Wednesday, September 26, 2018

Rally On, But Watch For...

With the Dow making a new all-time high last week, the market confirmed that this, the longest market rally in history, will continue. The record setting Dow confirmed the original technical concept of the market. It said that the industrials(when we actually made things) and the transports both must hit new highs to continue a trend. The trend is in place. With that said, I must remind you, dear reader, that many high profile business leaders have given their warnings about this market. In last week's piece I mentioned many of them. The following is a summary of issues that could derail this market.

Four Triggers

1) The estimate of future earnings is way too high. Granted the tax stimulus has helped and employment is considered full, however a closer picture reveals internal obstacles. Housing, the most influential aspect to our economy is no longer affordable. Builders cry material costs, lack of urban land and experienced workers with some just citing a workers, period. With looming trade tensions as demonstrated by the current tariff wars, earnings could take a dive, halt or fail to meet projections.

2)The mid-term elections. This point in my view is over-emphasized. Does it really matter if a democrat wins a state? The only agenda on the plate is Trump's call for the wall and a infrastructure bill. The two will pass in one form or another, so what's the big whoop?

3)Inflation. To me this is always present, but the government never counts food, energy and shelter. Those three are needed every day. I have repeated this point so many times that I'm blue in the face. Nevertheless, inflationary costs have appeared in many sectors to the point where the Fed and the government can no longer get away with their lies about a lack of inflation or the phony 2% target. The tariffs will add to this issue.

4)Rising interest rates. The Fed's current discount rate is 2.50%. It will rise a quarter point later today as it is expected by everyone. To me these rates are extremely low and rising rates will not effect the market until they reach 3.50%. We have a ways to go before the Fed reaches that level, if they ever do.

Bottom line: I agree with two of the above aspects. Sebastian reminds me that if someone is packing or is pointing a gun at you, you have every reason to be fearful. However, there are other times or situations that will add to stress. A snake crawls before you. Is it poisonous? You are sitting under a tree and dark clouds form in the sky. Do you move to a new location(lightning)? I think you get my point. There are many other bones of contention that could end this market rally.


Whether it is the Middle East, the South Sea Islands, revolution in Venezuela or elsewhere, any of these outbreaks can cause contagion. All these points are so well known that they are like the children's tale of "Cry Wolf."


No one in general knew about Lehman Brothers until it hit the news. We hear about companies like Toys 'R Us and Radio Shack. Remember, those companies received funding. The funded institutions also suffered. One that we do not know about could be failing as I write this piece.


This should no longer be a secret. Many states and companies have not funded their obligations to their workers. They are really hoping that the Guarantee Pension, a government agency will take this obligation off their books. This is corruption! I believe this is one big unreported issue.


The Fed's stress tests says that our banking institutions are in good footing. I disagree. The FDIC has roughly $25 billion and this small amount has to cover over a $trillion. Cannot be done!

Jobs and Employment

This is a strong point in our economy, but many companies are restructuring. They are taking advantage of low interest rates and new technology to increase their bottom line. The problem with this point is an important aspect to the bottom line - workers and wages. Generally, when companies seek restructuring, it means workers will lose. This week Wells Fargo, Under Armour and Starbucks announced cutting jobs with restructuring. These little stones build. They can become an avalanche.


This point relates to earnings. Insurance companies will be on the hook for massive wildfires out West. Hurricane Florence will cost billions and then, there is this related aspect. The flood waters have caused Carolina's pig farms, the largest in the nation, to mix with water, resulting in pig waste contamination. In addition, the flood waters are breaching Duke's Energy plant. A possible catastrophe could result with the waters mixing with toxic coal ash to poison Carolina's water supply. Pray that this type of negativity never happens. One Chernobyl is enough.

Less Than 200 Days

Brexit is coming and the two sides cannot be more bitter to each other. This is how Europe acts. Study every peace treaty in European history and antagonism is a common tread. One aspect that will surely be effected will be the currencies of the pound and euro. Beware the Ides of March!  

Small Potatoes

The S&P 500 is rebalancing. The last time was in 1999. This usually is very smooth, but sometimes extreme volatility results.

Anyway, there are always dangers out there. The rhetoric between nations concerning trade and sanctions is bordering on alarming. My group agrees that the present rally will last until the end of the year and at which point, the issues suggested by this piece will effect this rally for the negative.