5 Things To Ponder: Unstoppable Force Paradox

Submitted by Lance Roberts of STA Wealth Management,

As we enter the final month of the year, the markets advance got me thinking about something known as the "Unstoppable Force Paradox." While you may not be familiar with the name, you will certainly know the definition which questions "What happens when an unstoppable force meets an immovable object?"

Even Frank Sinatra sang about it in "Something's Gotta Give:"

The paradox arises because it rests on two premises—that there exist such things as irresistible forces and immovable objects. The paradox is that both cannot both be true at same time. If there exists an irresistible force, it follows logically that there cannot be any such thing as an immovable object and vice versa.

However, that has become the general view of the financial markets currently. As discussed in yesterday's missive on excessive exuberance, investors have been lulled into a state of complacency due to a seemingly "unstoppable" rise in the financial markets. Bad news remains good news, and even small drawdowns are quickly reversed sending stocks surging higher.

Eventually, the paradox of what happens when a seemingly unstoppable force collides with an immovable will be answered. Historically, such realizations have not been kind to investors.

This weekend's reading list takes a look at the reasons why stocks could rise higher, and the potential they won't. The question to be answered is "What will you do when the immovable object is met."

1) Stocks Set For A Santa Rally If No Bad News by Adam Shell via USA Today

"The combination of seasonal strength, strong business fundamentals and valuations at or below long-term averages increases the odds that stocks can continue to rise into the year's end, perhaps as much as 2%, says Sam Stovall, U.S. equity strategist at S&P Capital IQ.

"In support of history, we think the S&P 500 should do well in December," Stovall says. "Our projection for solid November employment gains (when the results are released Dec. 5), our forecasts for improving holiday retail sales and the prospects for better-than-expected fourth-quarter profit growth should help maintain the market's upward momentum."

2) Sorry, Santa Won't Deliver Year-End Gains by Mark Hulbert via MarketWatch

"For this column I surveyed the several hundred advisers monitored by the Hulbert Financial Digest in search of a precise definition for the Santa Claus Rally. I came up with three more or less distinct possibilities, and I subjected each to statistical scrutiny."

1) The Stock Market Rallies At Some Point During December

2) December Tends To Be A Good Month For Stocks

3) Stock Market Tends To Perform Well Between Christmas And New Year's

"The bottom line? For this definition, as well as the first two, the statistical basis of the Santa Claus Rally is too weak to make it worth the bother."

3) The Fed's Economic Coup – Why Every Asset Price Is Manipulated by David Stockman via ContraCorner

"Now in a recent forked-tongue effort to deny the existence of a Fed “put” under the stock market, Goldman’s plenipotentiary at the Fed, perhaps better referred to as B-Dud, has told us exactly that. If the monetary politburo deems that the nation’s economic bathtub is not full to the brim and therefore requires 'extremely accommodative' policy, the central bank will indeed deliberately pump-up the S&P 500 to achieve its misguided ends."

4) James Montier: "Stocks Are Hideously Expensive" via ZeroHedge

"Four words seem to define the current mood in financial markets: There Is No Alternative. Yes, equity markets might be somewhat expensive, but considering the alternatives – bonds and cash –, they are still the best investment. The correction in October turned out to be a mere hiccup in a solid bull market.

But James Montier remains skeptical. The value investor and member of the asset allocation team at Boston-based asset manager GMO sees the stock market in a near-bubble and warns investors from being complacent. 'To think that central banks will always be there to bail out equity investors is incredibly dangerous,' says the outspoken Brit. His source of wisdom in current markets comes from none other than Winnie the Pooh: 'Never underestimate the value of doing nothing.'"

Read Also: It's Painful Waiting For The Bubble To Burst via Comstock Partners

5) A Rising Aversion To Risk by Michael Kahn via Barron's

"Interpretation of the economic implications of the changing relationships of asset classes is beyond the realm of technical analysis. Still, action in the global bond market is hard to ignore right now with U.S. and many European government bond prices rising while riskier junk-bond prices are falling.

This suggests rising risk aversion. Despite climbing U.S. stock prices, the credit market's action—with yields on government obligations falling to unprecedented lows while riskier credits' yields are rising—implies nervousness about the global economy. Perhaps—though drawing big conclusions about the global economy is well beyond the scope of this column.

In my view, the bond market is telling us two things. First, low yields across the globe point to economic weakness, which is being met by ultralow rates set by central banks that are likely to persist. Second, risk aversion is growing even as the Dow Jones Industrial Average notches new records. Taking it easy with your money is probably a good idea."

Read Also: A Stock Market Correction Is Imminent by Lawrence McMillan via MarketWatch

Chart Of The Day: "Something's Gotta Give"