Wall of Worry
Remaining fully invested in the financial markets without a thorough understanding of your "risk exposure" will likely not have the desirable end result you have been promised. All five of the charts below have linkages to each other, and when one goes, they will all go. So pay attention to the details.
Hope springs eternal that 2015 is the year that the US economy stretches its escape velocity growth as consensus growth expectations at 2.9% are still at their highest since 2005 (although world GDP expectations are falling rapidly). However, as Bloomberg's Rich Yamarone explains, with 5 of the Top 10 economies in the world in or near recession, the wall of worry can be constructed as follows...
What "wall of worry"? Goldman Sachs S&P 500 Sentiment Indicator has reached 11 on the Spinal Tap amplifier of euphoric positioning...
Investors have never - ever - been less bearish about the stock market than they are in 2014...
Will 2015 be the seventh (7th) consecutive year of the current bull market cycle? It is possible. But with 100% of all analysts and economists betting on that outcome, it is quite possible that something else will happen.
Every year, David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. "I have not seen a year in which so many risks - some truly existential - piled up so quickly. Each risk has its own, often unknown, probability of morphing into a destructive force. It feels like we’re in the final throes of a geopolitical Game of Tetris as financial and political authorities race to place the pieces correctly. But the acceleration is palpable. The proximate trigger for pain and ultimately a collapse can be small, as anyone who’s ever stepped barefoot on a Lego knows..."
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.
The attached Barron’s article appeared in December 2007 as an outlook for the year ahead, and Wall Street strategists were waxing bullish. Notwithstanding the advanced state of disarray in the housing and mortgage markets, soaring global oil prices and a domestic economic expansion cycle that was faltering and getting long in the tooth, Wall Street strategists were still hitting the “buy” key. In fact, the Great Recession had already started but they didn’t have a clue: "Against this troubling backdrop, it’s no wonder investors are worried that the bull market might end in 2008. But Wall Street’s top equity strategists are quick to dismiss such fears."
While the current bull market remains "bulletproof" at the moment to geopolitical events, technical deterioration, overbought conditions and extremely complacent conditions; it is worth remembering what was being said during the third phase of the previous two bull markets...
It is common knowledge among those that prefer to see the glass of aggregate demand always half-full (in need of fiscal or monetary stimulus and thus always time to BTFD) that stocks "climb a wall of worry" and that stocks can't drop if so many people are negative. However, while we are sorry to steal the jam from their exuberant 'cash on the sidelines' donut, the truth is that eventually 'strong hand' short positions build to a point where they dominate and provide the tipping point of weakness in stocks. As Goldman Sachs highlights in the following two charts of short interest ratio (days to cover) and aggregate short interest (dollars), the last time there was this much money short was mid-2007... and that didn't end well.
It seems David Tepper's "frigging" "dangerous" market is hitting home as asset managers have greatly rotated their portfolios to hold the most cash in 2 years. Of course, as BAML is quick to point out - this is great "wall of worry" climbing news, "it’s people taking money off the table and playing defensive. There is some inherent buying power." We have now seen almost 6 months of institutional selling and retail investor buying and Bloomberg does a great job rounding up the best market mantras for why it's different this time, and everything is fine... remember "Today’s bearish investors are tomorrow’s bulls."
- Qatar Bank: Deutsche Bank to raise $11 bln with help from Qatar (Reuters)
- AstraZeneca rejects Pfizer's take-it-or-leave-it offer (Reuters)
- China Home-Price Growth Slowdown Spreads as Sellers Discount (BBG)
- The new face of NSA: Mike Rogers (Reuters)
- Putin orders troops near Ukraine to return home (AP)
- Wall of Worry Rebuilt as Nasdaq Rout Sends Cash to High (Nasdaq)
- Bank of England's Mark Carney highlights housing market's risk to UK economy (Guardian)
- Greek Selloff Shows Rush for Exit Recalling Crisis (BBG)
- Anti-austerity Greek radicals ahead in Athens local election (AFP)
Markets are deteriorating around the world but what could cause a real correction in the markets?
Fed's Fisher Says "Investors Have Beer Goggles From Liquidity", Joins Goldman In Stock Correction WarningSubmitted by Tyler Durden on 01/14/2014 13:40 -0500
"Continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy," warns the admittedly-hawkish Dallas Fed head. Fisher goes on to confirm Peter Boockvar's "QE puts beer goggles on investors," analogy adding that while he is "not among those who think we are presently in a 'bubble' mode for stocks or bonds; he is reminded of William McChesney Martin comments - the longest-serving Fed chair - "markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations."
The eye of the needle of pulling off a clean exit is narrow; the camel is already too fat. As soon as feasible, we should change tack. We should stop digging. I plan to cast my votes at FOMC meetings accordingly.
Could we have another bullish year in 2014? It is certainly possible as long as the Federal Reserve remains engaged in their ongoing balance sheet expansions. But maybe the ongoing inflation of assets, without the underlying improvement in organic, sustainable, economic growth, will eventually lead to the next market bubble and bust. Of course, for anyone that has payed attention, such an outcome would be of little surprise. The important point is that, as an investor, you need to pay attention to the ever decreasing reward/risk ratio of chasing the financial markets. The "low hanging fruit" has long been harvested and the risk currently far outweighs the potential reward of being aggressively invested. Of course, it is not popular, or fun, to rain on the bullish parade. However, while they will likely appear to be correct in the short term; the long term outcome will most likely be far less pleasant.