Focus List Review
A number of major stocks including all but one of the FAANG names and economically sensitive names such as CAT are trading below their 200dmas. AAPL remains the only FAANG that is still around its 50dma but is showing signs of strain. That our Focus List remains empty, a first since we launched the Focus List Review, highlights the particularly cautious stance we have taken in long positions. We were already seeing potential trouble ahead even as the Dow and S&P 500 Indexes hit new highs.
Our Focus List had shrunk down to just 3 names, with some wondering why so few names were on the list. Since the Focus List is designed to only showcase the strongest stocks, it was a signal of pronounced weakness in the general market. The 3 names have since broken down and been removed from the list. No new names have been added to the list based on the severe lack of stocks that would fit the criteria for inclusion.As Jesse Livermore once said, more money has been lost by those who maintained their long positions despite signs the general market was weakening.
The CBOE total put/call spiked to 1.29 at Wednesday's close when the NASDAQ-100 fell -4.63%, its worst closing performance since August 2011. Thursday's bounce was on only slightly higher volume on the S&P 500 while volume was lower on the NASDAQ Composite. Friday's gap lower was due in part to disappointing earnings out of GOOGL and AMZN. Friday's put/call spiked to 1.32, so a short term bottom could be near. Expect elevated levels of volatility to continue.
Interest Rates / GDP
Historically low interest rates around the globe should continue well into 2019. While the ECB has pledged to end its bond-buying program by year-end, it will keep interest rates at current levels well into 2019. So at best, low interest rates will remain in place outside the U.S.
Friday's GDP figure came in at 3.5%, slightly ahead of the 3.3% estimate, but well below Q2's 4.1%.
The IMF predicts the impact of U.S.-China tariffs will be felt next year, so cut its 2019 U.S. growth forecast to 2.5% down from 2.7%, while it cut China's 2019 growth forecast to 6.2% down from 6.4%.
Central Banks vs. Fiat
Meanwhile, history shows that central banks devalue their currency by printing money. This can inflate bubbles of various types of which the most serious is hyperinflation which destroys currencies and thus economies. They also try to prevent such hyperinflation or even elevated inflation by popping the bubbles before they get too big. Pro-business policies such as lower tax rates boosts GDP so the hope is the U.S. can grow which would allow the Fed to continue its program of rate hikes.
That said, one particular bubble of note lies in investment-grade bond issuance which has been reduced to the lower end of the quality spectrum. Renowned bond maven Henry Kaufman has argued that efforts to stabilize the financial system following the financial crisis of 2008 heightened risks by encouraging more debt via quantitative easing while increasing capital concentration among too-big-to-fail institutions.
QE has enabled companies to easily borrow at near historically low rates of interest to buy back shares which artificially inflate earnings. They have also used the funds to increase dividends, or engage in acquisitions. Wall Street willingly enables such deals.
The combination of worsening credit quality along with financial concentration in such instruments has increased the Fed’s role as the lender of last resort when markets drop. Institutional investors know this, making the Fed, according to Kaufman, “a greater captive of financial markets than ever before."
Despite his hyperbole, Trump has put good economic policies in place, but one must keep in mind that interest rates were higher in the early 80s so acted as fuel to jump start a new bull market under Reagan's pro-business policies in place after the 1981-82 recession. Today is arguably a far tougher situation than the early 80s, especially given the unprecedented levels of debt that has been created since QE started in late 2008. Singularly, QE is still flowing near record levels thus the bubble in stocks and bonds is pronounced. Are Trump's policies too late to this QE-fiesta or has the money printing environment painted the Fed into a corner as we have suggested? There is no free lunch. You cant create wealth out of nothing. The best we can hope for is a less than hard landing as a result of better economic conditions in the U.S. due to Trump's pro-business policies continuing to take effect.Breakout ETF?
Over in stocks and ETFs, BOUT is Investor's Business Daily's new ETF that focuses on the best breakouts. That they would issue such an ETF is perhaps illustrative of the group think over at IBD, despite evidence to the contrary. Since going public a few weeks ago, BOUT is down more than -20%. It's ticker should be DOUT, as in "I doubt this will work." Even before the market correction, BOUT was underperforming. This underscores our point that most breakouts don't work. It's always nice when things happen that underscore one's observations and studies.