Thursday Thrust – Markets Going Higher Just Because


I said the markets were broken the other day and this BAC chart spells that out.  We haven't had a sustained move down since last year as the market keeps grinding higher but it's all based on what investors HOPE is going to happen – not what is actually happening.  The "Hard Data" has, in fact, been crashing all year and the bounce we are currently celebrating is mainly due to post-hurricane buying – something we knew was going to happen but is still getting the markets very excited and now analyst/cheerleaders are extrapolating this one-time boost in buying ad finitum to entice more money off the sidelines and into the markets.

Even Warren Buffett is getting into the act, virtually guaranteeing the tax cuts will pass (which should boost bottom-line earnings – even though no actual improvements in sales or operations will have occured) and going so far as to state that he isn't even selling his winning positions because he will save so much money next year on lower tax rates.  Of course Buffett is talking his massive book, which holds hundreds of Billions of Dollars worth of stocks at record highs.  So are all the other fund managers they are trotting out on TV – telling you how great the market is at this price.  

We are VERY reluctantly long still, but not so much.  Since our last Portfolio Review in mid-September, our Long-Term Portfolio has gained $48,000 (2.9%) while our hedges in the Short-Term Portfolio have dropped $30,000 so a net gain of $18,000 on our paired portfolios while we're putting in fresh record highs. 

Just this morning, we discussed, for the first time, buying NAKED LONG TZA Nov $12 calls, which are $1.35 with (TZA) at $13.15 so they have just 0.20 in premium and, if the Russell (now 1,515) does drop 2.5% to 1,477, the ultra-short ETF would gain 7.5% to $14.13 and the calls would be worth $2.13 – up 57% on a 2.5% drop in the Nasdaq so 20:1 leverage on the downside.  

I know I put up a lot of doom and gloom warnings in the morning Reports but that's because I feel the need to serve as a balance to the irrational enthusiasm but we are, reluctantly, playing the long game and, like Buffett, we haven't yet cut our winners – but we are now hedging the hell out of them.  We'll see if earnings manage to justify any of this nonsense but we're ignoring the uptick in data on the assumption it's storm-related.  If it's a real rally that will keep going through winter – we won't miss much by sitting out this leg into earnings.

I hate to be the stick in the mud but look what's happening to Puerto Ricos bonds this month.  While people in the US may not feel like Puerto Rico is a state, the message internationally is the US can't take care of their own people in a crisis and don't even get me started on how crap Trump has been.  Yesterday alone, the bonds fell more than 10% the day after Trump visited – what happens if investors begin to question the value of our own TBills?  

Peurto Rico bonds are down 50% this year and they were down 20% before the storm so this is just what pushed them over the edge.  The island is $74Bn in debt and, with 3M residents, that's $24,666 each or $75,000 per family – good luck getting that back now that half their homes are wiped out.  The current estimate is $90Bn worth of damage was done to the island – that's another $30,000 per resident or $100,000 per household worth of damage.  Before the storm hit, the Peurto Rican Government had $1.6Bn left in their budget.   With widespread damage to telecommunications systems and the electricity grid, Treasuy Secretary Maldonado doesn’t expect to begin collecting sales tax for at least another month.

“I don’t have any collections, and we are spending a lot of money providing direct assistance for the emergency,” he said in an interview in San Juan. “Without the assistance from Congress, Puerto Rico’s government will not be able to operate next month.”

While attention has focused on the commonwealth’s staggering $74 billion debt, Puerto Rico faces a more immediate crisis in the wake of the storm. It’s running short of money for fuel, salaries of recovery workers and food aid. Meanwhile, only 8.6 percent of customers have electricity, mobile-phone service is sharply curtailed and many mountainous rural areas remain inaccessible.

You have conservatively over 100,000 homes that are destroyed here,” Governor Ricardo Rossello said an interview Wednesday.  “Essentially you’re looking at zero revenue for the next couple of months,” he said. “While you have zero revenue, you still have expenditures, plus emergency expenditures. That means the money is going to run out very quickly."

What is the message the United States is sending to the World when Congress and the President are, on the one hand, saying we have so much money that we can afford to collect $400Bn PER YEAR LESS taxes from the Top 1% and their Corporations while, on the other hand, we tell Puerto Rico their one-time $90Bn disaster is a "budget buster" and they are on their own?

$90Bn is over 100% of Puerto Rico's GDP – it's simply not possibly, in any universe, for them to be able to repair their island without assistance.  If they don't repair things – they will fall apart, default on their debts, etc.  That will then send cascading losses through the banks and funds that own the debt and will also add a high degree of risk to every US State's bonds, since investors will no longer have faith the Federal Government will ultimately bail them out.  

The federally appointed Bankruptcy board, which has broad oversight over the island’s finances, requested for immediate aid Tuesday. In a letter the panel sent congressional leaders, the officials asked the federal government to make low-interest loans available to ease the impending liquidity crisis.

“Failure to provide the greatest amount of federal aid and the emergency liquidity program will be potentially ruinous," chairman Jose Carrion wrote. "We must do all that we can to help Puerto Rico avert a tragedy of historic proportions."

The panel also asked that the federal government waive cost-sharing limits, disaster spending caps and grants for long-term relief.

If Congress doesn’t act, Maldonado said, “it will be a disaster.”