RF's Financial News

Sunday, July 9, 2017

This Week in Barrons - 7-9-2017

This Week in Barrons – 7-9-2017:

“Dog bites man – that’s not news. Man bites dog – now that’s news.” MJP circa 1990

Thoughts:

Joey ‘Jaws’ Chestnut won the Nathan's Hot Dog Eating Contest – for a record-setting 10^th time. He beat his own record – eating 72 hot dogs (with buns) in 10 minutes. I don’t know how anyone can eat 72 dogs in 10 minutes, but that’s just one of the elements that didn’t make sense to me this past week.

This week Deutsche Bank Research told us that the top 20% of all wage earners spend 60% of their earnings on luxury goods and 40% on necessities. The part that doesn’t make sense to me is that the lowest-income families still spend over 40% of their earnings on luxury items. It seems that spending (in general) is driven as much by emotions as it is by rational thought. And even though the lower fifth of wage earners cannot afford to spend money on luxuries – their emotions require it.

This week Tesla’s shares plummeted almost 20% - from $384 to as low as $310. The price drop doesn’t surprise me, but what doesn’t make sense is that it happened in spite of announcing that their launch of the much-anticipated Model 3 is two weeks ahead of schedule. Unfortunately, recent sales fell short of expectations, and Goldman Sachs came out and cut Tesla’s expected share price in half. In the past, investors were able to look past the numbers, but it seems looking past negative PR maybe too difficult for even the most diehard Tesla believer.

This past week the Trump administration called for increased fossil fuel extraction. This came on the same day that ‘Nature Magazine’ commented on rising sea-levels, drought, famine and the other challenges that face us if we don’t change our stance on climate change within the next three years. The group also said that the Trump administration “will result in the end of a livable climate as we know it.”

Environmentally on cue, Volvo announced that from 2019 forward their product line will only include hybrid or vehicles powered solely by batteries. Also, last week, Volvo successfully completed tests of their autonomous vehicle technology in Australia. Except for one small detail. It seems that Volvo’s autonomous driving system has no problem detecting moose, deer, elk, or caribou – but they are having an issue with hopping kangaroos. They are not worried, and don’t expect any production delays.

A new study showed that single people pay more attention to their investments than married people. But the part of the study that surprised me was that: (a) single people are more connected, (b) have more friends, and (c) value a meaningful workplace more highly.

Finally, if you wish to buy happiness – a recent study advises buying a pet instead of Prada. According to the ASPCA, the average pet will cost you $1,270 during the first year. Studies show that pets provide us with social support that is critical for psychological and physical well-being. The interesting part to me was that pet owners: (a) had greater self-esteem, (b) got more exercise, (c) were less likely to shy away from relationships for fear of being hurt, and (d) were able to more easily stave off negativity caused by social rejection.

So, congrats to Joey ‘Jaws’ Chestnut for setting a record that I hope no one will ever break – because it’s just too much of a ‘man eat dog’ world out there.

The Markets:

“Good ideas keep you awake during the day. Great ideas keep you awake at night”…Marilyn vos Savant

On Friday, the street was talking about how wonderful the jobs number was. The headline said that we created 222,000 jobs in June. But once you subtract the 35,000 government jobs along with 102,000 created by the Birth/Death model – you are left with a meager 85,000 real jobs created in June. Sad, isn't it?

Word out of Europe is that they are beginning to believe that the ECB is going to start tapering their QE program. It’s my belief that without QE, without corporate bond buying, and without the Central banks buying stocks – I just don't see how we can hold the market levels that we've attained. That's not a today thing, in fact in the short term we could see markets reclaiming their old highs.

Last week the International Monetary Fund (IMF) pared its outlook on U.S. economic growth, due to growing uncertainties around our nation’s fiscal policies. The IMF’s U.S. GDP growth forecast for 2017 has dropped to 2.1%. The Trump administration has predicted that annual GDP growth will reach 3% by 2021, and continue that rate through 2027. However according to the IMF, these projections are unlikely to materialize since this implied level of acceleration has only occurred during periods of strong global demand and during recoveries from major recessions. They also mentioned slowing productivity gains and an aging population as potential headwinds to our nation’s growth. But the IMF’s moderately negative adjustments to growth forecasts for the next few years should not spell bearish sentiments for U.S. markets, especially amid solid corporate earnings. More than policies, it will be fundamentals that ultimately define a market’s long-term potential.

Marketwatch published it’s 8 Market Threats for the last half of 2017:

The ‘Season of the Witch’ is right around the corner. Historically, August is the most volatile month for stocks – because September and October often bring the largest market declines.
Investors are too complacent. Overly-confident investors are more likely to be shocked by negative news, and sell when it happens.
There is a changing of the guard at the top. Much of the 2017 market gains can be attributed to the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google). That changed in early June, and currently the market is awaiting its next leadership group.
Baby boomers are programmed to mess things up. Boomers are not prepared for retirement, and returns on cash and bonds are excruciatingly low. They have piled into stocks, but pull their money out on any decline – further amplifying downside moves.
Disliking Wall Street banks is coming back to haunt us. With fewer institutions making markets, liquidity is reduced and trading is thinner. This will amplify declines when volatility strikes.
Geopolitical risks could boil over at any moment. North Korea is regularly testing ICBM missiles. ISIS-inspired terror attacks are everywhere. China is flexing its muscles in the waters off its coastline. European voters are rebelling against the European Union. And President Trump has been termed a ‘real wild card’ by his peers.
Doubters of our FED may be in for a big surprise. FED members expect three rate hikes this year, next year, and in 2019. However, a lot of investors aren’t buying it, and are unprepared for it to come true.
The market is developing a split-personality. Signs of market divergence are everywhere, and this can be an early warning sign of greater volatility ahead. "As the indices make new highs, you want to see more stocks participating" says Leuthold’s Ramsey. “Without market uniformity, you’re generally putting too few eggs in one basket.”

We are now in that crazy period where whoever is not in the market, could throw in the towel and go all in. And with the Bank of International Settlements (BIS) getting ready to throttle back the global Central banks on QE, investors could be the last to know. A major sticking point will be the massive under-funding of our pension plans. Some major pension plans are running 60% underfunded, and could be a disaster for millions coming up on retirement. One way to know if our Central banks are going to push the market to DOW 30k, 40k, or even 50K – is to see if the big banksters start to mention pension funds changing their charters and being able to put more money into the stock market instead of bonds. That would mean that pension funds would be allowed to offset their shortfalls by investing more in stocks, and that would tell me that banksters would continue to drive this market higher. Absent any kind of pension plan discussion, this market could be in ‘wait and see’ mode until after earnings.

In the later stages of a recovery: (a) debt levels expand, (b) spending picks up, (c) interest rates start to rise and (d) eventually choke off the rate of expansion. There are plenty of reasons to think that we are near the end of the post-financial crisis recovery. The signs of a recession are: (a) people stop borrowing and spend less, (b) people try and pay off debts and save more, (c) interest rates fall, and (d) corporate earnings drop – along with asset values.

In terms of debt levels, American household debt levels hit $12.73T in the first quarter of 2017 – which is slightly higher than where they stood when the financial crisis kicked off 10 years ago. In terms of spending, both home and auto sales have been declining for a few months. Morgan Stanley has lowered its auto sales projections for 2017 through 2020, and Ford had already announced layoffs and salary cuts to offset their sales slowdown. Finally, oil prices continue to be weak. When oil prices rallied after OPEC agreed to extend production cuts, U.S. oil companies started drilling like crazy and banks started lending to oil companies again. If oil prices continue to fall, oil companies will have to cut drilling and jobs, cash flows will shrink, and banks will once again be overexposed to a weak sector of the economy.

The irony of all of this is that both consumer and business sentiments are high, earnings should be good, and stocks are at elevated levels. Many people interpret this to mean that growth is on the verge of accelerating. The problem I have is that the numbers are getting weaker instead of stronger. Housing costs are up 19% over the last year. Tax burdens are up 10%. Auto insurance is up 9%, and wages are not rising. Consumer spending (which accounts for two-thirds of the U.S. economy) has been flat for the past two months. I simply don't see much reason to think spending is going to suddenly accelerate.

What can you do about it? Consider buying portfolio insurance. Purchase put options or hedging ETFs such as: HDGE. Both of these options increase in value when markets decline – and eventually even this market will revert back to the averages.

Tips:

“Some things you learn best in calm, and some best in storm”… Willa Cather

Do I think that a recession is imminent? No is my short answer, and here is why:

- The Standard and Poor’s 500 Index (SPX) closed yesterday firmly within its trading range – telling me that once again the bulls bought the dip.

- The Russell 2000 Index (RUT) also swung all the way back last week to trade comfortably near its highs.

- The NASDAQ Composite Index has been the most bullish this year, but the Goldman Sachs critique of the FAANG stocks on June 9^th took the NASDAQ down and it has not yet recovered. The index opened on June 9^th at 6330 and closed yesterday at 6153, up 64 for the day, but remaining well off of its earlier highs.

- The S&P volatility Index (VIX) closed yesterday at 11.2%, well within its yearly range. If we examine the November 2016 correction when the VIX moved from 12.9% to 23% in 9 days – we are currently not seeing that kind of volatility movement.

- Trading volume is another critical market indicator. Above average trading volume reinforces the momentum of price movement. This past week’s volume is slightly below normal, telling me that traders are not panicked or making any large moves.

- When comparing several stats to the last major market correction in November 2016:

o The Put/Call ratio is now 0.66 vs. 0.99 in Nov. 2016.

o The percentage of NYSE stocks above their 200-day moving average is 65% - compared to 54% in November.

o The SKEW Index (where lower scores are better) is currently 132, vs. 141 in November of 2016, and 154 in March of 2017.

o And lately traders are buying (rather than selling) when markets hit their intraday lows.

I remain cautiously optimistic, and my recommendations include:

- SPY (S&P) is up 8.5% year to date (YTD), and has a 68% probability of ending the year between 210 and 260.

- QQQ (NASDAQ) is up 15.2% YTD, and should end the year between 114 and 150.

- IWM (Russell Small Cap) is up 5.2% YTD, and should end the year between 119 and 155.

- American Airlines (AAL) – look at SELLING the July 14^th, +49.5 / -51.0 Put Credit Spread

- And Resmed (RMD) moved to all-time highs during the month of June (see below). Over the past couple of weeks, it has pulled back to its rising 20 period EMA on the daily chart. If it can hold this general $76 area – I like it for a continuation move higher.

To follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.

Please be safe out there!

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Sunday, July 2, 2017

This Week in Barrons - 7-2-2017

This Week in Barrons – 7-2-2017:

“We hold these truths to be self-evident, that all men are created equal,”… Declaration of Independence – July 4^th, 1776.

Thoughts:

Happy July 4^th. The legal separation of the 13 Colonies from Great Britain in 1776 actually occurred on July 2 – when the Second Continental Congress voted to approve a resolution of independence. After voting for independence, the Congress then turned its attention to the statement explaining its decision called The Declaration of Independence. Congress approved the Declaration of Independence two days following the resolution – on July 4, 1776. I have to think that our founding fathers would be shocked to see the nation they created – today. Not because of the advances in technology, but rather due to our confounding system of freedoms.

- If you told one of our founding fathers that it's illegal to cook a turkey dinner, take it to the park, and feed the homeless – you’d get a why?

- If you told one of them that you can no longer bake cookies and sell them door to door – you’d get a huh?

- I remember when my dad used to take me down to the Susquehanna River, build a small fire, have a beer, and fish. Today that same stretch of river has a sign with 11 No's on it including: no one after dark, no glass, no fires, no dogs, no fishing, etc.

I think our founding fathers would be less than impressed to see what a litigious society we've become and how NOTHING can ever be our own fault anymore. Go ahead make a list of the things do you do that aren’t taxed, licensed, or regulated. I think the shortness of that list speaks for itself. On January 1^st 2012, Ron Paul proudly made reference to over 40,000 new laws that were being added to our government’s books (on top of the existing hundreds of thousands). I wonder if our founders could even contemplate a reason to have 40,000 laws about anything.

On Tuesday, we will celebrate our breaking free from the rule of England. Yet in 2014 the Legatum Institute in London ranked the United States 21^st in the world in regards to personal freedom (which is calculated based upon civil rights and civil liberties protections). And as far as our intelligence and communications freedoms are concerned, the United States is ranked 41^st by Reporters Without Borders' World Press Freedom Index. They cited the U.S. Government's war on ‘whistleblowers’ (who leak information about surveillance activities, spying and foreign operations, especially those linked to counter-terrorism), and our country's lack of a ‘shield law’ (that would allow journalists to protect confidential sources) – as decidedly negative.

So, on Tuesday when you're having a hamburger with your friends, think about what a difference there must be from our founding fathers’ view of freedom to our current view. Think about ways you could help regain some of those freedoms – because the global elites will not return them willingly.

The Market:

“Should I stay or should I go?” … The Clash (1982)

Last week’s action in the NASDAQ has many investors asking themselves this very question about the stock market: “Should I stay or should I go?” I’m reminded that since February of 2016 some of the smartest financial big wigs have been sounding their market alarms. On the side of the markets trading lower there are:

- Ray Dalio (founder of the largest hedge fund in the world) came out in 2016 against the Federal Reserve’s plan to raise interest rates.

- George Soros (noted global investor) admitted betting against market growth, shorting Asian currencies and the Dow Jones Industrial Average.

- And Citigroup, in their latest market outlook talked of credit and equity drying up as a response to tightening monetary policy – thereby increasing the threat of a global recession.

And on the side of the markets going higher we have:

- Larry Edelson (editor of Money and Markets) predicts: "The Dow Jones Industrials will catapult to 31,000 over the next two years."

- Ron Baron (CEO of Baron Capital) says: “The DOW is going to 30,000."

- And Jeffrey Hirsch (editor-in-chief of the Stock Trader's Almanac) believes: “The DOW will surge to 38,820 beginning in 2017."

The BEARS say: (a) the global economy is on the ropes, (b) global debt loads are out of control, (c) we're 9 years into the second longest recovery in history, (d) economic data has been ‘fudged’ to look better than it is, (e) valuations are stretched, (f) increasing rates will most certainly end the expansion, (g) baby boomers are pulling money out of markets and slowing their spending (h) millennials don't have the salaries to create more overall demand, and (i) those promised tax cuts won't be all that promising. The BULLS say: when you examine past mania's you always see a market that gradually inches higher and then explodes to the upside in a very short period of time – and we are not there yet. Therefore, with trillions of dollars still sitting ‘on the sidelines’, as the market continues to inch higher – at some point people will ‘throw in the towel’ and give us a final panic melt up.

I have no issue with the BULL theory, because it has its basis in history. I also agree with the afore-mentioned panel that IF the Central banks stopped printing money, we would be in a global depression within 6 months. I believe that the ONLY reason we're at DOW 21K is because the Central banks printed money, distorted interest rates to zero, and started buying stocks. My only question is: “Do the powers that be want the DOW to go to 50,000?” It would certainly make the top 5% of the population a whole lot of money, but wouldn’t do a darn thing for the hundred million people that don't own any stocks. After all, we require a flat to rising market to support the umpteen trillion dollars’ worth of derivatives that are being used as collateral against loans. Any downward slide would cause a chain reaction and would be our own “weapon of mass destruction” according to Warren Buffet.

I think the 2^nd half of 2017 brings us a strange market. Recently the Bank of International Settlements (BIS = the Central bankers’ bank) has said that it is time for the world’s Central banks to tighten interest rates and unwind their QE positions. Last Sunday Reuters quoted them as saying: “Major central banks should press ahead with interest rate increases, while recognizing that some turbulence in financial markets will have to be negotiated along the way. Though pockets of risk remain because of high debt levels, low productivity growth and dwindling policy firepower – policymakers should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the great unwinding of quantitative easing programs and record low interest rates.”

If we were to assume that the BIS is laying down the law, and telling the Central banks what they should do – then their actions in driving up stock prices to absurd levels were merely creating the headroom necessary to absorb the corrections that will indeed happen along with their tightening. DOW 50,000 can ONLY happen if the Central bankers want it to happen. If Central bankers continue hiking rates, continue selling assets to reduce their balance sheets, and Draghi starts cutting his QE program from 65B a month to 25B – our market could easily fall 4,000 points. Throughout the remainder of 2017, I think that the Central banks are being told to take things down in a controlled manner. They don't want a panic crash, but they know things have gotten way out of hand, and it's time to work off some froth. I think our markets will be lower (not higher) by the end of the year.

After all, markets will do what the Central banks want them to do, and for the longest time that was to push stocks higher. Richard Fisher from the Dallas FED admitted on CNBC a couple months ago that it was the FED’s decision to drive stocks higher as a result of the 2008 melt down. Now it seems like their Central banking boss over in Brussels has said ‘enough is enough’. If that’s true, then this market is going lower by the end of the year.

However, in the near term the big news will be about corporate earnings. In just days we will be immersed into earnings season, and as always there will be winners, losers and ‘ok’ results. We should see sustained volatility throughout that period.

Enjoy this July 4^th holiday. Even though the U.S. is not quite the beacon of freedom that Adams and Jefferson created – it’s still a darn good place to live. And when I hear ‘The Clash’ ask the question: “Should I stay or should I go?” I’m staying – at least for the fireworks.

Tips:

“How should I buy my next car?”

The analysis is in. Assuming present day maintenance and interest rates, the cheapest way to buy a car is to buy a 10-year old used car, keep it for 5 years, and repeat the process. The most expensive way is buy a brand-new car, keep it for five years, and then do it again. The graphic also illustrates that if you buy a new car and keep it for 20 years, it will cost you less than if you bought a three-year-old used vehicle and drove it for 15 years.

The following graph is the latest Sustainable 50 list out of Goldman Sachs. After last week’s market action, we could use some settling down. It would be hard to create more chop than we saw last week. It was not just the end of the month, but the end of the quarter, and the end of the first half of the year. We saw some definite pops and drops – and even that was an understatement. After squeaking out a tiny gain on Monday, we dumped pretty hard on Tuesday, bounced furiously back on Wednesday, sold in panic on Thursday, only to bounce slightly back on Friday. It was quite the roller coaster ride.

Currently our market’s volatility is high. In fact, the only period in recent history that has had higher volatility was June of 2015 during the ‘Taper Tantrum’, and June of 2016 during BrExit. The reason for this past week’s increased volatility was the inefficiency of the NASDAQ marketplace. In the past several weeks, the NASDAQ has been exceeding it’s expected move – and that’s not a good sign. In fact, last week was one of the first weeks in 2017 where we saw a virtually ‘all-down’ day inside the S&P 100. Those types of events are often indicative of complete changes in tone within a marketplace. During that time, the only sector that was performing well was the financial sector – with bonds backing off their rally. However, if bonds rally next week – the financials are the only sector that can prevent this market from capitulating and pushing the S&P’s down into the 2,400 level. One of the tendencies of a highly volatile environment is to have the market open higher right out of the gate, and then continue fading during the day. This ‘gap up’ opening is often not due to buying, but rather shorts covering their overnight positions. So, don’t be too excited by a quick move to the upside on Monday or Wednesday – because it could be immediately followed by an even quicker move to the downside due to more short positions being initiated.

Next Week’s Recommendations:

- I’m watching the S&P (SPX = 2,423.41) and anticipating that it will remain within it’s expected range of: 2,399 to 2,448. Feel good if it can get above 2,438 and watch yourself if it gets below 2,411.

- I’m looking for a bounce in the NASDAQ and playing it via Selling the QQQ (137.64) Put Credit Spread of: + 133.5 / -135 for July 7.

- I’m watching Google (GOOGL) and Apple (AAPL) as they are both dangling near the edge of a cliff. If Google breaks under 925 to the downside, it could take the NASDAQ down with it.

- I’m watching both Facebook (FB) and Amazon (AMZN) as both have not been sold nearly as heavily as the other tech stocks. If the NASDAQ were to experience pressure, I would short Facebook first and Amazon second.