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Newsletter - marketcommentary





Last Build Date: 2018-04-22T20:21:09.7878931-05:00

 



THE ELEPHANTS IN THE ROOM

3/1/2018 6:10:00 AM

We have beendiscussing for years how the growth of the Fed’s balance sheet from $800bn to$4.5tn from 2009 to thru 2014, and near zero interest rates (ZIRP) have causedall forms of mal-investment that in thefinal analysis will bring down the “house of cards” that is the stock and bondmarkets.  But it gets even moreinteresting, in terms of the central bank “insanity”.  That the ECB, BOJ, and the BOE upped the anteeven more by instituting negative interest rate policies (NIRP)  will prove to be even more detrimental, in thelong run, than ZIRP.  (We did not includethe PBOC (Peoples Bank of China) in this, the reason being that China is not afully opened economy, given the fact that currency cannot flow freely acrossits borders.  But they take a second seatto no one when it comes to over-leverage and debt.  The downside of that story will surely come inthe future as well.)

While thebalance sheet of the Fed has gone basically sideways for the past 3 years, theECB, BOJ, and BOE were adding just under $5tn collectively, to theirs.  And given the fact that foreign exchangemarkets are very liquid and well developed, it should be of no surprise thatmuch of that non-US central bank stimulus found its way here to further inflateU.S.




THE FREE LUNCH

1/3/2018 11:05:00 AM

So, here weare.  Stock indexes are through the roofand making new highs almost every day. Realized volatility is collapsing through the floor, and has never beenlower for such a protracted period.  Theera of (normal) five, ten, or twenty percent corrections seem like a distantmemory of another time and place. Interest rates remain near historical lows, with seemingly benignduration risk in the bond market.  Inflationhas all but been pronounced as “dead as a doornail”. 

It was notthrough brilliance in the management of our major corporations that account forthe (irrational) exuberance that the markets seem to be embracing. Though theycertainly did their part with stock buybacks that helped inflate prices andknock compensation options “into the money”, thereby coincidentally increasingtheir own personal incomes.  No, it wassomething even greater and more damaging that is responsible for the grossinflation of financial assets.




THERE WILL BE SIGNIFICANT ROADBLOCKS IN THE MARKET THE REST OF THIS YEAR, 2018, AND BEYOND

11/11/2017 5:50:00 AM

There havebeen many of the strongest bulls on Wall Street that have changed their mindson the “Bull” side of the market, just recently.  Many of them have been very concerned aboutthe possibility of continued delays in the “Tax Reform” that is being bandiedabout in the House and the Senate.  Someothers such as Jim Paulson, Chief Investment Strategist at The Leuthold Group,just a week ago, was concerned about how most investors are still just lookingover the blue skies and thinking nothing can go wrong.  He also was concerned about the Fedtightening more than most investors anticipated, as well as a flattening out ofthe bond market.  As the shorter termbonds have been rising faster than the longer term bonds, the flattening couldturn out to be inverted soon and we all understand that is a precursor to arecession. The financial stocks that usually rise as rates increase, are nowdeclining, and that also signals that something is wrong.  Paulson is also concerned about theRepublican Agenda slowing down, as the House and Senate go back and forth withsignificant delays. 

 Another extremely respected equity analyst forMorgan Stanley, Mike Wilson, has recently changed his opinion, after being anoted bullish economic and equity analyst over the past 8 years.  He now expects either a major decline or atbest a bear market pause.  He also seessome of the same problems as Paulson.




THE PURCHASE OF BONDS BY THE FED OVER THE PAST 8 YEARS DROVE STOCKS UP

10/9/2017 6:00:00 PM

Asset prices(especially stocks) clearly have risen because of Quantitative Easing (QE, theFed lowering ST interest rates and purchasing bonds).   So, ifthat is the case, why doesn’t it make sense for assets and stocks to decline asthe Fed, and soon other central banks, will reverse their stance and sell thebonds previously purchased?  As the Fed,and other central banks, are planning on raising interest rates and tightening,by reversing what they have been doing for the past 8 years, it is obvious tous that assets and stocks will surely decline substantially.  Clearly, the QE that has been taking placefor years will be reversed and it will probably be called Quantitative Tightening(QT) (and it will be called QT for a reason—if they don’t tighten, inflationcould be next).

Our Fed isslowly tightening, as the other large central banks, such as the Bank of Japan(BOJ), the European Central Bank (ECB), Peoples Bank of China, (PBOC), are all movingmuch more slowly than our Fed.  It lookslike these central banks are listening to our Fed, and plan on following them.




WE ARE AS BEARISH AS WE HAVE EVER BEEN

9/6/2017 7:25:00 AM

A reader ofthis commentary recently asked us if we were “throwing in the towel?  The reader was, of course, referring to ourlong running bearish outlook for the U.S. stock market.  To quote the great Bob Dylan, “The times theyare a changin”…for the bulls, but not for us! We remain in the bearish camp as firmly as we have in the past.




A RECESSION COULD BE COMING

7/6/2017 11:40:00 AM


The Wall Street Journal recently published an article byGreg Ip entitled “Why Soaring Assets and Low Unemployment Mean It’s Time toStart Worrying”.  While Mr. Ip stopsshort of predicting a recession or its timing, he details a list ofpreconditions for recession, all which exist now.




VALUATION WILL MATTER...IT ALWAYS DOES

6/1/2017 5:00:00 PM

As the U.S.stock market continues to make new all-time highs it may appear to manyinvestors that valuations no longer matter. We do not see it that way now, nor have we ever in the past.




HOW DOES GROSS DOMESTIC PRODUCT GROW?

5/1/2017 9:00:00 AM

A majorvariable in the determination of GDP (Gross Domestic Product) is the growth ofthe labor force.  What a nation producescan be thought of, in simple terms, as the number of hours worked multiplied bythe output per hour (productivity).  Itis a documented fact that the growth rate of the U.S. labor force is decliningand is expected, by the U.S.




Debt Can be Looked Upon in Various Ways

4/7/2017 10:00:00 AM

 

Comstock hasbeen discussing the debt situation in our country for years.  We wrote a “special report” discussing thevarious forms of debt and explained how the debt is incorporated in “The Cycleof Deflation” (see attachment) as the debt was hindering many speculators andinvestors just before the dot.com bubble was about ready to collapse.  We warned that the debt was the main reasonthat the valuations were the highest in history and would eventually break themarket.  This was exactly what took placestarting in March of 2000 when the stock market crashed and a severe recessionbegan. 

We againwarned our viewers about the problems of excessive debt during the housingbubble of 2005 to 2008 when Alan Greenspan, the Chairman of the Federal Reserveat the time, decided to lower interest rates to 1% in June of 2003.  This caused the largest housing mania of alltime.  Banks were virtually pushing moneyto anyone that wanted a loan to buy a house (whether they could afford it ornot.)  Back then--they called these loans“no doc loans”.  These were loans thatwere made without any documentation whatsoever.

The amazingpart of this era was that Greenspan warned stock investors about the“irrational exuberance” that was taking place in the late 1990s as the stockmarket rose almost every day. The “irrational exuberance” speech drove themarket down, but that only scared off investors for just a few days and thestock investors regained the losses almost immediately.  After observing the voracity of the marketthat could not be held down, Greenspan changed his mind and confessed to beingwrong about his warnings just before the real break took place in early2000.  He also witnessed the housingbubble, and not only did he support the banks making the loans, but actuallyencouraged the banks to continue making these insane loans. 

This leadsus to the old time phrase, “fool us one time, shame on you, fool us twice shameon us.”  When the current debt bubblebreaks and the stock market collapses we could say, “Fool us 3 times and weshould be banned from trading and investing in the financial markets.”  Unless we can understand why the debt causedthe collapse in 1929 (after the roaring 1920’s), in 2000, and 2008, we shouldbe forced to compare the debt to GDP in all of these times to the present.

If you wereforced to do this you would look at the debt and be shocked at how much thedebt grew over the past two decades.  Ifyou are a Democrat you might compare how much the debt grew under President GeorgeW.




THE STOCK MARKET IS PRICED FOR PERFECTION

2/28/2017 1:05:00 AM

The Trumprally, which began during the overnight session the night of November 8th has,in our view, built perfection into prices, which we think were already pricedto near perfection.  In the bull case, fundamentalswere already improving and President Trump’s proposed cutting of regulations,taxes, and instituting pro-growth fiscal spending, just adds fuel to the fire.  It seems to us that every possible benefit ofthe doubt is being given to the new administration in an economic and politicalclimate that is unprecedented in our lifetime, and possibly our country’shistory.

In addition,there is nothing that says that President Trump will get all he wants from Congress.  The most positive outcome is being discountedby the stock market presently and if there is resistance or delay with hisprograms, the stock market will suffer.




THIS BULLISH STOCK MARKET IS VERY LONG IN THE TOOTH

2/2/2017 8:20:00 AM

This bullmarket is close to eight years old, and if it continues for another month, itwill be the second longest bull market in the history of the stock market.  Being heavily invested in a stock market thatis historically just about the longest on record, and is also extremely over-valued,has got to be dangerous. However, for some strange reason the sentiment ofinvestors in this stock market is just about as bullish as it can be.  In fact, the Investors Intelligence, MarketVane, January Michigan Sentiment, and VIX all show extreme bullishness to thepoint that you would have to call it “euphoria”.  And as you know, bullish markets often end when“euphoria” begins.

Manyinvestors believe that the rationale of being fully invested is due to the lowinterest rates, and even if the Fed raises rates, it will be a while beforethey raise rates high enough to get to normalized levels (basically around theinflation rate of 2%).  However, you haveto keep in mind that the peg rate of the Fed over the next year ranges from 2%to 2.5% or higher.  Therefore, the onefact that the bulls are leaning on is about to evaporate.  Keep in mind that the Fed did say they wouldraise rates 4 times in 2016, and they only raised rates once.  We suspect strongly that they will raiserates further, and faster, than in the past, especially since their two mandateshave reached the levels they set, and they don’t want to get too far behind thecurve. 

Otherreasons that the U.S.




THE STOCK MARKET HAS REACTED POSITIVELY TO TRUMP

1/3/2017 11:00:00 AM

The pasteight years provided a phenomenal environment for stocks, bonds, and realestate due to the tremendous expansion of the Fed’s balance sheet and theresulting eight year zero interest rate policy. During that eight year period the world became familiar with terms likeQuantitative Easing (QE) and Operation Twist as the Fed moved into unchartedwaters in both the magnitude and length of its easing programs.  What began as an emergency program to rescuethe U.S. and the world from the Global Financial Crisis turned into a longer termattempt to stimulate growth through the inflation of financial assets; thetheory being that wealthy people would spend more and that wealth would“trickle down”,  and result in economicgrowth.  As it turned out, it should alsobe mentioned, that the Fed alone pretty much carried the economic football asthe budget sequester limited the impact of fiscal policy as the U.S.




PRESIDENT-ELECT TRUMP WANTS ECONOMIC GROWTH

12/2/2016 4:30:00 AM

We have toadmit to being as surprised as everyone else at the stock market’s reaction tothe Donald Trump victory.  And it is notbecause we think the policies of the incoming administration will be lessgrowth oriented than the Obama or the not to be Clinton administration.  Quite the contrary.  President-Elect Trump’s policies will befriendlier to business and to the taxpaying public than the alternative.  The problem is that those policies could alsoexplode the debt, which we believe is the most significant financial threat tothe country’s growth and economic well being.

On thepositive side, there are a number of pro growth initiatives in the Trumpplan.  A partial list would include, infrastructurerelated spending and jobs resulting from the fiscal response, rebuilding adepleted military including new investment in weapons systems, scaling back oreliminating Obamacare, tax cuts for individuals and corporations, reducing themaze of Federal regulations that are choking certain business activity includingenergy production, building the Keystone and other pipelines, possible corporate investment inneglected real plant and equipment due to a shift to optimism from pessimism,and importantly, repatriation of corporate profits that are being heldoffshore, mainly in Europe.

On theopposing side, there are at least several negatives.  Among those are building a wall financed byMexico that causes friction and reverse immigration of low skilled workers(ultimately very inflationary), minimum wage laws, which are not only inflationarybut actually can destroy jobs, renegotiation of trade agreements that slowsbusiness activity, trade tariffs that are ultimately borne by the U.S.




The CB's have to Learn You Can't Go To "Cold Turkey" from "Wild Turkey"

11/2/2016 11:30:00 AM

We have beendiscussing (in the most critical way possible) the Central Banks all over the world for the past 16 years.  In fact, a journalist called us this pastJanuary and asked what we thought of the stock market?  We responded that we expected the stockmarket to decline sharply during the year 2016 as the Fed raised rates. The journalist countered that every time the Fed raised rates in thepast the stock market still did quite well. So far the journalist has been correct and we have been wrong.  We believe this will change again within thenext few months since the Fed will be forced to finally reverse the damage done over the past 8 years.  We tried toexplain to the journalist that we are presently in a completely differentsituation than we were in the past, when the stock market rose as the Fedraised rates because the economy was doing well and/or there were inflationaryrisks.  Now we have gone through QE1,QE2, QE3, and “Operation-Twist” where we drove rates down to zero (ZIRP), orclose to it for the past 8 years.  Thistime the Fed has grown its balance sheet from about $800 bn. to over $4.5tn.  This enormous amount of money has tobe eventually wound down.  This injectionof money printed by the Fed has not driven us into an inflationary bubblebecause there is very little “velocity” (the pick-up of transactions).  The injection of money does not lead toinflation since the money printed by the government or Fed does not get thepublic to spend the money and they save it instead.  This is called a “liquidity trap”, which is whatJapan went through for the past 27 years. The high debt that we have generated, as well as Japan, has caused adeflationary environment, which neither one of us seems able to achieve anytype of “escape velocity”.   This time isalso different from the past rate hikes since now our Fed is about to raise FedFunds right into the face of a manufacturing recession (down for over 6quarters in a row).  We also arethreatening to raise rates right into the face of virtually every other centralbank that is still in the loosening phase of printing more money and lowering interestrates.  All this while we are about totighten by increasing rates and raising the value of the US dollar.  And because of the US dollars rise andcontinued rise as we raise rates, it will be more difficult to compete with ourtrading partners and lower our exports. Most of our trading partners are participating in a race to the bottom,as they do whatever they can to lower their currency in order to sell moregoods and services to the US.  We havegiven this journalist at least 4 more reasons why we believe the increase inrates will lead to a bear market for US stocks. Right now, we would have to admit it looks like the journalist was rightthis past January.  At first, we lookedlike geniuses as the US stock market dropped sharply in January.[...]



MALAISE

10/6/2016 9:00:00 AM

Back in 1979 President Jimmy Carter addressed the nation andtold his fellow citizens the country suffered from a “crisis of confidence” inwhat became famously known as the “malaise speech”.    Back then the country was suffering from“Stagflation” or inflation with sluggish growth.




Central Bankers Have Failed to Stimulate Thus Far

9/1/2016 3:00:00 AM

As most ofour viewers know, we have not been happy with the world’s central bankers overthe past twenty years and have expressed those feelings.  The U.S. Fed is the most important centralbank among the major central banks of the world, as the U.S.




WHY THE WORLDWIDE BUSINESS CYCLE HAS SLOWED DOWN

8/5/2016 2:00:00 PM

This commentdiscusses the assumptions we have been using in our commentaries over the past20 years or more.  We have been consistentlyreminding our viewers that the debt built up over the years has a major bearingon the economic health of the U.S. economy, as well as the economic health ofother developed countries, who have also built up significant  debt positions.  It should be clear to investors that are asconcerned about the debt how these same countries’ GDP slowed down, just likethe U.S.




The Central Bank Bubble Is Worse Than The Dot.Com & Housing Bubbles

7/7/2016 5:05:00 PM

We warnedour viewers, over and over again, how the Dot.Com Bubble and Housing Bubblewould play out.  We are now warning ourviewers that the unwinding of the “Central Bank Bubble” will be worse thaneither of the other two bubbles.  Itseems like most investors continue to show apathy even with the warnings by usand quite a few others of the “unintended consequences” of the central banksdoing things that have never been done before. Those investors are in good company because it appears to us that theleaders of the major central banks of the world do not have any idea of the “unintendedconsequences” either.

Think for amoment about exactly what changes the Federal Reserve took in continuing tokeep the Federal Funds rate at zero or close to zero for approximately the past8 years.  This is called ZIRP (ZeroInterest Rate Policy) and the Fed, or any of the central banks that followedthe Fed’s lead, had any idea of the “unintended consequences” of this policy.  However, if you think they took a chance withZIRP, just think about the chances our Fed took while building their balancesheet up from $800 bn.




Operating Versus GAAP Earnings

6/2/2016 8:15:00 AM

As we write this month’s comment the S&P 500 stands at 2,099,1.33% away from its all-time high of 2,134. So we thought this would be a goodtime to discuss whether stocks are cheap or expensive relative to historicalnorms.




The Ending of QE

4/28/2016 9:05:00 PM

The endingof QE-3 formed a stock market top formation that presents a very strong technicalresistance that will be DIFFICULT to overcome!!

The stockmarket swings (based on the S&P 500) have been extremely volatile since theend of QE-3 in December of 2014.  Infact, ever since QE-1 ended in 2010, QE 2 ended in 2011, Operation Twistended in 2012, the market rose slightly and then fell sharply soon afterwards.  Now that the Fed ended QE-3 and have started raising rates the stock market has been very volatile and we suspect that the swings will wind up breaking down through the lows of 1812 and 1810 that took place early this year.




Corporate Buybacks Aren't What They Used To Be

3/31/2016 3:30:00 PM

“FinancialEngineering” as it applies to a corporate structure usually is defined as theaggressive use of various techniques to enhance shareholder value by affectingthe balance sheet.  Probably none hasreceived more attention over the last several years as stock buybacks.  It seems that not a day goes by that CNBC andthe financial media are reporting that companies have initiated or increasedshare buyback authorizations, and there has been a great deal of attentiongiven over the last many months to whether share repurchases represent ajudicious use of a corporation’s capital. In thisreport we will attempt to shed some light on this topic and also examine whatmessage the market may be saying about large companies that are doingbuybacks.  This is possibly one of themost important questions facing market participants today since the U.S. hasbeen in a zero or near zero interest rate environment for 87 months (anunprecedented amount of time.)  Duringthat time corporations have raised record amounts of long term debt athistorically attractive levels, while at the same time remaining voraciousbuyers of their own shares.   The major buyback companies as a whole haveoutperformed over the last 7 years, since the bottom on 3/9/09.  However, this recently has not been the caseas we will illustrate.Now in thisera where it seems there is an index for any financial asset class that can bemeasured there are indexes of companies that are buying back their ownshares.  The performance metrics of thetwo most popular are reasonably similar so we will focus on just one, theS&P 500 Buyback Total Return Index (SPBUYUT).  This index is calculated by S&P back to1994 (numbers sourced from Bloomberg), though it appears a more recent creationsince trading volumes and ranges don’t appear until 2013.  This index is equal dollar weighted andrebalanced quarterly.  It is a subset ofthe S&P 500 consisting of the 100 companies that for the 4 previousquarters have repurchased the largest percentage of their market capitalizations.  We will compare this to the S&P 500 TotalReturn Index (SPXT).  This index iscapitalization weighted and like SPBUYUT reinvests dividends.  It is thus a reasonable “apples to apples’comparison.While wewould argue that returns on financial assets have been inflated by anexperimental and dangerous environment the Fed has created through QE and ZIRPthe numbers tell us that since the market low on 3/9/09, SPXT has returned 252%while SPBUYUT has returned 374%.  Ashorter and more recent time frame, however, tells a somewhat differentstory.  Since the 3/9/09 market low thereare 29 rolling 4 quarter periods we examined. Of the 29 periods, there have been five where SPBUYUTunderperformed.  There were 2 in 2012 andthe most recent 3 (through this writing on 3/29/16).  The largest of the 5 is the last 4 quarterroll and the underperformance number is 7.02%. So we believe that the market is starting to punish companies that are themost voracious buyers of their own stock.There areseveral arguments made by buyback opponents that go as follows:Buybacks steal from the future byexpending resources that should be used to fund/ensure future growth inexchange for the short term gratification of a higher stock price that is theresult of the buyback.  Worse yet, iffinanced with debt, the debt has to be serviced and paid back eventually.Buybacks do not return[...]



"Stormy Seas" Both in the U.S. and Globally

3/3/2016 11:00:00 AM

We havewarned in the past about the potential for a world-wide deflationary bearmarket accompanied by a U.S., and possibly, global recession.  We believe this recession and deflationarybear market have begun and expect it will last through most of 2016 and into2017.

Two weeksago Barron’s Magazine ran a cover story titled “Stormy Seas”.  The authors were essentially on the otherside of this debate, by claiming “Despite Turbulent Markets”, the U.S. economywill avoid a recession and grow at a healthy 3% pace this year.  However, even if Barron’s is correct and theU.S.




More Fed Criticism

2/5/2016 8:00:00 AM

Last month’scommentary (which we also made a “special report”) was essentially a responseto a financial reporter who asked us why we were so negative on the stockmarket in 2016 just because the Fed, more than likely, was going to raiserates.  He stated that the stock marketalmost always rose during the previous rate increases.  We explained the difference between the Fedtightening now, with enormous headwinds to overcome, relative to the times whenthe Fed raised rates in the past.  Wewent on to also explain why the same headwinds to the Fed tightening wouldprobably also cause a U.S. recession (and maybe even a global recession). 

The priorcomment was written in late December just after the Fed had raised the Fed Fundsrate by 25 basis points.  Before thispast commentary very few people were warningabout a recession, here or globally. However, now we are reading a lot about criticism of the Fed, andvirtually everyone that appears on the financial networks seems to have astrong opinion about the probability of a U.S.




Difference between Past Fed Tightening and Now

1/4/2016 8:30:00 AM

A reporter asked us about the prospects of the stock market if the Fed raises the Fed Funds rate, since at the time there was a strong possibility of a rise in the rate to around 25 basis points.  We explained that, in our opinion, the ending of the ZIRP (Zero Interest Rate Policy) and increase in Fed Funds will be a significant negative for the stock market.




This Stock Market Is Long In The Tooth

12/3/2015 1:45:00 PM

At Comstock we continue to believe that the world is in an acceleratingdeflationary environment.  This is theresult of many interrelated factors we have written about in the past.   Themost important of these is the exceedingly large levels of debt that exist inthe world today.   In an effort to combat this deflation andstimulate the real economy the Federal Reserve has done three quantitativeeasings (QEs) and an “Operation Twist” (purchase of long term and sale of shortterm government securities).  Theseactions grew the Fed’s balance sheet from $800B to over $4.5T.  Also, as part of this program, it hasmaintained a zero interest rate policy (ZIRP) for 84 months.  This has not only punished traditional saversbut has forced many of those savers to take risk in financial markets withmoney they cannot afford to lose.   But thereal economy has not been stimulated in any meaningful sense.  The main effect has been the inflation offinancial assets, real estate and certain art. We strongly believe that ZIRP has made the financial markets much morevulnerable than normal.

As is evident from trends in GDP and its revisions, the US economycontinues to grow at an anemic 2%-2.5% since the bursting of the Housing Bubblein 2008.