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."
The first month of a quarter may set the market’s tone in subsequent months. In the context of today’s markets, they tie into a few questions you may be asking about early 2014 volatility: Is January’s market drop merely noise on the way to another string of all-time highs, or is there more to it than that? For instance, doesn’t it seem a little ominous that we stumbled out of the gates this year despite sentiment being rampantly bullish? Does this tell us to be cautious going forward? If you happen to read the Stock Trader’s Almanac, you’ll connect our questions to the “January barometer” (not to be confused with the “effect” discussed above). The Almanac’s founder, Yale Hirsch, coined the term in 1972 when he presented research showing that January’s return is a decent predictor of full-year returns. He concluded: “As January goes, so goes the year.”
WTI crude is back below $95.50 - its lowest in a month - as the price of the front-month has dropped over 3% today - its biggest single-day drop since November 2012. USD strength (+0.3%) is being ignored for now by gold and silver which are jumping handily (back over $1230 and $20 respectively). US equities are suffering for the first day of the year for the first time since 2008 (which ended -38.5%) led by Russell 2000 and the Dow Transports - which is seeing its worst day in 4 months.
Is the U.S. consumer tapped out? If so, how in the world will the U.S. economy possibly improve in 2014? Most Americans know that the U.S. economy is heavily dependent on consumer spending. If average Americans are not out there spending money, the economy tends not to do very well. Unfortunately, retail sales during the holiday season appear to be quite disappointing and the middle class continues to deeply struggle. And for a whole bunch of reasons things are likely going to be even tougher in 2014. Families are going to have less money in their pockets to spend thanks to much higher health insurance premiums under Obamacare, a wide variety of tax increases, higher interest rates on debt, and cuts in government welfare programs. The short-lived bubble of false prosperity that we have been enjoying for the last couple of years is rapidly coming to an end, and 2014 certainly promises to be a very "interesting year".
2013 is in the books... and quite a year it was...
- Fed Balance Sheet +39%
- Dow Transports' best year since 1997 +39%
- Russell 2000's best year since 2003 +37%
- S&P 500's best year since 1997 +29%
- Dow Industrial's best year since 1995 +26%
- USD, WTI Crude, and Treasury 5s30s curve Unchanged
- 30Y Bonds' worst year since 2009 -13%
- Gold's worst year since 1981 -28%
The last few days have seen VIX rising, stocks limp higher (with a mini melt-up into the close today on huge volume), bond yields higher, and the USD lower.
For the 3rd day in a row, traders in credit and equity markets bid for protection. VIX rose 1 vol to 13.5% (diverging notably from stocks) and High-yield and investment-grade credit protection is back at 1-week wides (again diverging notably from stocks). USD weakened back to pre-FOMC levels (-0.4% on the day) led by EUR liquidity needs by the look of it, was ignored by the commodity markets which saw silver and gold tank (gold < $1200) and WTI crude back under $100. Treasuries rallied modestly (yields -3bps) as stocks wriggled sideways on super-low volumes (with NASDAQ underperforming and Dow outperforming to break the new record-high 16,500 level). Homebuilders outperformed even after the dismal home sales data with Energy worst on the day.
Treasury curve flattening continues to gather pace as 30Y bonds rallied their most in 8 months today (even as the shorter-end sold off modestly) but on the week the flattening is dramatic to say the least. Of course, all eyes were on stocks as the Dow and S&P leaked (post European close) to new highs (and the Russell gained back yesterday's losses and some to close the week's winner +3.5%). Gold (and silver) rallied on the day back over $1200 (but closes -3% on the week). VIX followed a similar pattern to yesterday with an early drop followed by a drift higher as it's clear managers are protecting into year-end. Quad witching and rebalancing provided some fireworks into the close as volume rose and stocks slid (as Nanex noted - something broke - lots of micro-crashes/rallies) as CBOE quotes stopped with 10 minutes to go.
While stocks were the headline-makers yesterday, they mostly range-traded today taking a breather to think (even with a double-POMO) as the rest of the world's asset classes did their thing. The Dow closed at a new recxord highs but the Russell 2000, however, lost over half its gains from yesterday! Markets everywhere saw major moves... in no particular order, JPY carry trades disconnected from stocks (EURJPY fading) - until the last few minutes of failed ramp-levitation; 5Y Treasuries underperformed back to 3-month highs (up 11bps - the most in over 5 months) and the Treasury complex saw its biggest bear-flattening (5s30s) in over 2 years; WTI crude rose notably on the day , back above $99; and gold (and silver) was monkey-hammered to 40-month lows - with the biggest 2-day drop in 6 months. Following yesterday's smackdown, VIX initially followed through but as the day wore on, demand for protection grew and VIX closed higher... oh, and it's not all glee in stocks as internals today triggered another Hindenburg Omen.
Negative divergences are popping up on key price charts.
Negative divergences are popping up on key price charts.
The small-cap-dominated Russell 2000 fell for the 2nd week in a row for its worst performance in 4 months (though bounced modestly off its 50DMA today). Stocks traded in a relatively tight range today - swinging around VWAP - following their only driver - JPY crosses, most of the day. NASDAQ 400 was rescued to ensure the headline-writers do not panic. Treasuries were flat to modestly better on the day but end the week mixed with 30Y -1bp and 5Y +5bps - collapsing the term structure to 6 week lows. Precious metals bounced to end the week +1%, which with the USD closing unchanged on the week, made them the outperformer across asset classes. VIX closed higher for the 4th day in a row (with the curve now its flattest in 28 months).
US equities close weak for the 4th day in a row - echoing last week but without some earth-moving data to save them tomorrow as NFP did last Friday. Bonds and gold were also hit hard and the USD was well bid on the day. The USD is now unchanged on the week though (with AUD down 2%) and 30Y bonds are also practically unchanged (though 5Y is +5bps on the week). JPY crosses were unable to get any traction in stocks before Europe closed but this afternoon saw them recouple and lift stocks back to unch on the day - only to disconnect into the close as stocks tumbled once again. The Russell 2000 ended back below its 50DMA (2nd day in a row) despite a ramp to try and save it. New 52-week lows spike to near 4-month highs. MOMO names rescued NASDAQ a little.
For the last year, every test below the 50DMA for the Russell 2000 has been met with a cavalcade of BTFD-ers (which then transformed into BTFATH-ers). However, we wonder, does the following longer-term chart suggest this time might just be different?
The number of employees across the firms of the broad-based Russell 2000 equity index has collapsed by more than half from its peak. The price of that index, in the same period, has risen 137%. Can you spot when the index 'price' disconnected from economic reality?
Of course, we are sure the chart will be dismissed as meaningless for some "demographic" or "cyclical" reason and we should not worry, just BTFATH, of course.
"It's only a question of time before the central banks lose control," David Stockman warns a shocked CNBC anchor, "and a panic sets in when people realize that these values are massively overstated." The outspoken author of The Great Deformation rages "the Fed is exporting its lunatic policies worldwide." If one cares to look, Stockman adds, "there are bubbles everywhere," citing Russell 2000 valuations of 75x LTM earnings as an example, "that makes no sense. It's up 43% in the last year, but earnings of the Russell 2000 companies have not increased at all." This is dangerous, he strongly cautions, "I haven't seen too many bubbles in history" that haven't ended violently.