Latest Log Entry: Why To Own Stocks Right Here, And Why Not To

The pros and cons below for the “right this minute” scenario favor the bulls. As for over the course of the next year, well — at this juncture — not as much…

11/17/19 Sunday

List of reasons why it is smart to own stocks right this minute:

  1. This is typically a good time of year to own stocks.
  2. The recent breakout to new all time highs is likely to draw in more buyers, and see more bears capitulate (become buyers).
  3. The world’s 4 largest central banks are currently flooding the markets with liquidity.
  4. The Administration is obsessed with keeping the stock market buoyed. The President often tweets on, and takes credit for, the latest rally. Even the slightest pullbacks are quickly followed by optimistic tweets and/or commentary on trade talks.
  5. High probability that there will be a Brexit deal — announced soon.
List of reasons why it is dumb to own stocks right this minute:
  1. Our fear and greed index currently scores 100 (highest greed); denoting high odds of a near-term selloff.
  2. MACD and RSI show negative divergences on most time frames.
  3. Market breadth (all time highs and lows among individual stocks vs the broader averages) does not support current level.
  4. Volume has been markedly weak of late, suggesting there’s no big-money passion underlying current level.
List of reasons why it is smart to own stocks if you have a one-year time horizon:
  1. A trade deal will either get done between now and election time, or the hope of one will be kept alive the whole time.
  2. High probability that there will be a Brexit deal.
  3. Low probability that the Fed will upset the apple cart.
  4. Foreign equities, Eurozone’s in particular, are beginning to show technical strength. Eurozone economic data, while still notably soft, is beginning to exhibit some green shoots. I.e., signs that the global economy may not be on the verge of rolling over. 
  5. Longer-term moving average trend indicators are solidly bullish. 

List of reasons why it is dumb to own stocks if you have a one-year time horizon:

  1. The stock market is in the process of pricing in a trade deal, if one doesn’t emerge the market will fall apart.
  2. Stock prices have strayed far above what current forward earnings projections justify.
  3. Stock prices have been buoyed hugely by corporate share buybacks, and the prospects for more of the same going forward.
  4. Companies have spent more money on share buybacks than they have, in the aggregate, had money to spend.
  5. Number 4 has resulted in a record level of corporate debt to GDP, begging the question; how long can the buyback boom last?
  6. The level of outstanding investment grade (IG) debt of the lowest IG rating (BBB) is near an all-time high. BBB issuance this year alone is near its all-time high.
  7. Per the Fed, “the riskiest firms” account for most of the increase in debt in recent years.
  8. Pensions, hedge funds, and other yield-hungry investors are loading up on lower-quality bonds. A huge market-crushing exodus will occur in an economic slowdown as credit ratings get cut.
  9. CEO confidence is currently at recession-level lows.
  10. CEOs broke the one-month record for quitting their jobs in August. Also, the number of CEOs leaving their jobs year-to-date exceeds the level for this time of year during 2008 (the Great Recession). Suggesting that they realize that they’ve boosted earnings per share (and thus their bonuses) as far as they can, and that they believe a tougher earnings environment (i.e., weaker economy) is coming.
  11. Should CEO pessimism persist it’ll morph into job cuts. Once the consumer begins to fret over his/her job, and acts accordingly (stops spending), the ball game is over; as the consumer is absolutely the glue presently holding the economy together.
  12. Our proprietary macro index is scoring near its lowest level since the last recession.
  13. Unique, and huge, election-year uncertainty to come.
  14. Should for whatever reason(s) — e.g., surprisingly strong U.S. economic performance, or a sudden lack of foreign interest in U.S. debt — bond yields begin to rise notably and for an extended period, the presently bulging, dangerously low-quality corporate debt structure may begin to crack: A scenario which by itself — and ironically — could bring on an abrupt reversal in economic activity and, thus, catalyze the next bear market in equities.

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