Tag Archives: election

Politics Cranks Up The Volume On Volatility

All bets are off this election season Last week, the long and rancorous 2016 GOP presidential primary season came to an abrupt end as two of the three remaining candidates dropped out of the race. In a development that has astounded political pundits, Donald Trump is now the presumptive Republican nominee for President of the United States. Ironically, Hillary Clinton – who has long been viewed as the likely Democratic nominee – is still ensconced in primary season, slugging it out with her resilient challenger, Bernie Sanders. It remains to be seen whether Clinton can win key states such as California and finally capture the nomination. And every day that she must fight within her party weakens her, as she is being criticized from both the left and the right, which negatively impacts her ability to win in the general election. It seems that nothing thus far in this race has been going according to plan. Early on, pundits had predicted Donald Trump had no chance of winning the nomination, dismissing his bid as quixotic; similarly, they minimized the potential appeal that a candidate such as Bernie Sanders could engender and predicted an easy primary season for Hillary Clinton. Both assumptions have obviously been proven wrong. And although all Republican candidates for president signed an agreement that they would support the nominee, some are now reneging on the pledge. For his part, Trump has warned that his supporters may riot at the Republican National Convention this July if he does not get the nomination, although that now seems moot given all challengers for the nomination have fallen away. Meanwhile, candidate Sanders has suggested he will remain a candidate through the end of primary season and force a contested convention. What’s more, some prominent Republicans are already announcing they will not support Trump as their nominee in his bid for president. When House Speaker Paul Ryan announced last week that he is “just not ready” to endorse Trump, former vice presidential candidate Sarah Palin said she would campaign to unseat Ryan in the primary. And there are questions about whether, if Clinton is able to secure the Democratic nomination, Sanders supporters would stay home rather than vote for her in the general election. All bets seem to be off this election season, with some conservative Republicans even calling for a third-party candidate. Politics outside the proverbial box Adding to the disorder is that candidate Trump has a controversial platform that is not traditionally Republican in some important regards. For example, Trump’s suggestion last week that the US could renegotiate bond obligations to pay less than face value on US Treasuries to its debt holders, as Greece has done, could roil capital markets. In addition, Trump’s protectionist stance is of concern to many businesspeople because they fear a curtailment of free trade. Another area of concern is the US income tax code. Earlier this week, Donald Trump said he was open to raising taxes on the wealthiest Americans, a reversal of his original platform of decreasing taxes for those in all income tax brackets. This new position flies in the face of a key tenet of the Republican Party for two decades – and makes it more difficult to differentiate him from Democratic candidates. Perhaps even more controversial than Trump’s stance on certain issues is that of candidate Sanders, whose platform includes a protectionist approach to trade and a dramatic increase in income taxes on higher-income Americans. It seems that the candidates with the most fervent supporters are the ones whose platforms exist outside the proverbial box of their respective parties, which makes sense given American’s growing distrust of the “establishment.” Stock market uncertainty Pundits, of course, are saying that 1) Trump’s campaign platform will become more moderate now that he has to appeal to the general populace; and 2) it doesn’t matter anyway because he has a snowball’s chance in hell of winning the election in November. While the former may be true, any material changes in platform create uncertainty and ultimately reduce credibility – which is not typically met with approval by the stock market. But more importantly, the pundits have been terribly wrong about the candidacy of Donald Trump since the start, which suggests they could continue to be terribly wrong. After all, some of Donald Trump’s positions – such as maintaining Social Security at its current level – are likely to be more appealing to the general populace than to fiscally conservative Republicans. In other words, Trump may prove more popular in the general election than many expect – perhaps more popular than he has been in Republican primaries. Some even go so far as to argue that there is a significant cohort of dissatisfied voters that could support either Trump or Sanders. What’s more, if Clinton were to become the Democratic nominee, she may have difficulty winning over many Republican voters reluctant to support Trump, particularly given that she continues to be tugged to the left by the powerful primary challenge from Sanders. A pivot to the center, if and when she has secured the nomination, could similarly suffer from a lack of credibility, causing voters to wonder what they will actually get come January. Volatility up ahead This commentary is not intended to be an endorsement or indictment of any of the presidential candidates. What we’re concerned with is the stock market’s reaction to this year’s ongoing election developments. For example, a surge in the polls for Hillary Clinton could result in a sell-off of the healthcare sector on the assumption, rightly or wrongly, that her administration would have a negative impact on the health care industry. It’s no surprise, then, that some financial advisors I talk with are becoming increasingly worried about the presidential election and the potential for a substantial sell-off. In this “all bets are off” election, investors need to be prepared to be surprised – which means to be prepared for more volatility. Given not just this election but a potential Brexit, growing discontent in Europe and ongoing problems in the Middle East, it seems political developments around the globe could be the biggest source of volatility for investors this year. In this environment, investors will be well served by being tactical asset and sector allocators – and by focusing on downside protection in their respective portfolios.

Wait Until You Get A Pitch Right Where You Want It!

One of the most successful investors in history received the only A+ from Professor Benjamin Graham (of Graham and Dodd “Security Analysis” fame) at Columbia: the chairman and chief executive officer at Berkshire Hathaway, Inc., which traded as low as $38 per share in the early 1970s and now trades around $219,000 per share. If you haven’t guessed who by now, it’s Warren Buffett. How does he do it? Well, the following are excerpts from financial media interviews back in the late 1980s: “The most important quality for an investor is temperament, not intellect. You don’t need tons of IQ in this business. You don’t have to be able to play three dimensional chess or duplicate bridge. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd. You know you’re right, not because of the position of others, but because your facts and your reasoning are right. . . . Most investors do not really think of themselves as owning a piece of the business. The real test of whether you are investing from a value standpoint or not is whether you care if the stock market opens tomorrow. If you’ve made a good investment, it shouldn’t bother you if they close down the stock market for five years. You own a piece of business at the right price and that’s what’s working for you. . . . In 30 years of investing I have never bought a technology company. I don’t have to make money in every game. There all kinds of things I don’t know about-like cocoa beans. But, so what! I don’t have to know about everything. The securities business is the perfect business. Every day you literally have thousands of the major American corporations offered you at a price, and a price that changes daily, and nothing is forced upon you. There are no called strikes in the business. The pitcher just stands there and throws balls at you and you can let as many go by as you want without a penalty. In real baseball, if the ball is between the knees and the shoulders, you either swing or you get a strike called on you. If you get three strikes, you’re called out. In the securities business, you stand there and they throw U.S. Steel at $28 and General Motors at $80, and you don’t have to swing at any of them. They may be wonderful pitches, but if you don’t know enough, you don’t have to swing. And you can stand there and watch thousands of pitches, and finally you get one right there where you want it, something that you understand and is priced right – and then you swing . . .” On many occasions I have said, “The rarest thing on Wall Street is patience!” That quote is akin to Buffett’s quote, “If you don’t know enough, you don’t have to swing.” For most of last year, we didn’t “swing.” Then, in late August, our model told us to “swing” and we did. That was the week of the August 24, 2015 “lows” around 1800 on the S&P 500 (SPX/2091.58). The next time we “swung” was on December 11, 2015 when our model called for a “rip your face off” rally. About a week and a half later, we had to admit that was a bad “call.” In this business, when you are wrong, you admit it quickly for a de minimis loss of capital. So we came into 2016 with a defensive stance. But on Friday, February 5, CNBC’s Becky Quick asked me what the model was “saying” now. I responded, “It is saying we bottom next week” and we are tilting accounts according. It was during that week (February 11 to be exact) the SPX retested its August 2015 “lows” and the rest, as they say, is history. So where does this leave us now? Well, the consensus “call” is that we are either making a “top” followed by a big decline or we are at the top of the trading range that has been intact since October 2014 (~1800 – ~2130) and now the SPX is headed back down. That view is reflected in this excerpt from our friends at the Boston-based Fidelity organization: While this rally may continue to play out, the stock market may not break out of its year-long trading range until earnings growth stabilizes and the policy divergence between the Fed and other central banks ends. We are not of that view. Our work suggests the SPX will break out to the upside of the over-one-year trading range. As stated in prior missives, To me, this feels very much like 2013 where the markets ground down every short seller into the May timeframe before a near-term top arrived. If that pattern plays here, it would fit nicely with my internal energy indicator, whose energy would be totally used up by mid-May. It still feels like new highs to me. And maybe, just maybe, the S&P Total Return Index is pointing the way higher as it traded to new all-time highs while the D-J industrials notched new reaction highs (INDU/18003.75). Now, if the D-J Transports (TRAN/8085.98) can better its November 2015 closing high of 8301.80, we will have a Dow Theory “buy signal.” If not, it will be an upside non-confirmation and likely lead to a pullback in stocks. If the Trannies are going to make a new reaction high, it will have to come quickly, because as stated, by mid-May, the equity market’s internal energy should be totally used up. As for earnings season, while it is still a small sample of the S&P 500 companies that have reported 1Q16 earnings, 78.3% have beaten their lowered estimates (as of last Thursday). That is the best showing since 3Q09 and much better than the past few quarters. There have been some high-profile company “misses,” but the operative word (at least so far) for this earnings season is “beat.” Perhaps the better-than-expected earnings season is telegraphing stronger GDP numbers in the months ahead, although last week’s economic reports were on the softer side. This week, we get a slew of economic reports (Durable Goods, GDP, Core PCE, etc.) as well as the FOMC meeting. As I have repeatedly stated, IMO, if the Fed doesn’t raise rates this week, I doubt if they raise rates until after the election. However, the bond markets seem to think something’s afoot as the Roll-Adjusted Ultra Long Bond Future has broken down in the charts suggesting higher interest rates (chart 1). And, that could be what caused the Bloomberg US Dollar Index to try and reverse it downtrend (chart 2). Or maybe the interest rate complex is anticipating stronger GDP growth in China where energy and electricity consumption is strengthening and things like the Shanghai Steel Rebar Futures are surging (chart 3). It is also worth noting that, last week, Schlumberger said the crude oil surplus would be gone by year’s end and Caterpillar sees its business bottoming globally. The call for this week: Well, today is actually session 50 (I miscounted when I said last Friday was session 48, because I failed to account for one of the holidays) in the second-longest “buying Stampede” I have ever seen. As SentimenTrader’s cerebral Jason Goepfert writes, “The S&P 500 has gone 10 weeks since trading below a prior week’s low. This is the longest such streak since 2011 and among the most impressive since 1928.” That skein has left most of the macro sectors overbought. We are also within a week of the month of May where the market’s internal energy wanes. We have been steadfastly bullish since our model telegraphed the SPX would bottom the week of February 8; however, while we do expect an upside breakout by the SPX to new all-time highs, we are not real excited about adding to the many stocks featured in these reports since those February lows. In fact, according to one particularly brainy colleague, “Everything is expensive except emerging markets.” This morning, futures are flat as participants await the Fed meeting. Click to enlarge Click to enlarge Click to enlarge