This Week in Barrons – 8-14-2016:
Wow … What a Day / Week /
Month.
Thoughts:
According to PNC’s chief
economist, August can be summed up in one word: “sideways”. A 30-economist panel was surveyed and predicted
that 2016 would end with: Inflation at 2.0%, Unemployment at 4.7%, GDP at 1.8%,
Oil at $49 per barrel, Gold at $1,450 per ounce, and the S&P shedding about
30 points to end the year at 2150. Some
saw aggressive monetary easing by the ECB taking the Euro down to 95 cents, and
forecasting oil at $55/barrel due to Iran’s production capacity being too
optimistic. The common sentiment was
that there’s an “oversupply of everything” – from liquidity to debt to cheap
labor. These oversupplies have helped to
elongate economic cycles, and have broken down traditional connections between
many indicators. The same 30-economist
panel believes that increased market volatility comes with central bankers bumping
up against the limits of monetary policy.
The economists also cited
that over the past year investors have pulled $317B from actively managed funds
and put $374B into passively managed funds. Thirty years ago passive funds accounted for
1% of managed assets, and today they are 35%. Remember, there is a
tremendous amount of risk in a ‘crowded trade’.
In 1999, the ‘crowded (risky) trade’ was the dot.com bubble stocks. In 2007, the ‘crowded (risky) trade’ was all
financial companies tied to real estate.
Today, the ‘crowded (risky) trade’ is in low-volatility, income
oriented, passive strategies. Now-a-days
market pundits recommend higher yielding dividend stocks, because historically
they have held up better in a downturn. Unfortunately, historically these stocks
were NOT the ‘crowded trade’. Today
these stocks are SO ‘crowded’ that respected funds like Vanguard are closing
their doors to new investors.
The 30-economists also
pointed out that there is something fishy going on in the U.S. credit markets,
and it may give stocks a temporary boost.
“There has never been an August like this in the history of finance,”
said Brian Reynolds, chief market strategist at New Albion. August (typically a sleepy month for
corporate bond issuance) has seen record issuance in its first six days. For stock investors, this means that the
debt-fueled share buyback craze is in full force. Companies sold $70B in bonds in the first 6
days of August - already more than half the normal monthly average issuance of
$125B. Companies are aware of hungry
bond buyers, among cash-flush public pensions in particular, so they’re more
than happy to come to market now.
Pension funds in particular are itching for yield, and are now allocating
much of their cash to corporate bonds, even if they are typically a higher risk
than government bonds. The U.S. public
pension system has developed a $3.4T funding hole that will put pressure upon
cities and states to cut spending or raise taxes to avoid Detroit-style
bankruptcies. Along with cities and states, our public pension funds are
also dramatically under-funded and face ‘grave difficulties’ according to
Professor Olivia Mitchell at the Wharton School at the University of
Pennsylvania.
This week I learned that
the U.S. has entered into an
exclusive contract with a real estate firm to sell 56 old U.S. Post
Offices. The sale of these properties will fetch about $19B. A real estate sales commission of between
3-6% will be paid to the company of record: CRI. CRI
belongs to a man named Richard Blum.
Richard Blum is the husband of Senator Dianne Feinstein. Senator Feinstein and her husband
stand to make between $950m and $1.1B on the sale of U.S. Post Office
properties. How does a U.S. Senator from
San Francisco manage to get away with organizing and lobbying such a sweet
deal? Isn't this just like insider trading?
Finally, most economists
agreed that the biggest question surrounds the Presidential election. The viewership for the two Conventions was
between 23 - 29m viewers. Sept. 26 (the
date of the 1st Presidential debate) will be 56 years (to the day) since
the first televised general-election debate between John F. Kennedy and Richard
Nixon in 1960. 66m people – all on
grainy black and white televisions, watched that debate. This year I fully expect to see ALL of the viewership
records broken. I've been hearing about
‘Debate Parties’ already being planned. Some estimates (that include global, live
streaming) are calling for over 100m viewers.
The digital numbers are quite illuminating:
-
Facebook: Trump: 10.2m Likes / Clinton: 5.4m Likes
-
Twitter: Trump: 10.6 million Followers /
Hillary: 8.1 million Followers
-
YouTube Live
Stream: Trump: Averages 30,000 live viewers per stream / Hillary Averages 500
live viewers per stream
-
Instagram: Trump: 2.2 million followers / Clinton: 1.8
million followers, &
-
Reddit: Trump: 198k subscribers / Hillary: 24k
subscribers / Hillary for Prison: 55k subscribers
The Market....
On Thursday of this week,
we saw the DOW, the S&P, and the NASDAQ all hit all time highs on the same
day. Could history be getting ready for
a repeat of 1999-2000? The perma-bulls
say no. The people that either don't
know, or won't admit why this market is at all time highs – say no. The
smart money people that understand Central Bank buying, and 0% corporate debt
borrowing to fuel stock buy-backs – say yes.
The only unknown is when. It
could be Monday. It could be a year from
now.
Factually, this week we discovered
that:
- David
Tepper’s Appaloosa Hedge Fund suffered a Q2 loss of 33%.
- Over 70% of current market volume is
taken up by Central Bank buying and by companies executing stock buy backs
during the last hour of trading.
- 6 of the largest global investors,
and the largest institutional banks have given the SELL signal to their clients.
o Goldman Sachs … “Stocks are a SELL”
o
George
Soros … “Sell stocks, buy more Gold"
o
Marc
Faber … “The market will crash 50% lower”
o
Carl
Icahn … “The public is walking into a trap, as they did in 2007."
o
Andrew Smithers … “U.S. stocks are now about 80% overvalued”
- Productivity FELL 0.5% last month –
it’s longest losing streak since 1979,
-
Retail sales
(excluding autos) FELL 0.3% last month,
-
The Producer
Price Index FELL 0.4% last month, and
-
A
falling stock market would be a systemic risk to Deutsche Bank, Italy's oldest
bank, and several banks in Spain that are holding on by a thread.
-
Macy's announced
the closing of 100 of their 728 stores.
Nothing says ‘strength’ like closing 100 stores – aye?
Economist Hyman Minsky
believed that a financial crisis is caused by debt being financed with market
stability. He broke debt into three
buckets:
-
Hedged (low
risk) = interest and principal payments are made normally,
-
Speculative
(risky) = interest ONLY is paid, and the principal rolled into the future, and
-
Ponzi (very high
risk) = additional funds are borrowed to pay existing interest on debt. You are betting that the assets will appreciate
fast enough that they can pay off the debt and interest.
Currently we are seeing a
boom in Ponzi Financing, so much so we have even come up with a term for some
of these companies that fall into this category: ‘Unicorns’. The U.S. Government meets the very definition
of Ponzi financing:
-
Their current interest
ONLY payment is over $400B per year, and
-
They’re borrowing
over $500B per year just to meet their interest ONLY debt payments.
The next crisis will come
sooner rather than later because we are: investing in Unicorns, house-flipping,
having reduced income growth, experiencing horrendous job quality, debating the
minimum wage (which tells you about the quality of jobs), and seeing increased debt
financing.
We got here because we
never deleveraged. Rather than taking
the pain of the last housing crisis, the FED and government stepped in and (in
many instances) rewarded failure: Freddie, Fannie, AIG, GM, and others were
bailed out. Failure would have made us
stronger by making risk a reality, and allowing us to respect it. By not allowing failure we only make the
problem bigger. “You can choose to ignore the math, but in
the end you can’t avoid it”…Chris Wiles.
We are seeing a concerted
effort by all 55 Central Banks around the world to do anything and everything
to keep markets higher. They're doing it
by printing money out of thin air and injecting it into the financial centers.
The IMF says the world's biggest nations are $60T in debt and growing every
day.
Look at it this way:
-
You’re XYZ
company – in bad shape because your revenues have fallen for 2 years, and your
earnings are fading each quarter. In ‘normal’
times, investors would look at your balance sheet, and head for the exits. Your stock would fall day after day, month
after month.
-
Now assume you’re
the same XYZ company, with all of the same retail and institutional investors selling
your stock because it is fundamentally flawed.
The only change is that every month the Swiss National Bank gets handed another
$60B in printed money and buys 5m of company XYZ’s shares. Then the Japanese Pension Foundation buys another
10m shares. And pretty soon XYZ’s shares
are at 52 week highs – despite being only days from bankruptcy / failure.
As long as Central banks
are going to print money and buy stocks – stocks can’t go down. This is a perverted market and at some point,
something strange is going to happen. Be
alert, and don't be afraid to take profits. I suspect that one day there's not
going to be any left to take.
On a separate note, over
the past 5 years I’ve laid out a path for the U.S. dollar to lose it’s sole
Reserve status. 2009 was a wake up call
to the hundreds of nations that got stuck with our bogus dollars. They then lobbied the IMF and World Bank to
make the monetary system more equitable.
Fortunately or unfortunately, the plan is coming together: http://www.worldbank.org/en/news/press-release/2016/08/12/world-bank-approved-as-the-first-sdr-bond-issuer-in-china?cid=EXT_WBSocialShare_EXT The World Bank will be the first issuer of
Special Drawing Rights (SDR) bonds in China in September. I’m not patting myself on the back, but
rather noticing that no one seems to be following this angle. The world is growing tired of the U.S. being
the sole reserve currency, and the SDR's are the way they're going to get
around it. Keep a close eye on the
precious metals from September through the end next year. The precious metals could rise dramatically
over the next 12 to 18 months because China’s currency (included in the SDR) is
increasingly backed by more and more gold.
TIPS:
My attraction to the
metals continues. 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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