"Anyone who believes you can't change history has never tried to write his memoirs." --David Ben-Gurion
This Time It's Different
Bill Gross of Janus Henderson has launched a warning in his monthly newsletter. A warning against a reliance upon using history as guide to foretell future economic performance. Gross cites the yield curve as a possibly broken indicator of the economy's trajectory. Sometimes, I do not agree with Mr. Gross. But this makes sense, gang. The Fed often relies upon historical models, and the yield curve has been consistent. A wider spread between short-term rates is usually taken as a signal of confidence, while an inverted curve would be taken as as signal that recession was a near-term reality.
Gross writes, "Over the last 25 years, the three U.S. recessions in 1991, 2000, and 2007-2009 coincided nicely with a flat yield curve between the three-month Treasury Bills, and 10-year Treasuries." This morning, the spread between the two-year, and 10-year stands at 0.892, while the three-month/10-year spread is now 1.117. Flattening? Yes. Anywhere close to predicting a recession? No.
That is, unless the perversion of the free market has rendered the historical model inadequate for predicting future economic performance. Globally, central banks have force fed $15 trillion into their economies. Negative interest rates have become a long-term reality for investment-grade bonds. If interest rates are prices -- and they are indeed prices for credit, risk, and time -- and those prices are artificial, then how can manipulated outcomes be used as any kind of guide to forecast the future? It's an unknown.
Take the Phillips Curve, for example. The FOMC still clings to this simplistic model as if a lower-and-lower unemployment rate has to eventually produce higher-and-higher inflation. Those of us who grew up in the reality of an evolving world, and not behind a textbook, already know that government policy forced a lower level of participation on the labor force, as well as decreased demand for full-time employment. On top of that, the disruptions of e-commerce and reduced dependency upon fossil fuels have changed the price points where supply and demand intersect.
I am not calling for the next recession just yet. I am here to tell you that Gross is right about the usefulness of historical models in a perverse environment. We all have no experience. Tape on the foil.
Trend Gone Wild
Yesterday, the Nasdaq Composite finished in the green for a tenth consecutive session. I hear it almost everyday from somewhere. The tech sector has had it's run. How much further can these names go? Tech is in a bubble. Should you run and hide?
Several weeks ago, it was the "great rotation." You may recall that was when I invented the term "shmotation." Though none of us have a crystal ball, I wasn't buying it then and I'm not buying it now. The highest returns may be left for the truest quality in this space, filtering through the funnel of investor demand that results in price discovery, but can you really leave yourself unexposed to this space? That's the question. No, remains my answer. Tech still belongs in a diversified portfolio.
There has been much talk over the last 24 hours about the sector reaching, and surpassing, heights hit way back around the turn of the millennium. During the height of the "Steroid Era." Well, of course technology has performed well. That's where the cutting edge is. That is where innovation and creativity live. That is where the edge is going to be.
Tech always seems to run with the leaders. This week, tech leads alongside the bond proxies as dollar valuations, and yields collapse. Over the past month, as well as all year, Tech has led hand in hand with Healthcare, as that political football has been kicked around. Twelve months back? Oh, tech is in your top two again. Over twelve months though, tech's dance partner would be the Financials, as the election produced so far unrealized expectations for economic growth and rapidly tightening monetary policy.
It does not matter how many years you want to go back -- three, five, even 10? The Information Technology sector has performed far better than the S&P 500. Does this sound like a trend you want to bet your hard-earned dollars against? I only need to get burned once to know that fire is hot.
That screaming trend though, plants my brain squarely on my next thought. The Senate's healthcare bill failed, sort of. It looks like they may try again, sort of. Our legislators will, at some point, focus on tax reform. They will. I promise. The Republican majority will either get there feeling like they finally accomplished something, or they'll get there desperate for any kind of legislative victory. See what I mean? When they get to tax reform, they're going to be aggressive. They may be embarrassed. They may be hungry. One certainty is that they will get there with clearly defined intent.
When tax reform is finally discussed, a cash repatriation holiday will be a priority second only to corporate tax cuts. More than $1 trillion is held overseas by the 50 U.S. companies that have hoarded the most cash abroad. Who headlines this list? Only the likes of Apple (AAPL) - Get Report , Microsoft (MSFT) - Get Report , Alphabet (GOOGL) - Get Report , Oracle (ORCL) - Get Report and many others.
Tech names all? Well, at least half of all that dough, anyway. To avoid oversized domestic taxes, these firms have left their profits in place where they were earned, and funded capital expenses through the debt markets. That's where your buybacks and dividends have come from.
Taking more than a 30% haircut on profits... and Tim Cook figures it's more like 40% after state taxes are factored in, just makes no sense. So cash builds, and velocity slows. Remedy this, and these stocks will continue to outperform. You get the gist. The Trump administration has asked for a 10% repatriation holiday. A rate higher than that may just support the status quo.
Someday that cash comes home. Someday may seem like a long way off. I want to be long this space on that day, but that's just me.
13:00 - Baker Hughes Rig Count (Weekly):Last week's total 952 (flat), oil 765 (+2), Permian 373 (+4). The Rig Count is all we have today in the world of domestic macro. At least crude prices have been in play this week, so this could end up causing some volatility right where it's needed in order to spice up today's trade. Although total rig count growth, both for oil and nat gas, have flattened of late, the Permian does seem to be showing some life. Given that my energy plays tend to be Permian plays, this is what I'm watching.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2498, 2485, 2476, 2465, 2457, 2449
RUT: 1456, 1449, 1444, 1438, 1432, 1423
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At the time of publication, Guilfoyle was long AAPL and SLB, although positions may change at any time.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long AAPL and GOOGL.