Viewed Thru Rose Colored Glasses; Victor’s Update Market Forecasts
by the Curmudgeon with Victor Sperandeo
Rather than repeat the same “Trumponomics” concerns expressed in previous posts, the Curmudgeon instead provides excerpts of a SF Chronicle article, a Dow Theory Letters blog post and a Brookings Institutional report. They each amplify the US stock market’s positive reaction to Trump’s fiscal policy proposals, while ignoring (or dismissing) the risks of the President-elect’s alarming statements related to trade, nuclear weapons and a much bigger budget deficit.
Victor starts with keen observations and then updates his market forecasts. He also tells readers what to watch for in the new year.
Sperandeo believes the stock market continues to go up, because it’s going up! Money managers don’t want to be fired for under-performing or suffer redemptions from their equity funds, so they keep buying stock. It’s also likely that some of the money withdrawn from bond funds has been re-allocated to equity funds and ETFs.
Market Applause for Trump’s Fiscal Policy Promises:
1. In the December 23rd print SF Chronicle (subscription required), Thomas Lee wrote in an article titled Markets Reacting to Trump Promises (emphasis added):
Wall Street has retreated into a blissful bubble of wishful thinking. I find it puzzling that Wall Street, an institution that detests uncertainty, would choose to focus solely on Trump’s business agenda but ignore everything else.
“It’s confounding,” said Stuart Blair, director of research for the Canterbury Consulting wealth management firm in Newport Beach (Orange County). “Valuations are already pretty high. At some point, there will be a correction in the markets. But all that seems to have changed now that we have Trump.”
But what about the bad stuff? For example, Trump has suggested he will punish China for allegedly manipulating its currency to make Chinese exports cheaper, an act that will certainly ignite a trade war between the world’s two largest economies.
Incoming White House Chief of Staff Reince Priebus has suggested slapping foreign goods with a 5% tax, an act that will invite retaliation from foreign nations on US. goods. Hard to see how that will help US. multinational firms that do business around the world.
Like it or not, the United States can’t just grow on its own and thus needs access to global markets, said George Noceti, a wealth adviser at Morgan Stanley in San Francisco.
More importantly, Trump’s bellicose language on things ranging from allowing Japan and South Korea to develop nuclear weapons to his lukewarm commitment to NATO does not exactly promote stability in the global order.
I don’t really see how Wall Street can ignore that. After all, we’re talking about an institution that has at times soared and crashed on the tiniest scrap of information, whether true or not. And now suddenly, Wall Street has developed a severe case of apolitical tunnel vision.
Part of Wall Street’s thinking is that Trump is a deal maker, so what he says now is essentially an opening position in a long series of negotiations, Noceti said. That’s the problem with stocking the White House with business leaders with no diplomatic experience. In business, negotiations are about money and wealth. On the global stage, negotiations concern peace, war and human lives.
Wall Street would be wise to remember that, no matter how frothy the markets get.
2. Here’s what Dow Theory Letters (subscription required) had to say shortly after Friday December 24th market close (bold font added for emphasis and “tongue in cheek remarks”):
Trump wants to match Putin on new nukes as the two end four decades of going the other way? Sounds good! China warns of a showdown with the US over trade? No problem! In the US, it's "party on, Garth!" as the Dow basically gained back yesterday's loss and traders place bets on which day next week the Industrials will better 20,000.
3. A new analysis this week by the Brookings Institution cautions that the fiscal outlook for the US “is not promising” and is “likely to get worse soon.”
Echoing the warnings of the non-partisan Congressional Budget Office and anti-deficit groups, the new report notes that the current $11.7 trillion publicly held debt is equivalent to 77% of Gross Domestic Product – or the highest level relative to the economy in US history, except for a few years around World War II.
“Additionally, we are on the cusp of the full-on retirement of the Baby Boom generation, which will increase spending on Social Security and Medicare,” the analysis states.
First some new observations which effect my revised market forecast below.
1. The US stock market rally since the election
has been so strong that no material selling should take place before
1/2/17. The reason is taxes and
portfolio re-balancing. Traders who
bought the Trump victory stock rally could save 10%+ in taxes by selling
sometime next year. Here is the math:
Short term gains this year would be taxed at the maximum rate of 39.6%+3.8% (Obamacare tax on investments) = is 43.4% and that doesn’t include State taxes. If Trump ends Obamacare/ACA, then the 3.8% tax goes away. If the maximum tax rate is reduced to 33% (as several have proposed) then selling next year saves 10.4% on capital gain taxes.
2. At the end of the 4th quarter, pension funds and other financial institutions re-balance portfolios to a generally 60/40 allocation of stocks/bonds, respectively Therefore, buying bonds and selling stocks will take place. Stocks went up approximately
5%-10%, (from 9/30/16 and depending on the index) while bonds went down ~4%-15% in the 4th quarter to date. These roll adjustments should occur in early January, but also may occur near the end of this week (last of 2016).
3. The Trump fiscal plan specifics and timing to become law are unknown, as the Curmudgeon has repeatedly noted in recent posts. At the earliest, any Trump administration proposed fiscal plan related bills won’t be passed by Congress till April-July time frame. Most likely, it’ll be longer. This "gap" between when the tax bill/ regulation bills are passed, will result in a slowing economy.
At that same time (Spring 2017) Fed Funds rates will be rising (according to Fed Chairwoman Janet Yellen) and there will be critical elections in Europe that could effectively end the EU as we know it if rejection candidates win (especially Le Pen’s National Front party in France).
4. Most importantly, the term "Republican" is a fraud in the US today. The main examples are Lindsey Graham and John McCain (aka Butch Cassidy and the Sundance Kid, who never met a war they didn't like). They are not for what one would expect a Republican to strongly support: the Constitution, small government, low taxes, non-intervention Senators. They are "Neo-Conservatives - establishment elite representatives of the GOP "progressive order."
Add Mitch McConnell and House Speaker Paul Ryan who claim they want any new tax bill to be "revenue neutral," which means NO TAX CUT! Notice that you never hear "less spending" in exchange for tax cuts in the US Congress. Why not?
John Gapper, FT editorial writer, defines "Progressivism" as "the movement that tried to chart a middle ground between socialism and unfettered Capitalism through PUBLIC REGULATION AND CORPORATE WELFARE."
To me, it’s changing the Constitution without amending it!!!! Think about the statement? Public regulation is killing businesses and Corporate Welfare is FASCISM. This is the way of the New World Order.
Mussolini would be proud of this accomplishment. What is not said is once he got full power Mussolini had most of his Corporate "friends" who worked with him KILLED.
Victor’s Updated Market Forecasts:
1. I believe the rally in US stocks will be over in the first week of January 2017 (there is new money that comes into the market in early January generally via reinvestment of dividends). Buying or owning stocks can only lead to disappointment in the first half of next year.
2. Bonds are over sold, and are a long trade starting at the end of the year. Where it stops can't be predicted. It could last into March 15, when the Netherlands election takes place. [Geert Wilders, a Euro skeptic who wants to leave the EU is ahead in the polls1.]
Note 1. I don't believe the polls (which all politically fabricated). Yet the trend is strongly towards the political right. However, leaning towards Wilders and Marine Le Pen of France to win is the way to bet.
3. Gold is in “no man’s land” as far as being in a new bull market (which started December 2015) or a rally in an ongoing bear market (which started in September 2011). Considering the US dollar is at a 14-year high, gold’s ability to stay well above its 2015 lows (of $1055 to $1080) is a significant accomplishment. Spot gold is trading at $1133.50 per ounce at press time.
4. After 6 months, Brexit has gone nowhere, as no tangible progress has been achieved related to the UK’s exit of the EU. A third potential outcome, according to Gideon Rachman of the FT editorial board is that the divorce between the UK and EU many not be negotiated. His 12/20/16 FT editorial, titled The chaotic route to train-crash Brexit- An orderly separation from the EU should not be taken for granted (subscription required) states:
There is a third possibility that is little discussed but increasingly likely: “train-crash Brexit.” In this version of events, the UK and the EU fail to agree a negotiated divorce. Instead, Britain simply crashes out of the EU — with chaotic consequences for trade and diplomatic relations.
In fact, there are strong grounds for believing that a well-managed divorce will prove unattainable and that there will instead be a train crash. The reasons for this are both procedural and political.
Stalled Brexit and important European votes in Spring 2017 means many investments could be on hold for quite some time?
Victor’s Bottom Line:
Obviously, these are total contrarian bets, as they go against the current market trends.
The world is in a political and economic transition period which won’t be painless. Keep in mind the global trend towards socialism when you consider the following end quote.
In 1840, Fredric Bastiat stated in The Law (later translated from French to English):
"The delusion of the day is to enrich all classes at the expense of each other; it is to generalize plunder under pretense of organizing it. Now, legal plunder may be exercised in an infinite multitude of ways. Hence, come an infinite multitude of plans for organization: tariffs, protection, perquisites, gratuities, encouragements, progressive taxation, free public education, right to work, right to profit, right to wages, right to assistance, right to instruments of labor, gratuity of credit, etc. And it is all these plans taken as a whole, with what they have in common, legal plunder, that takes the name of socialism."
AMEN & Happy Holidays!
Good luck and till next time...
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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