This Week in Barrons: 1-13-2019:
“He’s using the Border Wall to mask the upcoming recession.” … Nouriel Roubini
For years the ugly truth has been staring us in the face: our stock-market advances remain a game of artificial liquidity and FED / Central Bank jawboning – not organic growth. There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of our FED / Central Banks. In March of 2009, markets bottomed on the announcement of QE1. Since that time, every correction has been met with major central-bank interventions: QE2, Twist, QE3 and so on. When markets tumbled in 2015 and 2016, global Central Banks embarked on the largest ($5T) combined intervention effort in history. Our global Central Bank balance sheets peaked in early 2018 – with a market correction closely following. But first we had to digest massive un-funded tax cuts along with record stock buybacks, before things changed:
- In September of 2018 (for the first time in 10 years) our FED removed one word from its policy stance: “accommodative.”
- Secondly, the FED increased its Quantitative Tightening (QT) program.
The markets peaked in September of 2018 with the sugar high of the tax cuts fading, trade wars, and slowing global growth. The FED likes to claim it is managing policy based upon the economy, but the ugly truth these days is that our stock market is managing the economy. Big drops in our markets have had adverse impacts on our economy. In fact, recognizing the market’s newfound sensitivity to QT, FED Chairman Jerome Powell signaled this week that he’s “flexible”on interest rates. So let’s not mistake this recent rally for anything other than what it is: our FED (once again) coming to the rescue of stressed markets. But the reality remains, the artificial liquidity is coming out of these markets. Corporate debt has doubled since 2007, and Government debt is expanding with no end in sight – having risen by another $2T in the first two years of the Trump administration. Each successive recovery keeps producing less and less organically driven growth, and an ever-higher wealth inequality.
The issue is still the FED. They look you in the eye and tell you they are shooting for 2% inflation every year. On what planet is stability achieved by losing 2% of your purchasing power every year? Then they tell you that 2% inflation is OK because your wages will outpace that inflation. Really? In real terms, average hourly earnings peaked over 45 years ago. The January 1973 rate of $4.03/hour rate has the same purchasing power as $23.68/hour would today. And the last I checked, the minimum wage was nowhere near $23/hour. So much for the minimum wage keeping up with 2% inflation. Now the FED has something to take our attention off our dying economy – and that’s the border wall / government shutdown.
For 10 years I've been talking about a ‘global reset’, and in a lot of ways we’re in it. After all: (a) our debts cannot be repaid, (b) our monetary system (that devalues its own currency by 2% a year) cannot last forever, and (c) the IMF has already floated the trial balloon of a global, digital currency with Bitcoin being their first shot at that reality. So yes, our current system will be replaced with a single world currency – but when? All of the insurmountable debt loads, inflation metrics, and currency devaluations are in place. When you remove the U.S.’s one time ‘mood-boosters’ like: the unfunded tax cuts, additional federal spending, repatriated profits, buybacks, and extra debt – the entire growth story disappears.
Many are screaming about the FED’s rate hikes. Unless they get rates up, they’ll have no room to cut them during the upcoming recession. However, the issue for me isn’t the rates but rather the $50B/month balance sheet reduction. Liquidity is the grease that keeps the economy moving. The FED needed a distraction while it continued to reduce the balance sheet – and the current administration provided that ‘shiny object’ using immigration, border wall, and a government shutdown. Now, I think they will do everything they can to make it look like – they’re doing everything they can to save our economy. And they will use all of these current and upcoming ‘shiny objects’ (border wall, debt ceiling, trade war, and Brexit) as distractions. The crush is coming, and 2019 – 2020 is the time. Grab your popcorn and a good seat because the show is about to start.
The Market:
I think that the volatility we’re seeing in markets is exactly what we’re going to see for the next 2 years. We spent 9 years trading cheap volatility (relative to its long-term averages) and as we ‘revert to the mean’ it only makes sense that the volatility trade becomes more expensive for some time to come. That’s great news because instead of ‘watching paint dry’ – we are now playing with ‘quick drying cement’. It’s the same game, only a lot faster. Honestly, once you become accustomed to the speed and taste success in a highly volatile market – you’ll never go back. Several factors are adding to the increase in volatility:
- Interest and Unemployment Rates Converging: Despite the concerns of a trade war and other global issues, some of our stock market declines can be attributed the convergence of the inflation and unemployment rates. When the unemployment and inflation rates get within 1% of each other – it’s often a sign of an overheating economy. Historically this has marked the beginning of a prolonged downturn for stocks, followed by a recession a year later. Right now, the gap between U.S. unemployment and inflation is slightly over 1%. If the Fed maintains a ‘calm’ rate hike environment but the unemployment rate continues to fall – we could be looking at a slow 2019 followed by a 2020 recession.
- Consumer Confidence Falling: When consumer confidence drops, so do stocks. Last year, as consumer confidence hit a September high of 138.4 – it was no coincidence that stocks hit their highs as well. In November and December, consumer confidence dipped – leading to the worst December since the Great Depression. In other words, keep a monthly eye on the consumer confidence reports as there is a reasonably high and direct correlation.
- Government Shutdown and Debt Ceiling issues: A debt ceiling is the amount of money that a government is allowed to borrow. This amount can only be increased by a Congressional vote. The debt ceiling has often been used as a bargaining tool for political advances when the House and Senate are controlled by two different parties. The debt ceiling should come into play around March of 2019, and the last time we had gridlock between the two parties over the debt ceiling was in 2011. Back then it took months to raise the debt ceiling, leading to the first U.S. debt downgrade, and sending the market lower by nearly 20%.
- China and U.S. Ceasefire Ending: Around March, we will also have the ceasefire deadline in the trade war between China and the U.S. Both countries would fare better if the two could come to an official agreement, but I don’t think for a minute that China won't use the debt ceiling deadline to its advantage. The timing of both the trade war and debt ceiling deadlines will further add to the volatility and instability of the market in Q2. That means cash is king and will once again be considered a strong asset class in 2019.
- Brexit Is Coming: Finally, in March the U.K. is expected to officially leave the European Union (EU). Shortly following, the EU will be electing a new Parliament, followed by the appointment of a new President, and a new head of the European Central Bank as Mario Draghi will be retiring. All of these events could have implications for global markets.
Conclusion: I would never suggest being completely in or out, of any market. 2019’s Q2 has the makings of being extremely volatile. You may want to invest now, and then pull out before Q2 so that the debt ceiling and trade wars are resolved prior to diving back in.
Info-Bits:
- Alexa, where can I find a good divorce lawyer? Jeff Bezos: Amazon’s founder; richest man in the world; and head of a technological pioneering company – was not enough to save his marriage of 25 years. He is following in the ‘divorce’ footsteps of Google’s Sergey Brin (and his long time wife Anne Wojcicki), and Larry Ellison (73 years old) and on his 4thdivorce. Judging by the wording in the Bezos’ statement, a 50/50 split of the $140B fortune seems to be in the cards.
- MacKenzie Bezos – welcome to Billionaire’s Row: MacKenzie, are you looking for something in the $140B or the $70B neighborhood? $140B buys you: Kuwait or Morocco but drop to $70B and you only get: Costa Rica, Panama, or Luxembourg. Maybe you prefer a $140B solution such as: Netflix, IBM or McDonalds – or we can certainly spend $70B for: BMW, Prudential or CVS. Oh decisions – decisions.
- Samsung: announced that their margins are shrinking and revenues are missing estimates. So what else is new in the tech world!
- Government shutdown: shines a light on a bigger issue – 78% of U.S. workers live paycheck to paycheck. 81% of women vs 75% of men require the next paycheck to make ends meet.
- 20% of millennials: (aged 18 to 37) expect to die without paying off their debts.
- Chico's FAS: is closing 250 U.S. stores as it expands its digital network.
- Ford and Jaguar Land Rover: announced that they will be cutting thousands of jobs due to lower Chinese demand and confusion over Brexit.
- U.S. Population Decline: the U.S. fertility rate continued to dip below what's needed for the population to subsist. The 2017 birthrate was the lowest in 30 years.
Crypto-Bytes:
- GEN-X: At this year’s Consumer Electronics Show, Nano X revealed a Bluetooth enabled hardware wallet. Adding Bluetooth means that the Nano X can readily be used with mobile devices – removing a pain point for many of the company’s current Ledger S users.
- TOKEN ACT: Two lawmakers from Colorado have introduced legislation seeking to exempt some digital tokens from securities laws. Senators Stephen Fenberg (Dem.) and Jack Tate (Rep.) jointly filed a bill dubbed the “Colorado Digital Token Act,”proposing that digital tokens with a “primarily consumptive”purpose should be exempted from securities classification provided they are not marketed for speculation or investment. The move is aimed to remove “regulatory uncertainty” that could hold back firms offering marketplaces for tokens and others aiming to fund-raise using cryptos. The Colorado Digital Token Act will: “Enable Colorado businesses that use crypto-economic systems to obtain growth capital to help grow and expand their businesses, thereby promoting the formation and growth of local companies and the accompanying job creation and helping make Colorado a hub for companies that are building new forms of decentralized Web 3.0 platforms and applications.”
- Deadcoins.com currently lists 934 defunct Alt-coins.
- Investing.com is tracking 2,533 active coins – up from 1,300 a year ago.
- 2019 Crypto ETF: The SEC has indicated that it will approve a crypto-ETF only when there's significant evidence that it is virtually impossible to manipulate the asset class and it's a safe investment for the general public.
Last Week:
At least now we know why the stock market tanked in December. In recent days, Apple, Constellation Brands, Lennar, Samsung, and a host of others have lowered financial forecasts. For the fourth quarter, 72 of the S&P 500 companies have issued earnings warnings. That’s twice as many as have issued positive guidance.
And quietly,China is actively adding to its gold reserves, building infrastructure, taking over ports, and basically getting themselves in a position to lead the world. They will even be using their Yuan and Shanghai exchange for the purchase of oil.
Mysteriously, with China, Russia, India, Hungary, Poland and others buying tons of gold – the price of gold has not appreciably risen. This was a cable intercepted from the U.S. embassy in China, that was released via Wikileaks: “The U.S. and Europe have always suppressed the rising price of gold, and intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will act as a model and lead other countries toward reserving more gold." Gold bugs have always known that the U.S. was instrumental in capping gold for exactly that reason. I think many nations would be happy to see the price of gold explode higher. They're buying it for a reason, and it isn't to lose money. It's for stability, to diversify reserves, and to find a way to back their base currency. I believe that one day there will come a point where 90% of the world doesn't want gold to be suppressed any longer. I don’t know when that happens, but I like having some physical gold and silver around just in case.
Next Week:
Monday's have a history of not being so wonderful. We're in no-man’s land right now. We saw the S&P fall 20%, and now (in a couple of weeks) we have gained back half of that fall. What now? The foundation surrounding a global slowdown is real. The warnings out of the retailers are real. So, unless the algorithms are programmed to just ‘buy-buy-buy’ – the case for rolling over is strong. I have to think that next week is going to be volatile as it begins earnings season. If buyers are set to ‘cover their shorts’ around 2640 (which is the 50-day moving average), there is definitely going to be some push and pull around that S&P level next week.
- If the S&Ps breach 2640 – then we need to consider a rally to 2700.
- Gold has been strong from December onward, and I’m looking for it to run at least into 1310 per ounce – with GLD running to 122.50 and potentially 124.
In terms of indicators, the McClellan oscillator attempts to display oversold and overbought conditions. Recently it went from -80 (which is very oversold) to +80 which is extremely overbought – in under two weeks. The last time that occurred was in March of 2009 – when we began a 9-year uptrend. A while back I mentioned that the S&P was in a box between 2,400 and 2,650’ish. I also mentioned that if we get to 2650 – it might be a good time to go short. There's a bit of a problem with that. According to the guys that watch the commodity traders, if the S&P moves into the 2650 level – shorts would be forced to cover and trigger a significant short rally. I'm simply pointing out that although logic suggests shorting the S&P at its 50-day moving average (2650), a billion shorts suddenly covering their positions would easily punch through this resistance and we could quickly find ourselves challenging the 2800 level. So do NOT automatically think that hitting 2640 to 2650 level is the dinner bell for going short. But rather, we'll need to see how it evolves. We have to respect the idea that although logic says "down",the algobots could be programmed for “up” no matter what the news.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $6.38 / in @ $3.57),
- Canntrust Holdings (CNTTF = $6.12 / in @ $3.12),
- Canopy Growth Corp (CGC = $38.25 / in @ 22.17),
- Ceco Environmental (CECE = $7.30 / in @ $6.95), and
- NVAX (NVAX = $2.20 / in @ $2.04)
Crypto:
- Bitcoin (BTC = $3,620)
- Ethereum (ETH = 124.00)
- Bitcoin Cash (BCH = 132.00)
Options:
- BIDU (BIDU = $166.08) Bearish: Jan 18, Buy + 162.5 / -160 / + 155 Put Butterfly,
- Canopy (CGC = $38.25) Bullish: Jan 18, Buy +35 / -40 Call Debit Spread,
- QQQ (QQQ = $160.69) Bearish: Feb 15, Sold the -167 / +171 Call Credit Spread,
- Square (SQ = $66.20) Bearish: Jan 18, Buy + 63 / -65 / +67 Put Butterfly, and
- XLU (XLU = $53.23) Neutral: Jan 25, Buy +55 / -56 Call Debit Spread
Thoughts:
- Micron (MU): is one of the few equities that has an implied volatility (IV) rank over 70%, and doesn’t have earnings coming up in the next few weeks. MU bounced off its 52-week low in late December. There could be some extra risk premium in MU options – available to option sellers. If you don’t have an opinion on MU’s direction and think that it might just stay in a wide range, the short Iron Condor that’s long the 28 PUT and short the 30 PUT, short the 40 CALL and long the 42 CALL in the Feb weekly expiration with 42 days till expiration is a neutral strategy that collects a credit 1/3 the width of the strikes, and has a 74% probability of making 50% of its max profit before expiration.
- Home Depot (HD): I think every home project I do requires 2 or 3 trips to Home Depot. With home sales slowing, it could be that people will be fixing up their houses rather than moving. HD has earnings coming up on Feb 19, which has helped push its implied volatility (IV) higher. Even though HD’s IV rank is only 58%, that’s still high enough to create interesting short option strategies. HD has rallied over the past week to drive it off its lows and toward the middle of its recent price range. If you think that HD might stay in a range ahead of earnings, but don’t want to trade through earnings, the short iron condor that’s long the 160 PUT and short the 165 PUT, short the 185 CALL and long the 190 CALL in the Feb expiration with 38 days until expiration is a neutral strategy that collects a credit 1/3 the width of the strikes, has a 71% probability of making 50% of its max profit before expiration.
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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Until next week – be safe.
R.F. Culbertson
