Are you feeling dizzy yet?
How about a nose-bleed, from the heights the stock market has taken us to?
Since the election I postulated that equities would go up on President Trump’s grow, grow, grow and build, build, build agenda, because the CEO’s of this country have been starving for a legitimate reason to invest in the future. Since the 2008 collapse through 2015, corporate management has been managing their individual company stock price with two main levers:
- RIF’s (Reduction in Force…a nice term for firing people). Just like your and my household, if our income (revenue) goes down, the first thing we do is cut expenses. A company’s largest, individual expense is payroll.
- Stock buy backs. If your earnings haven’t increased due to flat or declining revenue, it’s a crafty financial engineering maneuver to simply reduce the number of shares you have outstanding. Earnings Per Share is a calculation where you divide your company Earnings by the number of Shares available for investors to buy. It’s math. If my earnings are 10 and I have 100 shares on Wall Street, then my EPS = .10
But, if I ‘buy back’ 20 shares, the formula changes to 10/80, which equals .125. Voila! Just like that my Earnings Per Share went up!!
These tactics had run their course, so when Trump comes along with a radically new direction, CEO’s have no choice but make a bet that real growth is on the way; and bet they have.
Now, I wrote in several blogs this year that for the market to sustain its upward trajectory Trump would have to book some actual wins. Specifically Replace/Repeal and a Tax Cut. He hasn’t been able to move the needle on ObamaCare and the Tax isn’t quite a Bill yet. How long can the market sustain its dizzying run up without an actual win?
Hold on... there is good news
There is some good news that hasn’t been widely reported (big shock) and that is President Trump’s aggressive slashing of Federal Regulations that have been bureaucratic economic inhibitors placed by the previous administration. We don’t hear about this from the media, but CEO’s certainly see it at the corporate level and it has sparked some real revenue growth.
So, let’s build on this theme that lays before us – Trump’s Agenda Implementation versus the Media and Global Financial Elites, because there’s some real danger here and we need to pay attention to it. We’ll start with some financial groundwork and then look at the lurking counter measures.
Reuters reported that US equity funds had $7.5 billion of inflows last week, the largest in 18 weeks. Tech stocks got $1 billion of that, their largest inflow in 38 weeks. This influx is a combination of Individual Investors and Hedge fund managers, which historically, when these two groups start acting alike, disaster is on the horizon.
Hedge fund managers are up only 5.4% year to date, underperforming the S&P’s 14.4% gain. Not only will they not get their performance bonus this year, but they are liable to lose even more assets to passive investing (Individual investors buying an Index or ETF). So, they cave and buy the market, abandoning the discipline of protecting their client’s assets in ALL market conditions.
The National Association of Active Investment Managers has a weekly survey where they measure their managers from most bullish to most bearish (see graph below). Since 2006, those who are most bearish typically have a net short position (meaning they believe the market will go down soon), averaging 93%. Last week, those who are most bearish were 90% long (betting the market will go up). That, folks, is capitulation, and when everyone has capitulated there is no one left to push stocks higher. So, Mr. Market yanks the rug out from under them.
Capitulation is the most evident characteristic of FOMO: Fear Of Missing Out. If money were piling into stocks for legitimate reasons (Trump actually booking deals, not just saying “I believe we have the votes”), then there can be justification for that action. But, now it just seems people are shoveling money into the Dow/S&P500/NASDAQ just because everyone else is. Sorry, that’s not a great reason, especially for people who are “all in” to equities without any hedging position.
Warren Buffet has a very timely saying
I’m not saying the market can’t go higher from these record heights; my point is what’s your collapse plan? Notice I didn’t say exit, that’s way too calculated and rational. When the correction comes, it will be in the 5-10% range, followed by a “dead-cat bounce” and then look out below. Why am I so knowing? Because there’s no liquidity left to bail investors out.
Individuals certainly don’t have any; bloated with mortgage, student loan, margin and revolving credit at historical highs. Institutions can’t handle any more debt; the evidence has been apparent for several years by witnessing that they aren’t buying the bonds issued by the US Treasury (so we can pay our bills), our Federal Reserve has been…to the tune of $4.5 trillion.
Janet Yellen announced last month that the Fed has no choice but to reduce its balance sheet. How? Two ways. Either sell securities that they hold or allow bonds that are maturing to simple not be reinvested. The latter is preferable, but will take a lot longer. The former is more aggressive, but can push interest rates higher…at a pace the Fed wouldn’t feel they could control.
Trump’s Agenda vs Media and Global Financial Elites
So, speaking of Janet, that’s a good transition point to today’s blog theme of Trump’s Agenda Implementation versus the Media and Global Financial Elites. For you to grasp this you must be willing to separate the desire to see your 401k and stock portfolio swell with the possibility that what goes up, can very easily go down…incredibly by forces that would actually benefit from it going down.
There’s no denying a multi-level and widely spread stratagem to render Trump ineffective, if not removed. It’s certainly obvious in the political circles, exhaustively covered by the media. But, more importantly, at the civil level, which from the Financial Elites perspective, is a more effectual lever.
The rich keep getting richer and the poor remain poor. That’s what the above graph illustrates. It’s about civil unrest, which is worn out rhetoric, but still effective. I can speculate on the tactics for pages, but here are a few good guesses:
- Nov 4 Antifa Civil War (google that phrase if you doubt me). George Soros just transferred $18 billion to his liberal foundation that will no doubt be funding much of this Antifa activity (Read the FOX report here). Here’s how this is going to work. Several thousand protestors will start making noise and as crowds gather, leaders will pull people aside and put them on payroll. Swelling the numbers, which will be reported as larger than reality by a sympathetic media.
- Robert Mueller indictments on Monday are spun against Trump, even if they blatantly point to Clinton and Obama collusion. The liberal political factions have taken it on the chin the past month, between the revelation of the Clinton dossier, the IRS admitting they targeted conservative Christian groups and Hollywood donors (Weinstein) being eviscerated. Much more heat on this camp and they’ll need a distraction.
- Catalonia was allowed to hold a vote to separate from mother Spain, (just like Britain was allowed to vote an exit from the European Union) and to the Elite’s shock (just like with Brexit), 90% of Catalans said we’ll take independence. Then the Spanish government says ‘sorry, it doesn’t matter’ and is now imposing direct rule. Civil unrest. Just because it’s over there, doesn’t mean it won’t have utility here.
My point in all of this is that there are forces that don’t care how big your 401k is or that you’re relying on an investment portfolio to supplement a comfortable retirement. If you’re not hedging, you’re being naïve. Let’s consider some 2-year horizon math. If you experienced +20% this year and down 50% next year, your average would be -15%.
If you hedged and were only up 8% the first year, but also up another 12% in the second because the hedging techniques took advantage of a down market, your average would be +10%. That’s a 35% difference.
Remember what Uncle Warren said about swimming in the ocean… Hedge Funds Have Never Been This Short The VIX