Seeing Red Flags Everywhere
During Operation Desert Storm in 1991, Central Command asked me to fly a top secret mission to Lebanon in my twin engine Cessna 340.
Mission accomplished, I flew home on a 270-degree heading over the Eastern Mediterranean at an altitude of 200 feet, in order to stay under the radar.
It was a warm, hazy day, and I had the plane on autopilot, enjoying myself passing the time looking out for fishing boats, private yachts with bathing beauties, and cargo ships.
Suddenly, I saw an F-18 fighter jet come straight at me, pass a few feet overhead, do a 180, then come up right alongside my port wingtip. A minute later a second F-18 joined me on my starboard wingtip, and a third followed directly behind me at a safe distance.
I thought, ?This is not good.?
The planes had US markings. So I reached into my pilot?s case and pulled out a small American flag and held it up against the cockpit window.
They ignored me, stonily staring straight ahead.
Then I took off my New York Yankees baseball cap, held it up to the window and pointed at it.
Still no response.
Then they gradually started edging towards me, eventually holding course TEN FEET off each wingtip at 220 MPH. I was unable to change course.
I put out a Mayday call.
Five minutes later I received a call from a listening station at a British Army base in Cyprus. He said he was relaying a message from a US Navy helicopter from an undisclosed location.
Right at that moment the cause of my predicament became clear.
An American aircraft carrier loomed out of the haze, surrounded by 25 grey support ships. As I passed overhead, the cockney accent informed me ?Don?t worry, they only think you?re a suicide bomber.?
The second I passed over the enormous ship, it's deck chock a block with waiting aircraft and hustling sailors, the F-18?s suddenly peeled away.
Observing the disjointed market action over the past few days, that queasy feeling that I was about to be shot down in flames has returned.
Let me list the red flags I am seeing for this market.
1) The yen is appreciating. With a weak economy, exploding national debt, tottering government, demographic nightmare, and a 10-year JGB yielding negative -10 basis points, it should be falling. The yen (FXY), (YCS) only goes up for one reason: hedge funds around the world are covering their short positions because they plan to dump long positions in all other asset classes, especially stocks.
2) The bond market is remarkably healthy. Ten-year US Treasuries (TLT) hit a 1.70% yield today. Investors are not buying bonds because they love these fabulous 170 basis point yields. They are soaking them up because they want to hide their cash from the greater harm they could suffer elsewhere.
3) Defensive stocks have been roaring. Utilities (PGE) and telephone companies (T) have some of the best performing stocks of 2016. This is despite the fact that they are burdened by ancient business models and literally rusting assets. But they have high dividend payouts and low stock volatility that is attracting investors. This means said investors believe the rest of the market is going to suck for the foreseeable future. Not good, not good.
4) Oil is going down again. Remember that perfect correlation between oil and stocks (USO)? It will return with a vengeance, and oil now has a head start. The world is still drowning in surplus oil, and a wave of bankruptcies is about to hit us big time.
5) You know those monster moves in oil and commodities (FCX) we saw since January? 100% of it was short covering. There was almost no new net cash pouring into the sector. And what is all that cash waiting to do again? Sell short the next momentum driven market breakdown.
6) The calendar is about to turn savagely against us. Heard of ?Sell in May and Go Away?? It?s April. What follows April? May. We are about to enter a period of historic stock market weakness (SPY) which is really tough to beat, unless you are short or hedged.
7) The Republican Convention in July could be a nightmare. Remember the Democratic Convention in 1968, when the police were found to have rioted? The upcoming brawl in Cleveland could make that affair look like a cakewalk. Anyone with a predilection for civil disobedience has already made their travel plans for the summer. Markets everywhere will shudder.
Don?t get me wrong here. I am convinced that the bull market in stocks still has several years to run. I just think that the last rally was too much, too fast, and that we could be in for another hickey. This is why I am running one of my smallest trading books in years, with just a small long in gold.
By the way, parachutes don?t work at 200 feet. I doubt that would have been a concern of mine, as sidewinder missiles rarely have a problem hitting their target at 100 feet.
I?m still pissed at the squids in the Navy.
