Financial topics

[aedens]

Just my thoughts on what is going on with the stock market; it could be wrong. The Fed did the "QEs" and now they are "tapering". The last QE didn't work very well; as we noted the rate on the 10 year went from a low of 1.6% in May to 3.0% in December. Not good. The Fed needs to find a new source of demand for bonds. What better way to do it than to have the pension funds, etc., reallocate from stocks back to bonds. The stock market goes down some, bonds get bought and the rate on the 10 year goes back down without any additional QE. I think what the Fed does not want to see is for the stock market to get jittery like it did on Friday; they want a controlled drop. Therefore, the Central Banks may do another "Sunday night wonder" in the currency markets Sunday night to stabilize the situation. The second part of this is earnings are starting to lag stock prices by a lot and the Fed is worried that there can be an out of control crash if money keeps going into stocks and stocks go up another 20% or something like that while interest rates keep rising and earnings are flat. That's not to say they will get their wish but this is what I think is happening.

http://gdxforum.com/forum/viewtopic.php ... 970#p22168 as we noted

[John]

Earnings haven't been growing nearly as fast as stock prices. From what I've been able to gather, earnings are up about 6% in the past year while stock prices are up about 26%. I think the Fed is worried about this trend continuing, but that's just a guess. I will dig up something I read that Lockhart said about this.

Well, that essentially says that the price/earnings ratio has gone up
in the last year, and that's true, although it's fallen in the last
couple of weeks.

[Higgenbotham]

http://economistsview.typepad.com/timdu ... ering.html

Lockhart's views on stock prices are intriguing:

In response to audience questions, Mr. Lockhart rejected the idea that big gains in stock prices over the course of the last year mean the equities market has lost its moorings. When taking stock of what has happened, “I don’t see it as a bubble,” the official said, although he added he would like to see company earnings validate the advances the market has experienced. The official also said “we are watching very carefully to make sure we don’t get into bubble territory.”

He seems to be implying that he believes stock prices are reasonable only if earnings rise. Which is the same thing as saying he really doesn't believe that stock prices are exactly reasonable. They are just not sufficiently unreasonable to define as a "bubble." Combined with the careful "watching," one could interpret Lockhart as saying that the Federal Reserve believes stock markets are starting to get ahead of themselves. They are watching the financial stability issue like hawks...no pun intended.

The part at the bottom is the comment by the blogger. I would rephrase the first sentence to say that he believes stock prices are reasonable only if they rise in line with earnings but not if they outpace earnings by 20%.

[Higgenbotham]

Earnings haven't been growing nearly as fast as stock prices. From what I've been able to gather, earnings are up about 6% in the past year while stock prices are up about 26%. I think the Fed is worried about this trend continuing, but that's just a guess. I will dig up something I read that Lockhart said about this.

Well, that essentially says that the price/earnings ratio has gone up
in the last year, and that's true, although it's fallen in the last
couple of weeks.

Yes, and I think the Fed would like to see earnings rise another 6% next year and for the stock market to slowly lose some air as the money slowly shifts from stocks to bonds and lowers the 10 year rate. Lower interest rates should help company earnings too whereas if the bubble continues to grow and interest rates continue to move higher, it may slow earnings.

Whether they can engineer all that I don't know but that's what I think they are trying to do.

[Higgenbotham]

http://www.bloomberg.com/news/2014-01-2 ... tdown.html

Interesting reader comment in here.

"I just returned from Thailand recently and after having spent nearly a month in Asia the Western elites in Davos have MUCH to fear as the Asian laboring class has become physically hostile towards monopoly capitalists---their collective anger is real and palpable.

Asian leaders in developing countries are under extreme pressure to push back against the monopoly cartels subjugating their citizens in a race to the bottom. Sadly I expect more violence and chaos with insurrections abound as nobody in the developed nor developing world is prepared for the imminent push back from people who are treated more like subjects than citizens."

[Higgenbotham]

http://www.bloomberg.com/news/2014-01-2 ... gages.html

"21 percent of foreclosed homes across the U.S. are in limbo, vacated by former owners and not yet seized by lenders, according to data company RealtyTrac."

"8 million borrowers still owing more on their mortgages than their homes are worth."

"About 32 percent of seriously delinquent borrowers, those at least 90 days late, haven’t made a payment in more than four years, up 7 percent from the beginning of 2012."

While things are improving at the center of the US, at the same time, there are strong signs that the periphery is deteriorating, both outside and inside the US. These statistics would seem to say that the banks have abandoned part of the US market.

[vincecate]

Hussman's weekly post is out:

" Last week’s mild retreat only looks something other than mild when viewed in the context of a late-stage parabolic advance that has not seen a single 2.5% weekly decline since June of 2012."

"Increasing our concern is also a very well-defined log-periodic bubble running from 2010 to the beginning of this year, which we estimate is now past its “finite-time singularity”

"Increasing our concern is a 10-week average of advisory bulls at 57.7% versus just 14.8% bears – the most lopsided bullish sentiment in decades. Add the record pace of speculation on borrowed money, with NYSE margin debt now at 2.5% of GDP – an amount equivalent to 26% of all commercial and industrial loans in the U.S. banking system. Add the currency collapses in Argentina and Venezuela, as well as fresh credit strains and industrial shortfall in China, and one has any number of factors that could be viewed in hindsight as a “catalyst” (as the German trade gap was viewed after the 1987 crash, in the absence of other observable triggers). "

http://www.hussmanfunds.com/wmc/wmc140127.htm

[John]

From Hussman's article:

To quote Didier Sornette:
> “The underlying cause of the crash will be found in the preceding
> months and years, in the progressively increasing build-up of
> market cooperativity, or effective interactions between investors,
> often translated into accelerating ascent of the market price (the
> bubble). According to this ‘critical’ point of view, the specific
> manner by which prices collapsed is not the most important
> problem: a crash occurs because the market has entered an unstable
> phase and any small disturbance or process may have triggered the
> instability. The collapse is fundamentally due to the unstable
> position; the instantaneous cause of the collapse is secondary. In
> this sense, the true cause of a crash could be termed a systemic
> instability.”

http://www.hussmanfunds.com/wmc/wmc140127.htm

What I found particularly fascinating about this quote is that it also
applies to large computer software systems. When a software system
crashes, everyone looks to identify the cause of the crash, and
research shows that it turns out to be a perfect storm of a number of
individual problems. Each of the individual problems, or bugs, may
have been considered sufficiently unimportant to hold up deployment of
the system, but the collection of all of them created "systemic
instability" such that "any small disturbance or process may have
triggered" the collapse or crash.

John

[Higgenbotham]

That's interesting. Reminds me of what Robert Morrow was saying last year where he compared stock market failure to structural failure.

While Friday's anemic job numbers might sway some stock timers, Morrow pays little attention to such fundamentals.

Instead, he takes cues from mathematical formulas he developed in the 1980s when, as an engineer, he analyzed large turbines and airplane wings to predict when stress would push them to a breaking point.

"It turned out the market is very similar to that," Morrow said.

http://www.heraldtribune.com/article/20 ... ?p=3&tc=pg

Also from the same article:

Morrow said he started seeing trouble in mid-June, after the S&P hit 1,626 on June 14. He foresees a series of downward steps, each followed by a small recovery.

It turns out that the area around the past couple weeks has looked a lot like the area that Morrow is referring to.

[aedens]

The market moved back to the 50 day moving average as noted. The consumer decided to move rentier capital as some already have.
Most of us have been trimming positions for some time as we all know here for obvious reasons. Some may have to cover? Oh well.
No way to move the ball down the field now is there since the Voters are actual issue.
Had the discussion with a democrat on hidden taxes and who it hurts the most.
Will Rogers was right about its like watching a baby with a hammer.

Tea Time...

http://www.uwex.edu/ces/forage/pubs/hay ... report.htm

http://www.youtube.com/watch?v=XuFFzPHHueg