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Markets spent last week watching the Republican Party eat its own and reject seven years of promises to repeal the broken Obamacare bill while the Democrat Party that destroyed the American healthcare system celebrated. For the moment, investors chalked this cynical display of political paralysis as typical Washington dysfunction and left markets relatively unscathed. The Dow Jones Industrial Average shaved off only 1.5%, or 317.90 points, on the week to close at 20,596.72, while the S&P 500 dropped by 1.4% to 2,343.98. The Nasdaq Composite Index lost 1.2 to finish the week at 5,828.74 in the wake of a flurry of Elon Musk tweets designed to distract Tesla investors from that company's massive losses and broken promises.
Who says that the narrative of nonsense that dominates our public discourse is limited to Washington, D.C.? But investors will soon run smack into the reality that Obamacare imposed crippling costs on consumers and businesses that contributed to the worst recovery in modern history. With no prospect that the yoke of this ruinous legislation will be lifted off the backs of the American people for the foreseeable future, markets are likely to turn from irrational exuberance to rational sobriety very quickly.
Financials and Energy Are Getting Snowed Under Right Now
The energy sector is facing fiercer headwinds as oil prices finished the week at $48.20 (WTI) and $51.05 (Brent). Frackers are showing no signs of cutting production and have burned cash for 34 of the last 40 quarters, according to figures on the top 60 listed E&P firms collected by Bloomberg. They vaporized $11 billion in the last quarter alone. Now that oil prices have doubled since the beginning of 2016, frackers are back drilling like oil is $100/barrel. But oil is nowhere close to that level and is likely heading back down to the low $40s. OPEC's deal to cut production is hanging by a thread (as usual) as well. Natural gas prices are under pressure from a warm winter and we are now entering spring and summer. Energy stocks are under pressure as a result of these factors.
Then we have the financial sector, which started the year celebrating an expected deregulatory frenzy from the Trump administration but is now seeing the yield curve flatten significantly and eat up its profits. Financials led the post-election rally but are now retreating as doubts about Mr. Trump's ability to carry forward his agenda rise. With stocks still trading near all-time highs (the tech-heavy Nasdaq especially), Wall Street and the financial sector may have seen their best days already in 2017.
As for the retail sector, it continues to face even fiercer headwinds.
Stay Away from Retail – Particularly This REIT
Moving away from the failing American healthcare system, there are other large sectors of the American economy that are suffering existential crises. The first is the retail sector. Retail stocks keep sinking lower with each passing week. The stocks I have recommended as short candidates in Zenith Trading Circle are losing altitude faster than the Hindenburg – LB, M, JCP, SHLD, GNC, and GPRO among them. (Zenith subscribers saw some tidy profits last week in LB.) Mall REITs, including Simon Property Group (SPG), Macerich (MAC) and Taubman Centers (TCO), have fallen almost 20% over the last seven months as investors worry about rising numbers of store closings.
Last week, video game provider GameStop Corp. (NYSE: GME) and women's apparel retailer Bebe Stores Inc. (Nasdaq: BEBE) joined the long list of companies announcing store closures, while Sears Holding Corp. (Nasdaq: SHLD) told investors in its newly released 2016 annual report that "substantial doubt exists related to the company's ability to continue as a going concern." That didn't stop the company's second largest investor Bruce Berkowitz from buying more shares after the stock fell sharply on this news, but I would file that under the adage "in for a dime, in for a dollar" because Sears' vendors are starting to clamp down on sales to the retailer and the iconic company is edging closer to extinction with every passing week.
Speaking of mall REITs, one definitely worth avoiding is Seritage Growth Properties (NYSE: SRG), whose properties are anchored by none other than Sears. Seritage is tight on cash and has in Sears just about the worst possible anchor tenant in the world. I hear people tell me that Seritage is a good investment and even Warren Buffett owns shares. My response is that even Babe Ruth struck out from time to time. Seritage was a sucker's bet for everyone but Sears Chairman Eddie Lampert when it was spun out of Sears in 2015, and it is an even bigger sucker's bet now. Investors should avoid it at all costs.
With the retail, energy, and financial sectors limping along and political paralysis stalking Washington, investors need a new narrative to pump up stocks. And that is going to be harder and harder to find.
The post These Three Sectors Are Getting Slammed As Washington Flounders appeared first on Sure Money.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.