Archive for January, 2020

Here’s Why Big Companies Getting Bigger Might Be a Problem for the Entire Market

0 | By Shah Gilani

A lot of investors don’t buy big companies’ stocks because they don’t believe the companies can get any bigger than they are now. They’re wrong. They’ve been wrong. And they’ll continue to be wrong.

Just because a company is gigantic, maybe weighing in with a trillion-dollar market capitalization, it doesn’t mean it can’t get bigger and its stock can’t keep making higher highs.

As long as companies can grow their revenues and profits, their stock prices are going to go higher too.

But that doesn’t mean there aren’t problems with big companies’ getting bigger or their stocks soaring.

There are certain patterns you need to look out for when you’re thinking about investing in one of them.

And that’s what I want to show you today.

Here’s what’s working for big companies getting bigger and the problem with their stocks skyrocketing.

Coronavirus vs. SARS: Is This Time Different for the Market?

0 | By Shah Gilani

Investors almost always expect markets to react to current disruptions the same way they reacted to similar disruptions in the past.

We’re seeing that today with the spread of the coronavirus.

Already, analysts and market commentators are citing what happened in 2003, when spreading SARS deaths knocked the market down, but stocks ultimately ended the year considerably higher.

The question “is this time different?” is generally shrugged off because investors believe they know what markets did then and what they’ll probably do now because of it.

But what if this time is different?

What if investors aren’t looking at the big picture and how both China and the world have changed? What if investors forgot that something else lifted the market in 2003 and had nothing to do with SARS containment?

Here’s a more objective look back and why this time could be different

Capital Wave Forecast: Modern Monetary Theory – Fear Narrative or Far from Crazy

2 | By Shah Gilani

Modern Monetary Theory (MMT) has the power to change the United States in more ways than anyone realizes.

As the essential economic plank of the Democrat party, MMT is about to explode out of the far left-leaning academic containment tower it’s been brewing in.

Here’s what it is, how it’s supposed to work, how it would change the U.S., and what you should do with your money if MMT replaces democratic capitalism as we know it.

Big Banks Are Starting to Worry About the Market, Should You?

3 | By Shah Gilani

One of my favorite reads, Business Insider, threw me for a loop this week with an article titled, “‘Signs of excess are building’: 4 Wall Street giants explain why the stock market’s rally may have gone too far”.

Wall Street analysts are always worried about something, whether it’s the U.S.-China trade war, Iran’s saber-rattling, or the coronavirus spreading.

But, when big bank gurus are worried about “internals” – metrics surrounding the stocks that make up the market – maybe it’s time to worry.

Here’s what the four giants are worried about and what you should really be worrying about

This Is Your Warning for the “Profit-Taking” That Could Happen in Seven Days

0 | By Shah Gilani

Everybody loves Apple Inc. (AAPL).

Actually, everybody loves everything Apple: the iPhones, Macbooks, iPads, Apple AirPods, the Apple Watches, the whole Apple ecosystem, and especially Apple stock.

Even if you don’t think you own it, you own it if you own any mutual fund(s) or popular index-tracking ETF(s). Apple’s in most of them.

In fact, Apple is so widely held it’s frightening.

Here’s how big an influence Apple stock is on the stock market – the S&P 500, the Dow Jones Industrials Average, the Nasdaq Composite – and what’s frightening about where else Apple resides.

The Stock Market Has the Fed to Thank for its Latest Melt Up

1 | By Shah Gilani

Ongoing trouble in the repo market, where banks, big hedge funds and others borrow from each other, has forced the Federal Reserve to inject $400 billion into the fed funds market over the past four weeks.

That’s what’s fueling the stock market’s melt up.

Here’s how the problem in the fed funds market is driving stocks higher, why the Fed’s going to have to do even more, and what it means for future market moves.

The fed funds lending market is where borrowers use repurchase agreements, or repos, to borrow overnight or for terms of a few days to a few weeks. It has been in existential crisis mode for weeks now.

The bottom-line there is that big banks who usually lend their excess reserves in the fed funds market, to pick up interest overnight or on term loans, have been keeping more of their excess reserves parked at regional Federal Reserve banks. They’ve been doing this to collect IOER (risk-free “interest on excess reserves,” which the Fed’s been paying banks since the start of the financial crisis). Either that or they’ve been using their excess reserves to buy longer term Treasury bonds to earn more interest and speculate on interest rates falling.

That means there’s not enough money in the system to facilitate normal lending. As a result, the interest that borrowers must pay on repos has, at times, skyrocketed. And worse, sometimes the well’s dry.

To calm markets, provide necessary liquidity and not implode the financial system, the Federal Reserve’s been pumping money into the fed funds market like mad

Capital Wave Forecast: Get Ready to Roll with Earnings Ups and Downs

0 | By Shah Gilani

For the last few weeks your Capital Wave Forecast has been highlighting “negative narratives” like the fake recession and fake manufacturing recession narrative, the Fed’s lost control narrative, and how global debt is going to crash markets narrative.

The purpose of highlighting and debunking negative narratives is to warn investors that they should be watching the market go higher and reading Capital Wave Forecast to understand what’s driving markets, and not listening to or reading naysaying nonsense.

There are other negative narratives out there, which we’ll continue debunking, just not today.

Today, we’re catching up with where the market’s been going and what’s immediately ahead for stocks.

Last week, despite Friday’s mostly across the board selloff, markets rose yet again.

Passive Investing’s Dirty Little Secret: It’s All Good, Until It Isn’t

0 | By Shah Gilani

The secret momentum driver elevating market indexes to all-time highs, again and again, is none-other than the “passive investing” trend. It’s going on unbeknownst to even the drivers of this momentum bus.

Investors who don’t understand how big an impact money flowing into index funds has had on the market’s performance probably have no idea what could happen if the trend stalls, or worse, reverses.

Here are the pitfalls of passive investing and how bad the fallout could be if passive investors discover the trap they’ve entered, turn active, and sell.

The almost self-perpetuating cycle of rising markets attracting passive investment capital into index products, which boosts the value of indexes as money flows into them, which attracts more sidelined money and compels investors to sell actively managed funds and buy passive index-following funds, which have been lowering their management fees since they aren’t actively managed, which attracts more investor capital into the growing universe of index funds, which keep increasing in value as sponsors and their authorized participants buy all the underlying stocks in the indexes they track when investors buy those packaged products in the open market, is, almost self-perpetuating.

But you know the saying, almost only counts in horseshoes and hand grenades.

The truth is passive investing’s virtuous positive momentum manufacturing feedback loop isn’t a guarantee.

What passive investors aren’t seeing, because they aren’t looking through or behind the mad rush into what looks like a better mouse trap, is that more money flowing into index funds increases systemic risks inherent in the investment.

The Secret Driver Behind the Market’s Upward Momentum

0 | By Shah Gilani

In last week’s article, Why You Should Understand the Market’s Upward Momentum and What’s Going to Stop It, I explained how following market benchmarks is easier than following individual stocks. That’s because “big-picture drivers” (that are easy to follow) impact investor psychology and market direction.

Those drivers are:

  1. What the market is doing
  2. Interest rates and central bank policies
  3. The economy
  4. Alternative investment opportunities
  5. Risk and reward
  6. Geopolitics
  7. Momentum

I explained that “momentum isn’t last on that shortlist because it’s the least important big-picture item. It’s last because everything before it determines momentum…and when it’s hot, it becomes its own driver.”

And I also teased what this article’s going to reveal: “There’s another piece to the momentum picture, a big-picture momentum driver all its own, that’s been an engine of momentum, which I’ll get into right here next week.”

So, what’s the secret?

The hardly ever talked about big-picture momentum driver is the passive investing trend.

Here’s what it is, how it works, why it’s working so well, and what could end it.