This
Week in Barrons – 12-11-2016:
Are we trying to pick a winner, or
just going all in?
Thoughts:
This week was the 20th
anniversary of the phrase: ‘Irrational Exuberance’, and it couldn’t have come
at a better time. The markets are
pricing-in a perfect first 100 days of a Trump Presidency. This is
drawing in more and more retail investors, and as the retail investor begins to
become more involved – the professionals are taking profits and moving to the
sidelines. The retail investors are cashing
in their fixed-income chips, and doubling down on economically sensitive
equities – failing to recognize that global financial markets are extremely
complex, and virtually unpredictable.
CW (of Rockhaven Capital
Management) pointed out a recent coin flipping experiment performed by Professors
Victor Haghani and Richard Dewey. It seems that the professors built a
coin that had a 60% chance of landing heads-up, and a 40% chance of landing
tails-up. Each of the participants in
the study had an advanced finance or economics background, or was a young financial
industry professional. The participants
(made to resemble the average educated retail investor) were given $25 and
told: (a) to play for 30 minutes, (b) to bet as much as they want on each toss,
and (c) to quit after they win $250. They
knew the rules, and even knew that ‘heads’ had a 60% chance of winning. The results were stunning:
-
28% went bust,
-
5% ended with
less than $25,
-
32% had between
$25 and $100,
-
14% finished
with between $100 and $250, and
-
21% maxed out at
$250.
It seems that:
-
28% of the pool
of young, educated, financial professionals actually lost everything in a
simple game that was massively rigged in their favor.
-
30% of the
participants actually bet their entire bankroll on a single flip giving
themselves a 40% chance of being completely wiped out.
-
And even though
the probabilities were quite clear and the optimal strategy would be to NEVER
bet on ‘tails’, 50% of the participants bet on tails at least 5 times (each) anyway.
The lesson to be learned
is that when the retail investor enters the market – the market is closer to the
end than the beginning. Keep some of
your chips in reserve, and place your bets only where the probabilities are in
your favor.
The Market:
“Should I stay, or should I go?” … The
Clash
Since
the day Trump got elected, it's like the world swallowed a huge dose of ‘feel
good’ medicine. Business confidence went
from 38% to 65%, consumer confidence hit new highs, and the stock market is
acting as if the up-coming year will be nothing short of amazing. We are
experiencing the most powerful post-election run-up in history due to a
convergence in:
- November through January being the strongest market
period of the year,
- The normal post-election market run-up, and
- Our citizens believing that someone is actually
working for them again.
But this rally is
different from both the Internet bubble that ended in 2000, and the housing bubble
that ended in 2008. This is a rally
rooted in: credit, debt, hope, and outsiders. In 2000, the entire run-up
was based on the idea that profits didn't matter because we had just given
birth to a new technology called the Internet.
The 2007 fiasco was a study in fiscal unsustainability – as $600k homes were
being sold to minimum wage employees.
Both market collapses were fairly predictable. But this time, we are soaring on the hopes
that trillions of dollars in debt can be recouped by changing so much policy
that companies come back to the U.S., hire workers, pay them more money, and we
actually work our way out of this mess. After
all, we are $20T in immediate debt, and over $100T in debt due to unfunded
liabilities. The ‘gotcha’ here is that
we are still a functioning nation. The
$64M question becomes: Can we continue to thrive as a nation, halt the ‘Mad
Max’ scenario, and slowly dig our way out over the next 15 years? I still think some form of global reset must
come into play because mathematically debts that can't be repaid – won’t be repaid.
Market experts will tell
you that markets look forward and price in elements 6 to 12 months in advance.
But where were these same pundits warning of a market collapse in November of
2007 when the S&P and the DOW were putting in all-time highs? Because
just 10 months later the DOW was down over 7,000 points from 14,000 to 6,600. The current market is way out over its ski's,
and it wouldn't take much of a hiccup to yank it sharply lower. Both graphs below (the AAII Bullish Sentiment
indicator and Professor Shiller’s CAPE market valuation ratio) are flashing
cautionary pre-2008 and pre-2000 signals.
But this market has minimal overhead resistance, so how far it runs is
anyone's guess.
Under President Trump
there are several, generic market trends:
- RATE Increase(s) – The FED meets on Wednesday, and
it’s fairly clear that a rate hike is coming.
I’m looking for only one more in 2017.
- DOLLAR Strength – This increases earnings of
companies that sell ‘into’ the United States – like global mining and materials
stocks (ETF = PICK).
- INFRASTRUCTURE Fiscal Stimulus – Spending over $1T
over 10 years on infrastructure will match China’s $2T infrastructure spend
(ETF = IGF).
- TAX Cuts – By cutting the corporate tax rate from 35%
to 15%, every effective 7% tax reduction – raises S&P earnings by 9% (ETF =
SPY).
- REGULATION demise – Fewer regulations will lower
costs and boost the profits of the energy industry across the board (ETF =
XLE).
- TAX Repatriation – By enacting a 10% overseas tax
rate, 79% of those new corporate profits will be used for stock buy-backs (ETF
= XLK).
Before we drink too much ‘Kool-Aid’,
SF sent me a Washington Post article showing that Senior Defense Department Officials
suppressed a study documenting $125 billion worth of administrative waste at
the Pentagon out of fears that Congress would use its findings to cut the
defense budget. The report, which was
issued on January 2015 by the advisory Defense Business Board (DBB), called for
a series of reforms that would have saved the department $125 billion over the
next five years.
Again, maybe this
romp higher is just the stock market's reaction to Trump’s ‘No B.S.’ style of
leadership. But be careful, because what
the market is reacting to right now – may or may not come to pass – and that’s
the big gamble.
Tips:
Many of you have written
asking me what websites I review on a constant basis – here are some of the
financial ones:
-
Forexfactory.com
= I appreciate its trading calendar.
-
Finviz.com = It
has a great stock scanner and heat map for day trading.
-
Miningfeeds.com
= It has information on all of the metals.
-
IFTTT.com = I
use it to send myself free reminder texts on anything.
-
TradingEconomics.com
= I use it for global economic information.
-
Stocktwits.com =
I use it to measure bullish and bearish sentiment.
-
Oanda.com = I
like their heat map for longer term currency trades.
Barrons came out with a
‘Top 10 Favorite Stocks for 2017’ list and it includes: Alphabet / Google (GOOG), Apple (AAPL), CitiBank (C), Delta Airlines
(DAL), Deutsche Telekom (DTEGY), Merck (MRK), Novartis (NVS), Toll Brothers
(TOL), Unilever (UL) and Disney (DIS).
Not to be out done, an
analyst community came out with their own top 10 list comprised of: Mallinckrodt
Pharma (MNK), Endo Pharma (ENDP), Hanesbrands (HBI), Edwards Lifesciences (EW)
Mylan Pharma (MYL), Allergan Pharma (AGN), Alexion Pharma (ALXN), Activision
(ATVI), Salesforce.com (CRM), and NRG Energy (NRG).
Over this coming week I’m
watching:
-
SPX – if it
breaks over 2261 it could run all the way to 2300,
-
IWM – a move over
141 could signal another turn higher,
-
SPX’s Put / Call
ratio is under 0.7 signaling a fair amount of call buying. This is often a cautionary flag showing that there
are no buyers left to buy – leaving only ‘sellers’ in the stock. And more sellers than buyers often predicts a
‘top’.
-
WYNN and LVS –
sell Put Credit Spreads because all of the panic sellers have vanished over the
Macau news,
-
CMG – bought a
Call Credit Spread on a move downward to 370,
-
PLAY – sold a
Put Credit Spread and bought a Call Debit Spread – looking for a move up to 60,
-
TSLA – bought a
Call Debit Spread – looking for a move up to 195,
-
FB – bought a
Butterfly – looking for a move to 120,
-
For this Wednesday’s
FOMC meeting, I am buying straddles in: Gold (GLD), Bonds (TLT), the Euro (FXE)
and Goldman Sachs (GS). I’m looking for
the market to display a ‘Buy the Rumor, Sell the News’ behavior. I’m looking for a rate increase this week by
the FED – which will spark an initial run higher in the financials and the
dollar, and an initial drop in bonds and gold.
This spike higher will allow me to sell the financial and dollar
straddle calls, and sell the gold and bond puts. Then profit taking will allow me to sell the financial
and dollar puts, and sell the corresponding calls in gold and bonds.
-
This past week
we had the VIX (the market volatility indicator) moving higher along with the
markets. This simply signals increased nervousness
surrounding the markets. It’s not
impossible for this to happen – just rare.
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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