Look at These Two Dangerous Market Moves

Global markets are engaged in a massive re-pricing in the wake of Donald Trump’s election to the U.S. presidency. While the S&P 500 is again trading near a record high after rallying strongly on the belief that Mr. Trump will lower taxes, raze regulations, and make economic growth great again, currency and bond markets are moving in dangerous directions that cast shadows over the post-election ebullience.

The U.S. Dollar Index (DXY) ended the week at a one-year high of 101.21 as the euro (1.06) and yen (110.91) weakened significantly (these two currencies are the two largest components of the index).

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But emerging market currencies are suffering much sharper losses against the dollar, which will cause big problems as these economies have to refinance nearly $10 trillion of dollar-denominated corporate and sovereign debt in the years ahead.

The dollar is reacting in part to rising U.S. interest rates. The yield on the benchmark 10-year Treasury continued its ascent last week, closing at 2.34% (nearly 1% higher than its post-Brexit low) while the yield on 30-year Treasuries closed above 3% at 3.026%. Bonds are toxic securities that should be avoided at all costs.

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And then there’s the housing market…

Higher rates pushed 30-year fixed rate mortgages above 4%. The housing market saw a 27% surge in foreclosures in October, the largest one-month jump since August 2007. With 24% of households still sitting with negative equity and homeowners’ equity at 57%, lower than before the housing bubble burst ten years ago, rising rates are hitting a housing market that is more vulnerable than most people believe.

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Corporations are also more leveraged than before the financial crisis with Debt/EBITDA in the high yield sector at 5x vs. 4.2x in 2008 and 2.6x v. 2.2x in the investment grade sector. Corporations face $2 trillion of debt coming due in the next two years and will see higher interest costs going forward. Higher rates will limit future stock repurchases as well since many companies – especially investment-grade ones – borrowed huge amounts of money to return capital to shareholders.

Higher rates will also highlight the out-of-control federal deficit, which increased by $1.4 trillion in the last fiscal year. President-elect Trump will have to weigh the consequences of higher spending and tax cuts against a likely bond market freak-out if this issue isn’t addressed.

Investors Still Believe in Stocks

Stocks continued their post-election celebration last week with the S&P 500 adding 0.8% to close at 2181.90. The Nasdaq Composite Index jumped 1.6% to 5321.51 while the Dow Jones Industrial Average was quieter and gained only 0.1% to 18,867.93. Future gains may require a suspension of disbelief if bonds keep selling off and the dollar rises further. But investors believe that stocks are the place to be. Equity ETFs saw $44.8 billion of inflows in the days after the election according to TrimTabs, the second largest surge ever.

At the same time, outflows from bond ETFs were the largest since the taper tantrum in July 2013. High yield ETFs HYG and JNK continue to weaken as high yield market investors take money off the table after a strong 2016. Higher rates will be a big problem for many high yield borrowers in the years ahead since free cash flow remains in short supply in the precincts of Corporate America.

There was some notable corporate news last week. In the “Epic Stupidity” category, Tesla Motors Inc. (NasdaqGS:TSLA) shareholders approved the merger with SolarCity Corp. (NasdaqGS:SCTY) that is going to saddle the company with huge losses and more debt and hasten its need to dilute existing shareholders with future stock sales. Having just elected one of the best salesmen of our generation to be our president, it may not be surprising that investors are buying the nonsense incessantly spewing out of the jaws (or tweets, like the President-elect) of Elon Musk, but their support for this deal is going to be an expensive blunder.

All you have to do is look at Tesla’s and Solar City’s financial statements to see that these companies are heading for a crash. Tesla’s ridiculously overvalued stock is even more ridiculously overvalued now that the company is saddled with money-losing Solar City. Word from the solar panel market is that pricing is terrible and demand tepid, regardless of the carnival barkings of Mr. Musk. Congratulations to the idiot shareholders who approved this deal. Don’t call me to complain when you lose all of your money. You were warned. (Zenith Trading Circle members: obviously this is going to be good for your portfolio, though it will require a slight change in strategy. I’ll be in touch very soon.)

More ominous as a policy and economic issue, however, was the announcement that DuPont (NYSE:DD) will stop contributing to active employees’ retirement plans, which will affect the retirement plans of 13,000 workers. The company will also eliminate retirement healthcare benefits for all employees under the age of 50. This will save the company, which has billions of dollars of annual revenue, $50 million a year.

This is nothing short of disgraceful. The activist investors who hassled DuPont over the last several years can now pat themselves on the back for damaging the lives of more hardworking Americans while contributing nothing themselves of value to the US economy (and in case anyone is paying attention, the returns of virtually all activist hedge funds suck). Any idiot can cut costs and pontificate in the media about how businesses can be run better on the backs of American workers, but very few can build businesses. DuPont’s action is a serious black mark on American business, but unfortunately it is unlikely to be the last time we see something like this. Corporations will continue to waste money buying back their overpriced stock to prop up the value of management’s stock options while selling out their workers every time. Where is Elizabeth Warren when she could do some good?

On a personal note, I want to wish everyone who is reading a Happy Thanksgiving. I appreciate your interest and your thoughtful comments every week.

Sincerely,

Michael

22 Responses to “Look at These Two Dangerous Market Moves”

  1. You ROCK. I never subscribed to political correctness so when I read someone telling it like it is I think; it’s about time! Corporate debt is unsustainable and profits are masked with buybacks and fluff. I’m a PUT buyer I believe the big bear is right around the corner.

  2. Thanks for the info on Solar City. I just got off the phone talking to SC about installing a solar system on my home. I will take a second look. Also was told a about a multi-million contract with the military on installing solar systems on base housing.

  3. Please call to discuss allocated gold, silver, platinum, in an open-end bullion trust:1-905-415-2963, as a tangible asset portfolio hedge, Michael. As well, can you comment on Timing of 1x negative DOW, DOG, and its equivalents for S&P, NASDAQ, Other Japanese or European indexes?

  4. I’m in on the Chipotle Trade and yet it has been going up since I purchased the puts earlier in the week. Selling at a p/e of over 166 I can’t fathom what value anyone see’s at this price….What am I missing that purchasers think they are seeing? Paul

  5. Michael, Trump should request Yellen to buy some of the infrastructure bonds, so nominal interest rates will be capped, RE will not crash, and the government will not be overly burdened carrying its debt. If he does that, with the inflation caused by the infrastructure work, we could see negative real yields. This would be an application of helicopter money, as discussed at Davos. Your thoughts?

  6. Solar City is Governor Cuomo’s hack job; that is; millions were poured into the project from state-funded sources, subsidies, etc.

    All of the contractors have been paid and the building is totally empty. If you were to walk around the perimeter, it would take one hour.

    A stupid acquisition, for sure.

    With that said, Musk and Tesla’s shareholders can be given credit for fleecing the State and bankrupting the treasury.

  7. I invested with an options trader based in the UK. The salesman was so aggressive and I made the mistake of borrowing US5,000.00 and lost on all three trades he recommended. He told me the money was insured but even though it was put back into my account I cannot take the money out but am forced to do another options trade. I don’t know much about trading but am wondering if anyone has any suggestions on an options trade. I will get a call from an account manger tomorrow and am not sure what to do. If I could make a successful trade I would get some of the money out and invest it into the Zenith Trading Platform. Any advice?

  8. I have borrowed CDN$6,500.00 to invest in an options trading company even though I didn’t know much about trading but the salesperson was very aggressive and promised me the moon. I lost all three trades he recommended and even though he said the money was insured I cannot take it out of my account but am forced to do another trade. Any advice on what options to trade in? If I get the money out I would like to sign up for the Zenith Trading Circle.

  9. Margit, I bet the options trading company you’re getting harassed by is BinaryUno. STOP dealing with them. Walk away with your losses. These aggressive account managers are a fraud as is the company. I experience a similar faith but stupidly kept on giving and lost it all. Good luck!

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