January 30, 2017

Donald Trump says he is proud of the Dow hitting 20,000

The market accomplishment of the Dow Jones Industrial Average finally hitting 20,000 fills the airtime in the media. However, much like being handed five $20 bills for a $100 bill, the 20k milestone in a relatively narrowly defined index is irrelevant to the markets over any time frame.

Yesterday, after five weeks of consolidation and several attempts, the threshold was eclipsed and the responses from the media, not surprisingly, have been peripatetic and giddy. I suppose the thought is that it attracts viewers and listeners.

20K Is Fodder for Market Cheerleaders

As is typically associated with a climbing market, ursine opinions are now being ridiculed as the pace of advance quickens and commentators are urging retail investors to join the party after a near four-fold increase in the indices since The Generational Bottom in March 2009.

Simply stated, to me and many others, the Dow milestone is nothing more than fodder for market cheerleaders.

Examining the Recent Market Landscape

The recent market leadership has been in the groups that outperformed immediately after the Trump election victory; these include financials, technology, transports, materials, industrials and construction.

I had expected a 2017 market peak in the first half of January while many (consensus?) looked for an inauguration peak.

We were both wrong.

Within a few days, or maybe even earlier, the market is likely to become overbought.

Back to Fundamental Reality

From my perch, the gap between economic reality and expectations rarely has been wider. Above all, the markets are now inattentive to the ideological, logistical and fiscal constraints that represent practical headwinds to the implementation of the administration's proposed initiatives.

Besides this and my other deep fundamental concerns expressed in yesterday's opening missive, "Beware the Trumpian Spring Training Illusion," there is another issue -- the length of time that the market has not had a correction.

Some Historical Perspective... and a Concern

The market advance is now almost eight years old -- over two times the average bull market's age. The last 20% correction was during the financial crisis and we haven't seen a 5% correction in almost a year. For that matter, there hasn't been a 1% decline since late October.

Not only has Mr. Market gone quite a long period without a meaningful drawdown, the recent advance is occurring at already elevated valuations that are well-extended by almost every quantitative metric (CAPE, GAAP, enterprise value/EBITDA, price to sales and market value/GDP).

Here is some interesting data from InvesTech on corrections that provide us with an historical perspective 

Bottom Line

I have the following observations and investment conclusions:

-    DJIA 20k has no relevance to future price performance. It should be ignored.
-    History suggests a market correction is due.
-    The market's reward vs. risk remains unattractive (by my calculations, downside risk dwarfs the upside reward).
-    I would be fearful when others are greedy.

January 23, 2017

Doug Kass on Donald Trump and the markets

The market had a solid first day in the Trump Era with all three major indices up solidly as the 45th president of the United States was sworn into office. I have no idea where the country and market go from here, as one would expect when the biggest outsider since Andrew Jackson is now commander-in-chief. But I guarantee the ride will not be boring. 

It remains my view that volatility and risk are materially under-priced in today's markets. While animal spirits have taken over the markets, abetted by machines and algorithms that often create an artificial market setting by exaggerating market moves, I will remind all that there is a reason why they are called animal spirits and not human spirits. Animals, you see, are mostly a lot dumber than humans.

I am as bearish on stocks as I have been in months based on the following (and my portfolio reflects this):

- An Untested President Trump.
Regardless of one's political affiliation, it can be argued that, as a leader, Donald Trump is untested.His ability to understand, study and execute/implement far-reaching, complex and cohesive policy remains in question, particularly against a backdrop of deep-rooted animus between the Republican and Democratic parties.

- Will the President-Elect Really Come to the Rescue of the Middle Class and Fulfill His Campaign Promises?
Donald Trump ran on the notion that he will represent the Average Joe. After years of "Screwflation of the Middle Class," in which most Americans' disposable incomes had flat-lined with salaries unchanged while the costs of the necessities of life increased, the Republican candidate promised that he would represent them over the next four years. As noted below, in several bullet points, I remain a skeptic.

1. Will Donald Trump Be More Elitist Than Hillary Clinton?
Donald Trump's cabinet appointees are comprised principally of wealthy individuals who are not representative of our broader society.

The president-elect has argued that these appointees have been successful in private life and are good representatives to affect the change he has espoused. We shall see whether they feather the beds of their contemporaries or whether their policies "trickle down" to their constituents.

2. Campaign Promises Recanted?
The president-elect has made numerous extreme campaign promises to his supporters that he already has recanted in areas of immigration ("the wall"), a possible legal response to the Clinton Foundation and Hillary Clinton's emails, tariffs and trade and other core campaign principles.

3. Pay For Play -- Selling Access? 
Donald Trump's two sons already have gotten into "pay for play" problems, something that the president-elect and the Republican opposition were critical of regarding the Clinton's. Trump should be avoiding these conflicts at all costs, but he is not. Thus far there have been other examples of selling access; the president-elect doesn't yet seem to understand the degree of scrutiny a person in his position is in. He needs an army of lawyers around him building a Chinese wall between his business and the presidency. Will this be fact and can he separate himself from his business empire in order to do good and follow the will of the people without conflict?

- Fiscal Policy Limitations. 
The Fed's monetary largesse is no longer a factor or effective in catalyzing domestic economic growth. The baton pass from monetary stimulation to fiscal expansion is likely to be less smooth and probably will be implemented much later than the consensus expects. This applies to both the U.S. and Europe, as it is all now about politics and the ability to coordinate fiscal policy successfully. Will the president-elect get cooperation of a Republican-controlled Congress to embark upon aggressive fiscal stimulation while taking the budget deficit sky high? Is this a reasonable leap of faith by investors? There are also real issues as to timing and whether fiscal stimulation will be effective in a new administration. Fiscal policy efforts, such as the monetary expansion since 2009, may fail to trickle down to where they are needed most -- the middle class. In other words, fiscal policy may not be as effective in catalyzing growth as anticipated. As an example, the CEO of Cisco, which possesses a large overseas cash hoard, recently was asked what the company would do with a repatriation of its foreign profits. The answer he gave was that half would go to merger activity and the balance to share buybacks -- neither would add new jobs; indeed, the former probably will lead to lower net jobs.

- Lower Corporate Tax Rates Likely Will Not Produce a Hockey Stick Effect in Earnings Growth. Another example of market optimism is the excitement associated with the introduction of lower statutory corporate tax rates, which are currently at 35%. A rate of 20% to 25% seems to be the desire of the new administration. I have seen estimates that a new tax law will add as much as $15 a share to S&P 500 aggregate earnings. But, with the average S&P company only paying an effective tax rate of about 23%, how is the introduction of a lower statutory rate going to move the needle of S&P profits?

- Rising Rates May Not Be a Positive For the Markets. Another "fact" is the notion that rising interest rates are positive to our equity markets. But given the policy uncertainties (some listed above), is this belief fact-based? Interest rates are heading higher. While this helps a segment of our markets -- e.g., banks, which have an imbalance of rate-sensitive assets over rate-sensitive liabilities -- it hurts a broader swath of industry (utilities, telecoms and REITs). As I discussed in "Look Out Above! Rising Rates Pose Economic, Market Risks," a higher risk-free rate of return and cost of capital theoretically reduces the value of equities, produces competition to stocks from fixed-income instruments, likely will moderate buyback activity and, as discussed in the next bullet point, could raise the value of our currency, which will diminish the value of our exports and corporate profits.

- The U.S. Dollar Conundrum. Higher U.S. interest rates already are producing a rise in the value of the U.S. dollar, which could be unfriendly to growth as it reduces our import business. With 45% of S&P profits non-U.S. based, is a strong currency factually positive for U.S. equities?

Bottom Line

On top of the (false) optimism associated with Trump's message of Making America Great Again through lower taxes, the repatriation of overseas cash, the elimination of burdensome and expensive regulation and other policies aimed at jump-starting domestic economic growth, the dominant investor today -- quant funds such as ones that employ volatility-trending and risk-parity strategies -- have likely exaggerated the climb in stocks since the election.

Is it Reagan's "Morning in America?" -- a metaphor for renewal. We all hope so, but I doubt if this will be the case this time.

There is little basis for comparing the conditions that existed when Reagan gained the presidency to the current state of things. Economic, labor market, demographic and other conditions three decades ago were dissimilar.

Of even greater consequence is the issue as to whether the basic assumptions that have led to the surprising market advance are based in reality.

I am doubtful and I continue to believe that Donald Trump will make volatility and uncertainty great again.

I would fade the "animal spirits" -- the prowl of which has been documented by Jim "El Capitan" Cramer -- as I am fearful of elevated stock prices in a post-fact investment world. 

I would overweight gold and underweight stocks. 

January 9, 2017

Amazon a threat to traditional store based retailers

For apparel-centric (department store) retailers, the news releases issued after Wednesday's close by Macy's (M) and Kohl's (KSS) suggest a disappointing holiday season, with comps falling 1% to 2% below plan. (Real Money technical analyst Bruce Kamich also took a look at Macy's and Kohl's this morning and analyzes what may lie ahead for both names.)

The retail apparel group in general and M and KSS in particular are down meaningfully in price after both retailers lowered guidance.

- Most of the weakness apparently was in November, especially before the election. Thanks to Rule FD, this data is not released on a timely basis.
- Stock charts of VF Corp. (VFC) and PVH had suggested weakness in apparel, although Macy's suggested handbags and watches in its release. This would be the second year in a row of poor apparel sales. (Some reversion to the mean should be expected in the quarter ahead).
- The consumer's economic situation remains quite strong. The first quarter will be helped by a late Easter.

Macy's also announced yesterday a restructuring in recognition of being "over-stored." It is closing 100 stores; it has identified 68 of them that will shut their doors. I sense most of the comp shortfall at the retailer was in stores that will be closed. In a trip I recently made to soon-to-be-shuttered Macy's CityPlace store in West Palm Beach, the stores clearly were not replenished in a timely manner and I had heard that many of the associates knew something was up. A lot of the problems here should not recur next year and the company remains financially strong. I do not expect a cut in the dividend. Macy's also noted that its large online business grew more than 10%.

Amazon (AMZN) remains a significant problem for any store-based retailer. Several speakers at the Citi TMT Conference noted AMZN is a threat to everyone as the company has no constraints on his strategy and does not need to deliver good quarterly earnings. AMZN clearly wreaked havoc with apparel merchants this holiday, but it is not going to get all the business. 

At some point the share gains of Amazon and its peers will be discounted in retail share prices. We could be approaching that point sooner than later as the taste of buying after Wednesday's disappointments will be so sour as to dampen most investors' appetites. Moreover, who doesn't recognize by now the threats to traditional brick-and- mortar retailers? It is now universally assumed, so buying at the sound of trumpets could soon make sense.

These firms are not going away and, though I won't be participating; deep-value buyers -- and maybe even some activist investors -- will have a field day with retail merchandise "going on sale."

The issue, of course, is how long and how deep that sale will go on!

Two additional comments:
-    The aforementioned problems may have limited impact on my only long in the space, JC Penney (JCP) , which is trading below $8.00 this morning. The JCP stores I recently have visited look fresh and clean, the appliance initiative is gaining traction and the sale of the corporate headquarters will strengthen the company's financials, but it should be noted it was expected. I remain a buyer on weakness, with a time frame measured in months and years and not days and weeks.
-    The mess at Sears Holdings (SHLD) probably should unwind quickly, as I suggested in my 15 Surprises for 2017. It is hard to believe it had anything but a devastatingly bad fourth quarter. I doubt vendors will choose to support it in 2017 in spite of CEO Ed Lampert's latest injection of funds. Sears' sales of $20 billion is a lot of market share for JCP and others to take.

via thestreet

January 4, 2017

2017 could be the year of GOLD

The broad consensus is to own stocks and to sell gold. 

But, as I have discussed since 2003 in my annual Surprise Lists, the broad consensus of investors is often wrong. Indeed, it is often the case that the very coalescing of popular opinion behind an investment tends to eliminate its profit potential.

As Howard Marks writes:
"First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in: 'The outlook for the company is favorable, meaning the stock will go up.'

Second-level thinking is deep, complex and convoluted. The second-level thinker takes many things into account: 
-    What is the range of likely future outcomes?
-    Which outcome do I think will occur?
-    What's the probability I'm right?
-    What does the consensus think?
-    How does my expectation differ from the consensus?
-    How does the current price for the asset comport with the consensus view of the future and with mine?
-    Is the consensus psychology that's incorporated in the price too bullish or bearish?
-    What will happen to the asset's price if the consensus turns out to be right, and what if I'm right?"

While the animal spirits may have taken over the equity markets and have ignored the gold market, we should recall that there is a reason why Keynes called them animal and not human spirits. That's because animals are a lot dumber than humans!

As excited as investors are about stocks, they are now uninterested in gold.

I remain a minority and outside of consensus regarding gold. However, given the developing and concerning conditions -- and lack of credible policy responses -- that I now see falling into place, the uncertainty premium should be rising and gold may be a beneficiary this year.

What is most surprising to me is that the price of gold has not responded to these uncertainties, providing a potentially favorable upside/downside ratio for the yellow metal.

I wanted to start today's opening missive with the way in which I concluded my 15 Surprises for 2017 -- the major theme being that "Donald Trump will make volatility and uncertainty great again."

I especially would pay attention to the three questions at the end of my column as they relate to the prospects for a higher gold price. Answer them yourself -- I have my own responses -- and act accordingly:

Some final words.
My outlook for 2017 is more gloomy than in years.

To me, the biggest surprises are (1) the abundance of complacent sheep that populate our financial markets today, (2) the rapidity in which the bloom comes off the Trump flower next year, and (3) that the market actually may do what is unexpected in 2017.

The Republican Party becomes divided and Trump's policy support loosens. Even the newly elected president's "A Team of Rivals" cabinet with vastly different philosophies and backgrounds becomes splintered, full of tension and conflicted, much like an episode of "The Apprentice." Unlike President Lincoln (who neither lacked for self-confidence nor needed to be the only voice in the room) and his ornery set of advisers, Trump's management style of an "Apprentice-like" administration does not produce constructive and cohesive policy.

With little strategic vision and a limited ability to effectively govern, the Trump administration's popularity quickly wanes as the trade-off from a slower growth world to a late-cycle policy experiment to stimulate growth fails.

Off of Twitter, absent regular press conferences and the delay/failure of policy, Donald Trump by year-end 2017 will be less ubiquitous and harder to find than he has been for the last 18 months and more like Where's Waldo? 

All of which gets me back to the three questions that I have asked myself every morning over the last two to three years. These questions seem more appropriate to ask today than ever:
- In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
- In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
- With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?

Think about these questions as you approach investing in 2017 and consider embracing the contrary and even some of my "probable improbables" for a portion of your invested assets.


Risk happens fast in 2017.


As a possible manifestation of some of the concerns expressed above, the price of Bitcoin recently has ripped higher ($1,130), and Bitcoin, for the second year in a row, is the best performing "currency."

Finally, I would note that we have ransomed our economy because our policies have favored debt over equity and speculation over productive investment, placing gold in a more envious position:

-    There is a federal debt load of $20 trillion, an annual on balance sheet deficit of more than $500 billion and a total annual deficit of over $1 trillion.
-    There is nearly $49 trillion of public and private sector debt in the U.S. Every increase of 100 basis points in rates boosts debt service by $470 billion annually (that's 2.5% of GDP). This money that can't be spent growing the economy because it is paid to holders of U.S. debt.

Though it is always hard for me to value gold as I cannot produce an intrinsic value calculation, I believe the odds that gold will shine brightly this year are growing, and that the commodity may go from goat in 2016 to hero in 2017.

I have moved to a large holding in gold.

Position: Long GLD large; short GLD puts

via ZH