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Coal In Your Christmas Stocking


Tax-bill passage chance is 50/50 at best.

Geopolitical risk is hightening.

Volatility continues to trend lower.

The "perfect storm" is brewing for coal in your stocking this Christmas.

1. Tax-bill passage chance is 50/50 at best.  Corker and Flake are "no" based on deficit hawk stance and lack of re-election needs.  Johnson may turn to "yes" after concessions.  McCain is a probably "yes" despite voting "no" in 2001 and 2003 for deficit hawk reasons; always the "maverick" - he likes to surprise.  Collins is the main draw for a swing vote.  I rate her a "no," at least until she gets major concessions which probably wouldn't happen this year.  Which is the biggest problem - as the 2 "no" vote is reduced to a 1 "no" vote come end December after the Alabama election.  On top of that, they'll be dealing with the Democratic filibuster to the debt ceiling (DACA concession).

2. Geopolitical risk is heightening.  *Merkel will likely hold another election with EU leadership in the balance.  *Trump just labeled Un a terrorist which will likely result in retaliation, either cyber or military or both, very soon.  *OPEC is meeting Nov 30, and the shaky business "truce" will soon break.  Russia and Iraq have no motivation to cut.  Saudi Arabia has provoked Iran and Qatar.  US Shale production has reached a 45 year high.  *China has begun more stringently clamping down on internet liberties, just as internet commerce giants TENCENT, JD.COM, BAIDU, and BABA are at all time highs. *In the USA, the Mueller investigation is ramping up, honing in on central figures in the current Administration (Kushner, Sessions) enroute to Trump himself.

3. Volatility continues to trend lower.  Yesterday, the VIX was at 9.65 and VXO at 8.75.  A headline from a popular article yesterday was "This bull market will NEVER end."  If the risks continue to heighten over the next few weeks, while the volatility remains low, we are set up for a pop - either higher or lower, by about 5%.  Not the end of the bull market, granted.  The biggest risk is lack of passage of the GOP tax plan that nobody except big corporations likes.  The health bill passed the House and failed the Senate.  Goldman Sachs thinks it will pass, though a poll of economists revealed 60% disagree.  Second, China will be reporting ISM and Caixin data next week; despite recent liquidity infusions, I expect data to continue to slow, reflecting stronger currency, financial reform attempts, and decreased trade with Korea.  Third, the flattening yield curve (now below 60bp) gives us cause to pause if Trump's gift doesn't materialize but continued Fed rate hikes do instead.


The sky is NOT falling.  But I would be prepared for a 5% drop by Christmas.  So, I would recommend lightening up exposure (esp. of oil stocks while prices are high).  Besides, after Christmas/New Year's shopping has better deals.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.