We are being told we are in an earning’s recession.
We are being told the economy is going into recession.
We are being told the rest of the world is in trouble.
We are being told the market has to drop because of all this.
We have a response to all this. No it doesn’t. (We’ll explain in just a few!)
We have another response to some of this. Except for the U.S. going into a recession and except for the market having to drop, they are correct.
Earnings have been heading south. Earnings are soft. Guidance has been coming down. Many areas of the world are in economic trouble. The numbers out of places like Germany are abysmal. Many believe as Germany goes, Europe goes. Asia is softer. We expect the U.S. gdp to be softer though we are still growing with employment remaining strong.
But the market…the market is another story. In fact, our market has been broadening out. Economically sensitive areas are now emerging. INDUSTRIALS and now even the lagging TRANSPORTS look like they want to emerge. What gives? Do we need to say it again? We will say it again. Easy money…easier money and easiest money. Before we mention Bernanke (we mean Powell), it is important to know that:
EUROPE, which had been telling the world for months that they were ready to normalize…did a 180. Not only are rates still negative but they have all but stated they will go more negative. Talk about giving cocaine to a cocaine addict. On top of that, Lagarde now goes from the IMF to the ECB where she will make Draghi look like Volcker. Germany’s 10 year is yielding negative.
Japan? Japan remains in the abyss of easy money with negative rates while the BOJ owns over half of Japanese ETFs and almost 5% of their whole market.
Chinese officials have gone all in. We only know what is reported but they have been adding trillions into the system…and quickly. Remember, Bernanke was only adding a trillion each year.
Australia lowered rates. India lowered rates. Over $13 trillion of debt is negative. And then there is Powell and the markets. It’s very simple. As we have been telling you forever, whenever the market gets in trouble, the Fed comes to the rescue. They do not even hide it any more. The amazing thing is that it is still working after 10 years. Do not go any further than that.
Markets were imploding in the 4th quarter of 2018. Not just equities but credit. To be clear, the bubble makers know they can not lose the credit markets and all the leverage they have enabled. As markets continued to swoon in Christmas eve day, Mnuchin called a meeting with what is affectionately known as the WORKING GROUP ON FINANCIAL MARKETS. On Christmas day, not by chance, not by accident, a news report was floated that the Fed would change their stance from “raising rates a few times in 2019” to “patience!” Yes…they did this on Christmas day. The market bottomed the next day. To the day of their change of stance, the market bottomed. On January 4th, at 10 am, Powell confirmed the story they planted into the media on Christmas day. That morning, we easily came off our bearish stance as Powell gave some b.s. about he was worried about the economy. HE WAS WORRIED ABOUT MARKETS. 1st quarter GDP eventually came in at 3.2%.
Markets rallied into the end of April. Not once did we hear anything about the Fed needing to change their stance. In fact, all we heard from them was that everything was fine. And then came May. A 7-10% correction ensued…and that was enough to scare the crap out of them. Again, by no accident and on purpose and out of nowhere, on June 3, Powell sent a guy named Bullard (ST LOUIS FEDHEAD) out to do his bidding. Bullard came out and announce “the chance” for another pivot. This time, they would go from “patience” to “lowering rates!” Guess what the market did THAT DAY? It bottomed. The market has not looked back. And now with Powell confirming the lowering of rates at the end of July, the market is now broadening out on the bet that again, easier money will do the trick. Amazing? Not so much. It has been occurring for more than 10 years. These central bankers know they still have the big money listening so whenever markets get in trouble, they go to their default setting. Of course, all this easy money continues to enable gargantuan debt around the globe that is a guarantee to crash the market down the road…but for now, nothing doing. Just know this is not about an economy. It is not about earnings. It is not about tax cuts. This is all about the markets moving to the day off a central bank that could not even let a market drop more than 7-10%.
In recent weeks, we had been telling you it has been a large cap affair. It still is as small and mid caps continue to lag. But the lagging TRANSPORTS and INDUSTRIALS are now coming on as a bunch of names have come out of bases. We suspect the large amount of cash on the sidelines are making the bet that this area comes out of its slumber. On top of that, we are now noticing the lagging FINANCIALS starting to wake up as rates on the long end have started to tick up. Just keep in mind, it is now earning’s season where thousands of names report. We promise a lot of jello moving on the plate.
——“I woke up this morning thinking it was going to be another great day. I’ve been celebrating with friends, family and the community since I turned 90. I’ve told you about the gracious gift of $117 million that was collected and given in my honor to four charities that mean a lot to me. All that happiness blew up because I said in a newspaper interview that I have supported and will continue to support Donald Trump.———-
———Negative stories… vicious threats, without cause, to boycott the company that has enabled my foundation to give billions to support autism, medical research, education, heart and neurological issues like stroke, and to help our veterans. The company that I retired from in 2002 and have not had a business relationship with in almost 20 years. A company that has employed more than a half-million people. The people who work there are affiliated with both political parties or no party at all. They are of all religions and all colors and backgrounds. Why would people want to hurt them?———-
—–All because I give my voice and some of my money to our President. Am I in China? Argentina? Russia? That’s what it feels like to me.—-
——It saddens me that our country has come to this, where I, as a private citizen, cannot express my feelings. It angers me and it saddens me, but it sure as hell is not going to stop me. If you thought it would, you’ve got the wrong guy.———-
——-In the next ten years, God willing, I will accomplish more to save this world than my critics will do even if they had forty lifetimes.”———
Strong DOW day yesterday as UNH soars on a flip flop from the prez on drug rebates, BA bounces, GS strong as long yields back up. Most of the rest of the market under-performed. Amazingly, the small and mid caps were again down. Normally we would tell you this divergence must lead to disaster but right now, it is just about what not to be in versus what to be in and for the most part, it is the large caps.
A glance at the TLT shows a near term top as long yields back up. This should help financials as margins expand for now. A glance at the XLF shows very tight action.
GOLD and GOLD stocks remain bullish but seem to settling in here. We hope it takes more time and allows moving averages to catch up. We continue to believe the breakout was real but think there may be some time in here.
–We recently told you there was a darn good change big cap indices would go topside and break out of a long trading range. First off, the patterns were there but more importantly, we expected Powell to lower rates. We laughed at a few people saying Powell would not lower rates. We shall see how we finish today (reversals are a possibility) but as of this second, major big cap indices are edging out. Remember, small and mid caps continue to under-perform as well as other areas like the Transports and many Financials. We are never thrilled with these divergences but so far, big cap indices are paying no mind.–
–A few facts to ponder. Sorry about the sarcasm.–
—We are told GDP is in the 3s, unemployment in the 3s, major indices at highs, the big guy says “we have the greatest economy ever” yet the head of our central bank is lowering rates at the end of July. A nominee for a central bank position wants rates at 0%.—
—All these moves continue to enable massive, and we mean massive amounts of debt across the world to the tune of $250 trillion with no end in sight. May we repeat…$250 trillion of debt…but don’t worry. Just in the U.S., $3 billion is added to our debt every day and $1.5 billion of our tax dollars goes towards interest…again, every day. But don’t worry, the people that created all this debt tell us this debt is manageable.—
—50 year Italian bonds were just oversubscribed by a multiple of 6…floating at 2.8% even though Italy has serious debt/budget problems. —-
—14 different junk bonds in Europe have negative yields. Lending money to less credit-worthy companies and paying them…TO LEND TO THEM. Deposit the money and you give them the toaster! Lend money knowing you will lose money!—
—-100 year bonds (the most risky because of duration) are soaring as yields continue to implode. Guess what happens to these ridiculously long bonds if rates go the other way to make up for all this debt. (You do realize the more debt there is, the higher the rate is supposed to be.)—-
—-But again…do not worry. Debt does not matter. All is well. They have a handle on things. There are no bubbles. Negative yielding junk bond debt is just fine. Remember, as long as markets act well, nothing matters.—
—We know…sarcasm…but that’s all we have watching our Mets play ball and watching our Knicks in free agency!—-