Interesting TACs of the Week (December 17 – December 23, 2016)

 

Summary – A top-down review of interesting calls and comments made last week in Treasuries, monetary policy, economics, stocks, bonds & commodities. TAC is our acronym for Tweets, Articles, & Clips – our basic inputs for this article.

Editor’s Note: In this series of articles, we include important or interesting Tweets, Articles, Video Clips with our comments. This is an article that expresses our personal opinions about comments made on Television, Tweeter, and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Macro Viewpoints & its affiliates expressly disclaim all liability in respect to actions taken based on any or all of the information in this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance.

 

1.Keynes or Enhanced Shiller?

Longevity & Scale are two attributes of high success in the investing world. And when you get superlatives in both, you know it is rare & special. Ray Dalio is both. This week he borrowed the “animal spirits” term of Keynes to describe what he expects from the Trump administration.

  • ” … Trump administration could have a much bigger impact on the US economy than one would calculate on the basis of changes in tax and spending policies alone because it could ignite animal spirits and attract productive capital. Regarding igniting animal spirits, if this administration can spark a virtuous cycle in which people can make money, the move out of cash (that pays them virtually nothing) to risk-on investments could be huge. “.

Is it animal spirits or is it Tale Reward? Tale Risk is the term Robert Shiller introduced in March 2014 to describe the wave of confidence a charismatic leader can create in a country. Shiller used it to describe Japanese Prime Minister Abe. We used it to describe the election of Narendra Modi in India and again to describe Donald Trump’s victory on November 8. But we soon realized the impotence of the term because, in merely three weeks after the election, the Trump charisma & drive began delivering. So on December 3, we introduced an enhancement of Shiller’s Tale Risk term that we called Tale Reward. One specific reward can be seen below:

 

We have also been very enthusiastic about the team assembled by President Elect Trump, enthusiastic to such a point that some readers had begun doubting our balance. Thankfully, Ray Dalio came to our rescue this week:

  • ” … it is increasingly obvious that we are about to experience a profound, president-led ideological shift that will have a big impact on both the US and the world. This will not just be a shift in government policy, but also a shift in how government policy is pursued. Trump is a deal maker who negotiates hard, and doesn’t mind getting banged around or banging others around. Similarly, the people he chose are bold and hell-bent on playing hardball to make big changes happen in economics and in foreign policy … “.

The above discussion, we believe, is the main factor on which the fate of the current rally will rest next year. It is clear to us that President Elect Trump is already working as a de facto President & at a furious pace. Look what he accomplished on Friday by coercing Lockheed Martin to work hard to cut the cost of the F-35 program. He totally nullified Friday’s UN resolution condemning Israel by tweeting it is will different at UN from January 20, 2016. The message to the world is plain & simple. Listen to what the President Elect wants not what the outgoing President wants. 

If he continues this furious pace of decisive delivery & if the markets start sniffing a legislative implementation of his program, then the current rally could keep on going like an energizer bunny. Perhaps that’s why Ralph Acampora says the Dow could get to 23,000 – 24,000 in Q1 2017. Even a non-believer like David Rosenberg said we could see a major up move in stocks & rates in Q1. 

What about valuation, you ask? Rich Bernstein, Rosenberg’s old colleague, sent a colleague to tell CNBC Squawk Box that they expect a 50% earnings rise next year. Bernstein has maintained for some time that the earnings recession that began in 2014 ended this year and so it is not unreasonable for him to expect a big earnings rise in 2017. If Bernstein proves right, then today’s valuation could seem inexpensive in retrospect.

2.Santa Claus Rally

But before we get to 2017, we have to get past next week, a week that usually sees a Santa Claus rally. What happens when we don’t get such a rally between Christmas & New Year?  

Lawrence McMillan of Option strategist concurs:

  • “… The post- Thanksgiving seasonal period is over, and it went out with a whimper. We didn’t even get the “obligatory” rally the last week into Christmas. Now another traditionally seasonal period takes over: the “Santa Claus Rally” period. If that fails, too, it will point to a very weak January“.

So we prefer to wait and see what happens next week. 

3. Treasuries

Stock indices meandered this week and closed up slightly. Treasuries were up more decisively this week with TLT up 83 bps and EDV, the Zero Coupon ETF, up 1.5%. The 30-5 curve flattened a bit more with the 30-year yield falling 6 bps and the 5-year yield falling 4 bps.  German Bunds would mock these moves because the German 30-yr yield & 10-year yield fell by 13 bps & 9 bps resp. Gilts were no slouch either:

 

The option market saw large buyers of TLT Feb 126 & 127 calls according to Jon Najarian & Rick Santelli of CNBC. Is that optimism or a cheap lottery ticket? Actually a Treasury rally might be due, especially if inflation fears have reached a local max:

 

 

3. Gold

Tony Dwyer, strategist of correctly-bullish-in-2016 fame, suggested profit taking this week on both CNBC FM & BTV Surveilliance. He said “the most contrary controversial call I have right now is that the US Dollar is not going to strengthen as everyone thinks it is“. Well, if rates come down some & Dollar stops going up, can oversold Gold mount a rally? And how oversold is Gold anyway?

Even celebrities seemed moved enough to say Buy Gold on Friday, the celebrity being Carter Worth of CNBC Options action. 

 

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