Weekend Strategy Review November 27, 2016

Posted by OMS  at November 27th, 2016

The Dow rose 69 points on Friday, closing at 19,152.  It was up 284 points for the week.  The NASDAQ finished down 6 points on Friday and up 59 points for the week.

Friday’s rally on the Dow appeared to be a continuation of final wave “c’ up that should end near its theoretical target of 19,200+.  So, with Dow closing at 19,152, that target is now only about 50 points away.   The markets should be getting very close to a top.   With the Bullish seasonality associated with Thanksgiving Holiday about to end, the market could top next week.

The current rally has been very selective.  If you predicted a Trump victory and were in construction stocks or financials BEFORE the election, you did well.  On the other hand, if you owned healthcare stocks or some of the major pharmaceuticals, you probably lost money.  If you owned some of the high-flying NASDAQ stocks like Amazon (AMZN0 or Netflix (NLIX), you’re probably thinking, What rally?  AMZN was at 787 before the election, now it’s at 780. NFLX was at 124 on election day, now it’s at 117.  So the current ‘rally’ has been EXTREMELY selective.  Not all boats rose on this tide.

And therein lies the problem.  A financial stock like Bank of America (BAC) rose from 17 on election day to 20.86 on Friday.  That’s a 22 percent gain in less than two weeks.  Gains like this happen because of emotion.  They are usually not sustainable.  In the case of financial stocks like BAC, the emotion was the hope of higher interest rates.

But is this likely?  Hmmm?

Yeah, the Bond market has been getting clobbered since election day, so interest rates on Treasuries have risen.  But with the U.S. supporting a $20 Trillion debt, it also means that if interest rates continue to rise, servicing that debt will become even more expensive. 

Right now, the cost of servicing America’s debt is about 25 percent of the total U.S. budget.  If you subtract out the money for Social Security, Medicare, and debt servicing, there is only about 15 percent left for everything else.  So, we need to ask ourselves how President-Elect Trump will get the money for all new programs he promised during the campaign? Rebuilding the military, the cities, a wall (yeah I know he said Mexico will pay for it) and America’s infrastructure will not come cheap.  And 15 percent of the current budget won’t get it done, especially if he’s going to reduce taxes, which was another campaign promise.  

So, let’s be realistic.  We all know where the money will come from, at least in the short term.  The government will have to print it. This new money will only increase debt, at least for the short-term.  Longer-term, IF some of the things President Trump talked about cause the economy to grow at 4+ percent instead of the current 1.2 percent, then we will have the money for even more of his programs and could even start paying down the debt.  Wouldn’t that be wonderful!  But IF ifs and buts were candy and nuts, we’d all have a wonderful Christmas.

OK, so let’s assume that the government will print money over the short term so Trump can deliver on some of his promises.  He can get the Fed to print the money, but he will also need to keep interest rates from raising too much so he doesn’t have to pay a lot of interest to service the current debt.

One of the ways he’ll probably try to do this is by stacking the Fed.  If he puts pressure on Janet Yellen, the current Fed Chair, and Stan Fisher, the vice-chair, causing them to resign early, (both have terms that run through early 2018), and fills the two empty positions, he will have appointed four out of the seven members on the Central Bank’s Board of Governors.  That would enable him to influence the Fed. It would make his task of getting America growing again a lot easier.   

But he can’t increase the debt too much. He has to worry about the Debt to GDP ratio which right now is already at dangerous levels.  Since 2012, the Debt to GDP ratio has been averaging near 1:1.  In 2015, it was 1.04 to 1.  If an individual had a ratio exceeding 1:1, he would be bankrupt. BTW, in the 2 years before Obama, the U.S. Debt to GDP ratio was near 0.65.  In the four years before that, it was under 0.45.  So, high Debt to GDP, excluding our war years, is a pretty recent problem.  It happened because the country borrowed too much when it was not growing.  The problem can be fixed IF the economy starts to grow. 

This is one of the reasons I’m watching Bonds now. Despite what has happened since the election, if Bond prices continue to rise, a rise in interest rates will be problematic for the economy and debt servicing. Rising interest rates will make it difficult for the new President to implement his agenda.

So, with the Dow and other world equity market indexes nearing completion of major topping patterns, we could be very close to seeing major changes in where investors put their money. Beat down investments such as Bonds, gold, silver, and crude oil could start to rally as equities decline.  Rising Bond prices mean LOWER interest rates.  Hmmm?  So maybe in a Trump administration, at least at the start, equities fall while non-equity prices rise.  Remember, Wall Street was never a fan of Trump, like it was for Obama and Clinton. 

The U.S dollar is now slightly above my theoretical target at 101.55.  The chart for the Dollar suggests it should trade between 85-90 during 2017, then below 75 in 2018, eventually falling to 50-60.  On Friday, for the first time since 11/8, the hourly Money Flow indicators on UUP turned negative.  If UUP continues to decline next week, gold and mining stocks should start to rally. 

Continue to watch for UUP to drop off the Dean’s List and for GLD, RGLD, and other mining stocks to appear.

Same for TBT and TLT.  Right now, with TBT on the List, the Dean is telling us it’s still early to be buying Bonds. 

Next week could see some major changes to the Dean’s List as equity markets start to reverse.  Please pay attention to the List and look for changes to the ‘Sticks in the Sand’.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

11-28-2016

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