Archives for September 2019

Stock Market Reaction to Impeachment

Here we go.
I remember writing about impeachment in 1998 and hoped and prayed the country wouldn’t have to experience this kind of political circus again. It took 21 years, but the circus is back in D.C.
Thankfully, since we only have two prior, modern day instances of impeachment, stock market results are certainly not statistically significant. Given that, however, let’s take a look at the environments surrounding each of the prior two along with where we are today.
First, let’s look at Richard Nixon in 1973. You can see on the chart below where the “official impeachment inquiry” began. At first glance, it certainly looks like the stock market unraveled immediately following the inquiry. However, correlation is not causation. In other words, just because it looks like one thing is tied to another doesn’t make it so. It’s like saying that at the stock market peaks in 2007, 2000, 1990 and 1987 sharks migrated west to east instead of north to south. Or that the path of the stock market is moving tick for tick with the migration pattern of wildebeests. It’s just coincidence.
The macro picture in 1973 was very poor. The U.S. was heavily dependent on foreign oil and OPEC began production cuts in October 1973 against all nations they perceived to be supportive of Israel. The embargo continued in late 1974 and oil skyrocketed 400% leading to a global recession.
While the stock market looked like it was strong right into the peak in early 1973, that was the time of the Nifty Fifty, 50 stocks that were soaring while the rest of the market had already rolled over into a bear market. At the peak in January 1973, more than 50% of stocks were already down 20%. In short, the stock market’s foundation had crumbled, but the house was still standing.
I would strongly argue that the stock market would have seen the exact same results had the Watergate scandal happened or not. If you want to push back a little, maybe I would cede that a single digit decline could have occurred, but certainly nothing like the carnage from the oil shock and serious recession.
Let’s turn to 1998 when Bill Clinton was impeached. Below, you can see the official inquiry began in October 1998 at the end of the stock market’s 20% decline. Some would very wrongly argue that the threat of impeachment weighed on stocks. In 1998, stocks collapsed in August as Russia defaulted on her debt. After a brief bounce, they fell once again when hedge fund, Long Term Capital Management threatened to take down the entire financial system with their staff of Nobel prize winners and 100x leverage on bets that a 1 in a 1000 year storm wouldn’t happen.
Unlike 1973, the economic backdrop was much more constructive in 1998 as the Fed slashed interest rates and created a Wall Street consortium to bail out the imploding hedge fund. GDP growth never missed a beat, continuing to click at 4%+ until the end of the century. The stock market was already at the end of the bottoming process when the impeachment inquiry became official in October 1998. Stocks literally soared like a rocket ship from that point as the Dotcom Bubble was just beginning to inflate.
I feel very strongly that Clinton’s impeachment had almost zero stock market impact because the market had a strong base and there was almost no chance of him being thrown out of office.
Where are we today?
Today’s economic landscape falls somewhere between 1973 and 1998, however the geopolitical backdrop is much more stable than 1973 and more closely resembles 1998. Economic growth is “fine” and I don’t see an imminent serious threat. Yes, I still believe a mild recession is coming next year, but nothing like we saw in the 1970s. The tariff tantrum may seem like the biggest concern on the surface, but with an election just around the corner, Trump will almost certainly capitulate before jeopardizing the economy.
Looking at the stock market, it is also somewhere in between 1973 and 1998. While price is near an all-time high, the foundation remains very solid and stable which is more like 1998. We see high yield bonds near all-time highs and the New York Stock Exchange Advance/Decline Line is also close to all-time highs. This tells us that any and all declines are buying opportunities.
So far, the threat of impeachment has had no effect on stock prices. And unless a “smoking gun” appears and Senate Republicans begin to jump ship, I continue to believe that the stock market will proceed higher to Dow 28,000 and perhaps 30,000 in Q1 2020. Impeachment makes for sensational headlines, drives people to the media and creates an even bigger country divide, but I believe this will be the third time without market impact.

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Void of Relevant Data Makes Market Vulnerable to Headlines

With the Fed meeting behind us and earning season still a few weeks away, the markets are now acutely focused on geopolitical news. In other words, the markets are very susceptible to the latest headline or tweet. From my seat, stocks remain in a little range which I mentioned on Monday and you can see below on the right side of the chart bound by the purple line and blue line. While stocks could pop a little in very short-term, I do think that they will touch the blue line before long.

All four key sectors are pulling back constructively right now with only the transports causing me any concern. High yield bonds are hanging in really well, suggesting that another run to all-time highs isn’t far off. The NYSE A/D Line is only a day from all-time highs. This week continues to be the weakest week of the year historically and so far, the bears have been in charge.

With gold’s glitter of late, few have noticed that price action is no longer supportive of the bulls. Best case, it’s neutral. A closing price below $1490 will likely set up additional weakness of roughly $50.

Before someone emails me about the impeachment inquiry, I am writing an article for the next full Street$marts on the subject. I am hoping to have that out by the end of the week.

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Weak Week Clouds Short-Term Picture

Welcome to the single weakest week of the year, at least that’s what history suggests over the past 30 years or so. The five days after September options expiration have not been kind to the stock market overall. I should have done a little more digging to see how stocks behaved when they were already in uptrends heading into this week. Usually, September is much weaker when it begins with weakness, as I wrote about in The Myth of September’s Gloom.

When I look at price action in the Dow, S&P 500 and NASDAQ 100, the bulls have had a hard time on two separate occasions this month. You can see this on the chart below where I drew the arrow in the upper right corner. Closing above that area should push the indices to all-time highs right away which is not saying much. Conversely, that medium blue line is a downside target for any pullback.

Regardless of how the short-term shakes out, I think stocks are still moving substantially higher next quarter. Dow 28,000 should be a layup.

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THE Weakest Seasonality of the Year is Here

Stocks are looking a little tired. That’s my take today. The bulls have tried twice to score new highs, but the bears have put up a little resistance over the past two weeks. While I do not believe the market is on the verge of a bear market or even a 10% decline, risk/reward is no longer tilted strongly towards the bulls. And that’s okay. FYI, next week is the weakest week of the year on an historical basis for the stock market.

Stocks have run fairly hard since the August lows without much in the way of leadership deterioration. In fact, leadership has only gotten stronger with semis and discretionary pulling up transports and banks. Junk bonds are only slightly off all-time highs. There is lots of upside room left in this bull market.

I heard an interview with the head of a midwest state pension fund yesterday. I am not 100% sure, but I thought it was Wisconsin. Maybe not. But that’s what my 53 year old brain remembers. Anyway, I was absolutely floored with what I heard. First, this guy said he expects to earn 6% a year over the next 5 years which led me to think they had a very high allocation to anything but bonds. Then he said the fund is 45% allocated to bonds. And then he proclaims that his peers will only earn 5% a year over the next 5. His confidence lies in the fact they own a lot of private investments in private equity, private real estate and private debt and they know how to find only the best managers.

I was shocked at his arrogance and flat out ignorance. Someone should have told him that pension money is usually viewed as “dumb money” by analysts. To think he could outearn what he forecast for his peers by 20% is laughable. If that was a way to short his fund and buy someone else’s, I would love to do it.

When asked about why active investing was about to have its renaissance over passive, something I do believe will begin in the early 2020s, this joker boldly states that it’s because a few huge stocks are dominating the indices while the rest of the market is not doing well. HELLO! ANYBODY HOME?

This is where a seasoned, market informed interviewer would strongly push back on a thesis not supported by facts. Look at one of my favorite canaries below, the New York Stock Exchange Advance/Decline Line which measures participation in the stock market.

Where is it and has it been sitting?

ALL-TIME HIGHS

That means that the rally is broad -based with lots of of stocks participating and going up. I can’t believe a manager charged with tens of billions in assets can seriously be this clueless. I mean, if you don’t know, why make statements that can so easily be refuted with facts? I will be shocked if this fund will outperform its peers over the next 5 years with a leader not in touch with reality.

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Here Comes Another Cut, But Will the Markets Celebrate?!?!

What to Expect Today

The Federal Open Market Committee (FOMC) is going to cut interest rates by another 1/4% at 2:00pm on Wednesday. The market is expecting it and the cut has already been priced in. Any other action would be a shocker. With stocks so close to all-time highs, this is again reminiscent of 1995 when the Fed came from an overly restrictive monetary policy in 1994 to realizing they screwed up and quickly played catch up. Stocks had long understood and priced this in with 1995 being one of the all-time great investing years in modern history.

Right after the Fed announces their decision, all eyes will be on the statement for clues of future interest rate cuts or signs that the Fed may be close to being done. The stock market will definitely not like a rate cut with a hawkish statement, meaning comments from the Fed that they are not looking for more cuts ahead. I find it hard to believe that Jay Powell & Company will cut rates and then prepare the markets for more rate cuts this year.

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. I fully expect that to be the case today. Besides that, there is also a strong long-term trend for stocks to close the day higher, although that is not as strong as it used to be. Additionally, with stocks near all-time highs and significant upside progress over the past month, the bulls have even less dry powder than normal, not to mention how poorly stocks have done under Jay Powell on Fed day. 6 weeks ago, I offered that “any short-term rally may be sold”. From 2:00pm on July 31 until August 5, stocks fell in a straight line after Powell et al indicated that the rate decrease was a “mid-cycle cut” and not the beginning of a new accommodative cycle.

Jay Powell’s Arrogance & Ignorance

As I already mentioned, everyone knows what the Fed is going to do at 2:00 pm today. That’s not in debate. And right now, the market is pricing in at least another rate cut. Long time readers know that I have been very critical of the Fed, more with Yellen and Powell than Bernanke although Big Ben did make perhaps the single greatest imbecilic comment in 2007 when he said the sub prime mortgage crisis was “contained” and there would be “no contagion”. It would be impossible to have been any more wrong than that and on an epic scale.

Anyway, I think the Jay Powell led Fed is among the worst groups since 1988 when I entered the business. Greenspan may have been the worst Fed chair since Arthur Burns in the 1970s but Powell is certainly working on his legacy and it’s not an enviable one.

For 6 years I have pounded the table that raising interest rates AND selling assets which is now being referred to as quantitative tightening is the mistake of all mistakes. Selling assets is akin to also hiking rates as it reduces liquidity and tightens financial conditions. Janet Yellen should have chosen one or the other. Pick your poison. Instead, she forged ahead with both.

Jay Powell continued on that path except he, in a grand stroke of additional arrogance, decided that rates should go up at a quicker pace. Arrogance and ignorance are among the two worst character traits and I think Powell has them both. We all saw what happened last December when the Fed added that one additional rate hike and did not temper the asset sales. The global financial markets collapsed like hadn’t been seen since the Great Depression.

The Fed – Savior of the Financial Markets

Now, you can argue that it’s not the Fed’s job to appease the financial markets and you would technically be correct. The Fed has a dual mandate from Congress. Price stability (inflation) and maximum employment. However, the Fed, for the most part, usually follows what the markets want and have priced in. I say “usually” because there have been a few times when the Fed has gone off book.

Remember, the Fed doesn’t want to upset the financial markets. These markets are absolutely vital the U.S. and global economies. And despite what you may hear from Lizzie Warren and Bernie Sanders, a healthy and vibrant Wall Street community is an absolute necessity to a growing economy, even though that same group is prone to bouts of greed and bad behavior which can have a periodic and significant detrimental impact on the economy (see chapter on how the financial crisis began in 2007 and 1929).

When politicians from both sides talk about how Wall Street “wrecked” the economy, they always forget how many direct and indirect jobs were created from Wall Street’s work. The problem is that we (the U.S.) always seems to reward bad behavior and don’t punish it. And so many politicians continue to pat themselves on the back for the Dodd-Frank piece of legislation which did good by increasing capital standards but failed miserably by declaring victory that the days of Wall Street bailouts were over. Not a chance.

When push comes to shove, the political will is never there to let a Morgan Stanley or a Goldman potentially take down the economy. In real time in 2008, my thesis was that AIG should not have been saved which would have sent Goldman down with it. I thought letting more institutions be punished would have caused more short-term pain, but the free market would picked up the slack and the economy would have seen a much, much better recovery than it did. A topic for a different day.

Dual Mandate

As I already mentioned above, the fed has a dual mandate from Congress. Regardless of what President Trump believes or wants, the Fed’s instructions are from Congress. When we look at the Fed’s dual mandate, Congress essentially directs the Fed to keep inflation manageable and seek to have the country fully employed.

Right now, unemployment is at or near record lows with minority unemployment also at or near the lowest levels since records began. That is maximum employment, a point where the Fed would normally worry about a labor shortage and a spike in wages. While wages are finally rising, we are not seeing a squeeze and nothing like McDonalds paying signing bonuses like we saw years ago. With half of the Fed’s mandate pointing towards a rate hike, it’s makes me wonder.

Looking at price stability (inflation), we see the same trend that has been in place for more than a decade; inflation cannot seem to get going. While many people are familiar with the Consumer Price Index, the chart below is a much better gauge and you can Google if you want more info about it. The blue line excludes food and energy and this CENTURY you can’t find a single year of 3%. The very random Fed target of 2% has barely been met since the financial crisis.

So, the second half of the dual mandate is certainly amenable to a rate cut although the most recent data was just a tad “hotter” than the market was expecting. You have the dual mandate at odds. In my world, that would mean a neutral stance by the Fed. Leave rates unchanged and stop selling assets, which they did announce at the July meeting.

Jay Powell & Company at Odds

Jay Powell and the majority of the voting members of the Fed want to cut interest rates by 1/4%. There is a minority faction that wants to leave rates alone. Powell has spoken about an “insurance” rate cut which in my mind means a single cut. Today, we are look at cut number two. He discussed weakening economies in Europe and Asia that eventually could impact the U.S. I just want to know where in the dual mandate it says that the Fed should worry about China and Europe. The rest of the world is now loosening financial conditions so now Powell wants to follow them.

ECB chief Mario Draghi is on his way out of Dodge, leaving Europe in worse shape than when he began 8 years ago. With more than $15 trillion in negatively yielding bonds and a whole new round of bond buying starting, Europe is that fly in search of the windshield. That story ain’t gonna end well. However, the powers that be refuse to accept their fate. The Euro experiment is a failure, plain and simple. It should be dismantled, but I digress.

The markets are expecting 1/4% cut. One of the many great charts and work that Tom McClellan does has to do with forecasting a rate move based on the two-year Treasury Note. Below is a chart of that instrument overlayed with the Federal Funds Rate which is the actual interest rate the Fed controls. Tom argues that all the Fed needs to do is follow the two-year Note instead of meeting and debating all the time. His analysis certainly has merit.

When the solid black line is below the colored line, the Fed is allowing easy financial conditions. The reverse is true when it’s above the colored line. Right now, the two-year Note (the market) is telling the Fed to cut rates although a little less than it did 6 weeks before the Fed’s last meeting. While I believe it’s premature, the market does not.

What I Would Do

While I could go on and on and on as I sometimes tend to do, I am going to wrap this up by saying that Powell is going to hide behind tariffs and China as the reason to cut rates today. Although I absolutely do not think he will intend to poke the President, I do think that labeling tariffs as the potential economic weakness culprit will certainly tweak Donald Trump.

My own economic forecast remains unchanged since I first offered it in late 2017. I think the U.S. will experience a very mild recession beginning before the 2020 election. Although there are so many doom and gloomers who forecast something much more ominous, it’s almost impossible with the banks in such great shape, literally sitting on more than two trillion dollars in cash. And if you want to know what I would do instead of cutting rates, I would stop paying the banks to keep their excess reserves at the Fed. This would force them put some money to work in the economy.

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Stocks Were Looking for an Excuse to Pull Back

While stocks had another nice run last week, they didn’t exactly close Friday with much strength. That’s not surprising given how most of the major stock market indices were pushing up against all-time highs. So many times, we will a see security come back up and say hello to a previous important peak, only to watch it pause or mildly pullback first. The weekend news about Iran or Yemen conducting drone attacks on Saudi refining facilities was just what the market needed to pause. The key will be how stocks react over the course of the day. I suspect Monday will not become a day of celebration by the bears. The truly important price level is down at 26,400 on the Dow.

Last week, semiconductors scored a fresh, all-time high. As you know, this is a group I have been very positive on all year and especially over the past few months as it began to outperform with each passing tariff tantrum tweet. In other words, semis began to behave better and ignore what seemed to be bad news on the trade front. At the same time, consumer discretionary is right back to the July highs. Banks and transports are threatening to break out. That would make all four key sectors in gear together. What a change from the summer concerns.

At the same time, the New York Stock Exchange Advance/Decline Line is enjoying its time looking at blue skies above. I read over the weekend that some utter clown was using the NYSE A/D Line as reason to believe a large decline was unfolding. He concluded that the A/D Line was not making new highs, but rather going down as the stock market was rallying. As you can see below, he could not be any farther from reality.

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Bears Continue to Laugh & Scoff and Be Embarrassingly Wrong

When listening to the pundits and reading my Twitter feed over the past month or so, it has been fairly negative which it has basically been for the majority of the bull market with few key exceptions like January 2018. Whenever I prepare for a media segment, I usually start by saying that no one has been more bullish than I have on balance for the entire bull market. Most of my quantitative, upside price targets for the Dow were initially dismissed by most, then scoffed at and ridiculed and then given the chance of playing out before they were widely accepted as “everyone knew that”.

After the bear market ended, I remember being laughed at for calling for Dow 10,000, 15,000, 18,000 and then the preposterous 20,000. When the Dow first closed above 20,000 for five straight days, it opened the door for Dow 30,000 before the bull market finally ended. Currently, Dow 28,000 is up next, followed by 30,000. I really do love when people so easily dismiss these targets as the negativity has fueled so much of the bull market.

Not one single time did I forecast a bear market beginning unless and until certain criteria were met. Every now and then I randomly watch an old interview and with few exceptions, I am the bull and the bear is using all these scare tactics which have absolutely no historical significance and no current data to support the claim.

Anyway, after an August that “felt” a whole lot worse than it actually was, stocks began the new month with a selloff. Keep in mind that August ended with the Dow briefly poking above the trading range it had been in for most of the month as you can see on the chart below.

Many times, the first time through a range is met with resistance as late comers hop on the train, only to be immediately disappointed by larger investors who believe the move won’t hold. In this case, we saw a decline from that point into the first day of September which is the last red bar on the right side of the chart. It also resulted in what I labeled as a “bear trap” which means that the bears got too excited in their negativity and were trapped in losing positions as stocks immediately and powerfully reversed course the very next day on September 4th.

On September 5th, we can see that stocks opened sharply higher, leaving a blank space or “gap” on the chart which led to further pain for the bears. To make matters worse, this week had more confirmation that the selling we saw in August was over. Many analysts watch the amount of shares traded in stocks going up versus stocks going down for signs of extreme behavior. The most usual representation is a ratio or up versus down volume.

August saw a number of days where 90% of the volume was on the downside. So close to all-time highs, that’s unusual behavior and signals very little patience among investors and the desire to sell first and ask questions later. In other words, it creates the negativity needed for a market low much sooner than later.

This week we have seen a reversal where up volume has been swamping down volume to the tune of two days with at least 80%. And depending on the data source you use, there was a 90% day. Coming on the heels of a market pullback, this surge in volume in advancing stocks confirms the rally.

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Bears Getting Impaled

The bulls have been relentless of late, which should certainly not surprise anyone who reads this blog. I have been emphatically bullish, especially on semis and defensives, and looking for Dow 28,000. I can’t find many or really any others who have been as uniquely bullish as I have been. I don’t count anyone who believes that you should always be positive on the stock market because it will reward you over the very long-term. That’s a cop out. But let me be clear; although I have said that new highs are on the way with more upside coming, I have no problem turning on a dime, ringing the register and playing some defense. I also have no issue with making a call and having it backfire ending up with egg on my face. 32 years doing this, I should have bought a chicken farm for all the egg I have consumed.

Today, stocks are a stones throw from all-time highs, at least on the Dow Industrials, S&P 500 and NASDAQ 100. Reversing lower before hitting a fresh high would certainly cause me to become concerned about a deeper pullback. While semis have really been strong lately, other areas of tech have struggled a bit. Discretionary, yet again, has regrouped and is poised for new highs. I can’t even count the number of times people have written off the American consumer, only to be proven wrong. Banks and transports have really stepped up over the last week as one of the most vicious rotations in 10 years has seen buyers stampede into the laggard sectors.

At the same time, high yield bonds have quietly kicked it up a notch when many left the key canary for dead. The NYSE A/D Line has hit another all-time high, much to the bears consternation. Bull markets simply do not end with this type of strong behavior. Sorry bears.

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Remembering 9-11

I wasn’t around when Pearl Harbor was bombed but I know everyone from that generation remembers exactly where they were when it happened. My generation has the same memories of 9-11. I vividly remember watching TV in my office having just returned from Florida the night before where we debated staying one more day to get an early round of golf in on September 11th and then fly home after lunch. I was the party pooper in the group as I had been away for several days and I had my own two bachelor parties coming up with my wedding just under 5 weeks away.

Anyway, I was sitting at my desk when news broke that a plane had hit the WTC. I kept saying that it had to be false because there was no plane on the ground. I kept thinking that it had to be a little Cessna or small prop plane, never even contemplating a full scale commercial jet due to the unthinkable. As the second plane and video footage was released, word quickly spread that this was terrorism of an unfathomable magnitude. In 2001, I was the only one who had a TV in the office. One by one, people in my office park would wander in to get a glimpse of the footage and listen to the media.

I still shake my head in disbelief when I think about it. It’s still surreal. While I never forget those whom I knew who perished, today is one of those days where I dwell on it all of the time and pray for their families and everyone else impacted. I get angry when I hear that schools either do not teach about this unspeakable attack or refuse to show TV footage to the kids for fear that it may hurt the children. “Those who cannot learn from history are doomed to repeat it” – George Santayana

Never Forget…

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The Myth of September’s Gloom

As the calendar turned to September, the media was in their usual tizzy because historically, the month has the worst performance of any during the year. The problem with making very general statements is that context is ignored. It wasn’t long ago when all the headlines were about how strong the month of December was and everyone was all bulled up because stocks had corrected 10% in October and November. Then stocks collapsed in December like hadn’t been seen since the Great Depression.

As September 2019 began the stock market as measured by the S&P 500 was in an uptrend. By uptrend, I mean that the S&P 500 was above its average price of the last 200 days. Nothing secret or special, just an arbitrary way to determine the trend. September stock market performance is very different depending on whether stocks are in an up or downtrend.


The bottom line is that since 1950, the S&P 500 averages a +0.40% return in September when beginning in an uptrend versus -2.70% when starting in a downtrend. That is significantly different and well worth noting where the month is beginning. (Hat tip to one of my favorite research reads, Ari Wald from Oppenheimer)

Some of you will push back that I am permanently bullish and only look for data to support my case. That statement would be patently false as there have been plenty of times to be negative, but not so for more than a trade in over a decade.

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