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6.28.2017 - Free Investment Newsletter Bookmark

DOW 50K
 
I don’t know the number, but there must be like 10K newsletters out there. Some of them are pretty good, some pretty funny and some not worth the digital ink they’re written on.  But there’s certainly no shortage of them.
 
Over the many years I’ve been doing this letter, I’ve seen work posted on chat rooms, bulletin boards, web sites, blog sites, etc, from dozens if not hundreds of so called guru’s and experts. Like many, sometimes they’re hot, and sometimes they’re not. But as you cruise the net, it is fun to get all the perspectives.

Back in February of 2016 some of the big names in finance were sounding the alarm.  Let’s take a peek at some of their comments, and then remember that this was over a year ago, and the DOW was FIVE THOUSAND POINTS LOWER:
 
Ray Dalio, founder of the largest hedge fund in the world has recently come out against the Federal Reserve and its plans to hike interest rates further in 2016. In the wake of the oil glut and Chinese volatility, Dalio argues in an op-ed for Financial Times that tightening monetary policy will be counter-productive and that the U.S. is nearing the end of a long-term debt cycle that could test the reliance of global markets.
 
George Soros, hedge fund expert known for his enormous contributions to progressive causes and influence backing Democrats in U.S. elections, has issued similar warnings, however his actions speak louder than words. The noted investor recently admitted he is betting against continued market growth, shorting Asian currencies and the Dow Jones Industrial Average, When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008,” Soros said in a January speech in Sri Lanka.
 
Citigroup updated its market clock chart warning the country is entering Phase 4 of the economic cycle. In Phase 4, credit and equity dry up as a response to tightening monetary policy, which means the threat of a potential recession becomes much higher, reports Business Insider.
 
So, 16 months ago, these and probably half a dozen more ( James Rogers, Faber, Schiff, etc) were preaching a recession, and a market roll over.  Yet the market is up 5000 points since then. 
 
On the opposite side of the pendulum we have the DOW 50K guys:
 
Larry Edelson, a Money and Markets editor, predicts: “The Dow Jones Industrial will lead the way higher and catapult to 31,000 over the next two years.”
 
Ron Baron, CEO of Baron Capital, thinks: “It’s going to be 30,000.”
 
Jeffrey A. Hirsch, editor-in-chief of the Stock Trader’s Almanac, believes it will go even higher: “The Dow Jones Industrial Average will surge to 38,820 in a ‘super boom’ beginning in 2017.”
 
However, Paul Mampilly’s “Dow 50,000” prediction is really catching eyes, and one should pay heed - considering his past predictions have been spot-on.
 
Again, I can probably troll up another half dozen with similar forecasts. So the question is... who’s right and who’s wrong and...why?
 
Here’s the argument in Readers Digest condensed version:  The bears say 1) the world’s economy is on the ropes, 2) global debts are going to swallow us, 3) we’re 9 years into this current “recovery” the second longest in history, 4) the economic data is poor at best, 5) economic numbers have been fudged to look better than they are, 6) valuations are already very stretched meaning stocks are expensive, 7) hiking rates will end the expansion, 8) demographics suggest the baby boomers will pull money out of markets and slow their spending 9) the millennials following the boomers don’t have the salaries to create more overall demand, 10) promised tax cuts probably won’t be that excessive.
 
Okay, so what’s the bulls case? Well there’s a couple and they’re compelling.  For some they’re thinking about past mania’s. For instance, when Japan’s market went from 5K to 40K, it didn’t trickle higher all that time. No, it was inching higher and inching higher  gradually gaining ground and then “boom” it melted up.  In a very short 4 years it went from about 15K to 40K, with the bulk of it coming in the last two years of the run.
 
We saw that same form of panic buying in our own DOW way back in the 30’s. Just before the big crash, the DOW had been likewise inching itself higher and higher. Then just a year before it topped out and ultimately crashed, it put on a massive run of over 30%.
 
So there’s history that suggests that over and over through the ages, people have sat and watched the train leaving the station, until at some point they snap and go all in. Even way back in the 1600’s during the famous tulip mania, prices were  rising and rising, but then exploded to where in about 2 years’ time the price went up 300%.  Then it crashed.
 
Therefore, if indeed there’s trillions of dollars sitting idle, looking for a place to park, that as the market continues inching higher, at some point people toss in the towel, and “go for it” for all they’re worth. The final panic “get me in at any cost” -melt up.
 
I have no issue with that theory, because indeed it has been established as historical fact. It could happen again. Then there’s the Trump tax cuts. Some are thinking that if he can get a really huge tax cut through, then they’re going to be willing to give stocks even “more multiples” of value, as their profits should soar. So if you link up the tax cuts with the idea of everyone wanting to pile in, you can make a weak case for doubling from here.
 
But I think the “few” who are citing the Central banks as the main reason we could see 40 or 50K are the ones on the right track.
 
I’ve pondered the question many many times over the years in these very letters. In fact, I’ve stated over and over that as long as Central banks can print money out of thin air, and actually buy stocks for their portfolio, and  as long as they can print money and jam it into the system via “QE”, as far as I can tell the only way the market rolls over and crashes is if 1) they stop the printing, or 2) velocity of money finally picks up and we dive straight into hyper-inflation.
 
For the longest time (2009 -2012)  I was naïve enough to think that the Central banks were only doing all this QE and stock buying as to get the economy humming along again after  the mess of 2008.  But then it started to become clear that none of what they did really worked. Then we saw the “tag you’re it” game start. The big three, the  US Federal Reserve, then the ECB and finally the bank of Japan would take turns pumping money. Oh, your QE program ended? No problem we’ll start one. Then back to QE 2, etc. They weren't "saving" the economy, they WERE the economy. Without them, there is no economy. 
 
There are some things that you can state and believe in seriously. I for one believe that if the Central banks stopped all QE/money printing, we’d be in a global depression in under 6 months. I also believe that the ONLY reason we’re at DOW 21K is indeed the CB’s printing money, distorting interest rates to zero and below, and their outright purchase of stocks.
 
So the question is... do the powers that be “want” the market to go to 50K?  What would be the point of that? few that I can really see. Sure, it will make the top 5% a whole lot of money, but for the tens of millions that don’t have any way to own stocks...it won’t do a thing for them. If “everyone” had stocks, and I mean everyone, then maybe, somehow one could think that by pushing the market to an insane height, it would be somewhat akin to a universal wage being paid. A super bonus to put money in the hands of people. But again, a hundred million don’t have any.
 
However, that said, we have stated many many times that this market needs to be flat to rising, since some umpteen trillion dollars worth of derivatives have been swapped, using assets as collateral. A chain reaction crack up of all those “what Warren Buffet called weapons of mass destruction” - derivatives - would crash the world’s economies.
 
So what’s my take on this? Well it’s a mixed bag folks. I think that Central banks have the “ability” to drive this market to 40K. Sure they do. If it costs nothing to whip up a trillion fake dollars, why not two? Frankly I don’t believe the official numbers they put out anyway. The Fed’s aren’t audited, so how do we know their 4 trillion balance sheet isn’t 8 or 10?  Remember back in the 2008 melt down we only found out they sent 16 TRILLION to European banks because of a freedom of information act.  What else are they hiding????
 
 But I’m not sure that they have a reason to do so other than to keep the cycle of using ever rising stock prices as collateral for ever more loans. However, that said, I have repeatedly said “whatever this is; we’re in it. This could go for two years or two more minutes, I have no way to know”  Meaning that we are indeed in the middle of “something” never seen before. Does it end at 50K, or does it end right here in a spectacular crash?  My guess is that the Central banks have decided to keep us sideways and up, simply because the day they stop, it all comes down in epic fashion. That day will come. But from what level?
 
Then we have to consider the “big reset”.  You all know the numbers: 200 trillion in debt, massive pension plans underfunded, our currency only worth 5 cents, etc. All these things are basically impossible to reverse. Debts that can’t be paid, won’t be.  Now we see the Fed’s jawboning some concern about stocks being overvalued, while they’re hiking rates.  At some point a “reset” that’s global in nature has to emerge. A total rebalancing, there’s no other way out. Why would they send the market to 50K first? 
 
I could see the way to where yes... they push us higher and higher despite poor fundamentals, falling GDP, even falling earnings, and the people finally fold up and go all in. But even in that almost perfect line up, getting past DOW 30K is just something my head can’t get around. That would indeed be the tulip mania, the roaring 20’s, and the tech bubble all wrapped into one.  I don’t think we pull it off.  But then again I didn’t think they could contain gold for as long as they have either, so....Time will tell.
 
The Market....
 
Monday was flatsville. We started with a big jump out of the gate, and after being up fairly strong (70+) we gave it back and spent the rest of the day hovering at the flatline.
 
Tuesday was abject silly. We opened sort of flattish with a red tone. Then we got a little green and finally settled in at the flat line. See, Tuesday Janet Yellen was to be talking and it made sense that the market would simply hug the flat line until we heard what she had to say.
 
So she started yakking at about 1 pm, and for an hour I didn’t hear much of anything unusual. But at 2 pm, the market started falling fairly hard. What was that about? Well that’s the exact time that the Republicans announced that they weren’t going to vote on the Healthcare bill until after the 4th of July.
 
That got the ball rolling to the downside, as everyone figured that if they can’t even get Healthcare passed, how on earth are they going to get tax cuts passed? So we went from a flat day to ending the day with the NASDAQ down 100 the DOW down 99 and the S&P down 20. Not the end of the world, but a hefty drop none the less.
 
Today however, it was like yesterday didn’t exist. We had strong futures heading into the open and in the first hour of trading we had 100 DOW points and 13 S&P’s showing. But that was just the start of things. Somewhere around noonish the DOW was flashing 160 points. The S&P, which again was down 20 yesterday, was up 24 at 3 pm.
 
All the fears, all the jittery action of yesterday was instantly forgotten.  Why? Had anything really changed overnight? Nope. Not a thing. They simply got their digital tool kit out and programmed the Algo-bots to buy, and buy they did.  We ended the day with the DOW up 143 points. The S&P picked up 21.
 
So it’s evident that the Algo-bots and the fund managers have been trained to hop on any dip they find. Are they going to walk us back up to the all time highs? Probably, there’s not much further to go.
 
Oh by the way, after the bell, the Fed’s announced the results of the “bank stress tests” they were doing and of course they all passed. To celebrate, Wells Fargo announced an 11 BILLION dollar stock buy back. Then State Street bank announced a dividend hike and a 1.5 BILLION dollar buy back. Morgan Stanley and American express are going to hike their dividends.  Amex is also buying back 4 billion worth of its stock.  But wait, Citi tried to top them all. They just announced a 15 billion dollar buy back. Nope, not good enough. JPM just announced a 19.5 BILLION dollar buy back. 
 
With multi billion dollar buy backs hitting, after a big fat “rescue” day like today, I have to think they’re going to jam us higher right into the weekend. Don’t forget that this weekend is going to be extended for a lot of people, as the market is only open half a day Monday and it’s closed on Tuesday. So a ton of Wall Street folks, will simply remain out in the Hamptons until Wednesday.  What better way to celebrate July 4th than to go out with all time highs?

Tomorrow ought to be pretty interesting. We could see all time highs with no problem. The DOW is only about 75 points from that goal and the S&P is only 13 off. They could get that in a pre market gap!  Good luck folks. Lean long, and pray.

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