400 Decibels and Climbing (GDX,AAPL)

It’s another case of the circus noise masking the thieves’ million dollar getaway.

 

Who, after all, could hear the sound of that drill working behind the elephant cage amidst all that racket?

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It’s always been that way.  The news on the tube and in the papers trumpets WAR! FRAUD! MURDER! or RIOT! and the market is meantime smashing through its old highs while no one’s paying attention.

 

Call it textbook ‘wall of worry’.

 

The market is now drifting sideways, but we expect the post-election thunder, with its eternal debriefing and shrill accusation and counter-accusation to mask the rally that inevitably ensues.

 

You can count on it.

 

We’re just warming up.

 

Real Good News on the Way?

 

It’s always hard to judge your team midseason.  Everyone’s hopeful that the playoffs are a certainty and a championship year is within reach.  So it is, too, with earnings season.  Every new quarter brings investors renewed hope that the S&P will crush estimates and the markets will soar.

 

And that’s where we are now.

 

Here’s a look at the current quarter’s beat rate for earnings and revenues and – lo and behold! – what’s it show?

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First of all, that as of a few days ago and 1000 companies reporting, the ‘beat rate’ for earnings is 67% – that being the number of companies that bettered Wall Street’s best guess for their profits.

 

It’s also a number that outshines any quarter’s results for the last seven years!

 

If it holds.

 

We’re roughly half way through the season today, and though it may be that we’ve genuinely turned a corner, only time will tell.

 

The lower chart shows overall sales numbers for those same 1000 companies, and here the picture tints slightly darker.  With only 55% of reporting companies besting Wall Street’s revenue estimates, a story of efficiencies is told: companies that are essentially squeezing more earnings out of dwindling receipts.

 

That’s obviously not a tale that can be spun forever.  Employees eventually have to reduce their drug intake and get some sleep, and robots are less than a sure bet for the jobs they’re now covering.  In the end, there’s only so much that technology upgrades can secure in new profits and greater sales, so we’ll shortly come to the end of that road.

 

All the same, it’s from where those new earnings beats are arising that provides the hope.

 

Here’s a chart that outlines which sectors are posting the highest beat rates this quarter.

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Last week’s numbers show the tech and financial sectors leading the beat pack, with the industrials not far behind.

 

Certainly, in this age, one would expect the tech sector to lead.  And that, in itself, is a sign of health.  But financials generally only thrive in upbeat economic and business climes.  And the fact that we see the financials pulling at this juncture is very promising.

 

For there can be no final blowoff top, no surge in the indexes that sucks in all the pros and amateurs alike, unless the banks and brokers, led by Goldman Sachs, start rolling in dough.

And that appears to be what’s happening.

 

And not only that.

 

But it appears ordinary folks are also starting to spend.

 

In fact, it’s very likely that all the excess liquidity in the system is about to start moving, and a Trump victory – yes, dear readers, despite all we’ve heard to the contrary – a Trump victory might actually accelerate that process.

 

Take a look at the following chart –

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This is a chart of inflation in its simplest form, nothing stripped out or added in, just vanilla CPI as most of us city dwellers experience it, month in, month out.

 

The chart shows that we’ve had virtually no rise in prices since October of 2013 (in black).  During that time, the CPI moved higher and lower in a range between 235 and 238.

 

And then, this summer, we saw a breakout.  Prices rose and kept on rising (in red).  As of September’s reading, we’ve been looking at a trend that most believe will force the Federal Reserve to raise interest rates in December and at least once more in the first half of 2017.

 

That means bonds sell off and cash flows into stocks.

 

So how does Trump fit into this?

 

Well, it appears that those who trade in the CDS derivative market are looking rather favorably on the prospects of a Trump victory.

 

Remember: credit default swaps (CDSs) are essentially insurance policies that trade in accordance with the likelihood of a debt default by any particular nation.  The higher the price of the policy, the greater the default probability.

 

And where does the U.S. stand?

 

Have a look –

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For some mysterious reason, every time Mister Trump has taken a lead in the polls, the cost of insuring American debt declines.  That movement has been most pronounced recently, as an embattled Hillary Clinton loses support and makes a Trump win more likely.

 

CDS prices are a contrarian indicator of confidence.  That is, the declining costs of insuring a nation are actually indicative of its longevity!

 

Summing Up

 

If the Republicans take the White House next week, you can almost be sure U.S. CDS prices will continue to decline and business confidence will increase.  And the whole thing should mark a long ratchet higher for the stock market.

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Just one trade to report before we get on with this week’s bet.

 

It was the 15th of September in a letter called New World Volatility that we wrote a short strangle on AAPL that earned us an initial credit of $5.18.  We subsequently bought back the call for $2.93 (on October 20th), while the short PUT expired worthless last Friday.

 

That leaves us up $2.25 (on $2.93 spent), a profit of 77%.

 

Today, we’re gunning for something similar, but over a very short time horizon.

 

Below is a chart of the VanEck Vectors Gold Miners ETF (NYSE:GDX) for the last six months.  Our read of the chart shows a stock that’s been propped up by uncertainty before the election.

 

Have a look –

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  1. With the gap at the beginning of the month now covered by the last two days action (red circle), and
  2. A bearish engulfing pattern demonstrating the bulls’ failure (in blue), and
  3. RSI and MACD offering little hope for a break higher at this point,

 

We say this sucker is headed lower.

 

So…

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Many happy returns,

 

Matt McAbby

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