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Comstock Partners, Inc.
November 11, 2017

There have been many of the strongest bulls on Wall Street that have changed their minds on the “Bull” side of the market, just recently.  Many of them have been very concerned about the possibility of continued delays in the “Tax Reform” that is being bandied about in the House and the Senate.  Some others such as Jim Paulson, Chief Investment Strategist at The Leuthold Group, just a week ago, was concerned about how most investors are still just looking over the blue skies and thinking nothing can go wrong.  He also was concerned about the Fed tightening more than most investors anticipated, as well as a flattening out of the bond market.  As the shorter term bonds have been rising faster than the longer term bonds, the flattening could turn out to be inverted soon and we all understand that is a precursor to a recession. The financial stocks that usually rise as rates increase, are now declining, and that also signals that something is wrong.  Paulson is also concerned about the Republican Agenda slowing down, as the House and Senate go back and forth with significant delays. 

 Another extremely respected equity analyst for Morgan Stanley, Mike Wilson, has recently changed his opinion, after being a noted bullish economic and equity analyst over the past 8 years.  He now expects either a major decline or at best a bear market pause.  He also sees some of the same problems as Paulson. As stated above, the settlement of the Tax Reform continues to go back and forth as the Republicans are sprinting to the finish line in order to get a compromise between the two chambers.  This is where the Senate Republicans and Senate Democrats have to give something up to get the approval of the Senate Committee first, and then the Full Senate, before this year ends.  So it is crunch time for Republicans as the House Ways and Means Committee enters its final days of hammering out its tax-cut legislation, while a Senate panel has now revealed its own version.  If they don’t get this worked out, the stock market will have a very difficult time throughout the last couple of months in 2017 and all of 2018. Right now they don’t seem to be working out a compromise.

A commentator on CNBC, Mike Santolli, discussed how much the market volatility came to a screeching halt during the wild year of the Trump victory.  Most investors would have to think of this being a strong positive for the markets.  However, according to Santolli, he has gone back for years to show what happens to equity markets after going through long periods of very low volatility-- they are set up to decline significantly.  In fact, the S&P 500 just broke a record today, 11/9/17, by going through the longest streak in history of 370 days without a 3% decline.  Santolli showed that this is not a good streak, and once it breaks, it could turn into a bad bear market. 

There are other Republicans like, Douglas Holtz-Eakin, who in 2003 became the director of the Congressional Budget Office.  He is still very sympathetic to the congressmen that are concerned about the increases in the debt and deficits.  In fact, the budget office undertook a study of tax rates, and found that any tax cuts enacted, that increased the debt and deficits of the U.S., will not generate much growth over the next 10 years.  In fact, the Senate minority leader, Mitch McConnell, appointed Holtz-Eakin to the Financial Crisis Inquiry Commission in 2009, so we are not talking about a novice in this area.  Holtz-Eakin also has a major concern about some of the entitlements that no one seems to bring up during the Tax Reform discussions.  He believes our Social Security entitlements will come back to haunt us, unless we work on them as soon as possible.  Also, he is concerned about the fact that the global debt is three times the global GDP. 

So, as you can see, it looks like we will have plenty of things to worry about for the rest of this year, 2018, and beyond. 

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