Why The Casino Is Dangerous: There Is Nothing Below

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

The algos and chart traders are making another run at 2000 on the S&P 500, attempting to convince the wary investor one more time that buying on the dips is a no brainer. And in that proposition they are, ironically, correct.  To buy this utterly manipulated market at these nosebleed valuation levels is about as brainless of an undertaking as is imaginable.

Now we even have it in a back-handed way from Deutsche Bank. Its chief strategist, David Bianco, claims that the S&P 500 is now trading at 17X reported trailing earnings and that historically when the multiple has gotten into that zone after three years or more of market gains (we have had five) good things do not happen.  But, yes, this time is different according to perma-bull Bianco because even though above 17 PEs are rare after many years of EPS growth, very low interest rates are even more rare and support higher PEs:

Thus, powerful global structural trends appear at work and we find ourselves more accepting of long-term risk free real interest rates staying well below historical norms through the cycle. The completion of a good earnings season, improved confidence in decent US growth and S&P EPS growth for at least the rest of the year, and these still exceptionally low interest rates is shifting risk firmly to the upside for our longer-term fair value S&P 500 targets. We increasingly see the currently observed PEs as fair with upside at Tech, Healthcare and Financials, partially offset by Energy, with further overall S&P price gains fueled by EPS growth.

Now that is non-sensical Wall Street drivel. Honestly measured earnings have been growing only at a tepid rate, and have no prospects for acceleration given the sharp slowdown in both the global and domestic economy. And, please, how can we discount a distant stream of corporate earnings based on utterly artificial and unsustainably low interest rates that simply can’t be sustained over time without destroying the monetary system. That is, to keep the money market at zero and the ten-year at today’s 2.40% on a permanent basis in a world where inflation plus taxes turn these rates into deeply negative returns is virtually impossible. So sooner or later, and probably the former, there will be a normalization of interest rates, and that will cause a sharp downward re-pricing of equities.

In fact, LTM reported S&P 500 earnings after Q2 results and adjusted for the pension accounting change that is not embedded in the historical data were about $100 per share. That represents less than a 3% annual growth rate since late 2011, and implies a 20X multiple—- if the algos do achieve there target of 2000 on the S&P 500.

So with corporate profit rates off the charts, tepid earnings growth, sky-high actual PE multiples and a central bank pegged interest rate structure that has nowhere to go but up, it is evident that Wall Street stock peddlers like Bianco are doing nothing more than calling the sheep to another slaughter.

And a slaughter is what it will be. As shown below, there has been a thunderous collapse in stock market volume since the financial crisis, and trading is down by 60% on the NYSE and 75% on NASDAQ. Where has it gone? Into ETFs and the fast money driven options market, that’s where.  And what is the central characteristic of these venues in a market crisis?  The answer is lack of liquidity and a violent unwind of the implicit leverage in the massive hedge fund driven market in stock options.

And then what happens when the Wall Street casino experiences a significant break and the options/ETF un-wind gathers force?  Quite simply, the massive stock repurchase spree of corporate America comes to a halt as the C-suite hunkers down. As has been evident for several Fed cycles now, and as is quite clear in the chart below, corporate America buys strenuously at the top and lapses into paralysis at the bottom.

In short, the Fed and other central banks have ruined the internals of all capital markets, but especially the stock markets. The short interest has been destroyed; one way trade based on zero carry costs rules the day on Wall Street; and corporate America is plundering its own balance sheets in order to feed the fast money and fuel artificial winnings in the stock options racket.

But when it comes to real investors there is really no one home in the casino. Accordingly, when confidence in the central bank con game breaks, markets will gap down drastically, suddenly and violently.  And this time there will be no Bernanke style rescue. Were the Fed to attempt to go back to massive QE and thereby substitute its own liqudity for the crisis-driven collapse of corporate stock-buying, it would actually exacerbate the panic and compound the selling.

The reason not to buy the dips is thus a no brainer. There is a yawning gap below!

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Cognitive Dissonance's picture

I can see for miles and miles and miles.........

<The view from Central Bankers Peak is beautiful this time of year.>

MeMadMax's picture

Just a bunch of computers pushing numbers back and forth while picking up the occasional real life sucker once in a while...


Why anyone would invest in the market(using any method) is beyond me...

Truthseeker2's picture

"The 'Market Casino' will go down in history as the most pervasive, unregulated and ‘successful’ gambling establishment of all time.  It broke the bank (the FED, the Bank of England, among numerous other central banks), busted up the ‘street’ (Wall Street, cobblestones of the City of London, among other national financial districts) and wreaked havoc within the US & UK governments, among many others throughout Europe, the Pacific Rim, etc.  In time, it will prove to be the primary reason why whole populations will find themselves broke, busted and disgusted."

Nadine of Tyrol's picture

And I was so distracted by the gorgeous view that I neglected to notice that my shoelaces were untied.  I tripped and fell of the cliff into the abyss.  The soaring was fantastic until the very end!

<Central Bankers Last Creed>

tempo's picture

All clear. 2500 in 2015 Treasury estimates no rate increases or funding issues until 2016. Withholding above and spending below estimates.

LawsofPhysics's picture

Not for those of us who have been turning paper promises into hard assets of real value.


AllWorkedUp's picture

Let's not forget the Nasdaq needs to retake 5K before there is a meaningful correction.

JustObserving's picture

I thought there was Kevin Henry below to catch you as you fell. And the Yellen put.

Reality is so overrated

sunny's picture

Oh Goodie,  yet another article about how awful it will be when the market crashes....yippeee.

Someone wake me when the market actually starts moving south. 

crazybob369's picture

It will be too late. By the time you wake up, it will have gone so far south you'll need to look north to see it.

taketheredpill's picture


I think if the Fed were to announce a return to QE in the face of a meltdown there would be an immediate pop in risk assets.  A short-lived pop, but a pop nontheless.

Dr Strangemember's picture

But my realtor friend just told me yesterday that there is NOW no better time to buy a home and that rates will be skyrocketing in the coming months.  

kurtosis's picture

The point is that most buyers are not price sensitive;

You have corporate buybacks and sovereign (or quasi sovereign) funds buying or re-allocating; you have 0% money rates (or close to it); you have momemtum traders and technical systems piling in.

The short spec is getting run over every time they deep their toe in.

As long as this buying power is still there and not scared by a serious exogeneous event or some other unforeseen situation, it's likely that the market will keep going north;

However, once this ends (and there is no way to say if it's tomorrow or in one year), watch out below.



OsoPolar's picture

Why are you so negative? When trading volume is zero, prices will reach new highs.

orangegeek's picture

NASDAQ100 Weekly




The equation:  ZIRP + POMO + Share Buybacks = nothing but up for 5 1/2 years

JailBank's picture

With every company in the S&P buying back shares there are no shares left. Hence volume drops to these lows. Right? (Sarc)

coulous's picture

Las Vegas need water as markets need muppets

when they're gone : the casino 'll close

cluelessminion's picture

I've been saying the market was going to crash for decades.  It finally did in 2000.  I stupidly stayed out of the market (small 401k) while everyone else stayed in.  I've been waiting for this next crash thats supposed to be happening.  I could have doubled my account in less than 2 years if I just had the guts to stay in.  But I read ZeroHedge and other financial blogs with articles and posts by knowlegeable and educated people so I stayed away.  I'm pissed to say the least.  Damned if you do damned if you don't

Hippocratic Oaf's picture

No one could have predicted the FED involvement.

Oh, and this is not a 'market'.

smcapmachine's picture

everyone predicted the fed involvement.

mtl4's picture

Staying in the glass half full camp is a sure way to lose money in the long run.......better strategy is to just keep rining the market up until it doesn't.

JailBank's picture

Did ZH not tell you roughly 1 billion times to BTFD?

Hammerabi's picture

SPY calls. Lets go Janet!

JustObserving's picture

Go all in with TWTR 6 months out calls.  A ten bagger for sure.

Never fight a fraudulent market.  Or a fraudulent Fed.

Dre4dwolf's picture

When so few players are involved in the market, its easy to make valuations look high.

If only 10 shares of some company are being traded say an hour, all someone who has a lot of shares has to do ,is buy up the sell side at inflated prices and boom they look like they are making bank, meanwhile there is no other buyer there to maintain those high valuations (no buy walls).

So. . . a market without volume is impossible to value.

With soo few people in the work force, and inflation in food, rent, fuel prices breaking records every week . . .  who is going to have disposable income to  "invest" into these ponzi schemes?

Also there is very little risk for them doing this, because for the most part, these institutions are trading between eachother, buying and selling eachothers paper back and forth . . . so they aren't really risking anything since they are the primary buyers and sellers on both sides of the transaction 90% of the time.

Its akin to me owning a store selling apples, no one wants to buy my apples, so I fake volume by buying my own apples from myself creating artificial demand, thus driving the price of my own apples up, then when someone sees that apples (on paper) are sky-rocketing in value, they jump in like an idiot and buy up all my apples.

DOGGONE's picture

Look at realized results since QE manipulation began 12-1-2008

Why don't you get these real price histories in everybody's face??

medium giraffe's picture

Nothing below? Why, yes, there is something below.  It's just that, well, it can't be seen, you see? 

Even light doesn't escape what lies below.

Postal's picture

It's turtles. All the way down.

q99x2's picture

when confidence in the central bank con game breaks, markets will gap down drastically, suddenly and violently

Dude that is why the fascist FED implemented software applications at the end of 2011. How's it done since there is now an infinite supply of fiat correcting it to the upside?

Stop being so cranky and BTFD

astoriajoe's picture

Isn't what's below the casino normally dead bodies? That's what all those mob movies taught me anyway. just sayin'.

Atomizer's picture

When casino money mysteriously falls out of a courier truck, insurance claims are filed. Generally, the insurance protection is 5-7 higher than value of package. Under rare circumstances, 10-15. 

buzzsaw99's picture

So sooner or later, and probably the former, there will be a normalization of interest rates, and that will cause a sharp downward re-pricing of equities...

i keep reading this here. repeating it often enough won't make it come true no matter how much you may want it.

Sometimes I believe in as many as six impossible things before breakfast. [/Alice]

Boston's picture

Yes. Just look at Japan----interest rates near record lows AND their stock market still down about 75% from peak. The point: stock prices can tumble, and stay down for a long time, even when/if interest rates are falling.

Loucleve's picture

So leave!  your day job is no doubt at MMFA or MoJo anyways.

smcapmachine's picture

read this same article on ZH in 2013....and 2012...and 2011

moonman's picture

You must have been a guest cause your account has only been around for a little over 2 years.

SilverMoneyBags's picture

Exactly. Its because ZH understands economics and economics is separate than stock market finance/investing. They keep blaming algos, but its over stated.

Loucleve's picture

there is no market.  its dead.  cant you read a chart?

a normal market doesnt go up 50, 75 points every day and just SIT THERE for the rest of the day.

THAT is the point.

SilverMoneyBags's picture

Algos are created by human beings. There are no longer thousands of people standing on the floor of the exchange. Instead, they create mathematical forumals to do the trading for them. Of course traditional market mechanics are going to change when you eliminate a large portion of human emotion from trading.

SilverMoneyBags's picture

None of this matters. If you've listened to trading advice from Zerohedge for the last 6 years you would have lost everything. Economics =/= stock market finance.

Loucleve's picture

you mean, like owning Treasuries would have lost you all your money?  what planet are you on?

this coming from a guy whose hero thinks we have 56, no 57 states.  and he's been to all of them.

SilverMoneyBags's picture

Nominally the markets have basically doubled in 6 years. Even an idiot can make money, why isn't Tyler?

random999's picture

I guess everyone is just like me.

I dont buy because we´re at ATH while real world economy is on the edge of collapse.
I dont sell because central banksters have expanded monetary base by 500%.

How banksters and dictators decide to end this game I´m unaware of, so I will keep still on the "markets" and go long more offline-resources. You know, real assets..

jarana's picture

"I guess everyone is just like me"

So you should be doing the opposite...

Chuck Knoblauch's picture

No one is voluntarily buying this market.

No one has control of their pension units.

What the fuck is a pension unit anyway?

Is that like a share of stock adjusted for theft?

AGoldhamster's picture

Sorry, but boy that folk is a one trick pony .... SnP 3-5000 here we come and Nasdaq 6-8000 here we come.

Inevitable with all those reasons to buy - many many times already explained.

Not saying there will be no crash later - just that RIGHT NOW there is almost zero reason NOT to buy stocks.

assistedliving's picture

having missed every BTFATH/BTFD's; dont tell me what to sell but WHEN...