December 16, 2019
By Mish Schneider
The classic sandwich is overstuffed, served with spicy brown mustard.
Tasty and popular, pastrami is brined, seasoned, smoked and steamed.
The stock market looks equally overstuffed, as well as brined, smoked and steamed.
I read a story today that corporations paid on average an 11% tax rate. This is about half of the federally mandated 21% tax rate.
The impetus for the low corporate tax rate is to encourage economic growth and business investment.
Instead, the extra capital has gone towards record stock buybacks with hardly any new investment or hiring.
Furthermore, the recent Federal Reserve repo buying has injected at least $425 billion for short-term funding for banks, with more expected in the next few weeks.
Between corporate stock buybacks and free money for banks, is the market gorging too much on overstuffed pastrami on rye?
One of the best gauges for assessing the answer to that question, besides the Economic Modern Family, is junk bonds.
I did a piece called Stock Market Tells Bears, “Eat Crow!” from November 18th. I should have said “Eat Pastrami!”
In it I wrote, “In terms of price (JNK), a move over 110 should help bring the market to its euphoric knees.”
Today’s high in JNK was 109.47.
If my analysis is correct, that puts us very close to euphoria.
High-yield junk bonds are attractive when the anticipation is for lower rates for a longer timeframe. Furthermore, the price of junk bonds will rise if the anticipation is that these weak companies will improve.
Junk bonds in general, serve as one indicator for investors’ appetite for risk.
Hence, we are in a complete risk-on environment while getting very close to the euphoric stage.
Over this past weekend, we looked at the economic Modern Family. Although all gained in price today, they (except for Semiconductors) lag in price compared to the S&P 500.
Remember, the SPY is where most of the corporate buybacks are reflected.
I have also reported on commodities and their rising prices. That reflects the falling dollar and the Fed’s repo.
Today, oil, grains, coffee and copper all gained.
Getting back to equities, with current news and conditions of the Family and commodities, continuing to buy growth up here looks risky.
Buying value may look a bit better as we see in JNK, however, that too borders on gorging.
Nutritionally, pastrami is not that bad for you. The biggest health factor is the high sodium levels. But, too much sodium can cause high blood pressure and heart disease.
So, I would enjoy the fine taste of this bullish market. Nevertheless, beware that too much of a good thing also increases your risk of high blood pressure.
Russell 2000 (IWM) 163.41 pivotal area support
Dow (DIA) 279.70 the support with a new ATH at 284.11
Nasdaq (QQQ) With a small breakaway gap, 204.80 or the 10 DMA support 209.53 ATH.
KRE (Regional Banks) 57.52 support, 59.50 resistance
SMH (Semiconductors) 135.15 support. 142.10 the new ATH
IYT (Transportation) inside day. 195 is still key pivotal area with 191.25 key support.
IBB (Biotechnology) 116.30 key support 122.97 the 2018 high
XRT (Retail) 45.41 must clear. 44.15 major support
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