No Silver-Lining in the Clown Suit

Last week, we were looking for a silver-lining in the election of the Donald. We were hoping that he had been “scared straight” by his visit to the White House, and that his fear of failure and humiliation would lead him to hire the best people from either party. Instead, he seems to be gathering and surrounding himself with white fascists or, at least, people who pander to fascists.

This week, we don’t know what to think when it comes to the Donald. There has never been a historical precedent. It is tempting, but too facile, to compare the Donald situation to that of Germany in the 1930’s; after all, no two boarder-line personalities are ever exactly alike. And, communication technology has allowed the world to be better informed about this particular personality than it was about the Fuhrer. Our hope now, is that he doesn’t keep his xenophobic promises and that he improves, rather than destroys, global trade agreements.

The stock Market

Equities have screamed higher, along with rates and the dollar. Why? Expectations have something to do with it. Expectations that fiscal policy, finally, will deliver stimulus to the rest of the economy, instead of monetary policy breast-feeding the financial industry exclusively: expectations that the business cycle will start its engines, and that inflation will normalize: and finally, expectations that the Donald won’t keep his worst promises.

Expectations, however, have a rather short shelf-life. Even if these expectations become reality, which is not a forgone nor, perhaps, even a likely conclusion, the timing of these wished-for outcomes does not include the next six months. Since the market is a futures market, in the sense that it tries to look about six months ahead, and since none of the expectations can reasonably be expected to materialize within that time-frame, we see it as likely that the market will, at a minimum, go through a correction. The market has got too far ahead of itself on the stimulus debate before Trump is even inaugurated.

Even though we think that the long-term lows for yields have been set, we are certain that higher rates will not follow a straight path, and that a ‘uuge’ pile of uncertainty stands in the way of the market’s present expectations.

The chart below shows the nearly-vertical assent of rates and the SPX. Rates and the SPX rising simultaneously, seems like an anomaly, but in fact it has happened twice in the last year (green-coloured rectangles) and each time, rates and the SPX fell together soon after (dashed red arrows). We think it likely that both interest rates and the SPX will correct back to the trend line this time as well.

A similar situation exists with the SPX versus its earnings yield (chart below). It is likely that both will revert to the trend line (green arrows).

The sentiment counter-trend pattern that we follow is still valid. The chart below shows the long view. The post election spike in bull sentiment (blue oval) may be a classic case of overly optimistic individual investors piling in at the top.

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In conclusion, we find the balance of probabilities are pointing toward a correction in the S&P 500.


Long-term, gold and the dollar continue to follow our qualitative probability curve (chart below).

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In conclusion, we see it as likely that gold will mount a short-term rally before it breaks support. We are looking to take a short-term long position in gold and a short position in JDST, if gold starts to strengthen this week. If gold breaks below support on a close basis, we will again initiate short positions.

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Forty years of private equity trading, and still learning.

Forty years of private equity trading, and still learning.