Sunday, April 13, 2014

Why The Market Stinks

A five year bull market fueled by unprecedented Federal Reserve stimulus appears to be at a major inflection point. Is this the end, a cyclical correction or just a pause? Whatever phase one thinks that this market is in, I think we can all agree that it stinks. And Friday was no different than what had preceded it for 2014 as the selling of momentum stocks continued to spread to the rest of the stock market.

So just what is going on here? In a nutshell, the markets are out of gas. The Government does not have the right stuff. And I do not think that our economy can land on it's feet like Chuck Yaeger did when he pushed things too far. In short, Bernanke's deflationary fears are resurfacing:


As the great movie clip shows, the Fed has reached the point where the jet plane stalls out:

At first the institutional community tried to prop up the market indexes by selling all the momentum leaders and buying the "safe" S&P 500 names. Now those names are starting to crack.  Consider the following:

1 - An unprecedented monetary stimulus fuels a strong stock market rally, rescues the economy, but barely gets the economy moving. Despite Paul Krugman's rants, there is and will not be any fiscal stimulus to help matters. Not in this political environment.

St Louis Fed Monetary Base Chart. This monetary growth dwarfs anything in history. The great Milton Friedman who with Anna Schwartz plotted the money supply back to the 1700s,  must be rolling over in his grave.

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Furthermore, all of the money has gone into stocks for 5 years and not into the economy. Contrast the move in the S&P 500 as represented by the SPY with the growth of the economy - below:

Strong Stocks Were The Only Place To Go:  Stocks always lead, but this is nuts. The troops are not following.

Pathetic GDP Recovery: This is all we get for the above outrageous stimulus?!


2 - Hopeful bullish "spinmeisters" believe that the economy will finally catch fire without the help of the Fed.  However, the economy is showing signs of weakening just as the FED is taking their stimulus away. Furthermore, the Fed stimulus has had dramatically diminishing returns.

Impotent QE Results

3 - The Fed has no more tools left in its tool box. It can not do anything more to stimulate the economy except to keep short term interest rates low. But to pump in more money or to borrow more via QE is irresponsible.

4 - There is very strong evidence that the economy is starting to rapidly weaken and the weather excuse is bogus:

For example, New Housing Permits Have Fallen Like A Stone Even After The Bad Weather Ended:

On top of that, the yield curve is flattening as long rates fall. The hell with our artificial short rates. The banking system is still in big trouble. Just read JPM's earning's report. I think Jamie Dimon is brilliant. If he is having trouble, we are all in trouble.

5 - The ever more interconnected world economy is rapidly weakening.  China's GDP is falling rapidly and is much worse than the "Official Statistics" As per David Ignatius of the Washington Post, the Chinese government is clamping down hard on the county's economic excesses.

China's Phony GDP Numbers - Divide by two?

As I've said before, the BRIC economies are all slowing and the world's economic fate has now just about reached the point where we are all in this together. Furthermore, China is slowly pulling back their loans to the USA and an economic energy war between the allies of Europe & USA  against Russia is not helping. 

Lastly, there are economic games being played by the powers that be. There is no real way that Belgium bought up all of the USA debt that China and Russia recently said goodbye to.  Yet that is what the statistics say. Belgium has got to be fronting for some one. Also, who in their right mind bought up all of that Greek debt last week? Could it be the fictitious firm of "LeGarde  Freres?" Christine has been making the rounds talking up a very bullish game lately. I can't blame her from trying to do all she can for Europe. But my job is to try and figure out what is behind the recent words of Super Mario Draghi and her.

6 - Global tensions are still rising. I have talked about Iran, Russia, North Korea, Syria, and China in recent posts. All potential large global risk areas.

So where do we go from here? The markets are obviously short term oversold and nearing support levels. But the market is not oversold enough and still has some room before it reaches support. Also sentiment is a bit better, but still lousy. So short term may be a bit tricky as a snap back rally could happen at any time. But this is still no time to invest. This is strictly a trader's market. Sell the rips and short the dips. If you are a fast experienced trader and see some sort of climactic selling or major gap down, maybe buy it for a trade. But you can not lose money by staying in cash. Capital preservation is the watchword.

I do not like this situation any more than the next person. But I can not refute the facts. In my opinion, patience and the strength to avoid temptation is all we have right now. Throughout history the world has gone through economic cycles. Let's hope that this is just a bump in the road. But hoping and praying never made anyone any money.

BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.
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