This
Week in Barrons – 4-23-2017:
“…Closed today due to government shutdown.”… Smithsonian Institution
Thoughts:
Why does
everything in our government ALWAYS come down to the last minute? The
above is a picture of the sign posted on the gate of the National Zoo in
Washington, D.C. – advising visitors that the institution was closed due to the
partial government shutdown on October 15, 2013. If the U.S. Government fails to avert
a shutdown next week, investors should hope that Wall Street treats President
Donald Trump like it did Barack Obama and not Jimmy Carter. According to LPL Financial, markets
have shown modest weakness during government shutdowns (falling an average of
0.6% over the period of the closure), but show more dramatic shifts when a
single political party controls the executive and legislative branches of
government.
A 0.6% retreat would hardly be catastrophic
for the markets (which remain a few percentage points from all-time-highs), but
the single-party control of the current government could mean the market is more
vulnerable and its reaction more severe than normal. In the 5 instances where there was
single-party control, the markets were decidedly weaker in 4 of them, including
a 4.4% drop during an 11-day closure in 1979.
A single-party government shutdown does signify ‘rough waters to come’
surrounding passage of any major legislation – something markets are
particularly attuned to right now. This
rally (that was sparked by Trump’s election) has started to unravel with the
pulling of the health-care reform act.
The prospect of continued difficulties passing other economic agenda
items such as tax reform, infrastructure, and regulation reform – will cause
the markets to believe that their rise was unwarranted.
Federal government operations are currently funded
through April 28, next Friday. Without a
new spending bill, the government would ‘partially’ shut down for the first
time since 2013. Many federal employees
would be furloughed, but others (FBI agents and air-traffic controllers, for
example) would stay on the job. National
parks would close, but the U.S. Post Office would remain open. That was the situation from Oct. 1-16, 2013,
the last time the federal government partially shut down, due to a battle over
the Affordable Care Act. Washington flirted
with a shutdown in September 2015 over funding Planned Parenthood, and again in
December 2016, over health-care benefits for miners – but last-minute deals (in
both cases) kept the government open.
During the 2013 shutdown, 850,000 federal employees were furloughed
immediately. However, most civilian employees went back to work after a week.
Congress is currently on vacation, and when
lawmakers return they’ll have only days to head off a government
shutdown. Senators are due to return Monday, April 24, with House members
scheduled to come back a day later.
Before leaving, leaders signaled that they were likely to exclude the
most contentious provisions from legislation needed to keep the government
running past April. For example, House
Speaker Paul Ryan suggested that they would not eliminate funding for Planned
Parenthood, and Sen. Roy Blunt suggested that the April bill would likely
EXCLUDE President Trump’s request to start the U.S.-Mexico border wall and any
boost to military spending. Isaac
Boltansky of Compass Point Research & Trading expects lawmakers to return
from recess and quickly pass a short-term funding extension (Continued
Resolution) before passing another funding package that would postpone the
entire budget to the fall.
In terms of funding Trump’s $30B to $54B
increase in military spending, the first step is to eliminate the sequestration
verbiage surrounding the current defense budget. This keeps current spending limits at Fiscal
Year 2016 levels minus 10%. Some in Congress want Defense to remain on
‘Continued Resolution’ (CR) status. After all, CR is an easy way to
maintain the status quo, and cut the Fiscal Year 2017 budget without having to
address any specific programs. Until
they fix the sequestration verbiage, no increases will occur and Defense will
be forced to take the pre-negotiated 10% cuts.
Many of our military think that our own internal sequestration verbiage
is a much greater threat to homeland security than anything outside our
borders. I think that there will be a
few days of government shutdown – then President Trump will ‘blink’ and agree
to extend the CR past April 28th.
This will be followed by another short-term CR until the end of August –
at which time a real budget will be worked out.
I think we will eventually fix the sequestration verbiage but it will be
at the 11th hour. Right now,
with healthcare, tax reform, building the wall, and infrastructure still all up
in the air – an adjusted August deadline is just another 11th hour
decision.
The Market:
We have a military war raging in
Afghanistan, Syria, and maybe N. Korea, but we have a ‘war of truth’ being
fought within our own borders. So much
so that this past week Steve Ballmer (former CEO of Microsoft) opened a new
data mining site: www.USAFacts.org that
attempts to put all of the governmental data in one place. But even with this, there is a renewed
escalation of tension within the U.S., and recently the ‘gloves have come
off’. One recent video documented Yale
students signing a petition to repeal the First Amendment - the part of the
Bill of Rights that guarantees their own right to freedom of speech, religion,
the press, assembly and, ironically the right to petition. The world continues to have difficulty
telling fact from fiction. Last week
Bank of America’s Michael Hartnett noted: “Central
Banks (ECB & BoJ) have bought $1 trillion of financial assets
just in the first four months of 2017.
This amounts to the highest buying on record. This Liquidity Supernova is the only
explanation why global stocks & bonds are showing annualized double-digit
gains year-to-date despite Trump, the French elections, and N. Korea."
This quest to ‘prop up the stock market’
began after the great crash of 1987, when President Ronald Reagan created his
‘Working Group on Financial Markets’.
This group was tasked with ways to prevent market crashes before they
happen. Wall Street coined them: the
‘Plunge Protection Team’ (PPT). This
past week Dr. Pippa Malmgren (a former member of the PPT) said: “It’s not conspiracy theory, it is
conspiracy fact. There's no price discovery anymore by the
market because governments impose prices on the market." When you have a group designed to keep an orderly market, and a
member of that group admitting to setting prices – we have now confirmed our
government’s direction, ability, and intention.
At least we know why the market is over-priced – yet it holds up and
continues to push higher.
So, where do we go from here? Factually, the data is eroding: (a) retail
sales are soft, (b) the FED is still threatening to raise rates, (c) housing
starts are falling, (d) automobile purchases are cooling off, (e) the Purchasing
Manager’s Index (PMI) and the Consumer Price Index both missed their targets,
(f) GDP has been revised downward from 3% to almost nothing (0.4%), and (g)
earnings (and even ‘adjusted doctored-up’ earnings) are mixed. But more importantly, there is a lot of
speculation surrounding what the global markets will do based upon the results
of the first round of the French elections. The common thinking is
that if Le Pen wins, the market might get soggy – as she's in favor of leaving
the EU and ending their immigration nightmare.
However, didn't we hear that very same thing about the market prior to
Trump winning? And also on Friday the
Trump people came out and said that next week they would be announcing the
biggest tax cut plan "maybe in history".
Therefore, next week we have (a) the initial
outcome of the French election and (b) the possibility of an announcement
surrounding an upcoming tax plan. It’s
my guess that the market will push higher no matter who wins in France and
irrespective of the validity of Trump’s new tax plan. Why, because the Central Banks are in
control. If they want the market up –
the market will go up no matter who wins.
After all, they’ve already purchased over $1T worth of financial assets
in just the first 4 months of 2017. It
doesn't sound like they're ready to let markets fall or ‘be free’ just
yet. So, it’s my guess that they poke and prod this market to (a) regain
their 50-day moving averages and then (b) trade sideways as we have for the
past month.
Tips:
With the French election and the new tax
proposal, there is a tremendous amount of volatility priced into the market
this coming week. Currently the 2,350
level in the S&P has been the center of trading since the start of the
year. For example, at the beginning of
last week the S&P was at 2,332 and had a $28 expected move. The high for last week in the S&P was
2,360 – matching the expected move to the penny (2,332 + 28). Algorithms and investors are trading the
expected move as if they are guarding a castle – with the borders of the
expected move not being allowed to be penetrated.
Looking forward, this week’s expected move is $47,
which puts the S&P potentially touching down as low as 2,300, and as high
as 2,395. This level of volatility has
not been seen since prior to our U.S. Presidential election. This means that traders are worried and
covering their ‘tail-risk’. Currencies,
emerging markets (EEM), and our own financial markets (XLF) are also looking at
extremely high sector levels of volatility.
A few recommendations:
-
EWY (the South
Korean ETF) = If you believe N. Korea’s rhetoric about launching a
“super-mighty preemptive strike that will send the U.S. back to the Stone Age”,
then expecting the S. Korean market to go down in the coming weeks would be a
natural. A May monthly call credit
spread in EWY (selling the $62 Call and buying the $63 Call) expiring in 28
days is a defined risk bearish strategy with a 70% probability of making 50% of
its max profit prior to expiration.
-
XLY (the U.S.
Consumer Discretionary ETF) = If XLY opens around $87.50 on Monday, look into
buying the ETF as well as a couple of the largest stocks in the sector: Home
Depot (HD) and Comcast (CMCSA). Both HD
and CMCSA are in ‘squeezes’, coiled to fire to the long side – and should move
both stocks nicely higher next week.
-
IWM (the Russell
2000 ETF) = IWM has a weekly squeeze forming, and has all its averages (8-day,
21-day, and 50-day) in alignment. I’m looking
for this period of congestion to resolve itself and move higher. Consider buying the $147 IWM monthly Calls
for August, 2017. IWM is currently
trading at $137, and as IWM would gain steam and move higher – the $147
(out-of-the-money) calls should dramatically gain in value.
-
Google (GOOGL)
and Priceline (PCLN) are both in daily squeezes and looking to fire long. Given GOOGL has earnings on the horizon,
selling Put Credit Spreads on both should be good for the coming weeks.
-
Chipotle (CMG)
is setting up to have another good opportunity to the long side for trading
this coming week.
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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