Dow Jones Industrial Average
"Mission Accomplished" - With CNBC now lost for countdown-able targets (though 20,000 is so close), we leave it to none other than Jim Cramer, quoting Stanley Druckenmiller, to sum up where we stand (oh and the following list of remarkable then-and-now macro, micro, and market variables), namely that "we all know it's going to end badly, but in the meantime we can make some money" - ZH translation: "just make sure to sell ahead of everyone else", just like everyone sold ahead of everyone else on October 11th 2007, the last time stocks were here...
- GDP Growth: Then +2.5%; Now +1.6%
- Regular Gas Price: Then $2.75; Now $3.73
- Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
- Americans On Food Stamps: Then 26.9 million; Now 47.69 million
- Size of Fed's Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
- US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
- US Deficit (LTM): Then $97 billion; Now $975.6 billion
- Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion
On October 11th 2007, the 'old' Dow Jones Industrial Average reached its previous all-time high of 14,198.10 (with the all-time closing high of 14,164.5 on October 9th) as plans for the MLEC were rumored to save the world from the intensification of stress in the interbank funding markets. A week later, the Dow had dropped 5.5%; a month later it had dropped 8.5%; three months later it had slumped 18%. But, this time the 'wealth effect' will be different-er.
Gundlach Says Stocks "Obviously Overbought", Buys "More Long-Term Treasuries In Last Month Than In Four Years"Submitted by Tyler Durden on 03/04/2013 16:15 -0400
Doubleline's Jeff Gundlach must not be a GETCO algo because unlike the algorithmic programs who are all that's left of traders in this policy farce of a manipulated market and who are programmed to BTFD especially when there is a massive stop hunt program about to be unleashed on 10-20 ES contracts, he is not buying stocks. Instead the bond manager has closed his July 2012 call when he called the top in Treasurys, and told Reuters that he has bought "more long-term Treasuries in the last month" than in the last four years." And this coming form the so-called new "bond king." Gundlach said he started buying benchmark 10-year U.S. Treasury notes in the last month after yields popped above 2 percent, because he sees value there relative to other asset classes, including stocks, which he said are "overbought."
It looks like the Dow Jones Industrial Average will be the first major U.S. equity benchmark to breach new highs, so ConvergEx's Nick Colas breaks down this closely watched measure of domestic stock prices noting that the Dow is a quirky “Index” – price weighted (not market capitalization), compact (30 names) and fundamentally global (lots of brand-name multinationals). Change just one name in the index, and the outcomes vary considerably. If Google had been added at the end of last year, we’d be at 14,330 – well over the old high of 14,165. But if the Dow committee had added Apple instead, the index would have closed at 13,475 yesterday, up less than 3% on the year. And if Netflix had been the lucky company added for 2013, well… We’d be saying hello to Dow 15,000, and then some. The point here is that the notion of a “New High” for the Dow is a little arbitrary, by virtue of the price weighting function and stock selection process.
When the US income and spending figures for December came out, the punditry couldn't contain their exuberance following the massive surge in income which as we explained was merely a function of the pulled forward wages and bonuses in December due to fears of what the Fiscal Cliff and the expiration of the payroll tax cut would do to incomes in 2013 (nothing good), as well as a surge in stock dividends to avoid a dividend tax hike resulting in yet another boost in income. The spike in personal income without an offset in spending sent the savings rate to the highest in three years. Today it's payback time as moments ago we learned that the US consumer gave back all the December gains and then much following news that while spending did nothing, and came in as expected at 0.2%, personal income imploded by 3.6% on estimates of a modest 2.4% drop. This was the biggest drop in personal income in 20 years just as the US consumer's confidence was soaring at least according to such manipulated aggregators as UMich. What this also led to was that not only is the stock market back to 2007 levels, but so is the personal saving rate, which crashed from 6.4% to 2.4%, the lowest since November 2007, and leaving Americans with the least purchasing power just as the full impact of a government that is flirting with austerity is starting to be felt. And just as bad was the material 4% pullback in real disposable personal income or adjusted for inflation. "Consumers can’t spend what they don’t have, and they don’t much much,” summarized Bloomberg economist Rich Yamarone.
The underlying question in Bill Gross' latest monthly letter, built around Jeremy Stein's (in)famous speech earlier this month, is the following: "How do we know when irrational exuberance has unduly escalated asset values?" He then proceeds to provide a very politically correct answer, which is to be expected for the manager of the world's largest bond fund. Our answer is simpler: We know there is an irrational exuberance asset bubble, because the Fed is still in existence. Far simpler.
At some point, absorbing more information about the unsustainability of modern society yields diminishing returns. It becomes emotionally draining and thus counterproductive. Part of this exhaustion results from recognizing our powerlessness within the Status Quo, where independent thinking and structural innovation are intentionally winnowed out as threats to existing institutions and industries. Another part arises from the burden of knowing that the supposedly permanent Status Quo is far more vulnerable than generally believed. This is the psychology of knowing what lies ahead in The Burden of Knowing. These 'burdens of knowing' can diminish the small but real joys of the present - anti-thesised by an attitude such as “don’t worry; be happy.” And it certainly makes sense when life is still comfortable and enjoyable. But the philosophy of “thinking about the future is a downer, so I live in the present” ultimately rests on a false confidence that the future will take care of itself. Though Keynesian economists argue that nations are not like households, in truth debt/financial fragility is scale-invariant, meaning that rising debt, a high cost basis, and zero savings/investment lead to fragility in households, enterprises, communities, and nations alike.
- Pope steps down, citing frailty (Reuters)
- Japan’s economic minister wants Nikkei to surge 17% to 13,000 by March (Japan Times)
- Venezuelan devaluation sparks panic (FT)
- Rajoy releases tax returns, but fails to clear up doubts over Aznar years (El Pais)
- Companies Fret Over Uncertain Outlook (WSJ)
- Home Depot Dumps BlackBerry for iPhone (ATD)
- Kuroda favors Abe's inflation target, mum about BOJ role (Kyodo)
- A Cliff Congress May Go Over (WSJ)
- U.S., Europe Seek to Cool Currency Jitters (WSJ)
- Radical rescue proposed for Cyprus (FT)
- Franc Is Still Overvalued, SNB’s Zurbruegg Tells Aargauer (BBG)
- Northeast Crawls Back to Life After Crippling Blizzard (WSJ)
Big round numbers always encourage reflection. Turning 40 or 50, for example, or making (or losing) a million dollars. Or a billion. And so it is with “Dow 14,000.” ConvergEx's Nick Colas has three critical observations as we traverse this particular “Big round number.” First, it is clear that equity prices (and volatility, for that matter) are much more a direct tool of central bank policy than in prior economic cycles. Second, the rally off the bottom in March 2009 has left the investing world with very few money managers who can legitimately claim the title of “Smart money.” Lastly, you have to consider the way forward. The roadmap from Dow 6600 (March 2009) to Dow 14,000 was – in retrospect – clearly marked by signs labeled “Follow the central bank yellow brick road.” Good enough signage to get us here, clearly. But, as Nick notes, fundamentals – corporate earnings, interest rates, and economic growth – those are the metrics which will have to guide us as central banks inevitably reduce their liquidity programs. As he considers the way forward for U.S. stocks, he reflects on Spring 1994 - U.S. stock investors thought they had it all figured out as they exited 1993, just as they do now...
It was the deep of winter... CNBC was talking about "animal spirits", had just touted "the best January in 14 years", was quoting Raymond James' Jeff Saut as saying that "The market "is amazingly resilient, and is no longer overbought" and desperately doing everything it could to get retail back into stocks, and was succeeding: retail inflows into stocks were surging and seemed unstoppable... The Chicago PMI had just printed at its highest level in decades... the VIX was dropping fast... Stocks were soaring... Bonds were sliding... NYSE margin debt had just risen to the highest level since 2008... A few brief months earlier the Fed had unleashed a new, massive round of unsterilized bond buying... Bank of America was blaring about the "great rotation" for stocks, and yes - just shortly prior "global currency warfare" had broken out.
Name the year?
While some would look at the surge in government spending in Q3 last year (ahead of the election) and subsequent plunge in Q4 as conspiratorial, CNBC's Rick Santelli takes a step slightly further back as he draws the analogy between the mystical monetary experimentation of Ben Bernanke and his horde of central bank cronies and the "bloodletting of leeching" of medieval medicine providers. The point being that if you were sick in the middle ages, leeches were applied; and if you returned weeks later (still sick), more leeches and blood-letting took place - with no lesson learned. The fact that we borrowed $300bn in Q4 and managed a dismally dire drop in GDP growth offers little hope as the world glares agog at the Dow Jones Industrial Average index while Bernanke, six years on from the start of the recession continues to apply the same medicine that has done nothing to resurrect our economy. In Rick's words, "Whatever you're doing; It isn't working!" and in fact the monetary support could potentially hurt the economy in the medium-term as debt piles up exponentially. An epic rant...
- Boeing misses Q4 top line ($22.3 bn, Exp. $22.33 bn) beats EPS ($1.28, Exp. $1.18), guides lower: 2013 revenue $82-85 bn, Exp. 87.9 bn
- Hilsenrath discovers DV01: Fed Risks Losses From Bonds (WSJ)
- Airlines had 787 battery issues before groundings (Reuters)
- Monte Paschi ignored warnings over risk, documents show (Reuters) as did Mario Draghi
- China averts local government defaults (FT)
- Economy Probably Slowed as U.S. Spending Gain Drained Stockpiles (Bloomberg)
- Bono Is No Match for Retail Slump Hitting Dublin’s Fifth Avenue (BBG)
- Catalonia requests €9bn from rescue fund (FT)
- US plans more skilled migrant visas (FT)
- Japan PM shrugs off global criticism over latest stimulus steps (Reuters)
- CIA nominee had detailed knowledge of "enhanced interrogation techniques" (Reuters)
- Cleanliness Meets Godliness as Russia Reeled Into Cyprus (BBG)
- Deutsche Bank Seen Missing Goldman-Led Gains on Cost Rise (BBG)
Back in July 2008, just before all hell broke loose and the S&P was trading in the upper 1,200s, everyone's favorite permabull, JPM strategist famously reiterated his S&P 500 price target for the end of 2008: 1450. Two months later Lehman filed for bankruptcy, and 4 months later the S&P closed 2008 some 40% lower than said price target. Another two months later and anyone who had listened to Tom Lee lost 50% of their investment. Today, as the Fed's balance sheet crosses $3 trillion, and the global central banks have pumped a total of some $15 trillion into the markets, Tom Lee ws back on CNBC with what is his most permabullish prediction ever: he now expects the S&P to generate some 150 in earnings to which he applies a 17x multiple. His conclusion "If you put a 17 multiple on $150, the S&P really sort of peaks around 2,400 or 2,500." In Dow terms, this means a Dow Jones Industrial Average of, drumroll, 20000. He does, caveat it, however: "that's obviously 4 years away." And if Tom Lee was off by 40% in 4 months, we can't help but wonder what the hit rate on his 4 year prediction will be, and if, by using the same ruler extrapolation mechanism he applies to corporate earnings nand multiples one extrapolates the Fed's balance sheet at some $7 trillion in 4 years, what a loaf of bread will cost just as the DJIA crosses 20,000. For future humor purposes, it may be useful to bookmark this post.
"Return = Cash + Beta + Alpha": An Inside Look At The World's Biggest And Most Successful "Beta" Hedge FundSubmitted by Tyler Durden on 01/23/2013 22:31 -0400
Some time ago when we looked at the the performance of the world's largest and best returning hedge fund, Ray Dalio's Bridgewater, it had some $138 billion in assets. This number subsequently rose by $4 billion to $142 billion a week ago, however one thing remained the same: on a dollar for dollar basis, it is still the best performing and largest hedge fund of the past 20 years, and one which also has a remarkably low standard deviation of returns to boast. This is known to most people. What is less known, however, is that the two funds that comprise the entity known as "Bridgewater" serve two distinct purposes: while the Pure Alpha fund is, as its name implies, a chaser of alpha, or the 'tactical', active return component of an investment, the All Weather fund has a simple "beta isolate and capture" premise, and seeks to generate a modestly better return than the market using a mixture of equity and bonds investments and leverage. Ironically, as we foretold back in 2009, in the age of ZIRP, virtually every "actively managed" hedge fund would soon become not more than a massively levered beta chaser however charging an "alpha" fund's 2 and 20 fee structure. At least Ray Dalio is honest about where the return comes from without hiding behind meaningless concepts and lugubrious econospeak drollery. Courtesy of "The All Weather Story: How Bridgewater created the All Weather investment strategy, the foundation of the "risk parity" movement" everyone else can learn that answer too.
- Obama Signs Bill Enacting Budget Deal to Avert Most Tax Hikes (BBG)
- GOP Leaders Take Political Risk With Deal (WSJ)
- Basel Becomes Babel as Conflicting Rules Undermine Safety (BBG)
- Portugal Faces Divisions Over Austerity Measures (WSJ)
- The Fiscal Cliff Deal and the Damage Done (BBG)
- Cliff deal threatens second term agenda (FT)
- Deposits stable in euro zone periphery in November (Reuters)
- Fresh Budget Fights Brewing (WSJ)
- China Poised for 2013 Rebound as Debt Risks Rise for Xi (BBG)
- Who's Afraid of Italian Elections? (WSJ)
- China services growth adds to economic revival hopes (Reuters)
- Asian Economies Show Signs of Strength (WSJ)
- Japan’s Aso Targets Myanmar Markets Amid China Rivalry (Bloomberg)