Vicious Rotation and Wicked Reversals Dominate

2017 has been the year without volatility. Who would believe that stocks haven’t declined even 5% on a closing basis, let alone 10%. It’s crazy! And once the calendar gets to November, downside volatility becomes that much more difficult to see as potential catalysts for a decline go down significantly. Yes, of course, there is always that stray geopolitical event, like the infamous “Fiscal Cliff” in 2012 which I dubbed the equivalent of the Y2K hoax. The 2012 chart is below.

2017 has a potential government shutdown looming as well as some fairly fierce sector rotation as the proposed tax reform gets through Congress. I guess stocks could get a tiny bit cranky if the House and Senate cannot successfully get the bill out of conference this month. I just cannot believe there will be a December government shutdown.

Much  more importantly, we have seen a rush into the banks, discretionary, homebuilders, industrials and transports at the expense of technology, utilities and REITs. This is exactly what we saw after Trump won, but so far, on a much smaller scale. Interestingly, this time around, bonds are not plunging like they did 13 months ago.

Remember, stocks have a bit of a seasonal headwind for another week or two. We saw wild action on Friday with the erroneous Flynn announcement and then the largest downside reversal since 2000 on Monday, according to Rather than show my usual daily chart, below is a 15 minute chart so you can see just how volatile the action has been.

In the end, the bull market isn’t over. This rally isn’t over. A small dose of vol is here. Semis ceded their leadership position, but banks, discretionary and transports have stepped up. We just need to see high yield bonds score new highs to further insulate stocks from a correction.

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Idiocy in DC

I don’t even want to begin to count the hours wasted in DC on the shutdown and debt ceiling let alone what it did to innocent Americans, our economy and our focus as a nation. Yet our elected officials are celebrating like they won the World Series?!?! What an embarrassing mess.

White House staffers were quoted as saying they were “winning”. Speaker Boehner said they “fought the good fight”. I am glad our elected officials in DC treated this debacle as either a game or a war. How ridiculous that these are people who are supposed to be representing the electorate and serve OUR best interests, not theirs.

And in the end, all the country got was a 3-4 month reprieve before this starts again. The GOP better look long and hard before attempting this nonsense without a real plan. I said this when the government first shutdown and now I am even more convinced. If the republicans had simply raised the debt ceiling through the next election without conditions, they could have dug their little heels in on almost any of the other issues without being demonized. Obama could no longer be Chicken Little with his scare tactics and maybe, just maybe, the two parties could have reached some kind of Reagan/O’Neill compromise.

As we approach the next joke of a deadline, it will be interesting to see how the GOP position themselves since they lost what little credibility they had left when they caved in and received nothing in return this week.

I have written about scenarios like this before regarding the markets and except for the time I was wrong in 2011, it usually pays to ignore the nonsense in DC and the chest puffing on TV. In this instance as with the fiscal cliff and sequestration, I felt very strongly that the markets would ignore the news. One of the confirming reasons was because all of the media interviews I have done focused solely on the negative outcome, even going so far as to doubt the bullish case. That’s unusual. 

Stocks and bonds continue to act very well and there should much more to come this year and into next. I have been salivating to buy treasury and quality corporate bonds and I think the bottom has been hammered in for the rest of 2013. For full disclosure we are long and have been long high yield bonds for some time.

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The Administration Who Cried Wolf

With the exception of those directly affected and impacted by the government shutdown, it doesn’t seem like the public really cares. If it wasn’t constantly shoved down our throats by the media, I am not sure most people would even know. From the polls I have seen, the public is not in favor of closing the government as a strategy to forestall ObamaCare, but at the same time, they are also not in favor of ObamaCare itself. So conclude what you may.

Over the years, I think we have learned that with any public and serious negotiation, the two sides never really compromise or present reasonable offers until the second before midnight. This happens almost all of the time with the airlines and their unions. It happens every time with anything in Congress. In sports, sadly, we often see the two sides dig their heels in so much that a lockout or strike ensues.

My opinion today remains the same as it was before this began. Once the shutdown got passed a day or two, it was going to continue at least until the debt ceiling was hit in mid October. The incentive to open government now only to have the debt ceiling in a few days is very small. And speaking of the debt ceiling, the administration has said that October 17 is the hard date, the line in the sand. No matter which side of the aisle you sit, it’s generally accepted that the ceiling absolutely must be raised.

But it’s a long way between now and that compromise, or is it?

Yesterday, the Treasury Department pulled out all stops in screaming “FIRE” in a crowded theatre.

“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth… Credit markets could freeze,the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

As I recall, we heard the same garbage regarding the “dreaded” fiscal cliff late last year with recession and interest rates spiking and markets collapsing. I laughed each and every time DC spoke (actually called it a hoax) and used it to our clients’ advantage in Q4 2012 and especially Q1 2013. Only a few months later we were bombarded with sequestration, automatic budget cuts across  the board resulting from a bipartisan compromise reached in August 2011. If you recall, these cuts were going to send our economy spiraling into recession with spiking interest rates and collapsing financial markets.

By my count, the economy is the same mediocre, post crisis economy it was six months ago or maybe even a bit stronger. The stock market is up more than 10% and while rates have risen substantially, I think it’s fair to say that the reasoning behind it is the Fed taper and not anything having to do with sequestration.

So forgive me if I completely and utterly dismiss the scare tactics and hyperbole from the U.S. Treasury. Talk about the administration who cried wolf! The problem is that one day there will really be a crisis just ahead of us and after all this nonsense, it will be largely ignored.

So how do I think this will all end and what will the impact be on the financial markets? 

Putting myself in John Boehner’s and the GOP’s shoes, they are being viewed as the culprit so far with the President carrying the message about the debt ceiling and Armageddon. If I am Boehner, I would send a bill to the House floor raising the debt limit immediately without any strings attached. It would easily pass both chambers without much debate. Then I would dig my heels in on the budget and stop trying to repeal ObamaCare until the GOP has the majority of the Senate. That takes the President’s disaster scenario off the table and changes the message.

The President’s best path is to stay the course and tone down the rhetoric a bit. I would keep painting the GOP as obstructionists and harping on the fact that ObamaCare is a law that was upheld by the Supreme Court. A law that needs some tweaking but only after we get by these two crisis’. He should offer specific concessions on entitlement spending and tax reform to try and fracture the republicans into a deal.

In the end, we are likely to see what we have seen for several years, a last minute deal that raises the debt ceiling and funds the government for 3-6 months. Sad and pathetic, but true.

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2nd Worst Piece of Legislation in History

The 2nd worst piece of legislation ever just passed Congress. What did it do for our country? Not much!

Here are my thoughts on Fox Business.

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US on Sound Fiscal Footing… NOT!

As we saw during the summer of 2011 with the debt ceiling debate, it seems like our elected officials can only strike a deal as the clock is ticking down to zero. And when they finally do forge an agreement, it ends up being one atrocious one after another. So yes, I think the bill that came out of Congress is a total joke. It doesn’t do a single thing to put our country on a sound fiscal course and once again, our leaders just kicked the can down the road.

Did anyone actually read the bill before they signed it? I know I haven’t, but I have read clips about some of the nonsense that was thrown in.

What totally shocks me is how few people realize that their own taxes will rise with their first paycheck in 2013. The 2% payroll tax holiday has been killed and buried, not just for those making $450,000 or $250,000, but for all Americans. And let’s not forget about the taxes associated with ObamaCare that begin right now.

Now matter how anyone slices it up, tax are going up right away and will likely go even higher ovr the next 18 months. That’s not exactly the elixir our economy needs right now. But I will have more on this in the next Street$marts.

Market wise, while I (and our portfolios) have very much enjoyed the two day near vertical rally, I have a very tough time believing it is here to stay and 2013 will be a monster year for the stock market. I would love to be wrong and see the Dow soar to new highs and way beyond, but right now, I think we should temper our expectations. I will have more on this during my Fox Business segment on Thursday as well as in the next few Street$marts.

Hoping you had a happy and safe holiday season!


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Will the Country Even Function on January 1?

The latest Street$marts has been posted!$marts20121221.pdf


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Santa Claus Rally

If Santa Claus should fail to call, bears may come to Broad and Wall.

That’s an old stock market adage indicating that if we do not see the traditional Santa Claus rally over the final five trading days of the year, the potential for a bear market or major decline increases in the New Year. The final five days clocks at the close on the 21st, coinciding with the end of the world according to the Mayans.

There is also a trend that shows a very seasonally strong period for semiconductors from now through year-end. This group is one my canaries in the coal mine and absolutely vital for the long-term success of any bull market.

Besides the most overhyped event since Y2K, the “dreaded” Fiscal Cliff, news flow should really taper off until January 2 or 3, which is one of the reasons why this is typically a seasonally positive time of year.

It’s also getting close to when I release my Fearless Forecast 2013 as well as my Shockers 2013 lists. If only I knew what the heck I was going to write about!

Hopefully, I will send a Street$marts shortly, but in case I don’t, I wish you and your family a very happy, healthy and safe holiday week!


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The Single Most Overhyped Event Since Y2K

Here is the latest Street$marts that talks about Black Friday, Facebook, Apple, the “dreaded” Fiscal Cliff, how the bull market ends and some evidence of a weakening economy.$marts20121211.pdf

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CNBC’s Squawk Box Wednesday @ 6:20am

I am going to be on CNBC’s Squawk Box on Wednesday (11/21) at 6:20am discussing the Fiscal Cliff, our forecast to year-end and the potential for recession. After that, I hope to have a Street$marts to you by the end of the day.

Just in case I don’t, I wish you and your family a very happy Thanksgiving!


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Summer Rally, Pre-Election Sell-Off

The stock market will experience a summer rally, followed by a sell-off in the fall right before the election, Paul Schatz, chief investment officer of Heritage Capital LLC, told Yahoo.

Schatz said the first half of the year had a few unique twists, but it has been fairly typical for election-year market indices.

“It’s been an interesting first half,” he said. “We were vertical for a while and then we gave almost all of it back and now we’re kind of treading water in no-man’s land.”

Schatz predicted we already had a springtime low.

“The early June lows are going to be the lows for a while,” he told Yahoo.

“We will rally and peak some time at the end of July to the end of August. Then we’ll have the traditional sell-off before the election, postconventions.

“Stocks already had the summer declines we saw in 2011 and 2010,” he stated. “It’s rare when you see it three years in a row. … I don’t think it’s anything near what we saw last year.”

After the election, Schatz expects a year-end rally.

“So many of the bogeys for the market are known, everyone is worried about the same thing — the fiscal cliff, the euro, Greece, Spain, Italy — they’re all on the table now,” he added.

Schatz predicts that the problems in Europe will loom for the next several years.

“They’re going to get their act together this decade. It may take three, five or seven years to get their act together, because the alternative is nonexistence,” Schatz noted. “I mean Europe won’t exist. I’m not talking about the euro, I mean the continent.”

Europe will take its “sweet time,” but will be fine in five to 10 years.

“We’ve been underweight Europe forever and will stay underweight,” he added.

Regarding the fiscal cliff, Schatz said, “When push comes to shove, the lame duck Congress comes in, they make the middle-class tax cuts permanent, they extend the upper-class tax cuts for another six, 12, 18 months and let the next group worry about it.

“But I don’t think they’re going to solve that now,” he added. “There’s no impetus, there’s no catalyst for it.”

By the end of the year, Schatz predicts that the S&P 500 will be “1,400ish” and says he will keep an overweight position in biotechs.

Meanwhile, the so-called “fiscal cliff” looming at the start of 2013 with planned tax increases and spending cuts may begin to push the U.S. into a recession as early as the second half of this year, Bank of America’s top U.S. economist Ethan Harris tells Fortune.

Last month, the Congressional Budget Office warned the fiscal cliff could cause GDP to shrink by 1.3 percent in the first half of 2013, even as many economists are betting the politicians in Washington will cut a deal to avert the worst effects of the measures.

Harris says the fiscal cliff will begin to make itself felt long before it actually takes effect. Corporate earnings will slow in the second half and job growth may drop to nothing by October, pushing the United States towards the brink of another recession.

Read more on Heritage Capital CIO Expects Summer Rally, Pre-Election Sell-Off
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