Dow Jones Industrial Average

ConvergEx's monthly review of analysts' revenue expectations for the 30 companies in the Dow finds a ray of sunshine (let's call them 'sweet dreams') to counter the current humdrum market action. First, the 'good' news: analysts expect the current quarter to post some of the best top line growth in over 2 years. The 'meh' news: that’s still only a 2.5% comp to last year, and 2.9% excluding financials.  Still, that is better than the 0.3-0.5% growth of Q1 2014.  That acceleration, such as it is, continues into Q3 2014, where analysts have revenue growth pegged at 3.9%.  The 'bad' news: brokerage analysts have been spectacularly wrong in forecasting revenues of late. In Q1 2014 the Street expected 4-5% growth in May of last year, only to whittle those numbers down month after month and still prove too optimistic on earnings day. Still, things might work out this time and Q2 will actually see a rebound. At current valuation levels, the bulls better hope they do.

The Dow Jones Industrial Average (DJIA) Index is the only stock market index that covers both the second and the third industrial revolution. Calculating share indexes such as the Dow Jones Industrial Average and showing this index in a historical graph is a useful way to show which phase the industrial revolution is in. Changes in the DJIA shares basket, changes in the formula and stock splits during the take-off phase and acceleration phase of industrial revolutions are perfect transition-indicators. The similarities of these indicators during the last two revolutions are fascinating, but also a reason for concern. In fact the graph of the DJIA is a classic example of fictional truth, a hoax.

“If I had an hour to solve a problem and my life depended on it, I would use the first 55 minutes determining the proper question to ask, for once I knew the proper question, I could solve the problem in less than five minutes.” - Albert Einstein

Measuring the cost of anything in currency can be misleading. As we know, inflation can be gamed by authorities to appear low, and supposedly low inflation is actually high inflation if wages are declining while prices rise. Priced in gold and stocks, wheat is near multi-decade lows. That may not last. Technically the trend has reversed, suggesting much higher prices--in dollars, gold or stocks--for wheat and indeed, by extension, for all food.

Too much testosterone in the room? Heard that all before. It’s the adolescent-like traders that were battling with levels of testosterone and cortisol, pounding on their chests like Tarzan swinging through the trees in the jungle of the financial markets that brought the world down too.

We all know what will eventually unfold: another collapse, this one even worse than that of 2008. Until then, the fraud and fiction will continue. Everyone with a vested interest in stocks moving up will do everything they can to perpetuate this.

One has to wonder why we are dodging this truth about what we've become: a nation that turns a blind eye to skimmers, scammers and legal looting. As in the story of the Emperor's new clothes, the onlooker who declares the obvious - in this case, that the stock market is rigged - shatters the consensus lie.

As if to prove all the HFT naysayers right, milliseconds before 3:30 pm - the traditional time when HFT algos come out and ramp stocks into the last half hour of the day, a massive E-mini order block slammed the tape, driven by a tremor in the USDJPY, sending the DJIA green for the year in the most unriggedly of manners.

Though many blame the Global Crash of 2015 for the loss of faith in stocks, others say the erosion dated back to at least 2014...

While it is easy to blame western sanctions for the recent tribulations at the world's largest aluminum company, Oleg Deripaska's Rusal, the reality is that the industry specific issues plaguing aluminum makers, certainly including former Dow Jones Industrial Average member Alcoa, which involve a fair share of manipulation of physical inventories at assorted global warehouses are much more responsible than some theatrical rhetoric flaring up between the West and East in the past month. Regardless of the cause, as FT reports, Rusal just announced it is on the verge of insolvency after it warned of "material uncertainty" about its future, and that it has asked its creditors to delay repayment on a maturity from its $10 billion debt pile due next month.

Does anything about 2014 remind you of 2008? The long lists of visible stress in the global financial system and the almost laughably hollow assurances that there are no bubbles, everything is under control, etc. etc. etc.  certainly remind me of the late-2007-early 2008 period when the subprime mortgage meltdown was already visible and officialdom from Federal Reserve chairman Alan Greenspan on down were mounting the bully pulpit at every opportunity to declare that there was no bubble in housing and the system was easily able to handle little things like defaulting mortgages. The party, once again, is clearly ending and raises the question: "If asset bubbles no longer boost full-time employment or incomes across the board, what is the broad-based, “social good” justification for inflating them?"

With 40% of the portfolio in cash and having returned $4 billion to clients at year-end, Seth Klarman's Baupost Group has "drawn the line in the sand" as they reflect on the diminished opportunities in the so-called "Truman Show" market we see today. In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, Klarman notes, the stock market, heading into 2014, resembles a Rorschach test - "what investors see in the inkblots says considerably more about them than it does about the market." From "born bulls" to "worry genes" and from Bitcoin to flash-mob-speculation, "there is a growing gap between the financial markets and the real economy...and the overall picture is one of growing risk and inadequate potential return almost everywhere one looks... as every 'Truman' under Bernanke’s dome knows the environment is phony."

How the volatility of the market can be seen every day! Yesterday, the London financiers were out there celebrating on their 14-year high and backing that the ‘only way was up’. Then today they woke up too late after hitting the bottle too much and now that high has dropped as China’s economy is causing greater concerns for the rest of the financial world.

Having thrown in his bearish towel in December, the self-proclaimed "last bear standing" has had a tough January. His plan, to "just be long pretty much anything" appears to have back-fired (for now) as Eclectica reports a 3.6% loss in January - the worst month since the Fund's inception. His largest loss was on a long Japan theme (leveraged) and that was somewhat offset by gains in his short emerging markets and short China themes. It appears nothing hs changed from Hendry's December perspective of the inexorable melt-up in developed markets thanks to central bank largesse (247% of NAV exposed to stocks) though he does note "renewed turmoil" which, we suppose, merely supports his thesis longer term.

Celente again warned of the economic parallels with the 1930’s and said that we are again seeing recession and depressions, currency wars, trade wars and that this would lead to actual wars. His free webinar and Q & A tomorrow will look at ways to protect yourself from these risks in 2014 and beyond.