Tag Archives: stocks

The Problem With Phony Prosperity Is That It’s Phony, by Peter Schiff

Debt-funded prosperity isn’t prosperity. From Peter Schiff at schiffgold.com:

A lot of seemingly positive economic data came out last week, but in his most recent podcast, Peter Schiff said it is just feeding into a delusional economic narrative that ignores the most fundamental storyline – debt. Everybody is talking about a new era of prosperity, but Peter said it’s a phony prosperity and it isn’t going to last.

The May jobs report came out Friday, sending another ripple of optimism through the investment world. According to the Department of Labor, the US economy added 223,000 jobs in May. The unemployment number fell to an 18-year low of just 3.8%. Average hourly earnings rose by 8 cents. Average wage growth came in at 2.7% over the past year. Pundits and prognosticators on the major financial networks were giddy at the news.

But the good economic news wasn’t limited to jobs. Analysts were also excited about the personal income and spending data – particularly spending, which rose 0.6% in April. Meanwhile, income was up 0.3%. Peter put this into some perspective.

Consumers are spending money twice as fast as they’re earning it for the month of April — six-tenths up on spending, three-tenths up on earnings. So, what does this tell you? People are tapping into already a pretty shallow savings pool, or they are running up more credit card debt to buy stuff.”

Of course, everybody likes this. In the short-run, this is great because spending feeds into GDP. It can make everybody feel good about this false narrative about the US economy. Despite all of the fundamental issues facing the economy – namely the massive levels of debt – most of the mainstream is exuberant.

America is a sea of prosperity. Our economy is immune. We’re just going to keep on growing, even though we’ve got a rising cost of living, even though we’ve got increasing interest rates, massive debt on all levels, all these big-picture problems that we’ve got, but everybody assumes there’s nothing to worry about. In fact, you look at CNBC, I was watching them, today after the jobs numbers … and they are so excited – to a man. I mean, they’re just giddy, like little schoolgirls, about the stock market. Everything is perfect. Nothing can go wrong. Keep on buying.”

To continue reading: The Problem With Phony Prosperity Is That It’s Phony

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FANGMAN Stocks Are Not a Bubble, Pleads Goldman Sachs, by Wolf Richter

Conventional valuation don’t seem to matter much…when markets are on the way up. From Wolf Richter at wolfstreet.com:

This time, it’s different, say the strategists. So we’ll take a look.

In the bewildering wilderness of the most hyped Wall Street acronyms, we’re going to stick to FANGMAN – Facebook, Amazon, Netflix, Google’s parent Alphabet, Microsoft, Apple, and Nvidia – for the special moment. And the special moment is that the Nasdaq, or more loosely “tech stocks,” closed today at a new high.

But don’t worry. With regards to tech stocks, no matter how high they’ve soared, there is no bubble, based, believe it or not, on fundamentals, Goldman Sachs strategist Peter Oppenheimer and Guillaume Jaisson pleaded in a note, cited by Bloomberg. And the fun is going to continue, the said. And it’s different this time:

“Unlike the technology mania of the 1990s, most of this success can be explained by strong fundamentals, revenues and earnings rather than speculation about the future.”

“Given that valuations in aggregate are not very stretched, we do not expect the dominant size and contribution of returns in stock markets to end any time soon.”

“Leading tech companies today have become very large in terms of market value, but that reflects the significant growth of technology spending and its ability to displace other more traditional capex spending.”

So tech will continue to dominate, they argue, as everyone will have to buy it, including retailers as they try to escape the brick-and-mortar meltdown by shifting to e-commerce. And then there’s the whole huge promise of AI. They add:

“This ‘snow balling’ effect is similar to what was experienced during the industrial revolution where one technology led to another and caused traditional industries to spend more on technology to survive.”

Yes, Y2K comes to mind.

So let’s take a look at the non-bubble in the FANGMAN stocks. Here are their basic data as of Monday evening: Market capitalization, price-earnings ratio (P/E Ratio), annual revenue growth, annual revenues for the last full year reported, and price-to-sales ratio.

Market Cap,
billions
P/E
ratio
Annual revenue growth 2017 Revenue,
billions
Price-to-Sales Ratio
FB $562 32 47.1% $41 13.8
AMZN $797 210 30.8% $178 4.5
NFLX $156 243 32.8% $12 13.3
GOOG $783 48 23.7% $111 7.1
MSFT $774 56 5.5% $90 8.6
AAPL $935 19 6.7% $229 4.1
NVDA $156 44 40.6% $10 16.1
Combined: $4,163 $669.0

To continue reading: FANGMAN Stocks Are Not a Bubble, Pleads Goldman Sachs

Powell ain’t Yellen, by the Northman Trader

The timing of the recent stock sell off was propitious from one point. It came as Yellen exited, so she won’t be blamed, and as Jerome Powell became the Chairperson of the Federal Reserve. You can’t blame it on him, he probably hadn’t found the coffee machine when the plunge began. So nobody at the Fed can be blamed! From the Northman Trader at northermantrader.com:

When police try to solve a crime one of the key tasks is to determine who benefits from the crime. The beneficiary of a crime is not necessarily the perpetrator, but motive goes a long way to narrow the circle of potential suspects.

Who benefitted from this sudden aggressive sell-off aside from anyone who was positioned short?

Certainly not hedge funds that capitulated long in January with their highest long exposure in 3 years literally right before the sell-off.

And certainly not retail that went full balls long on the aura of optimism:

This trend continued right into February 1 following the FOMO train. Remember Ray Dalio?

Now this:

Panic selling with record outflows. In record time no less:

From greed to panic in less than 2 weeks.

People got hammered big time as price gave back months of gains in a matter of days:

That’s a lot of trapped supply and will present a challenge for future rallies.

So benefits from all this? One man. One man in particular:

Jerome Powell.

From his vantage point the timing of all this has to be perfect. Absolutely perfect. And from Yellen’s position it’s perfect too actually. But it is Powell I want to hone in on in particular.

To continue reading: Powell ain’t Yellen

So What Do I Think about the “Crash” in Stocks? by Wolf Richter

So far, despite the pyrotechnics, markets have not crashed. From Wolf Richter at wolfstreet.com:

A lot more will have to happen before this turns into a crash; and markets are not there yet.

With all this wailing in the media about stocks, you’d think there’s at least some blood in the streets. But no. Not a drop.

The Dow fell 4.6% today to 24,345. This 1,175-point drop, as it was endlessly repeated, was the biggest point-drop in history – but irrelevant given how relentlessly inflated the industrial average had become. The percentage drop today, combined with the drops of last week, took the Dow down just 8.5% from its all-time high on January 26.

For the year, the Dow is down merely 1.5%. I mean, what horror. The last time this sort of debacle happened was way back in ancient history of January and early February 2016.

The Dow is not even in a correction (defined as -10% from its recent high). But that messy Friday and Monday, following a record 410-day streak without a 5% decline, did break the recently pandemic illusion that you cannot lose money in stocks.

When the Dow gained 1,000 points in the shortest time ever, after having already booked the fastest-ever 1,000-point gains in prior months and years, no one was complaining about it. These rapid-fire 1,000-point-gains had become the new normal. So today, one of those 1,000-point gains has been unwound.

The S&P 500 dropped 113 points, or 4.1%, to 2,648. This took the index back to December 8, 2017. The past six trading days were the worst decline since … well, since the weeks leading up to February 7, 2016, at which point the S&P 500 was off 19%, not quite enough for a dip into an official bear market.

The Nasdaq fell 272 points today, or 3.8%, to 6,967, below 7,000 for the first time since the end of December, but remains, if barely, in positive territory for the year.

What’ll happen next? Dip buyers will come in, maybe at this very moment, or maybe later, and some of them will likely get plowed under, but there is way too much cash lined up in hedge funds specifically set up to profit from sell-offs. And dip-buyers have been rewarded relentlessly over the past eight years, and it’s not until the dip buyers get massively destroyed and stop dip-buying that the market is in real trouble.

Because nothing goes to heck in a straight line.

To continue reading; So What Do I Think about the “Crash” in Stocks?

“It’s The Turning Point” – Bond, Stock Slump Sparks Worst Week For ‘Risk-Parity’ Since 2013 Tantrum, by Tyler Durden

Sometimes a few graphs are worth thousands of words. From Tyler Durden at zerohedge.com:

Yesterday’s US equity market collapse and simultaneous bond market bloodbath was the biggest combined loss since December 2015, but perhaps more ominously, the week’s combined loss in bonds and stocks was the worst since Feb 2009.

Many suggested that Friday’s slump was GOP-memo-related, and it may well have removed some froth, but judging by the major correlation regime shift between stocks and bonds that started on Monday, we suspect this is something considerably more worrisome for investors.

Even JPMorgan admits that the bond market sell-off gathered pace over the past week raising concerns about its impact on equity markets. This is especially because the bond-equity correlation, which has been predominantly negative since theLehman crisis, has started creeping up towards positive territory.

The 90-day correlation between stock (SPY) and bond (TLT) markets has surged ominously in the last few weeks…

In turn this raises concerns about de-risking by multi-asset investors who depend on this correlation staying in negative territory such as risk parity funds and balanced mutual funds? How worried should we be about de-risking by these two types of investors?

Very.

Judging by the impact on Risk-Parity funds yesterday (worst single-day performance since August 2015’s flash-crash)…

And this week (worst weekly drop in Risk-Parity funds since June 2013’s Bernanke Taper Tantrum)

As mentioned above, these types of investors benefit from the structurally negative correlation between bonds and equities as this negative correlation suppresses the volatility of bond/equity portfolios allowing these investors to apply higher leverage and thus boost their returns. But, as JPMorgan points out, the opposite takes place when this correlation turns positive: the volatility of bond/equity portfolios increases, inducing these investors to de-lever.

In the past, just as we have seen this year, these risk-parity-correlation tantrums have been cushioned by equity market inflows, and we note that, in particular, YTD equity ETF flows have surpassed the $100bn mark, a record high pace.

If these equity ETF flows, which JPMorgan believes are largely driven by retail investors, start reversing, not only would the equity market retrench, but the resultant rise in bond-equity correlation would likely induce de-risking by risk parity funds and balanced mutual funds, magnifying the eventual equity market sell-off.

To continue reading: “It’s The Turning Point” – Bond, Stock Slump Sparks Worst Week For ‘Risk-Parity’ Since 2013 Tantrum

Punch-Drunk Investors & Extinct Bears, Part 1: by Pater Tenebrarum

The age old question: if everybody’s bullish (or bearish) who’s left to buy (or sell)? From Pater Tenebrarum at acting-man.com:

The Mother of All Blow-Offs

We didn’t really plan on writing about investor sentiment again so soon, but last week a few articles in the financial press caught our eye and after reviewing the data, we thought it would be a good idea to post a brief update. When positioning and sentiment reach levels that were never seen before after the market has gone through a blow-off move for more than a year, it may well be that it means something for once.

Sloshed as we are…   a group of professional investors prepares for a day of hard work on Wall Street. The tedium of a market that goes up a little bit every day, day in day out, is taking its toll.

Interestingly, the DJIA has fully participated in the blow-off this time, contrary to what happened at the end of the 1990s bull market and the first echo boom that ended in 2007. On the monthly chart the venerable Dow Industrials Average now sports on RSI of roughly 90, which is really quite rare.

 

The “slightly overbought” DJIA sports an RSI of 89.59 on its monthly chart in the wake of the blow-off move over the past year.

If you think this looks like the exact opposite of what we have seen at the lows in 2009, you are entirely correct – it is indeed the opposite in every conceivable respect. In 2009 the news were uniformly bad; nowadays, we are flooded with good news on the economy and corporate earnings. In 2009 stocks were cheap  – if not really historically cheap – now they are in many ways at their most expensive in history, particularly if one considers the median stock rather than  just the capitalization-weighted indexes.

Singing From the Same Hymn Sheet

We recall that the reading of the Daily Sentiment Index of S&P futures traders stood at just 3% bulls on the day of the March 2009 low. Looking at sentiment data today, there are probably 3% bears left. What prompted us to take a closer look at the data was an article at Marketwatch about the positioning of Ameritrade customers – in other words, self-directed retail investors. The article is ominously entitled “Retail investor exposure to stock market is at an all-time high”. An all time high? Isn’t this supposed to be the “most hated” bull market ever? That hasn’t been true for quite a while actually. Ameritrade helpfully provided a chart of its “Investor Movement Index” (IM Index), which measures the aggregate stock market exposure of its clients.

At the height of the Fed’s QE3 operation in 2014, retail investors were almost “pessimistic” compared to today. The Ameritrade IM Index is currently above 8, but it already established a new record high when it crossed 7.0 for the first time last summer.

To continue reading: Punch-Drunk Investors & Extinct Bears, Part 1:

How the Asset Bubble Could End – Part 1, by Pater Tenebrarum

Bullishness about financial asset prices, especially cryptocurrency prices, has reached that a peak of insanity that always gives way to market busts. From Pater Tenebrarum at acting-man.com:

Another Shoeshine Boy Moment

We recently pondered the markets while trying out our brand-new electric soup-cooling spoon (see below). We are pondering the markets quite often lately, because we believe tail risk has grown by leaps and bounds and we may be quite close to an important juncture, i.e.,  the kind of pivot that can generate both a lot of excitement and a lot of regret all around. Provided one manages to grasp the nettle with the proper combination of preparation and luck, the emphasis may be on excitement rather than regret.

Modern soup-cooling spoon for the sophisticated gourmet. We are not the gentleman in the picture, we don’t even know him, we just wanted to show this nifty spoon in operation. Once you have one, you will wonder how civilized life was even possible before it.

Photo credit: Hans Reinhart / Getty Images

We let all the bits and pieces of data and information at our disposal parade before our mind’s eye, hoping they would confess under its stern gaze. Of course no such confession could be obtained, but eventually, a thought occurred to us. This is known to happen from time to time.

Before we get to that, we wanted to report on another “shoeshine boy” moment a good friend related to us a few days ago via e-mail:

“Saturday I was waiting in the line at a battery store… a kid behind me asked me if I was in Bitcoin and Google and a few other of the hot ones…”

“I’m not kidding. Then later after he left, another guy asked me what stock he was talking about…”

 Complete strangers standing in a line at a battery store striking up conversations about bitcoin and FANG stocks out of the blue? That is definitely a signal of sorts. It is of course a good bet that whatever speculation caught their fancy, has probably already made them more money within just the past few days than the yields investors in government bonds can hope to earn over the the entire next century (+/-).

To continue reading: How the Asset Bubble Could End – Part 1