Dow Jones Industrial Average

If central banks have learned anything since 2008, it's that waiting around for the panic to deepen is not a winning strategy. Put yourself in their shoes. Isn't this what you would do, given the dearth of alternatives and the very real risks of implosion? Anyone in their position with the tools at hand would not have any other real option other than to buy stocks in whatever quantity is needed to reverse the selling and blow the shorts out of the water. If $1 trillion doesn't do the job, make it $3 trillion, or $5 trillion. At this point, it doesn't really matter, does it?

Just over a week ago, the Japanese stock market participants were stunned when stock orders amounting to a whopping $617 billion (yes Billion with a B) - more than the size of Sweden’s economy - were canceled for reasons still unknown in what was one of the biggest 'fat finger' trading errors of all time. Since then, US equity markets have suddenly become notably more volatile - and fallen significantly, VIX has seen odd intraday 'spikes', S&P futures saw the very odd 'satan signal', and USDJPY has suffered its worst losses in 3 years. This raises the question of whether US market microstructure is any better than Michael Lewis' Flash Boys' book describes.. (as we head into a bond market holiday, dismal liquidity, and a potential Black Monday), “That could absolutely happen here,” Tabb Group's Larry Tabb warns Bloomberg.

Have the S&P 500 and Dow Jones Industrial Average seen their highs for the year?  At this point in 2014, it’s probably a coin toss.  There are several factors in favor of a further rally, to be sure.  Corporate profits are still robust, revenue expectations are modest, and long term interest rates remain equity-friendly.  On the flip side of the U.S. equity market coin: long term valuations are toppy, plenty of other markets (commodities, bonds) seem to signal an impending global recession, and a host of geopolitical concerns now seem to be hitting a full boil. Also, let’s not forget that the Russell 2000 peaked in, oh, March (1209) and July (1208) and is down 8.8% from that last high. By that measure, equities are already rolling over. It is true that markets climb a wall of worry. Until it falls on them.

While the saying "cash on the sidelines" is patently wrong as all cash represents is a form of risk, asset and liquidity preference (and yes, for every buyer of stock there is a seller: repeat as many times as necessary until it clicks), we are confident the fact that the world's record number of billionaires, 2,325 in 2014 up from 2,170 a year ago, holding a record $7,291 trillion in assets or a little under half of the US GDP, have a record $600 million in cash on average, up from $540 million the year before.

The irony of maintaining a veneer of authenticity over a fundamentally inauthentic market is rich: the more the authorities manipulate the market to maintain high valuations and suppress turbulence, the greater the odds of a collapse of trust as inauthentic markets cannot self-correct or discover the price of assets, capital and risk. Once risk has been effectively hidden by perception management, participants lack the essential information they need to make informed decisions. And so their decisions will be catastrophically mis-informed. This is how declines morph into crashes.

This weekend’s “Things To Ponder” is comprised of a variety of readings that cover a fairly broad spectrum from educational to informative and even a little bit sarcastic.

Obviously, this weekend's reading list is focused on what to do now.  Is this just another "dip" that investors should buy into? OR, is this the beginning of the long overdue intermediate term correction or a "mean reverting" process?

Although the NYSE was closed between July 30 and December 12 of 1914, stocks were quoted by brokers and traded off the exchange.  Global Financial Data has gone back and collected stock prices during the closure of the NYSE to recreate the Dow Jones Industrial Average while the NYSE was closed.  We collected the data for the 20 stocks in the new DJIA 20 Industrials and calculated the average of the bid and ask prices from August 24, 1914 to December 12, 1914.  This enabled us to discover that the 1914 bottom for stocks actually occurred on November 2, 1914 when the DJIA hit 49.07, over a month before the NYSE reopened.  Few people realize that stocks in the US had already bottomed out and were heading into a new bull market when the NYSE reopened on December 12, 1914. The DJIA did not revisit this level until the Great Depression in 1932. 

After all this time Greenspan still insists on blaming the people for the economic and financial havoc that he engendered from his perch in the Eccles Building. Indeed, posturing himself as some kind of latter day monetary Calvinist, he made it crystal clear in yesterday’s interview that the blame cannot be placed at his feet where it belongs:

"I have come to the conclusion that bubbles, as I noted, are a function of human nature."

C’mon.

The MH-17 tragedy could mark a pivotal moment in the worst crisis between Russia and the West since the Cold War. Geopolitical risk is extremely high today. As it was in 1914. With the U.S. seeking to impose tough new sanctions on Russia, we appear to be on the verge of a new and more intense phase of currency wars and indeed of an economic war. Indeed, a millitary confronatation with all that entails cannot be ruled out ...

Wall Street analysts are "already throwing in the towel" on 3Q, 4Q revenue growth with forecasts for the 30 Dow Jones Industrial Avg. companies of 2.5%, 1.6% versus predictions of 3% or more just 2 months ago. ConvergEx's chief market strategist Nicholas Colas explains these lowered forecasts fly "in the face of a general consensus from the economic community, the Federal Reserve included, that the back half of 2014 will be better than the Polar Vortex-damaged first half of the year." As Colas warns, rather ominously, "we aren’t pricing 1.6% revenue growth for Q4 2014 with price/earnings multiples at 17-18x. If you are buying Dow 17,000 or S&P 1980, you expect better. Now, companies and the macro economy have to deliver."

With Gen-X and Gen-Y out as buyers, who's left to scoop up the tens of trillions of dollars of Boomer assets at bubblicious prices? Given that other nations face the same demographic dilemma, the answer appears to be: no one.

Timing matters, as fundamentals have no impact in a euphoric blow-off top or in a panic-driven, bidless crash. It's possible to be right about the fundamentals and lose money trying to trade those fundamentals. It's also possible to be wrong about the fundamentals and make a boatload of money trading Central Planning interventions. Our own advice that we try to live is: "invest in yourself, not Wall Street."

While the last 2 weeks have seen numerous Fed heads, most vociferously Bill Dudley, warning of 'complacency' in markets, fearsome of low volatility and worried about low risk spreads. Of course, investors don't care - don't fight the fed unless the fed tells you to sell, appears the mantra-du-jour. Fed communications are not working... and so they have left it to their mouthpiece - WSJ's Jon Hilsenrath - to explain that they are indeed concerned at just how risk-free markets have become..."Federal Reserve officials, looking out at mostly calm financial markets, are starting to wonder whether tranquility itself is something to worry about."

These two charts depict the same index over the same time frame, but they reflect two stories and two economies.