This Week in Barrons - 7-24-2016

This Week in Barrons – 7-24-2016:

“What if I’m wrong?”… Keanu Reeves

Thoughts:

It’s hard to believe that that the birth of the Internet happened 18 years ago, and Cisco is still trading 60% below its 1998 $82 price tag.  Just like the late '90's, those of us who are sticklers for fundamentals, are not having a ton of fun in today's markets.  It's really hard to get excited about buying a 10-year Treasury knowing that over the next decade you will earn a whopping 1.57% per year.  Or investing in a company like General Mills that is trading at 26X earnings, with a negative 3-year revenue growth, a negative 3-year earnings growth, and a whopping 2.5% dividend yield.

The simple fact is that no one knows what Negative Interest Rates are doing to our global economy.  Even one of the smartest men in the room, Charlie Munger of Berkshire Hathaway is confused.  At a recent meeting, Charlie responded to a question about negative rates by saying: “Of course I'm confused. Anybody who is intelligent who is not confused doesn't understand the situation very well.  There are a lot of folks running around giving very precise advice and suggestions about how all this plays out in the months and years ahead, and I would suggest that you pay attention to these highly confident prognosticators at your own peril."  The funny and sad thing about negative rates is that the Central Bankers who created them are equally clueless as to exactly what type of outcome we are to expect.

And that is why 2016 is so different than 1998.  Unlike 1998, today there are very few places of market undervaluation.  After seven years of massive Central Bank bastardization of the free markets, it is exceedingly difficult to determine what is right.  Our extended FED has invested in over 2,500 individual stocks and mutual funds, with the big unknown being how long they will be allowed to play in that sand box?  Will we have to see pension plans go under?  Will there be a popular uprising once people realize that the promises made to them will NEVER be honored?  There's an old poker saying, “After 30 minutes if you don't know who the patsy is – then it’s YOU”.  In this market it’s hard for me to identify the patsy, and that means that it could be me.

So what if I’m the patsy, and I’m wrong?  A couple weeks ago FBI Director Comey told us that: (a) Hillary lied under oath, (b) Hillary did have classified documents on her private, unsecure server, and (c) Hillary’s server was probably hacked.  I remember blasting Dir. Comey for NOT pushing for prosecution because it was his view that no prosecutor would have taken the case.

But something didn’t sit well with me.  What if I was wrong?  Dir. Comey obviously knew that the American public would boo, shout ‘double standard’, and talk about ‘selling out’.  And then it dawned on me – under normal circumstances, the FBI would have completed their investigation and presented their findings to the Attorney General for her decision.  The FBI would NOT have told the public what they found.  You and I would NOT have heard about the classified emails, the lying, and the hacking.  But rather the Attorney General would have locked down ALL of the findings as evidence.

Dir. Comey (by doing what he did) allowed J.Q. Public to see what a #CrookedHillary – Hillary Clinton really is.  He put the facts out there for the whole country to see.  If he had continued with business as usual, Attorney General Lynch would have sealed those records and said nothing.  By suggesting that ‘No prosecutor would have taken the case’, he handed both Chris Christie and Rudy Giuliani (former prosecutors) the PERFECT fodder to go ballistic and say on the record: "If I was still a prosecutor, I sure would have TAKEN that case!"  In fact Governor Christie (at the Republican convention) held court, with the audience shouting “She’s Guilty”.  And Governor Giuliani looked directly into the camera and said: “As a former prosecutor, I couldn't have had a better case to prosecute than #crookedHillary Clinton!”

They could only say those things, because Dir. Comey did what he did.  Dir. Comey handed Gov. Christie, Gov. Giuliani, and the American people a chance to compare the FACTS, to Hillary's statements, and see if they still wanted to vote for her.  Comey handed the Republicans all the firepower they needed to continue a civil suit against her lying under oath.  In politics, there are no coincidences, and nothing happens that isn't planned.  What looked like the absolute abolishment of rule of law in America, where there's one law for the elites and another for us peons, has instead given the American public a chance to prosecute Hillary.

There's a lot going on out there including: racial and economic trouble, a bizarre Presidential race, terror, moral decay, military tensions, and the list goes on.  I’m looking for calmer heads, societal healing, and a continued hope that I am wrong.

The Market:

Factually:

-       I wondered when the layoffs and firings would start.  This week: Schlumberger announced that it is laying off 8,000 more, John Deere is cutting 11% of its workers in Moline, Illinois, and Conoco Phillips is cutting 1,000 jobs.

-       General Electric (GE) beat their estimates this week but the real numbers showed: Organic Sales -16%, Power Sales -27%; Equipment Sales -30%; Aviation Sales -37%.

-       Real per capita GDP has risen at an annual rate of 1.3% since the current expansion began in 2009 – less than half of the 2.7% average since 1790.

-       The Gross Federal Debt last quarter was 105.7% of GDP – compared to 73.5% in the final quarter of the 2008 panic.

-       This week the IMF came out and lowered it's growth outlook for the global economy.

-       The Residential Construction Report from the U.S. Census Bureau and from HUD reported that both permits and housing starts were down from a year ago.  For permits, they were down -10.1%, and the 2^nd annual decline in as many months.  In each case the year-over-year loss was in the multi-family sector.

-       Unfortunately economists believe that deficit spending is a trap that provides a transitory boost to economic activity that is more than reversed over time.

-       The best evidence suggests the U.S. Government deficit expenditures are costing the taxpayers 1% on each dollar spent.  That means during times of deficit spending – it’s actually costing the taxpayer MORE than it benefits him.  According to Hoisington and Hunt: “As debt levels rise, the debilitating impact on growth speeds up exponentially.”

Lately, earnings continue to be manufactured, but the top-line sales-revenue numbers (on year-over-year basis) have been weak.  It’s one thing to beat expectations, but beating year-over-year actual numbers is quite another.  As an example, the major banks beat expectations, but their top-line numbers were not good on a year-over-year / growth basis.  The buy-backs (reducing floats), cost cutting, and other profit margin expanders continue.

For the second week in a row, the market simply went up.  It doesn't matter how bad the economic releases are, or how low the volume is – it just keeps levitating.  The choice is easy, as the market makes these new all time highs, (a) Will the underlying economy catch up, or (b) Will the market fall down to meet it?

The true economy does not support a 19K DOW or a 2200 S&P, but we are very close to both of those numbers.  Due to our Central Banks printing trillions of dollars, and injecting them into the market - the market is no longer a reflection of the underlying economy.  Consider what Bloomberg said this week about Japan's stock market: “The Bank of Japan is now a major owner of more Japanese blue-chips than both BlackRock (the world's largest money manager), and the Vanguard Group (which oversees more than $3 trillion).”  The Swiss (not to be outdone) have (according to Bloomberg): “Increased their holdings in the U.S. equity market by 40% going from $26.7B last quarter to $37.5B this quarter.”

So that’s why the market is going up despite lousy economic reports, lousy corporate earnings, etc.  The question is how far can it go?  If our FED continues to print money out of thin air and buy stocks with no regard to price, could we see DOW 40K?  I tend to think that long before anything like that happens, one of many different black swan events will put an end to all this nonsense.  Let's face it, every major nation has big debt troubles, and war is on the doorstep all around the globe.  Something will break, and it won't be pretty when it does.

Other than earnings, there is not much on the horizon that should impact markets directly. The Fed is sitting in the shadows with no rate hikes coming any time soon, certainly NOT before the election.  The Aussie Dollar is selling off against the U.S. dollar, as investors expect the Reserve Bank of Australia (RBA) will cut rates.  If they don’t cut rates we could see a rally in the Aussie dollar.  The silliness is the belief that the U.S. Fed will be raising rates any time soon.  The currency markets will continue to drive market volatility, and if the dollar continues to rise – this will put increased pressure on U.S. corporations and the economy.

Currently all I’m doing is playing around the edges.  In this game of musical chairs, when the music stops, the dash for that open seat is going to be spectacular.  For this coming week, I think the market will take a pause to do some backing and filling.  We're already so overstretched that normal comparisons are impossible to make.  No one has ever seen a market like this, because before 2008, central banks were not allowed to be in the market like they are now.  Ten years ago the idea of our FED buying tens of billions worth of US stocks was a laughable concept.  This market sideshow will be awfully interesting to watch as the next several months unfold.

TIPS:

My attraction to the metals continues to grow.  Some relatively inexpensive ones are: FFMGF, NAK, BAA, AUMN, EGO, and FSM.  I’m keeping it simple by being:

-       Long various mining stocks and their respective call options: AG, AUY, CDE, FCX, FFMGF, FSM, HL, NGD, PAAS, PGLC and SAND.

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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