Tuesday, December 13, 2016

Every Uber Driver is a Wall Street Expert

While I never had the exact Joe Kennedy shoe shine worker experience, I did have a similar experience in Feb 2000 when my landscaper told me his wife was day-trading dotcom stocks.  The NASDAQ market began it's steady decline 4 weeks later.

Let's play a little game -  What do all of these dates have in common?

12/13/16 (today)

Well, they are the points at which by various measures the stock market entered EXTREME overvaluation. 

1929 - the crash that began the Great Depression
1972 - Stocks fall by 50% in 1973
1987 - Black Monday
1999-2000 - The Dotcom bubble bursts
2007 - the Housing bubble bursts
2013 - nothing happened *
2016 - Trumpian Nirvana

I've discussed 2013 before so I won't spend much time there but suffice to say the global economy began cooling in 2013 and really slid in 2014-2016 however US stocks have so substantially distanced themselves from the companies they supposedly represent that weak underlying fundamentals can be ignored in the face of what the charts show.

Well, the stock market is again the talk of the town as it was in Joe Kennedy's time at the shoe stand or when my landscaper was asking for my thoughts on the Webvan IPO (look it up if you have a short memory).  However, this time it's a very Trumpian rally.  For all of his many flaws, Mr. Trump has a flair for distraction -- getting people to focus on a shiny gold faucet while the walls crumble around them.  This is today's stock market where people are focused on the Dow crossing 20,000 while ignoring that 30% of the Dow companies have been replaced in recent years (ie, they kick out the poor performers to enhance the headline number) and the fact that almost all of the gain in the Dow this year is due to 7 stocks -

1) Goldman - Because Goldman again will be running the world.

2) UnitedHealthcare - Because rolling back Obamacare will mean keeping high premiums for workers, without providing coverage. YEAH!!

3)  Caterpillar - Because ..... oh, I can't even pretend here - this is ridiculous, their business is imploding but the stock has soared on the hopes of MORE Federal spending in 2020.

4) IBM, 3M and Chevron - Rising tides lift all ships

5) JP Morgan - whatever business falls through the cracks at Goldman might go to JP Morgan.

I believe that you make the most money when there are huge mistakes made that you can see coming.  Well, 2017 is a HUUUGE mistake bearing down on us.  You see stocks don't act in a vacuum - there are a whole host of other assets that this bubble is impacting.  I expect this stock bubble to continue to chase money out of bonds.  This has the impact of raising interest rates, which will further strengthen the US Dollar.  That's great if you're going on vacation to Europe or Japan, but ask someone in sales how much fun it is to sell their products that are now 20% more expensive because of currency shifts and you'll hear the other side of that equation.

Then the Fed will have to try to reign in bond yields by raising rates QUICKLY in 2017 and that will choke off any economic activity. Boom - The next recession will be at hand.  We'll get a little preview of that today when the Fed raises rates, but don't expect any real reaction until rates start to approach 1-1.5% again.

Next up.... Why cutting the corporate tax rate is a strategy from 1980 that is doomed (ok, maybe not doomed, but what are blogs for if not for hyperbole?).


Thursday, December 08, 2016

Just trust me this is really not fake news, I swear :)

The markets were again crushed by a surge of buy programs at almost the exact same time as yesterday and that was the story of the day.  If you bought at 11:59 and sold at 12:31 you made more than they average working man or woman makes in a week in 30 minutes.  Hooray for gamblin.... I mean investing!!

The subject of "fake news" is all over the media outlets tonight after Sec. Clinton addressed the topic at one of her first public appearances since the election.  While I don't deny that "fake news" does exist (there is a guy dedicated to writing these fake stories who makes a very comfortable living spreading falsehoods), my greater concern is the more widespread "misrepresenting every day occurrences" as news.

Allow me to explain using some weather examples - this morning one of the morning shows was in North Dakota talking about the frigid conditions where it was 6 degrees F.  Two weeks ago the morning shows were in Syracuse NY covering a lake effect snow event that dumped 8-12" of snow on the area.  By discussing these routine weather events --- Newsflash: it snows East of Lake Ontario in November/December and it's really, really cold in North Dakota --- as somehow newsworthy the media is creating a story out of thin air.  This isn't news, it's buzzfeed-style presentations designed to keep you glued to the TV to find out if that snow in Syracuse is coming to NYC or Boston (short answer - no b/c NYC and Boston are not near Lake Ontario, but conveniently they neglect to mention this fact in their story that talked about a "winter blast invading the Northeast").

On a more local level let's consider the story that has dominated the headlines for the past 72 hours in the North Country -- another lake effect snow event.  About 10 days ago you could see that it was going to be cold enough to produce snow if the winds stayed consistent when they reached Lake Ontario.  I mentioned to a family member that was traveling that "there will be snow in the traditional snow belt with a strong West/Southwest wind turning West by Thursday night".  It was clear that it was going to snow very hard in a very narrow band of mostly uninhabited land on the Tug Hill Plateau.  However, the National Weather Service issued a Lake Effect snow warning for Jefferson and Lewis counties (almost 2600 square miles combined) despite the fact that just a tiny fraction of those counties would be impacted.

Here is the snow map from the National Weather Service:

Now keep in mind where that bulls eye of the storm sits - that pink area in between Lowville and Pulaski and take note of this map.

Hmm, that's interesting, I wonder why that area that is going to get pummeled with snow is awfully green on the map?  Could it be because it's mostly uninhabited forests?  Uh, yes that's exactly the answer. 

So, that's my long-winded way of say that even local sources are guilty of trying to spice up a story to make you pay attention.  The reality is that this was a fairly typical lake effect event that will deliver snow to a fairly narrow section of forest land and snowmobile trails.  However, that is not a story that gets you to click on it 10 times a day.  If the story says LAKE EFFECT WARNING FOR JEFFERSON AND LEWIS COUNTY, you'll probably click all day for updates.  This isn't an example of "fake news" but it is rather disingenuous and this is a very common practice in the entire media industry.

Okay, that's enough ranting for the evening :)

Drive carefully if you live in Worth, NY.


Wednesday, December 07, 2016

Another day, another bunch of dollars

If you've been following the blog for any length of time you are well aware that I believe the markets disconnected from economic reality for good in the middle of 2013.  The past 3 years have seen consistent growth in asset prices while economic activity has sputtered from Asia to Europe to the US.

However, today may have finally been the day that broke the camel's back.  For no real reason, the market continues to levitate higher on hope and dreams that an individual who has failed repeatedly is going to somehow, magically jump-start growth for every company in America (side note - I'm admittedly biased - my first job involved restructuring some Trump debt after one of his bankruptcies and I felt like I had to take a shower after every interaction with his company.  They were shady, incompetent, demanding, and argumentative at every point of the negotiation and it was the catalyst that got me out of commercial banking). 

The grandest irony of this latest market rally is that while both Sen. Bernie Sanders and President-Elect Trump roundly criticized Sec. Clinton for her connection to Wall Street Banks it's the banks are driving this rally. 

The incredibly influential roles being filled by current and former employees of Goldman Sachs both in leadership and behind the scenes has pushed the shares of Goldman up 30% in a MONTH adding $20 billion to their market cap.  Goldman Sachs alone accounts for roughly 1/3rd of the 1300 point move in the Dow Jones Industrial Average since the election.  So, I guess it's less about draining the swamp and more about filling the swamp with guys who drive cars that are worth more than your house.  If you add in JP Morgan Chase and Caterpillar more than 1/2 of the gain of the Dow is attributable to just those 3 companies. 

So here we go again on the subject of computerized trading.  Today, the markets were up, but nothing was out of the ordinary until someone decided to pull some of the liquidity from the market.  The best way to think of this is to say that it's like going to the grocery store for bread and when you get there they take 100 loaves off the shelf and only leave 3 loaves on the shelf.  Well, those loaves will suddenly go up in price if 100 people rush to buy bread.  That is essentially, what happened today, the market dried up for some unknown reason at 1:31pm and sensing that the market could be easily moved, a computer bid for $3 billion worth of futures in 1 second.  This is by far the largest trade I've seen in recent memory.  Again, thinking about our bread analogy, there were very few stocks for sale and a MASSIVE order hit the market as that exact moment conveniently causing panic buying and rising prices.  This spurred more automated buying and it was off to the races. 

Here are some of the best things I've seen in the past week:


US Government Debt to GDP:

Think what was happening in the mid-1940's: we were emerging from the Great Depression, fighting WWII, and we were about to experience the greatest period of innovation and growth in our nation's history.  If Trump's spending plans are real it is very likely our debt to GDP will exceed the highest levels experienced since the end of WWII and the ramifications of that for everything from the dollar to interest rates is significant.

Electronic control of the markets:
The key quote in there is often ignored by the financial media that want you to think the stock market is still that big marble building in lower Manhattan.  100 companies with 5,000 servers control 90%----90%!!!!--- of the Nasdaq market.

The total value of US corporations has now exceeded the dotcom bubble.  I can't get this chart due to copyright restrictions, but it shows the value of all stock and debt of US companies and the run over the last month has now pushed us into uncharted territory.

This is very telling - the US 10 year note (that has been rising in yield) is currently yielding 0.5% LESS than it was in March of 2009 --- the absolute bottom of the financial crisis.  I can hear you all saying, "what??". Well, the yield on the 10 year note should go up as people believe the economy recovers and they stop seeking safe assets like US treasuries.  So, at the bottom of the Great Recession the Dow hit 6,500 and the yield on the 10 year note was roughly 2.9%.  Today, the yield is about 2.4%, indicating even greater fear and risk in the global economy today than in March of 2009, but the Dow is at 19,500.

Finally, this is the overall chart of market psychology.  I believe we're nearing peak Euphoria (we can get sillier from here, see Feb/Mar 2000 for reference), but I think by January we could be in the Denial phase.