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Is The Yo-Yo Market Forewarning Doom?
- Auto Sales
- Bank of America
- Bank of America
- Bob Chapman
- Bond
- Cash For Clunkers
- Chrysler
- Citigroup
- Creditors
- Demographics
- Eastern Europe
- European Central Bank
- Financial Accounting Standards Board
- Greece
- Gross Domestic Product
- Institutional Risk Analytics
- International Monetary Fund
- Keith Horowitz
- LIBOR
- Monetary Base
- Morgan Stanley
- Obamacare
- Quantitative Easing
- Recession
- recovery
- SPY
- United Kingdom
- Wall of Worry
Andy
Kessler, a former hedge fund manager, wrote an op-ed article in the WSJ,
The
Yo-Yo Market and You:
Bull markets, it is
said, climb a wall of worry. Smart investors buy in early when worries
about profits or inflation or wars scare away the faint of heart.
Latecomers then bid up stocks as each worry becomes unfounded, until
there is nothing left to worry about. Once there is only good news, the
market peaks as there is no one left to buy.
Bear markets, on the other hand, fall into what I like to call
the pit of doom. Forget about worries—actual bad stuff happens, until
nothing bad is left to happen and the market bottoms as there is no one
left to sell.
From early May through last week, the market
dropped 1500 points into the pit, on the backs of gushing BP oil, riots
in Europe, a 30% drop in pending home sales and the news that maybe
your next door neighbor is a Russian spy. But now we've seen 680 Dow
points added over seven straight up days before a slight decline
yesterday. What the heck is going on?
Call it the yo-yo
market—from the top of the wall to the bottom of the pit and back—and
you better get used to it. It's hard to tell which market moves are
real and based on prospects for better profits, as opposed to moves
that are driven by all the extraordinary government measures to prop up
the world economy. Until a few things are resolved, you'd better learn
the yo-yo sleeper trick—that is, keep spinning at the bottom without
going up.
ZIRP: We live in
abnormal times. The Fed is running what is essentially a zero interest
rate policy, aka ZIRP. The stock market lacks a compass, a true north,
to find its way.
Good news, like the private sector adding
80,000 workers in May, or container shipping up 12% over last year, is
truly good news. Bad news, like Portugal's debt downgrade or a 10.8%
drop in auto sales in June, suggests the economy is slowing. No wonder
the market can't figure out which is the dominant trend. And so it goes
up and down, up and down.
To make things worse, the Fed's zero
policy is wreaking havoc in the real world, not just on Wall Street. In
most companies, projects are funded when expected returns are higher
than the risk-free rate of return, i.e., investing in T-bills.
But
the risk-free rate today is a big fat zero! Every project makes sense,
which can't possibly be right, so corporate planners sit on their
hands and companies just sit on their piles of cash. The sooner we zip
the ZIRP, the sooner we return to some sort of normal.
Crutches:
We all know that the economy is being held up on crutches—the biggest
being the Fed printing dollars, a quantitative easing that saw the
monetary base jump to $2 trillion today from $800 billion in September
2008. That program stopped March 31 and at some point has to reverse.
May's 33% drop in home sales, despite record low mortgage rates,
happened because an $8,000 tax credit expired at the end of April. Auto
sales are down as "Cash for Clunkers" expired eight months ago.
But we still have the crutch of the
remaining funds (about half) from the 2009 stimulus bill. And now the
Europeans are threatening a new round of euro printing. The stock
market won't believe that growth and profits are real until it sees the
economy without these crutches. Until then, the yo-yo.
Taxes/Seizures:
January 2011 will most likely see the expiration of the Bush tax cuts.
ObamaCare means higher levies on most Americans. There is talk of a
value-added tax and a lame duck Congress porkfest.
What is even
more troubling is the prospect of government seizures built into the
Dodd-Frank financial bill. This is much like the seizure of property
from auto industry bond holders (denounced as speculators) in the
bankruptcy of GM and Chrysler.
Dodd-Frank also provides
government leeway to seize firms it considers a systemic risk, without
really defining what that systemic risk is. Why anyone would provide
debt to large financial institutions (or auto makers) is beyond me,
certainly not without demanding a huge premium for the seizure risk. The
cost of capital for the U.S. economy is sure to rise, slowing growth.
Until public policy returns to some
semblance of stability, or at least more certainty, get used to 1000
point swings. Get used to the fans of gold and canned goods leading us
to the pit of doom one week and bullish optimists up the wall of worry
the next. For me, I like to get my bad news over with.
I'm
waiting for Spain to melt down the World Cup to pay off its debts, or
more seriously, real defaults from Spain, Greece and maybe California
and New York. Let's get on with it and put the structural reforms
behind us. That would be a true buy signal.
Mr.
Kessler isn't the only one who thinks we're in for a long tough slug
ahead. David Stevenson of MoneyWeek reports that the
US banking recovery is a sham:
The
arcane-sounding FASB 157 rule may seem deadly dull, but for bankers
it's very important – and very controversial, too. Here's how it works.
When banks want to borrow money, they often do so by selling bonds.
These are in effect IOUs. FASB 157 lets these banks pretend they'll buy
back their IOUs at current market rates, even though they may have no
real intention of doing so.
Now let's say that a bank's IOUs
drop in price – for example, because it's reckoned by the market to be
dodgier than was previously thought, meaning that the risk of holding
those IOUs rises.
Although the face value – the actual
amount owed on the IOUs – stays the same, the bank is now allowed to
assume that it owes less money to its creditors. So it can book the
difference between the previous IOU value and the current, lower price
as a profit.Bank of America, the biggest US bank by assets,
may record a $1bn second-quarter gain from writing down its debts to
their market value, says Keith Horowitz at Citigroup. Morgan Stanley
will also probably record $1bn in such debt valuation adjustments in
the second quarter, he says, equal to 60% of his estimate for the
firm's pre-tax income.
Chris
Kotowski at Oppenheimer is very clear what this really means. It's an
accounting "abomination", he says, because fluctuations in the value of
the debt don't change the amount the banks owe.
Then
there's 'mark to model'. To cut a long story short, this lets banks put
valuations on their assets that are more likely than not to be higher
than a true market price. In turn, that difference can be added back to
boost profits.
And Bob Chapman thinks Debt
Overhang Hinders the Recovery:
The
availability of cheap money allowed banks to search for new markets.
They had no compunction in making loans, because of the euro zone
guarantee. It wasn’t long before they were making many subprime loans
and they were in way over their heads, especially in Eastern Europe.
Such strong guarantees and
low profit margins tempted German banks and savings banks to use
derivatives and to buy US CDOs, and other toxic assets.
No one thought about
demographics and resale as the European birthrate collapsed.There is much consternation
over issuing bank interest rates in the interbank circuit. The secret
is banks again do not want to lend to each other, because they do not
trust each other. This is the wholesale money market known as LIBOR.
The ECB has stepped in to augment lending, but the solution is to only
temporary lend. If confidence doesn’t return rates could shoot back up
to near 5%. Last time the Fed came to the rescue, and it may end up
that way again.
Contrary to what the IMF’s experts think global growth is
about to take another swan dive and all banks with problems won’t be
able to grow out of their problem. Making matters worse the clock is
ticking. It is very obvious European banks are in serious trouble. Over
the past year, if you add up all the loans received from the ECB, the
total was $1.15 trillion.
In order to roll these loans and expand
profits these institutions and the total economies have to have growth
and that won’t happen unless there is more quantitative easing, both
in Europe as well as in the US and the UK.
We don’t know how they expect to accomplish this in
Europe under austerity programs. Remember as well that the euro zone
consists of 16 members and the EU has 27 members of which the 16 are
part of. Efforts are being made to coordinate another European
centralized bank regulator, which to us is the antithesis of what is
needed. The ECB wasn’t able to prevent the fiasco of the past several
years, so what makes the bureaucrats in Brussels and Frankfurt think a
centralized regulator will work? Here we are back to more
centralization. Europe has a banking crisis just like the UK and US
have. They might consider fixing that first. Throwing temporary funds
at insolvent institutions is not the answer. In the meantime banks
still do not want to lend to each other and except for AAA companies
they are reluctant to lend at all. The same syndrome is prevalent in
the US, where business loans to small and medium sized businesses are
off over 25%. This is a waiting game to see who goes under first. In
addition, these banks, state banks, have issued $3.78 trillion in state
debt. In order to pay back such loans governments have to reduce
spending, which, of course, curtails growth. In socialist Europe
governments make up a large part of overall spending.
We believe the austerity
program will work long term, but in the interim Europe not only faces
giant debt to service, but also could easily fall into depression. If
this happens the profits needed to help banks recover won’t be there. The bottom line is Europe’s banks, like those in the US and UK, are in a
box and they cannot get out. Almost all of them are insolvent and no
matter what they do there is no easy way out. Now you can understand
why another war is being prepared. It is to be a major distraction from
these terrible economic and financial problems.
Now, before you go out an sell
your equities to invest in long-term bonds, I think you should take
these bearish articles with a shaker of salt. Earlier this week, David Spurr
of Displaced EMA, sent me an interesting observation, Quarterly
Rail Traffic Correlation to GDP = 88%:
The above is a critically
important piece of information and one of the primary reasons that I
continue to monitor rail traffic. It provides the most timely data on
the economy. The above suggests that if the correlation of 88%
between US GDP and Q/Q rail traffic holds in the second quarter of
2010...(and there's not really any reason to believe that it wouldn't
hold - judging from prior history) then Q2 2010 vs. Q2 2009 GDP could
be 5% higher. This would make the
"headline" number for q2 2010 9.3% higher than q1 2010.
This announcement on July 30
would most likely be a surprise to the upside for equity and risk
markets. Most likely the markets are starting to discount this
information already - it will be interesting to see what happens to
the market when GDP is announced. The charts below represent the
actual data from the BEA
website.
I doubt
headline GDP will come in 9.3% higher than Q1 2010, but it wouldn't
shock me if the headline number handily beats expectations on the
upside. But we still need job growth to make this a sustainable
recovery, and the jury is still out on that front. I leave you with a
couple of interesting Bloomberg interviews, well worth watching (click on hyperlinks below):
And
one final interview below with Christopher Whalen, managing director
at Institutional Risk Analytics who says: "It's hard to build a bull
case for banks when their revenues are shrinking and their expenses are
going up." Indeed the bull case for banks can't be made until the
economic recovery takes hold. And if deflation and deleveraging
continue, banks are cooked.
headline GDP will come in 9.3% higher than Q1 2010, but it wouldn't
shock me if the headline number handily beats expectations on the
upside. But we still need job growth to make this a sustainable
recovery, and the jury is still out on that front. I leave you with a
couple of interesting Bloomberg interviews, well worth watching (click on hyperlinks below):
Seery Sees S&P
500 Falling to 900s; Cites `No Growth': Video
Gais
Sees `No Doubt' U.S. States Need More Stimulus Aid: Video
And
one final interview below with Christopher Whalen, managing director
at Institutional Risk Analytics who says: "It's hard to build a bull
case for banks when their revenues are shrinking and their expenses are
going up." Indeed the bull case for banks can't be made until the
economic recovery takes hold. And if deflation and deleveraging
continue, banks are cooked.
But before you jump on the pessimism
bandwagon, watch the upcoming US economic releases, especially the next
few non-farm payrolls reports. Growth will decelerate, but in my opinion
concerns of a double-dip recession are way overblown.
»
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Leo is the man. Just wanted to say that.
What you don't understand
is I make love to my hand
so I don't need you honey,
I beat my $*@! like it owes me money,
that's why, I say, F_ck it.
Smart words from Stinky the Grump. Things surely are on solid fundamental grounds, which is why we make banks mark to marke... oh, wait.
How could anyone, any thinking adult with a brain between their ears, even mention economic fundamentals? Equity markets are a washing machine for liquidity. Nothing more. Nothing less. The Dow could go to 40,000 and it would not matter. Nor does it matter that the Dow goes to 3. Neither level reflects the underlying fundamentals of which the market should answer to day in, and day out.
That's why
I say
F It.
I'm not too worried about doom anymore. After all, banks have had over two years now to decouple from counterparty and sovereign risk. So, nothing should ever be TBTF again!
Doom is the cleansing portion of the cycle.
"there is no double dip - we never got out of the first one"
Thank you - FINALLY - some one says it clearly in public!
What is the link between economics and equities?
We hear alot about market cause and effect based on decisions by the FED, but really with a strong economic foundation, equities could still be erratic depending upon investment or loss in any one specific sector.
The danger of reading too much into this correlation, is it has now become fertile ground for manipulation. A way to generate unfounded trust in political and monetary policy. At some point though, trust runs out.
Also, commentors on ZH are put into different camps on the US economy, either pro or con, depending upon the particular subject or commodity. But as US citizens we should all be striving for sustainability in our national health as prescribed by the constitution and our system of laws. So we try and uncover the truth of the situation and how it will effect us and our families.
----------
The problem is one of qualifying doom. To a financial person doom could be prolonged negative growth. A proponent of sound money may see the FED as doom. Someone focused on fiscal policy may see uncontrolled spending as doom.
Doom comes in many flavors.
However, sometimes facts are just so overwhelming that the reaction is more of disbelief than doom.
For example, when senators were told that to redeem a SS bond they would have to give up something else in the discretionary budget, only then they realized that there was no money in the trust fund only debt, reaction disbelief. From the outside we feel the same way, disbelief, the idiodic notion that to spend funds and somehow think they are still available.
The larger picture is one of systemic doom (austerity) born of political mismanagement.
I think perhaps you do not understand US fiscal reality.
Doom in its many forms for the US taxpayer is not a choice, it is a matter of policy.
Mark Beck
This yo-yo market is a traders dream. Keep pumpin baby.
Thanks, Leo! That sure was a long answer to a rhetorical question.
But I do actually enjoy reading your articles. You always inspire... some to action, some to criticism, some to adoration, some to suicide! ZH offers a good mix of views and I appreciate your participation.
Thanks Coon, Leo needed that.
Leo,
The progression of your posts over the past 6 months is troubling. Beginning of the year until the recent highs you were doggedly bullish. After the market started to sputter downwards, you started to 'warn' of volatility. Now that market continues to hit major hurdles, your pessimism is increasing.
In summary, your analysis is akin to rear-view-mirror investing. You've had very choice words toward users on here who questioned your optimism. Perhaps it'd be in your best interest to go back and re-read their analysis and your responses.
Read my post carefuly, I am still bullish, but realize it can go sideways until we get the next catalyst. Will it be the jobs report or something else? I do not know.
A quick look at financial history via the Kondratieff Wave shows all credit booms are followed by busts of equal magnitude. Money printing may hold up the house of cards for a while longer and provide some sense of optimism. In the end the collapse must happen so we can build on strong economic footing.
- you mean to tell me that every action has an equal and opposite reaction?? pffft.
Leo , are you genuinely stupid when it comes to markets or just do a good job pretending?
That was a rhetorical question , just like the title of your latest pointless post.
This place has turned into Markets For Dummies with all these no mark contributors.
I thought Larry crudlow was busy doing a interview for Playboy.
But I do remember the message, buy buy buy. But the hidden message is bye bye bye.
how about looking at the underpinnings of the economy. the economy which we have willfully chosen to serve. It doesn't serve us but we serve it. we all serve it because we're all a bunch of stupid sheep.
yeah let's look at cheap oil which has underpinned growth for a hundred years.
these articles are nothing more than a bunch of crap because how many of these stupid market gurus are even addressing the real problems? you even think people are even going to be using the term "pensions" in 20 years? the joke is on you. keep buying the dips, keep shorting, whatever you do, the joke is on you.
keep buying solars, sure, not realizing how energy intensive they are to build. how much petroleum is consumed and what the eroi is. I know a guy who was just given a $300,000 grant to cover the roof of his auto body garage with solar panels. you know what the max output is? 37 amps. you can barely run a fucking dryer on 37 amps. $300,000. Just another pipe dream.
(/rant)
Can we get an author around here who dares to take a shot at what the world is going to look like in 20 years instead of these dunghill roosters crowing about nothing?
Buy the Dips...
and I have been bullish for over a week, looking for S&P 1300, using this method. The bad news is out, earnings aren't a major disappointment, low volume is the weapon of the bull, what else?
we have come to accept Obama is Bush's third term, rather than pulling our hair out, why not ask the questions, would Bush have eventually got it right? The tax cuts are set to expire, but already government is figuring out new ways to tax its citizens. and the secret purpose of the Bush tax cuts was not to stop taxes altogether, but to send them back to the states, cities and municipal government, where the money is raised locally for local purposes. (some people do this with vegetables)
VAT is just another demographically supported plan to carpet bomb a wide class of tax payers. It was Greenspan who added fungilbe to our economic vocabulary, if hamburger is too expensive, shoppers buy chicken..
Obama will almost certainly follow everything Bush laid out during his Presidency. So what would Bush do now? He would push for an extension of the tax cuts, to force government to grow its tax base out. In philosophical terms it means sending more control from the center to the margins.
What does all this mean for corporate America, whose products and services make up that GDP? and Q/Q rail traffic is up? Let's consider metaphorically anyway that such a move signifies power and wealth being shipped around the country.
The center cannot hold, Bush and his people wanted to drown it in the bathtub, so far all Obama has done is pour the bubble bath.
There is no leadership? Check out small caps. The banks are unfortunately holding onto their corporate model, the mortgage crisis ruined the regional banking system. The bailout only helped the corporate bank model. Small business is still moribund. GDP may go up, but power is shifting. Obama is a Lincoln Republican, he wants to save the Union, but he is only saving it for the expansionists, the ravening individualists who went west after the Civil War, and created a nation with a newly formed system of states rights, (see AZ)
From the Bush perspective, America can and will assume the role of leadership in Mexico, and create a North American free enterprise zone, a single currency, and exert control over that union. There is no immigration solution, the problem only heightens the day of the solution. Obama may fire a few generals, but the war belongs to them.
And its a war of expansion. The US is on the move, the empire has a lot more to go. Taxation is the concomitant of growth. The first official act of the provisional government of the former Republic of Mexico will be to raise taxes, while at the same time allowing more of it to remain where it is collected.
Doom or opportunity?
doom
"I'm waiting for Spain to melt down the World Cup to pay off its debts, or more seriously, real defaults from Spain, Greece and maybe California and New York. Let's get on with it and put the structural reforms behind us. That would be a true buy signal."
__
Sure, I agree and the SP would be at 600 right about that point Leo.
_
Sounds like a Wolfe Wave megaphone pattern continuation to me.
Here's a link to my favorite paranoid schizophrenic sane person, Ty Andros, from very early 2009 explaining the phenomenon:
http://www.financialsensearchive.com/fsu/editorials/andros/2009/0122.html
Leo you are scaring me....
I am still buying the dips, but there is no leader in the market right now. We need a catalyst to get things going, but so far, nothing there. It's a trader's market, now more than ever.
There is only one catalyst that is going to make the market index go higher: QE2...QE∞. At that point, you can have all of the worthless dollars a DJIA 50,000 implies.
QE2 will not happen, sorry. The market likes it, but QE did nothing to boost final demand and QE1 gave us, for $2.5T .50% off mortgage rates and 1% off the long bond, the ROI was not there. Plus, QE is designed to maintain lower rates, rates are already going lower and the Fed knows placing paper is not an issue right now. They will wait for QE until placing paper is difficult as they know it will not boost end demand and it will shoot their load for no good reason. They will recommend more stimulus to Congress, expect a check for $1,000 per person/$2000 per family in October... a real bribe right before election season. That is the only way to boost M3 right now.
QE is overrated and I would be shocked if they do it mostly because every economist says they will do QE, well, what did QE do for us to begin with?? Nothing. They did it to weaken the dolllar, well, the dollar is going DOWN and stocks are going DOWN, Houston we have a problem here. Forget the death cross, you got a DXY, commodity, SPX death star cross here.
On demand, real demand will not return until deleveraging is over by the consumer, period. This could take 1 year or 30 years, no one knows. I would agree with Leo, I can't believe I am saying this, that you can buy some dips and trade them, but date them, don't marry them. Other than that, tobacco, toilet paper, consumer staples, energy, utilities that pay high dividends, bonds and a short strategy is my game plan. Growth is dead.
I'm thinking like Gully today.
It seems to me the market has always been volatile - up on good expectation, down on bad expectations. What's really the underlying problem is all the bad debt & credit underlying the financial system. As this stuff bubbles to the top, I can only imagine we are going to see fireworks on wall street. Looks to me like a we are at the start of another global down turn which may be ugly...
Doom eh. How about this. Supposedly all tied to the GOM problem.
http://fourwinds10.com/siterun_data/environment/earth_changes/news.php?q...
Re: Is anyone following the tectonic pressure ....
Hello Raye;
I live on the new madrid fault. And I can tell you this.
The surface rupture of the roads and highways is out of control.
Also, everyday of the week the structure of my moms home is "cracking" and shifting. You can hear the walls and the surface crack.
Nearby is a dollar general store. In that parking lot there are 3 flagpoles that "vibrate" violently. (not shaking from wind) Each and everyday, the roads "blow" up potholes. U.S. 41 is ruptured severely.
Interstate 65 is also badly damaged. They keep trying to repave them but it doesn't work.
The cline ave bridge at points is closing.
This bridge and off ramps leads right into Inland steel and LTV steel and BP amoco.
So far, I believe 5-7 bridges have been shut down or are scheduled for closing because they are unsafe.
I monitor the earthquakes daily. And as you know there are far too many happening too quickly.
I believe the general public has been misled. In my opinion, the 2012 shift is happening now, but everyone has been conditioned to believe that they still have time to prepare for the main event.
Thats b.s. It doesn't happen all at once.
In Momence Illinois, some of the buildings are beginning to "sink".
In cedar lake Indiana, the same is happening.
The bottom line is this; Buildings are cracking, parking lots can't be fixed, roads and bridges are closing every week, sidewalks are sinking and sinkholes are opening everywhere. At time day or night, you can literally feel the earth "vibrate" below your feet.
I'm in Northwest Indiana, and I believe we are about to get hit with a earthquake of biblical proportions. We are surrounded by propane, natural gas and bp amoco refineries.
And, Im more than concerned what will happen when the new madrid erupts.
best regards
Bob
http://thisistheendoftheworldasweknowit.com/archives/could-the-gulf-of-m...
Could The Gulf Of Mexico Oil Spill Cause A Massive Earthquake Along The New Madrid Fault Line?There is a very important aspect of the Gulf of Mexico oil spill crisis that hardly anyone is talking about. You see, it is not just an "oil spill" that BP has unleashed on the floor of the Gulf of Mexico. What BP has done is that they have uncorked an "oil volcano" that is violently spewing oil and gas out of the floor of the Gulf of Mexico so violently and with such pressure that it is beyond the capacity of human technology to control it. Millions upon millions of gallons of oil have already been pumped into the Gulf of Mexico, and millions upon millions more will continue to be pumped into the Gulf before all of this is over. So could all of this violent activity on the floor of the Gulf of Mexico spark seismic activity in the region that could potentially be absolutely catastrophic? Could this "oil volcano" cause an earthquake along the New Madrid fault line that is so powerful that it could bring about "the end of the world as we know it" for those living in the area?
no
A toy top spins most erratically just before it falls over.
Depending highly on if it's from Inception.
Forbes:
End Of The World As We Know It?http://www.youtube.com/watch?v=_XqQYjrUTiw