MARKET UPDATE - APRIL 6, 2018
$AAPL bought back the May 18th $175 Puts @ $9.95 this time only with a 5% allocation.
Merely the liability of China's retaliation and how that may impact AAPL's earnings growth there is enough to spook the technical breakdown of this seesaw. Picking these up tomorrow is fine. We anticipate that we will be liquidating existing longs and rebalance the porto to a higher position of cash with a net short bias if we see that 2581 # on the $SPX S&P500 Broken. It could happen next week or next month....when and if it happens then you can bet that our net shot position will significantly increase. Just be patient. Remember what we've been saying for the last 2 years: The benefit of the doubt continues to go to the buyers of this market. Until proven otherwise, this is a bull market. Well...the evidence both technically & fundamentally are getting harder to ignore.
However, we are not naive to the powers of world governments & central banks to prop up markets with a plethora of piñata helicopter money especially when they are orchestrated & in step together. However, the synergy of that orchestra is starting to unravel. Not just because the new Fed Reserve Chairman, Jerome Powell is nothing like his Bernanke & Yellen predecessors, but because central banks are fundamentally approaching damage mitigation now coupled with a [Chinese] Standoff.
The current situation is more likely that the fundamentals are now ahead of technicals in terms of downside pressure. Clearly the plunge protection team is making a last stand at S&P 2581 as trade war rhetoric heats up. Unexpectedly, President Trump has instructed Robert Lighthizer to coordinate an additional $100 billion in tariffs which are sure to face Chinese retaliation which will produce contagion of inflation, debt defaults and economic contraction throughout the global financial system. Even Trump admitted, ‘I'm not saying there won't be a little pain...So we may take a hit and you know what, ultimately we're going to be much stronger for it.’ The pain of resetting globalization to nationalism is likely to be historic. And as for Larry Kudlow’s hope for easy negotiations? China has already responded to Trump: ‘under these conditions, the two sides cannot conduct any negotiations.’ A forward looking stock market will eventually collapse if this current fundamental trajectory holds.
There were 28 days in the first quarter when the market moved plus or minus 1 percent, compared with only eight times in all of 2017. ‘It's a good deal more volatile than almost anything else you've seen," said Art Cashin, who began his career at Thomson McKinnon in 1959. ‘It is unfortunately reminiscent of some of the volatility we saw in '87.’
If the U.S. goes through with an additional $100 billion in tariffs, China will not hesitate to fight back and is already prepared to, their Ministry of Commerce said. ‘We will immediately fight back with a major response...We have no other choice. We feel America is very arrogant. They have taken a wrong action. The result is that they will hurt themselves. If they release the list of $100 billion tariffs, China is prepared. And will not hesitate. We believe this is a battle between unilateralism and multilateralism, a fight between protectionism and free trade. This is not good for China, or the world. Facing this serious problem, we must fight resolutely. We have prepared with a bottom line mindset and have planned detailed action. We won't start a war, but if someone does, we will definitely fight back.’ China’s Commerce Secretary added there was no merit to talk the two countries were discussing trade behind the scenes.
We plan to allocate a majority of the portfolio to SPY puts once the 2581 level breaks. Expect us to sell most all longs that we're currently holding, even good ole domestic home grown/gainers like AMZN.
In related news...George Soros is adjusting his hedge fund structure to begin purchasing cryptocurrencies on the Q1 dip. Yep. Crypto will emerge as the replacement for fiat after a debt crisis. Soros knows what he’s doing.
MARKET UPDATE - APRIL 5, 2018
Larry Kudlow and Steve Mnuchin represent the bullish last stand at S&P 2581. All of Wall Street knows that a close below February’s low at 2581 positions the market at risk of technical crash. Over the weekend of March 23rd these men attempted to calm markets by suggesting tariffs were simply being used as tools of negotiation towards better deals with China and NAFTA. Why did they feel the need to support markets at that time? Because the S&P had closed on Friday, March 23rd at 2588, just 7 points from the red line at 2581. Their last stand resulted in a massive Dow +700 rally on Monday, March 26th. The same thing happened yesterday. Wednesday morning as the S&P was trading into the dangerous 2570 range after China’s unexpected soybean retaliation, Kudlow repeated the same ‘negotiation’ message from the weekend of March 23rd and was once again able to produce a massive Dow +800 rally into the close.
There have been many notable ‘last stands’ throughout history. There’s the Alamo, General Custer, German’s in WWll, etc...the thing about last stands is they all end in defeat. History tells us that tariffs combined with Fed tightening will also end in defeat. Larry Kudlow’s soothing words cannot halt the contagion impact of inflation, debt default, and economic contraction on the financial system. On the flip side, judging from recent commentary it appears President Trump, Wilbur Ross, and even old Steve Bannon are no longer concerned about the stock market in this Chinese trade dispute. It’s low odds that Rothschild disciple Wilbur Ross will turn back now that he’s making such rapid progress. Both trade and currency wars (petroyuan) have been initiated over the last few weeks. 2581 will not hold into year end.
Take a step back from the short term ‘manipulation madness’ of Mnuchin’s plunge protection team and it’s obvious the market should have dropped big after yesterday’s unexpected Chinese trade retaliation. How long can they hold the line at S&P 2581? Uncertainty regarding this technical battle is why we are unwilling to load portfolio puts until 2581 is breached. We do believe it will eventually happen but perhaps not in the month of April. It has a higher probability of happening when the end of the Section 301’s 60-day comment period approaches in late May. By no means is this a firm forecast, we’re simply presenting a possible scenario. The market may well crash and burn well before May 31st if S&P 2581 is breached this week or next. 2581 is the most important technical resistance level of our generation because it represents a possible 1987 or 1929 catalyst that is now justified by risk fundamentals.
MARKET UPDATE - APRIL 4, 2018
The market bounced last week when it looked like both President Trump and China had caved on the trade war. We were leery of the optimism and suggested all eyes should remain on Wilbur Ross. One week later, Ross’s trade war is escalating more quickly than any anticipated. It took China only 11 hours to retaliate to the Section 301 tariffs with $50 billion in tariffs of its own. Wilbur Ross downplayed the overall impact by explaining China's tariffs ‘amount to about three-tenths of a percent of our GDP. So, it's hardly a life-threatening activity...It's relatively proportionate to the tariffs we put on based on the intellectual property.’ However, Ross also promised this trade war is just getting started, ‘several presidents got us into this deficit. This is the president who is going to get us out of it.’
Ross is accurate in his direct analysis but is misleading in his assessment of the overall impact. The one tariff that surprised everybody was China’s 25% tax on U.S. soybeans. China buys about a third of the entire U.S. crop, using it to feed 400 million pigs. By limiting soybean imports, China risks unleashing food inflation and roiling social stability in a country with a low margin for error. It also opens up the door to a new, third round of tariffs by the U.S. which would assure that a ‘nuclear’ trade war has indeed broken out. Not only is China seeking to hurt U.S. exporters, it’s also at risk of impairing domestic producers and supply chains who will struggle to replace U.S. soybean supplies. Surging feedstock prices will send pork prices through the roof. And here the problem emerges, and why China's action has taken so many by surprise: ‘There simply aren’t enough soybeans in the world outside of the U.S. to meet China’s needs,’ said Mark Williams, chief Asia economist at Capital Economics. China grows only 14 million tonnes of soybeans. As costs for hog farmers rise, that risks increasing the price of pork, a component of China’s consumer price index. And should food inflation rise too high, rumblings of social instability will re-emerge, as we saw back in 2011 which prompted the Chinese government to rapidly tighten financial conditions in the process unleashing financial chaos around the globe and the next leg of Europe's sovereign debt crisis. Wilbur Ross is ignoring the likelihood of contagion. This soybean tariff is the spark to ignite inflation, default risk, and economic contraction.
As rationale for China’s action, ambassador Cui Tiankai explains, ‘Such protectionism will not protect anybody. It will not protect American workers or American farmers. It will not protect American businesses or American consumers. It will hurt everybody including the U.S. economy itself.’ The Chinese diplomat said the two economies ‘are so closely interconnected’ that ‘any unilateral measures will hurt the other side, but the end result would be that it would hurt itself. We have done the utmost to avoid this kind of situation, but if the other side makes the wrong choice, then we have no alternative but to fight back,’ he added. No caving.
What about Trump’s obsession with stock market gains? According to CNBC's Eamon Javers a ‘White House official said the the WH recognizes that Trump’s actions are hitting the stock market, but this is a longer term thing,’ and the president has to follow through on a key campaign promise. The White House feels that China simply has to be held accountable. And speaking of China's retaliation, Javers tweets that he ‘asked a White House official last night if the U.S. was prepared for further Chinese retaliation for American trade action and if we should then expect further reaction by the U.S. The official said ‘all of it is under discussion.’