The overall equity markets last week seem to exhibit sell off exhaustion as those seeking protection via going long the CBOE S&P 500 Volatility Index (VIX) hit extremes. We figured where the weak hand was. That’s where it was, writes Nell Sloane of Capital Trading Group.
So, we thought to ourselves, what would be the easiest course for the equity markets given the extreme weak longs in the VIX?
Well to grind higher, slowly but surely. This is exactly what they have been doing.
We see some technical resistance at 2711 in the S&P futures but we have also seen correlations rise after getting pummeled.
We aren’t sold on the fact that the equities are in clear sailing mode once again, rather we know markets never go down in a straight line and bounces, even prolonged ones are natural and necessary.
Not even the U.S. bombing strategic positions within Syria could derail the up move, so that was very telling.
Oil did run up into Friday as those in the know must have played the setup game in preparation for hostilities, but, the Trumpster had one thing in mind, send a message and that he did.
The strikes were of the limited tactical precision type and they were effective.
We know the fundamental players including ourselves continue to be disgusted with the large QE operations and global debt build.
One vocal opponent to all this debt is Lacy Hunt from Hoisington who continues to pound the pavement regarding this unsustainable debt accumulation. As our readers know, we agree with his position and yes debt contribution to growth is going in the wrong direction.
Lacy points this all out in the following, “In 1952, $3.42 of GDP was generated for every dollar of business debt, compared with only $1.39 in 2017. In the corporate sector, where capital, as well as technology, is most readily available, GDP generated per dollar of debt fell from $4.50 in 1952 to $2.50 in 2007 to $2.21 last year. The dismal trend in productivity confirms this conclusion. The percent change for productivity in the last five years (2017-2012) was equal to the lowest of all five-year spans since 1952. It was also less than half the average growth over that period.”
One thing is very clear, debt is the new growth and it doesn’t matter, until it does, unfortunately.
Well, it’s earnings season and Q1 earnings are trickling in. And despite the massive rise in 3-month LIBOR from .25% to nearly 2.35%, the banks seem to be benefitting.
Citigroup (C) reported .08 cents earnings beat on $4.6B in revenue up 13% from last year. They also reported a $3.1B dividend and stock repurchase during the quarter. That is surprising to us, as we figure given the lofty share price, the last thing they should be doing with extra funds is buying back stock!
Bank of America (BAC) also beat expectations as profits rose 30%. We are quite sure the lower tax rate helped as well as the higher interest rates because we all know the rate they receive on their credit and loan repayments and the rate they pay to their customers is at decade wide spreads. Dare we mention their take of the $47B per year in free money from the Federal Reserve for the IOER mechanism? Good news nonetheless for investors we suppose.
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Also reporting was Netflix (NFLX) as their shares climbed 5% to $323 which puts their overall equity 2018 return near 60%! Their content spending continues to climb, hitting $10B this year, but they continue to add subscribers, 7.4 million in Q1 alone. Free cash flow is projected to stay negative for a few more years.
The problem we see with that is twofold for Netflix. One, they must continually pay up for content to stay at the cutting edge and second their $24.4B in debt is problematic, higher rates notwithstanding, Effectively you eventually must make consistent profits to remain viable and to afford this said debt.
We commented last week about the buildup of VIX protection and the most likely scenario that this would lead to and that was, a slow grind up in equities. The name of the game today seems to be, sniff out the largest weakest position and force them to the exits.
In the S&P 2711 is the Fib 61.8% so we would expect that to stall and offer some short-term players some decent levels to sell into. However, given the technical backdrop, the fundamental earnings picture may provide a continued slow grind higher.
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Ideas for the tax code: Well, it’s that time of the year again, where millions of Americans race to meet the deadline to file their annual tax returns.
We have seen a lot of discussions about the tax code, the changes and various opinions as to the benefits and costs of Trump’s new tax plan. It’s no surprise that #POTUS has been vocal the last few days about the glory of his tax plan and even #VPPence took to Twitter.
Despite all the administration’s gloating, we feel it is quite comical that the federal tax code consists of some 74,000 pages, yes that’s thousands!
We have an idea: how ‘bout we get rid of income taxes and just issue bonds. This is a republic, right?
Perhaps the people should vote on it, hell the U.S. government just borrowed $275 billion in Q1 alone. What is indeed both troubling and interesting at the same time is that Q2 borrowing jumps to $512 billion, nearly double the first quarter amount!
So, what would be the difference if we merely added to the Treasury borrowing, another $400 billion a quarter? It’s not like the principal matters, its just the interest payments we need to cover, right?
Furthermore, and what is certainly the biggest scam of all is the fact that individuals paid 5.3x more actual tax than the corporations for FY2017.
We are truly reaching the heights of Monopoly money, aren’t we? It seems as if the commoner's trivial average wage is a mere footnote on the US Treasury balance sheet.
We hear rumors of so called wage inflation and yet, that seems more conjecture and even hypothetical in fact because, we don’t see it.
What we do see is the staggering and certainly unsustainable income inequality that the U.S. is exhibiting. We expect this from some third world banana republic but if the elite globalists think this is going to stand then they have not studied their history very well.
In fact, we believe that the populist revolt that elected such a prominent celebrity to the highest office in the land is indicative of the overall concerns of the commoner base. Statista has a great chart of this inequality problem and in fact their latest figures point to the sheer magnitude of this divide, where 87% of the wealth in the United States is owned by 20% of the population. Even more staggering is the fact that the top 1% control nearly 36% of all wealth.
So, we can talk tax remittance and percentages paid and the wealthy can claim they pay 97% of all the taxes but that is why we do not compare nominal amounts.
In fact, even comparing percentages when it comes to the top 1% doesn’t make sense because their wealth is so exponentially higher than the average worker that the math doesn’t fit.
We are certain of one thing; the data is suggesting that the fiscal and monetary policies do not exhibit general linear models and are in fact directly contributing to this inequality.
Yeah, yeah, we will hear arguments till people are blue in the face that it’s always been Wall Street vs. Main Street, but that is not the case. Yes, there have been super wealthy and their opposite extreme poverty, yet this duality has never been this extreme.
A democracy and even a republic must recognize that a more equitable distribution will have a greater impact on the social fabric and civil well being of a nation than a hockey stick distribution.
Perhaps we are just wishful thinkers, or maybe we just hope logic finds its way into halls of the New York Fed and DC.
