The Trump Administration is following the playbook of Reaganomics. As part of its Reaganomics program, the Reagan Administration cut back sharply on the regulation of everything from monopoly and oligopoly to pollution and product safety, important elements that likewise effect the aggregate supply curve. Continue reading “Oligopolies and Monopolies”
Put on your macroeconomics hat and hold on for a wild, brain-stimulating ride as Lance dives into the GDP formula and explains the President’s monumental speech at the Asia Economic Summit in Vietnam last week.
This week’s show features commentary on President Trump’s monumental speech at the Asia Economic Summit in Vietnam last week.
Folks, this speech from the President was bigger than all other stories combined.
Of course Democrats want huge tax increases. Tax increases cause expanding deadweight loss and ultimately contract economic growth. Democrats clearly want to crash the economy while President Trump is in office to make sure that he’s a one-term President only.
The SPHB:SPLV ratio chart is showing a compelling setup for small cap stocks. The SPHB:SPLV ratio chart tracks high volatility (high beta with tendency to be small cap) stocks to low volatility (tendency to be large cap) stocks. This ratio chart is another barometer for the risk on versus risk off trade.
In a risk on market, higher growth and higher beta stocks are the name of the game. Investors go on the offense for maximum profits and their less concerned about the economy and a recession. In a risk off market, investors go on defense and move into safer and more stable (low volatility) large cap stocks.
SPHB:SPLV Ratio Chart
The market has consolidated a little over the last week and that was the swing long signal we were waiting for. Notice that SPHB:SPLV has broken through resistance at 0.8050 and now is pulling back to retest that level. This is a classic set up we can trade. If the 0.8050 level holds, it means previous resistance has become support and we can take a beautiful entry off that level (green arrow). Make sure to review this lesson on trading for beginners so that you know which stocks to screen for to take advantage of a turn in the SPHB:SPLV chart.
The dollar did a big drop today after the FOMC announcement left rates unchanged. The Federal Reserve said the reduction of the balance sheet will begin relatively soon. I think relatively soon means September 2017.
Corporate bond yields spreads are falling which suggests there is a low default risk. Using Fred and Moody’s we can chart the spread between lowest investment grade (Baa) and equivalent 10-year Treasury yields.
Corporate Bond Yields Spread Chart
Corporate bond spreads are at there lowest point since 2008. This suggests that markets are pricing in a very low risk of default which is bullish for the economy.
BAA Corporate Bond Yield
Corporate Yield of a Moody’s Graded Bond. For instance, a Seasoned AAA Corporate Bond of 30 Year is the yield return of bonds graded AAA by Moody’s with a maturity of 30 years. Bonds less than specified timetables are dropped along with bonds with redemption and rating risks.
Moody’s BAA corporate bond yields are instruments based on bonds with maturities of 20 years and above. For instance, a seasoned BAA corporate bond of 30 Year is the yield return of bonds graded BAA by Moody’s with a maturity of 30 years. Bonds less than the specified timetables are dropped along with bonds with redemption and rating risks.
The credit ratings of AAA and BAA are the two ends of the ratings spectrum for investment-grade corporate bonds as provided by the Moody’s rating agency. The yield difference between bonds with these ratings has historically indicated whether the economy was in a period of recession or expansion.
The credit-rating agencies Moody’s and Standard & Poor’s provide credit ratings on bond issuers and their bonds to give investors an idea of the investment reliability of the bonds, concerning the payment of interest and principal. AAA is the highest bond rating and indicates the safest bonds for investors. Bonds rated below BAA — BBB from Standard & Poor’s — are considered to be non-investment grade. That makes the BAA rating the lowest investment grade rating. The lower the credit rating, the higher the yield a bond will pay.
The corporate bond yields spread chart above shows riskier BAA rated bonds (lowest investment grade rating), versus 10-year Treasury yields. In periods of higher default risk, the plot rises. The plot falls in periods of lower default risk.
U.S. Treasury yields are falling because of low inflation. With inflation so low, the Federal Reserve will likely not raise interest rates again until 2018. Remember, the main reason the Fed raises interest rates is to combat inflation in an over-heated economy. Clearly we do not have that.
Tax cuts and a $1 trillion infrastructure spending program would push inflation higher.
With Congress failing to repeal and replace ObamaCare, it is pushing the Trump Administration’s tax cuts and infrastructure jobs program out further. Inflation is staying low for longer as a result.
The Federal Reserve now is in a position where they do not need to raise rates to combat inflation. As a result, the Fed funds futures rate has dropped and is now showing about a 40 percent chance of a rate hike in December 2017.
Next week when the Fed meets, we could get clarification on when they will begin unwinding their $4.5 trillion balance sheet.
If you have an opinion on what the drop in corporate bond spreads means, please add your comment below.
It’s funny how the same contrarians who said the stock market was going to crash because it was in a bubble back in 2011, 2012, 2013, 2014, 2015, and 2016, are still saying the same thing today.
Seriously, there are no contrarians still left today that trade. This 8 year bull market has killed them all off. Even the really rich ones who had millions of dollars to trade with back in 2009 are gone.
The only place today where contrarians can make money is through internet newsletters and selling their contrarian opinions to other traders and investors.
This week’s show features commentary on Madison Square Garden stock and trading outside your comfort zone.
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Doc copper, our favorite indicator for the health of the global economy, is looking strong of late which has led to a breakout in Southern Copper stock.
Copper is close to testing its resistance zone at $2.88. A decisive break above this level would close the neckline of a Bullish Inverted Head and Shoulders pattern.
Southern Copper Stock
Fundamentally, this company is a beast. SCCO’s Return On Asserts of 6.89% is among the best returns of the industry. SCCO outperforms 95% of its industry peers. The industry average Return On Assets is 0.93%.
SCCO’s Profit Margin of 165.88% is among the best returns of the industry. SCCO outperforms 96% of its industry peers. The industry average Profit Margin is 100.09%.
Southern Copper’s EPS is expected to grow by 37.79% on average over the next 2 years. This is very strong growth.
The time to buy Southern Copper stock was on the pocket pivot (blue dot). Darn! Do not chase SCCO higher. This chart is not a good setup right now as prices have been extended to the upside. Here’s what I’d like to see SCCO do and where I think we could enter.
The idea is to wait for a pullback and then consolidation on a momentum squeeze off support. If previous resistance becomes support and we get a candle over candle reversal off this level, that’s the time to go long. Add Southern Copper to your watch list and look for the setup.