The Canary in the Coal Mine Mike Swanson (12/13/2015)

Transcription

1 The Canary in the Coal Mine Mike Swanson (12/13/2015) STAGE ANALYSIS OF KEY MARKETS This is the most interesting chart right now. It s the JNK ETF which owns junk bonds and it s in a collapse. It has spent the past year and a half forming a giant top with support at the $35 level and last week it closed below that critical long-term support and fell over 2% on Friday alone. JNK is clearly in a bear market now. What this means is that the interest rates for corporate bond debt is going up. This will make the costs for corporations that issue new bonds to rise. This is important, because as I pointed out in my update the other week the giant stairway to heaven stock market rally that began in 2013 was fueled by corporate stock buybacks that were made possible by corpora- S&P 500 Long-term: Stage Four Bear Market Short-term: Market Falling Into Fed Meeting, Likely to Have One Final Bounce Into End Of Year Gold Long-term: Stage One Base Contines Short-term: Gold and mining stocks begin big rally and headed back up to October highs. DBA ETF Long-term: Stage One Base Short-term: DBA poised to breakout and rally to key resistance.

2 tions that issued bonds to take advantage of the Fed s zero interest rate policy and QE money printing program that drove lenders into the junk bond market. This year the stock buybacks have continued. Even though they have not been able to create a giant rally for the stock market they have been able to hold the market up in a big trading range. I don t want to repeat all of the details I gave about the importance of stock buybacks for the US stock market that I gave the other week so if you missed it just go to that report here: What is important now is to understand what the breakdown in JNK and the junk bond market means. What it means is that the stock buy back programs that corporations have been engaging in are going to end up being paired back in a big way next year. And yet stock market bulls are in total denial. Consider this quote from a CBS Marketwatch article that predicts a giant rally in the US stock market to begin thanks to more buybacks: The U.S. stock market s six-year bull run will extend into 2016, say Deutsche Bank analysts, who predict the S&P 500 will rally by double digits over the year. Average historical returns excluding recession decline and post-recession rebound years have been 13%, said Binky Chadha, chief global strategist at Deutsche Bank. Just based on buybacks alone, the S&P 500 index SPX, -1.94% should post an 11% return if corporations continue to conduct stock repurchases at the current pace. U.S. companies bought back a combined $ billion in shares in the first nine months of the year, the highest for a January-September period since 2007, according to The Wall Street Journal. And then another CBS Marketwatch Markets Stream post said this: Armed with flush funds and healthy earnings growth, U.S. corporations are expected to continue buying back shares and pursuing mergers at a rapid rate in 2016, potentially generating nearly a half trillion dollars worth of demand for stocks. We expect corporations will purchase $450 billion of U.S. equity during 2016 through buybacks and cash M&A, said David Kostin, chief U.S. equity strategist at Goldman Sachs, in a Thursday research report. The corporate sector has been the single largest source of investment in the stock market for the past five years, he added. Everyone wants to believe that the stock market is going to breakout and take-off and begin another stairway to heaven rally. No one wants to 2

3 think that the stock market is highly valued and everyone knows that the economy is weak. Most Americans are still suffering in the economy and few people really have extra money to throw at the stock market. The individual investor is already fully invested. Remember that the Ameritrade Index told us that months ago in a report analyzing it s account holders. So for the market to go up in a giant rally buying must come from somewhere. The middle class has been decimated. A few have been able to rise up into the upper class, but most Americans are much poorer now in terms of net worth than they were ten years ago. And so stock market Wall Street analysts are predicting another surge in buybacks next year in order predict big stock market gains. Goldman Sachs is telling people that there will be $250 billion net inflows into the stock market in 2016 thanks to the help of what they predict will be $450 billion in corporate share buybacks. Corporations have spent more money on corporate buybacks in the past few years than they actually made in profits. They have done this by issuing corporate bond debt instruments. The fall in JNK and rise in interest rates for bonds will slow down this activity and eventually bring it to a halt. The drop in JNK this week is a canary in the coal mine warning that tells us that the stock market is going to fall to pieces in If the $450 billion worth of new corporate buybacks that Goldman is predicting for 2016 do not happen then look out below! And they aren t going to be able to happen with junk bonds yields rising. These corporate buybacks are what enabled the stock market to go up. It wasn t Fed manipulation as some like to believe. Yes, the Fed policies helped make it happen. By keeping rates low and buying Treasury bonds the Fed created distortions in the allocation of investment capital that went into the corporate bond market. When the Fed makes interest rates artificially low it helps create a bubble somewhere. In 1999 it was in internet and tech stocks. After that it was in real estate and mortgage securities that helped create the crash of And now it is in this corporate junk bond market that is becoming unwound in front of our eyes that will cause another stock market disaster. The Fed created ANOTHER bubble disaster! I believe what I am telling you will end up being the story of 2016 and I am doing everything I can to prepare us to profit from it. More in that in a moment, because first I need to tell you that I do think we can still see a bit of a bounce in the stock market into the end of this year. 3

4 The drop in JNK is not going to cause the stock market to crash next week. Bubble bulls do not care about it. It s like when a pair of Bear Stearns hedge funds invested in subprime blew up during the week of July 16 of Jim Cramer said that the news meant nothing and then a month later got on CNBC and yelled and screamed for the Fed to bailout his Wall Street friends. And Bernanke made a credit move, but said that subprime didn t matter. But anyone who was paying attention and understood what was happening knew what the destruction of the two Bear Stearns hedge funds meant. So we will be watching JNK to see if it continues to decline. Next week we have the big Fed meeting on Wednesday and everyone expects that the Fed will raise interest rates and people are worried about that. So the stock market has fallen practically straight down since the start of this month and the DOW fell over 300 points on Friday. But the market has fallen so hard recently that it is now actually oversold on a short-term hourly chart. The VIX, which measures the volatility premium that people pay in the options market and goes up when people are scared of a market decline, rose over 26% on Friday. Usually when the VIX goes up that much in a single day a rally begins within a few days. Even in bear markets you tend to see some sort of bounce occur. So I think after the Fed meeting we are likely to see some sort of bounce take place in the markets. I m not looking for a rally up to the highs or anything like that. But we could see the S&P 500 go back up to where it started this month at. You can t really predict exact price action, but that d be around area for the S&P 500. Seasonally the last two weeks of the year see the market go up and volume in the market practically disappear at the same time. Money managers, hedge funds, and mutual funds tend to mark up their positions so they can make more bonuses. And you can bet your money that CEO s running corporate buybacks who have their salaries tied to stock performance will do the same. But there will be people getting out at the same time too that know that big trouble is coming that will put pressure on the buying and there has been large insider selling. So you cannot expect some massive rally. My guess is we will see a short-lived bounce start this week after the Fed meeting that will be strong for a few days and then fizzle out 4

5 into some sort of sideways action that ends with the start of a new drop in January that will take the market to its lows of this year and beyond. One reason to expect a bounce to happen is the Fed itself. The Fed has boxed itself in with all of its positive talk into raising rates now. But it does not want the stock market to decline or corporate bonds to decline so sharply in value anymore. So what can it do? It will likely raise rates and then accompany that decision with some extremely dovish talk about 2016 about rate policy. There are press leaks this weekend that suggest that the Fed will make a bunch of economic projections to make it look like they will raise rates only once or twice next year. One story says in July and then after the Presidential election. So it will hike and say everything is great! What the Fed will want is for people to think that they are doing the rate hike not because they are afraid of inflation and will thereby need to be aggressive, but to think that the Fed has fixed everything and is simply returning things to normal. Some stock market players who are scared that the Fed will raise rates like crazy next year will be reassured by such statements and buy. So they can help create an end of the year rally or bounce. You can expect Steve LIESman to do everything to pump up the Fed and convince the masses who watch CNBC that Janet Yellen is a great leader too. The problem is that things are not normal, because the Fed has created another disaster bubble and the lessons of 1999 and 2007 have taught us that when a bubble unwinds the Fed cannot stop it. Ultimately all of this will be extremely bullish for gold. When people realize that the Fed will not go on a rate hiking spree and they understand the problems in the bond market they will flock into gold. Gold and mining stocks are trading sideways and forming an incredible base to launch a rally off of. Gold stocks tend to lead the action in gold. When gold made a new low in November the mining stocks held their July lows and appear to me to be in a position to break their now $15.00 resistance level to begin a new rally up to their October highs. I ve been saying since the start of this 5

6 month that I expect an end of the year rally in mining stocks and precious metals to occur and everything still seems to be on track for this to happen. It should start by the end of this week and could also be triggered as a reaction to dovish statements from the Fed. Now if gold and the mining stocks do rally into the end of the year and then breakthrough their October highs next year they will begin a new bull market. And I also think this is very likely to happen. That means that mining stocks are the thing to buy now if you want to go long. People want to play rallies in FB and Apple and the other big popular Fast Money names, but mining stocks is the best thing now to buy in my opinion. And yes I do own GDX just like I have it in the model rebalancing portfolio. And I also think other commodities will follow gold up too as that is how bullish commodity cycles historically happen. And if you want individual stocks to buy I still think PAAS and PPP are two good mining stocks to buy. I put them on my top ten stock position list last week. So next year I m looking for a big bull market in gold and commodities and a vicious bear market for the US stock market. The other week the S&P 50 was up 1.5% year to date and it just ended this year down 1.5% year to date. Ten stocks in the S&P 500 are up 21% or higher year to date while the other 490 stocks are down 3%. This means that most people that own individual stocks are losing money in this market. But it s importance is that it is a symptom of the internal deterioration that has been going on in the market that happens at the end of bull markets and at the start of bear markets. The market fell below it s 200-day moving average and dumped in August and rallied back above it in October and is now below it again. Whether this is the first inning of a stage four bear market or the last inning of a stage three top is to argue semantics. It really doesn t matter at this point. In my view what we have seen this year with the narrow market action is the obvious formation of a major stock market top. Right now on a short-term basis the market is in a downtrend, but it is likely to bounce into the end of the year. 6

7 7 That will make whatever low that is set on this downtrend a critical support level for It will be a key support level like the 200-day moving average was in August for people. Remember it is when it was broken that the August dump happened. The computer trading programs even turned themselves off! If the market goes up into the end of the year all of the bulls will get excited. CNBC talking heads will call for a giant rally while ignoring the problems, because they want to believe one will come. Everyone in the money management business knows that the next bear market will crush the small player in the stock market and that an entire generation of investors will give up on stocks forever. CNBC ratings have fallen so much since 2007 that they no longer give their figures to the Nielson company. Jim Cramer s show is the lowest rated TV news show in the 6:00 PM time slot. Money managers know that a bear market may not only take Cramer off the air but will put many of them out of business. Thousands of hedge funds will close up shop and there will be investment advisors flying high today that will begging on the street. Many stock trading websites will close up shop. Phrases like momentum and Fast Money will be seen as cruel jokes. No one in my business or the money management business wants to think like this so they just dream of another stock market rally to keep things going. Really what they want is a final boom to sell out and get rich on. But I saw such cycles in the last two bear markets too in which many people vanished. But this will be the worst one, because most of the people in the market now are over retirement age and won t be able to ride everything out to the bottom and back up again. This is it. So everyone will be looking at some key support level to keep the faith. It will probably end up being the low of this month. And when that support level is broken is when the next round of real selling will happen. We ll get a better idea what the key level will really be around New Years. The thing is that the drop last week is nothing but a little move down for a few days. We have seen many such weeks in the market this year up and down and none of them have meant anything when it comes to the big picture. It is when the market breaks key support in 2016 that the moves will really mean something again. I have a short position in my own portfolio and the model rebalancing portfolio with short ETF s, but I also have some individual stock short

8 positions and I plan on shorting more individual stocks myself on the next market bounce. I ll likely be taking the new short position entries myself in January. So for the rest of the year I m going to spend a lot of time researching stocks to find the best ones to short that I can. I added STRZA to the top ten list of stock positions as a stock to short and bet against. It is one engaged in big buybacks that has amassed a lot of debt and is suffering from declining cash flows. It s the type of stock that I think is going to suffer in 2016 from a slow down in the ability of companies to engage in debt fueled corporate buybacks. I am short this stock right now and will be looking for more like it. I also am putting together a new course for you on how to find bad stocks and bet against them. I m going to show you what to look for in a great stock to bet against and how to find them. I put the first few videos for the course on Friday in the Power Investor members are here: Login with Username: wsw Password: 2016 I also just created a private Facebook group dedicated to finding and researching piece of slime (POS) stocks to short. This is just an extra bonus if you are interested. The only topic in the group is finding stocks to bet against and sharing research about that with group members. Off-topic posts will be deleted. It s a private group so if you are interested go here and request to join and I ll approve it. Corporate America has turned itself into Tyco. Our corporate leaders have borrowed money in aggregate not to hire more people or increase their productive operations through organic growth, but to use the money to increase headline earnings per share via financial engineering whether that be through corporate buybacks or through mergers and acquisitions. This is why stock prices went up during the stairway to heaven rally while the economy stagnated and S&P 500 profit growth has been in the red for the past year-over-over. You can see on the next page how the record low in junk bond yields in 2012 helped start it all. You can thank Bernanke! And Goldman Sachs and other Wall Street pumpers say the junk debt is just going to grow and grow and grow in 2016 too, but will it? 8

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10 10 FOCUS LIST OF TOP TEN STOCKS Shorts: EGRX, NVO (both overvalued Biotechs). HACK Cyberscurity ETF. CRH (TSX) (CRHM dual listing on NYSE). STARZ - cable media company that is a financial engineered mess. Longs: PAAS, PPP (TSX: P) 12/06: This week adding mining stocks PAAS and PPP to top ten list. 11/28/2015 This week adding STARZ to the top ten list of stock positions as a short. 10/29/2015 This week adding the ETF HACK to the top ten list of stock positions and the Canadian stock CRH(TSX). It has a US listing of CRHM. Added these stocks in this PDF update: HACK entry CRH entry $ /23/2015 This week added EGRX and NVO to the top ten list of stock positions. You can find the original update for them here: Login with Username: wsw Password: 2016 Over the rest of this year I plan on adding to this list until I get a list of ten stock positions. By limiting it to ten positions I ll be able to keep track of them and anything important that they do, including when to sell them, in these weekly PDF reports.

11 11 MODEL REBALANCING ETF PORTFOLIO ALLOCATION 12/01/2015: Using closes prices of today sold QID and moved that money into DBA. Also rebalanced whole portfolio on close. 11/28/2015: No changes this week, beyond regular Friday rebalancing. 7/31/2015: Purchase DXD. Portfolio now 20% each SDS, QID, DXD, CEF, GDX. 7/30/2015: Purchase SDS and QID. 7/27/2015: Liquidated DBA position for cash. 5/12/2015: I purchased a 20% position in the agriculture commodity ETF The model portfolio is now currently invested 40% in cash, 20% DBA, 20% CEF, and 20% GDX. This is the update I posted on the site about this purchase. What I am looking to do is own up to 5-6 ETF core ETF positions at any one time with 20% - 18% invested in each one and to maintain that allocation percentage by rebalancing the core positions portfolio every Friday at the closing price. This is what I plan on doing with the bulk of my real money over the next few years. As for individual stocks I consider them for now as more speculative and outside of the core positions portfolio For more on how this strategy works read my January monthly newsletter: Also see module 7 of my Bear Market Power Pack for several videos and academic papers about this market strategy: For an excel file keeping track of the portfolio go here:

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