Record highs!

New vaccines, Biden beginning his transition, Trump losing in courts – yes, things are looking up compared to the way the World seemed about to end for the last 6 months but that doesn't fix our economy. Even the Dow gains of 50% in 4 years are coming off a very narrow-based rally in which just two stocks, Apple (AAPL) and Microsoft (MSFT) are responsible for the majority of the index's gains.

At the beggining of the year, the S&P 500 was priced at an already-high 18.4 times the earnings expected in 2020, and 15.5 times the earnings expected in 2022. Now, it is priced at 26.1 times the adjusted 2020 earnings forecast and no one is sure of 2022. 2021, let's say the 2nd half is "normal" and we have stimulus in the first half – figure 20-21x earnings in 2021 at this pace, still 25% above the historically normal 16x earning for the index.

And, don't forget, all that assumes NOTHING ELSE GOES WRONG.


One of the things that could go wrong is a US Recession/Depression but it looks like we're planning to stimulate our way out of that and that's what put us over the top this week – Janet Yellen is the new Secretary of the Treasury and she helped usher in the low-rater era for the Fed – it's not likely she'll want to oversee the end of it. However, 10-year rates are now at 0.9% anyway, up from 0.5% earlier in the year (the spike up in the chart).

TLT is one of the ETFs we like to short at the top of their channel (140 on the 10-year, 170 on the ETF) as, generally, it's very doubtful that the US will move towards a zero-rate policy even though, effectively, we're standing at the door-step. Paying people to borrow money is simply not a sustainable economic model and, when you do that on the scale of the United States of America, who are borrowing $500Bn a month in 2020 – there's just no way to make it work.

chart (75)

You can sell the TLT March $170 calls for $2 and use that money to help pay for a $165 ($9)/160 ($6) bear put spread at $3 and that would be net $1 on the $5 spreads that are 100% in the money to start. Essentially we're betting that Janet Yellen and the Fed won't flip rates negative during her first two months on the job – seems reasonable to me! The upside potential below $160 is a 400% gain on your net investment. That's a great way to fight inflation!

Today should be a quiet day in the markets. We had our GDP Report this morning but it's only the 2nd estimate for Q3 and it came in at the same 33.1% everyone espected (up from the previous quarter) so not really market-moving at all. Corporate Profits were only up 27.5%, so not keeping up with economic growth and Durable Goods are down from 2.1% to 1.3%, so growth is slowing.

Wholesale inventories are up 0.9%, which is kind of bad but we are stocking up for the Holidays. The question is whether the consumers will show up to buy things. Retail Inventories are up 0.8% for the same reason and one of my major remaining market fears is that holiday shopping will be a disaster, leading to Q4 being a disaster and we'll be in a tremendous economic hole for Biden to dig us out of. Or, in Trumpland:

Remember how Trump took full credit for the post-election rally in 2016, while Obama was still President? In fact,. during this campaign, Trump predicted the markets would collapse if Biden got elected. You would think it would be difficult for one man to keep so much BS straight in his head at one time, wouldn't you?

Have a great holiday,

- Phil