Egg is Starting to Stick to the Teflon-Don(ald)
The Donald, because he doesn’t read much (any) history, seems to be totally clueless about Watergate. But, you say, he has staff to inform him of his ignorance. Unfortunately, the advisors that he might listen to — his son, son-in-law, and daughter — are just as clueless as he is when it comes to political history, and the advisors that might know something, the Donald tends to ignore. He does not seem to know, for example, that Nixon fired special prosecutor Archibald Cox on a weekend — which came to be known as the ‘Saturday Night Massacre’ — because Cox had subpoenaed Nixon’s tape-recordings. And he also seems unaware that immediately following the firing, the attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus both resigned in protest, and that Nixon himself had to resigned ten months later.
We doubt he knows any of this because if he did, he would not be looking for an excuse to fire special investigator Robert Mueller, nor would he be bad-mouthing his Attorney General Jeff Sessions directly to the New York Times. If Mueller subpoenas the Donald’s taxes, the Donald will see no other option, but to scream you’re fired!. The Russian involvement in the Donald’s finances and political campaign are now beyond doubt, only the sordid details need to be revealed. If Trump gets rid of Mueller, he will be paving the road to his own impeachment. Slippery Teflon-Don is getting old and sticky, and the egg is not coming off like it used to. You’re fired! doesn’t work in the real world. A constitutional crisis seems unavoidable to us at this point, so we need to think about what might happen to the stock market as a result.
During the Watergate scandal, when Cox was fired and then-Attorney General Elliot Richardson resigned in protest — the S&P 500 fell 14% from October 1st through November, but it needs to be pointed out that Wall Street was already mired in one of the worst bear markets in history. From January 1973 through August 1974, the Watergate burglars were convicted, Nixon resigned, Middle East turmoil created a global oil shock, and inflation had a dramatic increase resulting in stocks losing 42% of their value.
This time around, however, the economy is not in danger of slipping into a recession, the FED has been back-filling the hole left behind by the financial crisis, unemployment is low, inflation is low (but not deflationary), and the stock market is in the second-longest bull run in history. This makes today’s situation more like the impeachment of Clinton in the late 1990’s when the stock market and the economy were booming. At that time, the S&P 500 fell 20% in the lead-up to the special prosecutor’s report on Clinton, but recovered quickly when it became apparent that a recession was not going to be triggered. Today, we see a possibility of a correction in response to the Donald’s increasingly likely impeachment, but the economy is too far-away from recession to cause a full-out bear collapse.
Equities
The AAII investor sentiment index shifted 7.2% from the neutral+bearish side, to the bullish side, making the bull:neutral+bear ratio 35.5%:61.5% which is still not top-worthy exuberance.
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The put-to-call option ratio has turned-around and headed south again which implies a continuation of the rally in the SPX (chart below).
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Technically, the SPX is also bullish long-term (chart below).
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Gold
As we had expected, gold bounced off the double Fibonacci 50% retrace line and made a dash to resistance at the $1250 zone. The rally was too rapid for us to take short-term advantage of, and since our long-term view of gold remains bearish, we do not intend on going long at this point. We think further up-side potential is limited.
This week’s rally in gold was a result of both technical support levels being reached, and political uncertainty in the U.S. over the Trump-Russia affair. The latter factor, manifested itself in a lower dollar and in a narrowing US Treasury-minus-German Bund spread that boosted the Euro in relation to the dollar (two charts below).
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Using the TIP etf as a proxy for inflation, demonstrates that, even though inflation has risen slightly, it is still under the downward sloping trend-line. Unless the trend changes, gold will have limited upside (chart below).
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The HUI and percent bullish indicator for the gold miners continue to fit under the down-sloping trend-line which makes it likely that gold’s upside is limited (chart below).
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ANG Traders
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