Archive for 2017
Last week, I said the markets look nervous.
While there is definitely some strength underpinning the post-election rally, and the path of least resistance is up, we’re kind of stuck at the moment, waiting as the Trump Train lurches toward inauguration.
Right now, there isn’t much to do but sit back, watch comes confirmation hearings, and see how this whole thing shakes out.
In the meantime, you have been offering up some great questions and comments on Wall Street Insights & Indictments.
Today, I want to give you the megaphone for a bit, and answer some of your biggest questions and sharpest comments.
Let’s get to it.
Q: Hi Shah, You may well be right, but my “yes, but” brain raises these points:
1) Yes, the Fed “printed” a lot of money, but my understanding is that one of the reasons it was so ineffective is that most of it ended up in bank reserves, and the banks didn’t want to lend it.
2) The main impetus of buybacks, i.e. the QE money that did get out there, has ceased, and interest rates are on the rise.
3) There are many ways that things can go very wrong with Trump at the helm. – Noah
A: You’re right, Noah. The “printed” money initially all went towards backstopping the big banks. They needed a way to get capital and to get some mortgages off their books, that’s what the initial printing was all about. Then it became about making them profitable, making the cost of money zero so they could buy Treasuries, mark them up and sell them to the Fed for a profit, over and over. Banks couldn’t lend even if they had demand, which they didn’t. When demand reappeared, slowly, they were reluctant to lend at such low rates. Eventually they were made profitable again so they could lend.
Quantitative Easing money didn’t go to buybacks. It was how the Fed kept rates at zero and flushed up the banks. Because money has been so cheap, companies could borrow to buy back shares. Because there hasn’t been much growth or product demand to speak of, they haven’t had to invest in plant and equipment and used cash and borrowing for buybacks. Rising interest rates, unless they spike, won’t change the buyback story much. It’s still the quickest way to improve earnings (financial engineering).
There are lots of things that can go wrong with Donald Trump at the helm. There’s no question about that. But I’m optimistic he’ll balance his campaign rhetoric with prudent compromises, hopefully advocated by his cabinet.
Q: Good commentary Shah – your forecast sounds bullish, maybe too bullish in the next little while. We’re near 20k on the Dow and a tab under $20 trillion in debt (good round #s for correction?). And look at the huge ratio gap between the 10-yr and s&p. I too think a Trump Presidency will be great for our markets, but I think we have to go quite a bit lower first. That’s why I moved back into gold/silver stocks last week. Best regards – Stu
A: While we’re never out of the woods when it comes to a downdraft, or a correction (for all the reasons we know are out there, including the debt), the market wants to go higher. The way it’s acting, it could slip at any time, but it doesn’t. It just backs off and hangs out. Then it tries to rally again.
That kind of sentiment, the desire to put money to work, is what is preventing the market from any meaningful selling in the face of not being able to make still higher highs. So far, that’s fine. Your scenario for going quite a bit lower is probably, rightfully predicated on some of the other “gaps” out there, like market valuation against still unimpressive earnings. If we don’t see a meaningful improvement in Q4 earnings (and I’m NOT optimistic they will be up 6% like the Street expects), we could see some profit-taking – I agree with you on that.
The question then is, how low could we go before buyers who missed the last couple of rallies come in?
If Trump makes headway with tax cuts, overseas cash repatriation and stimulus, the markets will jump right back to those higher highs.
Q: We did the thing Shah proposed prior to the 30’s [Trump Can Deregulate the Banks Without Crashing the Economy – Here’s How] and ended up far worse. The Fed is necessary, but I think the other ideas would work. – BD
A: Actually, BD, we didn’t do anything different prior to the 30s. The Fed was making money easy then, teeing up the market crash and then tightened at the wrong time, which caused the Depression(along with tariffs).
The problem with the Fed is that they are so often flat-out wrong, not just late on making the right moves… if they even do make the right moves. It just makes sense in our computerized world that we swap the emotions and politics of the Fed and the interest of its crony capitalist owners for a mathematical model that raises and lowers rates based on a wide-berth formula we all understand. There’d be no guessing, only a clear path against which investors and businesses could make decisions.
Q: Is consumer confidence going up? Based on what? The “Artificially propped up” stock market? Sure, banks have boomed and have had consulting meets with Trump. We can most likely just go ahead and call them bribe meetings. And where does this 3.2% growth number come from? Another manipulated set of numbers from the govt?
I will be stepping aside of it all until the end of January. Hold your cash, hold your gold and silver, and wait for Humpty Dumpty to fall. – Rick
A: It’s not a bad idea, Rick, to step aside in January. It’s unlikely you’ll miss much more than a 5% move if everything goes right. It appears that consumer confidence as well as investor sentiment are going up, partly because they’ve been held back for so long, and there now looks like a business-friendly president and administration coming to push economic growth.
I’m laughing at your “bribe meetings” comment, because you are so right, it shouldn’t be funny.
Q: You’ve got a primary reason for stock market expansion correct – up until now, that is.
Yes, there’s been a lot of easy, addictive credit, and corporations have binged on borrowing and share buybacks. But did we miss the Fed raising rates in December, and promising more of the same for 2017?
Corporations have already maxed out on borrowing, and the slightest rise of interest rates sounds the death knell for any more such buyback activity. They probably won’t be able to service what they’ve already got. To expect a continuation of what we’ve seen is fantasy.
True, the Fed tends to blow hot air on their rates usually, but in this case they’ve got an incoming president with a real strained relationship with Yellen. A contracting market and struggling economy just as his term is getting started would please the liberals on the Fed. Also the Trump cards- yeah, that requires Congressional action, and I’m not so optimistic about that either. I think the government will be dysfunctional for some time. – John
A: I hope you’re not right about the Trump government being dysfunctional for some time, John. If that’s the case, my bullish stance will be unjustified.
I’m not worried about the Fed, and you shouldn’t be either. Until we see sustained inflation way above Fed targets, they’re not moving much. Until we see economic growth way above their expectations, they’re not moving much. The path for higher rates is before them and us, but they will absolutely be gradual – very, very gradual. They won’t kill any economic growth after saying they want the economy to run “hot” for a good while. Why would they? Higher rates, meaning the Fed Funds rate getting up to 2 is no big deal. Even at 3% (which Funds could only get to if the economy’s firing on 12 cylinders and is unlikely), that’s not historically an impediment to growth at all.
As far as the market rising, you’re right that a lot of that has been from buybacks. That’s not going to stop either way. If we backslide in terms of economic growth, buybacks will be the only game worth still playing. If we get tax reform, repatriation, and stimulus, more cash will flow to corporations, which they won’t be able to put to work in capex right away. So that will go to buybacks, again and again. That’s the big bid under the market right now, and I don’t see that changing. It’s become something corporations do, like how they used to make things and grow themselves.
That’s all for now.
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The Consumer Financial Protection Bureau, attacked since before it was born and facing a court challenge to its structure, may be dealt a death blow by the incoming Trump administration.
As an important consumer protection agency and the first domino in a line of regulatory agencies about to be pushed over by the deregulatory army heading to Washington, the CFPB needs to survive for the public good and your investment future.
I’ll be showing you how fixing it and not killing it can make regulatory regimes across the U.S. more effective, less intrusive and profitable for you.
Here’s the good, the bad and the ugly about the CFPB…
Fighting the Good Fight
Senator Elizabeth Warren (D-Mass.) has been constantly under attack over the Consumer Financial Protection Bureau ever since she was a law professor at Harvard University calling for the creation of the CFPB. She has continued to receive criticism in her role as Special Advisor for the CFPB when it was being written into the Dodd-Frank Act, and as the CFPB’s biggest cheerleader since her election as a Senator in 2013.
A lot of Republicans and deregulatory zealots have attacked Warren and the CFPB as examples of government overreach.
They’re not all wrong. There’s a lot about the CFPB that needs to be fixed, in spite of all the good the Bureau has done.
Born out of the financial crisis that imploded banks betting the wrong way on “no-doc” and “liar loans” in subprime mortgage-backed securities and other egregious big bank money-grabbing schemes, the CFPB (part of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted 2010) set new standards for the mortgage market and establishes necessary consumer safeguards.
The Bureau’s new rules make it mandatory that lenders verify borrowers’ income and their ability to repay loans. Rules now make it harder to push exotic mortgages, including ones with “teaser” interest rates. Regulations are now in place simplifying the disclosures that borrowers receive when they take out a loan.
Last year the CFPB forced Citibank to pony up as much as $700 million in compensation to customers after accusing the giant bank of tricking consumers into buying unwanted credit card “add-ons” like identity-theft protection. In 2014, CFPB extracted a similar amount for similar violations perpetrated by of Bank of America.
The Bureau has also gone after student loan servicers for overcharging beleaguered student borrowers, taken down credit card companies for charging undeserved fees, challenged payday lenders on their practices, and looked into lots of corners and dark rooms where consumer fleecing schemes may be residing.
By the CFPB’s own tally, it’s generated more than $11.7 billion in “relief” for more than 27 million consumers.
It’s even taken on the entire securities industry by proposing a set of rules prohibiting arbitration clauses in brokerage agreements that prevent class action lawsuits.
In addition to writing new rules, the CFPB also has the authority to enforce those that are already on the books.
And that’s where the Bureau ran itself into a wall.
The Bureau’s Bad Move
In 2014 the CFPB initiated a lawsuit against PHH, a New Jersey-based mortgage lender, claiming they illegally accepted kickbacks from mortgage insurers. The case was heard by an administrative judge who found PHH guilty and ordered a small sanction of $6.4 million.
That’s when CFPB Director Richard Cordray took matters into his own hands, imposing a penalty of $109 million. Critics of Mr. Cordray’s were furious at the overreach. The case was appealed.
Last October the U.S. Court of Appeals for the District of Columbia said Mr. Cordray’s interpretation was incorrect and the CFPB “violated bedrock due process principles,” by applying its interpretation of the law retroactively.
The PHH verdict brought into question whether a statute of limitations applied to the CFPB’s enforcement effort was illegal. The CFPB’s position, according to the Wall Street Journal is, that “Congress didn’t set a time limit for bringing administrative proceedings.” The Appeals Court said the three-year limit applies to enforcement of the alleged kickback violations and that the CFPB didn’t have a right to punish alleged conduct that took place before then.
But the most damaging aspect of the Court’s decision was its position on the very structure of the Bureau.
Title X, the section of the Dodd-Frank Act that sets forth the Bureau’s formation, says a director will be appointed by the President, confirmed by the Senate, and the Bureau then has the ability to “administer, enforce, and otherwise implement federal consumer financial laws, which includes the power to make rules, issue orders, and issue guidance.”
However, the Appeals Court’s opinion calls for the CFPB to be given presidential oversight, with a sitting president able to supervise, fire, and direct the head of the CFPB.
The current law only permits the president to remove the director for “inefficiency, neglect of duty, or malfeasance in office.” The Court found that clause to be unconstitutional, saying it relied on flawed reasoning that “[n]ever before has an independent agency exercising substantial executive authority been headed by just one person.”
Critics allege agency’s incorrect and egregious enforcement actions amount to a “bureaucratic end-run around the formal rule-making process-in effect, an unauthorized extension of the agency’s reach that can’t be fought via the usual political channels,” according to the Journal.
The Ugly Future of Over-Deregulation
President-elect Donald Trump’s campaign rhetoric about reducing regulations now puts the CFPB squarely in his deregulatory army’s sights. There’s no easier target to take down in the world of regulatory organizations than the CFPB now that a Federal Court has thrown it to the mat.
Taking down the CFPB is an opportunity for the new administration to show it means business.
But that would be the exact wrong message to send to the American people.
First, it wouldn’t be easy to tackle the Bureau and try to eradicate it. The pushback from the public would taint the new administration immediately and set up a battle royale, not unlike the one President Obama faced over the Affordable Care Act.
What the new president should do is publically support the good work the CFPB has done, admonish it for its overreach and establish appropriate checks and balances for its’ funding and oversight. Subjecting the Bureau to bi-partisan review makes sense, even though whichever party has control of Congress could exert their influence over the agency.
But that’s no different than any other aspect of government and makes sense historically and constitutionally.
How the administration handles the CFPB at this juncture of its life will be an indication as to how the rest of the regulatory regimes, with their prudent protections and sometimes obvious overreach will be streamlined or stalemated.
The American public shouldn’t be for more regulation, we should all stand for transparent, prudent, simple black and white regulations that safeguard us appropriately, punish lawbreakers quickly and severely, and clear a path for economic growth at the same time.
If we see the new administration streamline regulations while maintaining necessary protections, the investment landscape will look a lot smoother a lot sooner. If the wholesale slashing of necessary regulations becomes the order of the day, they’ll be plenty of time to make money in the new Wild West, and even more time to ponder the destruction that would cause when markets implode again from too many schemers fleecing the public again and again.
After 35 years in the markets, Shah Gilani has developed a reputation for his bold predictions – and for being right about the global events that impact the markets.
In 2007, he called housing bubble and the near-collapse of the global economy months before anyone else.
In August 2015, he called the selloff triggered by China.
In January 2016, he called the global market meltdown.
And in June 2016, he predicted “Brexit.”
Now, he may sound like a broken record these days, with his talk of Dow 21K and his assessment of the incoming Trump administration.
But where most talking heads will say anything to get on TV, Shah sticks to his guns. And it makes his readers a lot of money.
If you haven’t been paying attention, now’s the time.
On this episode of Making Money, Shah shares the information you’ll want today to get ready for what happens next. Click to watch below.
If you want to know which direction the stock market is going, just look at it. It will tell you.
That’s why the best-known mantra about market direction is: The trend is your friend.
If the trend is up, you buy more stocks. If the trend is down, you take cover or sell stocks.
Since 2009, the trend has clearly been up, up, and away. In fact, since the bull broke free from the bear’s claws in March 2009, the S&P 500 is up 200%.
And since the election of Donald Trump, the grade of the uptrend has gotten steeper with markets setting new all-time higher highs.
Another Wall Street mantra is: The trend is your friend until the end when it bends.
And that’s the problem right now.
Investors looking at the long, long uptrend are scared the election of Donald Trump as America’s 45th president precipitated a final push higher and that now we’re facing the bend that ends up breaking the back of this old bull.
I laid out my bullish case and why markets can double in a few years here on Wednesday.
Today, I’ll point out the hurdles, sinkholes, and black swans out there we should worry about that could interrupt the market’s march higher…
On this latest episode of Varney & Co, Stuart Varney asked Shah if he thinks the market will continue to rise. Shah’s response was, in Stuart’s words, “wildly bullish”.
In this market optimism, Shah is recommending two companies to get into now, and one company to stay away from…
Watch the video below to see why Shah thinks the market will go higher, and the only thing that could stand in its way.
Last week, in my Market Outlook for 2017, I summed up my expectations for the New Year by saying, “My outlook for 2017 is very positive.”
In the comments section at the end of the Outlook, reader James commented:
“It is going to be a year of turmoil. One shock after another. And you end up, “My outlook for 2017 is very positive …”Oh my! For me, it is: “BE PREPARED … for the worst!”
I agree with being prepared for the worst, because there are hurdles, sinkholes, and black swans out there. However there’s one gigantic market reason and three “Trump card” reasons why I’m optimistic about 2017 and beyond.
When I say gigantic, I mean the market can easily double, in a matter of years, not decades.
The reason is simple. But it’s not mainstream news, and only a few analysts realize what’s happening – which is why hardly anyone knows the truth about it.
Here are my simple, overlooked reasons that have me hopeful for the coming year…