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World War Wednesday – Trump’s “Fire and Fury” Spooks Markets

Well this is fun!

We went over our 2,480 line yesterday morning on news of tax cuts coming out of DC (conveniently timed for the market open) but then the tweeter-in-chief took time off the golf course to say that North Korea will be met with "fire and fury, the likes of which this World has never seen before."  Keep in mind that's a statement coming from the head of the only state that has ever actually used nuclear weapons on another country

That took the S&P right back to 2,460 for a gain of $1,000 per contract per our call in the PSW Morning Report, which you could have delivered to you every morning for just $3 a day.  That call paid for 3 years' worth of subscriptions so,


Our other shorting lines were good for $250 on Dow Futures (/YM), $1,400 on the Nasdaq Futures (/NQ) and a fat $1,500 per contract gain on the Russell Futures (/TF), which took a 30-point plunge from our 1,430 goal – not bad for a morning's work, right?

This morning, we're letting the indexes tell us what to do by watching our levels.  My not to our Members earlier this morning was:

/TF 1,400 is a good place to play for a long bounce if we get our usual pre-market run-up.  We're lined up right with /YM 22,000 (also a good long with tight stops below) and 2,460 on /ES and 5,880 on /NQ and if ANY of those lines fail then it's time to use them as bearish marks and short the laggard.

So we are waiting and seeing but European stocks are down more than 1% so it's looking like the advantage is going to the shorts, especially since the unrepentant Trump JUST re-tweeted the following:


President Trump vows America will respond to North Korean threats with "fire & fury" in a warning to the rogue nation

That's right, he's actually PROUD of the chaos he's caused, despite the fact that even Republican lawmakers criticized his dangerous commentary.  Clearly not only can they or Trump's generals control him but the new Chief of Staff can't stop Trump from tweeting whatever pops into his head at any given moment.  Perhaps Trump can't control himself because he believes his own BS, which is understandable as twice a day his staff delivers a folder full of "positive news about the President."  That's real news, of course, not the rest of the World's news, which is fake, which means Trump doesn't agree with it.

Unfortunately, Kim Jong Un believes that when the President of the United States makes a statement, he actually means what he says and North Korea has now warned that it was considering a strike that would create “an enveloping fire” around Guam, the western Pacific island where the United States operates a critical Air Force base. In recent months, American strategic bombers from Guam’s Andersen Air Force Base have flown over the Korean Peninsula in a show of force.

“Will only the U.S. have option called ‘preventive war’ as is claimed by it?” the Strategic Force of the North’s Korean People’s Army, or K.P.A., said in a statement. “It is a daydream for the U.S. to think that its mainland is an invulnerable Heavenly kingdom.”  

President Trump is not helping the situation with his bombastic comments,” Senator Feinstein said in a statement that the President's actions were counterproductive. Senator John McCain, Republican of Arizona and chairman of the Armed Services Committee, also took exception. “All it’s going to do is bring us closer to some kind of serious confrontation,” he told KTAR News radio.

We're very happy with our LMT and RTN stocks at the moment, of course, but it will be quite a trick if the whole market can shrug of the thread of nuclear anhilation being dialed up to 11.   Europe is taking it seriously, down 1.5% into lunch but, so far, our indexes are only down a bit more than they were yesterday and we have learned not to underestimate the ability of this market to ignore even the most blatant problems.

Speaking of blatant problems, Autonomous Research, the research firm focused on the financial sector, is warning of a ticking time bomb in China's shadow financial system.  By the end of 2016, shadow banking vehicles had become 51% of China's entire GDP – that would be $10Tn in the US!   Here's a video explaining the issue:

About 44,000 [WMPs] were outstanding at the end of 2016. This is nearly six times the number of outstanding mortgage-backed securities at western banks at the heart of the 2008 financial crisis.  This is a number that needs to be taken seriously as any small shock can lead to a rapid crisis that NO country, not China, not even the US, would have the finanical firepower to stop, without completely debasing their currency. 

Meanwhile, let he who is without mountains of highly leveraged debt cast the first stone as US companies are now more indebted, more leveraged, less profitable and more richly valued than ever – according to Mauldin Economics.  Sooner or later, the pressures of too much government debt and too many government promises, plus growth that is continually grinding slower, will break out into a recession, according to their analysis.  They cite Mike Lebowitz's "22 Troublesome Facts", amoung which are:

  • The S&P 500 cyclically adjusted price-to-earnings (CAPE) valuation has only been higher on one occasion, in the late 1990s. It is currently on par with levels preceding the Great Depression.
  • Total domestic corporate profits (w/o IVA/CCAdj) have grown at an annualized rate of just .097% over the last five years. Prior to this period and since 2000, five-year annualized profit growth was 7.95%. (Note: Period included two recessions.)
  • Over the last 10 years, S&P 500 corporations have returned more money to shareholders via share buybacks and dividends than they have earned.
  • At $8.6 trillion, corporate debt levels are 30% higher today than at their prior peak in September 2008.
  • At 45.3%, the ratio of corporate debt to GDP is at historical highs, having recently surpassed levels preceding the last two recessions.

In short, US corporations are simultaneously more indebted, less profitable, and more highly valued than they have been in a long time.  Plus, they are intentionally making themselves more leveraged by distributing cash as dividends and buying back shares instead of saving or investing that cash.

In other words, 

Be careful out there!  

- Phil


Provided courtesy of Phil's Stock World.

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