Larry McDonald: Sell any knee-jerk Clinton rally as dollar likely to surge

Published Tue, Nov 8 20163:16 PM ESTUpdated Tue, Nov 8 20163:45 PM EST

The Bear Traps Report

Editor's note: The following analysis is from The Bear Traps Report , a weekly independent investment newsletter authored by Larry McDonald, focusing on global political and systemic risk. Below is an excerpt from his latest note. — We're still in a late 2007 "sell the rallies" mode, a position that's been our friend over the last 22 months. It was December 26, 2014 [when] the S & P 500 touched a high of 2,092, [and] closed last Friday at 2,085. It's been one long pillow fight. Facing a media and Wall Street guaranteed Hillary Clinton victory, with high conviction, we believe any rally 2-3 percent will be short lived. At the end of the day, a Clinton White House brings a strong dollar relief run. Even worse, a potential short covering rise into a Fed rate hike attempt. The net result for markets? A move substantially lower for oil and rising credit risk. We've seen this show before back in December 2015. — It's truly remarkable that just three weeks ago, Wall Street's "base case" consensus was a possible loss of the House for the GOP, a certain Senate handover to the Democrats and a near "landslide" for Hillary Clinton. The consensus has come a long way to finally arrive at election day. — Amazing how after 18 months of polling, it takes election day to bring the net closest result in two of the most important swing states; Michigan and Pennsylvania. — Looking at our model focused on Mexican peso options, Hillary Clinton's chances of winning the presidency are just 56 percent. Even after Monday's plunge, one month peso volume is STILL at its highest level in five years. Likewise, dollar-yen one-month volume is near its highest levels in 60 days, people are still paying up for Trump hedges. The media inspired pollsters are far more consistent, hopefully. They put Clinton's chances at 80 percent. Our friend, Dr. Drew Linzer, is up at 86 percent, down from 95 percent just 10 days ago. More from The Bear Traps Report : Health-care sector pointing to a GOP Senate — Let's not forget, for 10 days prior to the FBI bombshell, this race was tightening. Since late last year, we've argued that the U.S. media has been stuck in a Trump denial echo chamber. Believe half of what you see, and none of what you hear from mainstream media covering political risk. We believe they've distorted the closeness of this race for 18 months. Our Washington partner ACG Analytics gives the race to Clinton, but we think it's far closer than meets the eye. Trump could very well pull it out. At the very least, the GOP keeps the Senate — biotech and health-care names pointed that way in yesterday's trading. Bottom line: A Hillary Clinton win gets you a slam dunk rally to be sold. A Trump win gets you a 10-15 percent plunge which should be bought. — Political Black Swans: The high risk of a "contested" election is NOT currently priced into U.S. equities relative to decent probability in our view. Obama will likely fire FBI head James Comey by year-end, sparking a constitutional face off with Congress. Once Hillary Clinton takes office on inauguration day, she is immune from prosecution. In 1973, the Department of Justice addressed this in a memorandum by the Office of Legal Counsel (OLC). The memo said, prosecution of a sitting president would undermine the power of the executive branch and its ability to function. Hillary Clinton can only be impeached for crimes committed while in office. December 9th is the U.S. government shutdown D-Day, we see elevated drama to come. — The U.S. treasury yield curve is steepening at an alarming rate. We're moving closer to a fiscal policy regime which drives yields higher. Aging populations within developed markets are choking on their political promises, entitlements and dependence on leverage to eke out GDP growth. — Bernard Baruch once said, "in any important election cycle you must take a look at gold." In our November 1st Bear Traps Trade Alert, we exited our position in the Gold Miners GDX , after an 11 percent gain. The 6.8 percent gold price sell-off since the July highs has been driven by concerns of ECB [European Central Bank] tapering and the surge in global bond yields. Over the last month, market participants have discovered the U.S. election is driving the gold bus. U.S. presidential politics has its hands on the macro gold trade at the moment. It all comes down to the fact that a Hillary Clinton win opens the Fed rate hike door, while a Donald Trump surprise closes it — there's colossal dollar impact on both sides of this coin. For more independent commentary and analysis, visit thebeartrapsreport.com

Democratic presidential nominee former Secretary of State Hillary Clinton (C) raises her arms with musicians Jon Bon Jovi (L) and Lady Gaga during a campaign rally at North Carolina State University on November 8, 2016 in Raleigh North Carolina.

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— We're still in a late 2007 "sell the rallies" mode, a position that's been our friend over the last 22 months. It was December 26, 2014 [when] the S&P 500 touched a high of 2,092, [and] closed last Friday at 2,085. It's been one long pillow fight. Facing a media and Wall Street guaranteed Hillary Clinton victory, with high conviction, we believe any rally 2-3 percent will be short lived. At the end of the day, a Clinton White House brings a strong dollar relief run. Even worse, a potential short covering rise into a Fed rate hike attempt. The net result for markets? A move substantially lower for oil and rising credit risk. We've seen this show before back in December 2015.