Wall of Worry
The "Smartest Money" Is Liquidating Stocks At A Record Pace: "Selling Everything That’s Not Bolted Down"Submitted by Tyler Durden on 07/02/2015 06:23 -0400
Buyout firms conducted 97 stock offerings in the second quarter, more than in any other three-month period. "It’s clear that we are currently in an environment of frothy valuations,” said Lise Buyer, founder of IPO advisory firm Class V Group. Her disturbing punchline: "The insiders - those with the most knowledge - are finding this a very good time to take some money off the table." In an echo of Leon Black, Frank Maturo, vice chairman of equity capital markets at UBS AG, said, “Private equity is selling everything that’s not bolted down."
There’s only one question that matters today in markets: why is the government bond market going up and down like a yo-yo? How is it possible that the deepest and most important securities in the world are currently displaying all the trading stability of a biotech stock?
"This market is dumber than a mule, and the nation’s central bank and its counterparts around the world have made it so."
Currently, a new form of danger arises. The Keynesian pettifoggers at the Fed have painted themselves into an epochal corner. After 78 months of ZIRP they have no idea about how and why they got here; and now, mired deep in the lunacy of free money, they are clueless about where they are going next. There is not a chance the US economy has decoupled from the rest of the world. The great credit-driven boom was universal and fueled by out of control central banks. Now comes the bust phase, and these same money printing central bankers have no clue what to do about it.
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.