RF's Financial News

RF's Financial News

Sunday, July 2, 2017

This Week in Barrons - 7-2-2017

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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