Detroit Default… Microshock… And New All Time S&P High
Between Detroit’s bankruptcy, Microsoft’s miss and worst drop in over 13 years, and GOOG’s miss (latter gobbled back by the BTFD’ers), it is no surprise that stocks rallied (thanks to GE’s explosion higher and Trannies surging). Mixed bag overall in stocks with the Nasdaq -1.4% on the week and TRAN +2.2% (with the S&P and Dow around 0.6%). Treasuries ‘outperformed’ stocks relatively speaking with a 11-12bps compression in the belly and 6bps at the long-end on the week – ending today at the low yields of the week. As an aside, AAA muni spreads pushed to their highest in 13 months as yield remain notably elevated as Treasuries rallied. Despite a 1% weakening of the JPY, the USD ended the week down around 0.4% driven by EUR (and AUD) strength. Despite USD weakness, Silver lost 2.2% on the week while gold gained 0.7%. WTI crossed above $109 and Brent today gaining 2.25% on the week (off today’s highs). VIX dumped back to 2 months lows under 13%, volume was dismal all week (worst today), but new highs all around for stocks (amid another idiotic Friday closing ramp) so we must be doing great?
The Crash Of 1929
Based on eight years of continued prosperity, presidents and economists alike confidently predicted that America would soon enter a time when there would be no more poverty, no more depressions – a “New Era” when everyone could be rich. Then 1929 began – a time when the stock market epitomized the false promise of permanent prosperity… it’s only when we learn the lessons of the past can we avoid the mistakes of the future – or this time it’s really different.
Congress: “Is it fair to say that Wall Street has benefited more [from QE] than Main Street has?”
Bernanke: “I don’t think so… I want to emphasize that we’re very focused on Main Street… Our low interest rates have created a lot of ability to buy automobiles…”
“The United States is afflicted with ‘New Eras'”
Is This A 2007 Redux?
I read a very interesting prediction from noted market bull Jeff Saut who, in an interview with Eric King of King World News, stated that:
“For the past two and a half months I have targeted tomorrow, July 19th, as the intermediate-top on both my quantitative timing and technical models. So I think tomorrow is the potential turning point for the first meaningful decline of the year. I have been raising cash for the past few weeks and I think this correction in the stock market will be roughly 10% to 12%.
It’s just a question of, is this thing going to end with a whimper, or is it going to end with a bang? The shorts have been absolutely destroyed here. We could see a blue-heat move that carries the S&P 500 somewhere between 1,700 and 1,730. That would be the ideal pattern, but they don’t operate the market for my benefit so you have to take what they give you.
I don’t think anybody can time the market on a consistent basis, but if you listen to the message of the stock market you sure as heck can decide when you should be ‘playing hard’ and when you should not be playing as hard, and so I’m not playing that hard right here.”
Whether, or not, Jeff is right about the exact date of the market top it does bring attention to the recent correction and subsequent rally to new highs. Was that correction just a pullback in an ongoing upward bullish trend or is the beginning of a more major topping process much as we saw in 2007? The chart below shows the price action of the market from 2003-2008 as compared to 2009 top.
The interesting thing about the historical price action is the potential timing of the Federal Reserve’s “tapering” of the current bond buying scheme. The market advance prior to 2008 which was driven by excess liquidity derived from the credit boom cycle – the current advance has been driven almost entirely by the liquidity pushed into the system by the Federal Reserve. The extraction of that liquidity could well mark the top of the current cyclical bull advance later this year or in early 2014.
It is not just price patterns that have me concerned but rather other similarities between these two advances that should be noted as well.
Most Americans just let their televisions do their thinking for them, and right now their televisions are telling them that everything is going to be fine.
But is that really the case?
Everything is fine, but….
China Warns Of “Overly Optimistic Forecasts”; Tells G-20 To Mind Your Own Economies
China Finance Minister Lou Jiwei as saying at G-20 meeting in Moscow:
- Some developed countries appear to be overly optimistic about the economic outlook and
- The U.S. is actually planning to exit its quantitative easing.
- Private consumption in U.S. may weaken if U.S. rolls back QE
- U.S. economic growth may slow again and
- U.S. may be forced to roll out a new round of QE which may jolt global financial markets, affecting not only emerging markets but also peripheral countries in Europe
- U.S. must implement stable strategy to exit QE to avoid the situation that it may have to restart easing after a withdrawal
The Fed’s Economic Forecasts Are Already Looking Way Too Optimistic