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OPINION

Is There Time For A Santa Claus Market Rally?

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.
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What a week to be away on vacation. I’m not a huge fan of vacations, but it was an amazing trip. I wish I could have chimed in more. Although, it seems that with the sharp declines and vulnerable nature of the market after key support finally collapsed, options were limited. Some shorts and ETF short hedges would have helped to mitigate the pain. The fact of the matter is that the wild swings experienced last week can trigger stops for long and short positions.

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The disconnection by the numbers:

There are so many numbers to churn and consider when trying to understand the depth of the sell-off, and to measure risk - the total stock market capitalization of $6.72 trillion in the Wilshire 5000 since late September.

For all the hand-wringing about the impact of tariffs, the fact is corporate profits are at levels never seen before; more than likely, we could be looking at another record quarter.

  • $4.1 trillion in corporate profits (2Q & 3Q)
  • $11.0 billion tariffs collected through early December

US Quarterly corporate profits

State of the Economy & Future Rate Hikes

Consumer spending increased at a faster rate than income and key inflation data used by the Fed, Personal Consumption Expenditures (PCE), edged up slightly, but is still manageable. Meanwhile, there are continued signs of caution from corporate America as non-defense capital goods Ex-aircrafts slumped -0.6%. 

Consumers are carrying the load, even lifting the Michigan Sentiment reading above consensus with only 12% of respondents mentioning the recent stock market swoon. People are still pumped about their jobs and higher wages.

Phony Fed

John Williams, head of the New York Fed, went on national TV Friday in a half-hearted attempt to quell the panic. It didn’t work.

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Of course, consumers aren’t alone in ignoring the stock market. The Federal Reserve is sticking with a game plan that completely ignores the plunge in household wealth. What’s so remarkable about all of this is the Fed used the notion of triggering a so-called virtuous cycle of optimism and opportunity by lowering rates to zero and then implementing a myriad of never-seen-before actions.

Back then, the Fed wanted the stock market to rally and for home prices to rebound. Now, with both under duress, it’s no big deal. This Cool Hand Luke approach to communicating with the public has been a disaster. One has to wonder when the Fed gets worried or feels it might be important to speak plainly to the public.

President Trump and the investing public should be upset because it’s not the level of rates, but the rapid increases and determination to continue. The numbers speak for themselves:

  • 9 rate hikes since Trump was elected
  • 126 months without a rate hike before Dec 2015

Banks Sinking

The sector has been the biggest disappointment of 2018, and things are only getting worse for big banks. Something isn’t right. I’m looking into Collateralized Loan Obligations (CLOs) and other instruments that could be the latest ticking time bomb the industry has created. Yesterday, Steven Mnuchin met with the heads of big banks, and released a statement on their soundness; the meeting itself seems odd, especially against 2018’s performance:

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  • Bank of America (BAC) -20.8%
  • Citigroup (C) -32.5%
  • Goldman Sachs (GS) -37.2%
  • JPMorgan Chase & Co (JPM) -37.2%
  • Morgan Stanley (MS) -28.2%

Regional banks haven’t fared much better. Last week, no exchange-traded fund (ETF) absorbed the loss of the KRE Regional Banking Index.  Assets under management declined 13.2%.

Shutdown

When I was in Europe, I checked the headlines, and I was surprised to see financial headline writers talk about the impact of the government shutdown of the market. I don’t think there is any correlation other than more headlines that make everything a would-be Constitutional crisis.

General Mattis was in the job longer than three Secretaries of Defense under President Obama, who also fired Mattis. All the noise is deafening, and we must respect the plunge, but we also must live for these periods. This is when you have opportunities that can deliver outside gains.

Merry Christmas, and God Bless

Portfolio Approach

I have a lot of work to go through positions in the model portfolio and single out opportunities. I have asked for everyone to have more cash than usual. If you don’t, contact your rep or research@wstreet.com.

Communication Services

Consumer Discretionary

Consumer Staples

2

2

1

Industrials

Materials

Real Estate

3

4

0

EnergyFinancialsHealth Care
111
TechnologyUtilitiesCash
104
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Today’s session

Futures have been trading in a wide range this morning.  Dow futures were down close to 230 points overnight but have since cut their losses, although they are still indicated to open lower.  Markets will be thin today, lets see if Santa can pay a visit to Wall Street.  A “Santa Claus rally” would be a rally covering the last five trading days of the year and the first two of the new year. 

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