RF's Financial News

RF's Financial News

Sunday, December 4, 2016

This Week in Barrons - 12-4-2016

This Week in Barrons – 12-4-2016:



“There are decades where nothing happens; and there are weeks where decades happen.” … Vladimir Lenin

Thoughts:

Since the Trump election, maybe we haven’t had a decade’s worth of news – but clearly something has dramatically changed.
-       On November 17th, the BIS (Bank of International Settlements) issued an unexpected, stern warning that the surge in the U.S. Dollar is causing a global financial tightening.  “The U.S. Dollar is making the repayment of USD-denominated cross-border debt increasingly more difficult, and is itself the new fear indicator.”
-       On November 24th, the ECB (European Central Bank) warned that: “More market volatility in the near future is likely.  The potential for abrupt market reversals remains significant amid heightened global political uncertainty and underlying emerging market vulnerabilities."
-       On December 1st, U.S. Treasury rates skyrocketed from 1.8% to 2.45%.  This does not bode well for stocks (especially those at record high valuations).
-       Today (December 4th), Italy will vote to amend their constitution.  A ‘No’ vote will signal the resignation of their Prime Minister, increased market volatility, and a potential challenge to being in the EU.

The most unifying element around the globe remains our indebtedness to each other.  The Congressional Budget Office reported that during the last fiscal year the U.S. budget deficit jumped from $438B to $590B, while U.S. business debt rose by $793B.  During that same time period, our total gross federal debt surged by more than twice the annual budget deficit to $1.4 Trillion.  According to www.usdebtclock.org, under the Obama Presidency our national debt has risen from $8T to $19.904 Trillion, with over $104 Trillion in unfunded liabilities.  Even California (that wishes to secede from the union) contributed less than 70% of its annual required pension contributions during the past fiscal year.  Not accounting for risk, California’s unfunded liabilities are approximately $170B – or 125% of their total tax revenues.

Often debt distress is first seen via the automobile loan environment.  And within that auto loan arena, both John Oliver  https://youtu.be/4U2eDJnwz_s  and I agree on examining the subprime car loan.  Factually:
-       86% of all Americans commute to work via automobile.
-       25% of all automobile loans are of the subprime variety.
-       The average interest rate on a ‘Buy Here – Pay Here’ car loan is between 19% and 29%.
-       The average default rate on a subprime loan is 33%, and the normal default (repossession) timeframe is 7 months.
-       Banks like Santander and GM Financial are expanding their sub-prime lending capacities.  And just like in the housing crisis – groups of subprime car loans are being bundled together, and sold off in tranches to unsuspecting pension funds.

Recently, the number of delinquent, subprime auto loans hit their highest level since 2010, with over 6 million individuals at least 90 days late on their payments.  These graphs show an eerie data similarity to the 2007-2009 recession.


“The delinquency rate of subprime auto loans is pronounced and worsening,” said researcher Andrew Haughwout.  Consequently, auto finance companies that specialize in subprime lending, as well as some banks with higher subprime exposure are likely to be experiencing declining performance in their auto loan portfolios.  Because these loans are being repackaged as bond-like asset-backed securities, the health of the subprime market will also spillover on to the general credit-market as well.  After all, subprime auto-loan losses increased 19.4% in October – year-over-year.

But what else is new: Central Banksters have forced investors into uncomfortable positions for years, and have forced them to risk much greater amounts.  The more liquidity that our Central Banksters add to a market place, the more they disrupt the natural ebb and flow of the market itself.  Credit is beginning to tighten, and traders are beginning to pull-back as November was the weakest month on record for Treasuries. 

And lest we forget, credit is the lynch-pin of the Trump expansion plan.  I can easily lay out a scenario where everything Trump wants to do (no matter how noble) runs into problem after problem as our global connectivity and cross nation debt levels and derivatives rear their ugly heads.  It’s within that scenario that I see wicked and sharp market corrections that could result in our market being cut in half.


The Market:
As SF mentioned: “If I were the incoming administration, I would destroy all of the old numbers and myths – and create a new starting point.”  After all, to get to DOW 19k we had to manipulate everything from the way GDP is measured to the way we count the unemployed.  We even modified our inflation calculation, and the way companies are allowed to state earnings.  Just about every number you hear lately has been manipulated.  This past week:
-       ADP reported that 216K jobs were created (above estimates), but then went back and CUT the October employment number almost in half. 
-       The Atlanta FED reduced its 4th quarter GDP estimate from 3.6 to 2.7%.
-       The U.S. Dollar rose close to 13-year highs, while the Chinese Yuan slumped to 7-year lows.  Collectively, those events will force deflationary pressures onto the U.S. economy.
-       The December Jobs Report had the unemployment rate falling to 4.6% - but only because an incredible 466,000 more people left the labor market.
-       The number of people NOT in the labor force have hit yet another all-time high.  How can we be at full employment when over 95.1 million aren't in the workforce?
-       In the last 3 months, 99,000 Full-time jobs LEFT the economy, while 638,000 Part-time jobs were ADDED to the economy.
-       With one month left in the year, 90% of the stock market’s gains have come in the past 3 weeks due to one of the largest sector rotations of all time.  New money is NOT coming into the market, but rather existing money is coming out of ‘technology’ (such as Facebook on the left – see sudden red downturn) and flowing into financials and industrials (such as Goldman Sachs on the right – see sudden green upturn).



In bonds, November was the weakest treasury month on record.  Almost $2T came out of the bonds, and moved into the U.S. Dollar and some into the stock market.  The ‘magic level’ for bonds is around 150.  If bonds sell off below the 150 level in a slow and orderly fashion, the markets may be able to react normally.  If (however) the bonds continue to sell off at their current rate, huge interest rate increases will be triggered almost instantly.  And while interest rate increases are good for financials and banks (see map of the TNX – the 10-year Treasury index below moving from 1.8% to 2.4% in a week), everything else such as car loans and mortgages will be forced to a grinding halt.


Dramatic interest rate increases (such as the above) cause: (a) corporate stock buy-backs to immediately disappear, and (b) the high-frequency trading ‘carry trade’ to dramatically decrease.  What this means is:
-       High Frequency Trading (HFT) firms need to borrow money to execute thousands of trades per second.
-       As the cost of borrowing increases, these firms will need to make more money on each trade.
-       HFT firms will begin to cut-back on the number of trades they are making, along with being more careful with each trade’s profitability.
-       Unfortunately, HFT trades comprise 70% of the current market activity – and slowing that activity down will substantially reduce the liquidity in the marketplace.

The interest rate ‘threshold’ for where it becomes difficult to make any money as a high-frequency trader is around 2.5%.  We are currently sitting at 2.41% with bonds down around the 150 level.  The moment the HFT’s disappear – the S&P’s will be the first to feel the pressure.  And once the S&P index lacks liquidity – then everything else will follow suit.  On Thursday, we came right down to the 150 level, and stopped on a dime.  If bonds aggressively break below 150, you will see precipitous selling in the S&P’s.  The specific companies within the S&P that will be sold first will be (just like in 1999) the technology companies that are currently not making a profit, followed closely by hardware companies where margins are razor thin.  So going forward, watch the bonds ( /ZB ) and study the 150 level.  If it breaks below that with authority, be very careful.

So far it seems like energy, drillers and transports are still looking strong.  I think they're putting too much faith in their announced oil-production cut.  History has shown us that OPEC rarely cuts back as much as they promise.  And it’s very tempting to sneak in those extra barrels at the higher cost – until cheating and over-production cause prices to fall to $8/barrel.

Evidently traders came back from their Thanksgiving holiday not in the greatest of moods – as we immediately traded lower.  That’s not to say there were no big winners.  On the heels of the oil announcement, some of the oil stocks that increased were: WLL, OAS and HES.  Likewise, the financials continued their climb with Goldman Sachs leading the way.  But other areas like biotech and technology took it on the chin – with big names like Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT) losing money on the week.

Today, Italy will vote on a Constitution altering referendum.  A ‘Yes’ vote will allow the Prime Minister to appoint a new Senate, and move Italy closer to the European Union.  A ‘No’ vote will cause several members of their Government (including the Prime Minister) to step down, and allow a more ‘right-wing’ party (that wants OUT of the EU) to come into power.  A ‘No’ vote will also lead to mayhem over the next year – including questions over how their largest banks will be capitalized.  If Italy’s talks toward exiting the EU were to accelerate, then France would not be far behind, and the whole ‘one world order’ test tube that is the European Union could come apart at the seams.  But with a ‘No’ vote, would U.S. markets plunge like they did initially with BrExit, or would they soar to new highs like they did with Trump?  That’s a great question.

The line in the sand with the S&P is 2190.  If the S&P remains above 2190, then this market rally has legs.  If the S&P closes below 2190, then the market rally for the next week or two is over.  Take care and be safe out there!


Tips:

Chris Brecher (one of the sharpest, short-term, market tacticians out there) has compiled his list of market ‘shorts’ below:





































I’m looking for:
-       A pullback in the U.S. dollar – that you can play via FXE,
-       A pullback in oil – AFTER it trades into $52.50/barrel.  You can play this via: UWTI, XLE or HAL,
-       Continued upside moves in:
o   Gold – holding above $1,178 potentially bounces to $1,245/ounce – that you can play via GLD,
o   Silver – holding above $16.61, bounces, and is playable via SLV, and
o   Copper – holding above $2.57, bounces, and is playable via FCX,
-      The Nasdaq (NDX) moving higher if it gets over 4,771, otherwise look for a pullback to 4,650,
-       The S&Ps (SPX) moving higher if it gets over 2,199.5, otherwise look for a pullback to 2,150,
-       The DOW moving higher if it can get over 19,079, and
-       Facebook pulling back to the 105 level.

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!

Disclaimer:
Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews.  You can learn more and get your free subscription by visiting: <http://rfcfinancialnews.blogspot.com>.

Please write to Mr. Culbertson at: <rfc@culbertsons.com> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <rfcfinancialnews.blogspot.com>.

If you'd like to view RF's actual stock trades - and see more of his thoughts - please feel free to sign up as a Twitter follower -  "taylorpamm" is the handle.

If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing: http://www.youtube.com/watch?v=K2Z9I_6ciH0


To unsubscribe please refer to the bottom of the email.

Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations.  Mr. Culbertson and related parties are not registered and licensed brokers.  This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document.  Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.

Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.

Remember the Blog: <http://
rfcfinancialnews.blogspot.com/> 
Until next week – be safe.

 
R.F. Culbertson

Sunday, November 27, 2016

This Week in Barrons - 11-27-2016

This Week in Barrons – 11-27-2016:



Thoughts:
Remember when:
-       Everyone thought BrExit would never happen,
-       That the Chicago Cubs would never win the World Series, and
-       The Donald would never be elected as U.S. President?

The good news is you’re not alone, as most of the betting parlors got it wrong as well.  The bad news is that many people have not put this event behind them.  Police officers are being shot by ‘distraught’ Hillary fans.  Corporate CEOs are being fired for saying that they are going to KILL Trump.  And just this week Jill Stein (the Green Party’s nominee for President) announced that she had raised $5m to recount the ballot boxes in Wisconsin, Michigan and Pennsylvania.

When Trump won, my very first thought was: “This ain’t over".  I remember when Jill Stein (on October 12th) said: “A vote for Hillary is a vote for War".  I guess that Ms. Stein (within a couple weeks) went from being afraid of Hillary – to praising her.  She also put up a web site, proclaimed that the voting machines were hacked, and raised enough money to recount the votes in 3 states.

If they ‘find’ an extra couple hundred thousand ballots for Hillary, can they actually pull the win away from Trump?  I don’t know that process, but it certainly looks like they're going to try.  And what about the financial ramifications?  After all, the market has been soaring on the idea of Trump cutting taxes and raising infrastructure spending.  Hillary wanted to RAISE taxes.  I think if the election results were reversed, we would see a 20% market pullback – eliminating all of the post-election gains and then some.  I'm not saying that this is going to happen, but the website, the donations, and the hard push from the left to take back the country are all real.

Maybe this will all fizzle out and calmer heads will prevail, but with $5 million being raised in a couple weeks to meet the requirements – this is pretty scary stuff.


The Market...



As SF reminded me:
-       The US economy and inflation have grown an average of 2% per year for the past 16 years.  Unfortunately, our debt has risen almost 350% faster than our economy – at a 6.8% annual rate.
-       Under President Obama, Government debt levels have doubled, unfunded liabilities are over $100 Trillion, and our debt to GDP ratio has grown to almost 121%.
-       Private and business debt is over $67 Trillion, and over 400% of GDP.
-       And lest we forget, out of the 300M total U.S. population: 95M are missing from the labor force, 2M people are in prison, 43M are living in poverty and receiving food stamps, 57M are Medicare enrollees, 73M are Medicaid recipients, and 31M are still without health insurance. Source: www.usdebtclock.org

All of this debt is unsustainable, and can’t be paid back.  The American people want: jobs, tax cuts, a balanced budget, low-cost education, and universal healthcare.  But it’s not clear how we cut taxes and achieve a balanced budget.  Or how we increase the defense budget, maintain Medicare and Social Security, and address healthcare, welfare and immigration – without boosting our debt to ridiculous levels.

After all, Trump is proposing to cut the corporate tax rate from 35% to 15%.  But corporations (with deductions) already average around a 17% tax rate.  So, going from 17% to 15% will not make all that much of a difference in corporate earnings.  This is especially true given the fact that corporate earnings (since 2012) have only grown by 2.6% per year, and Wall Street (using current stock prices) is projecting a 2017 earnings growth rate of over 20%.  Excuse me, but I really don’t see anything close to 20% earnings growth in the 9th year of an economic expansion, with the dollar strengthening, and inflation rising.

Trump also promises massive increases in infrastructure and military spending.  Thanks to Chris Wiles of Rockhaven Capital Management for putting together the following graphics showing how $2.63 Trillion of ‘Mandatory Programs’ will be allocated.  And since Trump didn’t mention any cuts, it’s safe to say that this pie isn't decreasing any time soon.





And then there is Trump’s $1.15 Trillion budget for ‘Discretionary Programs’.   The military accounts for 54% of discretionary spending, and if that increases along with infrastructure spending – it’s safe to assume that the entire ‘discretionary’ spending pie will also get larger.












The current budget deficit is about $616B, and will only grow larger with increased spending and additional tax cuts.  Oh, let’s not forget that interest rates are beginning to rise.







As for the immediate stock market direction, what in the world is going on?  How long will this ‘low volume – melt-up’ continue?  The market is moving higher strictly on the ‘hopium’ of Trump creating a monetary explosion.  Day after day, the volume of stock market transactions goes down, all the while stocks are moving higher.  A healthy market has stocks moving higher on increasing volume – showing the world that more and more people are bidding and coming into the marketplace.  Stocks moving higher on lower volume, means that people continuing to leave the party.  Some red flags to this market are:
-       The markets have broken through major resistance levels and moved higher - institutional participation has been lacking.
-       Excessive bullishness by the financial media.
-       Retail investors are becoming more bullish, and are beginning to chase an already over-bought market.  Historically this is a sign that the end is near.
-       The Dow Jones Industrial Average has risen too high too fast – signaling a ‘blow off top’.
-       The smashing of bonds (as yields spike) along with the continued pullback in gold, and emerging markets is a huge red flag.
-       And FED Chairperson Janet Yellen making it clear that she will raise rates in December – should serve as a large dose of caution to the markets.

Veteran trader Mark Cook sees the market moving higher from here, but not by much.  “I think we are going to see a lot of inflation.  The way that Trump is wired is that inflation is beneficial.  The stock market doesn’t like inflation.  During the Reagan years, after the election there was a huge rally, only to go down substantially once he got into office.  The table is set for quite a correction for 2017.”  And a well-known market forecaster Tom DeMark is predicting as much as an 11% decline for the S&P: “If there is going to be a plunge, it should happen within the next two or three weeks.”

There was supposed to be an OPEC meeting on November 30th that would include some non-OPEC nations as well.  They were trying to (once again) get some oil production cuts in place – in order to push oil prices higher.  As recently as today, Saudi Arabia suggested that the meeting may be on hold as they make sure that all of their own OPEC members are on board with the production cuts.  I suggest that even with Iraq and Iran balking at the idea, we will get some sort of a deal this week.  This OPEC announced deal should strengthen the oil market, and extending the overall market ‘melt up’.  If the meeting does not happen, then oil will fade and put a dent in the mindless romp higher.  

Also, the impending voter recount in 3 states could derail the markets.

The last situation that could put a pause in the markets is the December 14th FOMC meeting.  At this meeting, the FED will announce that they will raise interest rates ¼ of a point.  I fear the ‘buy the rumor, sell the news’ scenario.  In other words, even though a rate increase is widely expected – I’m looking for the markets to pullback when the FED actually does it.

One thing is certain, just 14 sessions ago the S&P stood at 2083 – barely hanging on to its 50-day moving average.  Friday, we closed 130 points higher at 2213.  That pace reminds me of 1999, and NO it can’t go on forever.  So, if OPEC announces a deal on November 30th, our market will climb higher, and I would start to lighten up ahead of the FED meeting on the 14th of December.  If OPEC does NOT come away with a deal, I would begin to lighten up, and want to be out of almost all trades by the time the FED meeting rolls around.


Tips:


History tells us that every single time for the past 100 years, whenever there has been a change from a 2-term President – the economy fell into a recession 6 to 12 months later.  History also tells us that every single U.S. recession (except for one with explainable circumstances) occurred around an election.  So, between the history of revolving Presidents, and the that fact that only 1 time has the market run for longer than this current expansion – odds say that this isn't a new leg higher, but rather a blow off top and the beginning of a market decline.



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!

Disclaimer:
Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews.  You can learn more and get your free subscription by visiting: <http://rfcfinancialnews.blogspot.com>.

Please write to Mr. Culbertson at: <rfc@culbertsons.com> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <rfcfinancialnews.blogspot.com>.

If you'd like to view RF's actual stock trades - and see more of his thoughts - please feel free to sign up as a Twitter follower -  "taylorpamm" is the handle.

If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing: http://www.youtube.com/watch?v=K2Z9I_6ciH0


To unsubscribe please refer to the bottom of the email.

Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations.  Mr. Culbertson and related parties are not registered and licensed brokers.  This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document.  Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.

Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.

Remember the Blog: <http://rfcfinancialnews.blogspot.com/>
Until next week – be safe.

R.F. Culbertson