Market optimism unravels

The bulls are reeling as everything that could go wrong did go wrong this week. And it's not just about the Fed.

By Anthony Mirhaydari Jun 21, 2013 2:57PM

A month ago, you could cut the optimism in the air with a knife. Any concern -- over slowing manufacturing activity, disappointing Q2 earnings guidance or low-quality job creation -- could be riposted quite simply: The Federal Reserve (and the Bank of Japan) is pumping billions of dollars a month into the bond market. That's forcing cheap cash into every nook and cranny, boosting prices.

 

How quickly it's all changed over the past week. The Fed, despite deteriorating economic fundamentals, is so confident about the outlook that it's increased its unemployment rate threshold to 7% from 6.5% and looks ready to start pulling back its $85 billion-a-month bond-purchase stimulus. That's roiling the bond market, pushing interest rates back up to mid-2011 levels.

 

But that's not all.

 

Millions of people are protesting high inflation in Brazil. India is suffering from a speculative currency attack. China's interbank lending market is seizing as officials belatedly clamp down on a runaway credit bubble. Europe is unfixed again as the International Monetary Fund reportedly threatens to pull the plug on Greece unless it fixes its budget just as the ruling coalition in Athens fractures under the stresses of austerity. Emerging-market countries are suffering from rapid capital outflows as the U.S. dollar strengthens, disrupting their fragile economies.

 

Stock market crash copyright Kyu Oh, Photodisc, Getty ImagesAnd in Japan, policymakers are struggling to figure out what to do next after their attempt to boost the economy by inflating stock prices (and destroying the yen's value) failed miserably.

 

All the while, we are marching toward a Q2 earnings season that should remind investors that the corporate profit picture is darkening because of weak global growth, higher labor costs and less ability to use ultra-low corporate bond yields to leverage up balance sheets and boost earnings via share buybacks.

 

 

Just look at the catastrophic decline in the iShares Investment Grade Corporate Bond Fund (LQD).

 

None of these issues are quick, easy fixes. They represent structural problems. The high from the cheap-money morphine was fun while it lasted. Now reality is biting.

 

 

After such a long run of complacency, investors have yet to suffer a dose of panic yet. I'm looking for the S&P 500 to test, at the very least, its 200-day moving average down near 1,500 -- which would be a drop of about 6% from current levels. The lower envelope, shown in the chart above, hasn't been tested since 2011. That would be worth a 10% drop from here.

 

 

I'm recommending short positions against European financials like ING Group (ING) and homebuilders like DR Horton (DHI) in my Edge Letter Sample Portfolio.

 

 

 

 

Disclosure: Anthony has recommended ING short to his clients.


Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​​​om​​​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


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41Comments
Jun 21, 2013 4:40PM
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No house ever stood for long built on a weak foundation. wood rots, nails rust, cement cracks; usually this happens over time.  we have been running around here with a bag of termites, pulling the nails with a crow bar and smashing the cement with a sledge hammer, how long you think the house is going to stand up? blame the democrats, blame the republicans, does it really matter anymore. at this point I don't care who F***** it up id like to know who's going to fix it. do we the people need to start firing idiots? because you know we can, I just don't think they know we can......
Jun 21, 2013 3:38PM
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Please, forgive my ignorance but "What the Feds are going to do with 4 trillions of dollars on bonds in their balance sheets?"

Jun 21, 2013 5:32PM
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All of these countries suffer from the "Big Government Blues."  When salaries and pensions and the number of employees and entitlements go this far out of control money runs out and the borrowing against the future starts.  Well the future is now and it is time to pay and pay we will.  Governments and other institutions are so bloated that they have to burst.  Yet the US president is going on a $60 million dollar vacation while furloughing people in government agencies like the Veteran's Administration nurses and doctors.  This is the arrogance of a ruling class that thinks everything belongs to them.  Working people seem to no longer have the right to keep any part of their money.  It all belongs to the ruling class to do with it what ever they like. 
Jun 21, 2013 5:29PM
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Let's see, we have google keeping tabs for the NSA. The FBI watching "over" us. Helicopter Ben on the financial desk. Nothing to worry about. I mean, look they foiled 50 count em' 50 terrorist attacks. And this all from the people who got Saddams WMD's.Nothing to worry about if your a banker, broker, or senator, but if your a regular working stiff you better get used to Alpo for your retirement dinner. Gentlemen, we have a broken system here, with Career Politicians and economists educated beyond their own intelligence and until we get rid of the lot of them running the country we are doomed. You can't make chicken salad outta chicken s..t.
Jun 21, 2013 4:07PM
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It's all about yields on the 10 year bond. Anything above 2.11 will cause rates to increase. Unless Ben comes out Monday and announces a more aggressive bond buying program, we will be down 10% or more by the 4th of July. Rising interest rates are the needle to this bubble the Fed. bubble factory created.

 

Jun 21, 2013 5:53PM
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I just knew Anthony would take this opportunity to jump in with another article. You don't hear from him when the DOW is up for the day.
Jun 21, 2013 6:16PM
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Its Friday, crack a freaking beer and relax.  Jeeez!
Jun 21, 2013 4:11PM
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"What the Feds are going to do with 4 trillions of dollars on bonds in their balance sheets?"

 

THREE currencies abound globe-wide right now... cash (paper and electronic), derivatives and debt instruments. Fifteen years ago there was $50 to 60 Trillion all told. Today it exceeds $1 Quadrillion and counting. Based on the rate of printing, electronic now exceeds paper. Derivatives prioritize ahead of any shareholder rights. Debt instruments are the broad vague leaky radioactive barrel in the room. The likelihood that ANY debt instrument is honorable is-- ZERO. There is no win potential here for Central Banks and Market Exchanges. Consider further that a "business platform" consists of administrators... not people with skill sets, craft precision, operations expertise or a labor discipline. They are paper and button pushers... the lowest forms of life who count and delegate, not DO. Say anything you want to the contrary, but this mother is a ticking time bomb and the exits are locked. DUCK.

Jun 21, 2013 4:20PM
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noberto rivera (Mr. GoChi),  
there is a very simple answer to your question of "What the Feds are going to do with 4 trillions of dollars of (US Gov't) bonds in their balance sheets?":  NOTHING.

As a quasi-governmental organization not answerable to the Administrative, Legislative or Judicial branches of the US Government and, moreover, as the present preferred-buyer of US debt, they don't have to care if the bonds on their balance sheet are a good or bad investment.  The know that the US citizens have to bail them out if things go bad . . . they are the ultimate too-big-to-fail organization . . . of crooks, that is.
Jun 21, 2013 5:56PM
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MSN:  I knew when I read the title who wrote the article.  That should tell you something. 
Jun 21, 2013 5:30PM
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Anthony, you have stated the obvious. If stocks lost 10% I would be surprised. The next steps in our economy is up to the American people and getting the them to think in a different way is not going to be easy. Socialism destroys the mind, the free enterprise system demands that the brain works and solves problems.
Jun 21, 2013 11:30PM
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why did my bond portfolio start selling off a week before the announcement by the fed. Did somebody know something in advance? was there insider information?

 

Jun 21, 2013 3:48PM
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Anthony, following you with all the charts, etc.  The charts are as worthless as the "markets", now.  You have a job to do in "promotion" of your own enterprise...but, do you really think that anyone "buys" this, anymore.? The "markets" are an entire fiasco...manipulated and controlled and we know by whom.  Today is another day "trying" to say that all is fine.  It is senseless with this "uptick"....period.  Scandals aboound now with this administration and it will get much worse.  The absolute worst President, ever....he is that stupid and the world knows this.  We are deep dodo for the next remaining years of his administration. Have a nice weekend, all.
Jun 23, 2013 11:21PM
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Uncle Ben announced QE3 taper because he doesn't want to leave that chore to his successor. The only challenge is that they won't be able to start it in September, 2013. It will more like be early to mid 2014 and that's going to really upset the shorts party this fall. If rates start to fall because they can't start to taper and Uncle Ben says bye, bye in Jan, 2014 things are going to get much more scary then anybody can predict now.
Jun 21, 2013 6:10PM
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Lost optimism has nothing to do with skimming the buy and hold  401Ks. There is a lot of wealth built up to transfer to "deserving pockets".
If anything short sellers are very optimistic. I'm going out to buy a megabucks ticket.

Jun 21, 2013 4:14PM
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HAHA good job Odummer

 

And this can be blamed on him unlike the 2008-2009 crash you all blamed Bush but he had nothing to do with it the banks and mortgage brokers caused that crash..

 

How is Odummer work for you dem voters now LMFAO..

 

You are about to find out he was a fraud....

 

I love saying TOLD YOU SO....

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I don't believe the market is on a steady drop. The powers that be will keep it floating. IF the markets can't show optimism by the years end, and full on Obamacare takes effect as it is supposed to, watch this whole thing blow up.

Obamacare, when it's fully initited on 01-01-14, will destroy, job wise, any positive results made so far. Many Americans will be relegated to 2 20 hour /week jobs. 40 hour fulltime work will be nonexistent for most Americans. I hope none of this happens.

Jun 21, 2013 6:26PM
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Hasn`t Tony been bearist since Dow 6500 in 2009?Where did he get his financial advice:

Mike Tyson or Lenny Dykstra?

Jun 22, 2013 3:49PM
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I wish he was right because the market will do the opposite of what he says. He is forced to cover his shorts and gets killed by helicopter ben raining free money all over this great land and copied in Europe and Japan.
Jun 21, 2013 6:09PM
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The bears love to talk down the market.Most would still be bearish if the Dow went to 000.

Of course, the Repubs have been praying for a market crash to make Obama look bad.

Wouldn`t a depression make the Republicans look smart?

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