While all eyes were on Hurricane Matthew last week, hackers and political operatives were busy preparing another Friday night surprise that rocked the presidential election with disturbing revelations about both candidates.
If you can tear your eyes away from this salacious mixture of Entertainment Tonight and The National Enquirer, you’ll observe that the markets remain focused on central banks that are increasingly ineffective and confused about their missions and their policies. Despite another mediocre jobs report (+156,000 jobs in an economy of more than 300 million people), the market seems to believe the Fed are increasingly likely to raise rates again in December. The futures market is currently pricing in a 64.3% probability of a rate hike before year end. The yield on the benchmark 10-year Treasury has risen by 12 basis points over the last month to 1.72% and is much higher than its post-Brexit low of 1.36%. The only way we will revisit that level is if the economy enters recession or crisis, neither of which is imminent though both of which is certainly within the realm of possibility under the current disastrous monetary policy regime.
Stock markets remain relatively oblivious to the possibility of anything going wrong, however, The VIX closed the week near at 13.48, well below its long-term average of around 19, and the S&P 500 is only slightly below its all-time high at its closing price for the week of 2153.74 (it actually dropped by 0.7% or 15 points last week).
Investors should be very wary as we enter the fourth quarter. And there’s one major reason that markets are (astonishingly) ignoring right now.
It’s an upcoming vote (but not the one you think)…
And it could have disastrous consequences.
The Potentially Disastrous Vote No One’s Talking About
In addition to the problems at Deutsche Bank, which is the real Creepy Clown in the global markets, Italy is getting ready to vote on changing the Italian constitution on December 4. The referendum would limit the powers of the Italian senate, which is viewed as a source of political gridlock. The vote is seen as a vote of confidence in the current pro-European Union government headed by Matteo Renzi.
If the referendum fails, it is likely to open the door for anti-EU parties to take over the government. Sources in Italy tell me that the polls are currently leaning toward defeating the ballot measure, something that markets are not expecting.
The Financial Times recently warned: “An Italian exit from the single currency would trigger the total collapse of the Eurozone within a very short period. It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash.” Coming from a publication not prone to hyperbole, this warning should be taken seriously. Italy is home to the world’s third largest bond market (after the US and Japan) and the third largest economy in the European Union (after Germany and France).
I’ll have more on that story soon (and show you how you can profit).
Speaking of profits, here’s a quick note on two of our current short plays:
Valeant Pharmaceuticals International Inc. (NYSE: VRX) dropped to $23.16 after hitting a recent high of $30.27 on September 7. Investors would do well to ignore the advice of Bill Miller and Bill Ackman and avoid this toxic company’s stock at all costs. Tesla Motors, Inc. (NASDAQ:TSLA) also saw its stock drop to a still absurdly overpriced $196.61 from a recent high of $230.61 on August 4. Apparently investors weren’t impressed with the news that the company plans to manufacture 50,000 cars over the second half of the year, bringing its full year total to 100,000. Maybe they realize not only that the company loses big money on every car that rolls off its production line (even after receiving massive government subsidies), but that the chances that it will meet the ridiculous production goals set by Rocket Man Elon Musk are zero. While Mr. Musk is busy pontificating about his vision of sending man to Mars (I have news for him – if man was meant to live on Mars, he would already be there), Tesla is going to run out of money long before it meets its production goals.
Mr. Musk denied in another of his infamous tweets (that are making a farce of SEC disclosure rules) that Tesla will be raising more equity before the end of the year just two days after the company formally stated that it would be raising equity in the near future. If shareholders are corrupt or stupid enough to approve Tesla’ s merge with insolvent Solar City, that will only increase the massive cash flow bleeding at the combined company and further necessitate the need to raise equity and dilute shareholders. Investors who believe these stocks are going up are delusional.
Based on a likely Fed rate hike in December, the vote in Italy, the problems at Deutsche Bank, and the sad spectacle of the US presidential election, I advise readers to sharply reduce their risk right now.