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11.30.2016 - Financial Intelligence Report Bookmark

The Gamble
 
Quite some time ago, I told my readers that I was moving what’s left of my wife’s 401K plan out of stock funds and into “cash”. ( money market).  We felt we had taken the best slice out of the 2009 - 2015 run up and after all....the market was being pushed up by all the wrong reasons.

That strategy looked pretty smart for a long time. If you look back at the overall market, it simply traded sideways for those two years. Then something interesting happened. The day after the election, stocks started running and they haven’t taken a break since. Now the DOW, S&P and the NASDAQ are all at new highs. The TV pundits are saying that we could hit DOW 25K.

Naturally my in box has filled with people asking if I’m going to swing from cash, back into stock funds in the 401K. So,  I thought it would be a good idea to discuss in public with you all, just what my thinking might be.
 
The case for seeing the market reach 25 or even 30,000 is NOT absurd. Consider the last 7 years. Could stocks have hit 19K without QE1, QE2, The twist, QE3, the trillions in printed dollars, and the almost “0” interest rates? Of course not. But with that combination, which pushed money into the system and allowed companies to borrow for ‘free” and buy up their own shares, we most certainly did see the S&P go from 660 to 2200.  We saw the DOW gain over 10,000 points.  So, the FACT is that given enough stimulation, the market can go on to wildly higher valuations.
 
Now let us suppose that Trump goes hog wild on his infrastructure plans. To do it he needs to borrow a Trillion or more dollars. Then let us suppose that he does induce companies to repatriate a couple trillion back from overseas to the US.  Do you think those companies are all going to spend it on renovations, plant expansions and hiring? No they won’t. They’ll take a significant portion of it and buy up their own stock via buy-backs. Add that to the trillion plus that Donald will borrow and spend, and no doubt some companies are going to make a fortune.
 
If they keep the interest rates low, and pull in all that inflationary  borrowing/spending and repatriation, then it is quite possible that this market can just keep rising well past what you might have thought possible. Add in the unquestionable inflation that comes with such a massive borrow/spend spree and there’s even more fuel for the higher market.
 
One could look at what I just wrote and say “Ghee, I’d best be fully invested in this!”  You should, right? I mean if the plan goes as they’ve written the plot, then it’s all kittens and rainbows from here on out.  But what if the plan doesn’t follow the plot? Then we have an issue.
 
To make the plan work, Trump has to borrow a lot of money up front. Will Congress go along with it? Secondly, he needs interest rates to remain low, very very low. Will market forces and the Central banks continue to go along with it?   Do not forget folks, this isn’t 1930. The entire world is now connected at the hip, and what goes bump in the night overseas, has effects here.

On November 24 the ECB warned that there Is "significant risk of abrupt market reversal" One week after the BIS issued an unexpectedly stern, if completely ignored warning, that the surge in the US Dollar is leading to an abrupt tightening in financial conditions around the globe, making the repayment of trillions in USD-denominated cross-border debt increasingly more difficult and suggesting that the Dollar index itself is the new "fear indicator". This was followed by the European Central Bank warning that the risk of "abrupt" global asset market corrections "have intensified" on the back of rising political uncertainty, which poses a threat to banks, stability and economic growth. “More volatility in the near future is likely and the potential for an abrupt reversal remains significant amid heightened political uncertainty around the globe and underlying emerging market vulnerabilities,” the ECB warned in its twice-yearly Financial Stability Review published on Thursday November 24.
 
See, the world is intricately connected via debt, and we’re swimming in it globally. On Dec. 4th there’s to be a vote in Italy about amending their constitution. Normally one wouldn’t give a rat’s butt about a vote in Italy, but a “no” vote will bring some interesting volatility, even a challenge to being in the EU. So along the path to Trumps “hail Mary” play to save the US, things have to go well across the globe. Will they? What if the Chinese dump more Treasuries? What if Japan and Russia sell more Treasuries?
 
Then of course you have the opposition from the left. Trump is going to be blocked and targeted at every junction. The media will be relentless. If interest rates rise too quickly, debt service will quickly become a massive issue. There are many who feel that if the 10 year ever breaks over 3%, it will cause a world wide stock crash. There’s reason to  believe that to be true.
 
We’d be amiss if we didn’t mention that fact that we are ALREADY at DOW 19K, and to get it there they had to manipulate everything from the way GDP is measured, to the way we count unemployment, to the way Companies are allowed to state earnings. Just about every number you hear is some form of made up lie.  So are we to think that because we made it 7 years doing all this manipulation magic, we  can get another 7 out of it by doing more? Consider Mr. Groenewegen:
 
We have gone so far from reality that markets are getting more and more non-investible because just about everything is manipulated. One can’t invest in a rational way anymore and therefor nothing makes sense and thus one can expect anything to happen. Basically, the only thing one can play is the volatility, it is the only theme that is predictable in these uncertain times especially in light of the illiquidity created by the central banks.
 
Central bank distortions have forced investors into positions they would not have held otherwise, and forced them into risk to a much greater extent than previously. Central banks have become a far larger driver of markets than was true in the past. The more liquidity the central banks add, the more they disrupt the natural heterogeneity of the market. The way out may not prove so easy. Following the worst two-week loss for bonds ever in the $100 trillion global bond market as well as the recognition it’s becoming more difficult to trade as dealers pull back.
 
 The HFTs who determine 70%-80% of the daily volume often back off when the market shows huge erratic down moves thereby sucking out the liquidity of the markets.  The post-crisis increase in correlations, which has been visible both within credit and equities and across asset classes stems directly from the fact that investors now increasingly find themselves focused on the same thing: central bank liquidity. Every so often, when they start to doubt their convictions, they find that the clearing price for risk as they try to reverse positions is nowhere near where they’d expected.
 
Let me sum this up for you all. I can lay out a plot that ends by the market hitting 30K. But to pull it off, everything needs to work so perfectly, it needs the precision of a 20 thousand dollar watch. I can lay out a scenario where everything Trump wants to do, no matter how noble, just runs into problem after problem as our global connectivity and cross nation debts and derivatives rear their ugly heads. In that scenario, I can see wicked and sharp market corrections...corrections that cut the market in half.
 
So NO...I’m not moving the 401K into stock funds. That might end up being a mistake and somehow everything goes to plan and the market is thousands of points higher by 2018. I’m a lot more “okay” with missing out on gains, than I am being fully invested in a 401K plan that only allows us to make moves in the damned thing once a quarter. The market can fall one heck of a way in 3 months. No...I’ll do individual stock trades of course, but I’m not willing to believe in a rosy market for money I can’t move quickly.
 
I have mentioned in the past that I might actually liquidate this 401K and invest it all in gold and silver. See, we had two 401K’s and I did just that with one of them many years ago. That money is up well over 100% now.  I can make the case that doing it again will pay off handsomely in the next ten years. Just sayin...
 
The Market....

Last Friday the S&P closed at 2213, and that proved to be a brand new all time high. But evidently when everyone came back from their Thanksgiving Holiday, they weren’t in the greatest of moods and the S&P gave up 13 of those points. Tuesday they came out of the gate looking a bit wobbly, then started to move higher, looking like it might get back to the highs. But it fizzled out.
 
Today, the futures were big and bright. There was all manner of talk that the Saudi’s had agreed to an oil production cut and that had oil up over 3 dollars a barrel. When oil goes up, the market usually follows. So they busted out of the opening gate and in moments the S&P was up 10 and the DOW up 90. But despite all the happy talk, it couldn’t hold those gains and by noon, the S&P had almost gone red. After another flurry higher, the air once again leaked out and by the closing bell, we were green by 1 on the DOW and red by 5 on the S&P.
 
That’s not to say there weren’t big winners. On the heels of the oil announcement, some of the oil patch stocks like WLL, OAS and HES were up huge. Likewise the love affair in the financials continued with Goldman leading the pack, up 7 bucks. But other areas like biotech and technology took a hit. The big names like AAPL, AMZN, MSFT etc were all red on the day.
 
So what’s it all mean? Was last Friday the “top” and now we’re going to correct for a while? That’s surely possible. When the market is only seeing leadership in a couple select areas, and those areas are up mainly on speculation that Trump can pull off the things he’s said...it’s a touchy situation.
 
The S&P lost 2200 today. That’s not good and I tend to think that if they don’t rescue that level tomorrow, then yes....I think we might be in for a bit of a pull back. If they rescue 2200... then I could see them regrouping and attempting another push higher. So I sort of think that tomorrow is an important day. Don’t forget folks, we have the FOMC meeting concerning policy and rates on Dec. 14th. They are going to hike. Is that really priced in, or are they going to start getting sketchy about it now? 
 
A pull back would be constructive. We came too far too fast. Now we’ll see if they are willing to prop things up here, or let it slide a bit more. I get the feeling that they’re willing to let a little more air out of this bubble run up, so I won’t be surprised to see some red tomorrow. I also don’t think that Friday’s jobs report will change anything. It is widely expected that the Fed’s are going to hike by a quarter point, this jobs report should be a non  issue.  Good luck out there everyone!

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