Corporate Welfare Delaying the Bear

The Fed reducing their balance and raising rates should have kicked off the bear market this year, were it not for some serious fiscal stimulus, most of it geared to help corporate profits.  Low tax cash repatriation was the first wave of money that corporations were given.  This was promptly used to buy back stock.  The next wave, which will last for a while, is the lower corporate taxes, which gives corporations more capital for guess what?  Stock buybacks, and the occasional PR savvy one time $1000 bonuses to all workers.  There is a big difference between a $1000 bonus and a permanent wage increase, which most companies are loathe to do, and really don't have to.  When you have an oligopoly, like most US multinationals do at the moment, there is no wage pressure.  It is take it or leave it for the worker. They usually don't have anywhere else to go.  And although they say the labor market is tight, its only because the wages haven't gone up and the labor force isn't growing.  Workers have very little pricing power, unions are weak or nonexistent, and there aren't many competitors that workers can switch to. 

An oligopoly not only gives you pricing power on goods, it also gives you pricing power on labor.  With the relentless trend towards mergers and acquisitions, and reduced competition, companies are enjoying the benefits of increased pricing power, which obviously leads to increases profit margins. 

Rent seeking is the ideal corporate business model, because there is no need to spend money on R&D, you can just raise prices and reap the benefits.  And competitors don't show up because these corporations now spend more money on lobbyists and campaign financing, to ensure the moats around their oligopolies, to increase the barriers to entry via specific, pinpoint government regulation, demanded by the corporate lobbyists.  The US Government has now become ensnared in an arm of the corporate "vampire squid", which provide the financing to politicians, who need the money to get elected, and thus compensate the corporations with favorable rules and regulations. 

This trend towards corporate welfare will not be easy to break.  It has been happening since the 1980s, under both Republicans and Democrats.  Populism will only help the corporations even more, in a roundabout manner.  Because populism requests handouts, and handouts mean bigger budget deficits, which eventually leads to a weaker dollar, due to the eventual requirement of low interest rates Fed intervention and QE to suck up all that debt issuance.  And a weaker dollar hurts the consumer, and helps the corporations. 

The current financial situation is not a stable equilibrium.  Only through the sheer force of the fiscal stimulus (both tax cuts and big budget increases) has the market been able to overcome Fed tightening.  This gives the market a false sense of confidence, and attitude of invincibility. The money noose is getting tighter and tighter, and the fiscal stimulus is now reflected in corporate profit estimates. 

Looking at the consumer confidence numbers, they usually peak with the economic cycle, and it is looking like late 1999/early 2000, both from an economic data and financial markets perspective.  The SPX and bond yields should top out later this year, probably around December, after the flood of stock buybacks get to work.

We have a little weakness the past few days based on the rapid rise in rates, but that usually doesn't last.  The stock market can only fall hard on its own weight, not from external factors.  Give it a couple more months and it will be bull hunting season. 

There is no need to short in the hole and sell after a pullback.  There will be plenty of rallies to sell into later this year.  For very aggressive traders, a deeper pullback towards 2800-2820 would be a buy opportunity to sell later into a November rally.