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Five Fundamental Flaws In Dip-Buying Euphoria
With S&P futures, and most notably financials, staging the second overnight opening surge in a row, we thought it perhaps worth reflecting on five quite concerning fundamental reasons why dip-buyers (as anesthetized as they have become thanks to central bank 'protection') could face a tougher time. As Mike Wilson of Morgan Stanley notes, for those looking for a cause or explanation of recent weakness, feel free to blame it on the more hawkish Fed minutes, Draghi’s comments that it was now “up to governments to do the right thing” or the soft US payroll numbers. After such an uninterrupted run, some kind of correction was inevitable and simply a matter of timing. The bigger question to resolve is whether this pull back will look like what we experienced in 2010 and 2011 or end up being more muted. Obviously, the key variables for this analysis remain growth and liquidity expectations. The 'payback' that we have been warned about for such an unseasonably warm winter is upon us (as macro data surprises increasingly to the downside) and that is the first flaw in BTFD logic. Wilson goes on to point out that NFIB small business hiring intentions have dropped precipitously, GDP growth is weak but earnings growth is now catching up (down) to that weakness and for many stocks is rapidly falling towards zero, we remain in a 'liquidity lull' as central banks stand on the sidelines and reflect, and perhaps most worrisome is the rapid deterioration in the Bloomberg financial conditions index. All-in-all, these sum up to suggest a greater-than-5% correction is more than likely.
Payback Time
Risk markets have been wobbling for over a month and showing signs of exhaustion since early/mid February. However, it took a more definitive decline in the broader market averages to get most investors’ attention. Specifically, the first week of April leading into the Passover/Easter holiday weekend was uncharacteristically weak for most risk assets, even US equities. For those looking for a cause or explanation, feel free to blame it on the more hawkish Fed minutes, Draghi’s comments that it was now “up to governments to do the right thing” or the soft US payroll numbers.
After such an uninterrupted run, some kind of correction was inevitable and simply a matter of timing. The bigger question to resolve is whether this pull back will look like what we experienced in 2010 and 2011 or end up being more muted. Obviously, the key variables for this analysis remain growth and liquidity expectations. Hence, the negative reaction to last week’s central bank comments and jobs data. On the growth front, it seems pretty clear to me that expectations got ahead of reality and are now set to disappoint. Nowhere is this more apparent than with the Citi economic surprise index. This index rolled over several weeks ago and it now quickly approaching the zero line. The reality is that the jobs number was just the punctuation on a long list of disappointing economic data points this year. Markets were simply ignoring them on the expectation for employment data to trump the negatives. Whoops. Not only did the Non Farm payroll number come in well below expectations, but the NFIB small business hiring intentions survey for March fell back below the lows of the 2001-02 recession (Exhibit 1). Vincent Reinhart and David Greenlaw have been warning us to expect some payback from the unseasonably mild winter. Apparently, payback time is here.
But stocks really care about earnings, rather than GDP, growth and while this recovery has been short on GDP; it has delivered on earnings growth in spades. At least until now. As I have noted before, earnings growth has been decelerating rapidly the past several quarters. The market hasn't really noticed or cared so much because we were falling from such a high level. However, we are now at that moment when growth is actually falling towards zero and for many stocks will be negative on a y/y basis.
Exhibit 2 shows what this trajectory looks like with 1Q implied by what consensus is currently estimating. As you can see, we are getting perilously close to the zero line for earnings growth in 1Q. History suggests the market is not kind to stocks if we cross over into negative territory. As regular readers know, this is something I have been expecting to occur during 2012….i.e. an earnings recession in the absence of an economic one. I believe this is why many stocks have sold off in response to beating 1Q earnings estimates (ORCL, FDX, NKE,MSM and DRI to name a few). The market appears to be selling the good news much like it bought the bad news in January. As for liquidity, this is a harder metric to gage and measure. Clearly, central bankers around the world have provided ample liquidity over the past few years to keep animal spirits more lofted than they otherwise would be. I see no reason for that to change.
However, there does seem to be a change at the margin with respect to when the next infusion may come. Our cross asset research team calls this a liquidity “lull” which may be enough to cause a more significant decline in equity prices than most thought possible just a few weeks ago. Exhibit 3 shows how the financial conditions have definitely rolled over with risk assets. Some of this is auto-correlation, but it is hard to ignore the observation that we did get a negative divergence between stocks (SPX) and the “financial conditions” index on this most recent new high.
In addition, I would also point out that financial conditions are not as loose as they were last year when stocks were at similar levels. Bottom line, slowing / disappointing economic data, zero percent earnings growth and a liquidity lull sounds like a recipe for more than a 5% correction.
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So how does the premise stack up in the PM trades then?
All things being equal or equally manipulated anyways...
ori
socthr-e-never-too-late
Soooo.....don't buy AAPL?
iphone cost $2000? Yes its $200 for the initial iphone purchase but the service providers charge about $120/month more (including unlimited texting and data pk) than the equivalent service if you buy another smartphone and simms card on ebay an have Tmobile or other service companies sell the service for $45/month. How does that make you cool hip AAPL sheep feel?? BTW AAPL throught Foxconn is probably one of worse pollutors and employers on earth. Go Slave traders!!
STFP (short the fucking pop)
Futures are right now butting up against the downtrend channel. I bet resistance holds. The algos won't take it through so is the PPT still out there?
this market shows one little one week crack and poof its all better --- except that negative yields vanish in a healthy market
Slave trade is an inefficient business model because you need to house and feed your slaves, banks have optimized it with debt slavery. Lower cost, higher return bitchez!
Honestly, thanks for the tip! I was considering buying one -- until now!
I told everyone to buy the dip on apple yesterday, in concert, everyone said this was a terrible idea and junked me, well you could sell today and have made 3%, what is that annualized at? Nobody has given a good case against apple on this board, not one person. I've been singing the same tune for over 2 years now.
Hey iMan, what's the point? Just take a second mortgage on the house and go all in Apple next time. With the annualized return you can buy a Ferrari to show everyone how right you were.
AAPL is a BTFD company. It'll be a rocky road but they'll get to $1,000. Their brand is strong and they make quality products.
So, in other words, bullish, right?
"The market appears to be selling the good news much like it bought the bad news in January. "
And they will again and again and again until none are left to buy.....or sell to...
Pay no attention to that man behind the curtain. I am the great and powerful Wizard of OZ.
http://www.youtube.com/watch?v=NZR64EF3OpA
we are all flying monkeys now
There is only one flaw with the BTFD mentality, recognizing the actual dip, period. Wake me when it goes to fucking zero, only then would anyone actually be able to say with accuracy that the bottom was in. Bloody pods.
So buy the dip in gold, but not in Apple?
I was never very good at Whack-A-Mole, but thank goodness our Central Planners understand how pulling each of these levers affects each of the other levers.
Sell AAPL puts to buy GLD..."The Golden Apple"
Trader 1: BTFD!
Trader 2: Which one?!
There is nothing fundamental about it. The market will go up as far and as long as they want to manipulate it up. Haven't we learned that yet? We're still trying to explain why the market goes up all the time and hardly has any noteworthy correction?
LMAO.
Inflation? Inflation by itself will explain most of the long term rise in stocks.
Need to never forget this is an election year, Jews control the money and Jews vote Democratic for the most part. Throw the charts out the window, this is what this whole fuckin charade is about. Poor economic news, Stocks higher, Good economic report, Stocks higher, its simply astonishing to watch this bullshit. Lastly, Bernanke knows that a republican in office will put him on the unemployment line so trust he will do whatever he can to keep this market higher.
You are such a douche bag. shut the fuck up you ignorant ass hole.
You resemble that remark!
Everybody is talking about it being an election year and TPTB won't let the market drop in an election year. Last time I checked, the last two crashes (2000 and 2008) were also in election years. I don't understand the election year bullshit pumping.
And what makes you think Bernanke's job status will be affected if a Repube wins? A Repube put him in the chair, and a Dim kept him there. You think Bernanke gives a shit? Besides, I think we all know that the prez just does what he's told, and if TPTB want Bernanke to stay in place, he'll stay, regardless of who is appointed, er, elected this year.
Thanks for the sermon dad.
Aw, you pissed I popped your bubble?
MFL mother Fcking Loser?
Bout right.
A 5% or 10% correction....sure, that is not too bad during an election year. But, the Bernanke Put is in full force. After a little pain everyone will be crying for more ctrl+P from the FED. AND THEY WILL PRINT LIKE NO TOMORROW!
Astonishingly stupid remark. "For the most part" you are clueless, and that is a tiny part in and of itself.
"For the most part?" that's it? "For the most part?" That is your deep thinking for the day? That is what you've come to say?
What an astonishing nit wit.
Selling into "strenght", that IS!
Flash crash FTW?
#sounds like a recipe for more than a 5% correction.
recipe... hey idiot.. where have you been recently? s/p 500 corrected ALREADY almost 5%.. top was 1422 ps..
tell me what i dont know. will s/p touch 200avg or not?
what a hogwash
alx
Nice overlay in Exhibit 3. The SP500 is prime for a slide - primary wave 3 down according to the Elliott Wavers out there.
You can check out the details here - included are the elliott wave counts:
http://bullandbearmash.com/index/sp-500/weekly/
"dip buying euphoria"
is the first word a noun, an adjective or an adverb?
"Apparently, payback time is here."
except for today. and yesterday.
Buying on the dip? How about shorting on the bounce???
http://bullandbearmash.com/index/sp-500/hourly/
When the SP500 goes up 18% in fourth months and is forecast to go up less than 10% for 2012 (which will prove to be wrong yet again), at minimum, a correction is in play.
More likely, for all you elliott wave folk out there, primary 3 down is underway.
It's the stuff that bubbles, or in elitist parlance, "irrational exuberance", is made of! But "Bubbles" Bernanke just calls it "the wealth effect", Dahling! (Make sure you say that with a flip of the gold-and-diamond-laden wrist!)
April 17, 2012, 9:00 a.m. EDT
IMF says global economy slowly improving
By Greg Robb
WASHINGTON (MarketWatch) - The International Monetary Fund on Tuesday raised its forecast for global economic growth in 2012 and 2013, citing improved financial conditions and unwinding of the financial crisis, but warned that the recovery is still fragile. In an update of its world economic outlook, the Washington-based institution said it expects global output to grow by 3.5% in 2012, up from a January forecast of 3.3%. Global output is expected to expand 4.1% in 2013, up from the previous forecast of 3.9%. The global economy grew at a 3.9% pace in 2011. Spain was the only major country that had its 2012 growth outlook cut by the IMF, to a decline of 1.8% from the previous forecast of a 1.6% drop. The Bank of Spain said earlier Tuesday that the Spanish economy is back in recession after a mild recovery in early and mid-2011. The European Central bank has some room to further lower interest rates as inflation is expected to fall below the central bank's 2% inflation target, the IMF said. Asia looks headed to a soft landing, the report said
http://www.marketwatch.com/story/imf-says-global-economy-slowly-improving-2012-04-17
Missed it again Tyler! Forget this site for market timing b/c it is always a doomsday. Yawn.
A 170 point spike on the back of this morning"s economic miss is not just retail dip buying.
ZH is bearish and this in itself should make you buy,
They have been bearish 1000 Dow points ago too.Just yesterday the smelled "repatriation" and and " euarcalypse now"
They will bearish into new hihgs,too.
I don't actually think you got the point of those 2 articles, nor do I think you understand that ZH hasn't been bearish 1000 dow points ago. Those who actually understand how everything works knows this, as a reminder of why the market is at the levels that it is at now. The problem with such intervention is that just like any artificial high it runs out eventually. And when this artificial high induced by the ECB, FED, BOJ, BOE, PBOC etc.. The hangover will be very painfull, and as they try and treat the very problem they created with more money printing it will just perpetuate the problem, and as they become more interventionist in the markets as Goldman Sachs points out, the frequency of intervention will soon become more and more rapid as it's effect is reduced until it becomes negative.
So what will be the eventual result when they have no more bullets to fire? Then everyone when it comes will cry "Nobody saw this coming". You can continue with your unicorn and pony view outlook of the dow, just don't expect me to come with you.