Dow Jones Industrial Average
Comparisons of the failure of the TARP vote and the fiscal cliff were summarily dismissed early in this clip - though CNBC's Rick Santelli does note, as we have vociferously stated that a market correction is the only impetus to get something done in Washington. Having abandoned his channel's "Rise Above" meme in the face of this "childish nonsense", Santelli agrees that politicians "can show incompetence at very critical moments." Then, sparked by the anchor's comment that "the markets would know if [the cliff] was going be a horrific thing", Santelli goes 'off-script' with an epic take-down of all things CNBC: "the stock market is an immediate gratification for investors to make money;" and asks the key question "Why do we look to the Dow Jones Industrial Average to handicap if this country is going to go down the sewer in a couple of years? It doesn't give us a glimpse into the future." He adds that the market is not discounting $100 trillion of unfunded liabilities in our future and then slams the door shut with what will likely become the new meme: "The Fed doesn't have a clue, neither does the President, neither does Congress."
Investors in the TBTF banks need to understand that the business model for this industry has changed. Thank Liz Warren
With gold and silver down this morning - following a mysterious vertical plunge last night (once again) - we thought ConvergEx's Nick Colas' timely discussion of gold was worthwhile. As he notes, Gold is the ultimate personality test for investors. Some hate it, excoriating its adherents for their lack of faith in human ingenuity – gold has been valuable since before humans could write. And some swear by the yellow metal, in the belief that it is the last vestige of rationality in a world of financial assets manipulated by central banks and opaque trading venues. What gets lost in the wash is that gold is a commodity and can be analyzed as such. On that basis, here is the 'Top 10' list of real-world fundamentals for gold.
Of course, it makes perfect sense - the largest market cap company in the world drops further and experiences a death cross and sure enough - the evergreen Dow Jones Industrial Average ended near the highs of the day - well north of the critical 'retirement-on' 13,000. In general risk-assets were quietly correlated with stocks today (amid relatively quiet volume on the major averages) but we note that the capital structure ETFs in general were less exuberant - though they did get a little bounce after the consumer credit data. All-in-all, the Dow stood alone in its non-AAPL exuberance as the rest of the market was mired in the sentment shift that is occurring (note the Dow saw ts 50DMA cross below its 100DMA and its closed perfectly intersecting with those averages). Must be the 'great' jobs number, right? Treasury yields end near their lows of the week, USD near its highs, Gold down on the week though at 3-day highs (supporting stocks), and high-yield credit weak today. Paging Skynet...
By now there can be no doubt that due to Bernanke et al's endless intervention in any and all capital markets, the "market" is no longer a mechanism that discounts the future in any way. In fact, instead of predicting the future, all the market has become is a backward looking race in which collocated algos respond to historical data - flashing red headlines - and attempt to out run each other in who can buy or sell more free for all, knowing full well at least one other greater fool will be behind them to pick up the pieces. Sadly, fundamentals as a driver to valuaton no longer exist. But such is life under central planning. Yet there is one thing that the market responds to - it is politicians and the uncertainty that political risk brings with it. This certainly includes that most political of organizations, the Federal Reserve, whose stimulative intervention into capital markets two months before the presidential elections was without precedent. Yet even here, the market has managed to decouple from reality, and is trading at level far greater than what political uncertainty risk implies. As the chart below from Citi's Matt King shows, a correlation between BBB spreads and a broader proprietary uncertainty index, there is currently a roughly 50% political risk premium that is not being priced into stocks.
If you want to send a roomful of 100 wealth managers into an icy chill, have Russell Napier address them. Napier’s presentation, “Deflation in an Age of Fiat Currency,” is thought-provoking, and the precise polar opposite of investing as usual. US stock markets aren’t cheap, not by a long chalk. Napier, like us, favors the 10-year cyclically adjusted price / earnings ratio, or CAPE, as the best metric to assess the affordability of the market. At around 21, the US market’s CAPE is near the top end of its historic range. The S&P 500 stock index currently trades at a level of around 1400. Napier believes it will reach its bear market nadir at around 450, driven by a loss of faith in US Treasury bonds, and in the dollar, by foreigners.
It seems like only last night everyone was celebrating more hope, if not much change. Now comes the hangover. The Dow Jones intraday drop is now 2.23% (and rising), greater than the biggest drop so far in 2012 record on June 1. The last time the market plunged as much: literally one year ago, or November 9, 2011. Sadly, it appears that one can't have their Dow Jones Industrial Average and redistribute it too.
Of the current stack of 30 'Blue-Chip' stocks that comprise the Dow Jones Industrial Average, Alcoa has managed to do the worst over the past 25 years - gaining a cumulative 63% in the last 25 years (or 2.2% annually). The Dow itself, based on Bloomberg's Chart of the Day, has risen 627% since the crash in 1987 (or 8.6% annually) - almost 10x that of Alcoa; while McDonald's (perhaps perfectly summarizing what America is all about) has risen on average 12.8% per year for a 1620% gain since Black Monday. But who has impacted the Dow the most since its highs in October of 2007? (Hint: they disappointed this week!)
With the election right around the corner, the chickens are going to come home to roost. Our ability to print our own currency and buy all the commodities we want with it is the exorbitant privilege that allowed us to export most of the problems within the monetary system elsewhere first. As Nixon’s Treasury Secretary John Connelly said when confronted by a group of European Finance Ministers: “it’s our currency, but your problem.” At the time he was correct, as we were at the very beginning of the fiat dollar standard. 41 years later the system is in its final days and our currency is about to become our problem as well. There were always going to be massive consequences to keeping this ponzi alive. The main point here is one I was hammering on in my last piece The Global Spring. You can only push people so far into hardship before things snap. They snapped in North Africa. They snapped in Southern Europe. They snapped in China. They are about to snap here. Oh, and one last thing. What do you think all of this signals for corporate margins?
The EU assembly just voted affirmatively to impose a spate of rules to control 'high-frequency-trading that, as the WSJ reports, was advanced by Germany following their concerns that speedy traders have brought instability to markets. It is somehow reassuring that three-years after we first brought HFT to the mainstream's agenda, at least one nation is taking it seriously, doing something about it, instead of being filibustered into the 'liquidity-providing' meme. The rules will initially require registration, collect fees on excessive use of HFT methods, and install circuit breakers with the goals to "limit the risks associated with high-frequency trading" per a senior German FinMin; but the more stringent rules to come will have the greatest impact as they intend to include requirements for orders to rest on the exchange book for at least half-a-second, and potentially order-to-trade ratio caps. Not surprisingly, the HFTs believe a "one-size-fits-all approach would be very harmful." Indeed - to their profits.
There has been a lot of ink spilled about how the stock market performs during Presidential election years generally leaning to why investors should be fully invested to the hilt. The current election year, with just three months remaining, has certainly played out to historical norms with the markets advancing on expectations of continued government interventions even as economic and fundamentals deteriorate. To wit Bespoke Investment Group wrote back in July: "We have highlighted the similarities between this year and prior Presidential Election years numerous times. Most recently, in early July we noted the fact that based on the historical pattern, the S&P 500 could see a modest pullback in mid-July coinciding with the kick-off of earnings season. Sure enough, the market saw some choppiness about a week and a half ago and subsequently rebounded in the middle of last week. Holding to the historical pattern, that rebound came right at the same time that the market historically sees its summer low. If the pattern continues, the S&P 500 could be set up for a nice rally to end the Summer. Will it hold? Only time will tell, but if the historical pattern has worked so far, what's to stop it from continuing?"
UPDATE: Answers Provided
A century apart and a continent apart. With Bernanke's fingers now glued on CTRL-C, perhaps the reality of these two charts suggests it's really not different this time at all...
To the vast majority of the US citizenry, the Dow Jones Industrial Average is an odd number that flashes on the new 42" plasma-screen during dinner; wedged between a news story about a panda sneezing and some well-endowed weather-girl saying "hot, damn hot". This is why the behavior of Ben Bernanke this week might go unnoticed by most of the great unwashed. That is, of course, if they do not drive or eat food. For those that do eat or use vehicles; for the first time in history, national average gas prices for the 2nd week of September were over $4.00. Of course, this is mere transitory market speculators - and is not real money leaving their EBT card.
Gold has been consolidating the nearly 100% gains that took place over the prior 2.5 year period from 2009 to mid-2011.