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Authored by Lance Roberts via RealInvestmentAdvice.com,

Recently, Bank of America’s Savita Subramanian discussed why the market could drop to 3800. She discussed her thesis in her latest strategy note titled “Five Reasons To Curb Your Enthusiasm.”

This analysis is interesting, particularly when analysts are rushing to upgrade both economic and earnings estimates.

More importantly, investors are incredibly long-biased in portfolios, with equity allocations reaching some of the highest levels in history.

What Subramanian questions, and something we have asked previously, is all the “good news” already “priced in?”

“Amid increasingly euphoric sentiment, lofty valuations, and peak stimulus, we continue to believe the market has overly priced in the good news. We remain bullish the economy but not the S&P 500. Our technical model, 12-month Price Momentum, has recently turned bearish amid extreme returns over the past year.”

With investors “all in,” we suspect a correction is more likely than not.

Technical Deviations

While BofA only expects a 10% correction, as shown, there is a risk of a deeper reversion.

A correction back to 3800 would only revert prices to mid-2020. As shown, over the last 5-years, corrections have ranged from roughly -10% to -33%. Notably, these corrections usually have reverted the index either to the 200-dma or beyond.

Given the magnitude of the market’s current deviation from the 200-dma, a correction will likely surpass 3800. A retest of the 200-dma seems most probable.

Furthermore, the entire market (small, mid, and large-capitalization companies) have all risen sharply in the liquidity-fueled advance from the March 2020 lows. Such provides plenty of fuel for a more significant correction if selling begins in earnest.

Retracements Suggests The Same

The 200-dma remains the lower boundary for corrections over the past 5-years. That level helps define the parameters of a retracement. As shown below, using the October lows as a starting point for the current rally, a 38.2% retracement aligns mostly with BofA’s prediction. 

However, a 50% retracement seems more logical as it aligns with the previous bottoms in both February and March. But a 61.8% retracement also aligns with the 200-dma. As such, we can determine that a correction could range from:

• 38.2% = 8.3% Decline

• 50.0% = 10.89% Decline

• 61.8% = 13.46% Decline

While the mainstream media loathes the discussion of a correction, corrections of this magnitude are a healthy process of reverting market excesses. Furthermore, corrections of this magnitude are well within the confines of drawdowns seen over the last 5-years of the market’s advance.

Fundamentals Require A Lot More

As discussed in “Earnings Optimism Explodes,” the market has run well ahead of fundamentals.

“Here is the problem for investors currently. Given analysts’ assumptions are always high, and markets are trading at more extreme valuations, such leaves little room for disappointment. As shown, using analyst’s price target assumptions of 4700 for 2020 and current earnings expectations, the S&P is trading 2.6x earnings growth.”

As BofA noted, their “fair value” model also suggests that prices are near a peak with a downside target of 3635. (Based on BofA’s 2022 cyclically-adjusted earnings forecast of $173 and its equity risk premium (ERP) forecast of 425bp by year-end (vs. 398bp today.)

Longer-term valuation metrics are all entirely distorted and suggests markets a likely close to a long-term peak than not. As Michael Lebowitz noted recently, the four major valuation indicators are simultaneously at levels offering near-zero returns over the next decade.

This Is Nuts

On many levels, the current exuberance is “nutty.” Our “Fear/Greed Allocation” gauge, which measures investor’s equity exposure, shows the same. With the index pushing 100, a historical rarity, such precedes market corrections.

There are few points in history where the market was this significantly deviated, extended, overbought, and overly bullish. Without exception, the market corrected. Sometimes it was just a 10-20% decline. However, sometimes it is a lot more.

While prices can certainly seem to defy the law of gravity in the short-term, the subsequent reversion from extremes has repeatedly led to catastrophic losses for investors who disregard the risk.

There are substantial reasons to be pessimistic about the markets longer-term. Economic growth, excessive monetary interventions, earnings, valuations, etc., all suggest that future returns will be substantially lower than those seen over the last decade. Bullish exuberance has erased the memories of the previous two major bear markets and replaced it with “hope” that somehow, “this time will be different.”

Maybe it will be.

Probably, it won’t be.

Starting To Take Profits

The problem for the majority of investors is the inability to predict whether the subsequent correction will be just a “correction” within an ongoing bull market advance or something materially worse. Unfortunately, by the time most investors figure it out – it is generally far too late to do anything meaningful about it. 

Yesterday, we started selling and taking profits, which provides us three benefits for the future.

1. Less equity risk, and higher cash levels, reduce portfolio volatility and allows us to navigate a correction while protecting investment capital.

2. It gives us capital to reinvest back into positions we currently own at better prices; or,

3. Buy new positions which have corrected in price.

While it is entirely true that “you can not time the market,” you can do some analysis and make deliberate changes to avoid problems.

As discussed previously, “risk happens fast.”

It is essential not to react emotionally to a sell-off. Instead, fall back on your investment discipline and strategy. Importantly, keep your portfolio management process as simplistic as possible.

1. Trim Winning Positions back to their original portfolio weightings. (ie. Take profits)
2. Sell Those Positions That Aren’t Working. If they don’t rally with the market during this recent rally,  they will decline more when the market sells off again.
3. Move Trailing Stop Losses Up to new levels.
4. Review Your Portfolio Allocation Relative To Your Risk Tolerance. If you have an aggressive allocation to equities at this point of the market cycle, you may want to try and recall how you felt during 2008. Raise cash levels and increase fixed income accordingly to reduce relative market exposure.

This is just how we are approaching it.

As the border crisis spirals out of control, US Border Patrol agents on Friday found a shocking amount of undocumented people stuffed inside a commercial trailer north of Laredo, Texas.

The incident occurred on April 16, when a large commercial trailer arrived at the Interstate Highway 35 checkpoint. During a routine non-intrusive scan of the trailer, agents “observed multiple anomalies inside the trailer,” according to US Customs and Border Protection (CBP) press release. 

Agents opened the sealed trailer, where they found a whopping 149 undocumented individuals locked inside. Many individuals were from Mexico, Guatemala, Honduras, Venezuela, El Salvador, Peru, and Ecuador, trying to escape socio-economic collapse and or drug cartels, for a new life in the US. All of the individuals were not wearing personal protective equipment. 

“Human smugglers continue to have no regard for the safety and health of the people they exploit for profit,” CBP said. 

Over the weekend, the Biden administration finally admitted a border crisis along the Mexico–US border. The administration spent months downplaying the chaos. 

Did Biden just admit it was a “crisis”?

Oh man, Kamala Heiress is not going to be happy.

pic.twitter.com/txcKAYX7sD

— Benny (@bennyjohnson) April 17, 2021

In March alone, 172,000 migrants were arrested after illegally entering the US – a 15-year record that has overwhelmed border agents. 

Imagine all the other commercial trailers crammed with undocumented people entering the southern border that border agents cannot catch. 

Once heralded by public health experts for its stringent COVID lockdowns, which helped tamp down one of the most virulent national outbreaks of SARS-CoV-2, India today is suffering from one of the worst outbreaks in the world. After average daily cases surged to their highest levels in months, India on Tuesday reported its largest daily death toll yet.

Despite their unpopularity, parts of India are now under yet another lockdown as leaders try to combat the fast-spreading infection. India’s health ministry said 1,761 people had died in the past day, bringing India’s death toll to 180,530, still well below the 567,538 deaths reported in the US. On Tuesday, the health ministry reported 259,170 new infections, topping 200K for a sixth day, and getting closer to the peak of nearly 300K seen in the United States in January. Total coronavirus cases in India are now at 15.32 million, second only to the United States, with epidemiologists saying far more infectious new variants were one of the main factors behind the latest surge in cases.

Many experts suspect India’s actual deaths are far more than the official count, in part because crematoriums in various parts of the country have been running so long that some of the metal parts essential to their function have started to melt.

In Lucknow, capital of the populous northern state of Uttar Pradesh, data from the largest COVID-only crematorium, Baikunthdham, shows 2x the number of bodies arriving on six different days in April than government data on Covid deaths for the entire city.

In another crematorium in UP, the number of cremations have jumped by 5x in recent weeks during India’s second COVID-19 wave. With hospitals full, and oxygen and medicines in short supply, several major cities are reporting far larger numbers of cremations and burials than official COVID-19 death data can explain, according to crematorium and cemetery workers, media and a review of government data, which suggests that COVID deaths are being undercounted.

“We are working around the clock at 100% capacity to cremate bodies on time,” Kamlesh Sailor, the president of the trust that runs the Gujarat crematorium in the diamond-polishing city of Surat, told Reuters.

This isn’t the first time that Indian crematoriums have been the focus of media coverage this month.

Government officials say the discrepancy in death tallies could be chalked up to other issues, such as over-caution in reporting COVID deaths (in the UK, the opposite phenomenon appears to be the case).

Bhramar Mukherjee, a professor of biostatistics and epidemiology at the University of Michigan, said many parts of India were in “data denial.”

“Everything is so muddy,” she said. “It feels like nobody understands the situation very clearly, and that’s very irksome.”

As new lockdowns begin in the hard-hit western state of Maharashtra, people in Delhi and towns of the populous northern state of Uttar Pradesh put out desperate calls for help on Twitter, asking for assistance getting their families into hospitals. Others reported dire shortages of oxygen and the anti-viral drug Remdesivir.

In a statement delivered late Tuesday, Prime Minister Narendra Modi urged states to only treat lockdowns as a “last resort” and instead focus on creating micro containment zones to tamp down the soaring cases caused by India’s “second wave” of the virus.

#COVID19 | “I request the states to treat lockdown only as a last resort. Should focus on micro-containment zones”: Prime Minister Narendra Modi pic.twitter.com/YfX1WD1RQ1

— NDTV (@ndtv) April 20, 2021

Manish Tewari, an opposition lawmaker, said on Twitter that a “monumental tragedy of epic proportions is unfolding across India. No hospital beds, no oxygen, no vaccination.”

Source: Bloomberg

The trend in India was cited by a Bloomberg Opinion columnist Tuesday who warned that COVID-19 “is going to kill more people in 2021 than it did last year” and cited India is a primary example of this trend.

As caseloads push medical facilities toward capacity, the health system itself is starting to crack. Vaccine stocks, hospital beds and even oxygen supplies are running short, leading to bitter arguments between the states and the federal government. In some places, the dead are being transported by truck because cities have run out of hearses. Elsewhere, crematoria have started to break down because of the sheer number of bodies being burned. The government Monday promised to open up vaccines to all people over the age of 18.

If things don’t change soon, the country will be facing 3,000 deaths a day — twice its current level, and 10 times what was being seen through most of this year — Bhramar Mukherjee, a biostatistician at the University of Michigan, wrote last week.

Stung by criticism that the government had failed its people, Modi earlier ordered that vaccinations be made available to all Indians over the age of 18 by May 1. But even as the country has clamped down on the export of vaccines to create more supplies for its own citizens, the trend of rising cases amid higher vaccination numbers is unmistakable – and it’s starting to worry some experts, especially after the discovery of the country’s first “double mutant” COVID strain.

Via SchiffGold.com,

Ben Bernanke served as the chairman of the Federal Reserve from 2006 to 2014. He famously told Congress the Fed was absolutely not monetizing the debt in 2008. He said the difference between debt monetization and the Fed’s policy was that the central bank was not providing a permanent source of financing. He said the Treasurys would only remain on the Fed’s balance sheet temporarily. He was obviously wildly mistaken or outright lying.

In this clip from his podcast, Peter Schiff wonders out loud if Bernanke has ever told the truth.

Bernanke recently did an interview and the interviewer played clips of some of the things Bernanke said back in the run-up to the 2008 financial crisis, specifically about the problems in the subprime mortgage market being transitory and of no real threat to the broader economy.

Bernanke admitted that he wasn’t speaking truthfully at the time, claiming he couldn’t speak honestly because he was part of “the administration” and he had to toe the company line. As Peter put it, this was basically an admission that he lied when he told the nation there was nothing to worry about and that subprime was contained.

He did that because he believed he was a member of the Bush administration. So much for the idea that the Fed is independent when you have a former Fed chairman admitting that he lied in order to push a narrative that the Bush administration wanted the country to believe – that everything was great and there was nothing to worry about.”

Of course, that raises a question: was Bernanke really lying then? Or is he lying now?

Is he just trying to save face because he doesn’t want to look like a complete fool, and say, ‘Well, yeah, I guess I was wrong.’? He’s now saying he wasn’t wrong. ‘I just wasn’t being honest.’”

Peter said he thinks it would be worse if Bernanke was lying back then rather than just incompetent.

Interestingly, nobody was outraged at Bernanke’s confession. Nobody seemed particularly concerned that a former Fed chair just admitted he lied to protect a political narrative.

More disturbingly, Peter said he suspects the same thing is happening today.

Either the Fed knows that we have a huge inflation problem on its hands and is lying about it, or it’s completely clueless and doesn’t realize it.”

The Federal Reserve is hanging its hat on the fact that it printed a bunch of money over the last 10 or 20 years and price inflation never reared its ugly head. Therefore, we can do this forever.

You can’t assume just because the inflationary policies of the past didn’t result in bigger spikes in consumer prices that we can turn up the heat, and we can have even more inflationary policies in the present, and that these policies won’t have any effect on consumer prices either. That is a completely ridiculous and asinine assumption to make. And I think ultimately this is going to go down as the Fed’s biggest blunder — much more so than the mistake in its bad read on subprime problems being contained. The idea that inflation was transitory is going to be an even bigger mistake and an even bigger policy failure, because by the time the Fed is forced to admit that they were wrong and inflation wasn’t transitory, they will have waited too long to do anything about it.”

In a rare statement by a President during jury deliberation in a major trial, Joe Biden says he believes that the evidence in the Derek Chauvin trial is “overwhelming,” and wants us to know that he’s communicated with God in his hope for the ‘right’ verdict in the case of the former Minneapolis police officer accused of murdering George Floyd last summer during an arrest.

“I’m praying the verdict is the right verdict,” Biden told reporters in the Oval Office – hours after speaking with members of the Floyd family, adding: “I think it’s overwhelming in my view.” Biden said he wouldn’t have commented if the jury had not been sequestered.

President Biden says he recently called George Floyd’s family:

“I’m praying the verdict is the right verdict, which is, I think it’s overwhelming in my view. I wouldn’t say that unless the jury was sequestered.” pic.twitter.com/v6G03KqUSw

— Breaking911 (@Breaking911) April 20, 2021

Biden’s comments come as major cities across the country brace for violent protests – which we suspect are likely regardless of outcome.

In Minneapolis – which would be the epicenter for major protests – some 3,000 National Guard troops have been deployed throughout the downtown area, two of whom were injured early Sunday when someone shot at their Humvee hours after Rep. Maxine Waters told people to “get more confrontational“ in order to “send a message” to white supremacists.

In Los Angeles, Beverly Hills has stepped up patrols after BLM protesters marched through the wealthy enclave last year.

In Philadelphia, shop owners have boarded up windows.

What’s more, six states and Washington D.C. have requested help from the National Guard to protect their Democratic-run cities, after they were forced to sleep on the floor of a parking garage during inauguration security detail in January.

“The number one focus for us is deescalation. We don’t want to use force if we don’t have to,” said Minneapolis Police Chief Medaria Arradondo.

In short;

Get out of cities

— Jack Posobiec (@JackPosobiec) April 12, 2021

One month after we learned that Microsoft was in advanced talk to acquire chat startup Discord for $10 billion, the chat startup has halted talks to sell itself to potential suitors including Microsoft, the WSJ reported citing people familiar with the matter, as it resumes interest in a potential initial public offering down the line.

Microsoft’s reported consideration represented a 40% premium to Discord’s latest capital raising round in December when its valuation was said to reach $7 billion. Overall, the company has raised roughly $480 million, according to Crunchbase data. Investors include Greenoaks Capital, Greylock Partners and Index Ventures.

The Journal reports that Discord – which operates a free online platform for chatting by text, audio and video, and is especially beloved by gamers – fielded interest from at least three companies about a deal. In the end, Discord opted to stay independent at this time as it is doing well on its own.

In a move that could facilitate an IPO, Discord last month hired its first finance chief, Tomasz Marcinkowski, a former Pinterest Inc. executive. While Discord isn’t a videogame company, many of its users rely on it to communicate with each other while playing games, and several businesses with ties to the videogame industry have gone public in the past year, including developers Roblox Corp. and Playtika Holding Corp. , game-hardware maker Corsair Gaming Inc. and game-creation tool provider Unity Software Inc.

Roblox did a direct listing last month, shelving original plans to go the traditional IPO route, after the videogame company decided it was too difficult to determine the right price for its shares.

Microsoft, whose market cap is nearly $2 trillion, has been looking for acquisitions that would help it reach more consumers. Last summer, it explored a bid to purchase parts of the video-sharing app TikTok amid a high-profile geopolitical standoff prompted by the Trump administration.

A deal for Discord would have helped Microsoft expand its presence in social media beyond LinkedIn and what it has developed through its Xbox videogame business. Discord users say the platform offers more attractive features such as higher-quality audio than competing chat services, including even that of Xbox and Skype, which Microsoft also owns.

In addition to the unsuccessful TikTok talks last year, Microsoft gave up on Mixer, its videogame live-streaming service that struggled to compete with the likes of Amazon.com Inc.’s Twitch, Alphabet Inc.’s YouTube and Facebook Gaming.

Chinese President Xi Jinping on Tuesday issued some aggressive remarks clearly aimed at Washington, but without naming the United States directly, in his keynote address at the Boao Forum on Asia. His emphasis was to warn against the “unilateralism of a few countries” who are prone to “bossing others around” – which can be resisted via greater global economic integration and avoiding the temptation of decoupling. 

He spelled out that that countries that “boss others around or meddle in others’ internal affairs would not get any support,” and that efforts to “erect walls” or “decouple” stand against market principles. This veiled swipe against the US included the words: “openness and integration is an unstoppable trend, any effort to build barriers and decouple works against economic and market principles, and would only harm others without benefiting oneself.”

While there’s plenty of regional and border countries, not to mention African populations, that would strongly disagree, XI asserted that “China will never seek hegemony, expansion, or a sphere of influence no matter how strong it may grow,” according to a state media transcript. 

The remarks came soon on the heels of the White House receiving Japanese Prime Minister Yoshihide Suga on Friday, where China topped the agenda in Biden’s first face-to-face meeting with a foreign leader since taking office. Their joint statement focused on China’s actions that “are inconsistent with the international rules-based order” and impact “peace and prosperity” in the region, while highlighting human rights abuses and anti-democratic policies in Hong Kong, Xinjiang region, and Taiwan. 

The hugely controversial US-Japan statement loomed large in the backdrop to Xi’s words:

“The world wants justice, not hegemony,” Xi said in remarks broadcast to the forum.

“A big country should look like a big country by showing that it is shouldering more responsibility,” he said.

While Xi did not identify any country in his remarks, Chinese officials have in recent times referred to U.S. “hegemony” in public criticisms of Washington’s global projection of power in trade and geopolitics.

By contrast, “true multilateralism” will serve to make the world “more fair and equitable,” he said.

Bloomberg broadly observed of the speech that it was “dominated by sweeping globalist comments as Xi lauded a system with the WTO and United Nations at its center. He warned we shouldn’t let one country set the rules for all and big countries need to behave appropriately. While he has made similar points before, it’s noteworthy that he hammered the message home. Markets were little changed, with stocks erasing initial losses.”

China’s president also offered that the global pandemic should negate this vision of unilateralism, saying it’s become clear the world must reject the “cold-war and zero-sum mentality” and oppose a new “cold war” which hinders common cooperation and progress against the most pressing matters. 

And this raises what is perhaps the only ‘bright spot’ in current relations given the new ‘common interest’ on climate change. US climate envoy John Kerry last week met with his Chinese counterpart in Shanghai for what is the first high-level trip to China by a top Biden administration official.