Bulls Stampede Ahead. The Hatred and Disavowing Continues

It looks like the bulls are getting a jump on the very strong seasonal tailwind that exists the day before Thanksgiving. All of the major indices look to open strongly to the upside with all-time highs across the board possible by the time we dig into the turkey. On the sector side, semis continue their relentless rally with consumer discretionary really kicking it into high gear. Banks are climbing nicely and transports look poised for perhaps the most upside in the short-term. While they still have a ways to go to repair the recent damage done, I am not ruling out new highs within 8 weeks.

While high yield bonds made all the headlines over the past few weeks with their little waterfall decline, they have quietly recovered more than half of their losses with upside in store. By the same token, the NYSE A/D Line is now just one good day from a fresh all-time high.

What remains absolutely amazing is that the major stock market indices “corrected” all of 1.75% yet the media made it seem like the bull market was over or a real correction was unfolding. Now, that 1.75% pullback did mask some weakness in many stocks, bull markets do not end with the behavior I have described over and over again. Since the bull market launched more than 8 years ago, investors, traders and the media loved to hate and disavow it. Granted, it’s a lot less hated and disavowed now than it was, but until the masses adopt the “buy all dips” mentality and CNBC stops running “Signs of the Top” segment after a tiny bit of weakness, the bull market will continue. Dow 25,000 is up next sometime during Q1 of 2018.

One thing I do find laughable is how the political parties spin the stock market’s rally. When Obama was in office, the democrats pointed to the bull market as a sign their policies were working and workers were benefiting in their 401Ks. The GOP gave Congress most of the credit or said that the market would have been even higher without Obama. Now, Trump goes from dismissing the bull market during the campaign to using it as a report card for his presidency. And the GOP leadership extol the virtues of their pro growth policies while the democrats scream that only the “rich” are doing well. You just have to laugh…

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The Disaster That is GE with 3 Alternatives

Last week, I had the pleasure of joining the Nightly Business Report hosted by two CNBC veterans, Sue Herera and Tyler Mathisen. You can find the segment at the 22 minute mark HERE. This is one show I always enjoy as I am the only guest in the segment and they let me articulate my point. On this particular evening, GE’s dividend cut was the big story of the day and that spilled over into dividend paying stocks in general.

Before I continue, long time readers know I rarely spend much time discussing specific companies unless they are true bellwethers and I think there is a tie or correlation to the stock market. This piece is obviously different from most and if interested, please do your own due diligence.

For all of this century I have taken the negative (bearish) side whenever interviewed regarding GE. It had become an old, stodgy company whose best days were clearly far behind. When Jeff Immelt succeeded “Neutron” Jack Welch, that was the straw that broke the camel’s back. While I thought Welch needed a lesson in ethics and morality, I never thought Immelt was even competent to hold that much coveted position. Welch delivered results which is probably why no one targeted him, while Immelt was a complete failure.

Anyway, except for buying GE bonds for some conservative clients in 2009, I have pretty much avoided the stock altogether. There were always better opportunities elsewhere. Earlier this year, Jeff Immelt retired as CEO and subsequently left the board of GE last month. His successor is John Flannery. Flannery has been unusually candid and blunt about GE’s troubles, including its cash flow. As everyone knows, GE cut its dividend by 50% and I believe that’s only the third dividend cut in the company’s history.

The dividend cut was a surprise to no one. Then Flannery pre-announced weaker earnings along with his turnaround plan. I thought investors would be a little comforted by this, but the magnitude of the decline in the stock after the news took me by surprise. The stock experienced a capitulatory, mini-crash on insanely high volume as you can see below.

When there are major shakeups at companies, new management often does a “kitchen sink” quarter where get all of the bad news out and then some. Anything that could possibly go wrong, they disclose, warn about and blame their predecessors. Then when everything doesn’t go as bad as forecast, new management gets to be the hero. In GE’s case, it almost feels like a “kitchen sink” year coming in up 2018.

GE has plenty of problems and then some. While I applaud Flannery for announcing a plan in the first place, he has his work cut out for him. And investors are not convinced. One of my close friends who runs a value fund boldly said to “stay away” as GE’s pension liabilities are overwhelming. On the flip side, one my colleagues just started nibbling on the stock with a plan to add more over time.

My view is that stock collapses like this are not repaired overnight. They usually take months or quarters and sometimes years to settle down and stabilize. Once a bottom (notice I did not say THE bottom) is reached, a stock usually enters a volatile and intermediate to long-term trading range where the bulls and bears battle around an equilibrium point until the light at the end of the tunnel is seen. In GE’s case, it could be in the mid teens to low 20s for a long time to come as you can see one potential scenario below. For the nimble traders, buying weakness and selling strength may be a good strategy until proven otherwise.

I don’t believe GE is a bellwether for the stock market, the dividend paying sector or large/mega cap value stocks. GE has its own idiosyncratic issues. Two ways to spot potential dividend cuts are to first watch how the stock trades. Sustainable dividend companies usually do not look like me skiing downhill on the weekends. That would be fast at a 25 to 40 degree pitch. Additionally, investors can track what’s called the Payout Ratio which is nothing more than the dividend of stock divided by the earnings. The higher the Payout Ration, the harder it is to sustain. While there is no hard and fast rule, especially when it comes to utility companies, 50% or less is an okay line in the sand. For all of 2017, GE’s stock warned and warned until the company listened.

At the end of Nightly Business Report segment, I tried to squeeze in three dividend stocks which look attractive. US Bank, Pfizer and Brinker (owner of Chili’s restaurants) which yield 2.3%, 3.6% and 4.3% respectively. All three have Payout Ratios under 50%. None look like a ski slope although Brinker certainly saw its collapse and now appears to be emerging from the ruins as GE has a chance to do down the road.

US Bank looks to be under reporting earnings which may seem counter intuitive. As my colleague Jim says, they appear to be reserving too much for bad loans which don’t seem to be coming to fruition. Eventually, that money will manifest itself in higher earnings.

Pfizer, unlike many other large pharma companies, has no major drug coming off patent so there is no “fiscal cliff” on the horizon. The company is in an excellent capital position and the value may be in the individual assets, either in a spin off or sale to fully recognize their more cutting edge divisions in biotech. For full disclosure, certain clients own this company.

Brinker which fell on hard times as the casual dining sector has really slowed is a cash machine with a price to earnings ratio of only 13. Although the P/E can always get even cheaper, that’s a good value with that high dividend. The company could be appetizing as a buyout candidate or . For full disclosure, certain clients own this company.

As always, please do your own homework and/or consult your financial advisor. Don’t just take my word. Managing the downside is key and you absolutely need a plan if things don’t go your way. Riding any stock to oblivion isn’t a plan.

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Bulls Plow Ahead Despite Major Issues in Washington

Stocks opened strong and surged all the way to 2pm on Thursday, as the bulls sprung back to life. Small caps led in a big way and the NASDAQ 100 scored an all-time high. Perhaps most importantly, junk bonds saw a huge day and began to repair the damage inflicted over the past month.

On the sector front, semis are back to within one good day from new highs. Consumer discretionary which I left for neutral last month is also at fresh highs. Transports and banks put in nice days, but they have much more catch up work to do.

The most important thing for today is that the bulls don’t give too much back. Markets are heading into a seasonally strong week with my favorite holiday of the year, Thanksgiving, on tap. Unless the bears can make some noise today which is also option expiration day, stocks should be on decent footing next week.

All year long I have discussed reality over rhetoric. As I posted on Facebook yesterday, in spite of Roy Moore begin abandoned by the GOP in his Senate race for allegedly having sex with a minor and pictures of Senator Al Franken groping a woman and Senator Bob Menendez’ jury deadlock on corruption charges and the House passing their version of tax reform which will be D.O.A in the Senate, the economy and markets continue to forge ahead. Dow 25,000 in the first half of 2018…

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Bounce on the Way. Will It Stick?

After nothing more than one really bad day in most of the major indices, stocks look like they want to bounce, at least a little. The key index to watch will be the Russell 2000 which peaked in September and has seen an orderly 3% pullback ever since. For the past week, the small cap index has been trying to put in a low. Additionally, although early, this index will also have a seasonal tailwind next month and into January.

Additionally, on the sector front, the Dow Transports have been beaten down, losing more than 5% over the past month. They are also important to watch as their failure to meaningfully bounce will likely spell a quick end to any rally.

Finally, high yield bonds put in the most constructive behavior on Wednesday, reversing sharp early losses to close in the upper end of its daily range as you can below by the last green candle. Along with the Russell 2000 and transports, junk bonds led stocks to halt their rally, so any bottoming action could help lift the major stock market indices.

We’ll see if a bounce develops and can be sustained. The bull market isn’t over, however the concerns I have discussed for the past month remain real and unrepaired, three of which are shown above. I really want to see any future rally correct the problems and not add to them. Having more stocks participate, especially on up days at new highs would be a good step.

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Strong Case for Bears But Bulls Could Be Ready Again

And the pullback continues. Everything I have mentioned lately is still in place and uncorrected. We have sentiment that’s a little too bullish. High yield bonds under pressure. Sector leadership weakening. And a very split market with the same percentage of stocks doing well as poorly. Except for price momentum and the positive time of year, the stock market does not look good. Yet with all that, the Dow is less than 1% from all-time highs. Bulls have something to support their cause. Bears too. While this behavior is definitely indicative of an aging bull market, it can and has lasted for almost two years in the past.

Over the coming days, it will be interesting to see if the bears can make any headway. On the surface, this looks like their best opportunity of the year, especially with junk bonds struggling. However, if semis have a good day and see new highs, that would damage the bears’ case. Additionally, the banks look like they are going to rally more. Discretionary, which I left for neutral to dead last month, just scored an all-time high. And the battered and beleaguered transports are trying to bottom after a 6% pullback.

Lots of crosscurrents.

I did an interesting interview on the Nightly Business Report on Monday regarding GE and dividend paying stocks. As I will be in the car for 5 hours on Wednesday, hopefully I can get that piece done and out quickly. It’s not often you see a bellwether, mainstay like GE taken out and shot on a billion shares traded.

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Lots of Concerns Abound

For the past 5 weeks I have often written about the elusive stock market pullback and the reasons why we shouldn’t be surprised to see it occur.  We had seasonal headwinds post-September. We had strength into earnings season. We had overly bullish sentiment. Nothing really mattered for more than a day. And just because stocks are seeing some weakness here, I am not beating my chest with “I told ya so”. Being early still equals being wrong.

Over the past two weeks, we have seen some other negative behavior in the Dow, S&P 500 and NASDAQ 100. Essentially, as each index hit new highs the number of stocks declining outpaced the advancing stocks. That’s not exactly healthy, especially when it’s happening over and over again.

Additionally, as I will write about in the next Street$marts, take a look at the two charts below. In the healthiest of markets, the Dow Industrials and Transports make new highs at or around the same time. Last month, the transports peaked and began to correct as the industrials continued higher. That’s a warning sign. Furthermore, this week we see the industrials score a fresh all-time high, but the transports are making a 30 day low. Again, that’s not exactly the behavior you see in strong markets.

I could continue on and talk about the banks or high yield bond warning or NYSE A/D Line, but I will leave that until next week. For now, these are all short-term concerns of mine and I continue to believe that the bull market remains alive, but a little less well than it had been. Dow 25,000 is next.

Enjoy the weekend! I am just back from Chicago and New Orleans where I was sick in both places. There’s is nothing fun about traveling when you’re under the weather. The night before I left was the first time since the 1990s where I had a fever. Happy to be home in my own bed and hope to shake this thing soon!

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New Highs Abound But a Few Cracks Developing

Suffice to say that the bulls have basically stampeded any and all attempts to take stocks lower since mid-August. However, for most of that period, the market’s foundation was rock solid and bears were just fighting against strong momentum. Recently, that has changed. Because I have been traveling since late last week and a bit on the sick side, I haven’t spent the time to create the charts to support my point. The Dow, S&P 500, S&P 400 and NASDAQ 100 are all at new highs. Yet with the succession of new highs last week, the number of stocks advancing versus declining on a number of days was actually negative. That means each of those highs was made with less participation, not exactly what you normally see in a healthy uptrend. However, keep in the mind that this behavior can and has continued for days, weeks, months and quarters before the market lost steam.

Turning to high yield bonds, we can see that they are not confirming recent new highs and have actually experienced a little pullback. It’s nothing big or significant yet, but it’s worth noting.

The NYSE A/D Line tells a similar story and looks a lot like JNK above. While the level of participation is diverging from the new highs in the indices, it is certainly not at an alarming level. Additionally, as with junk bonds, we have seen and can see this kind of behavior to last as long as 20 months before it matters to the market.

The bottom line remains the same. While there are a few cracks in the pavement with stocks very extended, momentum has been historic and difficult for the bears to easily end.

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The Next Fed Chairman & Post Fed Market Decline

Trump to Announce Fed Choice This Afternoon

Love him or hate him, Donald Trump certainly is not behaving like his predecessors when it comes to most things, but definitely not the selection of the most powerful banker on earth. During the campaign, Trump harshly and unfairly criticized Janet Yellen for keeping interest rates too low and creating a “fake stock market”. That was until he became president and miraculously embraced low rates and the surging stock market as a referendum and report card on his presidency.
Right after the inauguration, I published a fairly outside the box list of my Top 8 Shocking Surprises Under Donald Trump plus two bonus surprises.
Yellen Earned a Second Term
Bonus #2 had Trump reappointing Janet Yellen as Fed chair for a second four-year term. When Ben Bernanke, one of my all-time favorites, was not reappointed for a third term by Barack Obama, my choice was the underdog, Janet Yellen. Four years later, I believe she absolutely earned a second term. So I am sticking with her as my choice again although the odds are definitely against her in a huge way.
A Very Public List of Finalists
I don’t ever recall such a public list of potential chairs with so many comments. Former Goldman Sachs president and current cabinet member, Gary Cohn, was a shoo-in until his critical comments of President Trump following Charlottesville. Then former Bernanke right hand man, Kevin Warsh, was all the rage until his hawkish (favoring higher rates and less accommodation) stance became too unpopular. Now, current Fed Governor Jerome Powell is the heavy odds on favorite to be appointed by Trump this afternoon with Stanford professor John Taylor and rules based system for choosing interest rates picking up the rear.
Jerome (Jay) Powell is Heavy Favorite
Powell is the choice the markets are expecting. And I guess that if Yellen loses, I am more okay with Powell than anyone else. Taylor or Warsh would cause the most short-term upheaval, but even then, I don’t think we would see anything significant. Powell is the most similar of the finalists to Yellen although definitely not as dovish (favoring low rates and accommodation). Some have argued that a Powell/Taylor duo would be very strong. I am not convinced although with Powell in the chair role, Taylor’s rules based system would have little chance of implementation.
Don’t get me wrong. I am not against rules based systems, especially since we run our 12 investment models that way. I very much support and endorse, non-emotional, well researched, systematic strategies. However, I believe there needs to be more research and stress testing of a system Professor Taylor backs.
The markets like Janet Yellen. She is the known quantity and has done a good job in my opinion. Let’s not fix a problem that doesn’t exist. It’s not like GDP is growing by 5% and Yellen is loathe to cool it down by raising rates. And she is certainly nowhere near the disasters that Alan Greenspan or Arthur Burns were. Now those two men should headline the Fed’s Hall of Shame as among the worst chairs in history.
I am sticking with Yellen as my choice although Powell is the one that almost everyone expects to succeed Yellen in February. As always, nothing Trump does or says is perfectly as expected. We’ll see in a few hours.
Post-Fed Trend
In yesterday’s update, I discussed the various models and trends from Fed day. http://investfortomorrowblog.com/archives/3114
As we saw at the previous meeting and this one, the most powerful trends were muted because of the strong rally into the Fed meeting. Today, we have a rare trend which calls for stocks to trade lower after the Fed meeting. While it’s still only a short-term trade, it does bare watching, especially to see which sectors lead and lag on the downside to properly position for the next leg higher into year-end.
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***Special Fed Day Alert. No Rate Hike. No Surprises***

Behavior Models for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Eight meetings ago was one of the rare times where the models strongly called for a rally on statement day which was correct as well as a decline a few days later which was also correct.

Today, as with most statement days, the first model calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. If the stock market opens outside of that range, there is a strong trend to see stocks move in the opposite direction until 2:00 PM. For example, if the Dow opens down 1%, the model says to buy at the open and hold until at least 2:00 PM.
The next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 80%+, however with the Dow sitting at all-time highs with barely a hiccup in two months, the bulls exhausted a lot of energy, similar to what we saw at the last Fed meeting 6 weeks ago. That trend’s power has been muted significantly to less than 50%. That’s not exactly the kind of trend worth trading.
Finally, there may be a trend setting up for a post statement day decline, but there are a number of rally factors that still need to line up.

No Rate Hike & No Balance Sheet Taper Update

The good news is that short-term interest rates will not be moving higher at 2:00 PM. That will likely happen at the December meeting as the economic evidence certainly supports another 1/4% hike with GDP at 3%, unemployment at new lows and consumer confidence at new highs. I also don’t expect any news on the Fed’s plan to taper the size of its balance sheet.
Six weeks ago, I offered that the Fed would announce the cessation of reinvestment of certain instruments, if not all, to the tune of $300 to $500 billion a year. It turned out that my forecast was too aggressive as Yellen’s plan began last month with a paltry $4 billion in runoff and scales up to only $20 billion per month later in 2018.
Velocity of Money Still Collapsing

Below is a chart I have shown at least quarterly since 2008. With the exception of a brief period from mid 2009 to mid 2010, the velocity of money was, is and will continue collapsing. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a disastrous bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. The economy has been suffering for many years and will  not fully recover and function normally until money velocity rallies.

It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets. It continues to boggle my mind why no one calls the Fed out on this and certainly not Yellen at her quarterly press conference.

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Q3 GDP Sees Another Resurgence & Energy Looking Sweet Again

On Friday, the government released a first look at Q3 GDP which I had been looking in the 3% range before the hurricanes hit. It wouldn’t have surprised me if that number was a quarter to half point lower. However, even with the hurricanes, the resilient U.S. economy still grew by 3%. All year, I have written about the economy accelerating to the upside in Q2 and Q3 with the election as the catalyst. Way too many people underestimated the powerful impact of the GOP sweeping the board last November.

Of course, the president wants to and will take the credit for the resurgent growth; they all do But I firmly believe that almost anyone in the GOP would have seen the same or similar results. It’s the sweep that mattered. Anyway, not only is the U.S. economy accelerating higher but so is the rest of the world. Japan and Europe are showing growth that far exceeds analysts expectations and the best numbers in years.

This all translates into booming global stock markets, but that’s nothing new. Remember, stocks move long before the data do, roughly 6 to 9 months. Today, stocks are a little jittery after Kevin Brady offered that a “phase in” of the corporate tax cut is on the table. That’s the same Kevin Brady who once thought the border tax was an absolute certainty. We’ll see. I still think comprehensive tax reform gets passed by mid February, but I am losing a little faith that it will be as good as I once thought.

In the markets today I am looking at a small pullback in stocks, but the energy sector looks to be ready for another leg higher. That could be 10%+ into year-end if the stars line up properly.

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