Tag: news

Submitted by Lance Roberts of STA Wealth Management,

The comedian Louis CK has a great bit in his act called "Of Course.  But Maybe…" that explores the good and bad thoughts that exist within the human psyche.  I have posted the clip below for your viewing pleasure. > {Disclaimer: I do not endorse or support any views that may be found offensive.  Of course, I do…but maybe…}

It is in this context that I wanted to discuss a recent article by David Goodboy entitled "2014 Promises To Be Another Bullish Year."  

As he opines:

"I love it when the stock market bears crawl out of their caves. The louder they get about an imminent market crash, the more confident I become that it's not going to happen anytime soon."

Of course, 2014 is going to be a good year because of the "Wall Of Worry"

"When everyone is super bullish, that's when it's time to expect a market correction. Even the bears have a name for this phenomenon: climbing the 'wall of worry.' Stocks are said to be climbing the wall of worry when they are acting the opposite of what the bears expect. Certainly, there will be pullbacks and even a few sharp drops in every bull market, but I expect the long-term upward trend will remain in full effect well into 2014."

But Maybe…

Everyone already is super bullish, and a Bob Farrell's Rule #9 states:  "When everyone agrees something else is bound to happen."  The chart below shows the bullish sentiment of professional investors versus the S&P 500. It is important to notice that peaks in bullish sentiment normally coincide with both minor and major corrections in the markets.

Another way to view bullishness is through the use of "leverage" to increase portfolio returns.  The more "bullish" investors become; the more "risk" they are willing to take on.  A good way to look at this is by viewing the level of margin debt as compared to the level of negative cash balances as shown in the chart below.

Currently, investors all "all in."

Of course, 2014 is going to be another bullish year because of cash inflows:

"The stock market is controlled by buying and selling. These so-called inflows and outflows of capital are what determine stock prices. Investors transferred $12 billion into stock funds in just the final week of November, according to Lipper, the largest increase in five weeks. Funds specializing in U.S. stocks attracted $8.9 billion of these inflows, while non-U.S. stock funds absorbed $3.1 billion."

But Maybe…

The chart below shows the push by individual investors into retail equity mutual funds. It is really a testament to what we already know which is that historically investors tend to do the opposite of what they should – "buy high and sell low."

As I discussed in "Third Stage Of A Bull Market" investors tend to go through three distinct psychological stages during the "Bust To Boom" phase:  1) Disbelief, 2) Acceptance, and; 3) Exuberance.  The problem with David's argument is that he is assuming that individual investors have some knowledge about the future of the market and are making a rational investment decisions. However, the reality is that low rates are forcing investors to take on more risk than they realize as they chase returns.  In other words, "everyone is now in the pool."

Of course, 2014 is going to be another bullish year because of the Federal Reserve:

"Think of the Federal Reserve as the wizard behind the curtain. The world's most powerful central bank sets the economic tone by tightening or loosening monetary policy. Its powers include its command of interest rates and an entire host of quantitative tools to spark or slow economic activity. The Fed is showing zero sign of ending its QE program anytime soon and has said its decision to start tapering depends strictly on the economic data…With interest rates near zero, and the Feds unlikely to start tapering until well into 2014, the stock market has no place to go but higher.?"

But Maybe…

I do agree with David's point that the Fed is responsible for artificially inflating asset prices.  As I discussed in "Bernanke/Yellen To Drive Stocks 30% Higher:"

"At the current rate of balance sheet expansion, and assuming that cor
relations remain, the markets could well rise to 2329 by the end of 2015. This would also mean the Fed's balance sheet would have also expanded beyond $6 Trillion. This would likely imply that the Fed would own more than 50% of the treasury market."

The problem, potentially, is that individual investors are, as discussed above, piling into equities under the belief "this time is different." In 1999, it was the "tech boom," followed in 2007 by the "real estate/credit boom." Today, it is the inherent belief that the "Fed's accommodative policy" trumps all other issues.

What we do know is that the Fed has embarked into a dangerous game of "bubble blowing" in the hopes that the bubble can be deflated without impeding the economic recovery that it created. This has never been the case previously and is unlikely to be the case presently.

The majority of the arguments for a continuation of the bull market have given way as interest rates have risen, valuations have climbed and earnings and revenue have slowed. This has left the Federal Reserve's ongoing monetary interventions as a main driver of stock prices. However, that could change with President Obama considering a hawk, the former Bank of Israel chief Stanley Fischer, to become the vice chairman of the Federal Reserve.

When asked in an interview about when the Fed should begin tapering $85 billion in monthly bond buying, Fischer replied that:

"There is an efficient way to do it, which is to start doing it pretty soon and to do it gradually."

Despite Wall Street hopes for ongoing infusions of liquidity in the financial markets; the drumbeat of "tapering" is growing louder.

Of course, 2014 is going to be another bullish year because of corporate earnings:

"…the recent upward move in PMI is indicative of earnings growth soon to follow. This is signaling that we should soon experience an overall improvement in earnings in the first quarter of 2014."

But Maybe…

Since the financial crisis, top line revenue has grown only 1/10th as fast as corporate profitability of which the latter is already at a historical peak. The chart below shows the deviation in corporate earnings from their long term historical trends verses the market.

I discussed the problem with the current earnings cycle in "Analyzing Earnings As Of Q3 2013" wherein I stated:

"The ongoing deterioration in earnings is something worth watching closely. The recent improvement in the economic reports is likely more ephemeral due to a very sluggish start of the year that has led to a 'restocking' cycle.

 

The sustainability of that uptick in the economic data is crucially important if the economy is indeed turning a corner toward stronger economic growth. However, with the Affordable Care Act about to levy higher taxes on individuals, it is likely that a continuation of a 'struggle' through economy is the most likely outcome.

 

This puts overly optimistic earnings estimates in jeopardy of be lowered further in the coming months ahead as stock buybacks slow and corporate cost cutting becomes less effective."

---

Could we have another bullish year in 2014?  It is certainly possible as long as the Federal Reserve remains engaged in their ongoing balance sheet expansions. 

But maybe the ongoing inflation of assets, without the underlying improvement in organic, sustainable, economic growth, will eventually lead to the next market bubble and bust. Of course, for anyone that has payed attention, such an outcome would be of little surprise.

The important point is that, as an investor, you need to pay attention to the ever decreasing reward/risk ratio of chasing the financial markets. The "low hanging fruit" has long been harvested and the risk currently far outweighs the potential reward of being aggressively invested. 

I realize that it is not popular, or fun, to rain on David's bullish parade.  However, while he will likely appear to be correct in the short term; the long term outcome will most likely be far less pleasant.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/31eDcpksnmQ/story01.htm Tyler Durden

While the BLS may be searching far and wide for evidence of hedonically-adjusted “core” inflation, and not finding it anywhere (expect in assets, housing prices, food and energy, but apparently all America buys every day are LCD TVs and iPads), one place where not even the BLS can hide what is clear and present “inflation” is college grade point averages, and especially grades for humanities courses, where as the saying goes pretty much everyone is “above average.” And, as JPM adds, “Soon, colleges will have to “turn the dial up to 11” or else everyone will have the maximum GPA.” Well, in a society where the push is to make everyone equal, it would only be fair for everyone to get the exact same perfect grades…

Some perspective from Michael Cembalest:

In Garrison Keillor’s Lake Wobegon, “the women are strong, the men are good-looking and all the children are above average”. Regarding US private and public universities, Keillor got the last part right. As shown below, the mean grade point average at US private and public schools has been increasing at a steady pace since 1970. Soon, colleges will have to “turn the dial up to 11” or else everyone will have the maximum GPA. As per the study from which the data is sourced, the 1960’s jump took place when the purpose of a GPA changed from being a motivator for students to being a measure used for external evaluation. GPA increases since 1970 are seen as a by-product of student evaluations of teachers (i.e., tough-grading teachers get bad evaluations, and eventually become extinct). Humanities courses have seen the highest grade inflation. Lower grades in science and engineering apparently discourage some students from pursuing them; do not let that affect you.

If it seems like people put too much importance on GPA, I would agree. What you learn is more important than what grades you get. However, you should also be aware of the realities of the job market. In the National Association of Colleges and Employers’ Job Outlook 2013 Survey, GPA importance hit an all-time high: 78% of employers screen candidates based on grade point averages.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3agO-09Jk_Q/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Is the unemployment rate real or fake? It is obviously fake, but we want to believe the fake is real for a variety of reasons.

We like to think we know the difference between what's real and what's fake. When we're fooled by a fake Rolex watch purchased for $20 on some humid Asian street corner, we shrug it off: it's no big deal because the fake isn't harming anyone.

And when it's difficult to discern the fake from the legitimate, as in fine art paintings and financial policy, we rely on experts to differentiate between the two.

But what if the "experts" are as clueless as the rest of us? What if they've been corrupted by easy money to authenticate the fake as legitimate? Consider ObamaCare, an extraordinarily complex policy that "experts" assure us is a phenomenal advancement that is "working well."

But what if ObamaCare is a fake? What if it is really not insurance at all, but a giant skimming machine designed to enrich and solidify the power of the state-cartel that operates the sickcare system?

"Experts" (PhDs and Federal Reserve economists) assure us our financial system is the core engine of "growth" in our economy. But what if this assertion is simply a useful illusion, and the reality is that the U.S. financial system is a giant skimming operation that harvests immense profits off the real economy to the benefit of the few, the financial cartels and their lapdogs in the Central State?

"Experts" in the Federal government assure us the unemployment rate is 7%. But if we include the 91.5 million people of working age who could be working (and would be working in a work-fare economy), then the real unemployment rate is double the official rate: 14% or even higher.

Is the unemployment rate real or fake? It is obviously fake, but we want to believe the fake is real for a variety of reasons.

The 1974 Orson Welles documentary (recommended by correspondent K.K.) F For Fake helps elucidate this peculiar dynamic of human nature.

The master art forger who plays a central role in F For Fake noted (self-servingly, but amusingly so) that his addition of a few fake Modigliani paintings into the world's collections did no damage to Modigliani (long since deceased) or the collectors, who benefited from the opportunity buy a Modigliani masterpiece.

We want to believe the fake unemployment rate of 7% rather than the real rate of 14+% because the officially sanctioned forgery feeds our belief that our bloated, corrupt Empire of Debt is sustainable, fair and working well. To accept that we've been bamboozled, ripped off, taken advantage of and ultimately cheated out of an authentic economy and life by swindlers is too painful.

How is the Federal Reserve's creation of money out of thin air not officially sanctioned forgery, a forgery we accept because we are like the collectors who are willing to buy forgeries as masterpieces, as long as they're good forgeries, rather than forego the joy of owning a masterpiece?

Just as the belief in the provenance of a masterpiece creates its value in the marketplace, so it is with money: if it is created by a central bank and ultimately backed by the State's right to tax its citizenry, we consider it legitimate, even though it is clearly an intrinsically worthless forgery of real value (i.e. gold, silver, land, cans of beans, machine tools, etc.).

And just as the value of a masterpiece is shattered by the loss of faith in its value, so it is with money: should the belief that creates the value fade, so to will the practical utility of the money.

Any doubts about the value of the euro, yuan, yen or dollar are dismissed by the mainstream as the confused ravings of a lunatic fringe, because maintaining the faith in the provenance of paper money is essential to the power created by financial engineering. But it's worth keeping in mind that this belief in the value of money created out of thin air by the conjurer's wand is just that, a belief.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/TjwQo3RYZEY/story01.htm Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Is the unemployment rate real or fake? It is obviously fake, but we want to believe the fake is real for a variety of reasons.

We like to think we know the difference between what's real and what's fake. When we're fooled by a fake Rolex watch purchased for $20 on some humid Asian street corner, we shrug it off: it's no big deal because the fake isn't harming anyone.

And when it's difficult to discern the fake from the legitimate, as in fine art paintings and financial policy, we rely on experts to differentiate between the two.

But what if the "experts" are as clueless as the rest of us? What if they've been corrupted by easy money to authenticate the fake as legitimate? Consider ObamaCare, an extraordinarily complex policy that "experts" assure us is a phenomenal advancement that is "working well."

But what if ObamaCare is a fake? What if it is really not insurance at all, but a giant skimming machine designed to enrich and solidify the power of the state-cartel that operates the sickcare system?

"Experts" (PhDs and Federal Reserve economists) assure us our financial system is the core engine of "growth" in our economy. But what if this assertion is simply a useful illusion, and the reality is that the U.S. financial system is a giant skimming operation that harvests immense profits off the real economy to the benefit of the few, the financial cartels and their lapdogs in the Central State?

"Experts" in the Federal government assure us the unemployment rate is 7%. But if we include the 91.5 million people of working age who could be working (and would be working in a work-fare economy), then the real unemployment rate is double the official rate: 14% or even higher.

Is the unemployment rate real or fake? It is obviously fake, but we want to believe the fake is real for a variety of reasons.

The 1974 Orson Welles documentary (recommended by correspondent K.K.) F For Fake helps elucidate this peculiar dynamic of human nature.

The master art forger who plays a central role in F For Fake noted (self-servingly, but amusingly so) that his addition of a few fake Modigliani paintings into the world's collections did no damage to Modigliani (long since deceased) or the collectors, who benefited from the opportunity buy a Modigliani masterpiece.

We want to believe the fake unemployment rate of 7% rather than the real rate of 14+% because the officially sanctioned forgery feeds our belief that our bloated, corrupt Empire of Debt is sustainable, fair and working well. To accept that we've been bamboozled, ripped off, taken advantage of and ultimately cheated out of an authentic economy and life by swindlers is too painful.

How is the Federal Reserve's creation of money out of thin air not officially sanctioned forgery, a forgery we accept because we are like the collectors who are willing to buy forgeries as masterpieces, as long as they're good forgeries, rather than forego the joy of owning a masterpiece?

Just as the belief in the provenance of a masterpiece creates its value in the marketplace, so it is with money: if it is created by a central bank and ultimately backed by the State's right to tax its citizenry, we consider it legitimate, even though it is clearly an intrinsically worthless forgery of real value (i.e. gold, silver, land, cans of beans, machine tools, etc.).

And just as the value of a masterpiece is shattered by the loss of faith in its value, so it is with money: should the belief that creates the value fade, so to will the practical utility of the money.

Any doubts about the value of the euro, yuan, yen or dollar are dismissed by the mainstream as the confused ravings of a lunatic fringe, because maintaining the faith in the provenance of paper money is essential to the power created by financial engineering. But it's worth keeping in mind that this belief in the value of money created out of thin air by the conjurer's wand is just that, a belief.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/TjwQo3RYZEY/story01.htm Tyler Durden

While stocks clung to overnight ramp gains, tensions were clear under the surface. Managers sought protection as spot VIX trended higher (closing over 16%); JPY crosses were not buying into (or supporting) the equity bounce (off the S&P's 50DMA), credit markets remained unimpressed, Treasuries closed practically unchanged (30Y was worst +2bps), gold and silver were bid, and another Hindenburg was spotted. The previous two "clusters" of Hindenburg Omens produced meaningful corrections in the US equity market (albeit dips that were rapidly bought). While ominous in its wording, the features that cause an Omen are all about market confusion with highs, lows, advancers, decliners, and momentum all signaling opposing (and mixed) views. With this week's FOMC meeting likely to resolve in significant volatility one way or the other, it is perhaps not surprising that the 3rd H.O. has just been spotted.

 

S&P futures tested perfectly to their 50DMA overnight (making the biggest 4-day high to low drop in 5 months) before bouncing back handsomely…

 

The omens are clustering…

 

JPY carry was not buying it…

 

And VIX was bid – suggesting hedges were in demand…

 

Gold and silver were well bid after POMO ended…

 

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/270JRXP3B0I/story01.htm Tyler Durden

While stocks clung to overnight ramp gains, tensions were clear under the surface. Managers sought protection as spot VIX trended higher (closing over 16%); JPY crosses were not buying into (or supporting) the equity bounce (off the S&P's 50DMA), credit markets remained unimpressed, Treasuries closed practically unchanged (30Y was worst +2bps), gold and silver were bid, and another Hindenburg was spotted. The previous two "clusters" of Hindenburg Omens produced meaningful corrections in the US equity market (albeit dips that were rapidly bought). While ominous in its wording, the features that cause an Omen are all about market confusion with highs, lows, advancers, decliners, and momentum all signaling opposing (and mixed) views. With this week's FOMC meeting likely to resolve in significant volatility one way or the other, it is perhaps not surprising that the 3rd H.O. has just been spotted.

 

S&P futures tested perfectly to their 50DMA overnight (making the biggest 4-day high to low drop in 5 months) before bouncing back handsomely…

 

The omens are clustering…

 

JPY carry was not buying it…

 

And VIX was bid – suggesting hedges were in demand…

 

Gold and silver were well bid after POMO ended…

 

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/270JRXP3B0I/story01.htm Tyler Durden