Stocks Are Selling Off – But Not For the Reason You Think

About the only good news that emerged over the past week is that we are one week closer to the end of the most disgusting presidential election in American history. While other elections may have involved similar descents into the depths, one would have hoped that American democracy had evolved to a more constructive point by 2016. Alas, the opposite is true and the country is now barreling toward political and economic disaster. The outcome of the election will be a more deeply divided government that continues its unconstitutional expansion and violation of liberty through fiat rather than the consent of the governed and crushes the economy under a growing weight of taxes and regulation.

With the prospects of a Clinton victory rising, a result the markets and establishment are rooting for, it therefore seems curious that stocks have been selling off the last two weeks. Last week stocks were off for the second consecutive week. The Dow Jones Industrial Average fell 102 points or 0.6% to 18,138.38 while the S&P 500 lost 1% or 21 points to 2132.98. The Nasdaq Composite Index fell 1.5% to 5214.16.

But why?

Contrary to what you might think, it’s nothing to do with politics. But it’s everything to do with the establishment.

Here’s what’s going on…

The Real Reason Markets Are Precarious Right Now

In the face of low-rent politics and the wholesale sell-out by the media of any pretense of journalistic ethics, high levels of investor complacency should be alarming to people. More than ever, investors must ignore what they are told by the so-called “establishment” and seek out information from the rare truth-tellers whose only agenda is to help them protect their capital from Wall Street and Washington.

That job is going to become even more difficult in the years ahead as the Federal Reserve stumbles around in the dark trying to undo the damage wrought by its destructive policies. Fed Chair Janet Yellen’s recent comments, among her most idiotic ever, stating that the Fed may be willing to allow inflation to overheat when asset inflation has been raging for years demonstrates the profound incompetence and corruption of the people in charge.

The truth is, financial conditions are tightening as the odds of a Fed rate hike in December continue to rise. And that’s not all…

There are good reasons for stock investors to worry. In addition to the likelihood that the chicken-hearted and feckless Fed will notch up rates by another quarter in December, there are other serious risks on the horizon. Italy will vote on December 4 to amend its constitution; if it votes “no,” it will open the door to a potential exit from the European Union that would rock global markets. And the Italian banking system is for all intents and purposes insolvent while Germany’s banking sector is also under serious strain. Deutsche Bank continues to face serious problems that are going to require it to raise additional capital from somewhere while Commerzbank, its largest rival, also struggles. Geopolitical tensions are rising around the world, particularly between the U.S. and Russia, and the next president could face a stiff challenge early in 2017.

Over the past week, long rates kept rising with the yield on the benchmark 10-year Treasury rising to 1.8% and yields on German and Japanese bonds rising (though they remain pathetically low). The US Dollar Index (DXY) also rose sharply to 98.09 as both the British pound and Chinese yuan weakened significantly. With stocks fully priced, bond yields rising, the dollar strengthening and a new earnings season upon us, the odds of higher market volatility are rising.

Investors are also ignoring signs of excess debt in the corporate sector. Low interest rates have allowed U.S. corporations to borrow enormous amounts of money that they are going to have to pay back. Corporate America is more leveraged today than on the cusp on the 2008 financial crisis but investors are acting as though there is little risk of anything going wrong – a big mistake. As The Wall Street Journal warned last week: “Leverage carried by companies rated investment grade and below investment grade has hit record levels, far exceeding the highs reached around the time of the financial crisis, according to statistics from Moody’s Investors Service.”

Median earnings before interest, taxes, depreciation and amortization for speculative grade companies is 5x debt versus 4.2x in 2008 while the ratio for investment grade companies is 2.6x today versus 2.2x in 200 according to Moody’s. This is only possible because interest rates are so low – believe me, companies are not generating significant amounts of cash flow. The only sector that has reduced leverage since the crisis is the banks, which were mandated to do so after blowing up in 2008 after pushing their leverage up to irresponsible levels. Even the Fed is starting to worry about these high levels of corporate debt, though it is moving about as quickly as a tortoise moving its bowels to do anything about it. There is no question we are heading toward another debt crisis – the only question is when it will arrive.

Finally, it was amusing to see Elon Musk tweet that Tesla would not need to raise equity before the end of the year two days after the company made a filing with the SEC stating precisely the opposite. A few days later, an analyst at Oppenheimer published a report opining that the company will have to raise about $12 billion of capital to meet its production goals. With roughly $3.3 billion of cash on hand if the ill-advised Tesla/Solar City merger is approved, the company may not have to raise more equity by year end but will definitely have to do so relatively quickly in 2017. But that begs the question of why Mr. Musk thinks he can ignore the securities laws and tweet out whatever he wants whenever he wants without the SEC taking any action against him. He seems to suffer from Trump-Tweeting-Derangement Syndrome. The only difference is that he is a darling of the corrupted media. At least until he loses people a lot of money in his ridiculously overvalued stock that everyone in America should short. (Get my put recommendations here.)

Sincerely,

Michael

21 Responses to “Stocks Are Selling Off – But Not For the Reason You Think”

  1. Edouard D'Orange

    They shouted “down with the establishment” back in the ’60s. Now, they are the establishment and wrecking the country with debt (corporate and government), easy money (Federal Reserve), regulation (enormous government) and social engineering. So, now I say: “Down with the establishment”!

  2. With so much talent and intellect in this country, it is beyond me why and how we have gotten into such a position and the public and media is so sophomoric when discussing it or covering it. It is as if we all returned to the drama of our high schhol days.

  3. Of all the “strategists” at money map, who I really think are out to help simpletons like me, you are a real hoot ! Thanks for the plays, with patience I believe they will all pan out quite nicely in a short amount of time….. Thanks again for sharing your “gift” with us.

  4. I am 54 yrs young and have always wanted to invest in the stock market . Ive always had to work hard 6 and 7 days a week for what little i have aquired and could never trust what i read. It is relaxing and hopeful to read some honesty . I have found some advise i can trust to finally start putting some money so it will work for me. Thanks for all your advise.

  5. J. A. Barrowman

    How will Canadian government and corporate Bonds fair if the ‘Super Crash’ happens later this year or early next? Prior to the US election, it’s my intention to sell off most of my equity holdings and buy various short term bonds with maturity dates of 2 – 3 years in Bond pools through my investment broker. Any thoughts?

  6. Human Populations and consumption rate of resources has peeked Earth’s capacity. More Technology & Ageing societies imply a plateau-economy; unfortunately Capitolism depends on an unrealistic ever expanding ‘growth’ model.

  7. It is interesting to see the number of myopic individuals who continue to believe that this fiat money economy can go on forever living on debt and inflation. We will return to a gold based economy whether these people believe we will or not, because it is the only honest money. What most people do not realize is that Rome tried the same approach, using inflation to finance wars most of which they did not win. This wound up impoverishing the empire so severely that when the Germans took over they could not save it. Later in 1092, when the Byzantine Empire reached the same crisis, Alexios I brought about the return to 95% gold coins, which helped the empire continue for another 350 years, when it was conquered by the Ottoman Turks.
    The tragedy is that humans do not learn from history, because we always have ignorant politicians who believe that they have the power and intelligence to solve any problem which might arise. This time is not different. As a student of history for more than 50 years, I see a situation which our politicians do not understand, and which has become enormously costly to our economy as well as our society.

  8. I just finished reading ¨The Creature from Jekyll Island.” If you want to know what has caused and will continue
    to cause our bankrupt Governments, you must read this book. It should be compulsory reading for any investor.

  9. I just finished reading ” The Creature from Jekyll Island.” If you want to know about the cartel known as The Federal reserve (which by the way has nothing to do with the Federal Government nor does it have any “reserve’s”. It is strictly a cabal, which should be disbanded.
    This book should be compulsory reading for every one.

  10. I was a passport member of Money Map Press for a while before you joined them and I tried to follow the advice of some of the team members but I never found ample consistency with their advice. So I would win some and lose some. The result basically leaving me where I started. Then when I received an email from you introducing yourself, your experience, and your formula to Zenith the financially weak stocks and ride the wave of profits down the slope of their decking stocks; it struck me as perfection! I had given up my passport membership with Money Map Press already and wasn’t looking back until I received your email. I loved your concept so much that I singed up again with Money Map Press again but only for your Zenith publication even though you were just starting with them and haven’t even given one stock option to short yet. I have followed your advice on every stock option recommendation so far and although not all of them are profitable as of today, I can honestly say for the first time probably ever in my life that I am still confident that based on your Zenith formula all will work out pretty much the way you predicted it would. I have used the down days to purchase more options and reduce my average costs on your recommendations so some of them I have acquired even cheaper than your portfolio granting me an even bigger profit than what you are publicizing! I have noticed sometimes your advice is in direct opposition of others from Money Map Press and it begs me to question who is right? My loyalty is with you Michael. I firmly believe in you and your analysis of the market and the economy. I sincerely believe you are one of the rare few most honest and knowledgeable people I have ever been so fortunate to be associated with. I sincerely appreciate all of your advice, opinion and direction. Keep it coming!

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