9.3 C
New York
Thursday, March 28, 2024

Monday Market Movement – Recovering on Low Volume

Same old, same old.  

If it's Monday, we must be recovering back towards Toppy Tuesday's highs so we will wait patiently to begin shorting again.  With Trump out of the country, we haven't had a crisis all weekend and they are keeping the President too busy to tweet – so all is well(ish) at the moment.  Unfortunately, no one is keeping the Fed from speaking and we have 6, yes SIX Fed speeches TODAY and then 2 tomorrow, 2 on Wednesday (and the Fed minutes at 2pm) 3 on Thursday and one on Friday for 14 Fed speeches in 5 days – a new record!

Endless Fed meddling is likely to give us a wild week leading up to Friday's Q1 GDP Report, which will be the 2nd estimate but the Atlanta Fed has already pegged Q2 GDP growth at a blistering 4.1% (almost double the first Q1 estimate of 2.3%) and, if true, the Fed has no choice but to tighten at the next meeting before we whip into an inflation crisis.  

We're already seeing tightening labor hammer productivity while driving up wages and we could be looking at 3-4% inflation rates by the end of 2017, which means you need to deduct that from your market gains to determine your buying power and, more importantly, deducting even 3% from bond gains pushes most of them into negative territory – a factor that could stampede even more money into the markets in search of inflation-fighting returns.  

That's going to blow us off the scale re. valuation metrics on the S&P 500, which is already showing overvalued levels on 18 of 20 of the metrics tracked by Bank of America (BAC) with the Shiller P/E Ratio a whopping 74% above average and the Market Cap of the S&P is almost double its usual percentage of our GDP:

As noted in last week's Live Trading Webinar (replay available here), we have no shortage of long positions and we took advantage of the dip to add a few to our Member Portfolios last week but, on the whole, we're still aiming to keep a mainly neutral stance, waiting for the market to decide if it wants to break up or break down from S&P 2,400.  

The Central Banks have continued to push liquidity into the markets through various QE programs but that is coming to an end in the fall with only the Bank of Japan projected to still be printing money in 2018 so be on the lookout for anything that pokes a hole in that narrative – as it could easily upset the entire Global apple cart.  

Moody's has already warned that a combination of collapsing Global Productivity and the aging population is slowing their Global Growth Outlook and, if those conditions run head-long into a Central Bank tightening cycle – well, it's hard to see what the markets are being so gosh-darn bullish about, isn't it?

There are a number of limitations to estimating productivity growth:

  1. The Cobb-Douglas Production Function assumes that the labor and capital shares of total output are constant over time.
  2. This functional form does not fit well to all industries.
  3. Ideally one would be analyzing business-sector productivity as productivity in the government sector is not well-defined, but data availability does not allow this for most countries.
  4. There are data limitations across many countries globally, for instance in calculating capital in terms of productive benefit or services instead of asset values.
  5. Total Factor Productivity estimates across organizations may not be strictly comparable depending on whether the contribution of the quality of labor is separated from the contribution of TFP growth or not.

For example, in order to analyze the drivers of productivity growth, economists use the “Total Economy Database” of the Conference Board due to the extensive geographic coverage. Even with these caveats, however, the data across different estimation approaches show the same trends – the broad-based and persistent nature of the decline in productivity growth globally is evident no matter what approach one uses and is evident in both labor productivity and TFP growth measures.

My bearish case on the markets is not that the economy is collapsing – just that it isn't growing fast enough to support these ridiculous valuations and that means I'm not in favor of riding out these stocks with 30 – 300 x multiples as I don't think this kind of irrational exuberance is going to be able to avoid the reality of slowing Global Growth over the next decade.  There is still plenty of financial engineering (stock buybacks, non-GAAP projections, M&A) to be done to keep things looking good for a while but, on the whole, this is not a sustainable situation

Image result for greed fear cycleI said the same thing in 1998 and the same thing in 2007 and, in both case, a year later, I was still wrong as the markets ramped higher and higher.  A year after that, I was right and my biggest regret both times was not hammering home my case for caution more vigorously because people love rallies and HATE missing out on them so they will often get in at the worst possible times unless someone tells them why it's a bad idea.  That's my job! 

There's nothing wrong with buying things – just make sure you have hedges, make sure you have CASH!!! and make sure you have a plan for what you will do if you wake up and the market is down 5% on day 1, 10% on day 2 and 20% on day 3 and, if you are comfortable with your disaster plan – THEN go have fun…

Speaking of inflation (and fun), last Monday I told you we liked Silver (/SI) Futures long at $16.70 and that one got away at $17.03, with another $1,650 gain (we liked it at $16.40 the previous Wednesday) and the Dollar was weak at $98.75 but now the Dollar is 96.85, down 2% while the markets are flat to down so keep in mind they only LOOK even but, in fact, they are weakening against a constant currency.   We're long on /DX down here and the UUP June $25 calls are now 0.22 and we still like those for the next few weeks, though disappointing so far.  

If the Dollar stays weak, the markets can keep looking strong but, if the Dollar bounces back – look out below as equity prices adjust.  

 

168 COMMENTS

Subscribe
Notify of
168 Comments
Inline Feedbacks
View all comments

Stay Connected

157,452FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles

168
0
Would love your thoughts, please comment.x
()
x