Still Bullish. Junk Bonds & Taxes

Stocks have definitely been quiet of late although that’s from a bull’s perspective from the inside looking out. There has been a very slight drift higher. From a bear’s perspective from the outside looking in, it must be painful first watching stocks relentlessly melt up and then continue to grind higher day after day after day. These types of markets wear on anyone holding cash waiting to invest. From my perspective, I have tried to do my best not to screw up my bullish outlook.

Looking at the major indices, it’s hard to make a seriously negative argument. Sure, I can poke some holes, but nothing significant. Of the four key sectors, the semis and discretionary continue to rock. Transports look like they want to pullback and then explode higher while the banks just frustrate investors. I think if the financials are going to shine, their time is coming this quarter.

While I have written about some recession concerns, the credit markets are not showing any worries. High yield bonds just keep making new highs day after day and week after week. Long before stocks peak and well before the economy peaks, I fully expect the junk bond market to put in a major high. We’re not even seeing junk bonds peak yet, so I have to laugh at all those Chicken Littles out there who yell that the U.S. economy has been in recession for months. That’s just not the case.

If I had to point to one somewhat dumb little supporting fact at just how strong stocks are, look no further than the strength leading up to tax day. While roughly 80-85% of the country saw their taxes fall in 2018, we know that those of us living in high SALT states like CT, NY, NJ, CA, IL & MA may see higher tax bills due today. I would have thought that would have caused a mild pullback to meet those liabilities, but maybe I am either overthinking it too simplistic in my analysis.

Anyway, today is tax day and it’s typically one of the strongest days of the year. I think the logic goes that investors make their IRA contributions at the very last minute and portfolio managers tend to invest that all at once. I actually reasoned that people sold some holdings to cover tax bill and sellers got exhausted before today. Who knows. I’m glad tax day is behind us. I do like seeing all that money in my checking account. That is, until the IRS pulls it and then cashes my April estimated tax check.

 

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Junk Bonds Say Full Steam Ahead

It’s been a fairly quiet few days for stocks after the better than expected employment numbers were released on Friday. The economy created 196,000 new jobs versus the 175,000 expected. As I wrote about then, I was expecting a strong number with a sharply higher revised number for February. While the former happened, the latter certainly didn’t as February was only revised higher from 20,000 to 33,000.

There’s nothing wrong the major indices. All looks fine. The four key sectors are split with semis and discretionary rocking and rolling, but banks struggling and transports looking like they want to burst higher. High yield bonds continue to quietly shock and surprise at all-time highs. I’ve been saying this for years, but certainly of late, bull markets do NOT end with behavior like this. Junk bonds usually top out long before the stock market. Risk on remains in place. The bears are and have been wrong.

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Jobs Friday

Today, we have what is always labeled as the “all important” monthly jobs report. Frankly, given the Fed’s recent 170 degree turn, I don’t think it’s that vital unless the data either completely fall off a cliff or completely spike. Both are unlikely. After February’s unexpectedly weak report, I said that I fully expect a sharp revision higher when March’s report is released in early April as well as a decent report for March. I still feel that is the case. If it turns out that I am wrong and we see more economic weakness than recession may be closer at hand than I thought. That would cause me to rethink a lot of things. Let’s wait and see what happens. I’m sticking with the weight of evidence that points to strength in the jobs market.

Not much has changed on the stocks front. A good employment report should send them higher, but they still look a little tired in the short-term. Bonds should weaken on a good report but they look like they could bounce after that. Gold probably looks the most interesting here as it is set up for an upside move.

That’s it for today. I’m in Tampa with my little guy to watch UCONN take on mighty Notre Dame tonight in the Final Four. It’s going to be a tough one for sure. We don’t seem to fair well against the Fighting Irish on Fridays during Lent.

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Lyft a Bust??? Stocks Soar & Roar

Last week, we ended with the hottest and most anticipated IPO in a very long time. It was one that caused me to dust off my HOT IPO Roadmap and tell you to run for the hills. Lyft came public to all the glory and hoopla of a Ringling Brother circus. And certainly not to my surprise, it fell flat on its face after running above $88. Last I checked, it was sub $70. The pundits were chastising Uber for waiting to be number two. Who’s laughing now? I am sure Uber is learning a valuable lesson!

Regarding the stock market, the bull remain long and strong. However, it seems like a whole new group of bears have just started to notice that an epic rally has been taking place since Christmas. I saw some of the loud and proud bearish pundits who have been pounding the table all year that stocks absolutely had to revisit the Christmas lows and probably break them. These guys were singing the market’s praises as if they had been positive all year. One clown says he used to be a broker before he started blogging and became a pundit. Last time I heard him comment, he was invoking the Logan Act regarding Trump. I don’t know how pundits stay so wrong for so long and then flip a switch, revise history and claim victory. I actually do know. It’s because there’s no accountability.

Anyway, I can spend all day laughing at pundits who refuse to ever admit defeat and just revise history. It’s like those “floor traders” we see on TV who don’t really do anything but walk around the floor socializing and waiting for someone to ask their opinion. Most trading is done electronically. They don’t manage money. They aren’t fiduciaries and frankly, they’re just around for show and entertainment.

Geez, I sound salty and ornery today like my buddy Sam Jones. I’m really not. And I had a great weekend in Albany and Vermont watching basketball, skiing and catching the Mount Snow Spring Brewer’s Festival.

As most of you know, I have no problem admitting I am wrong because it happens pretty much every day as I am reminded at home. “Dad, you’re so wrong”. “Babe, you don’t know what you’re talking about.” While I absolutely can’t stand Duke, I thought there was no way they could lose before the Final Four. Wrong. I thought my UCONN women would have a very tough time on Sunday against Louisville. Wrong. For a few weeks in early January I thought stocks would see a secondary decline into March. Wrong. 30 years in business, I am still learning each and every day. Make a trading error? Fix it ASAP. Don’t wait and hope it goes my way. Cut your losses and take my lumps early and move on. Markets are usually right. Markets also don’t care what price I bought or sold anything at.

Moving on…

Stocks roared out of the gate to begin Q2 as Chinese economic data was unexpectedly robust. The S&P 500 broke out to new highs for 2019 and the highest level since October 10 as you can see below. The NASDAQ 100 looks very similar and equally as strong. Before I continue beating my chest about all-time highs, I want to add that Monday was somewhat emotional for the bulls. As such, I would not be surprised to see some pause to refresh or even a little pullback over the coming week or two. It wouldn’t be one that I would take much action on, but I would be aware. Ultimately, as I have said every week all year, stocks will resolve higher and buying any and all weakness remains the strategy until proven otherwise.

The Dow Industrials are lagging as you can see below, but no longer by a huge margin. The Boeing news has settled down and I expect the Dow to kick it up a notch as Emeril would say. The S&P 400 and Russell 2000 are the two lagging indices that need to step it up sooner than later. If the bears want to point to something concerning, there it is.

All in all, stocks continue to soar ahead as I spelled out in my 2019 Fearless Forecast. All-time highs are coming. Have patience. There will some trading ranges and pullbacks and frustrations along the way. The economy is decelerating but I don’t think recession is here just yet.

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Hot IPO, LYFT, Coming Out. Time to Buy?

“Hot” IPOs like Alibaba, Twitter and Facebook are usually very emotional, much anticipated and huge financial media events.  Investors clamor for these stocks, usually throwing caution to the wind as fundamentals are trampled by greed. The media are usually camped out at the NYSE or NASDAQ with minute by minute updates as to where the stock may open.

As I have discussed over and over, emotion in investing can have a very detrimental impact on your portfolio! That’s one of the reasons I have always had a tough time advising people to buy a hot IPO on its first day of trading. My theory has always been that if a company is as good as advertised, there will be plenty of time to buy it down the road once it stabilizes, even if that means at higher prices. Of course, that strategy is irrelevant to those who just want to trade the stock for short-term gains.
With Lyft, the new generation ride sharing company, coming public today and its brother, Uber, shortly thereafter, I am doing my usual review of similar and much anticipated, “hot” IPOs to show you what transpired over the coming few months.
The term “hot” is subjective and I tried not to cherry pick the list, however, I am sure others can argue for inclusion of more companies. This research has absolutely nothing to do with the fundamentals of Lyft, which definitely concern me, even though I am a frequent user of Uber and sometimes user of Lyft. The numbers just don’t add up and work for me, but that could also be because I am absolutely awful at gauging the future success of companies with business models that seem broken right out of the gate.

With all that said, let’s take a walk down hot, tech IPO memory lane.

Snap was the most recent hot IPO and oh what a disaster that was. Snap opened at $24, ran straight to $30 and then spent the next few months sliding and grinding to under $12. To its credit, it did bounce strongly to $20, but that was a classic bear trap before collapsing to $5.
Square came public at the end of 2015 as stocks were trying to recover from their summer swoon. After a wild first day which saw Square’s high for the next five months, the stock traded as low as $8 before doubling. Patience was rewarded, my long-term theme.
Alibaba was the largest U.S. IPO of all-time, coming public in September 2014 to huge fanfare and expectations. I don’t recall an IPO ever getting that much media attention. I surmise that the vast majority of individual investors never heard of Alibaba until the days leading up to the offering. After another wild first day, the stock pulled back 15% for a few weeks before uncharacteristically soaring to its all-time high two months later. However, as we have seen time and time again, buying strength in IPOs was not a rewarding long-term strategy as the stock was subsequently cut in half before double bottoming in September 2015.
Twitter, another hugely popular and much anticipated IPO, also bucked the trend over the past few years. While it initially dropped 20% from its $50 first day high, that set off a very powerful rally of almost 100% to $75 before seeing the customary 60% IPO collapse to $30. End result: investors were mostly better off waiting than buying right away.
 Facebook may have been the most high profile IPO since Google and had all kinds of problems right out of the gate. Talk about the epitome of what not to do! Here is one piece I did. (http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20120525.pdf) As you can see, it was almost straight downhill, 60%, for four months before THE bottom was hit at $18. End result: investors were absolutely better off waiting than buying right away. Patience was rewarded.
LinkedIN is next and similar to Facebook, there was immediate and significant weakness before a good low was seen. End result: It was basically a toss up.
Just like with LinkedIN, Groupon experienced the ole buyer’s remorse right from the start with the first meaningful trough coming about a month later. End result: investors were better off waiting than buying right away.
Yelp bucked the trend somewhat with only a shallow initial pullback, but the stock didn’t escape the carnage as you can see over the first three months. End result: investors were better off waiting than buying right away. Patience was rewarded.
Zynga was just like the others with an immediate month long decline to a good trading low. End result: investors were better off buying sooner than later.
I added Google as it was before the financial crisis as well as arguably the hottest and most anticipated IPO of all-time or perhaps since Microsoft and Apple in the 1980s. This is certainly not a social media company like the others. It was also during a very different investing climate back in 2005 with vastly different results. It does not belong in the group above, but I figured I would answer the question before it was asked. End result: investors were rewarded almost immediately. The stock never returned to its first day’s or week’s range.
The moral of the story is that most of the time, investors are rewarded by having patience with hot IPOs. Personally, I would rather be late and pay up than be early and lose a lot of money.

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Stocks Pause, Bonds Yields Collapse

Greetings from Baltimore with some absolutely beautiful spring weather waiting for me! I knew my day would be great on Tuesday when I arrived at the airport and saw not a soul around. From the time I dropped my car off at 7am to the time they closed the boarding door at 7:30am to the time I landed and picked up my rental car at 9:15am, every minute was a pleasure! And my day only got better from there as I got to visit with some special folks throughout the day and evening. Let’s hope I didn’t jinx myself with my travels today.

The bears tried to follow through on Monday from Friday’s red day, but ended up not making much noise by the time the day ended. The bulls couldn’t do much better with some really nice early morning gains on Tuesday. In short, we have the Dow Industrials in a trading range, the S&P 500 and NASDAQ 100 in uptrends and the S&P 400 and Russell 2000 in downtrends. In other words, the stock market overall is somewhat digesting those massive post-Christmas gains and not beginning a major move to the downside.

Bonds and defensive sectors continue to be the real (and quiet) story. As I keep writing about over and over and over, utilities and REITs have behaved the best since last summer. After seeing yields on the 10-year Treasury Note spike to 3.25% last year and hearing the pundits all predict skyrocketing interest rates, those same yields have collapsed to under 2.4% as you can see below. That is a reflection on slower global and U.S. growth and more demand for our bonds. When competition for U.S. bonds approaches 0% or even negative yields, investors will flock to where their money is treated best, causing our yields to fall. Of course, they do have currency risk if those investors need to convert from the Euro, Yen or some other non dollar currency, but I think you get my drift.

Let’s keep an eye on Boeing and the growing saga with 737MAX. Frankly, I am surprised that the stock has held up so well in the face of what I think could possibly be an enormous earnings problem long-term, worst case. And now we have another issue last night with that aircraft. I just don’t understand how the FAA could certify a plane that they knew had problems which needed software to fix. If the plane needed more powerful engines that caused the nose to suddenly rise, how could they let Boeing move forward with the design and not force them back to the drawing board?

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Boeing, Mueller and Yield Curve, OH MY!

A week ago, I started off my writing that a stronger seasonal headwind was in play for the week, but I didn’t think it would be a significant decline. Stocks did pause overall, pulling back about 1% although it certainly did feel like there was more to it, especially if you watched the various headlines come across with Boeing and the Mueller investigation, BREXIT and the yield curve once again. For a stock market that has risen almost vertically since Christmas, all the news seems to be on the dark side. Doesn’t anyone want to report anything good?!?!

The Dow Industrials, S&P 400 and Russell 2000 have certainly been lagging the S&P 500 and NASDAQ 100. Nothing there to indicate anything worrisome. Semis and discretionary look great while banks and transports stink. A little worry to be had there. Junk bonds have been solid as a rock and the New York Stock Exchange Advance/Decline Line has powered well past its old all-time high.

Seriously folks, how can the bears argue with that behavior? We are seeing widespread participation in this rally as we have since Christmas. I know. I know. They will tell you that it’s all the “bond proxies”. In other words, the NYSE A/D which I show you below is so strong because bonds are rallying and that’s because the economy is heading into recession. Well my friends, the next recession is always coming, but it’s not this week or this month or this quarter. And I don’t think it’s next quarter either.

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The Most Unanticipated FOMC Meeting

The Most Unanticipated FOMC Meeting

Today is one of the most unanticipated Fed statement days in recent memory. How will we ever survive without hearing that “today is the most important Fed day ever”? I say that because absolutely nothing is really expected today. Chairman Jay Powell did his 170 degree turn earlier this year and the Fed is now on a new course. Okay. Maybe, I am exaggerating a little bit. Perhaps, we will hear about their plans to end their sale of bonds purchased during their Quantitative Easing programs, but that should be about it.

Financial markets have ripped since Powell’s embarrassing mea culpa in early January with stocks and bonds sharply higher. Crude oil is also up significantly and the dollar is marginally higher. Gold is basically flat.

Model for the Day

As with every Fed statement day, 90% of the time stocks stay in a plus or minus .50% range until 2pm before the fireworks take place. That should be the case today as well. After that, we usually see strength into the close roughly 75% of the time. That trend has been muted today after Tuesday’s action. However, there may be a less frequent and negative trend setting up for after the Fed which would call for lower prices in the very short-term.

No Rate Move

The FOMC is absolutely not going to touch interest rates today nor at their next few meetings either. They are effectively on hold until further notice and the odds favor the next move to be a rate cut. Besides Powell and the rest of the FOMC doing an about face in early January, a few very important pieces of economic news have surfaced lately. None come as a surprise.

First, the European Central Bank cut their annual GDP forecast from 1.7% to 1.1%. As I have written about before, for all intents and purposes, Germany and Italy are already in recession. Second, China’s economy continues to surely and steadily weaken. Finally, the February employment report in the U.S. was wildly weak although I feel fairly confident that it is going to be revised sharply higher.

Although the Fed’s dual mandate calls for maximum employment and price stability, I do not believe they can ignore what’s going on around the world. The global economy is soft. Continuing to raise interest rates here would certainly have detrimental effects on growth as well as likely strengthen our currency. Neither would be considered good for the global economy.

Right now, Goldilocks is alive and well and residing in the U.S. economy. Not too hot. Not too cold. The Fed would be backed into a corner if the U.S. economy re-accelerated again without Europe and China following suit. That would force Powell to raise rates and hasten recession.

Recession Coming in Late 2019 to Late 2020

Speaking of recession, I stand by my forecast from 2018 that the U.S. will see a mild recession beginning between Q3 2019 and Q3 2020 although I would happily be proven wrong. Economic data is decelerating. I believe we have seen the trough in weekly jobless claims along with the peak monthly new jobs created. Housing has been a challenge for some time and that does not appear to be changing any time soon. Credit cards delinquencies are spiking and auto loans, especially from millennials, are a big problem.

Don’t get me wrong. The economy is not teetering on recession. I just listed the problems. GDP is still growing, coming off a 3.1% year with 2% likely in 2019. Wage growth is the best in many years and money is flowing back to our shores. It’s going to take time for all this to wear off and some external shock to hit.

One thing I know for sure. Powell and the Fed will not forecast the next recession. Why? Because the Fed has never, ever, ever once correctly predicted recession in the U.S. or really anywhere for that matter. You could say that they are perfect in their incompetence. You could also argue that secretly they really do see problems coming down the road, but could never telegraph that publicly for fear of upsetting the markets. This is the argument I fall on the floor laughing my head off.

The Fed is always late. Had they started the rate hike cycle earlier or the asset sales, they could have avoided conducting them concurrently. I have said this from day one and never wavered; what the Fed was trying to do is like landing a 747 on I-95. It’s technically possible, but so beyond likely to be successful. In fact, as I have stated many times, it has created a fertile landscape to grow recession.

Janet Yellen & Jay Powell Are to Blame

Let’s get back to Jay Powell and the Fed. Longtime readers know that I was a very big fan of Ben Bernanke while I called Alan Greenspan the single worst Fed chair ever, or at least on par with Arthur Burns from the 1970s. I call it like I see it. For several years, I have been a very vocal critic of Yellen and Powell for trying to land a 747 on a postage stamp by raising interest rates AND selling fixed income assets, now to the tune of $600 billion a year. In the history of the world, no central bank has ever had the temerity to believe it could accomplish this without consequences.

Cue our Fed with Yellen and Powell.

This group is and has been either arrogant or ignorant or both. Look, the Fed is behind 90% of the recessions. They begin a rate hike cycle and push and push until the landscape is so fertile for recession that all it takes is a little spark. They did it leading up to the financial crisis. They did it during the Dotcom burst. They did it in 1990 with the S&L Crisis and Iraqi invasion of Kuwait.

This time, the pomposity has been taken to new heights by adding the program of what’s been labeled Quantitative Tightening. The Fed is now selling the securities in the open market that they purchased during Quantitative Easing. These sales are effectively interest rate hikes by themselves. The markets and economy cannot withstand the Fed conducting both. And although the rate hike cycle appears to have ended, the damage has been done.

Now we have Greenspan and Yellen both forecasting gloom and doom. “Run for cover.” “Crisis on the horizon.” What a joke! Yellen remarked on her way out of Dodge that she didn’t think we would have another financially related crisis in our lifetime. Now, all of a sudden, she sees a series of crisis.

Is this all in the name of selling books? Goosing demand for their 6 figure speeches? Or, do they really believe this, but just outright lied to the public when they were in charge? No matter how you slice it, Janet Yellen and Alan Greenspan are embarrassments.

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Strong Sector Leadership. Seasonal Headwind This Week.

As I wrote about last week, stocks ended their deepest and longest pullback since the Christmas bottom. And that was all of 3% and 5 days. Not much for the bears to hang their hopes on. I also commented that I wanted to see which sectors led out of that pullback since it was unlikely that the rising tide would continue to lift all ships.

Since the March 8th low, the bulls should be proud that it’s been a “risk on” rally with biotech, energy, healthcare and technology leading the way. That is fairly strong leadership. Lagging are the defensive groups plus materials and transports. That’s not bad either although the masses are all up in arms about the transports. While they do matter, I am not going put too much weight on them as they are still rallying fairly well as you can see below.

Finally, with last week’s quadruple expiration of options and futures and stocks rallying, there is a strong trend for some weakness this week. While I don’t have a strong opinion of the magnitude, I don’t think it should be a significant decline if it comes.

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If At First You Don’t Succeed…

On Wednesday, the bulls tried to break stocks above what pundits are calling the “key” line in the sand. This was the fourth such attempt in the past three weeks. As I mentioned before the first try almost always fails and the second is usually a little more emotional. After that, one of the attempts usually sticks. You can see this on the chart below. Today, is that fourth attempt and we will see where the bulls end up.

Given the run we have had this week, coupled with negative seasonality next week, my initial take is that stocks are not going to run away from here. My sense is that the fourth try will be followed by a fifth one sooner than later but not immediately. However, even if stocks pause here or mildly pullback, I don’t think it will be enough to warrant much action. There is too much strength beneath the surface.

Just look at junk bonds below. When almost everyone left them for dead (including me) last year, this group has exploded higher, ripping the faces off of the bears. I will end with an oldie but a goodie that many of you have become use to hearing. Bull markets do not end with behavior like this.

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