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Friday is the latest deadline for a government shutdown.  Sure, the government’s essential activities will continue, while the non-essential activities will be put on ice.  If it happens, there is a chance that the markets will see temporary volatility.  I say temporary because everyone knows that’s it’s just another round of political kubiki theatre and will not last.

The House passed the stop-gap bill Thursday evening 230 – 197.  The Senate “may” sneak a bill in Thursday as well, but most likely it will be Friday.

Politico reports: …Senate Majority Leader Mitch McConnell (R-Ky.) appears to have a serious problem.

Senate Democrats said they’re confident they have the votes to block the stop-gap spending bill that the House is taking up, according to two Democratic senators and a senior party aide. And top Senate Republicans are openly worried about the situation as they struggle to keep their own members in the fold.

“I’m concerned that we, yeah, we may not have 60 votes in the Senate,” South Dakota Sen. John Thune, the third-ranking Senate Republican, said Thursday morning. “And I think that’s obviously problematic.”

After a lively party lunch on Thursday, the vast majority of the Senate Democratic caucus emerged in opposition to the GOP proposal.

“I am convinced that between Republicans who publicly said they’re [voting] no and Democrats who said they’re a ‘no,’ there are not enough votes in this chamber” to pass the House plan, said a Democratic Senator, who requested anonymity to discuss the matter freely.

The sentiment was confirmed by a Democratic aide and another senator.

Friday’s trade may be interesting indeed!

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Yesterday we discussed the large slide in cryptocurrencies across the board, Bitcoin being just one of many popular cryptos.  It had fallen ~50% from its high in just four weeks.  This scared enough “investors” (read: beginning speculators) that a post for suicide prevention was put up on Reddit.  Although Bitcoin made a slight reversal Wednesday, it wasn’t really an “opposite day.”  That came in the equity markets.

US traders came back from the MLK holiday Tuesday morning in an, albeit brief, buying mood.  The Dow was up several hundred points and crossed the latest one-thousand point marker: 26k.  This set another record.  The prior record was set just a few weeks ago when the Dow traversed 24,000 and traded 25,000 in just 23 days.  The move from 25,000 to 26,000 was a blistering seven days.

With another all-time high in the record books (yawn) and another 1,000 point level reached in record time, traders did something we haven’t in quite some time: they sold to book profits.  The S&P traded above a record 2,800.00 before the selling started, which led to a ~40-handle decline at its low.

But don’t worry about that!  The market isn’t allowed to go lower for very long.  It’s an everything bubble — just buy it!  And they did.  WEDNESDAY was George Costanza’s “opposite day.”  Traders remembered the Seinfeld episode when George did everything the opposite and he came up roses.  So whatever their reason was for selling Tuesday (too high? Getting ridiculous? Plffft – whatever) they did the opposite —> buy everything with both hands!

With that idea in mind, traders drove the S&P and the Dow to new all-time highs yet again.

Yawn…

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Yes, it’s a dramatic title, but when it comes to the world of cryptocurrencies trading, it must feel quite painful to many to be invested at this time. For many, they will have seen their cryptocurrency holdings decline by more than 30% in the last few days, some much more depending upon when they decided to buy into the rally. And since every major cryptocurrency is losing large amounts of quoted value at the same time, the cycle has increased in severity at each tick down. But how did we get here?

For one thing, it is important to note the impact of margin. For those cryptocurrency exchanges that allow margin trading, some allow the trader to use their open trade equity increases as margin to finance a larger position. While this isn’t a huge concern when trading equities, it is when you consider the extreme volatility of cryptocurrencies. In other words, if a trader has purchased a position and that position were to gain, let’s say, 30% in value, then the trader would be allowed to leverage a larger position by using the unrealized value of the earlier open position to buy more cryptocurrencies. And of course if the new position(s) gain value as well, then this allows for an even bigger position to be margined, and so forth. But if and when the markets take a sharp turn downwards, then traders who have margined their gains on already margined positions must liquidate in order to maintain a market position. But since this pushes the value of their current holdings down, this causes more liquidations. And given how sharply cryptocurrencies can rise or fall, the probability of a cycle of liquidations increases greatly.

This is the feedback loop traders are currently finding themselves in, but without readily available means for most to short sell the market, they are forced to go into cash instead of capitalizing on the decline. As the Chinese government continues to pressure bitcoin miners and South Korea ponders banning cryptocurrency trading, in addition to calls by global central banks for tighter regulation, traders are being forced to consider whether there will be a lot of people willing to buy during such a time of widespread uncertainty. While the future of blockchain itself seems secure, the value of holding particular cryptocurrencies is not. Indeed, many of them are not exactly directly tied to the success of the blockchain protocol they are created upon, leaving open the question of what their value should be based upon. And in the absence of any strong case to establish the value of Bitcoin or Ethereum or any other cryptocurrency besides the price that is currently being traded, it is not surprising that many are convinced it is time to exit and regroup.

Does this mean that cryptocurrencies will disappear? Probably not. They continued to exist after the horrendous collapse of Mt. Gox in 2014, and will likely survive the currently much less severe declines we are now seeing. However, it also seems that the current state of the crypto marketplace will yield much greater regulatory scrutiny and intervention given that there are people who now hold Bitcoin in an IRA or who otherwise are approaching it as an investment. This combined with the introduction of Bitcoin futures products suggests that speculative trading will fall more under the control of governments and central banks. As of the writing of this article on Tuesday afternoon, Bitcoin reached a low of $9928.62 on the GDAX exchange. Given the levels of volatility common in cryptocurrencies, they could be at $15,000 or at $5000 by tomorrow. Until then.

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Monday was the Martin Luther King holiday and all markets were officially closed.  Because this is an American holiday, only the USA is closed.  The ES futures, however, were temporarily trading until 12 pm Central, which allows anyone to access the market for hedging purposes.

Last Friday the market received two important data points but they didn’t really affect the market much.  The market is experienced an amazing melt-up at the moment so at this point, data won’t matter much.  It’s important to keep watching, however, because it will eventually accumulate and be important to traders.

In the future, perhaps the most important data point will be the CPI (consumer price inflation).  Econoday reported the following Friday:Housing and medical care costs, which together make more than half of the CPI, firmed and fed a constructive 0.3 percent rise in the ex-food and ex-energy core rate for December. This hits the high end of Econoday’s estimates as does the 1.8 percent year-on-year rate. This is good news that points to strength for the Fed’s core PCE price index later this month.

The housing sector has been showing general strength and is reflected in housing costs which went up a notch with a 0.3 percent December gain and with the closely watched owners’ equivalent rent sub-component also up 0.3 percent. Another 0.3 percent gain comes from medical costs which are getting a lift from prescription drugs where hikes are coming on strong, up 1.0 percent following November’s 0.6 percent gain.

The other report were the Retail Sales data and from Econoday we read: It was a very good holiday shopping season but perhaps not a great one. Retail sales rose a solid 0.4 percent in December which is just shy of Econoday’s consensus though November is revised 1 tenth higher to what is a standout gain of 0.9 percent. Core readings show similar strength with all pointing to a solid consumer contribution to fourth-quarter GDP.

Nonstore retailers, a component which e-commerce dominates, did in fact have a great season. Sales here rose 1.2 percent in December on top of November’s 4.2 percent surge. These gains no doubt came at the expense of brick-and-mortar boxes as general merchandise inched only 0.1 percent and 0.3 percent higher in the two months with the sub-component for department stores down a very noticeable 1.1 percent in December. Clothing stores are another December disappointment, falling 0.3 percent and reflecting price discounting as evidenced in the apparel reading of this morning’s consumer price report.

Again, these reports will be important in due to, but right now it’s all about the incredible one-way melt up that we’re experiencing now.

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During the early part of this week, the financial journalists and Wall Street analysts were all talking about, and anxious for, earnings season to start.  JP Morgan was one of the first to report and because of the recent passage of the tax bill, it was more interesting than normal.

When asked about the tax changes, CEO Jamie Dimon said:U.S. companies will be more competitive globally, which will ultimately benefit all Americans. The cumulative effect of retained and reinvested capital in the U.S. will help grow the economy, ultimately growing jobs and wages. We have always invested, even in difficult times, in our employees, customers and communities, and as a result of the tax plan we will be increasing and accelerating some of these investments.”

On the same subject, the corporation reported the following:

Will JPM actually repatriate cash and if so how will it be used?

  • No significant remittance of cash expected – we have capital and liquidity requirements in foreign entities – it is a deemed repatriation

Why does a reduction of 14% in the federal tax rate translate into a lower reduction in the JPM effective tax rate?

  • Difference driven by the geographic mix of taxable income, non-deductibility of FDIC fees and the impact of a lower tax rate on other deductions

What is JPM doing to share the benefit with its employees, customers and communities?

In addition to programs already in place, we are planning a broad set of strategic and sustainable benefits for our employees, customers and communities.

Overall, JPM earnings beat expectations, with adjusted EPS of $1.76/share – better than the expectations of $1.69.

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I remember it like it was yesterday – the day that Standard & Poor’s downgraded the debt of the USA.  On August 6th, 2011, the Washington Post reported: “Lowering the nation’s rating to one notch below AAA, the credit rating company said ‘political brinkmanship’ in the debate over the debt had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.”

It was shocking.  It had NEVER happened before.  It was going to inject a LOT of volatility into the market, which every traded loves.

Fast forward to January 10th, 2018, and it may happen again as Bloomberg reported:  U.S. TAX CUTS SEEN AS CREDIT NEGATIVE FOR SOVEREIGN BY MOODY’S.  Discussing the new tax law, Moody’s said the following – “Any boost to economic growth from the new US tax law will be modest and depend on how businesses and individuals deploy tax savings; growth unlikely to offset negative impact on government deficits.” Additionally, the contribution of tax cuts to aggregate growth will be modest, around one-tenth of a percentage point of GDP.

This sure seems like bad news, right?  One of the pristine global ratings firms does not like the implications of the tax cut.  Hmmm, isn’t this one of the ratings firms that gladly went along with A+ ratings for CDOs, CLOs, CDO-squared..etc garbage equities that brought the world to its knees in 2008?  

Yes…yes it is.

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With a potential government shutdown looming for January 19th, President Trump and Congress are maneuvering to reach an agreement on immigration in order to keep the government running. The President made an unusual move in conducting open door negotiations between Republicans and Democrats, which made it more obvious that some progress appears to be happening. One crucial shift is to focus away from a complete immigration overhaul and to focus instead on dealing with the most pressing issues.

In particular, the President focused attention on replacing DACA, tightening border security, and building a border wall. He also focused on ending the visa lottery system.  However, more comprehensive reforms would be pushed back for later. In the end, it seems that any agreement that can be reached would have to come along these lines, and the President has essentially agreed to sign any legislation that Congress decides on, thus focusing the burden on Congress. Ultimately, this seemed to be his intention all along, but it remains to be seen if this strategy will succeed in avoiding a shutdown and reaching a reasonable compromise. The markets should react positively to an agreement being reached, but it is doubtful that the impact will be large.

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Sometimes it’s just better to sit on the sidelines and wait. If anything, Monday was a slow day in the markets. We once again achieved new highs for the S&P 500, but volumes overall were low. The index closed up +0.17% to settle at 2747.71, Meanwhile, the Dow Jones settled at 25283, down -0.05% for the session. Overall, few major stocks made impressive moves, with Weight Watchers and GoPro both being notable exceptions.

As far as the FOMC is concerned, member Bostic voiced concerns that the fed should be patient with rate hikes. This signals a potential shift in FOMC rate policies as Janet Yellen will be leaving her post next month, leaving the possibility that rate hikes may slow down going forward. Of course, all of this is very speculative at this point, but Bostic’s comments do seem to align with President Trump’s favoring of lower interest rates, and incoming FOMC chair Powell might lean in favor of softening the pace of rate hikes. We’ll keep an eye on the FOMC during this crucial period going forward.

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Not to insult anyone’s intelligence by the title of this article, but if you have watched major news media and listened to some politicians over the years, you can surely agree with us that taxes are often presented by some as being either unrelated to economic growth, or worse presented as being NECESSARY to create economic growth. While it is definitely true that tax revenue pays to employ people who create and enforce laws that allow trust and an organized flow to economic activity, it is also clearly true the the economy is greatly impacted by the drag created by taxes. After all, if you had more money at your disposal, would you throw it away? Or would you put it to some use, either to purchase goods and services or invest into your financial future? Clearly that question does not need to be answered.

But when it comes to politics, we cannot underestimate the degree of mental gymnastics that some will go through in order to insist on doing things their way, even when it conflicts with the very goals they profess to seek to achieve. A great example is the fact that even Bernie Sanders, the self-described democratic socialist, had to admit under scrutiny that the GOP tax bill will indeed cut taxes on the overwhelming majority of the middle class. However, true to form, Sanders immediately criticized the bill as being flawed because the tax cuts for the middle class with expire but the tax cuts for corporations will not. While this is true, it begs the question: so why didn’t you and those like you propose an alternative? Or better yet, why don’t you commit now to keeping taxes from going up later? Of course, the answer is that it is simply a political maneuver designed to carry the vote of the middle class. However, while I doubt that taxes alone will keep an entire group of diverse people in one camp, it seems rational to conclude that most people will prefer to keep more of their earnings. Even corporations are surprising the establishment by committing to investment and even pay raises for normal employees.

While we cannot say that taxes are the only thing that counts, it is clear that having more money free to be used by individuals and businesses clearly creates a fertile environment for economic growth. Going forward, we can expect the markets to respond strongly to this change, and so far they have responded predictably with the US equities markets continuing their 2017 upward trend. Generally speaking, bullish impact can continue to be expected, especially for companies that were already struggling with slumping revenues. To this end, we look forward to what the markets will bring our way going forward, and hopefully exploit those opportunities effectively as they come our way. At minimum, we can expect more volatility, but the current tax and legislative environment should continue to bolster equities prices for the near term.

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Does the Dow, or the Nasdaq, or the S&P500 make new all-time high records EVERY DAY or what?  Although nobody should have been surprised to see the Dow finally trade north of 25,000, it is still amazing to see yet another day notch a new record.  It seems like it will never end, which I believe has been said before.

The charts below are from the WSJ.com and show us how quickly the market (Dow) can move from one 1,000-point milestone to another.

The velocity of the new milestones reached are coming faster and faster.  The WSJ notes: The 30-member stock average was on track to close above 25000 for the first time in its 121-year history Thursday, taking just 23 trading sessions to climb from 24000. The blue-chip benchmark added 0.3% to 25013 in early trading.  What’s more, the 23-day run was the fastest of all time!

Additionally, over 50% of the Dow’s rally is due to (just) the following five stocks.

  • Boeing +898pts
  • UnitedHealth +429pts
  • Caterpillar +407pts
  • 3M +406pts
  • Home Depot +355pts

The “speed” of the rallies, as each 1k mile point are reached, are coming faster and faster as the market rallies straight up.  Some long-time investors see this as a warning sign, as if the market is getting ahead of itself. Some call this a “blow-off” top, but could last much longer than expected.

Much longer indeed…it should continue to rally until the central panners are out of the market, which means it will go up forever.

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