Election Day Bullet Points

Welcome to Election Day 2016. I for one am unable to conjure any emotion other relief that it’s over.

There will be plenty to read and watch today, so let me keep this very short.

  • Through last Friday, the markets looked into the eyes of the presidential election and blinked. The S&P 500 ended last week with its longest losing streak since 1980, closing down for nine consecutive trading sessions, ending the week at 2085.18, up only 2.02% for the year.
  • However losses were a relatively modest -3.1% during this period, so while investors had been clearing out of the market before Tuesday’s election, they had been doing so in an orderly manner.
  • To place the recent loss in perspective, the S&P 500 has lost a greater percentage in a single trading sessions 295 times since 1928 than it has since it started thinking that it might have to utter the words “President Donald J. Trump” on the morning of November 9th.
  • Then on Sunday, FBI Director James Comey let Hillary Clinton off the hook for a second time. This set off a giant rally on Wall Street with the S&P 500 closing up over 2%. Markets have long favored a Clinton presidency on the basis that the Devil they know is better than the Devil they don’t.
  • It also looks increasingly likely that Republicans will maintain control of the Senate, which gives investors comfort that if Mrs. Clinton does pull off a victory, she will not be able to raise taxes or push through her anti-business agenda.
  • We will learn today if markets got ahead of themselves on Monday. Trump still has a narrow path to victory through Florida.
  • If Trump wins today: As I explained yesterday, equities could sell off sharply as investors wrestle with an outcome that was not priced in to the market. In that case, we can expect many of our favorite short positions to head straight down.
  • If Clinton wins today: The relief rally that many expected may continue but likely not for long as her victory sends the country straight into political paralysis and constitutional crisis that leaves us vulnerable to geopolitical and economic threats.
  • Either way: Since market valuations are already extended, any sell-off could be serious until cooler heads prevail.

My Full Election Day Market Analysis

Junk bonds are also in the middle of a bad run though the losses are manageable thus far. The BofA Merrill Lynch U.S. High Yield Index has dropped by 1.8% since October 24, and investors have redeemed billions of dollars from high yield ETFs. Junk bonds are still enjoying a very strong year (despite rising defaults and poor risk-adjusted returns that extend beyond the troubled energy patch) but are giving some of those gains back based on the same concerns that are spooking equity markets.

Markets may also be growing tired of being told that the economy is wonderful when it is decidedly not. Despite phony government statistics that report a low unemployment rate of 4.9%, there are 96 million people out of the work force and the quality of jobs being created is poor. Non-farm payrolls rose by 161,000 in October, another in a long line of woeful numbers in a country of 320 million people. Private sector jobs increased a mere 142,000, 28,000 less than expected, last month. And 195,000 more of our fellow citizens left the workforce, dropping the labor-force participation rate to 62.8%. Much of this has been made possible by the expansion of the Dependency State by the Obama Administration, which lowered eligibility requirements for virtually every type of government freebie in existence.

As ObamaCare unravels just as its architect conveniently leaves the scene of the crime, America faces the challenge of reversing the unsustainable expansion of unaffordable entitlements that are busting federal and state budgets. In the fiscal year that just ended in September, the annual federal deficit jumped to $560 billion but the federal debt jumped by $1.4 trillion because many budget items are “off balance sheet.” With the federal debt about to hit $20 trillion, having doubled during the Obama years, it won’t take long before it hits $25 trillion and more and the country is spending $1 trillion just on the interest on the federal debt. Anyone who believes that interest rates will remain at their artificially low levels regardless of what the feckless Fed does is fooling himself. The only way interest rates will stay low is if we have another credit crisis, which is increasingly likely to happen but only after rates rise and trigger that crisis. The next president may not be inheriting an immediate crisis, but he is facing a crisis nonetheless.

The press continues to write about hedge funds losing money and investors but misses the most important point of the story – these investment partnerships are not “hedge” funds. With very few exceptions, they are long-biased funds that charge hedge fund fees (meaning a management fee plus a performance fee). Such fees are only appropriate for uniquely skilled managers or for unique investment strategies that protect capital in down markets, something that very few funds are capable of doing. Reports that some of the largest funds in the world such as Crispin Odey (down more than 40% this year), Pershing Square (down 20% for the second consecutive year) and Paulson & Co.’s funds (which have lost money all but one year since the financial crisis when they made a killing on subprime mortgages) are an object lesson in the importance of risk-adjusted returns and avoiding chasing celebrity managers and what we in the business call “hot dots.” The sad reality is that few fund managers have demonstrated an ability to make money without the Fed pumping huge amounts of liquidity into the market, suggesting that as the Fed moves closer to raising rates again returns are likely to be even worse.

See you on the other side.

Michael

9 Responses to “Election Day Bullet Points”

  1. William P. Dunn IV

    I completely agree, we will have another “KICK THE CAN DOWN THE ROAD” the next four years. Math is a pure science and number’s don’t lie only people do. The people whom lie the most? The answer: POLITICIANS they will tell you what ever you wish to hear!!!!!!!!!!!!! It does not matter if listening to a “DUMMERCRAT or a RIPOFFABUBLICAN” both parties are to blame. Dummercrats can not find enough $$$$ for deadbeat and RIPOFFABUPLICANS can not find enough 22 caliber bullets to purchase for $22.00 each which I can purchase at Walmart for 22 cents a piece and both send everyone else’s children off to wars that their own children never participate in. So much for DUMOCRACY in America today.

  2. What about the currency wars in the IMF? Will Britain, Russia, India, China, and South Africa have enough veto power to kick the dollar out as the world’s reserve currency, and issue a new world currency? How would that play out? Do you see that happening in the near future?

  3. Spot On. Only this train wreck of an economy that we have here is not something new. This has been growing for years. Throughout history all economies crash and burn. When that happens somebody else gets to play top dog for a few decades. I’m sure that America is partly into the exercise now. But the real reason it is all falling to shit is that there is too much fat in the system and you have wasted too much blood and treasure fighting in wars that had nothing to do with the USA.
    It will be verrrry interesting to watch this buffoon try and run the place (just hope we all live to see the result in 4 years time).
    Your friendly politician and aaallllll his cronies going back to long before I was born have just been ratcheting up the gravy train, loosely called ‘government’, spendathon that is about to crash the economy. Every Administration seems to double the size of this train and most people with a few brains can’t help but notice that the maths and the history and the logic are all coming together and its just not going to be pretty.
    In my opinion the bloke who ‘left the hand grenade in the gearbox of USS Enormous-Economy’ before retireing was our dear old dunce, George W. when he announced on May 17, 2002 That he would spend an additional US$440 Billion on low cost housing. What a fantastic idea that turned out to be. On that day he announced help for down payments on houses, Single Family Affordable Tax Credits to assist in getting “Low income people into richer neighborhoods all across America”. And directed his people to “make the rules simpler”, make it “much less complicated” and cant forget “don’t want fine print to stop folks owning their own home”. All well and good except that it won’t, can’t and didn’t work. We still haven’t fully recovered from that idea. An Honorable Idea that even poor people should own their own home. But it caused more pain on the population of America than anything short of War.
    Lets blame all the politicians, bureaucrats, spin doctors and assorted leeches that make the ever growing machine rip you off in some way, shape or form.

  4. I am told that 29% of all mortgages in the U.S. Are 5+ years in arrears because the mortgagees agreed with the accommodation of FASB to terminate forclosure activity. (61% in Hawaii). Have these Billions in bogus assets been written down to market value? If not, how will the U.S.avoid another housing/mortgage crisis?

  5. Rates do need to rise. But what would happen if the Fed started raising them one sixteenth of a point every quarter? Would this spike volatility? Or drain liquidity from the system? Methinks not. But it might just send the signal to all market participants that the free lunch is over. Too, at that rate, it would take 20 years for rates to arrive at 5%. That hardly seems inflationary, especially in comparison to the Carter era rates of some 20%.

  6. Just wanted to say Thank You to all of you. As your articles are helping me release. Your insight and forsight speaks to my focus on change thats needed. You inspire me and that alone. Ill never thank you enough for. Mentor Capital. Hookes Law just revealed itself.

    Robery F. Pacione

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