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The Market Running Out of Buyers... Except the Fed?
By most
historic metrics, the market is showing signs of a significant top. Here are
just a few key metrics:
1) Investor
sentiment is back to super bullish autumn 2007 levels.
2) Insider
selling to buying ratios are back to autumn 2007 levels (insiders are selling
the farm).
3) Money
market fund assets are at 2007 levels (indicating that investors have gone “all
in” with stocks).
4) Mutual
fund cash levels are at a historic low.
This final
point is key. Mutual funds are the “big boys” of the investment world. If they
have become fully invested in the market, this means there are few buyers left
to push stocks higher. This is evident in the fact that every time mutual fund
cash levels dropped, stocks collapsed soon after (see chart below).
In plain
terms, the odds are high that a Top is forming in stocks. With that in mind,
if your
portfolio is heavily invested in stocks, now is a time to be taking some
profits. If you can, consider moving a sizable chunk into cash.
The market
is extremely tired and the systemic risks underlying the Financial Crisis are
in no way resolved. With investor complacency (as measured by the VIX) back to
pre-Crash levels, the Fed withdrawing several of its more significant market
props, and low participation coming from the larger institutions, this market
is ripe for a serious correction.
I’m not
saying this will immediately happen. But at some point there will be a new
round to the Financial Crisis. When that happens, we WILL have another Crash.
Indeed, it is quite possible that stocks are making a VERY significant top, so
being heavily invested in stocks going forward doesn’t make much sense. Take
some money off the table. If you need a place to put it, I suggest physical
cash or Gold/ Silver bullion.
If You MUST Stay Long, Shift to Quality
If you DO
have to stay invested in stocks, now is the time to be shifting out of junk
into quality. The market rally
from March 2009 has largely been lead by junk companies (financials, retailers,
etc). Meanwhile, quality has lagged dramatically.
As an
example, let’s compare the performance of Coke (KO) to Bank of America (BAC).
KO is one of
the best, most profitable brands in the world. The competitive moat around this business is extraordinary
and it remains one of the most easily recognized franchises on the planet. You
can drink six glasses of Coke a day and still enjoy it the next day. That
quality is almost nowhere to be found in any other food/ beverage on the
planet: even chocolate would get old after six bars a day.
BAC on the
other hand has swallowed Countrywide Financial AND Merrill Lynch’s garbage
assets. It is effectively insolvent based on its derivative exposure alone (the
company has derivatives equal to 3,000% of assets). BAC’s balance sheet is like
an open sewer and without serious government intervention the company would not
even exist right now.
And yet,
BAC’s stock has risen nearly 200% since the March ‘09 lows… while KO is up roughly
50%.
This
relationship works to the downside as well. What I mean is that when stocks
come unhinged, Quality (Coke) then outperforms Garbage (Bank of America) hands
down.
So, if you
HAVE to remain invested in stocks to the long side for whatever reason, now is
the time to be moving into high quality companies. This means finding companies
with low debt, lots of cash, strong results (KO actually GREW revenues in
2008), and significant competitive advantages.
Good
Investing!
Graham
Summers
PS. If
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I call it The Financial Crisis “Round Two” Survival
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Here's the latest market prediction from the legendary Jeremy Grantham of GMO.
Jeremy still puts fair value on the S&P 500 at ~900--a healthy 30% below today's level of ~1300. This assessment is similar to that of many other value-conscious investors, including John Hussman and Robert Shiller.
But this is "Year 3 of the Presidential Cycle," Jeremy says. And, historically, "Year 3" has been good to stocks because the government does everything it can to help get itself re-elected, including flooding the economy with cheap money.
And interest rates are still fixed at near-zero, Jeremy notes. And, usually, emerging bubbles don't burst until rates are rising.
So enjoy the ride until October, says Jeremy. Then sell everything and head for the bomb shelter.
So, where are we now? Although “quality” stocks are very cheap and small caps are very expensive (as are lower quality companies), we are in Year 3 of the Presidential Cycle, when risk – particularly high volatility, but including all of its risky cousins – typically does well and quality does poorly. Not exactly what we need! The mitigating feature once again is an extreme value discrepancy in our favor, but this never matters less than it does in a Year 3.
This is the age-old value manager’s dilemma: we can more or less depend on quality winning over several years, but it may well underperform for a few more quarters. We have always felt we should lean more heavily on the longer-term higher con?dence.
As a simple rule, the market will tend to rise as long as short rates are kept low. This seems likely to be the case for eight more months and, therefore, we have to be prepared for the market to rise and to have a risky bias. As such, we have been looking at the previous equity bubbles for, if the S&P rises to 1500, it would of?cially be the latest in the series of true bubbles. All of the famous bubbles broke, but only after short rates had started to rise, sometimes for quite a while. We have only found a couple of unimportant two-sigma 40-year bubbles that broke in the midst of declining rates, and that was nearly 50 years ago.
The very famous, very large bubbles also often give another type of warning. Probably knowing they are dancing close to the cliff and yet reluctant to stop, late in bubbles investors often migrate to safer stocks, and risky stocks betray their high betas by underperforming. We can get into the details another time, but suf?ce it to say that there are usually warnings, sometimes several, before a bubble breaks.
Overvaluation must be present to de?ne a bubble, but it is not a useful warning in and of itself. I fear that rising resource prices could cause serious in?ation in some emerging countries this year. In theory, this could stop the progress of the bubble that is forming in U.S. equities. In practice, it is unlikely to stop our market until our rates have at least started to rise. Given the whiffs of de?ation still lingering from lost asset values, the continued weak housing market, weak employment, and very contained labor costs, an in?ationary scare in the U.S. seems a ways off.
Read more: http://www.businessinsider.com/jeremy-grantham-stocks-will-go-up-until-october-and-then-theyll-crash-2011-2#ixzz1DCbmxzKFIn an insane world, a sane man must rationally act insane to survive.
So I'll short cotton cos its at a 150 year high, but even I'm not crazy enough to touch share market - you may as well send your money directly to Ben.....do not pass go, do not collect $200, got directly to f***ed.
Wow! Haven't seen this many bulls on ZH ever. Capitulation for the bears? I think Phoenix Capital is correct on this one but not for the reasons they stated.
Market top? The only top that has mattered was the top in the purchasing power of FRN's - tell us when the CRB index starts to crash and it will mark the need to buy the bottom in purchasing power of cash (FRN's).
In other words, stock bulls have actually been uber-right but in reality, those (like me) that detest cash because of the global macro-debasement programs would be crazy to choose short E/S in favor of rotting mounds of U.S.$'s or Euros. What will your 10,000 shares of KO buy you in terms of water, heat, power, food, accomodation when you finally sell at a precious profit?
Since 2000, the place to be has been long gold/short stocks but only since the FED embarked upon the QE's has it flattened.
The food riots are soon going to force a shift in policy and that will be when you want to short the world and go long cash.
Egypt and Tunisia were the dead canaries but when the miners start to drop is anyone's guess.
it is rewarding to hear from those poo pooing the negative/bearish on stocks/bonds/$ ZH crowd..
with statements like: " Zh is a very small group everyone else is bullish on investing"
"Robo and leo making money while you all junk them"
yet we are the crowded trade?? amazing
Leo and Robo get junked for posting buy buy buy after every disastrous UE report or economic short fall..Not that they cannot profit from the ponzi, but perhaps that they cannot admit the underlying manipulation.
some might say they are very much like Madoff's investors they made $$$ yr after yr..so they kept quiet and helped the ponzi continue.
If the fed's mandate, spoken or not, is asset inflation then a trade against the mkt is implicitly a trade against the fed. The fed can create credit longer than the trader can stay solvent. Within that dynamic you can do well for awhile but the gig will definitely unwind at some point...as I believe it is beginning to with rise in LT debt rates. I believe most of the grey beards on ZH understand this (and to a much greater extent than I do for sure).
I don't disagree with you at all, but with hft algo's and fed liquidity there is essentially no top. these folks can buy and sell to each other with a volume that can prevent the market from falling and just range trade all day if they wanted two. work the leveraged spy etf up and down 1% day after day, after day going nowhere
Yup. Just keeping in mind the objective will yield the results: Resuscitation of the TBTF banks is what it's all about. Pumping up the reserves/resources of the Big Boys is the goal. All else is noise. All else will be sacrificed to appease the Gods of Banking.
What's gonna happen when housing/foreclosure data get worse again? While vigilantes are willing to play poker with central banks in bond market, why wouldn't they get on the short side of ES trade? Well, I'm just one of them - patiently buying mid-term ES puts for second month now and keeping enoughy dry powder to continue for another six months if necessary - probably even to start shorting ES futures sometime this month. On the other side I have quite a lot of energy and other non-cyclical stocks as collateral for this exposure. And I belive that short side of trade is gonna become very crowded after next european, US or global black swan (munis, debt ceiling debate, spain, protugal, housing data, emerging world inflationary induced war/revolution tensions).
Expect S&P 500 under 1200 befor summer holidays - don't forget that FED needs excuse for new QE round and 1400 SP combined with falling housing prices sure wouldn't be good one.
Good luck!
simple logic..liabilities in the private sector must increase by the amount of Government debt increase. It has always been thus. Supply of Government debt can only match the demand for it, to match private sector liabilities. The amounts held in Government trust accounts don't count.
Either investors must shift from other assets to buy the new debt, or the Fed must buy it. No choice, no other option.
Are liabilities in the private sector increasing? Well you could bring the unfunded private pensions on to the books. Medicare and Medicaid, where privately funded, would do the trick, as would 25 trillion in infrastrcuture spending.
The Fed has made the decision for the tax payer. It will spend it on the banks and screw the country until the country can figure out how to take up the slack of increased government liabilities and match it with private sector demand.
Once the Fed stops monetising (aka debasing the currency and the countries ability to restructure away from the FIRE/militarily-based economy) we either have a solution or foreign central banks will have to, not only monetise their own debt (as with the UK and Japan) but also monetise the US Governments debt.
When central banks decide to liquidate Treasury bonds then the shit hits the fan. Although the Fed is the largest single holder, foregin governments and central banks own the US and its debt.
Discretion to manage the economy has already been given to foreigners by our sell out politicians. In this case,any deficit has been a sell-out and sell-outs by polticians have been happening for decades.
Now, let's not get into the fact that foreign governments have been debasing their own countries and pretending that owning US government debt is the ultimate proof of succesful monetary policy. It plainly isn't.
Going broke by finding or exploiting consecutive suckers (taxpayers) will be the seen as the road to ruin by all countries.
It is not a matter of switching to gold either. We are seeing signs that it is the security of food, energy and water that will determine which countries are successful in future. Can bet on guns, but then what will that mean? Feed ourselves, get energy and water and let everyone else starve, freeze and dehydrate to death, or increase suffering for billion of people so we can continue to sell-out?
Can point fingers all you like, the next governments will have to deal with the four horseman soon enough. New normal hey?
The stock market (the market that is not) will only take a dive when manipulator.gov needs $ to flow into bonds.
Is this reality really not commonly embraced here yet?
the random usage of odd all-caps words is always an indicator that the author is full of shit and basically just trying to sell something.
I am inclined to agree with the.bulls on this one. . My intermediate top call for the market and a correction these next few months is probably wrong. Even the bullish hosts on cnbc are worried. You can tell be listening to them and i watch them every day especially maria! However when the troll capitulates it is time to do the opposite usually.
Don't bother with shorts now, come back October 1st, 2011, to short this market - you are fighting against history-
In fact, if we shift the Presidential Cycle one quarter forward, third-year returns jump even higher. The 12-month period beginning in October of the second year of the presidential term has enjoyed average total returns of more than 28 percent, on average. And since 1933, not a single third year 12-month period beginning in October has registered a loss (the worst return was a gain of 6.6 percent).
http://www.hussmanfunds.com/rsi/prescycle.htm
How are your puts doing?
last 2 flows show Grandma Boomer has jumped off the fence into stocks, retail is back, they will push it now even harder.
While TPTB are able to camouflage the consequences of
the looting, the market freak show will go on.
Unfortunately the real market or nature sometimes intervenes.
How far are we from that point now??
You can usually tell when a ponzi scheme is coming to an end when the same old suckers suddenly no longer want to put any more money into it.
Also when the smarter ones start wanting their money back.
Sound familiar....
I pay NO attention to a graph that doesn't footnote the data sources.
And you don't get much more bearish than me...
Coke may be a great company but why buy it after a 50% rise if odds are the market is about to become unglued? Funny but I didn't see a lot of recommendations to buy Coke in March 2009.
At some point (probably years from now) buying the stocks of companies that make things everyone wants and consumes and pay nice dividends to boot will be eschewed by the masses because prices are so low nobody in their right mind would 'risk' buying them! Such is human nature.
OK - if "Mutual Funds are the big boys" and they're all-in....again: so what? Yes, in the past it might have meant something, but wouldn't they be guilty of negligence if they didn't have good tech & equipment = algos? Well, but probably not HFT's... hmmm.... the concept of "no buyers" is intriguing, but I'm still thinking any "correction" will be just an accident... a fuck-up at some high-tech level, i.e. the smarty-pants out-smart themselves, or an outside influence. Could definitely happen - but sure not because of fundamentals or "technicals"
Now, for my next trick, Humans will stand on their hind legs. And then, start to think with their brains.
OK, but then WTF is this???
http://www.dailymail.co.uk/sciencetech/article-1351270/Yes-walk-But-just...
The reason the market won't top here is because blogs like ZH are full of people saying the market is going to top. How many people in 2007 were talking about the top.
Even those who have been chronically wrong for almost 3 years....Rosenberg, Prechter, Nic Lenoir, Bob Janjuah and other such frauds of the finance industry are nowhere to be seen or heard.
The insanity has and can go on a lot longer than you think
Trying to call the top is a mugs game. Why do you think Janjuah chabges jobs every 2 years ? Because he's right ?
The people calling a top, as in a 'crash', don't have a clue about the money market. The market may yet see down days, weeks even but it is not about to crash like 2008.
People have been junking RobotTrader & Leo for at least six months for their stock calls, yet Robottrader & Leo have been right.
Interesting points but I would not use this blog as a gauge of market sentiment...most readers/commenters (me included) here are very well versed on what is going on and take a realistic/negative view...we will likely be right in the end but that timing part is always the issue.
"well versed"? no, I don't think so. The ZH comment section is the white-trash trailer park of financial blogs.
Which is exactly why pomogranate posts here!
As I sit here picking me crack and imbibing me coors I just got to say, shucks, now that was well said, especially when one is looking at a reflection in the trailer's john. YOU are right! Couldn't agree more.
Your points are well taken about the never ending top story and its various proponents however I am inclined to side with Hugh Hendry that the bearish view (which is concentrated here out of all proportion) is so far from mainstream today as to be laughable. Sadly, ZH represents an extreme minority in the larger scheme of things. You really should try to get out more.
Look on this as a statistical argument.. how many web sites say no, how many say yes?
Against:
Fed manipulate...
they are serial MEGA failed bubble blowers... but you have to bide your time because they ALWAYS fail!
THE untimate bubble blowers are still blowing fake bubbles to keep Madoff absolutely green with envy at the audacity, ludicrous and sheer in your face downright blazen .. oh I have given up with all the adjectives to say this is a complete and utter scam by the Fed aided by the rest of the global banksters to rob the poor... I am totally sick of it, I don't participate in this market but I will protest and protest and fed up that the people in my country don't get off their fat bums and do something...
I have written to politicians and tried but the masses are morons who don't care until they don't have food in their mouths, only then will they say 'please sir can I have some more'
Mututal fund buying is irrelevant. trading is all computers now, and they don't need no stinkin cash !1 LOL
Skynet - HFT.
I think you are very right, they wanted the sheeple out of the market so they can control it... the sheeple were a bad influence and caused 'irrational'... rational movements based on fundamentals so they needed to be 'taken out' by what ever means... kill any shorters, kill any fundamental traders/investors... DEATH unless you buy high, sell high, buy high, sell high, buy high, sell high, ad infinitum according to the HFT bible
But, I think the big boys (Goldman's, JP Morgans) still need quite a few suckers to sell to so they can realize those pumped up gains. What's the point in pumping up the market if you can't sell to the greater fool?
You may be joking here but what you say has some truth. With the baby boomers beginning to rely on their 401K's the Fed's doing all it can to bring back the market. They will do what they have to do to keep this market inflated and the fewer of us little guys there are to screw with their plans the better. What's the number of retirees our country will have in the next 10 years? Quite a few I believe. And they would not do well living in tents.
These are just the fools that Goldman and group want to sell to---these are the bagholders (mom and pops 401k's). Once these fools are comfortable going all in, Goldman and crew will steal their wealth right from under them. First destroy the housing wealth of the country. Next, destroy the wealth of the baby boomers close to retirement. As for these people living in tents? They don't care about that. That is government's problem.
3) Money market fund assets are at 2007 levels (indicating that investors have gone “all in” with stocks).
4) Mutual fund cash levels are at a historic low.
But unlike 2007, there's a new player in the market. a hedge fund to end all hedge fund - The Fed. So what if mm and mutual fund cash levels are at historic lows? The Fed's printing press shown no signs of slowing down.
I agree that trying to call a top is rather ambiguous at best, but you have to admit that even the Fed can't keep this bullshit up forever. Geometrically increasing stagflation, as a result of runnin' dem presses, will eventually turn us into another Egypt. Well, unless wereally HAVE just become a bunch of complacent cattle. I find it unlikely that any population forced into the corner for too long won't eventually revolt.
Yep, yet another one calling the top, oblivious that the metrics they are using are irrelevant for the time being.
Eventually one someone will be right and hailed as a hero, as most will have forgotten that they called a top 2 months previously, and 2 months before that ......