[Updated: March 25th] I had to update this post, because I just read Barry Ritholtz's comments in Barron's and I almost shit a brick. He says that the Bears need to "put up or shut up" i.e. the onus is now on us bears to prove why this rally could end. Excuse me? Are we living in some sort of parallel universe here? All you have to do is look at the first chart below to see that the market is still lower than it was 13 years ago.
If anyone had told you back in March of 2000 that 12 years hence, the economy would be 2 years out of the prior recession, global Central Banks would have injected $7 trillion of new money directly into the financial markets, like a shot of adrenaline, the fiscal deficit would be 10% of GDP (i.e. highly stimulative) and yet the stock market would be lower than it is today - you would not believe them for a minute. Meanwhile Ritholtz even wrote a book about the 2008 financial collapse ("Bailout Nation"), so he of all people should know that nothing of substance has changed to make the financial markets more stable than they were back in 2008. He proves my theory that the majority who rightly predicted the subprime/Lehman debacle, won't see this next collapse coming. John Paulson is another hedge fund manager who made bank during the subprime debacle, but who is now loaded up on risky bets thinking that the worst is over and it's time to mint coin. It's a pervasive groupthink across Wall Street, based on the overwhelming precept that you "don't fight the Fed". Ritholtz even says so in the article: "The strength of this market—or at least the Fed’s liquidity beneath it—deserves the benefit of the doubt". To paraphrase: The Fed is printing free money and my job is to pick up the dollar bills lying on the floor before someone else does.
Unfortunately, not withstanding the assertions of those with extreme incentive to focus on short-term profits, these are the riskiest financial markets any of us have faced in our entire lives. 2008 was just a warning, a tremor before the earthquake.
[Original Post: March 14th, 2012]
Fools and their money are soon parted. I don't know why it has to be that way, but it does. It's an axiom. And here we are, literally seeing it happen again, in real-time. Another blow-off top in the markets attended by mass complacency.
This time in the face of the greatest economic/financial risk since the Great Depression. It's amazing how despondent people were just this past October during the autumn chapter of the yet unresolved European debt crisis, then along came the ECB to juice the markets with free money and here we are a few months later fat and happy all over again. To be clear, it's the self-nominated elites on Wall Street, in the lamestream media and our feckless leaders who are in total denial that Central Banks have used $7 trillion of newly printed money to paper over the massive cracks in the economic foundation. As for the general public, they left the markets in total disgust after 2008 and won't be coming back any time soon. Yet, it's an absolute article of faith on Wall Street that rallies can't end until the general public joins in at the top. Just today, Ron Insana (@01:49 into the show) reiterates this belief. (notice how he thinks low volatility is actually bullish - more on that below). This pervasive belief on Wall Street that the general public can be counted on as the sucker of last resort, will be the Street's ultimate undoing. It means that the big money is barrelling into this blow-off top fully invested, which is contrary to the tops in 2000 and 2007 when they took the opportunity to unload on small investors, raise cash, and otherwise control the market's descent. As they say, fool me four times, shame on me...
There are many indicators right now pointing to MASSIVE decline, so I will focus on what I see as the most obvious ones and move on from there:
The Big Picture:
First some perspective. Despite all of the hoopla in the media about Dow 13,000 etc, the stock market is still at a level it first passed 13 years ago in 1999. This latest spike of exuberance is very reminiscent (albeit on a smaller scale) to the DotCom bust in 2000, because it is led by the Nasdaq and high growth stocks such as Apple [AAPL], Intuitive Surgical [ISRG], Lululemon Athletica [LULU], Ultra Salon [ULTA], IBM, Priceline [PCLN] etc. etc. All of these stocks have gone parabolic in the past several weeks - juiced by easy money. Apple more than any of them - already the highest valuation company in the world, and yet it gains billions in market cap on an every day daily basis (see second chart below).
But here is the problem: the overall market has only recently just surpassed its high from last August. And it's still lower than the all time high from 2007 and even below the high from 2000. It's been 13 years to nowhere. Who would believe that after $7 trillion of direct injections from various central banks that the market could get back only 80% of the value it lost since 2008:
The Jobs Picture:
No, not those jobs, the Steve Jobs picture. Sorry to be callous, but he did leave the company again. We know what happened last time he left - the company floundered and the stock ended at $2. Yet this time, on the news of a fifth generation iPhone and a 3rd generation iPad, both of which account for almost all of the company's growth - the stock went inexplicably parabolic. THIS ALWAYS ENDS BADLY, THERE HAVE BEEN NO EXCEPTIONS - THIS WILL BE NO EXCEPTION:
Party like it's 1999 -
We all know how that turned out. This time, it looks like some people are leaving the party early. There are many divergences to point to right now:
1) Transportation stocks, are still well below their high from last August, unlike the Dow; therefore this is considered the mother of all divergences i.e. a Dow Theory non-confirmation (the Transports are the candlesticks, the Dow is the line chart):
2) Municipal bonds peaked out and are falling on heavy volume - not what one would expect from an asset class considered to be much safer than stocks:
3) It's a shame about Gold. It was deemed to be our saviour from hyperinflation (which never materialized), but it turned out to be just another overhyped vehicle for speculation. Here it is falling well below the highs from last August - on heavy volume:
Mass Complacency
There are too many articles to link to showing mass complacency at this juncture, so I was not going to go the anecdotal route and then I literally just perused CBS Marketwatch and found three bullish articles in one section (lower left):
Meanwhile, yesterday, the (VIX) options volatility (fear) index fell to a level not seen since just prior to the 2007 all time stock market high. A low VIX means that sophisticated (large) investors are not buying options to protect their investments, because they assume the market is going higher. Paradoxically, a low VIX has presaged the last three market tops (as you see below), which means investors forego protection at tops and reach for protection at bottoms - not what the text book "Efficient Market Hypothesis" would suggest:
Some will wonder if I still like Treasuries here. I do, even though long-term bonds got hammered this past couple of weeks. They are trading directly inverse to the stock market, which is what you would expect. In deflation, there will be a flight to the dollar and to Treasuries as the preferred (only) holding vehicle. Eventually that trade (dollar/Treasuries) will come unglued too, but eventually can take a long time, as anyone reading this blog already knows.
So for the time being at least, short-term Treasuries are the safest place to park money. Just today, Prechter discussed owning cash (currency) stored in a trusted 3rd party's vault v.s. Treasury debt. So his general thesis, is that if the U.S. Government defaults, it's better to hold dollars than 30 day t-bills. Unfortunately for that theory is that the dollar itself is a zero-dated t-bill - technically a dollar is a FEDERAL RESERVE NOTE i.e. it's a promise to pay exactly nothing, immediately. Moreover, there has never been a currency that retained its value after a government default - NEVER IN HISTORY. So it's not that I am saying the U.S. can't default, I am saying that at least for the time being the trillions in risk capital invested in stocks, junk bonds, corporate bonds, commodities etc. has nowhere else to go but into dollars and Treasuries in the face of a global credit collapse.
[invest at your own risk]
1) Transportation stocks, are still well below their high from last August, unlike the Dow; therefore this is considered the mother of all divergences i.e. a Dow Theory non-confirmation (the Transports are the candlesticks, the Dow is the line chart):
2) Municipal bonds peaked out and are falling on heavy volume - not what one would expect from an asset class considered to be much safer than stocks:
3) It's a shame about Gold. It was deemed to be our saviour from hyperinflation (which never materialized), but it turned out to be just another overhyped vehicle for speculation. Here it is falling well below the highs from last August - on heavy volume:
Mass Complacency
There are too many articles to link to showing mass complacency at this juncture, so I was not going to go the anecdotal route and then I literally just perused CBS Marketwatch and found three bullish articles in one section (lower left):
Meanwhile, yesterday, the (VIX) options volatility (fear) index fell to a level not seen since just prior to the 2007 all time stock market high. A low VIX means that sophisticated (large) investors are not buying options to protect their investments, because they assume the market is going higher. Paradoxically, a low VIX has presaged the last three market tops (as you see below), which means investors forego protection at tops and reach for protection at bottoms - not what the text book "Efficient Market Hypothesis" would suggest:
Some will wonder if I still like Treasuries here. I do, even though long-term bonds got hammered this past couple of weeks. They are trading directly inverse to the stock market, which is what you would expect. In deflation, there will be a flight to the dollar and to Treasuries as the preferred (only) holding vehicle. Eventually that trade (dollar/Treasuries) will come unglued too, but eventually can take a long time, as anyone reading this blog already knows.
So for the time being at least, short-term Treasuries are the safest place to park money. Just today, Prechter discussed owning cash (currency) stored in a trusted 3rd party's vault v.s. Treasury debt. So his general thesis, is that if the U.S. Government defaults, it's better to hold dollars than 30 day t-bills. Unfortunately for that theory is that the dollar itself is a zero-dated t-bill - technically a dollar is a FEDERAL RESERVE NOTE i.e. it's a promise to pay exactly nothing, immediately. Moreover, there has never been a currency that retained its value after a government default - NEVER IN HISTORY. So it's not that I am saying the U.S. can't default, I am saying that at least for the time being the trillions in risk capital invested in stocks, junk bonds, corporate bonds, commodities etc. has nowhere else to go but into dollars and Treasuries in the face of a global credit collapse.
[invest at your own risk]
