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."
According to Goldman, the median company’s EV/sales ratio is now the highest in 35 years, surpassing even the dot com bubble.
Smith & Wesson’s earnings report gave renewed momentum to a rally in gun-making stocks, which began amid a debate about firearms that followed the Sandy Hook Elementary School shooting 15 months ago. As Bloomberg notes, many gun enthusiasts have stocked up on weapons to avoid potential restrictions in response to the Sandy Hook incident, the second-deadliest mass killing at a school in U.S. history, and that has driven stocks like Sturm Ruger to handily outperform even the highest of high-beta momo indices like the Russell 2000. SWHC was up 16% after earnings - its biggest gain since the shooting - as it beat expectations once again.
Stocks saw their lowest range day of the year so far today - and one of the lowest volume days - with today's laggard yesterday's big winner Russell 2000. Financiasls surged today and Energy dropped to worst performer on the year. Treasuries drifted sideways to very modestly lower in yield even as the USD weakened (led by AUD, CAD, and GDP strength). USDJPY and stocks were generally well coupled once again. Gold and silver leaked higher but today's biggest mover was WTI crude which tumbled back to around $101 (-1.4% on the week). High yield credit spreads flatlined with late weakness but HYG (the HY bond ETF) was notably weak all day. A late-day VIX smackdown tried to take the S&P cash into the green (mission accomplished) and new record highs - but it failed. Not exactly the high conviction, break to new highs push so many had hoped for as everyone eyes Friday's NFP (and ignores today's weak ADP and ISM Services - and weak China's Composite PMI).
It would appear the BFTATH mentaility has morphed into a BTFICBMD perspective as the "market" shrugs off an 'apparently expected' ICBM launch to soar to new record highs with the best day in stocks for months (if not years). USDJPY was in charge intraday as 102 was flushed through (with JPY's biggest drop in 2 months) and dragged stocks (led by the "most-shorted") non-stop. Equity volumes were 20-30% below yesterday's. The USD was relatively unmoved on the day (modestly higher oddly on a risk-on day). Gold and oil prices slipped (but remain in the green on the week) as Silver slipped into the red. Copper rallied. Treasury yields surged 6-8bps (the biggest jump in 4 months) as 2s10s steepened 6bps. VIX was cracked 2 vols lower to 14%. The S&P closed at 1873, just 27 points shy of Goldman's 2014 year-end target.
Volume is around 35% below yesterday's pro-rata but none of that matters. The S&P 500 is at record highs but it is the "most shorted" and most notably the Russell 2000 that is just exploding higher with a massive gap. Up over 3% on the day, smashing to new record highs, this is the best day in over 26 months. This is the biggest rise in stocks since October 2011 (when global central banks came to a co-ordinated rescue). Bear in mind that the Fed already noted small-cap multiples were over-extended (5% below here)... but BTFATH anyway.
While The Russell 2000 briefly regained positive territory for 2014 (up 1.5% on the week), the Dow, S&P, and Trannies ended the shortened and low volume week practically unchanged (and the Dow -2.6% YTD). Treasury yields oscillated as bad-news-good-news played out but ended the week practcically unchanged (10Y -1bps, 5Y +1bps). The USD drifted lower today to end the week very modestly positive (+0.1%) as EUR strangeth dominated JPY and CAD weakness). VIX went higher all week (admittedly OPEX-impacted) as underlying stocks remained bid. Credit markets ended the week wider than they opened on Tuesday (despite equity strength). Depsite the USD, commodities rose on the week with Silver and WTI crude up almost 2% and gold up 0.5%. For an options-expiration day, today's volume was very weak. And 2014's best performing S&P 500 sectors... Healthcare and Utilities.
In a world in which there is no risk, only return (thank you Federal Reserve Risk Management LLC), hedge funds - used to generating Profits just by sitting on legacy positions - see no need to reallocate their portfolios. Nowhere was this more evident than in the position turnover in Q4. As Goldman calculates, total asset turnover in Q4 dropped to 28% - a new all time low. In fact, the only increase in turnover, either buying or selling, was in the tech and infotech spaces. Everything else saw an unprecedented buyers and sellers strike.
Headlines will suggest that today's rally was due to the beat in US PMI (a data item that doesn't even rank on Bloomberg's scale of economic importance) and chose to ignore the misses (macro and micro) in everything else (which must be weather-related), the facts are different - it was simply an AUDJPY-inspired almost perfect correlation levitation from the post-China-PMI miss lows - more China QE to come. Having decoupled from USDJPY overnight, today's melt-up in stocks recoupled the all-important fun-durr-mental pair and lifted the Russell 2000 back to unchanged for 2014. With OPEX tomorrow, VIX was noisy and remains bearishly divergent from stocks (though was offered today). Credit markets lifted with stocks. Treasury yields rose back to modestly higher on the week. Gold and silver rose on the day starting from the China PMI miss (as did the USD with most of the majors losing ground against it). US Macro hits fresh 6-month lows.
"Victory" This morning's USDJPY 102 stick-save was just the momentum ignition required to send the Russell 2000 and S&P 500 to critical 'unchanged' levels... "Mission Accomplished"... The Dow and Trannies remain down over 2% as the Nasdaq leads the way up 2.4% on the year. It would seem that despite 'economists' proclamations that the terrible maco data is 'weather' driven (and this transitory), they are also seeing it as bad news... which is - in our new normal - great news for liquidity-fueled bubbles (which the Fed will remind us later in the Minutes do not exist). US Macro data has plunged to six-month lows.
So Venezuela is collapsing, Thailand is crumbling, and Ukraine is for all intent and purpose under martial law, US macro data is dreadful (and no, it's not all the frigging weather), and German consumer confidence dumped again; and US stocks soar (8th day in a row for Nasdaq for first time since July) on the back of a BoJ move that was fully expected (and entirely under-utlized) but sprung USDJPY back above 102. S&P futures volume was 35% below average as the day-session range was extremely small. The Russell 2000 almost reached unchanged for 2014. The un-taper, QE balls-to-the-wall trade continues it would appear - Gold (and even more so silver - longest win-streak in 46 years) continue to surge; Treasury yields continue to slide; the USD slips lower (led by EUR strength); and of course, high-beta equities jump higher (as stodgy big caps underperform). Unfortunately, the EM crisis is far from over - as EM FX tumbled today. VIX also rose notably, disconnecting from stocks; and credit markets are wider today than Friday's close.
Crisis was averted. Or was it just put off for another day?
Once again the smell of NAPALM is in the air
"Own physical gold because the old system will implode. Those who own paper assets are doomed."
Beginning by disavowing Mario Gabelli of any belief that rising stock prices help 'most' people, Marc Faber discusses his increasingly imminent fears of the markets in this recent Barron's interview. Quoting Hussman as a caveat, "The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak. There's no calling the top," Faber warns there are a lot of questions about the quality of earnings but "statistics show that company insiders are selling their shares like crazy." His first recommendation - short the Russell 2000, buy 10-year US Treasuries ("there will be no magnificent US recovery"), and miners and adds "own physical gold because the old system will implode. Those who own paper assets are doomed."