DECEMBER 2017 DESERT OF THE REAL INVESTMENT NEWSLETTER
It is likely that 2017 will see the major market indices
close at record high levels. It is possible, even likely, that there will be a
pullback in the short term. The outlook for 2018 is not guaranteed, but signs
indicate the first part of the year will continue to provide gains or at least
avoid large, sustained pullbacks. Several factors point in that direction.
First, monetary policy has shunted everyone into equities,
or at least away from cash. Interest rates have been extremely low, causing
money to cascade into equities or other oddities. Take a look at information contained in a
recent John Mauldin newsletter, “Thoughts from the Frontline.” Here is where some money is going:
• A painting (which may be fake) sold
for $450 million.
• Bitcoin (which may be worthless) soared nearly 700% from $952 to ~$8000. (Now up to over $11,000.) More on this later…
• US corporations sold a record $1.75 trillion in bonds.
• •Argentina, a serial defaulter, sold 100-year bonds in an oversubscribed offer.
• Illinois, hopelessly insolvent, sold 3.75% bonds to bondholders fighting for allocations.
• The market cap of the FANGs increased by more than $1 trillion.
• Money-losing Tesla Inc. sold 5% bonds with no covenants as it burned $4+ billion in cash and produced very few cars. (Hmmm… when did we last hear the term "burn rate"? 2000, I recall.)
• Bitcoin (which may be worthless) soared nearly 700% from $952 to ~$8000. (Now up to over $11,000.) More on this later…
• US corporations sold a record $1.75 trillion in bonds.
• •Argentina, a serial defaulter, sold 100-year bonds in an oversubscribed offer.
• Illinois, hopelessly insolvent, sold 3.75% bonds to bondholders fighting for allocations.
• The market cap of the FANGs increased by more than $1 trillion.
• Money-losing Tesla Inc. sold 5% bonds with no covenants as it burned $4+ billion in cash and produced very few cars. (Hmmm… when did we last hear the term "burn rate"? 2000, I recall.)
Two historical and seasonal market
factors may also come into play. The first is the “Santa Claus Rally” and the
second the “January Effect.” The Santa Claus rally happens in the last week of
December and the first two days of January. This effect is attributed to
workers investing their Christmas Bonuses (the Author Rob asks “what are
these.?” He has not gotten a Christmas Bonus since the early 1990s.),
purchasing based upon lower prices anticipated by the January effect, and the
tiny gasps of “peace on earth and goodwill toward men” that are still in
utterance.
The “January Effect” is believed to the
result of investors selling off losing investments to harvest the tax losses
(lower prices for stocks) and again, investment of Christmas bonuses.
BUBBLE. BUBBLE, WHO’S GOT THE BUBBLE?
Remember the kids’ game, “Button,
Button, who’s got the Button?” Several players would put their hands out and
one kid would secretly drop the button into another’s hand. Then the kids would
try to guess who had the button. (This is not to be confused with the game of
“Hot Potato,” which may prove to provide a much better analogy.) Only one kid
can have the button, and the player that makes the right guess wins the game.
BET ON BITCOIN?
A Bitcoin is a cyber-currency that has
no physical existence. It is held on peer-to-peer networks and not on a single
server. Bitcoin is accounted for on the “block chain,” a distributed database
of the transactions. Bitcoin “miners” are paid in Bitcoins for solving
extremely complex problems that protect the block chain. When Bitcoin was
released, a PC had enough processing power to mine Bitcoins. Now it requires a
huge server farm in a remote part of the world where electricity is very cheap.
Bitcoin is accepted by numerous
parties. It is gaining in acceptance across the world, but is by no means
broadly accepted. It is banned in many countries, especially in countries in
economic turmoil such as Venezuela.
There are also concerns about Bitcoin
because of its use in criminal and terrorist activity.
And we should also note that there are several
other cryptocurrencies trying to compete with Bitcoin. And if you really,
really wanted too, you could launch your own cryptocurrency.
WHEN SHOULD WE GET THE BUTTON?
Bitcoin is currently worth $11,056. (12.3
at 6:00pm ET) https://www.coindesk.com/price/ It is extremely volatile. It will
soon be trading as a commodity in the Futures market. The US Commodity Futures
Trading Commission (CFTC) confirmed Friday that CME Group and
CBOE had met the
requirements
for regulated trading, while Cantor Exchange would also be able to debut
Bitcoin binary options.
Bitcoins
have not yet been approved for major American markets and Bitcoin ownership is
not just one mouse click away. But large
financial institutions are poised to launch Bitcoin exchanged traded funds. This is when to get the button. A we know, exchange traded funds (ETFs) or
sometimes known as exchange traded products (EFPs) are a common investment
product. There are ETPs for market indices, market sectors and foreign markets.
Currently, there are Bitcoin ETPs awaiting SEC approval. Proshares and REX
Both
of these funds will have a product that is short Bitcoin exposure and one that
is long Bitcoin exposure.
Some
investors are betting it all on Bitcoin. Early adopting investors are dabbling
in it and some got on the train very early. The Authors have not invested in
Bitcoin yet, but believe the time to move is as soon as the ETPs are issued.
These products will be launched with much fanfare and money will flow in at a
fast and greatly accelerating rate.
At
this point, the “Greater Fool” effect will be in full vigor. The price behavior
of Bitcoin will resemble that of dot.com stocks in 2000, real estate in 2008
and perhaps even tulip bulbs in 17th century Holland. Keep your stop
loss orders tight and hold on for the ride. The Authors’ need to ride another
wave of other peoples’ insanity.
SURF’S
UP IN THE DESERT OF THE REAL
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