Is this a market bubble?

When stocks go vertical as investors ignore technical, fundamental and economic evidence trouble is brewing.

By Anthony Mirhaydari Jan 23, 2013 4:17PM
Red arrow digital Riko Pictures PhotographerThe market dislocations reached an extreme on Wednesday as mega caps IBM (IBM) and Google (GOOG) boosted a small portion of the market, while the rest melted lower. While the Dow Jones Industrial Average ($INDU) goes vertical and pushes to new highs, the NYSE actually has a few hundred net declining issues. If this isn't a blowoff top, than the market has truly broken.

The central bank-fueled market fantasy continues as stocks keep ignoring all the technical, fundamental, and economic catalysts saying caution is warranted. Even long-dated VIX contracts remain buoyant as the volatility term structure steepens -- a harbinger of downtrends. Sentiment has reached a bullish extreme, with newsletter writers recommending their largest net long positioning in the Nasdaq since July 2000.

That's right folks: We're looking at dot-com bubble levels of market idiocy.

Then, it was the belief that slapping ".com" on any mediocre business idea was a license to mint money. Now, the belief that that central bank interventions will solve all the structural ills that still plague us: Excess indebtedness, structural budget deficits, stagnant wages, dilapidated infrastructure, and an employment-to-population ratio mired at early 1980s levels.

Not just here, but around the world.

That the European Central Bank's commitment to "do whatever it takes" via unlimited bond purchases will solve the loss of competitiveness of economies like Greece, an imploding real estate market in Spain, and youth unemployment in Portugal amid signs Germany -- the center of strength in the Eurozone -- is falling into a recession.

Or that the Bank of Japan's announcement Tuesday of a 2% inflation target will end its multi-decade debt-deflation malaise caused by zombie banks, massive government indebtedness, an insular culture, and a rapidly greying workforce.

Or that yesterday's comments from the Bank of England -- that it could embark on its own competitive devaluation as it warns of a currency war -- will erase huge household debt loads and signs the country is falling, yet again, into recession.

This is fiat currency manipulation and maltreatment on a scale the world has never seen. It's a sign that global policymakers are acting in desperation.

They are scared that the normal business cycle is trying to run its course, pushing the economy down into a natural pullback after a multi-year expansion. But, since the required improvements haven't happened, the housing market hasn't fully recovered, consumer balance sheets haven't healed, government deficits haven't closed, they cannot allow it to happen.

So they are trying, as we enter the sixth year of 0% interest rates, to use more cheap money to stave of recession by juicing the stock market. Fed chairman Ben Bernanke has repeatedly pointed to the Russell 2000 small cap index as a measure of his success.

 

 

They are not succeeding in helping the real economy. Many rich-world economies are already in technical recessions. And here at home, the Citigroup Economic Surprise Index has crashed through the zero line as the economic data continues to disappoint as the stock market disconnects from reality. Such as the big miss in yesterday's Richmond Fed manufacturing report.

 

With more taxation and spending cuts coming out of Washington very soon, spiked with the drama of a possible government shutdown, a loss of consumer confidence, and the 1.5% GDP hit from the fiscal cliff deal, the United States could see an outright economic contraction this year.

 

Clearly, the stock market and bullish investors aren't considering this line of thinking at all.

 

 

They just see cheap money being pumped into a system already drowning in liquidity. And they see that as rerating equities higher despite a stalling of earnings and revenue growth; ignoring the problems this monetary stimulus is causing, from a massive accumulation of excess reserves at the Fed to a decline in net interest margins at financial institutions to signs of excessive risk taking by the likes of JPMorgan (JPM). 

 

 

Eventually, with crude oil marching towards the $100 a barrel level, inflation concerns will also enter.

 

Which is why I've moved into precious metals and the related mining stocks -- an area of the market that's been forgotten over the last few months and is poised for a turnaround.  Today, I'm adding Golden Star Resources (GSS) and Silver Wheaton (SLW) to my Edge Letter Sample Portfolio.

 


Disclosure: Anthony has recommended GSS and SLW to his clients.

 

Be sure to check out his 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.  

98Comments
Jan 23, 2013 5:55PM
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No question in my mind there is a bubble forecast. When? Who knows. The Fed has been monetizing debt with those monthly infinite treasury bond purchasing programs. These QE programs have increased the money supply 58%. We consume 75% and export just 25%. 16+ trillion in debt and rising.  You can't spend your way into prosperity. Wall Street is on economic steroids by the Fed's interactions. Sooner or later you come down from the high and go into withdrawals....the bust. The Fed has created 3 bubbles within the last 20 years, it's creating another one. What makes you think this is different. Come on people are you that naive, ignorant and gullible?
Jan 23, 2013 6:03PM
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The market will go up to compensate for the 85 billion a month the FED is propping it up with.   When the FED stops, look out below.  

Until then ride the market higher.   But when the music stops grab a chair and hunker down.   It will not be pretty....
Jan 23, 2013 6:41PM
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I usually keep my nose out of here, but I seem to remember a conversation on the Titanic.

 

Passenger, "Is it true we're sinking?"

Steward, "No Sir. This ship can't possibly sink."

Passenger, "Can you tell me what that gurgling noise is then?"

Jan 23, 2013 7:06PM
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In defense of Anthony. How many people were right about the housing bubble?  Yea, that's what I thought!  Looks like a lot of people are going to get burned again.  Can't blame Anthony on this melt down soon to happen.  Don't walk on thin ice.  That is the moral of the story.  Sooner or later you will get wet.
Jan 23, 2013 6:03PM
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10,000 Baby Boomers retiring every day........... Get the premium from your mutual funds while the banks still have enough QE money to keep it inflated....... JMHO

 

After all this is about where the market should have been if the banks and politicians where not crooks.

Jan 23, 2013 6:09PM
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I agree.  Going to add positions starting tomorrow.  The stock market has been propped up by cheap money and cheap interest rates so now I feel a correction is due.  Gold, silver, gold and silver miners all look good to me.  This is the time to do just the opposite of what everyone else is doing.
Jan 23, 2013 8:20PM
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Hi Anthony;  One thing for sure this is a party and a half.  I am still short MSFT, COST, CMCSA and have been for almost a month and they are still very close to where I shorted them then.  The consumer still hasn't scoured out the spending and lifestyle habits of the last 40 years or so.  Lifelong habits are difficult to break.  And as I was saying on Cramers blog the Arbitrage of the Asian economies are still at work lowering Americans wages and Lifestyles as we sleep.  Fake everything in America now.  From an administration denying everything about the dangers from massive money printing to the liberal medias role in acting out gun violence.  Am I old and cynical like I was warned I would be 25 years ago? I remember my boss telling me some 25 years ago.  "When you get old you have seen things so many times the truth can't help but sneak through", and that is what being cynical really means.  JMHO

Jan 23, 2013 6:59PM
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Anthony, although I haven't always agreed with your stock market predictions, financial/economic assessments, or political views, I absolutely agree with your fundamental precepts and arguments in this article!  I certainly don't understand all the technical data and/or the complex charts in your article, but I do understand the basic premise -- our country is BANKRUPT; as such, the US dollar is steadily losing value and the country is headed for hyperinflation! Unfortunately, President Obama and a majority of the Democratic Party believe that they (the federal governmnet) can spend their way out of this fiasco.
Like in Dr. Seuss' story, "How the Grinch Stole Christmas," I wouldn't touch this stock market with a 19 1/2 foot pole!

I know that I'm going to get a lot of flack from many MSN Money bloggers. But, I'm sorry folks, Anthony Mirhaydari is right on target!  I admire his courage for standing up for what he believes in. Don Moore

Jan 23, 2013 7:47PM
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Buy the fear and sell the exuberance.  The S&P 500 is up 35% over the last 3 years, while GDP has been floundering.
Jan 23, 2013 8:09PM
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Bond holders will be crushed this year.  Inflation will come, and I don't think it will be a smooth curve.  I believe it will jump quickly.  When this happens, people will get hurt, and the government will just be dealing with more bailouts.  You ain't seen nothin' yet.
Jan 23, 2013 7:23PM
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With no fundamental change over the last 2 months (e.g. the fiscal cliff hanging over our heads), Anthony has reversed fields long to short, short to long, equities to precious metals and back again) several times.

 

I think his technical analysis hasn't worked in a while.  That is why the "market is broken".

 

The idea isn't to argue with the market, it is to make recommendations that will do well in the market in the near future.  If it is irrational, then your tools better keep up with the market.

 

Of course, eventually, it will go down.  And precious metals will rise again.  But maybe not for 6 months.  In 6 months he will reverse course 6 more times...just watch

Jan 23, 2013 8:16PM
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Great article again Anthony !!! 

Don't worry about all the haters of your recent doom trend in writing. You are right.

You are in good company with Robert Shiller, Peter Schiff, etc. 

Jan 23, 2013 9:30PM
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The reality gap between Wall Street and Main Street is so wide now that when it does snap, it'll be a big one.
I've been noticing all my bills going up and listening to others complain about the same. Bills going up, income coming down.
The mucky muck window dwellers are just raising prices to cover their loss. They aren't taking a pay cut, no way. They will just lay it on the backs of the middle class so that they can continue living their same self indulging mucky muck life style while everyone else pays for it. The Wall Street Main Street reality gap will snap.....And when it does, it ain't going to be pretty.

Jan 23, 2013 6:23PM
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You´ve got it right this time. It´s musical chair all over again.
Jan 23, 2013 7:57PM
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OK guys mark your calenders and submit your predictions; 10% retraction, from these levels by June, creating one heck of a buying opportunity.
Jan 24, 2013 12:56AM
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Mirahaydari is consistently all over the board. He has called for epic an bull market and epic bear market within the last 18 months or so. If one predicts every possible scenarion, something will finally hit the mark. He has the nerve to include himself with the "smart money" crowd - whoever that is. Flipping a coin is just as helpful as following his advice  would be IMHO.
Jan 24, 2013 8:43AM
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The decline in Apple last night proves the market is nuts.
Jan 24, 2013 2:58PM
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Not a surprise at all what's going on down here today...We have been up what. 9 out of the last 10 sessions or so...Manipulators in panic mode, pulling their hair out, the little they have left, so at 1130 hrs they started selling big time, orders coming in left and right...Please do not blame it on Apple, that is a complete farce, Apple is still the most profitable and best company there is. Don't have enough time to go over why these crooks are selling Apple...If you have any knowledge of the markets and the economy and government you should know the reasons...Oh well, about 2 hours left, we will see how things develop...This one may go to the scumbags; never give up though.
Jan 23, 2013 8:41PM
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Seems like he's trying to "talk" the market into his prediction to be vindicated and hopefully make money with his bets. In fact, nobody knows. Nor are investors lately nearly as irrational as he'd like to think. Actually, there are equally compelling arguments for a very positive period ahead. I lean toward the latter and see a number of reasons to think so, at least based on what we can tell now.   
Jan 23, 2013 5:32PM
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Its always easier being a doomsayer ( bear) and to be wrong...because you just have to change your arguments to bubbles and that the bears will win out eventually. Of course there will be a bear market eventually, but most of the analysts on MSN have been caught flat footed by the market still doing well.


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