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6.14.2017 Free Investing Newsletter Bookmark

Chicken Little
 
The story of Henny Penny, also called Chicken Little, or sometimes Chicken-licken (not to be confused with “Finger-licken” from Kentucky Fried Chicken), the terrified little chicken convinced that the sky is falling and that life as we, or at least as chickens know it, is over... is so common that “the sky is falling!” and “Chicken Little” and related names have become bywords for fearmongering, and the often tragic results that occur.

 
If you remember the original story, an acorn fell and hit Chicken Little on the head, and thus he assuredly thought that the sky was falling. It must be he reasoned, it had literally hit him in the head. ( he obviously didn’t see the nut the bird had dropped)  So worked up was Chicken little that he simply “had” to tell the king, to warn him.   In his panic he ran into Henny Penny and told her, Henny went along with Chicken little. Then they met Loosey Goosey and goosey went along, and then they met up with Foxy Loxey. 
 
The fox asked “what’s the issue”, they told him the sky was falling and wanted to meet the king, and he slyly suggested he knew right where the King lived. And the Fox led them to his den and.... Well, ate them.
 
This story has passed into the English language as a common idiom indicating a hysterical or mistaken belief that disaster is imminent. Versions of the story go back more than 25 centuries, in dozens of languages.
 
So, what the hell am I doing talking about children’s stories?  Well, if you hadn’t noticed, some massive names in investing have been running around like Chicken Little warning of earth shattering economic troubles and market crashes.  Starting with the mundane we see this out of Zero Hedge....

The latest monthly Fund Managers (FMS) survey from Bank of America is out, and continuing the trend noted in previous months when the number of active managers who said that stocks are overvalued hit the highest in nearly two decades, the latest version reveals that the number of respondents saying that equities are overvalued has just hit a record high, surpassing the all time high set during the 1999 bubble
 
But that’s just a generic observation. Overvalued can be argued as to what level represents overvalued. Is it 20 times earnings? 22? 25? 28?
 
Moving along, the Headline’s just keep coming. Here’s a catchy one from a member of the Barron’s Roundtable who’s retiring in a few months...
 
Felix Zulauf: "Today Feels Like Late 1999; I Expect FANG Stocks To Fall 30% Or 40%"
Today seems like late 1999. We haven’t seen the peak yet.... I expect the FANG stocks and the Nasdaq to have a big selloff. They could easily fall 30% or 40%."
 
Moving along, a name we all know and many respect, Bill Gross had this to say....
 
Bill Gross: "All Markets Are Increasingly At Risk"

You have the potential for low asset returns in which the now successful strategy of “making money with money” is seriously threatened. How soon this takes place is of course the investor’s dilemma, and the policymakers’ conundrum. But don’t be mesmerized by the blue skies created by central bank QE and near perpetually low interest rates. All markets are increasingly at risk."
 
Sing it Bill, Sing it!  But it is falling on deaf ears....so let’s continue...
 
James Montier
 
Current arguments as to why this time is different are cloaked in the economics of secular stagnation and standard finance workhorses like the equity risk premium model. Whilst these may lend a veneer of respectability to those dangerous words, taking arguments at face value without considering the evidence seems to me, at least, to be a common link with previous bubbles.“
 
You all know of the traveling investor James Rogers. He was a bright guy, made billions. Now get this...He’s been calling for a crash of epic proportions every year for 5 years now. Here’s the latest...

Jim Rogers Warns Next Crisis Will Be "Biggest In My Lifetime"
You’re going to see institutions that have been around for a long time gone - Lehman Brothers had been around over 150 years. Not even a memory for most people. You’re going to see a lot more of that next around, whether it’s museums or hospitals or universities or financial firms."
 
Like Rogers, David Stockman has been predicting the falling sky for several years now, here’s his latest....
 
David Stockman ---- 'Horrendous storm' to hit stocks, Wall Street not rational
"This is one of the most dangerous market environments we've ever been in. It's the calm before a gigantic, horrendous storm that I don't think is too far down the road," he recently said on "Futures Now."
 
I can go on and on and on. Just this weekend another huge hedge fund with 3 billion under management has given the money back to the investors, the operators saying that they have no idea where they could truly invest the clients money and feel safe or give value.
 
So what’s the deal? Why all the Chicken Littles?  Are they looking for attention? Are they fear porn purveyors?  No, I don’t think so. I think that they’re simply “investors” from a different time. A time of honor and truth. A time of free markets with no manipulations. A time where Central banks weren’t buying stocks. A time where companies didn’t sell debt to buy their own stocks. A time where “investing” meant finding companies that were making money organically, not by reporting “adjusted, non GAAP proforma” earnings.
 
When these guys look at the market they shake their heads. They can’t understand it, things have become irrational. There’s players in this market that they either will not concede to, or don’t believe, such as Central banks being behind all this. But I want you to pay attention to the next piece....You’re all familiar with Marc Faber right? Read this closely...
 
"The Fed's policies have actually led to a lot of problems around the world," Marc Faber begins his discussion with Bloomberg TV's Trish Regan, especially "people in the lower income groups [who] spend say 30% of their income on energy, transportation, and so forth, electricity and gasoline." The Gloom, Boom & Doom Report author goes on to discuss everything from how the Fed is creating a two-class system around the world, the inexorable growth of governments, buying votes, Bitcoin, interest rates, wealth taxes, and overall market valuations. "We are in a gigantic financial asset bubble," Faber explains, "everybody's bullish," but he sees a slowing global economy (as do we e.g. Baltic Dry Index); "[The bubble] could burst any day. I think we are very stretched.
 
Now for the kicker....He penned that in January of 2014!!!  Yes folks, he saw the bubble, and the insanity in 2014. Well guess what? We got more insane and blew bigger bubbles.
 
We are in “something” here. Lots and lots of very smart people have thrown their hands up in despair. We shouldn’t be up here, everythings upside down, the markets are in bubbles, and blah blah blah.... Just like Chicken Little. Yet up we go. All time new highs galore.
 
I don’t know how far this goes folks. When you have a method to where you can print money and use that money to buy up financial assets, it seems to me that they can paper over damn near anything to keep the illusion alive. It seems to me that the only thing that will end this is just one of two issues....1) they simply pull the plug and the Central banks pull away the free money, or 2) at some point the velocity of money kicks into gear and in a very short period we experience run away inflation.
 
Back in 2008 everyone and his brother was screaming about us being 10 trillion in debt. Now we’re 20 trillion ( 200 really, but who’s counting)  Yet we’re all still here. The sky didn’t fall. So why not 40 trillion? It’s all fiat playdough anyway. Each day the bubbles move closer to their pins, but somehow it doesn’t take us down. It gets papered over and on we go.
 
We’re in something here. An experiment? Maybe. A last gasp attempt to save the world? Maybe. All I do know is that what ever we are in right now, is bigger than anything we’ve ever seen before. The major central banks have played a game of “your turn” for over 8 years now. The Fed’s did their QE 1, 2 3, twist, etc, the Japanese did their QE and buying stocks, the ECB did their turn, buying 60 billion a month in assets.... And because the world is indeed connected, money printing in Europe or japan or Switzerland, does indeed end up here.
 
When does that stop? How does it stop? Does it have to stop?  Logic says yes it will indeed end. But I’ll be damned if I know just how. We have already seen so many impossible things, that I can’t wait to see the next one. Get your popcorn and watch the show. Lean long into stocks and hope you can get out if something wicked this way comes.  It’s really all we can do. As the market goes up, take some off the table and buy some gold, buy some silver, buy some bitcoin. Turn fake market profits into tangible 3 dimensional assets. I still suppose that one day in the future, you’ll be better off with  a nice shiny,  paid- for  car in your drive, than 1000 shares of the XYZ company.  
 
The Market....

  On Monday the market didn’t do a whole lot, but Tuesday it pushed up to all new highs again.  There wasn’t really any good reason for it, other than...”they could” so they did.  But today was Fed day. Today we were to hear what the FOMC was going to do with interest rates.
 
The market remained pretty much flat all day awaiting the Mighty Yellen. Then her prepared statement was read by Steve LIESman from CNBC. The bottom line was that they agreed to hike interest rates a quarter of one point, bringing the target to 1 - 1.25%.  In the decision, there was one dissenter, Neil Kashkari.
 
They also laid out the basics of how they plan to reduce their balance sheet, starting later this year. And finally... 12 of the 16 Fed heads figured that they’d do one more hike in 2017. 
 
After the announcement, the market dipped and bobbed and wiggled. That’s to be expected, it always does knee jerk movements after a Fed statement. Then, at 2:30 Yellen came on stage to give her side of the story and field questions from reporters. There wasn’t much in there that we couldn’t have expected.  I think the only surprise was them talking about lowering their balance sheet this year instead of next. That caught some folks off guard.
 
Once she was done blathering, the market started coming up off its lows. The DOW had been close to being red, and the S&P was actually red by 8 points as she was talking.  But the wrap up is that we ended the day with the DOW green by 46 and the S&P red by 2, and the NASDAQ red by 25.
 
What’s it all mean, if anything? In a nutshell, not a lot really. It’s my guess that we just saw the last rate hike we’re going to see for quite some time. Sure... they “might” squeak one in at September...but that’s going to be a tough sell. Retail sales hit today and they stunk. The CPI missed their target. The GDP estimator continues to  slide lower and lower. 
 
This market has been fueled by ETF “basket” buying and Central bank interventions. This market can’t go down in a meaningful way until the CB’s stop printing money, something Mario Draghi has refused to do and Japan is Kung fu master of.  Sure we could see a 5 - 10 percent pull back, they used to be common. Desired actually. But unless we’re hit by some huge black swan event, this isn’t over yet.
 
The DOW hit a record high close today on the very day the Fed’s HIKED rates. In more normal times, the DOW would have been down triple digits. But we’re not in normal times, as you’re well aware.  Take a look at the commentary above... where all the big names are warnings “something wicked this way comes”...hell Farber was calling for it in 2014!  Yet we continue up and up.
 
As I’ve said in the past...we’re in the middle of something never seen before. This is a grand global experiment with all these Central banks trying to keep assets afloat, while underlying economic conditions erode. 
 
The next thing on the calendar is options expiration on Friday. Large market turns have occurred during major expiration days. So IF there’s any excuse for them to take us down 5% or more...that’s as good as any.  I’m still leaning long, but I’m frightened every day. What a way to operate, eh?  Take care. 

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