Friday, December 1, 2017

A December Surprise?

Alexandra Gibbs and Fred Imbert of CNBC report, Stocks fall on report that Michael Flynn was directed by Trump to talk to Russians:
Stocks fell Friday on a report that Michael Flynn was directed by President Trump to talk to Russians.

ABC News reported that Flynn, the former national security adviser, would testify that he was directed to make contact with Russians during the presidential campaign in 2016. Flynn pleaded guilty to lying to the FBI about his postelection contacts with Russia's ambassador to the U.S.



[Update: ABC News on Friday evening corrected an explosive special report that aired in the morning saying that Donald Trump, as a candidate for president, had asked Michael Flynn to make contact with Russians.
During "World News Tonight," ABC News investigative reporter Brian Ross said the source who had provided the initial information for his story later told him that it was as president-elect, not as a candidate, that Trump asked Flynn to contact the Russians.
The initial report, based on one anonymous source, prompted a dramatic reaction in the financial markets, and the Dow fell more than 350 points.]
In a statement, Flynn said he agreed to "cooperate with the Special Counsel's Office reflect a decision I made in the best interests of my family and of our country."

"If you believe the market has been rallying in the last 13 months [on Trump, this report] potentially unravels all of that," said Jeremy Klein, chief market strategist at FBN Securities. "Markets don't like uncertainty and this is the ultimate uncertainty."

The major averages hit their session lows on the report, with the Dow Jones industrial average briefly dropping more than 350 points before trading 133 points lower.


The S&P 500 declined 0.7 percent after falling more than 1 percent. The Nasdaq composite lagged, dropping 1.1 percent

Gold and Treasuries spiked higher following the ABC report as investors fled to market safe havens.

"It comes down to did trump obstruct justice in any way," said Peter Boockvar, chief market analyst at The Lindsey Group. "It's another potential political blindside. We've gotten a lot of those," he said.


But it appears many investors were willing to bet that the Flynn report does not mean the Mueller probe would lead directly to Trump and derail his presidency and economic agenda. Stocks pared their losses after Senator Mitch McConnell told reporters that they had the votes to pass the Senate tax bill.

Senate had Republicans delayed voting on their tax bill Thursday, sending stock futures lower. The setback concerned a fiscal "trigger" that forced lawmakers to patch up the plan only hours before a planned final vote.

But futures cut their losses as the Senate showed signs of progress on coming to an agreement on a tax measure.

Republican Senators Steve Daines and Ron Johnson — two of the last GOP holdouts on the bill — said they would support the measure, increasing the likelihood of it passing.

Expectations of lower corporate taxes have been a boon for U.S. stocks since President Donald Trump got elected, helping the major indexes reach all-time highs. Jeff Carbone, managing partner of Cornerstone Financial Partners, said that, without a corporate tax cut, stocks could suffer a 3-to-5 percent pullback in the short-term.

If the Senate's bill passes, House and Senate members would have to work on a new bill to reconcile differences between their two tax bills.

Bruce Bittles, chief investment strategist at Baird, said the market realizes "the Republican party wants to get this done one way or the other," but added that "the big question is how much of this is already built into the market."

"We're sitting at all-time highs and I wouldn't be surprised if we took some [gains] off the table" after the corporate taxes are cut, Bittles said.

In corporate news, shares of Mylan jumped 4.6 percent after CNBC reported that Amazon has held preliminary talks with generic drug makers about a potential entry into pharmaceuticals.

Ulta Beauty was the worst-performing stock in the S&P 500, falling 7.5 percent after the cosmetics retailer issued weaker-than-expected guidance for the current quarter.
I too wonder how much of the tax cuts are already priced in. We will find out soon enough as stock markets had another great week. In fact, Thursday was one of the best days in a long time for the Dow.

But you can tell traders are edgy and not just in the stock market:





Will Michael Flynn's testimony lead to the impeachment of President Trump and wreak havoc on all markets?

I don't know. All I know is risk assets are expensive here, and not just stocks, so if you want to sleep well at night, load up on US long bonds (TLT).

About the only good news for stocks this week is Goldman warned valuations are at their highest since 1900 which means a lot of pain ahead. Typically, stocks continue to rally higher after these dire calls from Goldman and other big Wall Street banks.

Everyone knows valuations are stretched in stocks, high yield bonds (HYG) and other risk assets, including real estate, private equity and infrastructure.

This is why I like US long bonds (TLT) on a risk-adjusted basis. You're not going to get rich but that's not the point, the point is you won't get caught when the tide turns and your portfolio won't sustain huge losses.

If you want to trade stocks, I can recommend plenty of them, but are you willing to sustain the wild swings?

For example, on StockTwits earlier today, I posted that Citadel's Ken Griffin, Illinois's richest man, sees opportunities in healthcare shares of Valeant Pharmaceuticals (VRX) and Teva Pharmaceuticals (TEVA).

You'll recall I mentioned Teva Pharmaceuticals in my comment on top funds' activity in Q3 2017:
Now, what are the top funds doing? Are there any interesting moves worth noting? Sure, I noticed that Julian Robertson cut his big losses in Teva Pharmaceuticals (TEVA) last quarter but David Abrams, the one-man wealth machine, initiated a new position last quarter right before the stock got slammed hard a few weeks ago (click on image):



Now, Teva's shares are up nicely today but I can tell you from experience, that's not a chart you want to buy, more often than not, you will be disappointed (it is oversold but can become even more oversold).

And while David Abrams and his mentor Seth Klarman are great value investors, when it comes to timing, they're far from perfect. They have both been sitting on shares of Keryx Biopharmaceuticals (KERX) for a long time and they're losing money on them so far.

Still, these guys have conviction, they're excellent value investors who don't typically churn their portfolio, so if they're accumulating a position, it's worth paying attention.
I spend a lot of time tracking what top funds are buying and selling and actually like the way Teva and Valeant shares are trading lately but I'm very careful trading any stock and respect my stop losses. I don't need to read articles on what Ken Griffin likes, he jumped on these shares after other top funds loaded up (RenTech, Paulson, ValueAct, Abrams Capital Management, etc.).

But stocks are stocks, meaning they're inherently risky and the difference between Ken Griffin and you and me is he has an army of quantitative risk managers looking at his portfolio and dynamically hedging risk.

People think trading stocks is easy. Just buy when everyone else is scared and sells. Really? Ask Bill Miller how well that went for him as he averaged down on shares of Valeant and IntreXon (XON), two of his top holdings.

Nothing is easy about these markets. The moment you put risk on, you can get killed. And just because a stock is oversold, doesn't mean it can't get more oversold. Case in point, shares of Macy's (M) which kept falling into the abyss before recently stabilizing and moving up:


Shares sliced below the 200 and even 400-week moving average before the recent run-up. I actually prefer the risk on Macy's now than a year ago because shares of brick and mortar companies have been doing well recently, surprising to the upside, propelling retail stocks (XRT) higher:


If you look at shares of Wal-Mart (WMT) and Costco (COST), they've done extremely well, despite everyone thinking that Amazon (AMZN) is taking over the world.

Amazon isn't taking over everything, it's putting its competitors on notice, driving them to innovate or face extinction. Case is point, Kroger (KR) which came back strong this week after everyone thought Amazon's acquisition of Whole Foods spelled the end of this giant grocer:


Now, I'm not telling you to go buy oversold stocks for the sake of it. Truth is you're better off focusing your attention on stocks making 52-week highs than stocks making 52-week lows.

Any experienced trader will tell you buy the breakout on a long-term weekly chart because even if shares are up significantly from their lows, they typically run up a lot further after making new highs.

This is true for individual stocks but also for stock markets like the S&P 500 (SPY). It's very hard to short this market from a technical perspective:


Still, nothing goes up forever. Sure, we might get a quiet melt-up that lasts into 2018 (who knows) but the silence of the bears and VIX will come to an abrupt end which is why from a risk perspective, I keep telling people to increase their exposure to US long bonds (TLT), especially if stocks keep running up as momentum algorithms and central banks keep squeezing shorts higher.

I'm particularly worried of deflation headed our way which will roil cyclical shares like financials (XLF) and industrials (XLI). When I said it's as good as it gets for stocks, I meant it, especially for some stocks that have run up a lot.

But with the holidays around the corner, seasonal strength might carry stocks higher and this could last into Q1 2018.

I was shocked this morning when I saw the Canadian dollar (FXC) soar on a 14 sigma job beat. I immediately called my buddy who runs a one-man currency hedge fund and implored him to keep shorting the loonie on any strength (he agreed).

One final note on the December surprise. Earlier this week, Bloomberg's Lisa Abramowicz tweeted this:



To which I replied:



Get it through your head, you won't make a killing with US long bonds (TLT), but you will survive when markets turn south and clobber all risk assets.

I'm not saying it's going to happen anytime soon, but be prepared and aware of the macro and geopolitical risks that lurk out there, and there are plenty. [The first place we will see a canary in the coal mine is high yield bonds (HYG) so pay attention to credit spreads.]

I'll end by sharing with you some stocks that moved up on my watch list on Friday:


As always, if you don't know what you're doing, stick to ETFs (like SPY and TLT) and consult a financial advisor. Trading stocks for a living in these markets isn't for the faint of heart.

Below, John Carlin, CNBC contributor and former assistant attorney general, gives his take on the guilty plea from from former National Security Advisor Michael Flynn.

Andrew S. Boutros, Seyfarth Shaw partner, also gave his take on the legal implications following Michael Flynn pleading guilty to lying to the FBI.

Lastly, Stephen Denichilo, Federated Kaufmann Funds, provides his market outlook as major averages took a hit Friday following Michael Flynn’s guilty plea.

As always, please remember to kindly donate and subscribe to this blog via PayPal on the right-hand side under my picture and support my efforts in bringing you some great insights on markets and pensions. I thank all of you who take the time to contribute.


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