Some of my weekend thoughts? From the old Wise-Owl (grin)

 Some of my weekend thoughts? 

As 2020 ended, financial markets mainly in the United States have reached new highs, on hopes and prayers that the Covid-19 vaccines would be the cure-all and create the conditions for a rapid V-shaped recovery. And with major central bankers across advanced economies maintaining their massive ultra-low policy rates and unconventional monetary and credit policies, stocks, and bonds have been given a significant tailwind/boost. However, these trends have widened the gap between Wall Street (elite and most-wealthy) and Main Street (working-class, poor, and vanishing middle-class), reflecting a K-shaped recovery in the real economy. Those with stable work environments and incomes who could work from home are doing well; those who are unemployed or partly employed in unstable low-wage jobs are faring quite poorly, and likely the pandemic responses are sowing the seeds for more social unrest in 2021. In the years leading up to the Covid-19 debacle and crisis, 84% of stock-market wealth in the US was held by 10% of shareholders (and 52% by the top 1%), whereas the bottom 50% held barely any stock at all.

The Covid-19 contagion has accelerated this concentration of wealth, because what is bad for the masses is almost always good for elite and most-wealthy. By shedding good salaried jobs and then re-hiring workers on a freelance, part-time, or hourly basis, businesses will likely boost their profits this trend will accelerate over time with the increased application of artificial intelligence and machine learning and other labor-replacing, capital-intensive, skill-biased technologies (just look at a TSLA factory).

Following a free fall in the first half of 2020, the world economies started to undergo a V-shaped recovery in the 3^rd quarter, but because many economies were reopened too soon, without real planning and thought. By the 4^th quarter, much of Europe and the United Kingdom were heading into a likely W-shaped double-dip recession following the resumption of renewed lockdowns. And even in the US, where there far-far less political appetite for new pandemic restrictions, the expected 7.4% growth in the 3^rd quarter is likely to be far too optimistic and will likely be followed by growth of 0.5% to 1.25% at best in the 4^th quarter of 2020 and in the 1^st quarter of 2021 I am expecting 3.5% to 3.7% growth at best. Risk aversion among American households has translated into reduced reckless spending in an 38% to 72% consumption-based economy and thus less hiring, production, and capital expenditures. And high debts in the corporate sector and across many households imply more deleveraging, which will reduce spending, and more defaults, which will produce a credit crunch as a surge in non-performing loans swamps banks’ balance sheets.

Globally, private, and public debt has risen from 320% of GDP in 2019 to a staggering 369% of GDP at the end of 2020. So far, easy-money policies have prevented a wave of defaults by zombie firms, households, financial institutions, sovereigns, and entire countries, but these massive liquidity measures eventually will lead to higher inflation as a result of demographic aging and negative supply shocks.

Whether major economies actually experience a W or a U-shaped recovery, there will be long lasting economic scars. The reduction in real capital expenditures will significantly reduce potential output for good, and workers who are on the edge will likely experience long bouts of joblessness or underemployment as such they will be less employable in the future. These conditions will then feed into a political backlash, potentially undermining trade, migration, globalization etc. even further. The so called Covid-19 vaccines will not improve these types of misery, even if they can be quickly and equitably administered to the world’s people. But we should not bet on that, given the logistical demands and the rise of “vaccine nationalism” and disinformation-fueled vaccine fears among the public. The “BS” hype that these vaccines are over 90% effective have been based on preliminary, incomplete “BS” contrived data. According to serious non-hyped infection control materials that I have extensively reviewed, we will be lucky if the first generation of Covid-19 vaccines are even 40% to 50% effective, as is the case with the annual flu shots. There is also a risk that in late 2021, Covid-19 cases and deaths will again spike as “vaccinated” folks (who will still be contagious and not truly immune) start engaging in their old risky type behaviors. I find it remarkably interesting that if Pfizer’s vaccine is supposed to be the key to our economic and health salvation, why has their CEO dump millions of dollars of stock on the same day that his firm announced their breakthrough test results...seems very strange to me!

At the halfway point in January, the market has been struggled to hold onto its gains and has failed of late to make new highs. Such is surprising given the recent passage of a $900 billion stimulus bill and Biden’s proposal for another $1.9 trillion. With another $2.8 trillion in stimulus hitting the economy, inducing the FED to do more QE, markets seem for the most part unimpressed...however after the first two weeks of January, the market is up a mere 0.32% year-to-date!

M&A activity was very brisk last year also contributing to the markets bullishness and building on a strong 3^rd quarter, announced global deal volumes for the industry (per data from Dealogic) were up 18% quarter/quarter to a staggering $1.3 trillion (with a T) in 2020/Q4, making this the 2^nd highest quarterly increase since the TBTF-Banker led great financial crisis. **I do not see this bullish trend repeatable to help fuel a repeatable trend** we saw completed deal volumes were up 44% quarter/quarter to $1.1 trillion. Strength in the near term helped sustained the equity market rebound, FED support.

As I discussed recently there is hardly any pent-up cash sitting ideally on the sidelines, the markets are driven by buyers and sellers supply and demand right now [until the next Tsunami wave of stimulus liquidity is launched] is limited. In the current bull market November – December advance, few were willing to sell, so buyers must keep bidding up prices to attract a seller to make a play. As long as this remains the case, and exuberance exceeds logic, buyers (bag-holders, from the greater fool crowd) will continue to pay higher prices to get into the positions they want, this trend could turn on a dime, so be weary buying tops in this environment.

 ch is also the definition of the proverbial “Greater Fool Theory” which states that it is always possible to make easy money by buying assets/stocks whether or not they are vastly overvalued, as the premise is that you can easily sell them for a profit at a later date because there will always be someone (i.e., a bigger or greater fool) who is willing to pay up more at an over-inflated / higher price. The problem that creeps up slowly and hits like a 10-ton-brick is that when the low level of incremental buyers are no longer willing to pay a higher price, the trend can change dramatically and when sellers realize the change, there will be a rush to sell to a shrinking pool of buyers. Eventually, sellers overwhelm the buyers and then they begin to “panic sell” as buyers evaporate, and prices plunge.

Single stock options open-interest has increased to all-time-high levels, which is why the recent options-X expiration is important for stocks, especially for names with significant large open interest within at-the-money (ATM) January 15^th options, because market makers delta-hedge their unusually large options portfolios are likely to be continually active, leaving countless investors suddenly out of the money). This flow is exacerbating stock price moves in an already skittish market.

Small trader call buying mania interestingly has exceeded 9% of total NYSE volume last week (adjusted for equivalent shares). Now it seems that everyone is an options pro, and in my opinion, 95% of option buyers have probably no clue about theta and other Greeks that impact price. On the other hand, do you need that knowledge if you are consistently buying lottery tickets, the returns have been better than buying a Powerball ticket of late!

 he danger the bulls face is that there is abundant evidence that everyone is currently in the shark-infested bloody pool leaving the market vulnerable to significant risk!

·        More stimulus and direct checks start to make their way into the economy which leads to an inflationary spike that causes the FED to discuss hiking rates and tapering QE sooner than even they expected.

·        We have seen a rise in interest rates and if it continues especially over higher inflation concerns until it impacts a massively debt-laden economy causing the FED to be forced to implement what they call “yield curve control.” 

·        Our once prized dollar, which has been on a down-trend (propelling commodities higher) has an enormous net-short position, could reverse hard, and move higher squeezing the shorts, pulling in foreign reserves, causing a short-squeeze on the greenback. The reality is that both a rise in the dollar, with higher yields, is likely to start attracting reserves from countries faced with more serious economic weakness and negative-yielding debt. This would quickly reverse the proverbial tailwinds that have supported the equity rally since March, and especially in the last several months of 2020.

·        There is also a major contagion/problem of monetary policy as the herd of traders/investors have been incessantly chasing risk assets higher because they believe they have an insurance policy against losses, a.k.a. the manipulative interventionist FED.

Sit back, take sip of a favorite brew and contemplate for a few minutes “If the markets are rising as the incessant hype has been stated because of expectations of improving economic conditions and earnings, then why are Central Bankers pumping liquidity into the markets like crazy” Central Banker massive interventions have negative consequences as while boosting asset prices may seem like a good idea in the short-term, in the long-term, it significantly harms real economic growth it also leads to the repetitive cycle of “must-have” monetary easy-money-policies...if you remember your teaching in econ-101 [if you were a student of mine] using monetary policy to drag forward future consumption leaves an enormous void that must get continually refilled of the bubble will a collapse in the future. No matter the hype and rhetoric monetary policy cannot create self-sustaining economic growth and therefore requires larger and larger amounts of free-flowing monetary policy to maintain the same activity level. The filling of the “gap” between fundamentals and reality almost always leads to consumer contraction and, ultimately, a recession (many nasty) as economic activity recedes.

This giddy liquidity fueled stock market has returned more than 166% since the 2007 peak, which is more than 4x the growth in corporate sales, and 7.9x more than even pro forma GDP. GREAT news for the 10% of the population that owns 90% of the stocks in the market, and the overall blinded bullish sentiment is now getting greater than extremes I saw in 2000, and 2007-2008.  It is not surprising to us old-traders and investors to see that retail investor confidence (often called dumb money) is near its highest levels on record. The interesting thing about this euphoric market is that newbie investors are rushing into equities in anticipation of an economic recovery. Even I must concede that while there will be a recovery, it is likely to fall far short of current investor expectations. Such is historically the case with “euphoria” now at mania levels, the only question is just how disappointed they will be (are they conditioned to buy all 10% pullbacks?) while sentiment measures are certainly worth considering, as the old axiom goes (as I learned the hard way in late 1999 into March of 2000 trying to SHORT what I saw as a mega top) “markets can remain irrational longer than most who do not practice solid money management can remain solvent.” Therefore, from a money management point of view, I always want to focus on the technical indicators as well!  When like today markets are exuberantly bullish, with investors believing there is “no risk” to investing, you see virtually every stock moving higher as we have been experiencing.

Parabolic vertical moves have one thing in common, the psychology of the masses, and fear-of-missing-out (FOMO) and eventually the incompetence of real serious risk management. where greed and fear (fear of missing out on the bullish rally or subsequent nasty selling) are primary drivers of prices. We saw TAN (solar ETF) put in some rather bearish price action this past week. TSLA has also shown signs of rolling over; but is still the most extreme bubble of them all IMHO.  XLF has also been on fire since the November into December rotation started and has got an extra boost lately from yields rising, but over past several sessions (daily and weekly) we have had some “strange" looking candles, and we saw a rather decent gap down on Friday. Of course, financials love rising yields, but the question is was it already priced in here (we have risen right up to those pre-Covid-19 levels and earnings are still lacking at the double top as the XLF is right at that huge overhead resistance levels from a year ago. Important pre-covid-19 levels here to consider. Leading up to the pre-covid-19 top we had yields move up around 40bps. We saw a similar rise in yields this time. Though this, move is much larger in percentage terms.

Gold has frustrating anyone trying to play the so-called bullish break out momentum premise strategy for months. I suggested back in early August that we should play the contrarian position (SHORT) in GLD “gold” The move higher was significant, but few spoke about gold moving higher until it started climbing above 190. Now the GLD “gold” has gone from extremely overbought sold to most oversold. Here we are once again, the GLD has been smacked down from its relative- high of 183.20 just 9-days ago to Friday’s close of 171.13, dropping into near-term oversold territory, but not extreme (yet). In December, the GLD dipped below its 200dsma at 172.73 Now we have dropped below it. Setting up for a drop back into support at $164.00-165.00 thereafter we have solid support at $154.00-$155.0

 

The dollar that has been hated by everybody appearing on CBNC smack-talking it is suddenly pushing above the 90.5 level (DXY). The longer-term trend could be violated to the upside and as a result, an orchestrated short squeeze could be significant here. I outlined my dollar thoughts and DXY premise last week, but whenever folks have been this short the dollar it usually has bounced rather violently. Watch the close on Tuesday. A breach above the big trend line and things could get dynamic for the smart short-squeeze players.