Ordered direct from K-mart...The lawn chair that Powell has used and folded himself! Yeah, he folded like an Ed Lampert owned K-mart lawn chair.
Wow, that was fast. The Fed gave out some hints, and they were not Wall Street Journal trial balloons. They were sledge hammers nailing down the dovish message to the financial world. The rate hiking cycle is over. Going to neutral at this point with this kind of economy is screaming to the market that the next move is a rate cut, not a rate hike. The Eurodollars market started to sniff that out at the end of December, and there was disbelief in the fixed income community. Now there is universal belief that the Fed is done, and the balance sheet contraction will finish this year.
The Fed chairman is now just a cheap suit who is owned and operated by Wall Street. If Wall Street throws a temper tantrum, the Fed will listen and obey their commands. Powell tried to act like a tough guy, like he was different, but he's just a lamb in wolf's clothing. A bull in a bear suit.
The excuses for the quick flip flop without weakening economic data were lame. 1) The narrative around Chinese and European economic weakness. Narrative? Is he trying to make monetary policy or write a script for a two bit investment banking analyst? 2) Government shutdown. Last I checked, the government shutdown is over, and government workers got a free 3 week paid vacation on the taxpayers dime.
This doesn't change my outlook for the SPX. This current Fed is not the one that's causing the problems. It is the bubble that was built up over years and years that is ready to pop soon. Late cycle, over stimulated, overvalued, and no organic growth. It is going to be a disaster once all the latecomers jump on board the bull train. Powell's capitulation only speeds up the process in forming a top, as now the bulls have less excuses to not buy. Once the trade deal rumors start flying around, short 'em all.
The upside in the SPX is mostly over. There is likely another 1-2% upside after the trade deal rumors come out and that's it. SPX 2720-2730 would be an exquisite level to short. Waiting for it.
The crowd is catching up to the brutal realities of the current market. Earnings blowups are coming in fast and furious, yet the US macro data is still coming in relatively strong. Everyone sees the weakening global economy but they think it will not have a big effect on US corporate earnings.
What gets lost in the day to day happenings is the bigger cycle, which is clearly overextended and drugged up on uppers (too late rate hikes from Fed, ECB/BOJ overdoing QE, and Trump tax cuts and budget buster spending deal in 2018). You cannot expect an economy with low population growth and no productivity growth to have an organically high growth. All this stimulus justed ended up building excess capacity, malinvestment, and bubbles. The symptoms are most obvious in China because they are the ones who have overdosed the most on the equivalent of financial methamphetamines for the longest period of time.
The big picture gets lost over overblown, relatively meaningless trade issues between US/China which are easily blamed for everything bad that's going on, when the problems are much more deep rooted and more significant.
Despite all this, in the short term, there are too many events that will eventually be settled over the next few weeks (Fed meeting, tech earnings, trade talks) that could be a catalyst for a fake out relief rally that would be a beautiful short selling opportunity. Those who are short now will eventually get paid in the spring, but they may have to face some short term pain once all these uncertainties get removed.
Ironically, removing the excuses like the trade war and the Fed will only leave investors realizing how bad things are when the markets go down after a trade deal and after Powell talks dovish.
AAPL earnings are after the close, and Fed meeting is tomorrow, which would be meaningless were it not for Powell's press conference. AAPL has already let the cat out of the bag, so earnings should be a nonevent/slight positive, and I think Powell has been scared stiff on talking tough after the last meeting, so he'll probably be as dovish as possible to placate the markets.
To sum it up, I expect a last gasp rally in the next 1-2 weeks, and then choppy trade for a few weeks before the downtrend returns with a vengeance in March/April.
Here we go again. Wax on, wax off. Deal on, deal off. With a surging SPX, going up almost every day, I guess Trump thought he could afford to pretend to play hardball with Xi. Suddenly the preliminary talks have been canceled, and then uncanceled by Kudlow. What a sh*t show.
Xi is seeing right through Trump's Art of the Deal games. Xi will promise the world with regards to imports but will be vague and noncommittal when it comes to forced technology transfer and intellectual property theft. He knows what is important to China and isn't about to make a commitment that bans what China wants from US corporations.
Xi is president for life. Trump is probably president for just 2 more years. Trump wants another 4 years, so he's not going to raise tariffs to 25% on Chinese goods and weaken the US economy just to help out a few US multinationals in China. There is a lot of posturing going on, but the highest probability scenario is a lightweight deal, lacking specifics, with only cosmetic promises from China to increase US imports in exchange for no tariffs. The market will be satisfied and then the reality will hit the market a few months later when it realizes that the economy is still weak despite the end of the trade war.
The first pullback after a blistering rally off a capitulative bottom is almost always a buying opportunity. Even though I am a longer term bear, I would be tempted to buy this pullback, although its already up 30 SPX points from Tuesday's bottom in premarket trading. Confirming my gut feel that SPX will break 2700 before there is a good short set up. It is definitely much preferred to have that short setup while there is either a lot of optimism that a deal is getting done or there is a rumor that a deal has been made. Even though I know that the global economic weakness is not about a US/China trade war, but about a cyclical downturn that is long overdue. It doesn't matter what I believe, it matters what the rest of the investors believe, and they believe that the trade deal will revive the global economy.
Mnuchin is the annoying kid in the front of the classroom, raising his hand to volunteer to help his teacher, who is Trump. We got a leak in the Wall Street Journal about Mnuchin tariff cuts ahead of a January 30 meeting with Chinese officials on trade. Of course, the White House denied it, just like they tried to deny the G20 framework that would be in place to make a later trade deal. Believe the leaks, not the denials.
They are folding like a cheap lawn chair, as Xi has waited out Trump masterfully, even as the Chinese economy is deep diving, not giving in on intellectual property or forced technlogy transfers. He is sensing Trump's desperation to make a trade deal to rescue the US stock market. The Chinese will agree to a haphazard, nonbinding agreement on various aspects of IP, imports etc. for the elimination of tariffs and free trade guarantees. Expect the Chinese to keep what they've always been doing, which is steal technology, force foreign companies in China to do joint ventures with state owned enterprises while revealing all their IP, and ignore patents along the way. Much like the US/North Korea agreement, it will be toothless and all for nothing, keeping the status quo.
Mea culpa on my prediction of weakness into earnings season. I underestimated the eagerness of the Trump administration to try to rush a crappy trade deal that accomplishes nothing in order to placate the stock market. Also underestimated the willingness of fund managers chasing stocks to front run the "pop" on the US/China trade deal. This big rally all but guarantees a bloodbath after the trade deal is announced.
We are finally getting acceptance of the rally, and that it will not be going away anytime soon. It doesn't mean that the rally is over, it just means that the steep part of the rally move is over. Now there will be more choppy back and forth action, still grinding higher, but with more 1-2 day pullbacks, and no more straight up moves.
Short term trades should be made not just on short term factors, but intermediate and long term factors which affect the probabilities in the short term.
I came into 2019 expecting a quick New Year rally that would last about a week with a subsequent sharp pullback by now. Instead, the market has been relentless going higher, breaking significant psychological resistance at SPX 2600, with pullbacks that have been less than 1% ever since AAPL came out with their earnings warning in the first week of the year.
My expectations for January so far have been wrong. With this kind of strong price action, I would have expected low put/call ratios and a broader acceptance of the rally and bullishness based on a potential US/China trade deal and a dovish Powell. Instead, the put/call ratios have been relatively high, and there is a lot of chatter among traders about the market going too far, too fast, needing a pullback.
Whenever you see this kind of relentless buying off a capitulative bottom that you had on Christmas Eve, it has to be respected. Usually this kind of buying doesn't dissipate quickly, and the market tends to rally longer than most investors expect. This interpretation of the market action is based on past experience and gut feel. It feels like the world is underweight equities right now and now just starting to feel FOMO.
Longer term, I think this rally will set up a great shorting opportunity. The fundamentals are worsening and there are still too many bullish on the US economy. But its not the time to short now. Based on past instances you had this kind of price action, the rally tended to grind higher and higher. It looks like SPX 2650 will be reached sometime later this month, and a run to SPX 2680 is probable before a top. I will be patient in putting on shorts. This market is looking for bears' blood right now, so be careful shorting.
If I had a quarter for every time I heard that equities are weak because of the trade war...I'd be able to play a lot of Pacman at the arcade. Naturally, investors think if there is a trade war deal, the market is free to go higher and higher and forget all that happened in December, like it was a bad dream.
When I think about the trade war excuses, this moment in boxing history keeps popping up. Roy Jones Jr vs. Antonio Tarver.
You also can't blame it on Jerome Powell. He wasn't the one fomenting a stock market and corporate debt bubble like Bazooka Ben and Janet Yellen. Whenever a bubble is allowed to grow to enormous proportions, its only a matter of time before it pops. Of course, like the 15 minute attention span audience that is the stock investor, they will scapegoat whoever happened to be manning the controls when the bubble pops. This time it is Powell, and to a much lesser extent, Tariff Trump and PPT Mnuchin.
The bubble popping is not just a US phenomena. It is happening in China, Australia, Canada, and a few emerging markets that no one really cares about. It is taking different forms in each country, but the foundation for the bubbles has been super loose monetary policy and a reluctance to tighten even when the economy is running hot and asset prices are going higher.
Starting from last year, the global markets are finally paying the price for front loading demand and overshooting asset prices too high. It has nothing to do with the trade war, and very little to do with a few 25 bp rate hikes or a few percent decrease in the size of the Fed balance sheet. It has a lot to do with earnings topping out while stocks were at one of the highest price to book and price to sales ratios of all time.
And don't believe those people telling you stocks are fairly valued. Yes, if there is a corporate tax cut / income tax cut every few years along with a QE thrown in to monetize the huge supply of Treasuries necessary to fund the fiscal stimulus. US economic growth has been government debt fueled, just a different form than what China is doing with its economy. The only major economic zone that isn't doing this is the EU, and the financial markets have punished their stock markets relentlessly for not running giant budget deficits, providing corporate welfare, and doing fiscal stimulus after fiscal stimulus.
They say China is the one that is addicted to debt fueled growth. So is the US. It is ridiculous how big the budget deficit is when unemployment rate is at 3.7% and the jobs market is the tightest in nearly 20 years. When the cycle turns down, $2 trillion budget deficits will be the norm.
We've had a huge rally since Christmas Eve, going further than I expected so quickly. But SPX 2600 is a hard resistance that won't go down on the first attempt to break through. Based on the steepness of the December decline, I expect the market to grind higher for a few more weeks, even with earnings bombs coming up. This is mainly because of the anticipation of the trade war deal (Pavlovian response) and time needed for the market to adjust to the new range around 2350-2650 before finding what is likely to be a lower level in the summer.
Looking for a pullback this week, which probably will get bought, and set up another move higher once the tech earnings are behind us and Powell coos dovishly at the January Fed meeting. We will need a trade deal for there to be that final euphoric counter trend pop to fade with confidence. Until then, there will be hopes for a big rally on a trade deal which everybody expects to happen. It is typical stock investor behavior. Only looking at the cards that they have and not thinking about what the cards their opponents hold. There is a lot of first order thinking and very little second order thinking in the markets.
The ironic thing about the stock market is that it is the highest stakes poker game in the world, but the players mostly use only low limit hold'em analysis, not the higher order psychology and analysis employed at the high stakes limits.
What we saw in 2017 and 2018 could largely be attributed to anticipation and execution of the tax cuts, mainly corporate tax rates being reduced from 35% to 21%. With more and more baby boomers retiring and Social Security and Medicare expenses set to bust the budget, don't be surprised to see $2 trillion government deficits in the coming years. It will require very easy monetary policy for it to not affect the US economy, as normal monetary policy wouldn't be able to tame the distorted supply demand dynamics such a huge deficit would create.
If Democrats win in 2020, there will be quite a lot of pressure to raise taxes on corporations and the rich, especially considering many of the Democratic candidates are farther left than Obama.
One of the reasons the US economy has outperformed Europe is because of the big budget deficits (combination of lower taxes and more spending) contributing to greater demand. It hasn't had any negative drawbacks such as a much weaker dollar because of the interest rate differentials between the US and the rest of the developed world. But when the US economy weakens, those interest rate differentials disappear as the Fed goes back to ZIRP, and the dollar will get much weaker. It may seem like a weaker dollar would be great for the US, much like a weaker currency is great for Japan and Europe. But the US is a massive net importer, so inflation in imported goods would be a big hit to consumption for the lower and middle class. Remember in 2007 and 2008, the dollar was getting a lot weaker right up until the financial crisis hit in fall of 2008.
Contrary to what many stock investors believe, a weaker dollar is not that good for the stock market as it hurts domestic consumption, offsetting a lot of the export benefits.
The past few days rally after the AAPL earnings bombshell are a combination of funds repositioning to more of a neutral stance, after de-risking in December, New Year equity allocation inflows, Powell turning back to being a stock market slave, and optimism about a US/China trade deal that everyone thinks is the magic elixir for this market. Unlike most investors, the S&P will be more vulnerable to weakness after the trade deal, because it takes away a positive short term catalyst, without providing a fundamental change. 10% tariffs are relatively meaningless when China lets its currency weaken.
Market is up again today after a weaker open, the FOMO trade is still on so be careful with shorts. Its a tough market, trying to squeeze shorts and then squeeze longs. Over and over again.
What you saw in AAPL on Thursday will be a recurring theme as earnings are revised lower in the coming quarters. Blame China for earnings misses. These CEOs are a lot like Trump. Taking all the credit for the good times, and blaming others for the bad times.
Earnings are a much better gauge of the real economy than lagging economic indicators or pulp fiction Chinese data. We had Fedex and Micron a few weeks ago. Now AAPL this week. As the nonfarm payroll report and ADP reports show, the employment data is still strong, because companies are still not so willing to so quickly adjust to a change in economic conditions.
But there are cracks starting to seep in as the ISM numbers came in much worse than expected. The problem with looking at the economic data is that you are looking at the rearview mirror. December was a game changer. You had the biggest stock market drop in many years on a monthly basis. And the Fed still raised rates. When have you seen that before?
It is not about the Fed's rate hike path or pause anymore. It is about how late they will be to cut interest rates, waiting to see weakening employment data which is always a lagging indicator. Powell showed no urgency to react to financial markets, which is always the first to warn about changing economic conditions. He doesn't want to feed that crack addict, giving him more crack after the crash, trying to regain the high. Powell got my respect in that December meeting, even though it cost me money, because I thought he would fold like a cheap lawn chair. Instead, he had some backbone and decided not to be the tooth fairy. In the short to medium term, it is bad news for stocks. But it prevents another extended bubble and crash scenario, which will be good for stocks in the long run.
China did a 1% RRR cut overnight. They will be doing more stimulus, because they are addicted to debt and cheap money. And it will not be enough. With overflowing debt levels, they are going to have to do a mega stimulus like 2008 or 2016 to turn this ship. Problem is that it just makes the situation worse for their next downturn as the debt keeps growing. China seems reluctant to pull out their often used big bazooka this time, partly due to their effort to support the yuan, and also because there is already so much bad debt in the system.
After a bad day, we are getting that gap up, thanks to the RRR cut. Its probably a chop day today, and then a rally on Monday. So I will be waiting for that rally to put on short positions. The AAPL earnings bomb messed up the timing for the short, so just waiting for the right moment to strike.
Eurodollars have spoken: Powell is bluffing. In November, the Eurodollars market was still drinking the Fed kool aid and believing what they were saying. They were pricing in further rate hikes in 2019 and 2020. The Fed is still projecting 2 rate hikes for 2019, but the Eurodollars futures are telling a different story. It is now pricing in a small chance of a rate cut for this year.
Whenever there is a disagreement between the Fed and the STIR market, I usually agree with the STIR market. It doesn't mean that I blindly follow and believe what the Eurodollars market says. But this time, the market is forecasting future economic scenarios which are highly probably, and the economists and the Fed are still too anchored to 2018 in forecasting 2019 economic conditions.
After a massive financial bubble pops, you get quick and unexpected deterioration in the economy, mainly because rising asset prices have served as a substitute for low population growth and low wages in maintaining consumption growth levels. This is not just in the US and many other developed countries, but also in China (dependent on rising real estate prices).
With house prices going down and now stock prices, the US consumer will definitely scale back. The meager wage growth and lower oil prices will not be enough to offset this. Especially for the high end consumer, which is cutting spending rapidly.
We have a big gap down on the first trading day of the year, which is not common, but when it does happen, it is usually a bad sign for January (see 2014, 2016). I continue to believe that those panic levels on Christmas eve will be retested this month, so I am looking for a good spot to short. SPX 2530 as a very hard level to break through, so anything close to that is probably a good risk/reward short. But this market is so weak, it might not give you that level to short at before it goes back down to retest 2340. Maybe the bulls will get trapped into buying after a dovish Powell speech or trade deal rumors pushes the market above 2510. That would be the ideal time to short.
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