – there are 500k more openings than applicants. Every other sector is showing roughly 3m more applicants than job openings. It would naturally follow suit that wages in the sectors needing applicants would out-strip wages in the other sectors. Bottom line, yes there are a lot more applicants than openings, but job availability is much more sector specific than ever before.

Secondly, in order for jobs to increase – the economy needs to grow. The economy grew at a lackluster 1.6% pace in 2016. The Atlanta FED just halved their estimate for U.S. Q1 2017 GDP growth downward to 0.9%. The graph below shows the U.S. just now hitting its lowest 10-year average annual GDP growth rate (1.3%) in history.

As SF and I agree, it’s the growth rate that we worry about. 0.9% GDP growth does not allow us pay down the debt, address our failing Social Security and pension issues, revise Medicare and Medicaid, and invest in the infrastructure projects that our nation needs. Maybe we have reached a point of employment maturity – where those who have been educated and desire to work, are doing so. And those that are not employed are victims of their own inadequate skill sets – colliding with advanced technologies.

Unfortunately, President Trump’s new budget only exacerbates the sector / skill set jobs issue. While he is asking for $50B additional for defense and security, he is proposing deep cuts or outright elimination of programs at the major federal agencies including Agriculture, Housing and Urban Development and Treasury. What follows is a list of agencies whose funding Trump is asking Congress to eliminate, as well as selected programs he wants to cut at larger agencies.

I worry that Trump’s budget is not only going in the wrong direction, but fails to consider human resource availability. For example: Trump proposes the elimination of the “Meals-On-Wheels” program which delivers food to senior citizens. The delivery of food to one senior citizen for an entire YEAR is roughly equivalent to that same senior staying in a hospital for one DAY. The elimination of that program will (according to the Kaiser Foundation) cause increases in hospitals stays and institutional care of as much as $60,000 annually per individual. And just think about what will happen to the U.S. economy when older, low-income pensioners suddenly (as a result of Trump’s new healthcare plan) have 5% or 10% less to spend on necessities? Currently, the average household income of someone older than 75 is $34,097, and their corresponding average expenses total $34,382. If their pension benefits were to be cut or their health costs increased, their spending would fall, and due to the sheer number Americans over 75 – their decreased spending on food, energy and other staples would force a recession. Lastly, an increase in defense spending of that magnitude will openly show the world that the U.S. does NOT have enough engineers, technologists, scientists, and mathematicians to fulfill its own needs.

The Market:

Sir John Templeton once said, "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." I think we’re in the euphoria stage right now because: (a) bullish sentiment is at its highest level in 30 years, (b) consumer confidence is at a 16-year high, and (c) we have gone 107 straight days (a 22-year record) without a 1% decline in the S&P 500.

And just this week Janet Yellen decided to raise interest rates 0.25% for the 3^rd time in the past 11 years. The rate hike came at the same time that the Atlanta FED reduced their 1^st Quarter GDP estimate to 0.9%, and GM decided to layoff 1,000 workers from its SUV plant in Michigan. In its policy statement the FED pointed to un-spectacular and only small positive changes in our economic conditions. They also remarked that lifting rates from near-zero would provide them more cushion should any major shocks occur. In part, the FED is normalizing monetary policy ahead of any fiscal stimulus measures that President Trump may try to implement. And yes, since the election, the Dow Jones Industrial Average has climbed over 14%, the S&P has risen over 10%, and the Nasdaq has added more than 13%.

I'm not going to beat a dead horse. We're overbought, over extended, exhausted, and expensive, and we’ve been like that since December. The bulls are saying that we're simply building a base here before another sprint higher. The bears are saying that this market is running on hope, prayers, and central bank intervention – and if we don’t get something tangible soon it will be lights out. I'm somewhere in the middle of that mess.
The way this system is set up now (with so many financial instruments backed by assets) governments need this market to either go up or hold steady. That's why we don't see even the smallest of pull backs, and it keeps getting harder to justify leaning long. I think that the economy isn't strong enough to weather rate hikes, but the FED had no choice. If you remove the one-day ‘post Trump bump’, this market has virtually run in place since Feb 23. We're back to being trapped in a box. Right now, the box is 20,750 on the low end of the DOW and 21,115 on the upper end. We would need to close above 21,115 for a couple sessions in order to have any faith that another leg-up is coming. On the downside, a couple closes under 20,750 could easily snowball into a drop down to the 200-day moving average around 20,351.

Tips:

If successful investing is about buying low and selling high, the probabilities tell us that we should certainly be a bit cautious here. The top graph above shows us that 2016 saw the most hedge fund closures and the fewest hedge fund launches since 2008. In 2016, over 1m borrowers defaulted on their student loans. Even Bill Ackman’s hedge fund took a $3B loss last week when he liquidated his position in Valeant Pharmaceuticals.

The DOW over the past 12 sessions has only put in one organic up-day that did not come as a result of a manufactured, over-night ‘gap-open’. Now the age-old adage is true: “Never short a dull market.” Just when you figure the market is ready to roll over, it has a habit of waking up and moving higher. The bottom chart above shows the movement in the DOW over the past 6 months. The areas within the red boxes show sideways and chop followed by sharp moves higher in each case. I think that this period of sideways and chop will extend for a few more weeks before the next move higher. But this is happening NOT due to growth or economic reports, but rather because of all of the leverage and lack of volume within the stock market. The SKEW (a volatility indicator) set an all-time-high reading last week. So even though the market itself isn’t moving – investors THINK that the market is going to move dramatically to the downside.

Bonds are also showing a rare amount of volatility. After the passing of the Dodd-Frank legislation, banks were restricted from purchasing equity positions but not as much from purchasing bond positions. Therefore, trading volume has increased in bonds since 2008, leaving equity volumes quite small and virtually unsupportable in the case of a downturn. Which much of the big-name equity movement being caused by stock buybacks, and if the FOMC raises rates 3 more 4 times this year – stock buybacks will go by the wayside along with the market’s ability to move itself higher.

Having said all of that, for next week I’m looking at:

- PayPal (PYPL) – With the NASDAQ at all-time highs, PayPal (with the wind at its back) should do the same – pushing from 43 into about 45.

- NetEase (NTES) – Using the same rationale as above, NTES (sitting at $292) should be able to push back into $309.

- NetFlix (NFLX) – Using its earnings release and the $150 line as a magnet, buying a butterfly 2 weeks out should be a good strategy.

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, March 12, 2017

This Week in Barrons - 3-12-2017

This Week in Barrons – 3-12-2017:

“The fundamental things apply – As Time Goes By”… Herman Hupfeld

Thoughts:

Dear Mr. Sinatra:

Somedays I wish I could turn back time – back to when the fundamental things DID apply. The Snapchat IPO is my latest case in point. SNAP’s $29B market cap makes it larger than over 65% of the companies in the S&P 500. Couple that with their 2 whole years of sales history, massive losses, and all of their voting shares being controlled by two individuals barely born while you were alive – it’s a “case of do or die”.

But in many ways Mr. Sinatra: “It’s still the same old story” with the world being awash in oil. There is speculation surrounding how long any deal between OPEC and non-OPEC nations to limit production will hold up, but three elements are for sure: (a) U.S. shale oil production has come back with a vengeance (see below chart of rig count consistently increasing), (b) oil inventories stateside are swelling, and nobody was ready for this pullback in price (see price chart below).

I’ve heard rumors of a 20% ‘Border Adjustment Tax’ being placed on foreign oil to keep the domestic shale producers (and their banks) engaged and in business. I’ve also heard that Saudi Aramco (the $2T Saudi oil company that is going public in 2018) is ready to spend ‘whatever it takes’ to keep the price of oil elevated.

On Friday, I think the SEC exuded a little “passion, jealousy and hate” when they nixed the proposed formation of a Winklevoss Bitcoin Trust ETF. It seems they feel that the proposed ETF wasn't consistent with rules that require a security be "designed to prevent fraudulent and manipulative acts and practices, and to protect investors and the public interest." Secondly, the SEC felt that significant markets for bitcoin were non-regulated. I don’t understand, nobody talked about manipulation and non-regulation 2 weeks ago when more silver was shorted on a single U.S. exchange than produced globally during an entire year. And given the SEC allows investment in both Russian and Venezuelan ETFs, it goes without saying that ‘regulated’ would NOT be the word that comes to mind when I would describe both of those market places. But more than that, what I found interesting was the graph below showing the reaction within the precious metals market as soon as the Bitcoin decision was released. I can only assume that precious metal investors are frustrated at the blatant manipulation of their own markets, were hoping for a bitcoin alternative, and when none was forthcoming – dove back into their own manipulated and non-regulated markets.

Mr. Sinatra, today our government is so bloated, and faces huge budgetary constraints. I often remind myself of Peter Drucker’s quote: “It takes exponentially more people to manage more people; therefore, you should actually work on getting more done with less.” We the people (in thinking that our leaders could properly stimulate the economy) allowed our government to exceed their budgetary limits, borrow a lot of money, and make promises that they couldn’t keep. In fact, globally it’s virtually non-existent to find any country that runs a balanced budget, has a sound monetary policy, and hasn’t overpromised on entitlements. Therefore, there isn’t much that governments can do in terms of discretionary spending. Short of starting a war, the amount of truly impactful things that President Trump can do is limited. Governments can do very little to foster growth, aside from having simple policies, and getting out of their own way. But as the song says, “No matter what the future brings” – time will go by.

Markets:

This week the non-farm payrolls report came out, and we were told that our nation has a 4.7% unemployment rate. They actually had the audacity to issue that number in the face of a dramatically declining workforce participation rate. When talking to SF this week and using numbers directly from www.bls.gov (without adjustments) – he calculated the unemployment percentage for adults (over 16) as 37.3% of the total population. WOW.

During the last 8 years, investors have had to endure: a flash crash, a downgrade of the U.S. credit rating, a debt-ceiling crisis, a taper tantrum, GrExit (Greece), BrExit (Britain), and Trump. The Fed kept the punch bowls full, and made sure any setback was quickly alleviated with easy money. Easy money forced many savers into riskier assets like stocks and high-yield bonds, but that was the price paid to keep the romance alive. The graph below shows that for the first time since the U.S. presidential election, stocks made more 52-week lows than made new 52-week highs.

Going back a little over a week, the market put in a huge 300-point UP day on Wednesday March 1^st. Then the market spent the next 5 sessions giving it all back. On Thursday (the 6^th session) it held the flat line, and with Friday’s jobs report we gained 7 on the S&P and 45 on the DOW. The jobs report estimates were for the creation of 190K jobs in February, but the actual number showed that 235K jobs were created. Naturally, the fact that 124K of those jobs were as a result of a fictitious ‘birth/death model’ didn’t stop us for going green on the day.

In normal times, I would easily suggest that the uptrend is intact, and we’re about to regain those points that we just gave up. But this Wednesday, the Federal Reserve is going to raise interest rates – which normally doesn’t bode well for a market. Secondly, the U.S. debt ceiling takes effect on the very same day. The new Treasury Secretary has already gone to Congress to start the process of getting the debt ceiling raised, but will they be willing to do it? And if they don’t do it – what happens?

It’s possible that we see a market reaction similar to what we saw after the last two ‘bad events’. With BrExit, everyone thought that the market would roll over and crash, and instead it began a 4-month climb. With Trump winning the presidency, everyone thought that the market would crash, but ‘in the wee hours of the night’ it reversed a 1000-point slide and ran to all-time highs. Then the day before Trump’s speech to Congress, the feeling was that if he didn't do well we would roll over, and instead we gained 300 points the next day.

So, it’s certainly possible that the market reacts to the rate hike and debt ceiling the same way. Or because this market is so over-bloated that they could use the rate hike as the excuse to pull its plug. Some think that the debt ceiling is going to be the last straw. They feel that the Congressional Anti-Trumps will block everything, and force a Government shut-down that would make Trump look bad. That’s certainly a possibility. So, over the next couple weeks, all heck could break loose, or they could ignore it all and continue this mindless romp higher. That's how divided things are right now. I continue to nibble long, but with small size. If this market rolls over, I don't want a ton of exposure. And if it gets back above its March 1^st high, then I will get longer.

Tips:

Last week I mentioned investing in inverse ETF’s as my 2^nd best way to invest in a downward facing market – and correctly BL wrote me and mentioned that both Morgan Stanley and Raymond James have BANNED all inverse products. The ONLY short ETF allowed for use at each of those firms is HDGE, and I whole-heartedly recommend that product as well.

This coming week is a ‘primary’ market options expiration week, and an FOMC meeting. The SPX (the proxy for the S&P 500) has an expected to move for this week that is 50% greater than the expected move for last week. That means that this coming week should be 50% MORE volatile than last week. In fact, at no point in the last 6 weeks has the expected move been this large. And these days, the SPX and its related products control over 1/3^rd of the total options/market activity. The only reason that I’m bringing this up is that if the SPX (currently @ 2372) were to move lower than 2342 or higher than 2402 – the markets are poised to move an additional 60 points lower or higher in a hurry. Watch the financials and oil. If both financials and energy continue to move lower, it will drive the SPX to the lower part of its range – and that will spell danger in a hurry.

I’m watching:

- AK Steel (AKS) & Fleetcor Technologies (FLT): They have no support underneath their respective bear flags – so any move to the downside is shortable on Monday morning.

- Nucor Steel (NUE) moves with U.S. Steel (X) – only slower,

- Incyte Corp. (INCY) was a takeover candidate by Gilead Pharmaceutical (GILD) on Friday afternoon. If they don’t announce it on Monday, then short INCY at the open on Monday.

Selloffs normally start with Consolidation and then Divergences:

- Watch the foreign markets for any breakdowns.

- Watch the bonds to see if they continue their downward slide.

- Watch the Russell Small-Cap Index (RUT / IWM) to see if it continues moving lower and takes the SPX with it.

- Watch to see if the SPX gets under its Average True Range (ATR) trailing stop on a daily chart.

- Watch the other sectors such as: transports, technology, banking and energy – because EVERY selloff in the SPX has been preceded by a selloff in one or more of these sectors.