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 4th,
1776.
Thoughts:
Happy July 4th. 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 1st
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 21st 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 41st 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 2nd 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 4th 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.
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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