At Brexit, the DAX had an incredible square out at the close before anyone knew the results. I surmised if it lost, there would be profit-taking on a buy the rumor sell the news. If it won, markets might go ballistic. We know what happened, it went ballistic. But end-of-the-world forecasts were a fantasy as the FTSE did quite well. Markets have rallied for the most part since the semi-finals in the French election two weeks ago. If Macron won, I thought we could be on a “buy the rumor, sell the news” rinse cycle.
The initial outcome on Sunday night had the YM gapping up but dropping lower immediately for the classic gap and fade. The ship steadied by Monday morning but it remained off the high. Elsewhere, the euro/U/S. dollar (EUR/USD) currency pair was a golden spiral 263 days off its high as of Friday’s close and the open on Sunday night was negligibly lower and by the morning drifting lower. With the European economy in such terrible shape, they cannot afford much more strength in the EUR/USD. While one faction of France has been celebrating for the past two weeks the truth of the matter is the currency has gone counter to what they need in order to stimulate their economies.
I’m purposely staying out of the politics of the French election in this forum but I have this much to say. If I’ve said it once, I’ve said it a thousand times. The Starbucks report on consumer behavior after Ferguson proved the consumer shuts his wallet during times of social unrest. The French just elected a candidate who ran on a platform of telling the French people terrorism is a reality they are going to live with. Reading between the lines, this means there will be more attacks in France. Nothing is going to change. So how can the economy possibly improve over time? You can figure out the rest.
The CAC, the epicenter of excitement gapped up two weeks ago looked like it was taking profits by Monday morning.
Elsewhere, the House came through with a package for healthcare that will now go to the Senate. The market liked that not so much for this bill which is not a repeal of Obamacare, but it pushes forward the agenda to do something with taxes this year. What would a repeal look like? For one, if coverage lapses for X period of time which may be 90 days right now but is subject to change in the Senate sausage grinder, they have the right to hit the customer with a 30% surcharge that was in the original bill from last month. Last time, for people who did not have insurance, they were subject to an immediate 30% surcharge.
Now, I ask, if a person couldn’t afford insurance before, how are they possibly going to afford it if they are subject to an immediate fine? Let’s just say for the moment if your premium would be $300 a month which is $3,600 for the year. The fine would be $1,080 or adding an extra $90 per month and let’s say it’s a family of two. So that adds $180 a month. The middle class was already challenged to afford it. They will not be allowing competition to purchase insurance over state lines. So how will they possibly lower premiums and deductibles to the point where it makes a difference?
Where am I going with this? Median home prices have now surged beyond the highs of the last decade while the home-ownership rate is at a 30-year low per the Census Bureau. Of all the sectors last week, the HGX started looking questionable.
Follow this logic, the stock market has already baked tax reform in the cake. If they don’t get it, you can figure out the rest. But what they haven’t baked in is the possibility people who want to buy houses may get shut out of the market because they have to buy health care. Since the 80s, people who wanted to buy houses and couldn’t afford it if they lived in places like Southern California fled to states where housing prices were affordable. Several millions fled California for places like Nevada, Arizona, Texas, Washington and Colorado. New Yorkers migrated down south. The U.S. population in this decade compared to prior decades are not moving anymore. If the housing sector takes a real hit, it will be only a matter of time before the rest of the market gets hit. This health care bill will not help.
I know we are exploring areas beyond the charts but I believe it’s also important to think some of these things through. Of course, in a bubble it may not matter because this is a market that only goes up. Lately, I’ve seen ads and even listened to commercials on radio promoting software that allows the trader to make money even when he is sleeping! Yes, certain brokers are promoting a software that allows the public to participate in the same kind of algorithms the big boys use. When I see this kind of thing, I cringe.
When the crowd, egged on by Wall Street themselves comes to the conclusion you can make money trading by pushing a button, it’s going to end very badly. It’s an industry that never learns it’s lesson. Every generation thinks this time it’s different. I get it the people who were trading in 1929 obviously weren’t around in 1999. But this generation has already experienced two crashes.
This time the market dodged a bullet because a Le Pen victory most certainly would’ve blown up the European Union. We’ve had more than our fair share of major issues in the past month. Now, these are in the rear-view mirror. That doesn’t mean we are out of the woods but some of the geopolitical risk is now taken out of the market. The theme for the first part of this week is to see how far they can go with selling the election news.