I admit to being among the above. Thankfully, I have refrained from making overly bearish bets without the confirmation I need and being disciplined with stop losses. I have also eased the pain by taking some fliers on momentum stocks verging on breakouts. I've heard a number of stories from bears who haven't been so lucky.
The scenario reminds me of the August to October period of '07. Those who had been screaming about the housing bubble and subprime mortgages were proven correct in a mini panic with the market dropping from 1555 to 1370 between mid July and mid August. But the Federal Reserve began cutting interest rates and this was enough to convince nearly everyone that the worst was behind them. The market wound higher over the next two months on extremely light volume - even surpassing its July highs. Divergences were plain to see. Financials were lagging badly. Overall breadth and volume were weak. But most brushed this aside - "mere growing pains," they said.
I hear the same comments today from those who were very cautious in spring and skeptical in the summer. Autumn has come and they are bullish. I notice that my trading account is sporting its largest net long position in a long time - so I am no different. Many other commentators are falling over themselves to make the most bullish short term projections. 1100, 1200, 1350 by year-end. Even the bears, myself included, refuse to suggest that it is impossible. If a 50% rally was possible on very little fundamental improvement, what's another 20 or 30%? I hear "fundamentals don't matter in a market dominated by machine traders." Those who proposed that people "buy low and sell high" are suggesting they again "buy high and sell higher."
The driver behind it all, as I have maintained all along is mood and risk appetite. "Performance anxiety" is a term that explains the phenomenon well for money managers. If they want to be sitting at their desk in January, they better damn well make sure they buy. Anything.
Jeff Cooper of Minyanville writes today:
I just got off the phone from one of the smartest hedge fund managers I know (who went out on his own after a stint with one of the legends in the industry).
Jeff: "What are the folks you respect saying here?"
Hedgie: "Everyone of them who are smart enough to be long are qualifying their position by saying, 'We're long but there is nothing fundamentally that justifies it'"
Jeff: "In other words, they all feel they are skating on thin ice, but it's recreational and they all feel they'll be smart enough to be off the ice if it cracks?"
Hedgie: "Last time I checked, when ice just cracks, there is no warning."
I had thought that the rally would end on a whimper; slowly rolling over and accelerating thereafter. But the unrelenting bullishness of Wall Street is setting up for an epic failure. It is a game of musical chairs. Only instead of dancing to music, Wall Street is having a bonfire with the chairs, dancing naked around it and chanting to the theme song from Mad Money.
There will be no sitting.
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12 comments:
Matt,
Mish has been saying a few times that the rally in stock markets is supported primarily by rally in junk bonds -- the source companies can get funding. He postulated that as long as junk bond market isn't collapsing... or alternately treasury-junk spread isn't widening, the stock market will find strong support. Therefore, huge crashes are unlikely.
JNK, LQD, & HYG are making new highs as of now.
The dollar just won't stop its plunge. Very painful for the bears and the neutrals -- everyone just have to jump into the stock markets and join the frenzy to be happy now.
Looking at the extreme frenzy we are in right now and given my bias towards bearishness, I'd like to agree w/ the epic crash scenario. Everything from junk bonds, foreign currencies, commodities, stocks, etc. just seem like all the same market.
However, the scary prospect is that junk bond market that keeps finding support.
Any thoughts on this, Matt? Do you agree w/ Mish? For one thing, JNK did give a warning signal several months before the huge 2008 crash. It could well do it again. But... I guess you can already catch my line (see last paragraph).
I'm a very light bear right now (mostly in cash) & quite disciplined in cutting losses when necessary. Even now, already I'm feeling much pain.
Roger,
Good observations. The corporate bond market is indeed a key factor to the recovery story. I'm not sure about the tracking ability of the ETFs as a proxy for this, however.
So to suggest that 'the equity market will not go down unless JNK leads' might be a bit of a stretch.
Of course, we have no idea to what extent central bank guarantees may have had an impact on these markets (directly or indirectly). What we do know is that a lot of bad companies have been given a lifeline. Some have managed to roll over most of their obligations - but at what price? What profit assumptions went into determining their ability to pay interest rates of 9-12%? What role did the major underwriters of this debt - and their cozy relationships with the Feds - have in making the deals happen?
I'm inclined to think that there are a lot of distortions in the corporate markets (as there were in the panicky days of Oct/Nov). And I'm also inclined to think that as equity issuance starts to matter (nobody seems to notice this - yet) the same liquidity in bonds will dry up.
Unfortunately, I can't give you a clear answer. To follow this, it might be a better idea to find a few companies in different industries that still need to raise capital. Get to know them well - talk to the IR reps. And use your findings as a proxy for the overall corporate market. I think this would be more instructive than following JNK.
Regards,
That was a great finale, Matt,
"I had thought that the rally would end on a whimper; slowly rolling over and accelerating thereafter. But the unrelenting bullishness of Wall Street is setting up for an epic failure. It is a game of musical chairs. Only instead of dancing to music, Wall Street is having a bonfire with the chairs, dancing naked around it and chanting to the theme song from Mad Money.
There will be no sitting. "
This humble reader can't comprehend why anybody would buy anything.
"This humble reader can't comprehend why anybody would buy anything."
Lemme try to give you some perspectives of the bull-side thinking:
1. Last year's crash was because of Lehman failure. The Fed is in full control now and won't let anything fail, they've learned enough.
2. Recovery is here, every smart economists have already pronounced it loudly. Bernanke being one of them.
3. Or if you don't believe no.2, the Fed is increasing money supply. That is inflationary: we should go into commodities, stocks, & junk bonds. USD is going to be worthless, so we better buy foreign currencies.
4. The Asian financial crisis was solved by devaluing the currencies. Now we are devaluing the dollar, therefore it will work.
5. I don't care about the reason, all the technical signs Dow Theory, etc. says the market should go up. I can't afford missing this huge rally, I should go in at whatever cost!
You see... if you don't look at the humongous debt lurking behind, waiting to get paid, you have this "all scenarios lead to inflation" thing. The perfect irony is... if you take those debts into factor, you have this perfect "all scenarios lead to deflation".
The thought that "government is in control of everything and can get whatever they want" is deeply entrenched in most of the masses. Never underestimate this!
Matt,
For an example of the corporate bond performance, you should look at this:
http://www.minyanville.com/articles/stocks-bonds-credit/index/a/24527
Pay attention in particular to the chart of Citigroup 2012 bonds vs C stock price. The bond is trading as high as when C was at 40s. Well, I guess there it goes another reason for bullishness: corporate bonds are at highs while stocks haven't recovered much.
I very much believe this is an epic distortion. But how will it be resolved? No idea. Could the bond & stock markets crash violently in sync?
This humble reader can't comprehend why anybody would buy anything.
Picking up dimes in front of bulldozers. I just took a nice profit on some GE calls. I bought them with full knowledge that GE's common equity is most likely worthless if their financial assets were subject to GAAP. I merely thought it very possible that at 15.50 it could rise to 17.50 by option ex. I'd wager a guess that 90% of market participants (even ardent bulls) are operating with such a mentality.
The thought that "government is in control of everything and can get whatever they want" is deeply entrenched in most of the masses. Never underestimate this!
I like Mish's saying that "belief in wizards runs deep." This is my biggest contention with the Austrian School, where most adherents steadfastly believe the Fed can control the economy even while admitting that the Fed's attempts are grounded in fallacious theory.
Could the bond & stock markets crash violently in sync?
This happened last year. It will likely happen again - but in a more bifurcated fashion. The Citi bonds you talked about aren't really corporate bonds. They are more like GSE bonds. It is implicit that they are backed by the federales.
However, it is the implicit guarantees that are under attack politically. With HR1207 for the Fed and outright populist anger toward the Treasury, those guarantees might have to be reneged. This goes back to the "belief in wizards."
Best,
"I like Mish's saying that "belief in wizards runs deep." This is my biggest contention with the Austrian School, where most adherents steadfastly believe the Fed can control the economy even while admitting that the Fed's attempts are grounded in fallacious theory."
Excellent point, Matt. If you look at his most recent article:
http://globaleconomicanalysis.blogspot.com/2009/09/rally-in-6th-inning-or-top-of-12th.html
it seems Mish himself is falling to the same belief. Well, only a little bit... there's something contradictory going in his mind, I think.
Here's the quote:
"The rally is based on the fumes of massive money printing, not just in the US, but China, the UK, and practically everywhere else as well."
This implies if the central banks keep pumping money, stock markets will sustain its rally to new highs.
But here's his statement that's a bit contradictory to that:
"Please note the thought 'It is unclear why the US Federal Reserve has allowed this to occur.'
The answer is easy. The Fed is NOT in control, it never was, and it never will be. The Fed can print money but it cannot force banks to lend."
Well, the Fed started stimulating & doing crazy stuff in 2008 before and during the huge crash. It continued to this year. Yet the market managed to plunge some 40%+ during those huge 2008 & early 2009 crashes. So, it has more to do with social mood -- implying the Fed is not in control.
I don't mean to discredit Mish. He's one of the best & most honest economic bloggers around. I'm just emphasizing on the topic of the belief -- how amazingly deep it runs in the masses.
I owe a lot to Mish. His was the first blog I became acquainted with back in 2005 (making me one of his first readers). He has pointed me in the direction of many other fantastic sources of information. And I rarely disagree with much of what he writes.
But I would also disagree with the "rally is from money printing" comment. The rally is, as you mentioned, due to optimism about future rising prices. As prices rise, people become more comfortable and even more optimistic - until there are none left to convert to optimism, and the rally runs out of steam.
In fact, there hasn't been much money printed at all. There were temporary guarantees, asset swaps and takeovers, etc. They all count as part of the 23.7 Trillion figure given by Barofsky. But the bad assets are still there. And those guarantees are starting to be wound down (the money market guarantee ends Friday). Money spent by the government doesn't count as 'printing.' Every dollar spent implies a dollar needs to be saved elsewhere to pay the inevitable future taxes.
So the total amount of actual new money created that have been made available for asset speculation is likely quite minimal. In isolated cases I'm sure it has made an impact, but in the grand scheme of things, it is not the 'cause' of anything - rather a catchphrase for the confused to cling to as explanation for something that was already happening.
Same here, Matt. Only unfortunately I only get acquainted to Mish in mid 2008. I think my acquaintance with your blog somehow indirectly was through Mish's comments. "Hyperinflation is impossible" or something like that.
Mish kind of provided me the basics for market understanding -- and correctly as well. Same as you, if there's a guy who I owe big thanks for teaching correct economic concepts, it's Mish. He also agrees with the idea that social mood is the primary force that moves markets. He rightfully pointed out that in the comment "the Fed is not in control."
But somehow, he managed to make that comment we disagree with. Looking back his articles from the early years, arguably his recent articles has become more and more political. It shows his disgust at the US govt & first and foremost: the FED. I guess it's this strong emotional attitude (hatred, disgust) is what led him to make such comment.
Recently, I tend to think that his blog quality has declined somewhat compared to the past. In the past, there used to be abundant excellent economic concepts I could learn from his blog. I kept many of his articles in my archives. Nowadays, those are becoming rare. Existent, but rare. An example of that rarity in recent days is "how China will handle the Yuan".
Looks like it is just you and Roger Matt, but I will chime in. Roger posted the reasons for the bull and I thought for a minute he as serious. I think Goldman Sachs manipulation is the reason for the bull, but then again this is really only a technical bounce. In Elliott terms, we have just recently reached what should have been the minimal retrace of such a huge decline. Looking at the form of the 1930 rebound, this one is taking shape to at least resemble it. It also appears to have another leg to go.
I hope Roger wasn't serious about Lehman causing this. One has to remember that it wasn't just Lehman that failed and it isn't beyond the realm that the rest of wall street also failed and LEH was sacraficed to get aid for the rest. I don't believe a company that touched less than 1% of all assets would roll over the system. I believe the half trillion potentially missing from Citi was more concern.
I don't believe anyone understands how absurdly bullish the price on the SPX is, as it represents a valuation of around 150% of the 1929 and 1966 peak values. Plus we are looking at a long deflation, which will likely take stocks down to prices that will make the Japanese proud. There isn't another prop they can use the next time.
Andy Xie says that the Chinese will roll over when the dollar rallies. I may open an account to play the rally in the dollar and nothing else. The whole world is short dollars, long carry trade and who knows what else. It could easily make 100 on the index this next time. Talk from China is nothing more than jawboning to gain a stealth devaluation for themselves, as they are irretrievably linked to the dollar.
I don't believe the market goes much farther for some of the very reasons you mentioned. I can't believe they are selling the recovery nonsense and employment used to snap back when recessions ended. I keep writing that unemployment claims are still above all of 2008 save 3 weeks in December where they were roughly equal to the last couple of weeks. Job losses above an entire recession year hardly spells recovery and the numbers indicate the government job data in general is a farce.
Lastly, I too read Mish every day. I am having trouble posting there, but Mish has been putting out some really good stuff lately. Some of it is right down my line, which may be a bad way to judge journalism. Hard to learn something if you already agree.
"The answer is easy. The Fed is NOT in control, it never was, and it never will be. The Fed can print money but it cannot force banks to lend."
This is a totally misunderstood idea. I believe the point in buying these treasuries is to put cash in banks so they can pay each other. We aren't talking about printing in this case, but asset exchanges. If I take dollars for my goods, I have given up my assets and the dollars become my assets.
The greatest misinformation they put money in the banks. Money don't exist in banks, as from the first time they make a loan, they owe out more money than they have. Credit exists between banks and banks can exchange assets for currency to pay for the conveniences of depositors, but they really don't have any spare money. What a bank does is act as surety and their capacity to act as surety is diminished. Citi totally lost its capacity to act as surety and the other banks knew it. The truth is that the only ones that can hold up a bank from the inside are other banks. Thus banks knew Citi had nothing but wooden nickels to pass around and refused to do business with them. The CNBC cry that banks were afraid to lend to each other was really, Citi is broke to the point that there isn't enough money to lend to them, even if one wanted to.
There is more to this. The only means of creating more bank capital is to sell stock to depositors. Once the depositor pays for the stock the money no longer exists. What the bank does is a swap of a deposit for a capital position. This leaves even less money to pay debts, as the money supply falls and debt remains the same. We are in a bankruptcy and those that think we have avoided a Great Depression don't understand the problem. Losses in stocks are going to be amazingly huge.
"I hope Roger wasn't serious about Lehman causing this. One has to remember that it wasn't just Lehman that failed and it isn't beyond the realm that the rest of wall street also failed and LEH was sacraficed to get aid for the rest."
mannfm1, I don't agree with whole the idea of LEH causing the whole crisis. I'm just outlining the logic/reasoning of the bulls, which I think is non-sense. If you look at my other points for bullishness, I think you should see that those points are non-sense and I completely reject them.
IMO, the problem is basic & simple, yet very hard to grasp for almost everyone because of faulty economic theories. The problem is too much debt in the system chasing too little productivity, that's it and that's all.
In the simplest of terms, all governments trying to do are trying to roll over and add more debt into the system -- kicking the can further down the road. Social mood is a crucial factor to the success of this.
As long as social mood is positive, the market will allow for more & more debt. But as it turns negative, this simply cannot be done. The can can't be kicked further... the end of the road is met. At this point, the huge intellectual failure in our generation will show.
Extreme positive social mood allows people to put faith & trust to the least worthy of borrowers. As mood turns negative, they increasingly distrust the borrowers from the lower layer to the upper layer, with governments being the top layer. As the governments lose faith, the ultimate bubble bursts ... along with it come severe economic consequences. Maybe the ultimate central bank (the Fed) getting abolished -- I hope so.
The stock market rallies are violent. There's almost no breather/consolidation/correction. This will result in the lack of supports when the time comes for it to go down. If you look at the charts... there's no significant support until 950-960s and next is 870s, after that is all the way to 666 March low. It's like you're being forced to sprint long-distance with very little rest. You'll tire very quickly & might not be able to finish the race.
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