January 7, 2017
Stocks and Interest Rates are MOVING
Let’s start with this: It is NOT 2016 when stocks started the year by selling off sharply for two weeks…which quite naturally convinced 99% of the investment industry boobs that we were in for a nasty down year in equities and the economy…which was obviously dead, dead wrong…So, taking it a step further, as we do crank up this new year, with the robust rally since the election (which virtually NONE of those same brokerage house “strategists” were expecting), you can pretty much bet that any down day or week in stocks will have all those same geniuses still bleating that “Here comes the correction…so don’t buy it here”…and they will CONTINUE to be just as wrong as they always, always are.
THE STOCK MARKET IS STILL A BUY. RIGHT HERE. RIGHT NOW. ALL THE TALK ABOUT EQUITIES BEING “OVER BOUGHT”, OR “HIGH P.E’S”, OR “DUE FOR A CORRECTION”, IS JUST ANALYTIC GIBBERISH FROM THOSE VERY SAME GUYS WHO HAVE TOTALLY MISSED THE LAST MOVE (AND MOST OF EVERYTHING BEFORE IT FOR YEARS) AND ARE NOW WISHFULLY HOPING FOR A 5-10% “PULLBACK” SO THEY CAN GET IN…AND IT WON’T BE HAPPENING…There is a TON of money on the sidelines that fearfully exited the markets throughout 2016 and that same money is part of the fuel for buying that I believe will CONTINUE TO KEEP THE MARKET GOING RELATIVELY STRAIGHT UP FROM HERE. In other words, sooner or later, they will be forced to throw up their hands and buy what easily may become a BIG, headline generating, “runaway” market…and most likely they will do so just about when it IS finally time for a serious pause in the bull move.
Here’s the long term look I have been showing you for years…
Last January I used this same chart when calling for 20,000-21,000 on the Dow in 2016…and while I am not ready to throw out 25,000 as an objective this year, from this perspective & scale, it DOES look entirely possible…Aside from just the ”look” here, by the numbers, a 20% gain IN 2017 would take us to 24,000, which, when you consider that the Dow has posted 20+% gains 11 times since 1982…or one out of every three years…AND considering that we are most about to see MASSIVE fiscal & economic stimuli heaped on top of an economy that is ALREADY producing 3% growth, the idea of 24,000 by year end…frankly…almost looks EASY.
And just to emphasize that a 20+% gain is NOT a rarity, here are the 20+% annual moves in the Dow since 1982:
1982 – 22%
1983 – 20%
1986 – 22%
1989 – 27%
1991 – 20%
1995 – 33%
1996 – 26%
1997 – 22%
1999 – 25%
2002 – 25%
2005 – 16%
2013 – 26%
You might note that the period from 2006-2012, when no 20+% gains occurred, does reflect the effects of the Great Recession…which is OVER…and I would therefore fully expect to now see some numbers that annually, and routinely, look more like what we saw in the 1990’s.
And so, for the 100th time, with my firm belief that Stocks and the Economy will be accelerating much faster that all the Wall Street & internet yakhead geniuses are expecting, I continue to predict that interest rates will be going up MUCH faster and bigger than the markets are currently reflecting…and therefore continue to recommend owning puts in Eurodollar Futures (and again, this is NOT the Eurocurrency).
Start here…a simple picture of what short term rates have looked like for the past 30 years…and a reminder that the “norm” in interest rates is really 3 or 4 percent above today’s levels…
I will say it again…The Fed will be dealing with ENORMOUS economic stimuli at a time when the economy is ALREADY humming…at the same time that Interest Rates are STILL at ROCK bottom, ABNORMALLY LOW LEVELS…And I would also point out that the minutes from their December meeting reflected a growing desire to eliminate the idea of “gradually higher rates”, and that more Fed governors are specifically arguing for faster increases than pundits and the markets are currently anticipating.
Stocks are not slowing down…
And the following chart clearly (in my opinion) indicates that Interest Rates will accelerate higher as the Stock Market takes off…And do remember that Eurodollars go lower as interest rates go higher…
STOCKS AND EURODOLLARS HAVE BEEN MOVING DEAD OPPOSITE EACH OTHER
LIBOR and the Eurodollar Deposit Rate (essentially the international interest rate for Dollars outside the USA) are virtually identical…Here is the actual Eurodollar rate chart on which the Eurodollar Futures contract is based…Decide for yourself where YOU think rates might go from here…
My opinion in black & white: Stocks are still in a SHARPLY higher upswing. The economy, ALREADY surging, is going to have an enormous first 6 months in 2017. Price and Wage Inflation (which just registered its biggest one month gain in 7 years) will be accelerating…AND THE FED, WHOSE ACTIONS NEED AT LEAST A FULL YEAR TO HAVE THEIR DESIRED IMPACT, WILL BE MOVING AGGRESSIVELY TO CATCH UP IN A GAME IN WHICH THEY HAVE ALREADY FALLEN BEHIND THE CURVE.
I AM STILL BUYING EURODOLLAR PUTS…
I AM STILL ADDING TO MY POSITION.
Here is the put option I am currently buying…and I AM STILL BUYING PUTS…I think this move has barely gotten started…
Here are a few more charts that I think are relevant…
Same here on the S&P 500 that follows...Just looks like it could erupt higher...IMMEDIATELY. Interestingly, I just pulled an article with the 2017 S&P projections from 9 major banks and brokerage houses...with their average guess being 2358...for the YEAR...when I honestly think we could be there in less than a month (certainly within a few)...and all those geniuses (who were essentially negative over and over throughout 2016) will then be "revising" their forecasts AGAIN...And I will reiterate, virtually NONE of those guys, nor anyone who follows them, have been in the market for the post election rally...and are generally STILL not sure how to "get back in"...But they WILL...at sharply higher levels when they FINALLY, actually, become truly bullish.
Again…if this IS the case in stocks…I see nowhere for Eurodollars but SHARPLY lower…
Give me a call if you think this makes sense…
I DO think this market is NOW ON THE MOVE…that small periods of consolidation like we’ve seen the past few weeks will be followed by strings of bigger down days than have been the case since this market topped out some months ago…
Pick up the phone and call me…I am definitely interested in hearing what all of you think as we head into the new year…about this and any other perceptions you have regarding the markets and the economy…or just to say Hello.
Happy New Year,
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars