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.  

103Comments
Jan 23, 2013 5:37PM
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If you keep saying the market is going to correct you will eventually be right , but those of us who ignore your headline grabbing crap and stay disciplined and invested are up 4+% year to date alone!!
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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