The new market bubble
Enthusiasm for the Dow's record high looks dangerously frothy given the context of the move.
Excuse me for being a killjoy, but someone's gotta do it. The Dow's shiny new record high isn't evidence of a robust economy, stronger job growth, accelerating corporate profitability, growing global trade flows, or a sustainable rise in consumer or business confidence.
No. This is a victory for the bureaucrats and central planners who, in a strategy we once thought reserved for the communists in Moscow, Beijing, and Pyongyang, have manipulated interest rates and devalued our currency to forward a singular goal: Boost the markets as a last gasp effort to boost the economy.
It's not working. Not only is it not working, but it's sucking retirees and weakened households -- who are increasingly tapping their retirement accounts to pay bills and buy food -- into a third market bubble. Here's why.
Two weeks ago, I wrote about how six years of 0% interest rates and five iterations of bond buying (taking the monetary base from $800 billion to more than $3 trillion) has been an abject failure in its effort to help working class Americans rebuild. Sure, initial efforts in 2008 and 2009 ended the last bear market and quelled panic.
But the Fed's insistence to keep pushing whenever the stock market catches a cold has resulted in record gas prices, a widening of the inequality between rich and poor, and undercut the ability of seniors to find low-risk investments that will protect them from the ravages of inflation.
And it's resulted in the weakest, most underwhelming economic recovery of the modern era.
I care, and I believe most Americans care, more about a near 8% unemployment rate, $4 a gallon gasoline, persistent inflation in housing rents and health care costs, higher taxes, stagnant wages, and the fact that six million fewer Americans are working full-time vs. the 2007 high -- even as the population has swelled by 12.3 million over that time.
So yes, forgive me for withholding excitement.
And the fundamentals are set to weaken even more as deficit cutting in Washington -- done out of fear of fresh credit rating downgrades and a descent into a Japanese-style debt spiral --cuts at least 1.5% from GDP growth this year, at a time when the economy is barely treading water.
Let's see how consumers react to higher fuel prices, higher taxes, fewer government benefits, and a drop in disposable incomes.
Overseas, fresh recessions are nipping the heels of most of Europe and Japan. The Eurozone crisis is about to flare up again, with protesters in the streets of Portugal, the French economy succumbing to a manufacturing slump, political chaos in Italy, and a backsliding on deficit targets in Spain.
And let's consider the health of the market itself.
The Dow is a price-weighted index that has relied heavily on IBM (IBM), which pulls the rest of the index around by the scruff of the neck because of its $200+ per share price tag, to carry it higher.
Broader measures of the market, such as the NYSE Composite Index and the Russell 2000 have already topped out and are now merely retesting their February highs. Cyclical, economically-sensitive stocks have been flat lining since January. And key commodities like copper and crude oil remain well of their highs.
Most importantly, and I hate to keep harping on this point, but breadth remains very, very mediocre.
Stocks have been forced higher seven days in a row and yet the percentage of NYSE stocks above their 50-day moving average remains under 70% -- well off of the near 90% level reached in January. There were fewer than 1,500 net advancing issues on the NYSE on Tuesday -- below the 1,500+ result seen in late February and unimpressive compared to the near 1,750 net declining issues seen during the recent selloff. And NYSE up volume accounted for just 79% of total volume -- below the 87% seen in late February and unimpressive compared to the near 90% down volume day seen on February 25.
There's more. The CBOE Volatility Index (VIX) is off of its February low as it forms a positive divergence vs. stocks -- a harbinger of trouble. And utility and health care stocks are the breakout performers -- hardly a sign of confidence in the future of the economy.
The one thing this market has working in its favor is momentum fueled by cheap money --which, if memory serves, was exactly what drove the housing bubble, too. If you thought Miami condos and Las Vegas tract homes were great investments in 2006 and 2007, then by all means pile into stocks.
If not, as I've been recommending for weeks, use the enthusiasm to your advantage by booking profits in stock positions and raising your exposure to beaten down "safe haven" assets like Treasury bonds, precious metals, and even cash. In currencies, the euro looks vulnerable as well. The ProShares UltraShort Euro (EUO) position I added to my Edge Letter Sample Portfolio is up 5.2% since February 20.
Disclosure: Anthony has recommended EUO to his clients.
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" If you thought Miami condos and Las Vegas tract homes were great investments in 2006 and 2007, then by all means pile into stocks. "
Many articles state that the market is hitting new highs, and that there is PLENTY of money on the sidelines. That is THE problem. There is ALREADY enough liquidity to fund all the investments needed to get this economy going full steam ahead.
We already have a deep ocean of liquidity, we never needed to be flooded and drowned with additional money from the clueless Helicopter Ben Bernanke.
The trillions of printed fiat money from the federal reserve needs to find a home somewhere.....so it is washing up on the shores of Wall Street.
Maybe it is just plain simple, bonds are fully priced, stocks are the only game in town ?
Inflation,sooner or later, is going to eat your savings alive :(
I am willing to bet 50% of my money history repeats, the crowd starts piling in
once the Dow crosses 15K.
As a minor, very minor, player in stocks and not a day trader, I am spooked from ever having any more that a small % of my money in the market. Traders, flash trading, shorts, opportunists, insiders are, in my opinion, fueling the volatility that can wipe out the individual investor very quickly The books, THE BIG SHORT and Barofskys BAILOUT convinced me to never be over exposed and favor cash, even at the eroision of its value through inflation. I know I will have at least that less inflation, to me a better deal than risk in the market.
It should be obvious that a companys balance sheet and value doesnt, usually, fluctuate to the extent to drive the ups and downs we see. Investors do not drive the market, traders and computers do and they can ruin you by the time you realize they are profit taking by selling and drag you down after their gains are realized.
THE MARKET IS A CASINO AND THE FEDS HAVE COINED SO MANY CHIPS THAT THEIR VALUE IS AN ILLUSION.
Anthony has been quite the flip flopper in the past, but he is right on the money with this article. This market is all about cheap money and it is a bubble that will make the last one look like popcorn.
OK, so Tony is not excited about this market however I have been investing in blue chip stocks for the past 5 years and it has been painful at times watching money be invested then quickly erased by volitile swings in the market but the fact remains that I was buying stock when the dow was 6,500 and I still have those shares so I'm being rewarded right now, and oh yeah I'm pretty excited right now no matter what people like Tony say.
What would the alternative been? Don't invest? Go hide in a cave somewher? What for doomsday?
My guess is the gov. will let the pain return before the next election just in time to blame the Repub's for all the problems and gain complete control of the house and senate in order to push their socialistic ideals onto the rest of us without resistance in their own ranks or from the people who will be entirely dependent on them for their handouts in order to eat and pay rent.
And you think things are bad now?
"So what was the alternative to the Fed bailouts and money printing? AIG goes under? GM goes bankrupt taking out thousands of suppliers with them? As a result tens of millions on unemployment, soup kitchens, hundreds of thousands more plunging into poverty every day."
AIG goes under? Yes. It was always a scam business. GM goes bankrupt? Where have you been? That was Michigan. SE MI had 250,000 auto-related or supporting businesses go poof in 2008. No one came to help or bail and the self-employed don't collect unemployment. We are-- still here in MI, even though our tier businesses moved to TX KY and TN screwing all the loyal. Soup kitchens? Shelters tend to be in inner cities yet nearly all of the mass-terminated here were suburban. We had to literally do the impossible and still do now that Nazi Gov. Snyder got elected by the Right, who then moved out. As for poverty... our best know it, our worst suck off the teet of Bernanke fiat money printing and have useless jobs as money handlers, paper pushers and button pressers. Meanwhile, the 5-year stagnation has erased nearly every ounce of skill and craft critical to recovery. What did YOU think? That Obama's market manipulation (that's fiat-caused inflation lifting the deadbeat publicly traded business platforms, not actual business) was actually healing us? WE HAVE NO ECONOMY. WAKE UP. We will not recover until the markets crash and America rebuilds from the ground up, not the desk PC and laptop.
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