First cracks of a market u-turn?
Abraham George Macro View
While the DNC is in full swing, former president Barack Obama and the heavy weight Ladies of the Democratic Party like Hillary Clinton, Elizabeth Warren and Nancy Pelosi will all make their speeches today to portray what a terrible president Trump has been and why Americans should never make the mistake of giving him another four years.
Meanwhile, Wall Street has been busy analyzing Joe Biden’s tax plans. A combination of different groups have come to the conclusion that the richest Americans can expect their taxes to go up between 13% to 18% in a Biden presidency.
The lesser privileged will also see tax increases but it is more indirect and much smaller in the range of 0.2% to 0.6% .
Biden plans to tax more for anyone making $400,000 a year in payroll taxes and capital gains. In the US, if anyone is making close to $550,000 a year, they will fall under the 1% category.
For those rich an average 15% increase in taxes is no big deal considering the three decades over “manna” that they have been showered with the blessings of the Fed. The Fed has come to the rescue of the markets ever since Greenspan introduced the Greenspan “put” through many other creative methods and not only lowering interest rates.
It is the rich who mostly own all types of financial assets like stocks, bonds and commercial real estate. Apart from the fat pay checks, they also get richer when their assets go up in value.
The gap between the rich and the poor has been widening so much, some of the rich are feeling down right guilty. The likes of Jerry Greenfield (Ben and Jerry’s ice cream co-founder) and Disney Abigail (heir to Disney corporation) are pleading to the government to raise taxes on people like them immediately, substantially and permanently. Bless their gold plated hearts.
They probably foresee and fear a situation like the French Revolution or Iranian revolution when the poor overthrew the monarchs out of power.
Only in this situation the monarchs are the ultra-rich. If you have been reading or listening to the works of Ray Dalio, I am sure you already have a good picture. Dalio has been talking about the divide between the poor and the rich in US for many years.
Equities
Apple became the first two trillion dollar company yesterday. It was only two years ago almost to the day that they were elevated to the position of the first one trillion dollar company.
If you are an ardent follower of Warren Buffet, you should be holding almost 45% of your portfolio in Apple. Buffet now has $133 billion in Apple. Buffet invested in Apple with a lot of reluctance and late to the tech boom. Imagine if he had not invested in Apple how his portfolio would have looked. There is more to the Apple story and don’t be surprised if it will turn out to be a monopoly stock. Watch for Microsoft and Amazon also to hit the two trillion mark at some point soon.
We have been discussing about the divergences in the major indexes in past reports. We believe the high in the Dow was seen on Aug 11 at 28,155 . While the S&P 500 and the NASDAQ have continued to rise and make new highs this should resolve soon and the markets turn south.
The S&P 500 just made it to rising above the previous high and fell back by the close. Only 33.9% of the index’s members participated in taking the markets higher. It looks like the generals are making a last stand while the soldiers don’t want to claim more territory. Think greater bearish potential exists and the downside critical level is 3325.
Bonds
While there is still risk for a rise to 181 think yesterday’s rise to 179^13 must have fulfilled the pullback requirements. The expected move down could be very swift and strong.
Euro
The Euro exceeded our projected targets but must have topped out at 1.1966 yesterday. The subsequent move down has been swift. The long Euro trade is a very crowded one. The daily sentiment index and the commitment of trades data point to that. A close below 1.1785 should give us more confidence.
Gold
Gold exceeded a couple of points above our projected gap levels from the last report and fell flat. This decline is the largest in a day since the rally started. It gives us more confidence for the downside potential. Think the move down should eventually draw prices to 1700 .
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.