I love the market's attention span – or lack thereof…
No matter what happens, just a day later it's all forgotten and the dip buyers come in to buy things back to their highs. We had this pattern back in 2006/7 andit was even a joke meme. It's the kind of behavior that works – until it tragically does not.
This morning, we've pretty much recovered half of yesterday's losses and we'll see where we end up but 2,712 was what we expected and we don't really care if it takes one day or two.
Very much like in 1999 and 2006/7 investors have negative credit balances though, in 1999, it was just over -$100Bn and in 2007 it was -$75Bn and now it's -$300Bn so pretty much everything that was wrong with this strategy just prior to the other crashes is wrong with this strategy times 3!
That's why, on the whole, this market is all about the Fed and even though we saw the trade war with China reignite yesterday, it's a good thing because it takes the Fed off the table as their minutes last week listed trade wars as a primary headwind that may cause them not to raise rates. As long as rates remain ultra-low, those dip-buyers can keep on borrowing to buy those stocks and don't worry, this party will never ever stop and we'll never run out of money and the rates will never go up, right?
Well, maybe worry a little…
Meanwhile,it only takes 10 companies to make up 20% of the S&P 500's earningswith Apple (AAPL) coming in at 4.1% these days. Apple has boosted the Tech Sector to the top of the S&P with 26% of the market cap, followed by Financials at 15%, Health Care at 14%, Consumer Discretionary 13% and Industrials at 10%. The Energy Sector, which once led the index, has fallen to just 6% of the S&P's market capitalization.
So, if we want to consider where the S&P 500 is going, we really only need to look at these 10 companies and consider their effect on their overall sector to know where the other 490 companies are likely to follow. I've said for a long time, we called the top at 2,728 on the S&P because Apple is approaching a $1Tn Market Cap and that is a level that is very, very likely to be rejected so, even if we pop over for a short time, we're still likely to end up right back here again.
JPM, BAC and C have the same issues in a rising rate environment and there's nothing exciting going on with JNJ or PFE to think Health Care will begin to lead us higher and don't even get me started on Consumer Discretionary – the consumers have no money – that's something that became apparent in the recent earnings reports.
Speaking of reports, Q1 GDP has been revised lower this morning – from 2.3% to 2.1% so not a huge revision (10%) but way, way below the 3% that was promised. In fact, the whole of 2017 missed Trump's projections of 3% by almost a full point and, if we miss by that much going forward, we're going to have a $500Bn budget hole in the economy over and above the $1Tn hole that's PLANNED with the 4% growth that is FANTASIZED.
Over in Europe, GDP growth forecasts have been cut as well – from 2.4% for 2018 to 2.1% and that's only -15% so, of course, no one will worry about that or consider the consequences of it when paying 100x earnings for stocks in a low-growth environment. After all – what could possibly go wrong?
Just like our relentless dip buyers, our Governments have been spending and spending and spending, doubling down on debt in the past 10 years in an attempt to boost their economies and, $10Tn later in the US, we have 2.1% GDP growth to show for all of our efforts. That $20Tn debt pile is now growing at AT LEAST $1Tn per year and, even at 3%, the interest on the debt alone is $600Bn per year, which is 20% of all Government collections.
Japan's debt service is 40% of their Government's collections and they are still paying under 2% on their notes. What will happen when rates go up to 5% and the US needs $1Tn (33% of collections) just to avoid defaulting on their loans. For Japan, 5% would take up ALL of the Government's revenues – the country would simply exist for the purpose of paying debts – like Greece.
Like Japan, the US is relying on increasing the GDP faster than the debt increases to bring down the Debt to GDP Ratio, which sounds good in theory but, so far, isn't working out in fact. Since it's not working, the solution seems to be going much, MUCH more into debt and then seeing if that does the trick. If it doesn't – I predict more debt. After all, it's bound to work sometime, right?
There's nothing wrong with debt if you are using it to make an investment in something that will pay for itself over time. Tax cuts for the Top 1% and Top 1% Corporations do not pay for themselves over time. Public Transportation pays for itself, Roads, Bridges, Dams, Power Plants, Schools – those are the things that give us a long-term return on investment yet those are the things we CUT so that we may give to the rich. It's an asinine policy and it will doom us all if we keep it up.
The great and lasting achievements of the Roman Empire were roads and aqueducts, not the parties Nero threw at the palace. The Colosseum stands to this day, built in the year 80 to entertain the masses and it was still in use 500 years later – THAT is a good investment in infrastructure!
So, despite the rush of dip buyers – the big picture isn't changing and, until it does, my outlook remains the same and I don't see us blasting higher. Much more likely, we bounce between our bounce lines – having stopped right at the Weak Bounce line on the S&P (2,684) that we predicted back in March.
Using 2,684 as a bottom and 2,728 (strong bounce) as a top it's a 44-point range so we'll call it 9-point bounces within that zone to 2,693 and 2,702 and we'll short /ES at the 2,702 line with tight stops above in case this morning's move is a head-fake on the way to more selling. If not, and we stay over the line – we'll see if we can get back to 2,728 – where we'll probably short again as nothing has really changed and I don't see a catalyst that breaks us out of this range at the moment.