This
Week in Barrons – 3-19-2017:
“You can take this job and shove it.”… Johnny
Paycheck (1992)
Thoughts:
Sometimes I wish I was just clueless and
happy. I remember:
-
When we didn’t
like our own economic growth (GDP) numbers – so we changed the way we
calculated GDP.
-
When the banks
were about to be declared insolvent – so we allowed them to change the way that
they valued their assets.
-
When the Chinese
and Russians were NOT stockpiling gold, and the Saudis are selling their oil
for dollars instead of gold.
-
And when the
unemployment calculations were done the ‘old fashioned way’ – that included the
92m who had left the workforce.
Last week we were told that the unemployment
rate had fallen to 4.7%. We also learned
that December of 2016 held the highest rate in 10 years for people quitting
their jobs. So I asked myself: “Where
are all of these jobs coming from?” The
following chart shows job applicants vs job openings for various industrial
sectors. Inside the professional,
finance, insurance and healthcare services sectors – there are 500k more
openings than applicants. Every other
sector is showing roughly 3m more applicants than job openings. It would naturally follow suit that wages in
the sectors needing applicants would out-strip wages in the other sectors. Bottom line, yes there are a lot more
applicants than openings, but job availability is much more sector specific
than ever before.
Secondly, in order for jobs to increase – the
economy needs to grow. The economy grew
at a lackluster 1.6% pace in 2016. The
Atlanta FED just halved their estimate for U.S. Q1 2017 GDP growth downward to
0.9%. The graph below shows the U.S.
just now hitting its lowest 10-year average annual GDP growth rate (1.3%) in
history.
As SF and I agree, it’s the growth rate that
we worry about. 0.9% GDP growth does not
allow us pay down the debt, address our failing Social Security and pension
issues, revise Medicare and Medicaid, and invest in the infrastructure projects
that our nation needs. Maybe we have
reached a point of employment maturity – where those who have been educated and
desire to work, are doing so. And those
that are not employed are victims of their own inadequate skill sets –
colliding with advanced technologies.
Unfortunately, President Trump’s new budget
only exacerbates the sector / skill set jobs issue. While he is asking for $50B additional for
defense and security, he is proposing deep cuts or outright elimination of
programs at the major federal agencies including Agriculture, Housing and Urban
Development and Treasury. What follows
is a list of agencies whose funding Trump is asking Congress to eliminate, as
well as selected programs he wants to cut at larger agencies.
I worry that Trump’s budget is not only
going in the wrong direction, but fails to consider human resource
availability. For example: Trump
proposes the elimination of the “Meals-On-Wheels” program which delivers food
to senior citizens. The delivery of food
to one senior citizen for an entire YEAR is roughly equivalent to that same
senior staying in a hospital for one DAY.
The elimination of that program will (according to the Kaiser
Foundation) cause increases in hospitals stays and institutional care of as
much as $60,000 annually per individual.
And just think about what will happen to the U.S. economy when older,
low-income pensioners suddenly (as a result of Trump’s new healthcare plan)
have 5% or 10% less to spend on necessities?
Currently, the average household income of someone older than 75 is
$34,097, and their corresponding average expenses total $34,382. If their pension benefits were to be cut or
their health costs increased, their spending would fall, and due to the sheer
number Americans over 75 – their decreased spending on food, energy and other
staples would force a recession. Lastly,
an increase in defense spending of that magnitude will openly show the world
that the U.S. does NOT have enough engineers, technologists, scientists, and
mathematicians to fulfill its own needs.
The Market:
Sir John Templeton once said, "Bull markets are born on pessimism,
grow on skepticism, mature on optimism, and die on euphoria." I
think we’re in the euphoria stage right now because: (a) bullish sentiment is
at its highest level in 30 years, (b) consumer confidence is at a 16-year high,
and (c) we have gone 107 straight days (a 22-year record) without a 1% decline
in the S&P 500.
And just this week Janet Yellen decided to
raise interest rates 0.25% for the 3rd time in the past 11
years. The rate hike came at the same
time that the Atlanta FED reduced their 1st Quarter GDP estimate to
0.9%, and GM decided to layoff 1,000 workers from its SUV plant in
Michigan. In its policy statement the
FED pointed to un-spectacular and only small positive changes in our economic
conditions. They also remarked that
lifting rates from near-zero would provide them more cushion should any major
shocks occur. In part, the FED is
normalizing monetary policy ahead of any fiscal stimulus measures that
President Trump may try to implement.
And yes, since the election, the Dow Jones Industrial Average has
climbed over 14%, the S&P has risen over 10%, and the Nasdaq has added more
than 13%.
Tips:
If successful investing is about buying low
and selling high, the probabilities tell us that we should certainly be a bit
cautious here. The top graph above shows
us that 2016 saw the most hedge fund closures and the fewest hedge fund
launches since 2008. In 2016, over 1m
borrowers defaulted on their student loans.
Even Bill Ackman’s hedge fund took a $3B loss last week when he
liquidated his position in Valeant Pharmaceuticals.
The DOW over the past 12 sessions has only
put in one organic up-day that did not come as a result of a manufactured,
over-night ‘gap-open’. Now the age-old
adage is true: “Never short a dull market.”
Just when you figure the market is ready to roll over, it has a habit of
waking up and moving higher. The bottom
chart above shows the movement in the DOW over the past 6 months. The areas within the red boxes show sideways
and chop followed by sharp moves higher in each case. I think that this period of sideways and chop
will extend for a few more weeks before the next move higher. But this is happening NOT due to growth or
economic reports, but rather because of all of the leverage and lack of volume
within the stock market. The SKEW (a
volatility indicator) set an all-time-high reading last week. So even though the market itself isn’t moving
– investors THINK that the market is going to move dramatically to the
downside.
Bonds are also showing a rare amount of
volatility. After the passing of the Dodd-Frank
legislation, banks were restricted from purchasing equity positions but not as
much from purchasing bond positions.
Therefore, trading volume has increased in bonds since 2008, leaving
equity volumes quite small and virtually unsupportable in the case of a
downturn. Which much of the big-name
equity movement being caused by stock buybacks, and if the FOMC raises rates 3
more 4 times this year – stock buybacks will go by the wayside along with the
market’s ability to move itself higher.
Having said all of that, for
next week I’m looking at:
-
PayPal (PYPL) –
With the NASDAQ at all-time highs, PayPal (with the wind at its back) should do
the same – pushing from 43 into about 45.
-
NetEase (NTES) –
Using the same rationale as above, NTES (sitting at $292) should be able to
push back into $309.
-
NetFlix (NFLX) –
Using its earnings release and the $150 line as a magnet, buying a butterfly 2
weeks out should be a good strategy.
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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