Trump Pump and Dump Nears Completion
Pump It Up
In the 80s and 90s, Trump would allegedly buy stock in a company, then pretend his corporation was going to acquire the said company, pumping up the price. Trump never followed through, but since regulators never did anything about it, he would make millions over a decade. The easiest con for the scammest of artists.
Classic buy the rumor, sell the news; in this case, Trump was creating the rumor. If it sounds like insider trading, that’s because it is. Not exactly what a real billionaire would do, but it’s not like Forbes or Trump keep accurate records.
Eventually, markets learned not to trust Trump’s word. Like every scam, time decay eventually reigns. It was time for Trump to move on to selling steaks or college degrees.
Now it seems the market has selectively lost its memory again.
Trump, on the other hand, remembers. He’s upped his con game since then. Fake run for president, accidentally wins, check. Enact tax cuts to incentivize corporate buybacks, while pressuring the Fed to ease monetary policy in an effort to pump up the economy while in office, check. Take all the credit for the inevitable stock market rallies, while blaming political opponents if anything goes wrong, check.
Pump, pump, pump. Then, when things inevitably crash, point your finger as loudly as possible at every single person around you.
You can’t really accuse Trump of doing a pump and dump insider trading scheme when we’re talking about the entire market, not just one stock. Trump’s very policies and tweets are market moving. Unlike previous presidents, Trump gets on his Robinhood account from the toilet, buys a bunch of SPY, DIA, and QQQ, then tweets out that we will meet up with China’s prime minister any second now.
Investors like to say don’t fight the Fed, but ultimately, don’t fight the Trump rally. Or so it would seem. With the world nearly on fire, it’s only a matter of time before this American con runs out of time.
We could look at nearly dozens of factors to assess whether the market is healthy, ranging from the inverted yield curve (no, as a recession indicator, it doesn’t matter that the inversion was temporary) to Brexit and Hong Kong, but let’s just look at the core factors affecting the stock market to see why there’s little reason for optimism. These include earnings, trade tensions, Fed policy, macro data, the 2020 election, and of course, impeachment.
Trade Tensions and Fed Policy
The trade war cooled off a bit once the impeachment inquiry started. All of a sudden Mr. Hard Wall Trump couldn’t sing the song of Phase 1 trade deal fast enough. China realized how desperate Trump was to prevent a stock market crash and recession that they decided to test (tease) Trump. Oh, phase 1, yeah we haven’t signed that yet. Maybe in 30 days.
Didn’t matter, markets rallied. The hope for trade relief meant we were ready to test new highs again. At the end of the day though, the market is now pricing in a full-blown trade deal with no retroactive historic damage. We are way above May’s highs before the market priced in a nearly perfect deal. Since then, we have 6 months of time decay, uncertainty, and overall damage to the macroeconomy.
Ah, but the bulls argue we’ve had the Fed cut rates 3 times since then, so stocks deserve higher multiples. But that is assuming ceteris paribus. In other words, we have to ask ourselves why the Fed is cutting.
Without going into a deep argument about the exact economic and political factors that motivated the Fed’s decision making, what is undeniable is that the debate regarding the future of US interest rates and stock market valuation comes down to what stage of the cycle we are in.
If we are just in an 11-year mid-cycle adjustment like in the 90s, then the projection for stock prices over the next 12 months is double-digit growth. Given that we are at all-time highs, we can infer that the market has taken the optimistic side of this bet.
Namely, yes the data is bad, but surely we’ve already bottomed right? We’re just in a lower growth environment, which is exactly why stocks should be valued even higher than they were under a higher growth environment, right?
For now, the Fed no longer seems to think we are in a mid-cycle adjustment. Goldman Sacs told us the Fed was going to tell markets that those 3 rate cuts are the conclusion of their mid-cycle adjustment. Sacs said we would see the word patient again.
Instead, the Fed indicated openness to further cuts on the basis of weak data. Definitely no rate hikes ever again! Which meant the market could rally a little higher. Bad news is good news since the Fed will have to cut, and good news is good news, since it means the economy really has bottomed and we are going to see a re-acceleration of growth. So what about that data and earnings?
Earnings
Clearly, market expectations for Q3 earnings were too low. 75% of companies beat expectations, which sounds good on the surface, until you realize that 60% lowered guidance for Q4. Interestingly, since we were hovering around all-time highs, the market technically had to decide if it was going to break up or down.
Well, we know where the market chose. The rally came strong, violently even, in certain stocks. But does it make any sense for stocks to be at all-time highs when earnings growth was negative year over year and companies continue to project even worse numbers? We can lower expectations indefinitely and continually “beat” those expectations, but at some point, the market has to give.
If Q4 is as bad as projected, what will the argument of the bulls be? Don’t worry the Fed will be there forever, Trump will be president forever, and this cycle will last forever.

Economic Data
I am not seeing the re-acceleration in growth that markets have assumed. The payroll of 128k is amazing right? I mean come on expectations were for the GM strike to cut job growth to 85k. Okay, but 12 months ago payroll growth was 250k! So we are now at half the growth rate and supposed to get excited?
What about 50-year lows in the unemployment rate? The blacks and Hispanics have so many jobs- the best jobs. In reality, though, the unemployment rate is rarely constant. It usually declines steadily as the business cycle peaks, and then rapidly rolls over once we’ve hit a low point.
Given that 3.5% is incredibly low and wage growth is no longer robust, we have started to stretch this rubber band as far as it will go. We are already up to 3.6% again, and as Ben Bernanke points out, once you go .3% above a low, you are already in a recession.
Which means it doesn’t matter if we get 3.5% or 3.6% again for a couple of months. We need to keep the unemployment rate below 3.8% for the next year for Trump to avoid a recession before re-election.

I’m not even going to bother going over industrial data (factor orders were worse than expected at -.6% MoM). It’s bad and hasn’t gotten better. The rate of decline may have slightly slowed in certain realms, but we are a far cry from a reversal in trucking and manufacturing trends.
While we avoided a broader recession in 2015 even though trucking crashed, that can’t happen forever. Eventually, the industrial sector spills into the broader economy.

That’s why business investment is so concerning. At first, it only impacts the edges of the economy, but if all businesses decide at once they are going to wait and see how the 2020 election plays out, then the consumer’s precious confidence will roll too. And the market continues to price Trump’s re-election chances at 100%. Which brings us to politics.
Politics and Impeachment
Which Democrat brings peace of mind to the markets? Sleepy Joe Biden who’s corrupt son stepped down from multiple countries’ boards when called out about it? Maybe Mayor Pete since he’ll say anything his corporate donors want.

The fact of the matter that the market would rather die than accept is that Elizabeth Warren and Bernie Sanders are extremely popular to the Democratic base. The betting markets give a 50% chance that one of them wins the primary.

At a 54% chance of Democrats winning the presidency, that means there’s at least a 25% chance that Sanders or Warren are president in 2020 (although I would easily double those odds). It’s important to consider that the stock market historically hits an all-time high 1 out of every 15 trading days or 6% of the time, so we shouldn’t just be aggressively short simply because we are at all-time highs.
But does it really seem like the market is pricing in a 25% chance of a Bernie Sanders socialist overhaul of the US economy? I personally think it would be great if we all had healthcare, weren’t constantly going to war with half the world, and taxed the wealthy a little bit more, but based on the billionaire class crybaby reaction to Warren (while completely dismissing the possibility of Sanders), and there’s little reason for optimism.
Impeachment has become more interesting than markets have priced. Initially, the market barely reacted. No way our precious leader will ever leave us! But here I’ll end on some local news.
I currently reside in Frankfort, Kentucky. On Tuesday, we had a gubernatorial race. Trump went all-in on supporting the Republican incumbent Governor and Trump wannabe Matt Bevin. At his Rupp Arena rally (where the UK Wildcats play), Trump told his supporters to vote Bevin in to “show the liberal media that their fake news impeachment witch hunt is a nothing burger.” Okay, that’s not the real quote, but you wouldn’t have been able to tell the difference.
Trump also said it would be a bad sign for him if Bevin loses. Well, sorry Mr. President, but Andy Beshear, a Democrat, won the governor’s mansion in a state Trump won by 30%. Looks like the impeachment isn’t quite firing up Trump’s base like he thought it would.
Conclusion
Trump will keep tweeting about all the amazing things he’s done. But eventually, the numbers (and importantly the fear and uncertainty itself) will be priced in.
Earnings continue to look bleak, even if the market hasn’t yet priced in Q4. The Fed easing is bullish in the short term, but eventually, we are either in a recession or avoided one. The economic data has yet to support the bottoming out theory, and if we don’t bottom, then the Fed can’t push us out of a recession with a string. Phase 1 trade deal will prove to be too little too late. And we haven’t even gotten started with the 2020 election and the impeachment hearings.

I’ve been Hunting a Caterpillar
If my bearish thesis plays out, then CAT looks like a phenomenal short. Due to the trade war, CAT has been a swing trader’s dream since January 2018. CAT recently broke multiple critical bullish levels and has been trading with an extremely high beta relative to the Dow Jones.
I was short CAT into earnings. At first, I was vindicated; it was down nearly 6% premarket! They reported worse than expected revenue, earnings, and forward guidance. Usually, such a trio is abysmal for a stock. Yet, CAT immediately reversed, violently. By the end of the day, it was barely down 1%. As the Dow rally continued, CAT went up 5% on multiple days!

When the Dow had one gentle pullback, CAT dropped 3%. If CAT can break the 14 month high of $146.70, then there is room to run north of $150. But the bottom of the swing range is $110, meaning we have a ton of room to drop when sentiment turns negative. There are only bearish catalysts left once the latest Dow rally inevitably cools off.
Time is against us on these options, since no one knows when the market will crash. So, I’m going with longer-term options, including January 2020 and March 2020. While I’m tempted to buy the more aggressive $120 puts, there is plenty of delta/gamma to profit off much closer to the money. Personally, I find January 17, 2020, $140 puts attractive, currently trading at $4.15.
Those options have lost over 50% of their value in the last 2 weeks. I’m looking to exit these options at 2.5x gain, but I will reassess as we continue to hit new highs. If $146.70 is breached, there is a lot of more room to run upwards.
If you feel like being conservative, wait for confirmation of a pivot point to indicate significant sentiment reversal. Don’t get cocky if we get a couple of pullbacks; cash out your profits early. Trump could keep this market alive well into 2020.
Disclaimer: This content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this post constitutes a solicitation, recommendation, endorsement, or offer by myself to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. The opinions expressed in this publication are those of the author.

