Is It Time To Sell The "Old Guy At A Club" Market?

Tyler Durden's picture




 

It’s time to think like a contrarian, warns ConvergEX's Nick Colas. Why? Because capital markets seem as bulletproof as one of those up-armored military personnel carriers you see in war zones.  So what could really rattle stock, bond and commodity markets over the next 3-6 months?  The go-to answer, steeped in history, is geopolitical crisis, where the logical hedges are precious metals, volatility plays, and possibly crude oil.  Look deeper, however, and other answers emerge. 

The simplest one is a shallow U.S. recession starting early next year.  The causes: slack consumer spending and a slower labor market as corporations take a “Wait and see” attitude into the Federal Reserve’s first rate hikes in eight years.  Hedges would include non-cyclical stocks and volatility plays.

Lastly, the most common answer from an ad hoc survey of our peers at ConvergEx: a surprise bout of inflation that forces the Fed’s hand to raise interest rates in a still slow economy.  Hedges: volatility plays. But fair warning: it is time to think like a contrarian. But not, perhaps, to invest like one. Yet.

Via ConvergEx's Nick Colas,

Ever see an older man at a nightclub or bar, chatting up much younger women?  Or -yes – perhaps, much younger men? He doesn’t have the Russian oligarch vibe – no entourage to order his drinks or hold his cigarettes. And he’s not a friend of the owner, or an A&R guy from a major label, or just one of those super-cool dudes that can just pull it off.  No, he is mildly awkward, bordering on creepy.  Watching him in action is like a nature show where the aging, toothless lion can no longer hunt for his food.  And yet, he persists.  Again and again, he (the guy, not the lion) proves impervious to public embarrassment and repeated rejection.  But he keeps trying.

After a while, you realize that there is a reason for all this: it worked once, and probably fairly recently.  For reason or reasons unknown, that aging Romeo found his Juliet and for one day in late fall it felt like summer.  At least to him.  And because it worked once, he tries again.  Just hang around long enough and you will see it happen.

Take away the awkward desperation, and this paradigm broadly fits the price action of risk assets like global stocks and derivative markets at the moment.  Today was a good example.  Take one part mini-banking crisis in Portugal, add some weak European economic data, and mix with a twitchy U.S. market and you should have had a day-long sell off.  Instead, the open was the low.  Equity buyers stepped in, using exchange traded funds, and the U.S. stock market lifted most of the day.  Why would investors step in, especially with news that would have sent them running just a few years ago?  Because every single pullback for over 5 years has been a buying opportunity in U.S. large cap stocks.  Every.  Single.  One.  Equity markets have trained investors to keep buying, so while the bull market is +5 years old, it still thinks it “Has it…”

So what could be the shock that ends this persistent pattern?  I got asked that question on television today, and I punted.  The truth is that any really bearish case is hard to describe without sounding like you are stepping into the realm of fantasy.  But the reality is that an ever-up trending market is the actual fantasy.  With all that in mind, here are three events that would finally cause that elusive 10% correction and enough actual stock market volatility to get the CBOE VIX closer to 20 than 10.

Geopolitical risk.  This is the most common answer to the question “What could hurt stocks?”  At the same time, the devil is in the details.  Israel’s relationship with the Palestinians is tragic for both sides, but neither side is a major oil producer.  So however bad that problem gets, it is unlikely to force oil prices higher.  Also, keep in mind that Israel has been in hot and cold conflicts with its neighbors since its founding in 1948.  None of the headlines we see about the latest problems are new.  Sad, yes.  Novel.  No.

 

To really inject fear into capital markets, you need to disrupt oil supplies with a short sharp shock.  Think the Saudi embargo in 1973, or the Iranian Revolution of 1979. Then there is Saddam Hussein’s invasion of Kuwait in 1990, and the post-9/11 Gulf War II. Four major events in the last 40 years.  That pace makes an oil shock something more than a bolt out of the blue, but less than a persistent threat.  If you want to include the short period in 2008 when Crude went to $140/barrel, that would be a fifth.  Whether that liquidity-driven bubble would have created a recession even without the Financial Crisis, we’ll never know.  But make no mistake – a quick move up for oil prices always pushes equities lower.  Always.

 

Recession.  Yes, I said it.  What if the yield on the 10-year Treasury at =/- 2.50% is right? One way to explain this parlous payout is that fixed income markets forecast a long period of slow growth and modest recessions, eliminating the threat of inflation.  At +5 years of ‘Expansion’, we are due for a recession just based on historical averages.  Just consider how quickly expectations for a robust 2014 collapsed under the weight of a few feet of snow this winter.  Or the way economists gave up on a robust Q2 2014? The smart money seems to be on a 2% run rate for the second half, and that seems reasonable enough.

 

But what happens in early 2015? Will companies continue to hire as the Federal Reserve embarks on its first rate increases in 8 years?  And will consumer spending finally accelerate?  Anyone who lived through the 1994 rate cycle - a violent rotation of both capital and sentiment – knows not to diminish the impact of a rising rate environment.  For proof, a quick quiz.  What were Fed Funds on Christmas 2007?  Answer: 4.25%. Pretty normal times, those.  Now how long do you think it will be before the Fed gets to a 4.25% Fed Funds rate now?  And can the economy continue to expand as we get there?

 

The old guy at the club gets kicked out.  As I canvassed ConvergEx staffers about their most-likely downside scenario, their most common answer was a rising rate of inflation.  This would force the Federal Reserve to raise interest rates Volcker-style, threatening or even causing a recession to dampen rising prices. Certainly, a burst of inflation would challenge the Fed in a way not reflected in equity prices. The fact that inflation has remained calm (unless you have a child in college, or a parent in need of medical care, or are inordinately fond of breakfast foods) doesn’t make this concern any less valid. The road to Hell is paved with good intention, after all.

In summary, it is important to keep the worry-wart playbooks close at hand.  After all, it wasn’t all that long ago that our aging Lothario looked more like a bear than a bull.  It is time to think like a cautious contrarian, even if the current market still rewards the brave.  Remember – it works until it doesn’t.

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Fri, 07/11/2014 - 19:33 | 4948724 TeamDepends
TeamDepends's picture

Turn the other cheek.  Cheeks, if necessary.

Fri, 07/11/2014 - 20:35 | 4948742 kaiserhoff
kaiserhoff's picture

So is Wild Bill 7 on vacation or AWOL?

Without him, this place is nuttier than a squirrel turd.

Sat, 07/12/2014 - 01:11 | 4949368 Ariadne
Ariadne's picture

Dues paid x1000000000000000000

Can't say what the tax on his hopium is...

Sat, 07/12/2014 - 23:02 | 4951467 jeff montanye
jeff montanye's picture

"for one day in late fall it felt like summer"

whoever wrote that is not bad. like the initial motif as well.

keep it up.

Sat, 07/12/2014 - 15:05 | 4950401 Eirik Magnus Larssen
Eirik Magnus Larssen's picture

Hilarious.

Fri, 07/11/2014 - 19:40 | 4948744 So Close
So Close's picture

The fed can not raise rates.   They have backed themselves into a corner.

Fri, 07/11/2014 - 19:47 | 4948758 kaiserhoff
kaiserhoff's picture

Yes, but let's be specific.

If the Fed raises rates, they are upside down on a staggering portfolio of bad debt and toxic waste.  Their losses would be in the trillions.  Also all levels of government would go cash flow negative, big time.  Ask fonz about the refi on T bills.  We are led by criminals AND idiots.

Fri, 07/11/2014 - 20:14 | 4948817 CrazyCooter
CrazyCooter's picture

So, if I follow here, a bank that lends at 0% only makes money when all loans are paid in full ... oh, wait, I mean they break even. So much as one default and the bank lost money. This excludes overhead, like taxes, operating costs, etc.

ZIRP is about giving free money/advantage to the politically connected class.

The Fed will just roll it over forever. Or, as some clever banker once said, "A rolling loan gathers no loss."

It will be trading partners who no longer accept the dollar which will force the end of the current shit show. Since we pretty much import everything but food, it won't be pretty. Pensions and life insurance will still get paid, but it will be in a currency that ain't worth shit.

I shudder to think what the politicos will pitch as "the final solution" in such an environment.

Regards,

Cooter

Fri, 07/11/2014 - 22:42 | 4949184 max2205
max2205's picture

But Ben said rates would stay low until after he dies.....wbo and when does he get thrown off the 54th floor roof?

Sat, 07/12/2014 - 09:16 | 4949675 TBT or not TBT
TBT or not TBT's picture

On that day everyone should give free sexual favors to frakkers, whose work made it so that the thing that allows objects and people to move about need not come from overseas.    

Sat, 07/12/2014 - 14:08 | 4950205 All_Your_Base
All_Your_Base's picture

"that the thing that allows objects and people to move about"

 

Do you mean earthquakes?

Fri, 07/11/2014 - 19:48 | 4948745 So Close
So Close's picture

dp

Fri, 07/11/2014 - 21:43 | 4949053 RaceToTheBottom
RaceToTheBottom's picture

Wait, did the old guy get some action?

Fri, 07/11/2014 - 22:00 | 4949091 DeadFred
DeadFred's picture

Yeah but not with one of the youngsters he was chatting up. It was with someone only the best beer goggles could help.

Sat, 07/12/2014 - 12:41 | 4949962 InjectTheVenom
InjectTheVenom's picture

nah.   he ended up doing the 5-knuckle-chuckle for sure.  

Fri, 07/11/2014 - 19:41 | 4948746 Pairadimes
Pairadimes's picture

Those "up-armored military personnel carriers" he's talking about aren't just for war zones anymore, they are parked behind the police station down the street.

Fri, 07/11/2014 - 19:52 | 4948771 TeamDepends
TeamDepends's picture

Those MPC's have always been designed to confront God and football loving Bubbas.

“"Today Americans would be outraged if U.N. troops entered Los Angeles to restore order; tomorrow they will be grateful! This is especially true if they were told there was an outside threat from beyond whether real or promulgated, that threatened our very existence. It is then that all peoples of the world will pledge with world leaders to deliver them from this evil. The one thing every man fears is the unknown. When presented with this scenario, individual rights will be willingly relinquished for the guarantee of their well being granted to them by their world government."
- Henry Kissinger in an address to the Bilderberger meeting at Evian, France, May 21, 1992

Remember kids, Evian backwards is "naive".

 

 

Fri, 07/11/2014 - 20:01 | 4948784 TeamDepends
TeamDepends's picture

Hey Henry Kissinger, you amoeba zygote maggot, TeamDepends DOES NOT FEAR THE UNKNOWN!.  And there are legions more who will stand behind us and the many many others who fear nothing!!!!

Fri, 07/11/2014 - 22:19 | 4949132 chumbawamba
chumbawamba's picture

I literally fear nothing.  The lack of something really scares me.

-Chumblez.

Fri, 07/11/2014 - 22:40 | 4949176 Lin S
Lin S's picture

Kissinger was a tough talker back then, real tough.  He's softened up quite a bit in recent years, which is only logical.  22 years have passed, and old Henry has one foot in the grave and the other on a banana peel.

Death and Hell are just around the corner for him.

Fri, 07/11/2014 - 23:50 | 4949289 Jam Akin
Jam Akin's picture

Hendry K will keep on going as long as he keeps on receiving those transfusions of children's blood.

Sat, 07/12/2014 - 01:25 | 4949375 Rhetorical
Rhetorical's picture

I dont know if you know this or not Ill guess you do and say this for the benefit of the audience. But a study done on mice showed that transfusions of a younger matching donor mouse prolonged life both in quantity and quality. I use quality for lack of a better word since we're tlakin bout kissnger but ya I laughed at your comment.

Sat, 07/12/2014 - 04:51 | 4949533 Doña K
Doña K's picture

A million Cypriots are looking for the opportunity to put a bullet in his spine.

Sat, 07/12/2014 - 08:04 | 4949610 August
August's picture

A toddler a day keeps the reaper at bay.....

Fri, 07/11/2014 - 20:32 | 4948867 roadhazard
roadhazard's picture

They have to come out of those tin cans sometime ;)

Fri, 07/11/2014 - 20:04 | 4948793 Freddie
Freddie's picture

.....as bulletproof as one of those up-armored military personnel carriers..... you see in small town DHS USA.

Fri, 07/11/2014 - 20:45 | 4948905 wee-weed up
wee-weed up's picture

 

 

Yep, the Obozo Admin knows the LEOs love their toys.

They will continue to give them all they want in exchange for...

Following orders to round up and even shoot civilians...

When the Admin feels the time is right.

Fri, 07/11/2014 - 19:34 | 4948727 fonzannoon
fonzannoon's picture

" I got asked that question on television today, and I punted."

What a dirty pirate hooker. He is on cnbc once every 2 weeks and talks about how he expects growth in the 2nd half of the year. Lose this dude Tyler.

Fri, 07/11/2014 - 19:34 | 4948729 seek
seek's picture

The Fed will never raise interest rates due to inflation (or any other cause) for the foreseeable future.

Fri, 07/11/2014 - 20:03 | 4948790 Squid-puppets a...
Squid-puppets a-go-go's picture

yer, and itll be the buzz Lightyear monetary policy: "to infinity and beyond!"

Fri, 07/11/2014 - 19:35 | 4948732 TideFighter
TideFighter's picture

Who gives a damn about the old guy in the room, the Fed owns the whole town. 

Fri, 07/11/2014 - 20:52 | 4948935 Not Too Important
Not Too Important's picture

And once they add hookers and blow to the GDP, it's on!

Fri, 07/11/2014 - 21:28 | 4949022 StychoKiller
StychoKiller's picture

Meh, nightclubs are NO place to meet women, especially for older men:

1. The music's so loud you can't hear what the woman is saying (wears out yer hearing aids!).

2. Most bars still allow smorking (bad for older lungs).

3. Any woman that's willing to go home with you after a few hours in a club usually doesn't have her haid screwed on right.

So, older guys, find the woman of yer dreamz at a church!

Fri, 07/11/2014 - 22:39 | 4949177 TheReplacement
TheReplacement's picture

So you are afraid of smoking.  What, you really wanna live to be so old you get stuck in a "home"?  Sounds like a glorious end.  Good luck with that.

If you are at a club you are looking for a woman whose head isn't screwed on right.  You want to take her home and give it your best effort to screw it on correctly.

 

 

Sat, 07/12/2014 - 07:18 | 4949589 Zwelgje
Zwelgje's picture

yeah

Sat, 07/12/2014 - 03:00 | 4949444 jbvtme
jbvtme's picture

delete

Fri, 07/11/2014 - 22:06 | 4949107 DeadFred
DeadFred's picture

Water empires always fall to the outside barbarians.

Sat, 07/12/2014 - 12:09 | 4949889 MrSteve
MrSteve's picture

To whom do the land empires always fall?

Fri, 07/11/2014 - 19:35 | 4948734 kaiserhoff
kaiserhoff's picture

Typing is not necessarily writing.

Fri, 07/11/2014 - 19:37 | 4948738 rsnoble
rsnoble's picture

Too many they've seen bulletproof since DOW 10k.  I'm not bullish but when you call the end everyday for years on end eventually we'll be right.  It's lasted longer than I ever thought for sure.

Fri, 07/11/2014 - 19:43 | 4948750 Bub Ba
Bub Ba's picture

Meaningless drivel

Fri, 07/11/2014 - 19:45 | 4948754 buzzsaw99
buzzsaw99's picture

the pit of hell could open up in the middle of central park and the stock market would rally.

Fri, 07/11/2014 - 19:49 | 4948764 kaiserhoff
kaiserhoff's picture

It hasn't?  I was pretty sure I saw that on CKGB last week or maybe it was just the Lloyd.

Better check my meds.

 

Fri, 07/11/2014 - 22:08 | 4949112 DeadFred
DeadFred's picture

Siri told me it would open on July 27. Would Siri lie?

Fri, 07/11/2014 - 19:47 | 4948757 AccreditedEYE
AccreditedEYE's picture

Another string of anti-bull stories. I thought we've become wise enough to learn the show must go on and they'll never let this ship sink? It's like CNBS... At this point, these stories just become more bait to scare the crap out of retail and get them to sell/short positions. (Then lose $) This has to stop.

P.S.- what Buzzy said.

Fri, 07/11/2014 - 19:47 | 4948760 Yellowhoard
Yellowhoard's picture

If rates go to 4.25, the interest on the national debt will consume every last bit of discretionary revenue at the Federal level.

Rates HAVE to stay this low until everything unravels suddenly.

Fri, 07/11/2014 - 21:46 | 4949054 NihilistZero
NihilistZero's picture

If rates go to 4.25, the interest on the national debt will consume every last bit of discretionary revenue at the Federal level.

Why?  If the FED buys a high enough percentage of the new debt through front and back channels you can raise interest rates significantly and it's neutral.  Higher rates on FED purchases even enable Congress to claim more "revenue" from FED interest payments returned to the Treasury.  All the while the higher interest rates make it at least "look" like you are running a functional economy.  It's all bullshit digits in a computer.  As CrashIsOptomistic so often points out, energy is the bottom line.  To keep the dollar the reserve in the energy game they WILL raise rates.

Fri, 07/11/2014 - 19:48 | 4948761 Otto Zitte
Otto Zitte's picture

Last Rooster Standing

Fri, 07/11/2014 - 19:50 | 4948766 dirtyfiles
dirtyfiles's picture

this so called "bull market" is so overextended that it create opposite effect known as "yawn another new high"

and doesn't create new real energy needed where real bear market would spark up changes and reforms people looking for

Fri, 07/11/2014 - 20:02 | 4948783 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

Geopolitical risk no longer affects the markets. This has been clear since the Syria debacle. 

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