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.
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.
And 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.
Disclosure: Anthony has recommended ING short to his clients.
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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?"
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.
"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.
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?
If anything short sellers are very optimistic. I'm going out to buy a megabucks ticket.
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....
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.
Hasn`t Tony been bearist since Dow 6500 in 2009?Where did he get his financial advice:
Mike Tyson or Lenny Dykstra?
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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John Stumpf acknowledges that growth has been slow, but he says he's still optimistic.
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