Has this giddy market front run all the stimulus, is the best outcome already priced in?

Is all the so-called good news already baked into stock prices?

I believe it is and then some!

Interestingly the major U.S. stock market indexes have reached record highs at the same time that Covid-19 cases and deaths in America have hit new records peak for deaths, and cases. Financial markets, of course, focus on the future (6-9 months out) rather than the present, and they are predicting vastly better days ahead in 2021, especially now that the vaccine will end the pandemic (if it works). One vaccine began to be administered this past week and, a second was approved Friday, bringing more hope for an end to the pandemic by mid-year in 2021. But they cannot immediately stop the massive rising toll of death and illness that threatens to outstrip the capacity of many hospitals in the U.S. to treat patients.

So-called market gurus being pranced about daily on CNBC are forecasting equity returns around 10% to 17% for 2021!

Strange....that these predictions of further advances from the fresh highs this past week in the major indexes DOW the SPX-500 and Nasdog, plus the previously lagging Russell-2000 index of small-capitalization stocks indicated extreme optimism and extreme optimism for 2021. Especially given how far these indexes have come from their lows in March, a gain of 63% for the Dow to 86% for the technology heavy Nasdog to over 100% for the Russell 2000.

Interest rates will remain low in the long term, money flowing into stocks will ensure that they trade up on ever higher multiples (almost all dips being bought immediately) and to generate returns playing the LONG side of the market I have had to take increasing risk, and this risk feels like a massive “bull” trap!

Interestingly professional fund managers responding to Bank of America’s latest survey appear to be all in. Cash holdings were down to a mere 4%, the lowest level of the year and the first time the respondents were so underweight cash since May 2013. Hopes for the Covid-19 vaccines led them into crowing into so-called “reopening trades” in consumer and commodity names. As for “crowded trades,” investing in technology stocks remained the biggest crowed trade in the Bank of America’s latest survey, followed by shorting the dollar and buying Bitcoin.

While the money-handling so-called pros have been moving out on the risk, spectrum to produce returns (and preserve their employment), the amateurs have gone full-tilt into trading especially in options they have been purchasing shares directly, as opposed to taking diversified positions in exchange-traded funds. Since the market’s liftoff in the spring, small options trader’s market activity has dwarfed that of large ones, options activity has skewed heavily to bullish call options over bearish puts since then. This massive structural shift in individual’s feverish trading chase indicates that “there is more than excessive optimism in the markets”.

With the benefit of zero-commission trading, it is now easy and cost less to trade, and the Covid-19 induced stay at home factor, have contributed mightily to 2020’s trading frenzy! So long as our markets continue to be boosted by extremely accommodative FED monetary policies and expectations of massive-massive fiscal measures, the dips are likely to be bought with vigor. The FEB this past week stated that they will continue their near-zero-rate policies and their securities purchases of at least $120 billion a month until it is satisfied that full employment is reached, and that inflation has topped its 2% target, making up for past blunders.

Depressed fixed income yields around the globe, with more than $18 trillion in bonds trading at negative yields, undergird all asset prices, including those of stocks.

Fed-head Powell, when asked about equity valuations at his press conference allowed that price/earnings multiples were on the high side, but added that the equity risk premium was not out of line, given low Treasury yields. As such this suggests that the extremely optimistic outlook for next year is already discounted in current stock prices.   The FED’s rate repression has not eliminated credit risk, but has invited massive and I mean massive borrowing at historically low rates,

 Bank’s recent survey of investors found what could be called possibly “the biggest consensus in history,” favoring U.S. equities, followed closely by emerging-market stocks. The 3-biggest risks respondents see are the virus mutating into a nasty strain that vaccines cannot stop; serious side effects emerging, as already seen in a few; and a substantial number of people refusing to take a vaccine. That does not imply widespread worries that the Covid-19 vaccines will fail. But it suggests that the markets already have largely discounted their success and the much-anticipated massive 2^nd half recovery.

 

Housing market is not as healthy as hyped, very vulnerable

 A terrible contagion no one is addressing  JMHO

As you are aware from my various writings the housing industry plays a critical role in the U.S. economy by contributing 15%-18% to GDP every year and homeownership accounts for a quarter of American household net worth. So, when so-called analysts and experts start hinting at a “housing crisis” it should spark concern, uncertainty, and maybe even some fear.  There is no single economic definition of a housing crisis.  Utter the phrase “subprime mortgage crisis” or “2008 housing market crash” to any old-time real estate agent, or what was unfortunate homeowner caught in the cesspool or economist/investor who lived and worked through that challenging time, and you’re likely to receive a trembling type response. The trouble began when banks started to greatly relax their lending criteria (with consent from regulators and the FED) and handing out subprime loans to borrowers who would not have qualified under ordinary circumstances. No down payment, the banks saw no problem as back them many lenders required little to no upfront cash to finance a home. Sub-par to no credit, again there were blinders on as there were no conceived contagions as banks across the country had managed to significantly ease their credit requirements to make it possible for more un-worthy folks to secure loans that they should not have gotten nor could they afford...thereafter buoyed by the sudden ability to get home loans like they were practically “free”, buyers flooded the market. Amid the growing demand, house prices continued their steady rocket ride (like they have been again in 2017 through 2020). Far too many borrowers took on high-risk loans, counting on being able to refinance later due to pent up new-found equity. But when house prices dropped like a rock more than 18% in the fall of 2008 and interest rates started to rise, many homeowners found themselves stuck in vastly unsustainable mortgages, sometimes owing significantly more than the value of their homes (many 25-40% more). When demand crashed due to folk’s inability to meet their mortgage obligations, the pendulum swung the other way, and there was way too much supply chasing too little demand. During 2008, 3.1 million foreclosures were filed, the equivalent of one out of every 54 homes and homeowners lost over $3.73 trillion in home equity.

We now have a Covid-19 pandemic rental housing crisis; as with the onset of the Covid-19, 20.5 million folks suddenly lost their jobs and unemployment skyrocketed 3.5% in Feb. 2020 to 14.7% in April 2020 a far greater rise than the 8.8 million jobs lost in the aftermath of the Great Recession. The abrupt and extreme severe recession prompted me and many others to believe that there could be another housing crash similar to 2008!

However, for the time being, the housing market held strong post-pandemic as the 2008 style housing crash has yet to materialize in 2020 it will likely be a 2021 event as through the CARES Act, the government issued forbearance plans allowing mortgage holders to pause or reduce mortgage payments for a limited period of time. So far, this has prevented a glut of mortgage defaults and foreclosures. Improvements in the jobs market since April (unemployment sits at 6.9% as of Oct. 2020) have helped the situation somewhat for homeowners to get back on track with their mortgage.

A lack of new construction, low mortgage interest rates, and a surge of pandemic home purchases have depressed supply near record lows. As a result, the median sale price of existing homes skyrocketed over 15% in October, according to the National Association of Realtors.

The rental market has not fared as well as owned housing post-pandemic, and that is especially true for cities with economies centered on oil and energy and major metro areas with a heavy concentration of professional and technical workers. Where the asking price for rent is declining sharply, landlords are struggling to cover their mortgage, and where the cost of rent is increasing, unemployed renters are finding it hard to make ends meet. Experts estimate that over the next several months, 30-40 million Americans could be at risk of eviction.

The pandemic is causing grave concern, particularly in the apartment market, as apartment dwellers are quite disproportionately hit with job loss and rent payment troubles. This contagion will fester down throughout the apartment market complex. Many apartments are now owned by mega REITs and conglomerates and this will inevitably result in availability and affordability issues in the months ahead.

Perhaps the most basic form of a housing crisis boils down to people not being able to afford the available homes and apartments, a situation that has plagued the country for far too many years. In 1970, the average household income in the U.S. was $8,730 and the average home price was $17,000. To qualify for this loan, a buyer would need a down payment of about $5,238, or about 60% of their annual gross income. Today, the average U.S. household income is $64,400 per year, or about $5,700 per month. However, the average home price in the U.S. has rocketed to about $387,000 as of the 3^rd quarter of 2020. In this scenario, a 20% down payment would exceed the entire annual household income. This situation is even worse among first-time buyers, and builders report record low numbers of first-time buyers in the pipeline.

With 2020 now almost over, we can calculate how many times the benchmark 30-year fixed mortgage has hit record lows this past year. And according to the latest weekly update from Freddie Mac which showed that the 30-year FRM dropped another 1 basis point to a fresh-all time low 2.66%, we can now declare that in 2020 the 30-year mortgage hit a record low on 16 weekly occasions...a record. The chart below depicts all you need to know, showing the 30-year mortgage yield plunging by half from 5.0% in late 2018 to its current level just above 2.50%

This massive plunge in borrowing costs has fuel a new housing bubble in my opinion that has helped boost the economy during the pandemic. Lower rates, combined with an exodus from big cities to ride out the pandemic, have pushed buyers into the market. Current owners have also been able to save money by refinancing their loans. The latest housing data suggested weakness dead ahead: new-home sales tumbled to a five-month low in November, dropping 11% in a sign the market is cooling off as coronavirus cases surge, while existing homes were also down last month, slipping for the first time in six months. That came as the median selling price jumped 14.6%, the 4^th straight month of double-digit increases.

I find it remarkably interesting and very economically unfriendly that homeownership is unaffordable for the average wage earner in 75% of counties surveyed across the U.S. That is according to a report from Attom Data Solutions, which studied more than 400 counties covering about 200 million folks. The most cost-burdened areas were on the east and west coasts, including the top five. Eighteen of the top 25 priciest markets were in New York or California.

To be able to afford a median-priced home in New York County (Manhattan) a person had to earn $341,401 a year, according to the report. That made it the costliest county in the nation.

A big driver of housing unaffordability is wage growth lagging behind home price appreciation. The report found that home price appreciation outpaced average weekly wage growth in the 3^rd quarter in two-thirds of the counties. Home prices are still rising and are projected to continue to grow. Attom basically determines home affordability by calculating the percentage of average wages needed to make monthly house payments on a median-priced home, with a 30-year fixed-rate mortgage and a 3% down payment. Virus pandemic concerns are still quite valid and may show up in the coming months, which could hurt prices as well as affordability. That remains a significant potential cloud hanging over the market.

Harvard University’s State of the Nation’s Housing 2020 report, arrives at an exceptional time for the U.S. Four key findings from the report are particularly relevant.

Persistent unaffordability

·        The coronavirus pandemic came as the U.S. was facing crisis-level housing affordability issues, especially for low-income households.

·        In 2019, 37.1 million households were “housing cost-burdened,” spending 33% or more of their income on housing.

·        Interesting of all households nationwide close to 18 million in total were “severely cost-burdened,” spending 50% or more of their income on housing.

Renters were more cost-burdened than homeowners, with 46% of renters cost-burdened compared to 21% of homeowners. Also, 24% of renters and 9% of homeowners were severely cost-burdened. In total, though, homeowners made up 40% of all households with severe housing cost burdens, given the larger number of homeowners in the overall population.

Cost burdens were greatest among lower-income households. For households earning less than $30,000, 81% of renters and 64% of homeowners were cost-burdened. This includes 57% of renters and 43% of homeowners with severe cost burdens. For those earning between $30,000 and $45,000, 57% of renters and 36% of homeowners were cost-burdened, including 15% of renters and 13% of homeowners with severe cost burdens.

High housing cost burdens were driven by persistently high housing costs relative to income. In 2019, the median sales price of existing single-family homes rose faster than the median household income for an eighth straight year. It is highly likely that when cost burden data for 2020 is available next year, it will likely show greater unaffordability still in the homeownership market. Despite the spike in unemployment in 2020, home prices were up 5.7% in September year over year according to the S&P CoreLogic Case-Shiller Home Price Index.

The economic fallout of the pandemic, combined with ongoing housing unaffordability put millions of renters and homeowners at risk of losing their homes in 2020. Despite various policy protections for renters and homeowners enacted during the crisis (they screwed landlords), housing security remains fragile for far too many Americans heading into 2021.

According to some dismal data from the Census Bureau’s Household Pulse Survey in late September, 36% of all homeowners lost employment income between March and the end of September. Among homeowners, income loss was most common for those earning less than $25,000 (44%), Hispanic homeowners (49%) and Black homeowners (41%).  Homeowners of color earning between $25,000 and $50,000 were also disproportionately behind on mortgage payments.

Supply shortages, down payment barriers and tighter credit continued to pose challenges for renters seeking to achieve their dream of homeownership. The report highlights Freddie Mac’s 2019 Profile of Today’s Renter and Homeowner survey, which found that 41% of respondents considered their inability to afford monthly mortgage payments a “major obstacle” to becoming a homeowner. The same survey found nearly half of current renters believed lack of enough money for upfront costs, like the down payment, would be a major obstacle to buying a home. Meanwhile, lending standards tightened considerably during the past six years. As evidence, the report cites the Mortgage Bankers Association’s Mortgage Credit Availability Index, which declined by 34% from February to September 2020, reaching its lowest level since 2014.

Greater caution from lenders following the pandemic, and depleted savings due to job cutbacks and reduced income overall pose major ongoing barriers to homeownership heading into 2021.

 

 

New DEBT as far as the eye can see, has our government no shame?

King Trump today:  New DEBT as far as the eye can see...King Trump on Sunday night signed into law the $1.4 trillion fiscal 2021 appropriations and the $900 billion Covid-19 relief deal Congress approved last week, after criticizing the measure and signaling he might not sign it for days. The House will vote today to raise stimulus checks to $2000, but it is not likely to get 60 votes needed to pass the Senate (which means the stimulus checks remain at $600 and the rest of the bill remains the same) “As President I am demanding many rescissions under the Impoundment Control Act of 1974. The Act provides that, "whenever the President determines that all or part of any budget authority will not be required to carry out the full objectives or scope of programs for which it is provided, or that such budget authority should be rescinded for fiscal policy or other reasons (including termination of authorized projects or activities for which budget authority has been provided), the President shall transmit to both Houses of Congress a special message" describing the amount to be reserved, the relevant accounts, the reasons for the rescission, and the economic effects of the rescission. 2 U.S.C. § 683.”  The bill will remain law regardless of what Congress decides to do with President Trump's request for rescissions.

 Stimulus bill includes:

• Extension of all pandemic unemployment insurance programs by $300/week per person.
• $600/person stimulus checks (which change depending on income).
• $284 billion to Small Business Administration and Payroll Support Program extended through March 31, 2021.
• $27 bln for airlines and other transportation (potential related stocks: UAL, AAL, DAL, LUV, JBLU, SAVE, HA).
• $15 bln for live event places.
• $84 bln for schools.
• Additional money for vaccine distribution, and testing. No money for state and local governments. No liability protection.
• The bill includes new Fed language: "rescinds more than $429 billion in unused CARES Act funds; definitively ends the CARES Act lending facilities by December 31, 2020; stop these facilities from being restarted, and forbids them from being duplicated without Congressional approval."

I took 2 different leverage SHORT positions on the Russell-2000

I stepped into these positions  

Order at $11.55 to book out ½         12-28-2020   I am LONG  4000/1000 at  $6.55 we could hedge by writing covered calls against the position, WE ARE IN to THE SELL / BUY-ZONE    Reviewed      12-28-2020      Developed 11-28-2020    “Direxion SHORT on small caps”   I will be LONG  “TZA” again 6000/1000-for portfolio  @ $6.00  and or < than > $6.55  looking for a retracement play, target $12.45 thereafter $17.75  

Order at $6.60 to book out ½         12-28-2020   I am LONG  6000/1400 at  $3.30 we could hedge by writing covered calls against the position    WE ARE IN to THE SELL/BUY-ZONE    Reviewed      12-28-2020         “SHORT on small caps”   I will be LONG  “SRTY” again 10,000/3000-for portfolio  @ $3.05 and or < than > $3.60  looking for a retracement play, target $8.45 thereafter $11.75 

The Greatest "Con" America has a Middle class!

 A crying shame

What happens when Americans finally see through the manipulative fog, and discover that the so-called “American dream” of moving on up into the middle class is just a pipedream fantasy; I believe that answer is very-close at hand as we may well find out in the next four years of this New-Administration! Of the many things Americans cannot bring themselves to admit, is one of the most consequential...that our hyped middle class is a sham, a figment of our imagination rather than a solid reality. The reality is the vast majority of the nation's wealth and income has been diverted from the working class and once cherished middle class to those at the top of the wealth-power pyramid and the technocrat/financier insider class (the top 5% to 10%) that serves as a slave the interests of those at the top. This massive transfer of wealth has accelerated rapidly in the 21^st century as virtually all the real income gains of the past 20 years have flowed to the top 0.1% to 1.0%. This RAND study found that America's elites siphoned over $50 trillion into their own pockets during the past 2-generations Trends in Income From 1975 to 2018.  Amazingly the earnings of the top 0.1% grew at a rate of over 15 times faster than the earnings of the bottom 90% 

It is extremely unfortunate that the working-class (as wage’s share of the economy) continues its pitiful 50-year decline... 

It is a tragedy in my opinion that the top 0.1% own more than the bottom 80% and the top 1% own 40% of all private wealth and the top 10% own about 90%. If the top 10% own 90% of the wealth and has for the most part basically “seized” virtually all the income gains of the past 20 years, then is it not extremely obvious and logical that America no longer has no middle class...just an elite class and a working class!

Please reflect upon the $1.7 to $2.0 trillion plus in student loan debt burdening those who bought into the premise and “BS” narrative that a college diploma was a guarantee into the security of the middle class. The debt load carried by those clinging on to “BS” aspirations of middle- class security is staggering. As I have written about before the burdening powerless students “economic slaves” with uncertain futures with trillions in high-interest “economic enslavement” debt would have been viewed as criminal a mere two generations ago, but now it is celebrated by those reaping the interest benefits from debt-slaves.

The new political class serves the top 0.1% and only gives “BS” lip-service to the various so-called PR-worthy gathering of a middle class in the form of empty platitudes. Now those claiming middle-class status cling to jobs because they need the healthcare insurance coverage provided by the employer, not because the job is actually rewarding.

Once the FED’s massive con-job of printing trillions of dollars out of thin air dissolves and the nation has to balance its books in the real world (not in the Alice-in-Wonderland world), their remaining speculative skills will no longer generate meaningful income.

The last vestiges of financial security for the vanishing middle are once heralded defined pension plans and real ownership of a home, which is less a real asset and more an option on the current housing bubble. This phantom wealth is one encounter with reality away from disappearing into the mists of speculative extremes imploding.

The American Dream was once based on broad-based access to acquiring capital and agency, access which has narrowed to the top 5%-10% of those on the economic order. The FED has played a game of lowering interest rates so households can lower their interest expenses by refinancing their mortgages time and time again, so that their wealth deteriorates and that they can continued to buy crap that they do not really need, but this game has ended; as interest rates cannot drop any further without entering a negative rate, a zone of insolvency for the banking sector. Basically the “BS” game of creating the massive illusion of real wage gains is now over. What happens when Americans finally admits that their middle class has vanished.

 

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My pontifications, and weekend writings (part 2)

 

This year will forever be remembered as the year of the Covid-19 pandemic and trillions upon trillions of stimuli that jacked up asset pieces and the stock market. It was a year of tragedy for many, but it offered some especially important insights for those of us that make our living by navigating the gyrations of the market.

The first and foremost lesson of 2020 is that it was impossible to predict what the stock market will do until we know how much intervention and manipulation the FED will be embroiled in, and how much fiscal stimulus would be generated due to the Covid-19 pandemic. Even those with concerns about the potential for a worldwide pandemic would have never guessed especially the US and subsequent global stock market reaction. The idea that the indices would fly to new all-time highs as a pandemic raged and millions perished would have been inconceivable to me a year ago. The flood of liquidity (FED and fiscal) created by central bankers around the world has been unprecedented and the market's robust response has persisted far longer than I thought possible fueling the bullish tonality. Not only was the overall market performance in 2020 stunning but other strangely bullish themes like the massive rise of SPACs and the flood of liquidity seeking out electric vehicles makers and suppliers were not foreseen by me.

Those of us traders and swing-traders that produced the biggest returns in 2020 were not those that foresaw what was coming, but those that reacted quickly and substantively as conditions shifted and inputs were known. Market participants that played strong defense as the indices started to crumble in February and then jumped back in as the trend turned positive in March and April are those that had the most success (we enjoyed over a 222% gain in our value play portfolio).

The easiest mistake to make during the past trading year was to look for a retest of the March lows and to underestimate the power of the V-shaped recovery fostered by massive FED intervention and massive FED liquidity and fiscal liquidity once it started. With this in mind, the best way to prepare for 2021 is as follows:

It is hard to resist the temptation to guess what is going to happen, but the much more powerful approach is to embrace the idea that you simply don't know, and we need to follow the “free and easy” money, “smart-money-players” and the trend which has been the bull’s friend so far. When you keep an open mind about the markets rather than hope it conforms to your expectations, then you are better able to adapt. Let the price action be your guide.

Stock market forecasting is largely about “the bigger picture”. There are articles I have written about how the economy, politics, valuations, Covid-19, and many other issues will impact the market.  Focus on what I call reaction rather than anticipation unless you are a savvy technician. When you focus on price action it requires a simply reactive approach. I have repeatedly suggested to my group (and trading buddies) that you have to watch the market and various stocks that you desire to trade and try to understand the character of each one and how they move and what makes them move (initially limit your research and observance to a few say (8-16) so you can get detailed price, trend action. We never know when/what things will develop in this market. The best we can do is to understand and pick up on early tells and signs and then act swiftly and decisively.

In 2021 Please be prepared for volatility and view the pops and drops as trading opportunities. One thing I can predict about the market in 2021 with great certainty is that there will be uptrends and downtrends, mega pops and short-covering pops 😊. The market is not going to go straight up or down. There is going to be extreme volatility this year (watch the VIX, UVXY and VXX). Volatility should not be dreaded. It is our friend and provides us with a source of new opportunities. Rather than dread a potential market pullback I like to be prepared to celebrate the opportunities that will arise and be ready to enter plays you still like those that you missed or that got away from you. The key to steady trading (day or swing) success is to stick with the proven trend, believe in your technicals and focus on using decent money management (taking profit) realizing that we can always reload. I have found that those that do best [keep an open mind] and are those that trudge away day-after-day, through the bad days and the good. Opportunities and good outcomes come to those that work hard. The great thing about the stock market is that there is always another opportunity coming. We just have to be ready every day to find it and trade it. If you do these things effectively you will most certainly have a successful 2021investment/trading year no matter what the market may do. 

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Even before the Covid-19 virus-induced downturn wiped out the savings of tens of millions of Americans, more than one hundred million folks throughout the country had nothing saved for retirement; this my friends is a terrible real-life “retirement crisis,” unfortunately Americans are in deeper financial disorder than ever due to their lack of real savings and rampant (mostly unneeded) spending. It was back in 2016 when I first wrote about what I saw a huge economic contagion [that more than 100 million working age Americans did not have any retirement account assets in an employer-sponsored 401(k) type plan, individual account, or pension; a very terrible development; meaning that the American dream of a decent retirement after decades of work is now a working-class nightmare. In a world where the Covid-19 pandemic is resulting in an economic and life-altering “great reset,” small and medium-sized enterprises are being wiped out in droves as permanent job loss soars into the millions. 

This a terrible issue in America today as there are a hundred million people that have nothing set aside for retirement (expecting to live off of government handouts and scraps) they have no investments which is basically a failure of financial literacy that started as far back as the 197’0s and massive greed “live for today, worry not about tomorrow” as we seldom if ever teach our children about saving, investing and nothing about amassing unstainable debt.  The financial elites and most wealthy have long kept the population in a perpetual financial stupor while they rack up massive credit card bills, and became slaves to debt has just become a part of the American way.  

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My pontifications, weekend thoughts and writings (part-1)

I wanted to take this opportunity to wish you and your families a very very Merry Christmas and share my hopes for a very prosperous and safe New Year for you and your loved ones. 

Over the past couple of weeks, I have discussed why was positioning portfolios to participate in the traditional year-end “window dressing” “BS” rally. The Stock Trader’s Almanac explored why end-of-year trading has a directional tendency. The Santa Claus indicator is pretty simple. It looks at market performance over a seven-day trading period the last five trading days of the current trading year and the first two trading days of the New Year and unfortunately for the Bad-News-Bears, the statistics are compelling. The stock market has risen 1.3% on average during the 7 trading days in question since 1950. Over the 7 trading days in question, stock prices have historically risen 76% of the time, which is far more than the average performance over a 7-day period. 

Whether optimism over a looming new year, holiday spending, traders on vacation, institutions squaring up their books before the holidays (funds marking them up) or just the holiday spirit the bottom line is that bulls tend to believe in Santa Claus and bears believe Santa is delivering coal 😊! 

Please remember (please put those thought hats on) remember that at the beginning of 2020 the indexes posted a negative January effect/return following an incredible rally in 2019. More like 2013, the market’s extension was extreme with a near-record number of stocks above their 200dsma. The market needed to correct before continuing its advance to all-time highs in February. January 2021 has a lot of similarities to both 2013 and 2019. With the FED continuing QE and a near-record number of stocks above their 200dsma, and an extreme bullish bias, the risk of a correction looms heavy. A King-Trump government shutdown, stalled stimulus bill, or a surge in virus deaths could be the catalysts. 

As I have spoken about much of the equity rally this year has been supported by the decline in the USD. Currently, foreign inflows into U.S. equities are near a record, along with net-short positioning on our precious greenback.  Such is the perfect stealth type of environment for a sharp reversal in the dollar from deeply oversold conditions. Notably, over the past few days, we have seen a slight positive turn in the dollar. While still too early to definitively say a turn has occurred, this is something to watch very closely. 

While I expect the “Santa Claus” rally to materialize over the next few trading days, there are risks heading into January. As there are occasions when investors have received a “lump of coal.” With current market dynamics more similar to 2013 and 2019, this may be a year investor wind up on the “naughty boy/girl” list. 

I have shared data showing the more extreme overvalued conditions in the market. As quite often sentiment and valuation go hand-in-hand. One impacts the other and creates a self-reinforcing loop until something happens to break the vicious cycle. Over the past 40+ years, there have never been more severely overvalued firms within the SPX-500. 

What is essential to understand is that excessive bullish sentiment and overvaluation are the two required ingredients for a “bubble.” Since stock market bubbles reflect speculation, greed, and emotional biases; valuations are also a reflection of those emotions. It is not just P/E’s showing elevated valuations but virtually every conceivable valuation metric used in finance. 

With the “Santa Claus” rally officially kicking off this coming week, I am maintaining our long bias with reduced hedges at the moment. Once we get into January, depending or a definitive answer on the state of the stimulus bill, potential government shutdown, and market technical levels, I will likely begin reducing risk and hedging portfolios with index SHORTS and inverse leveraged funds accordingly. As hard evidence is mounting quickly that the economy and earnings will likely disappoint very overly optimistic projections currently. Ans I believe that investors, in general, are way too far over-confident. Historically, such has always turned out to be a witch’s brew for a continued bull market advance in the near-term.  

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 Amazingly the SPX-500 has risen by just over 69% since hitting its cesspool depth of despair on March 23^rd and most of the strength has come technology stocks like (the TFAANG+M, semi-conductors, and stay at home massive overly bloated players) they have driven the rally for months as consumers have been hunkered down due to the pandemic.

No question, 2020 has been a horrific year for the health of Americans during the Covid-19 crisis and the economic toll it has taken on society. But for technology and so-called disruptor investors, it was sheer bliss.

software stocks have gained on average 79%, in 2020, driven by low interest rates, and massive tailwinds from the change in basic assumptions about needing to work from home, and the lack of real decent alternatives for growth investors. As a bonus, firms with rising subscription revenues tightened their belts (layoffs) on expenses, helping margins. The Nasdog has rallied 46%, year to date, almost triple the return on the SPX-500. Chip stocks have vaulted 54%, cloud software stocks have gone parabolic returning 72%, within technology, almost everything worked out sweetly (I just wish I had held longer). 

I hope that the bulls have thoroughly enjoyed the run in 2020) as 2021 will be a different outcome. As we have seen that interest rates have begun crawl higher and growth stocks historically underperform when rates rise. I believe the Covid-19 vaccines, in addition to reopening the economy, could drive demand for commodities and add fuel to rising rates. There are certainly areas of the global economy that have secular growth trends, and that will not change. As we look to the continued adoption of cloud computing, the rollout of 5-G, and the battery electrification of vehicles.

But “valuations are extremely rich,” especially for the kind of “herd-mentality” stocks that populate far-far too many growth funds. The so-called great reopening trade premise could push investors to leave technology for cheaper opportunities elsewhere. 

The IPO market will likely grow as I noted last week, 2020 was the biggest year for IPOs since 2014, and that’s not including special purpose acquisition companies, a suddenly extremely popular alternative manner to go public. 

According to Renaissance Capital, the average initial public offering in 2020 returned 75%, the best performance since the late 1990s dot-com bubble years. Renaissance counts another 71 firms that have selected bankers or filed paperwork to go public.

And there are several potential behemoths waiting in the wings: Renaissance sees post-IPO valuations north of $50 billion for Flipkart the Indian e-commerce leader now owned by Walmart and the payments company Stripe. Also, possible: IPOs for Instacart, the grocery delivery company; stock-trading platform Robinhood; and Compass, the real-estate brokerage firm. 

Remember all these offerings will likely suck liquidity out of the markets

Cloud-based software companies have fantastic, asset-light business models, with predictable revenue streams, big growth, and gigantic addressable markets. But the prices...folks are paying for these players are NUTS! Morgan Stanley’s Weiss recently noted that enterprise value-to-sales multiples for software stocks now stand 85% above their five-year average. Valuations will contract in my opinion significantly (look at “ZM” as a recent example).

 

Open for business, or are we Now, that vaccines are here, it is really time to consider reopening bets. (INTU),  (YELP), and (GRPN) should all benefit as conditions normalize for small businesses. Expect gains at online travel firms (BKNG) and (EXPE), which are both cheaper than (ABNB) business, which was buoyed by the quarantine, could be a burden in the recovery.

 Some food for thought:  Dell (DELL) seems likely to spin off its controlling stake in (VMW) later this year.  (IAC) has said it might spin out Vimeo, its video tools firm, and do not be surprised if IAC also distributes its huge stake in (ANGI). 

 No one can truly doubt that this market has been mostly fueled by speculative buyers on a massive locoweed drunken tear, thanks to trillions and trillions of stimulus monies and the FED’s near “0%” interest rates: Despite the market’s parabolic rise, the moves we experienced throughout most of 2020 often felt like a bubble of “free and easy free-flowing monies” that has been happening for the past several decades!

 As we are about to enter a New-Year it is time to start looking ahead and figuring out what is the next leg of this highly manipulative market journey will take us! In contrast to the dot-com bubble, the stocks that moved the markets this year were churning out earnings at a decent clip and the upstarts were close to or already profitable.

Investors shifted course at the beginning of November, trading away from the Covid-19 helped darlings after the election results and the announcement of positive clinical data for the Pfizer and Moderna vaccines. 

The reopening stocks, including airlines, hotels, cruise lines, traditional retail, and industrial firms, rallying in anticipation of renewed activity in their operating environments (folks hoping and praying for the economic light-switch to turned on). The other Players on a rampage are the latest so-called technology disruptors, most of which have recently gone public, including TTD, SNOW, PLTR, MDR, CRWD, QS, to name a few “primarily software firms” that provide a unique way and/or system to store, sort and utilize information, often for specific industries. One look at the near-parabolic price charts of these illustrate how hot this chase and speculative type of market has been.

I have previously written about the surge in retail trading (Robin hood type), which has been a major force behind this phenomenon, especially among younger folks for whom stock trading seems to serve as a surrogate for unavailable leisure activities and sports gambling.  Public.com, a social-networking site, created for small dollar-dominated trading and first-time traders were fostered so many could learn about stocks from each other. 

In terms of how extended some of these investor favorites have become, I compared the number of stocks valued at over $10 billion that trade for more than ten times revenues for 2021 and I found over 150 such players; according to FactSet...there are 5-6 times more stocks in this over the extended category now than at the close of 2018.  Some of this can be explained by significantly depressed interest rates thanks to the FED’s intervention and overt speculation and yearning to participate in the parabolic-rise to-the-right an incessant trend where all dips are bought is also a likely bullish factor. This parabolic rise of the aforementioned technology names reminds me plenty of the Greenspam dot-com bubble. 

Please let us not forget that a high percentage of the stocks rising parabolically into thin air on most traders apps will face new potential entrants with new novel technologies, crowd appeal, and their luster will fade. 

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