Tag Archives: Stock Market

Why Trump Claiming Ownership Of “Markets” May Not Be As Crazy At It Seems, by Mark St.Cyr

As Trump heralds each new high in the stock indices, he has predictably been warned that he’s setting himself up for a fall when the averages do. That may not be as self-evident as it seems. From Mark St. Cyr at markstcyr.com:

I want to pose something which I know currently flies in the face of what many (and of those many, many I respect immensely) are currently cautioning the President against. i.e., Claiming credit for the current rise and new lifetime highs in the “markets.”

As of this writing the Dow™ is within spitting distance of (once again) topping the previous never-before-seen-in-human-history-all-time-high, setting the new benchmark at 22,000. (By the time I publish it may be a fate accompli)

Many are calling for caution when it comes to the President taking credit implying this seemingly great “win” could end up being nothing more than a “boat anchor” around his reputation should the “markets” falter, turning a once worthy accolade into the proverbial “kiss of death” signaling the scapegoating to begin in earnest.

Not only is there a lot of merit in that argument, I would also agree with it wholeheartedly if not for just one thing. The President himself, and his long history of how he frames both arguments for accolades, as well as eschews (as in publicly lambaste) those who question his perceived accomplishments.

All one has to do is look at his past performances on both TV, and in public, and it’s there. Again, the clues are everywhere, and he’s been doing it for decades. i.e., I believe this is nothing new. It’s only new to the current political mayhem.

Why I bring this up is in respect to one of the President’s most recent tweets. To wit:

I would like to bring your attention to the one thing in which he is absolutely both defining, as well as being correct with. And it is this: “Was 18,000 only 6 months ago on Election Day. Mainstream media seldom mentions!”

At first blush this appears to be a “Well…Duh!” type statement. However, if you think about how one would use the above as to frame that “Duh” observation into a sword-and-shield for defense against the possible torch-and-pitchfork bearing hordes should the “markets” falter? Defining the message, terms, all while taking credit in a believable construct – isn’t as crazy as it first appears. Especially if you can not only evade the “horde”, but possibly redirect their anger away from you – and onto another. i.e., Welcome to Machiavelli 101.

To continue reading: Why Trump Claiming Ownership Of “Markets” May Not Be As Crazy At It Seems

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The Next Stock Market Crash Will Be Blamed On Donald Trump But It Will Be The Federal Reserve’s Fault Instead, by Michael Snyder

Actually, the Federal Reserve won’t be responsible for the next stock market crash; a dramatic change in social mood will. However, Michael Snyder makes the important point that President Trump will not be responsible. From Snyder at theeconomiccollapseblog.com:

A stock market crash is coming, and the Democrats and the mainstream media are going to blame Donald Trump for it even though it won’t be his fault.  The truth is that we were headed for a major financial crisis no matter who won the election.  The Dow Jones Industrial Average is up a staggering 230 percent since the lows of 2009, and no stock market rally in our history has ever reached the 10 year mark without at least a 20 percent downturn.  At this point stocks are about as overvalued as they have ever been, and every other time we have seen a bubble of this magnitude a historic stock market crash has always followed.  Those that are hoping that this time will somehow be different are simply being delusional.

Since November 7th, the Dow is up by about 3,000 points.  That is an extremely impressive rally, and President Trump has been taking a great deal of credit for it.

But perhaps he should not have been so eager to take credit, because what goes up must come down.  The following is an excerpt from a recent Vanity Fair article

According to Douglas Ramsay, chief investment officer of the Leuthold Group, Trump administration officials will come to regret gloating about the market’s performance. That’s because Trump enters the White House during one of the most richly valued stock markets in U.S. history. The last president to come in at such valuations was George W. Bush, and the dot-com bubble burst soon afterward. Bill Clinton began his second term in a more overvalued stock market in 1997, and exited unscathed. But if his timing were different by just a year, he would have been blamed for the early-aughts market crash.

This stock market bubble was not primarily created by Barack Obama, Donald Trump or any other politician.  Rather, the Federal Reserve was primarily responsible for creating it by pushing interest rates all the way to the floor during the Obama era and by flooding the financial system with hot money during several stages of quantitative easing.

To continue reading: The Next Stock Market Crash Will Be Blamed On Donald Trump But It Will Be The Federal Reserve’s Fault Instead

 

Is It March of 2000? by Karl Denninger

Financial markets are never rational, but sometimes they are especially irrational. From Karl Denninger at theburningplatform.com:

There was a little company called “Micro Strategy” (by the way they still exist.)

In the first week of March the stock had skyrocketed by over 50%.  The next week it “checked back” most of those gains.

The following week the stock collapsed.

A couple of weeks later, the Nazdaq cracked big.  I was house-shopping, in a hotel, woke up to CNBC full of crying babies and chuckled.

I will note that MicroStrategy was a little dogsqueeze company.  In terms of market cap it was a nothing – literally.  Even today, 17 years later, it’s a little $2 billion firm — granted, much smaller today in market cap than it was then.

In the run-up of the previous weeks and months there had been plenty of indications of trouble.  Many companies had reported slashing prices, increasingly-saturated markets were well-understood and of course there was the “burn rate” nonsense of the period.

It’s arguable that it was that MSTR collapse that upset the apple cart.  You see, when people are buying stocks of companies that have nothing but negative free cash flow as far as the eye can see or sky-high P/Es of 60, 80, 100 or more they’re betting with their eyes taped over on exactly one thing: Indefinite exponential growth of the business and, of course down the line, profits.

The problem is that this is an impossible premise.  There is no way for that to ever happen because it is mathematically impossible.

Today we have Amazon, Facebook and Apple all priced in this way.  Of the three only Apple has some argument for its valuation, but even there given the recent run of almost 50% it’s priced for indefinite exponential growth of a saturated product — iPhones.

To continue reading: Is It March of 2000?

Stock Markets Sit Blithely on a Powerful Time Bomb, by Wolf Richter

Speculators on margin add to stock market volatility, because their creditors can force them to either cut their positions or cough up more money when prices go against them. From Wolf Richter at wolfstreet.com:

No one knows the full magnitude, but it’s huge.

How big is margin debt really, and how much of a threat is it to the stock market and to “financial stability,” as central banks like to call their concerns about crashes? Turns out, no one really knows.

What we do know: Margin debt, as reported monthly by the New York Stock Exchange, spiked to another record high of $528 billion. But it’s only part of the total outstanding margin debt – which is when investors borrow money from their broker, pledging their portfolio as collateral.

An example of unreported margin debt: Robo-advisory Wealthfront, a so-called fintech startup overseeing nearly $6 billion, announced that it would offer its clients loans against their portfolios.

“The dream house. The dream wedding. The dream kitchen. The dream vacation.” That’s how it introduced it in a blog post this week. “We want you to have your cake and eat it too,” it said.

Instant debt “without the hassle of paperwork,” it said. “We want our clients to be able to borrow what they need, when they need it, directly from their smartphones.” Secured by “your own investments.”

It’s a great deal as long as stocks are soaring. Clients with at least $100,000 in their account can borrow up to 30% of the account value. It’s seductive: No required monthly payments and no payoff date, though interest accrues and is added to the monthly balance. The rate is as low as 3.25%. “How’s that for flexibility?” it says.

That’s how margin debt is being pushed at the end of the cycle.

This borrowed money can be drawn out of the account to fund vacations or a down-payment of a house. But when stocks spiral down, as they’re known to do in highly leveraged markets, and fall below the margin requirement, clients get a margin call. They either have to put cash into the account to make up for the losses or they have to start liquidating their portfolio at the worst possible time.

To continue reading: Stock Markets Sit Blithely on a Powerful Time Bomb

 

The Biggest Stock Bubble In U.S. History, by Investment Research Dynamics

If you make an apples to apples comparison of earnings now to those in 1999, the stock market is now in its biggest bubble ever. From investmentresearchdynamics.com:

Please note, many will argue that the p/e ratio on the S&P 500 was higher in 1999 than it is now. However, there’s two problems with the comparison. First, when there is no “e,” price does not matter. Many of the tech stocks in the SPX in 1999 did not have any earnings and never had a chance to produce earnings because many of them went out of business. However – and I’ve been saying this for quite some time and I’m finally seeing a few others make the same assertion – if you adjust the current earnings of the companies in SPX using the GAAP accounting standards in force in 1999, the current earnings in aggregate would likely be cut at least in half. And thus, the current p/e ratio expressed in 1999 earnings terms likely would be at least as high as the p/e ratio in 1999, if not higher. (Changes to GAAP have made it easier for companies to create non-cash earnings, reclassify and capitalize expenses, stretch out depreciation and pension funding costs, etc).

We talk about the tech bubble that fomented in the late 1990’s that resulted in an 85% (roughly) decline on the NASDAQ. Currently the five highest valued stocks by market cap are tech stocks: AAPL, GOOG, MSFT, AMZN and FB. Combined, these five stocks make-up nearly 10% of the total value of the entire stock market.

Money from the public poured into ETFs at record pace in February. The majority of it into S&P 500 ETFs which then have to put that money proportionately by market value into each of the S&P 500 stocks. Thus when cash pours into SPX funds like this, a large rise in the the top five stocks by market cap listed above becomes a self-fulfilling prophecy. The price rise in these stocks has nothing remotely to do with fundamentals. Take Microsoft, for example (MSFT). Last Friday the pom-poms were waving on Fox Business because MSFT hit an all-time high. This is in spite of the fact that MSFT’s revenues dropped 8.8% from 2015 to 2016 and its gross margin plunged 13.2%. So much for fundamentals.

To continue reading: The Biggest Stock Bubble In U.S. History

This is Worse than Before the Last Three Crashes, by Wolf Richter

Investors are paying historically high prices for corporate profits. From Wolf Richter at wolfstreet.com:

This chart shows “multiple compression” is coming.

How long can this surge in stocks go on? That’s what everyone wants to know. Projections range from “forever” – these projections have become increasingly common – to “it’s already finished.” That’s a fairly wide range.

Everyone has their own reasons for their boundless optimism or their doom-and-gloom outlooks. But there are some factors – boundless optimists should push them aside assiduously – that, from a historical point of view, would trigger tsunami sirens. Because in the end, it’s not different this time. And the cycle of “multiple expansion” and “multiple compression” is one of those factors.

For example, a stock trades at a price that gives it a P/E ratio of 20 (stock price is 20 times earnings per share). When earnings per share remain flat over time, but the stock price rises, then the P/E ratio (the multiple) expands. When this spreads across the market, even when aggregate earnings remain flat, it means “rally.”

And earnings have been flat since 2011! The other day, I posted a chart that showed that earnings of the S&P 500 companies in Q4 2016 were back where they’d been in Q4 2011. So five years of earnings stagnation. Yet, during those five years, the S&P 500 index soared 87% [read… S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since].

The thing that changed during those five years was the P/E ratio. This combination of flat earnings and soaring stock prices, and thus soaring P/E ratios, is, historically speaking, not a good thing when it drags on for too long. This chart shows the S&P 500 P/E ratios on every January 1 of the year. This aggregate P/E ratio has nearly doubled from 14.9 on January 1, 2012, to 26.7 on March 3, 2017:

To continue reading: This is Worse than Before the Last Three Crashes

Paul Brodsky’s Advice To Investors: “Get Angry”

Paul Brodsky is mainly angry at fiduciaries who are climbing on the stock market bandwagon although stocks cannot realistically be said to offer good or even fair value right now. From Brodsky, of Macro Allocation Inc., via zerohedge.com:

Get Angry

Wall Street looks a lot like Lake Wobegone, where the women are strong, the men good looking, and all children are above average. We have always been happy warriors, but it is difficult not to resent the passive nature of investing foisted upon the markets by economic policies that backstop and boost asset prices beyond reason, which in turn diminishes the value of investment intelligence and experience. Passivity implies the markets will always produce positive real returns and real economic growth over all time horizons. It is an illogical and preposterous notion, and yet it is the zeitgeist – all above average.

Fertility rates among wealthy and educated cohorts in advanced economies – from which the investor class is comprised – have already begun to decline, as has the demand for manufacturing output among the working class in most advanced economies. Not a good situation. This reality begs fundamental questions: “are increasingly digital, indebted societies being served well by analog economies” (no) and “why is growth the unquestioned objective of policy makers and political economists” (because growth is necessary to sustain nominal asset and liability prices, which in turn is necessary to avoid credit deflation, goods and service price deflation, and bank and portfolio insolvency)?

The counterfactual to this practical yet insidious economic framework would be an economy that actually economizes, that works naturally to drive prices lower and the purchasing power value of savings higher. Since savings are ostensibly obtained through production, the incentive of workers would be to produce at a competitive global wage scale. Economic right sizing would not be feared and economies would shrink to profitability. Deflation would not be feared either; in fact it would be welcomed. Workers would actually benefit from increasing productivity, innovation and automation. They would be more productive, have more stable income and more leisure time, and be able to save for the future at a positive risk-free real rate of return. Alternatively, rentiers would not be able to reduce the value of production and increase the value of assets by issuing unreserved credit. Alas, such an economy no longer exists.

To continue reading: Paul Brodsky’s Advice To Investors: “Get Angry”