Friday, October 20, 2017

Markets on the Edge of a Cliff?

Fred Imbert and Thomas Franck of CNBC report, Dow jumps 123 points to record high after Senate takes step toward tax reform:
U.S. stocks traded higher on Friday after the Republicans took a step toward achieving tax reform.

The Dow Jones industrial average rose 123 points, reaching an intraday record. UnitedHealth and Goldman Sachs both rose about 2 percent to lead advancers. Shares of JPMorgan Chase, meanwhile, hit an all-time high after also jumping 1.4 percent.

The S&P 500 also notched an intraday all-time high, advancing 0.4 percent as financials led advancers by rising 1 percent.

PayPal was among the best-performing stocks in the index, rising 4 percent after the company reported better-than-expected quarterly results.

Celgene shares were the worst performers on the S&P 500, falling 10 percent after the company said it will discontinue trials on a drug aimed at treating Crohn's disease.

The Senate approved a $4 trillion budget measure Thursday by a 51-49 vote. Passing a budget unlocks reconciliation, which enables the GOP to pass a tax bill with a simple 51-vote majority in the Senate. Using the tool removes the need for winning Democratic support, which would likely sink a GOP tax measure.

"The market was very excited about tax reform last year after the election. But come the first half of this year, those expectations dropped. Recently, expectations of tax cuts have started to creep up," said Rui De Figueiredo, CIO and co-head of the Solutions/Multi-Asset Group at Morgan Stanley Investment Management.

"The Republicans are so on the hook to get something done that those in-party divisions are likely to be resolved in order to get tax reform done," De Figueiredo said.

Investors have recently seen a higher likelihood of a new tax plan coming from the GOP after the House passed another budget bill earlier this month.

Rising expectations of lower corporate taxes have helped stocks rise to record highs recently, along with strong corporate earnings and solid economic data. The Dow first crossed above 23,000 earlier this week.

"We continue to set new highs and that does put people on edge at times," said Tom Anderson, chief investment officer at Boston Private.

"We've gone a long time without a 5 percent correction. But we continue to be bullish on stocks. We think this stock market is supported by fundamentals," Anderson said.

Wall Street also looked to corporate earnings on Friday, as General Electric and Honeywell, among others, reported quarterly results. Honeywell reported earnings per share that were in line with expectations while GE posted a big miss on its bottom line.

GE shares slipped 0.2 percent and briefly fell more than 8 percent in the premarket.

"Let there be no debate, this quarter was undoubtedly worse than expected," JPMorgan analyst C. Stephen Tusa, Jr. said in a note Friday. "It is becoming increasingly clear that this is a "workout" of a set of business that are impaired for whatever reason (macro and/or micro) generating essential zero FCF, and management is fighting to salvage value, not a simple restructuring."

Investors also looked to Washington as President Donald Trump has reportedly completed interviews with all five of the candidates that he's considering for the role, including current Chair Janet Yellen.

The decision could potentially be announced next week, Reuters reported Thursday citing a source familiar with the matter.

Politico reported late Thursday that Trump was leaning toward appointing Fed Governor Jerome Powell as the next head of the central bank.
I personally would pick Neil Kashkari as the next Fed Chair as he understands the repercussions of raising rates when global inflation is in freefall. But as one of my Greek-Canadian friends told me so bluntly: "There's no way Trump will appoint a brown man to be the next Fed Chair" (unfortunately, he might be right, but I still hope Kashkari gets appointed).

Brown, yellow, red, black, white, it doesn't really matter, the next Fed Chair has their work cut out for them.

Right now, everyone is buying the "Fed put" which is now "global central banks' put" nonsense which is just keep buying stocks at all cost because central banks have effectively killed volatility and they will make sure to limit the downside of stocks.

There is a huge disconnect between the real economy and the stock market and credit markets and astonishingly, it seems like the risks of a melt-up like 1999-2000 are rising.

But as stocks keep making record highs and credit spreads record lows, now is the time to start thinking of protecting your gains and limiting your downside risks.

Yesterday, I wrote a comment on private equity's asset stripping boom where I explained the link between credit markets, dividend recaps, leveraged loans, and how it's all going to end badly.

Nobody paid attention. Only one astute bond manager here in Montreal, Pierre-Philippe Ste-Marie of Razorbill Advisors sent me an email saying that comment "was a good one."

Damn right it was, and by the way, all you institutional money managers looking to gain alpha in fixed income should contact Pierre-Philippe at Razorbill Advisors and allocate a sizable amount to them and watch them add significant risk-adjusted returns over your bond index (I'm not kidding, do your DD).

I know, bonds are boring, stocks keep melting up but be very careful here, this is when you need to start thinking with your big head, not your little one.

In my last comment, I noted the following:
The most important chart to pay attention to right now is the iShares iBoxx $ High Yield Corp Bond ETF (HYG) which has been on tear as US high yield spreads hit a record low (click on image):


I want you to look at that monster run-up and ask yourself how sustainable is this going forward. In fact, things have gotten so out of whack in credit markets that Lisa Abramowicz of Bloomberg reports junk-bond traders are increasingly just buying stocks (follow Lisa on Twitter here, she posts great stuff).

All this just reinforces my belief that the bubble economy is set to burst and when it does, deflation will hit the US and we will experience the worst bear market ever, crushing many chronically underfunded pensions and pretty much all institutional and retail investors.
I know, October is almost over, we didn't get another crash like in 1987, the Fed and other central banks are on it, buying up financial assets like crazy, so why not just buy risk assets and join the party?

I don't know, I'm highly skeptical and used the US tax cut announcement this morning to buy more US long bonds (TLT). My advice to all of you is to keep buying US long bonds on any dip, they will offer you the best risk-adjusted returns going forward (click on image):


Or you can ignore my advice and just keep buying more stocks (SPY), high yield bonds (HYG) and other risk assets as they make record gains. Just make sure to book your profits before the music stops (good luck).

I leave you with some scary charts to ponder. First, a couple of sobering charts from the latest monthly commentary from IceCap Asset Management, Should I Stay or Should I Go? (click on images):



Second, some measures of the equity bubble run amok from Factset and others, and investment strategist Peter Schiff shows you why we're in the "Calm Before The Storm" (h/t, Jesse Colombo, click on images):





And Jim Conaway, an intelligent analyst out of Virginia looking for a new opportunity posted this on LinkedIn:
Are financial bubbles inversely correlated to disposable income?  "Since 1970, every time asset values have risen above 520% of households disposable income (the dashed line in the chart, click on image) then the US has been in a bubble and a subsequent crash has followed...This has simply meant asset values growing much faster than households income or households capability to sustain those price increases. The depth of each crash has been relative to the overshoot of asset values on the upside."

Of course, all this doesn't tell us how long this central bank induced mania will go on for, only that the risks are rising as stocks keep setting record highs and credit spreads record lows.

Below, Thomas Lee, Fundstrat Global Advisors, and Art Steinmetz, OppenheimerFunds, weigh in on whether tax reform will likely impact the markets. Poor Tom Lee, even he is throwing in the towel, going back to his bullish ways.

And investment legend Ken Fisher, Fisher Investments CEO, chairman and founder, provides insight on the markets as stocks continue to rally, stating valuations don't tell you where the market is going. He's right but they do tell you when things are getting stretched like crazy.

Third, a great clip from Real Vision television which explains why sky-high equity valuations, economic uncertainty, plus concerns over interest rates, central bank reactions and debt, the risks are rising. With a stellar cast, featuring some of the greatest investors on the planet, The Big Story - Edge of The Cliff, examines the potential for a major market correction and what that means for investors, in a world of complacency and compressed volatility. Filmed in September 2017.

Lastly, if you really want to slice your wrists, listen to Paul Craig Roberts on why a looming catastrophe is hanging over our heads.

Roberts doesn't understand how the US becomes stronger as its debt grows (see my comment on the coming renaissance of macro investing) and he perpetuates the myth that "only a handful of people saw the 2008 crisis coming." There were quite a few who saw it coming, including yours truly!!

As I listen to these intelligent investors and analysts, they make perfect sense but in these central bank manipulated markets, markets can stay irrational longer than they can stay solvent. Nobody knows when these markets will crash but as risk assets keep setting new record highs, the risks of a market blow up are rising fast, so be on guard and don't worry if you miss a major blow off top.




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