Good morning,

For the second week, a melt up of the FAANG stocks drove the NASDAQ up 1.19% to another all-time weekly high.  Also closing at all-time record highs were the S&P 500 and the small-caps index, Russell 2000, while the DJIA and DJTA ended the week lower, as the DJTA and BKX closed Friday as this week’s losers with declines of 2.79% and 1.58%, respectively.  

And for the second straight week, the FAANG stocks outperformed the NASDAQ, courtesy of a 17% move higher of Netflix (NFLX) on Tuesday after the company reported stellar earnings.

Even a crash-and-burn of President Trump’s healthcare bill on Capitol Hill couldn’t stop this stock market bull.  But, Reuters thinks the Trump administration failure has not yet been priced into US stocks.  

The U.S. dollar stumbled to a 10-month low against a basket of currencies and U.S. Treasury yields fell after the fresh setback to the healthcare bill raised investors’ doubts about Trump’s ability to enact tax cuts and infrastructure spending. Reaction in the stock market was muted, and analysts said the expectation for business-friendly legislation out of Washington is all but priced out of the stock market.

My response is: nothing is priced into US stocks except expectations of more liquidity from central banks and the asset inflation it generates.  However, a hit to the US dollar is another matter anytime central banks dilute the currency.  

And contrary to some who mistake the US president as some kind of ideologue, I think President Trump’s and the Fed have a tacit understanding based upon practicality.  Yellen doesn’t want the blame that she’s pushing too hard for higher rates, and Trump doesn’t want the blame for the anticipated market turmoil incited by questions of what happens to sentiment during a protracted government shutdown with an alleged ‘crazy’ man on one side of the fight.  And you can bet your bottom dollar that the media have their scripts and memes already prepared for this eventuality in October.

Walls, bridges, tunnels, highways, high-speed rails, airports, communications and whatever infrastructure needs updating as Trump’s budget seeks to prepare the US for a ‘New Deal-light’ to include millions of highly-paid blue collar jobs as a contribution by government to mute the introduction of deflationary forces that come with the deployment of industrial robots.  

Add another $52 billion (or $89 billion, if the House and Senate Armed Service Committee gets their way) to a proposed five-year $1.0 trillion infrastructure budget, and we have a wonderful story for mom-and-pop voter to stay with the president.  That’s how presidents serving their first term do, and the slight of hand to all of this planned fiscal stimulus will include a slide of the US dollar.  Think of a stealth Plaza Accord, and you’ll get the picture.

But, from the standpoint of trades, this plan also provides cover for the Fed to prop markets while the US dollar slides against commodities and precious metals.  “It’s the budget deficits from Trump’s budget that have caused the US dollar to decline,” will become the media mantra.  I think the anticipated Plaza Accord-like scheme along with a compliant Fed will drive commodities prices from under the weight of systemic deflationary forces of automation and demographics.

Okay, back to the market action this week.

In the US Treasury market, the yield on the UST10Y drop another nine basis points, adding to the previous week’s six-basis-point drop.  The yield now stands at 2.24%, after failing to achieve momentum above the two-week surge higher through the 200-week MA earlier this month.  

The UST10Y and LIBOR curve tumbled as well, and closed at 101.3 basis points at the close on Friday.  So, here we go.  Yield curves are crashing again.  

This week may give me a better clue about whether the Fed can arrest the flattening Treasury curve, because if it cannot, the health of the banking system may take a turn for the worse.  This week, we saw this dynamic.   While stocks conspicuously pushed higher despite another setback of negotiations in Washington regarding the ACA, the BKX dropped 1.58%.

And for the second straight week, stocks got no help from the yen, which rallied strongly again this week, this time by 1.24%.  And the heaviest-weighted currency of the USD index, the euro, climbed a robust 1.69%.  The seven-month rally of the euro has been truly eye-popping.   From the low of the first day of trading in 2017 to today, the euro has soared by 12.8% against the US dollar.  Wow.  Folks, a move of this size requires a lot of capital.

The European currency has contributed to the bulk of the 10% decline of the USD index since the January 3 high of 103.81.  It appears that President Trump is getting his weaker dollar after all, despite of the contrary implied through communications by his Secretary of Treasury Steven Mnuchin during his confirmation hearings.  

My take is, a weak US dollar in the forex provides a tailwind in the gold market. But in order for that thesis to manifest, we’ll need to see a gold rally in August, as the gold price has not adequately reflected the 10% decline of the USD index.

Speaking of which, spot dollar-gold moved higher this week by 2.29%, and closed the week above the $1,250 level at $1,255.10 per ounce.  Silver’s catch up from its tie with WTIC and CRB index included a spike higher of $0.62 for the week, closing Friday’s trade at $16.55 per ounce.  As I’ve mentioned in recent reports, the spread between gold and silver prices may narrow back to the 70-times level by the close of Q3.  Presently, the spread is 75.84-times.

And confirming strong moves in the spot market were solid moves higher of the precious metals stocks.  The GDX, GDXJ and SIL closed higher by 2.80%, 2.28% and 3.04%, respectively.  Along with the dollar-gold price, all three ETFs closed above their respective 200-week MAs.  

My guess is, the dollar-silver price remains comparatively depressed if the metal begins to trade like a monetary metal and not an industrial one.  And based on that assumption, I’ve set an initial target of $18.50 for the metal.

A weaker US dollar did absolutely nothing for the WTIC price this week, the price of which dropped $0.77 (-1.65%), to close out the week at $45.77 per barrel on the NYMEX.  My proxy for the oil market, Exxon-Mobil (XOM), fell to $80.12 this week, down 1.43%.  Both WTIC and XOM trade below their respective 200-week MAs.  The charts don’t look bullish to me, and with good fundamental reasons to suggest that the oil price is actually higher than maybe it should be.

We have only another two weeks of gasoline drawdowns to cover this year’s summer driving season, and inventories are still very high.  Remember, gasoline supplies lead demand by approximately four weeks, so the draw-downs remaining in the coming two weeks supply the demand expected during the last two weeks of the summer driver season.  And if we add in this week’s news of record shale production in the US along with another notch higher to the already-high rig count, I see nothing bullish in the oil market.

Another important move was made in the copper market.  Dr. Copper rallied another $0.032 (+1.17%) this week, closing Friday’s trade at $2.723 per pound.  Once again, the copper price trades above its 200-week MA, with this week’s 3.25% move higher of Freeport McMoRan (FCX) confirming bullishness among the professional traders of the copper market.

Okay, let’s wrap up this week.

As I stated last week, I think the Fed is angling for more consumer price inflation, but is also tentative with future monetary policy due to uncertainties in Washington regarding the contentiousness regarding President Trump’s proposed budget.  Will this bickering about a ‘Russian connection’ with the White House stop for long enough to get an agreement upon a budget bill?  I’m not too sure, and apparently neither is the Fed.  

I agree with David Stockman’s assessment of a failure to pass a federal budget could rattle markets if both sides play a protracted game of ‘chicken’.  I suspect that the government shutdowns during Obama’s tenure and the shutdown during the early Clinton years may pale in comparison to what we may witness in October.  

Trump has been painted as a reckless and unstable individual who wouldn’t mind one bit a chance to approve federal expenditures at the executive level on a case-by-case basis, which he’s required to do by law if the debt ceiling is not raised.   Does the Congress really believe he’s a reckless dictator-like character, or will his foes on Capitol Hill call him in the hopes the president has bluffed?  

Boy, I’d hate to be among the guys and gals responsible for actually calling Trump on this budget fight.  Of the three government shutdowns, Congress loses the political fallout.  But with Trump on the other side this time, maybe Congress will gamble.  In any event, markets will become spooked by the high-stakes game between a most unusual US president and equally aggressive opposition.

Folks, if a budget does get passed without too much fanfare (is that likely?), a dollar rebound could become quite epic.  

I’m warning my readers now about what I see as possible ramifications to all markets as we approach the final days leading to the mid-October deadline of raising the debt ceiling.  If a vicious fight between the Trump administration and Capitol Hill turns out to be anything close to reality, even in backroom discussions, it could get ugly for a while.  

Remember though, Yellen has our backside, but volatility may return with true revenge in its heart, leaving the Fed no choice but to step in during a severe correction, if it ever happens.  I think when Yellen said the following in her Congressional testimony of last week…

Possible changes in fiscal and other government policies here in the United States represent another source of uncertainty. In addition, although the prospects for the global economy appear to have improved somewhat this year, a number of our trading partners continue to confront economic challenges.  At present, I see roughly equal odds that the U.S. economy’s performance will be somewhat stronger or somewhat less strong than we currently project.

… she knew she had the federal budget fight ahead of her to cope with.  And I think the FOMC meeting scheduled for September 19,20 will be her last opportunity to massage Wall Street’s thinking about future rate hikes before the mid-October drama begins.

So, what do I expect will happen in October?  I expect the powers behind Washington senators and representatives will crack some heads if needed if this fight gets out of hand and threatens US national and global security.   And that’s what we’re really talking about here: national security.  The US cannot conduct foreign policy during a US dollar meltdown.  

In the end, I expect a big, fat “nothing burger,” but the drama and volatility in markets may get quite intense during the upcoming national soap opera leading up to October.

Okay, onto my Watch List.  

My current portfolio: LQMT, LC, ROX, SC (short), FRED and FNMA.

This Week’s JBP Stock Ideas

WATCH LIST

On Tuesday, July 18, I bought 5,000 shares of FRED at $6.57, with an initial target price to sell at $8.00.

And Fannie Mae, an old favorite that’s been very kind to me, is back in my portfolio.  For those with me last year, you’ll remember I made $30,000 from a monstrous move higher following Trump’s election victory.  Although I expected to make a good score on FNMA, I didn’t expect $30,000 within 36 hours of his victory.

Now that the stock has retraced the rally, and then some, the stock has reached my ‘buy zone’.  On Wednesday, July 19, I alerted that I bought 10,000 shares of FNMA at $2.53, with the thinking of buying 10,000 more shares if the stock reaches the $2.20 handle again.

The Fibonacci retracement of FNMA, see chart, above) illustrates severe pessimism among traders of the stock, which had me scratching my head in early April when the stock continued its downtrend to as low as $2.20.  

My think is, that the Trump rally has been deflated in some stocks that have been bid aggressively since November 8.  FNMA surely is one of these stocks.  The stock is now a bargain, in my opinion, especially after we find out that the Republicans in their latest budget proposal seek to privatize Fannie Mae and Freddie Mac.

This privatization scheme has always made sense to me, as the New Deal programs of the Roosevelt era may no longer be affordable within the context of today’s federal budget blowout.  Well, that’s my thinking and the thinking of Trump and core Republicans, anyway.

From TheStreet.com:

“The Treasury has already provided $187 billion in bailouts to Fannie and Freddie, and taxpayers remain exposed to $5 trillion in Fannie Mae and Freddie Mac’s outstanding commitments, as long as the entities remain in conservatorship,” the bill reads.  “Our budget recommends putting an end to corporate subsidies and taxpayer bailouts in housing finance.”

In January of 2016, I wrote an article about the implications of Fannie Mae following a Trump election victory.  The points made in the article are as pertinent as they are today.  You can read the article, entitled, ‘If Trump Wins The White House, FNMA Soars’ on my website.  

Well, FNMA did soar from a Trump victory, and I expect it will once again, maybe to the $10 and $20 range after the budget deal fight is over—in October?  Let’s hope the fight is over in October.  Odds are it will be.

Until next time…

Trade Wise and Green!

Jason Bond