- Interim Update 16th November 2016

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Trump's first 100 days

At the end of October Donald Trump released a list of things that he would do within his first 100 days in office if elected President. Many of the items on the list are either not realistic or not important. For example, the first item on the list is: "Propose a Constitutional Amendment to impose term limits on all members of Congress." He can certainly propose such a change, but there is no way that a majority of incumbent politicians will vote in favour of it. There are, however, items on Trump's "things to do list" that are both achievable and important. We will now single-out some of the ones that stand a good chance of happening and would have a significant effect on the financial markets.

1) "I will direct my Secretary of the Treasury to label China a currency manipulator".

This is wrongheaded thinking in three ways. First, every currency is being manipulated. For example, if China deserves to be labeled a currency manipulator then so does the US Federal Reserve. Second, the "currency manipulator" charge would stem from the belief that China's government was trying to weaken the Yuan in order to obtain a trade advantage, but the fact that China has reduced its holdings of US government bonds by hundreds of billions of dollars over the past two years means that China's government has actually been trying to STRENGTHEN the Yuan. The reality is that the Yuan has been falling under the weight of its own over-valuation and China's government has been trying to slow the decline. Third, it's nonsense that China's economy would gain a trade advantage over the US economy via an artificially-low Yuan.

Based on wrongheaded thinking it certainly is, but this is something that Trump seems determined to push ahead with. The potential effects are reduced trade, higher costs for US consumers, an increase in the pace at which China's government sells off its US Treasury bonds and higher US interest rates.

2) "I will direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately".

This implies that the US government will implement tariffs and put other obstacles in the way of international trade. Did nobody in US politics learn anything from Smoot-Hawley?

3) "Middle Class Tax Relief And Simplification Act. An economic plan designed to grow the economy 4% per year and create at least 25 million new jobs through massive tax reduction and simplification, in combination with trade reform, regulatory relief, and lifting the restrictions on American energy. The largest tax reductions are for the middle class. A middle-class family with 2 children will get a 35% tax cut. The current number of brackets will be reduced from 7 to 3, and tax forms will likewise be greatly simplified. The business rate will be lowered from 35 to 15 percent, and the trillions of dollars of American corporate money overseas can now be brought back at a 10 percent rate."

As discussed in the latest Weekly Update, Trump's proposed tax cuts aren't being funded by reduced government spending and therefore aren't genuine tax cuts. The private sector will end up paying, one way or another.

What the tax cuts constitute is a Keynesian stimulus program, and in this regard they could be effective. In other words, they could give the economy a significant boost over the coming year or two at the cost of slower long-term progress. They could also give equity prices a significant intermediate-term boost (especially when it is considered that more than 70% of the tax cut will go to the top 5% of taxable-income earners) and add to the upward pressure on interest rates.

The proposal to lure trillions of dollars of American corporate money from outside to inside the US will give the Dollar Index and the US stock market a boost if it is effective, but we don't see why it would be effective. Why pay 10% to the US government just for the 'privilege' of bringing home money that has already been subject to foreign tax requirements?

As an aside, the money-supply figures reveal that there has been a substantial transfer of US dollars from outside to inside the US over the past 12 months. That is, the international money flow that Trump's tax proposal is designed to incentivise has already happened for other reasons. The other reasons are probably fear of the ECB's profit-crushing Negative Interest Rate Policy (NIRP), the risk of a European banking crisis, "Brexit"-related uncertainty, and the range of social, political and economic problems infesting Europe.

4) "End The Offshoring Act. Establishes tariffs to discourage companies from laying off their workers in order to relocate in other countries and ship their products back to the U.S. tax-free."

This would hinder international trade, lower corporate profits and increase costs for US consumers.

5) "Repeal and Replace Obamacare Act. Fully repeals Obamacare and replaces it with Health Savings Accounts, the ability to purchase health insurance across state lines, and lets states manage Medicaid funds. Reforms will also include cutting the red tape at the FDA: there are over 4,000 drugs awaiting approval, and we especially want to speed the approval of life-saving medications."

This could be a big step in the right direction. It could boost the economy, pave the way for more full-time jobs and save a lot of lives, but it isn't something that's going to happen in the first 100 days.

6) "Restoring National Security Act. Rebuilds our military by eliminating the defense sequester and expanding military investment".

The idea that the US is not spending enough on its military is absurd, as made clear by the following chart.



The problem is that policing the world and being constantly involved in regime change in multiple countries* is both very expensive and counter-productive. US foreign policy under Trump is likely to be less-interventionist that it would have been under Clinton, but funding the military is still going to place a large burden on the US economy over the next few years. Moreover, no matter how excessive the size of the military, war-mongers in the government will always find ways to make full use of it.

7) Dismantle the Dodd-Frank Wall Street Reform and Protection Act that was passed in 2010 as part of a typical "closing the stable door after the horse has bolted" response to the 2007-2009 financial crisis. This wasn't on the first-100-days list linked above, but Trump has said that it is a top priority.

It should first be understood that if fractional reserve banking were recognised under the law as the fraudulent practice that it is, then there would be no need for any special laws to 'regulate' the banks. To put it another way, an entity that has been granted the power to create new legal tender out of nothing has the ability to disrupt the entire economy and therefore needs a special set of laws/regulations.

Unfortunately, Dodd-Frank is not a useful set of laws/regulations. The big banks are currently engaged in the same sort of activities that contributed to the 2007-2009 crisis, so the legislation hasn't achieved its touted purpose. The legislation has, however, caused the banks to employ an army of lawyers and compliance officers that produces reams of paperwork and adds no value. Actually, the 'compliance army' that must now be employed by every financial institution adds negative value, because from a customer's perspective it makes dealing with banks, brokers and other financial firms far more difficult than it should be.

In effect, Dodd-Frank makes the economy less efficient and its elimination should be an important plus, although much will depend on what replaces it.

Summing up, the various proposals aimed at making international trade 'fairer' will be costly to the US economy. The tax cuts could be very effective as a short-to-medium-term stimulus program, with substantially-higher interest rates being the most obvious ramification. The elimination of some unwieldy legislation, most notably Obamacare and Dodd-Frank, will help, while growing the already-bloated military will waste resources.

    *Rarely does a week go by when the US is not involved in the bombing of at least three countries, and in September it actually managed to bomb six countries in a single weekend.

Copper breaks the bear market pattern

The middle section of the following chart illustrates the Commitments of Traders (COT) situation for Comex copper futures. It reveals a spectacular rise in the speculative net-long position (the red bars) during the one-week period ending Tuesday 8th November, which is the date of the latest available data.

At 8th November the speculative net-long position in copper futures was actually higher than at any time since early-2004. In other words, it hit a 12-year high last week. Furthermore, the 8th November numbers don't include the effects of the post-election price surge.



The dramatic increase in the speculative net-long position in copper futures has smashed the bear-market pattern that dominated over the preceding three years. Prior to the past two weeks, whenever the speculative net-long position in copper futures moved above the zero line the price was near a short-term peak. The price would then decline until speculators, as a group, had become net-short to the tune of 30,000-40,000 contracts.

Putting it in simpler terms, the change in copper's COT situation suggests that copper has commenced a cyclical bull market.

At the same time, the ramp-up in speculation has created short-term downside risk. In this regard, the copper-futures speculation in China discussed in the article posted HERE is of greater concern than the goings-on at the Comex. It seems that speculators in China will buy any futures contract that happens to be in a steep upward trend.

The T-Bond is close to a short-term bottom

Here is a chart of the 20+ Year Treasury ETF (TLT), a proxy for the prices of long-dated US government bonds. The bottom section of the chart shows the daily RSI(14), a short-term momentum indicator.



On Monday of this week, TLT's daily RSI hit its lowest level since the second quarter of 2007. This means that by one measure, the T-Bond market is now more 'oversold' than at any time over the past 9 years.

Also worth noting is that TLT has just experienced a "death cross", meaning that its 50-day MA has just crossed its 200-day MA from above. Despite the name, "death crosses" are reliable short-term BULLISH signals, the reason being that they tend to occur near short-term price bottoms. Specifically, a "death cross" will often occur near the end of a multi-month correction within a bull market or around the first short-term bottom within a long-term decline.

The combination of the 'oversold' extreme in the daily RSI and the "death cross" suggests that the Treasury market is very close to a short-term bottom in terms of both price and time.

The Stock Market

The US

In the latest Weekly Update we listed "market internals" as one of three reasons that there could be a 6-12 month extension to the US stock market's long-term bullish trend. Here's what we wrote:

"...at no time over the past several months has there been a meaningful bearish divergence between the senior US stock indices and the 'market internals'. Furthermore, during last week's rally the 'internals' were stronger than most of the indices. For example, whereas the S&P500 Index (SPX) rebounded to a lower high last week, the UWSPX/SPX ratio (the Unweighted SPX divided by the capitalisation-weighted SPX, a measure of breadth within the S&P500) made a new high. This is a bullish divergence."

Today we wanted to make it clear that the upside breakout by the UWSPX/SPX ratio was not the only bullish divergence over the past week between the indices and the 'internals'. Of perhaps greater significance is that there have been more individual common stocks making new 52-week highs on both the NYSE and the NASDAQ than at any time over the past few years.

Here's a chart showing the NYSE situation. Within the past few days the number of individual common stocks making new 52-week highs (the green bars on the lower section of the chart) hit its highest level of the past three years even though the NYSE Composite Index was below its September-2016 peak and well below its 2015 peak.



We hasten to point out that while this is evidence of a continuing bull market, it does not imply a bullish short-term outcome. There were many cases over the past 15 years when the number of individual stocks making new 52-week highs became relatively large just prior to the start of a significant short-term market decline.

Gold and the Dollar

Gold

Current Market Situation

The US$ gold price almost touched important lateral support in the low-$1200s on Monday. Also, Monday's intra-day low might have defined the bottom of a price channel.

The rebound following the test of support has been weak up until now, so we won't be surprised if there are additional tests over the days ahead. An intra-day spike below support wouldn't be a problem, but a weekly close below $1200 would be a problem for the intermediate-term bullish case.



At this stage the decline from the July peak looks like a routine correction, but with the 'new bull market scenario' having not yet been confirmed we shouldn't blindly assume that this is necessarily the case. In the financial markets, blind assumptions that turn out to be wrong are often very costly.

We are looking forward to seeing the next set of COT data as it will show the extent to which speculators liquidated their collective net-long position during the post-election rout. It will be a positive development if the total speculative net-long position in Comex gold futures has fallen to 150K contracts or less.

India's Gold Market

In last week's Interim Update we linked to an article by Jayant Bhandari dealing with the general panic, and the panic-buying of gold, that was set in motion by an incredibly ill-conceived and poorly-planned decision on the part of India's government to ban the most popular currency notes. A follow-up article by the same author has been posted at http://www.acting-man.com/?p=47842. It is a must read.

The situation in India appears to have gone from very bad to much worse over the past week. Economic collapse appears to be an imminent risk, all because of the gross stupidity and arrogance of Narendra Modi, India's Prime Minister.

Gold Stocks

In the latest Weekly Update we mentioned that the HUI didn't have any remaining nearby lateral support of significance, but that the bottom of a price channel was situated a few points below Friday's low. As illustrated by the following chart, the channel bottom was reached on Monday.



The rebound from the channel bottom has not done enough, yet, to indicate that a short-term low or even just a multi-week low is in place. Conclusive evidence of a reversal would require a solid break above the channel top, but a daily close above 196 would be an early warning of a bullish turnaround.

Interestingly, one of the same signs that the T-Bond market is close to a short-term bottom also applies to the HUI. We are referring to the fact that the HUI has just experienced a "death cross". Even if we are dealing with a far more bearish intermediate-term scenario than we currently have in mind, the "death cross" increases the probability that a short-term bottom will soon be put in place if it isn't already in place.

The Currency Market

The Dollar Index

In the latest Weekly Update we wrote that major resistance at 100.0-100.5 for the Dollar Index would probably be tested within the next two weeks. As illustrated below, the resistance is now being tested.

There is a good chance that this resistance will be breached within the coming few months.



On a short-term basis, the Dollar Index is 'overbought'. This could result in a few weeks of consolidation in the 98-101 range prior to a breakout.

The likelihood of an upside breakout in the Dollar Index within the coming few months represents a threat to gold-related and commodity-related investments. It is a good reason to be cautious. More specifically, it is a good reason to maintain a hefty cash reserve and to look for opportunities to hedge long-term positions.

The Australian Dollar (A$)

The A$ is beginning to confirm the C$'s bearish performance.



The Yen

Our expectation has been that the Yen's July-August 'double top' near 100 would be followed by a roughly 10% decline to the vicinity of the 70-week MA, after which there would probably be a rally to new multi-year highs. This expectation was based on what happened in the past after rallies from multi-year lows to above the 200-week MA, and is unchanged.

As illustrated by the weekly chart displayed below, the 70-week MA is in the 89-90 range and the current price is 91.7. This should mean that the Yen is now within 2 points of a correction low and in roughly the same position as it was at the times indicated on the chart by the green arrows.



Updates on Stock Selections

Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html

Premier Gold (PG.TO) published the long-awaited results of the FS for the Hardrock (Trans-Canada) gold project after the close of trading on Wednesday 16th November. The results can be summed up in one word: lacklustre.

The results are lacklustre because they reveal that the project is economically unattractive near the current gold price. The project has significant option value, but there is little chance of it being shifted into the construction phase with the gold price at or below US$1250/oz. If all else remains the same, a gold price of at least US$1400/oz will probably be required.

Although the results are unimpressive, they aren't surprising. We were hoping for better, but the delays in completing the FS and PG's efforts to de-emphasise the Hardrock project by making investments elsewhere were warnings that Hardrock's economics would not justify mine development anytime soon.

If the stock market were an unemotional weighing machine then the FS results wouldn't lead to additional weakness in PG's stock price. This is because PG offers good value at its current price even if a value of zero is assigned to Hardrock. However, the stock market is a highly emotional voting machine.

There will be additional comments on Hardrock's FS in the Weekly Update.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://www.goldchartsrus.com/