Gold Bugs vs. Stock Bugs

December 31, 2011

The S&P500 ended the week, and the year, on a down note, losing 0.6% for the week.  Volume was very light, but that’s not surprising for the holiday season. Volatility ticked higher, but not in a substantially meaningful way.

Macro news was mixed.  The Case-Shiller home price index disappointed. Home prices fell more than expected, to all time post-bubble lows. Consumer confidence surprised to the upside, although it’s still near depressed levels. Initial jobless claims came in worse than expectations. And Chicago PMI was better than predicted. Internationally, especially in Europe, macro data was broadly disappointing. Europe is almost certainly entering a recession.

The year-end results for stocks are notable. The S&P500 lost a fraction of a percent to close at 1,257. The Nasdaq finished the year down 1.8%, and the Russell 2000 fell 5.5%.

What makes the losses notable are the year the predictions—from the Wall Street experts—made a year earlier.  Goldman Sachs predicted that the S&P would close between 1,450 and 1,500. Barclays, at 1,420.  Merrill Lynch at 1,400.  And Blackrock at 1,350.

The point is that not only did the “pros” get it wrong, but that they all missed by a wide margin and in one direction—they were all too optimistic, as is typical for Wall Street experts.


Because their job is not to be right.  Their job is to sell.  And it’s almost impossible to “sell” customers, or potential customers, on buying stocks when you issue bearish forecasts, even when you have reasons to be concerned about the chances of a stock market advance.

In short, Wall Street “pros” are paid to lie, to con investors into buying products that may or may not be in their best interest to do so.

And what’s just as odious is the way Wall Street “pros” disparage anyone who promotes investments that they do not sell, even if the investments are blowing away the performance of equities.

Witness gold.

Not only did gold finish the year UP about 10% (vs. a small loss for the S&P), but gold has RISEN for 10 consecutive years, while the S&P has barely gained any ground over the same period AND has gone on massive “roller coaster” rides, up and down, in the interim.

Yet ask any Wall Street “pro” to describe a gold investor, and you’ll hear the term “gold bug”.

The implication is clear—if you decide to buy (and dare to actually hold for an extensive period of time, as opposed to trade) gold, then you must be some sort of nut job, or a bug, who must be psychologically disturbed to want to own such a “barbaric relic”.

But once again, gold has been UP 10 years in a row.

It’s ironic then, that Wall Street “experts” are still pushing a product class—stocks—that have so massively UNDER-performed gold, and at the same time, are mocking gold investors.

If this keeps up, shouldn’t stock investors be the ones who are mocked? Shouldn’t stock investors be called “bugs”, or better yet, stock bugs?

What other Markets are Saying about Stocks

December 24, 2011

The S&P500 climbed higher by 3.7% on very low volume going into the holiday season.  Volatility has also subsided tremendously; the VIX has dropped back down to levels that are almost back to those when the S&P was 100 points higher earlier this year.  So, as the year winds down, a sense of calm or even complacency has spread over the equity markets. In a few short weeks, traders have decided there’s little to worry about.

In economic news, the data were again mixed for the US and negative for much of the rest of the world.  At home, housing starts beat expectations, but virtually all of the beat came from apartment starts, not single family homes, which are still stuck at multi-decade lows. Meanwhile, existing home sales missed badly.  Median home prices—down 3.5% yoy—continue to grind lower for the fourth consecutive year.  The US housing market is still falling. It’s showing no signs of turning around. And just last week, the NAR admitted that it had overstated existing home sales every year since 2007 by over 14%, on average. So the housing crash, as bad as it was first looked, was actually even worse. The final revision to 3rd quarter GDP missed, coming in at 1.8%, worse than the 2.0% consensus estimate. Initial claims beat expectations, as did consumer sentiment. Durable goods orders, when stripped of airplanes and defense, were far worse than predicted; they fell 1.2% instead of rising 1.0%. Perhaps the worst numbers of the week were personal income and spending. Both missed badly, suggesting that consumers are fast running out of fuel (incomes) needed to boost the largest component of future economic growth (consumer spending).

Technically, the S&P is still in a multi-month downtrend.  The peak for the year was reached at the end of April, and the S&P has been trending lower ever since. In fact, the S&P is now up for the year by LESS than 1%.  The path taken to this almost UNCHANGED level has looked like a roller coaster ride, but at the end of the year, the stock market looks like it may end up very close to where it started.

On of the ways to judge whether the US stock markets are fairly valued is to compare them to where other major asset classes are trading, specifically asset classes that have a high positive correlation with stocks.

For example, of another correlated asset class has surged far ahead of the S&P, then traders could argue that stocks have more room to “catch up” with that asset class by rising further. In other words, the S&P could be argued to be undervalued.

So how does the S&P stack up against other major asset classes near the end of 2011?

Let’s start with Treasury yields, specifically the US 10-year.  First, let’s point out that the S&P500 has been—especially over the last three years—positively correlated with 10 year Treasury yield.  Also, it’s important to note that the Treasury market is a major (by size) asset class that competes with equities for capital.

The 10 year yield, as it turns out, is near historical lows.  At the current 2.0% yield, the 10 year is implying that the S&P should be well under 1,000 and closer to 800.  In other words, the 10 year Treasury is implying that the stock market is highly over valued.

Next, let’s look at the euro. The euro has also has a consistently positive correlation with the S&P.  And over the last six months, the euro has been in a clear downtrend. At its current level, the euro is implying that the S&P should be well under 1,000 and closer to 900. The euro also says the S&P is overvalued.

International equity markets are also critical to compare to US stocks. The MSCI EAFE index is the benchmark for developed market stocks and is a great way to compare relative value with the S&P500.  And the correlations are very high.  Unfortunately, the EAFE index is down substantially for the year, wiping out, in fact, all of the gains from 2010, and then some. The EAFE index is implying that the S&P500 should be closer to 1,050.  By this measure, the S&P is overvalued.

Now let’s look at industrial commodities—oil and copper. Both do have a strong positive correlation with the S&P. Yet in this case, both are roughly in sync with the S&P.  Oil is implying the S&P is fairly valued; copper is implying the S&P is only slightly overvalued.

Finally, let’s look at high yield corporate bonds, which trade very much like equities due to their greater sensitivity to business cycles—like stocks, high yield prices rise a lot in good times, and fall a lot in bad times. Here, we find that high yield is actually prices above where stocks are priced. So high yield is implying that the S&P is slightly undervalued.

Putting it all together, we find that three markets, Treasuries, the euro, and EAFE, are pointing down for stocks. Commodities are saying stocks are fairly valued. And high yield corporate debt is saying stocks are slightly undervalued.

The final verdict? US stocks are slightly overvalued.  And since these correlations are fairly strong, there’s a very good chance that this overvalued condition will correct itself in the first half of 2012.

50 Horrific Economic Numbers about the US

December 17, 2011

The S&P500 resumed its slide last week, dropping almost 3%. Volume was moderate. And volatility eased, suggesting that traders were growing complacent even as prices edged lower.  So traders reduced downside insurance protection. The problem is that this leaves the stock market more vulnerable to sharp price drops, should some catalyst for selling emerge.

Macro results were mixed to weak.  Retail sales started out the week with a big disappointment. It seems that despite the Black Friday hype, the total sales tallies were not as strong as hoped for, both with and without auto sales.  Producer prices were basically in line with expectations, as were consumer prices.  Inflation isn’t becoming a problem, which makes sense in an economy that has never really recovered.  The Empire State manufacturing survey beat expectations, but industrial production missed badly.  And initial claims have now dropped below the recessionary 400,000 mark, more likely because the unemployed are running out of benefits, less so because they found jobs.

Technically, the short-term (daily) charts have returned to a bearish bias, after last week’s losses. On the weekly charts, the downturn that began in late April (which was officially the high point of the year) is still in full effect.  The bearish argument is that the subsequent peaks formed since late April have each been lower and lower.  The bullish argument is that the early October low has held, and that the subsequent lows have been higher. Very soon, this tug-of-war will resolve itself; technically, there’s very little room left in this multi-month triangle than should lead to s breakout, either to the upside or the downside.

Last week, as the years winds down, the blog ZeroHedge featured a post that assembled a list of “50 economic numbers about the US that are almost too crazy to believe”.

The main point, obviously, was to use some basic (hard to dispute) data to build a case that the US economy not only hasn’t really recovered from the Great Recession, but that it’s still in a recession, or more likely the Lesser Depression, as Nobel prize-winning economist Paul Krugman describes it.

Here are some highlights:

A staggering 48 percent of all Americans are either considered to be “low-income” or are living in poverty.

The average amount of time that a worker stays unemployed in the United States is now over 40 weeks.

There are fewer payroll jobs in the United States today than there were back in 2000 even though we have added 30 million extra people to the population since then.

One recent survey found that one out of every three Americans would not be able to make a mortgage or rent payment next month if they suddenly lost their current job.

19 percent of all American men between the ages of 25 and 34 are now living with their parents.

The retirement crisis in the United States just continues to get worse.  According to the Employee Benefit Research Institute, 46 percent of all American workers have less than $10,000 saved for retirement, and 29 percent of all American workers have less than $1,000 saved for retirement.

The six heirs of Wal-Mart founder Sam Walton have a net worth that is roughly equal to the bottom 30 percent of all Americans combined.

Child homelessness in the United States is now 33 percent higher than it was back in 2007.

Today, one out of every seven Americans is on food stamps and one out of every four American children is on food stamps.

A staggering 48.5% of all Americans live in a household that receives some form of government benefits.  Back in 1983, that number was below 30 percent.

During the Obama administration, the U.S. government has accumulated more debt than it did from the time that George Washington took office to the time that Bill Clinton took office.

Another point important point has nothing to do with the economy and the effects on markets, the subject matter that most often dominates blogs like this one.

Instead, the takeaway is more fundamental.  It goes to the heart of our social and political system.  While horrific economic numbers like these certainly could lead to lower stock prices, these trends could also lead to something far more dire.  More and more astute observers are pointing to the parallels between these trends—in prior eras—and complete social breakdown.  And such breakdowns rarely occur peacefully; instead, they often lead to civil war and broader interstate war.

If these economic trends continue, a collapse in the stock market could be the least of our worries.


Latest Euroland Gimmick

December 10, 2011

The S&P500 inched up 0.88% last week on lower volume. Volatility also dipped as traders lightened up on downside protection. Once again, headlines from Europe drove almost all of the big moves in risk asset markets, especially equities. Diverging (bearishly) from stocks, the euro dropped slightly for the week. And US Treasuries are still stuck at near record low rates. Both of these factors suggest that stock market investors, in general, are more optimistic than investors in other key markets.

On the economic front, the US data continues to hang in there, despite signs of rapid slowdowns in Europe, Asia (China and Japan), and Latin America.  US factory orders disappointed, by falling more than expected.  ISM Services badly missed; remember that services are the dominant segment of the US economy.  Initial jobless claims dropped back below 400,000, but as usual (with a virtual 100% track record), the prior week’s figure was revised higher (worse). International trade, while still in a massive deficit, was slightly worse than expected. Consumer confidence was slightly better than forecast, but still at abysmally low levels given that the economy is supposed to be in a “recovery”.

Technically, the S&P is still in a bounce formation, but it’s sitting at a major testing level—the 200 day moving average, which is now sloping downward (not a healthy sign).  The hope among bulls is that the almost “taken for granted” Santa Claus rally will push the S&P above the 200 day, allowing the stock market to finish strongly. Interestingly, as of Friday’s close, the S&P is still DOWN slightly for the year, despite the hugely volatile swings, both up and down, over the last four months.

Last week, stocks ended with a strong final day, spurred on by the latest—of seemingly dozens—of eurozone “fixes” that are in fact nothing but thinly disguised gimmicks design to fool the markets into believing that all is well.

Two years ago, such gimmicks lasted about six months, before markets saw through the lies and started selling—-stocks, corporate debt, and sovereign debt.  Then earlier this year, the gimmicks lasted a month or two, before the selling began. Lately, it seems as though the gimmicks “work” for a few days or at most a few weeks, before the ugly truth sinks in.

So this time, it might be useful to get a sampling of opinions from leading media outlets and their most respected journalists and thinkers.

From the Financial Times:

“Near-Term Risk to Peripheral States Remains”

“Amid all the heated speculation about the European Union summit’s impact on Europe’s economic future and Britain’s role in it, traders are asking a more mundane question: “Has it done enough to get us through to Christmas?” Their answer: probably not.”

From the New York Times:

“Europe’s Latest Try”

“We’re losing count of how many European Union summit meetings have ended with “historic” agreements to contain the euro-zone debt crisis only to see them fall apart as markets judged they were inadequate or irrelevant to the problem of making good on old debts and generating enough growth to pay off future obligations.

We are not optimistic that Friday morning’s agreement on a “new fiscal compact” for the euro-zone will now break that cycle.”

From Paul Krugman, on his NY Times blog, in describing the most recent “fiscal union”:

“The Orwellian Currency Area”

“… the relentless wrong-headedness of the Europeans, their insistence on seeing their crisis as something it isn’t, and responding with actions that deepen the real crisis, has been a wonder to behold. In the 1930s policy makers had the excuse of ignorance; there was nobody to explain what was happening. Now, their actions amount to a willful disregard of Econ 101.”

From The Telegraph:

“The Eurozone Banking System on the Edge of Collapse”

“Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.

The European Central Bank admitted it had held meetings about providing emergency funding to the region’s struggling banks, however City figures said a “collateral crunch” was looming.

“If anyone thinks things are getting better then they simply don’t understand how severe the problems are. I think a major bank could fail within weeks,” said one London-based executive at a major global bank.”

So here we go again:  not only is the latest “plan” announced on Friday not a true solution (as usual), but it’s also at risk of masking a ticking time bomb, a potential collapse that threatens the entire banking system of the eurozone, and perhaps, the entire world.

What a disaster.

European Lost Decade?

December 3, 2011

Seemingly out of nowhere, the S&P500 rocketed 7.4% almost retracing the losses from the prior two weeks. Volume was moderate, and volatility fell substantially.


The markets cheered to an emergency intervention by the world’s leading central banks, which banded together to provided slightly cheaper dollar funding to the ECB so that it could then feed the dollars to the dollar-starved banks within the eurozone.

Almost universally, the world’s leading financial and economic experts expressed surprise at the equity markets’ reaction, noting that the substance of the action was almost trivial. And to support the argument that stocks over reacted, almost all other risk markets reacted far less seriously. US Treasuries for example, in a true risk-on environment, would be expected to sell off massively. Yet they barely budged, suggesting that the wise folks in credit land are far less optimistic about this central bank move.

In fact, many have argued that for the central banks to throw out another crutch to capital markets, the central banks must have been very worried about how fragile the European financial system actually is. Some funding statistics were flashing red, suggesting that conditions were returning to the near meltdown state last seen in 2008. What’s scarier is that these funding sirens were not turned off by the central bank scheme. These funding stresses are still flashing red.

Economic data were mixed in the US but decidedly bearish in the rest of the world. New home sales disappointed. The Case-Shiller home price index disappointed. Chicago PMI beat expectations. Initial jobless claims crept back up over 400,000. ISM manufacturing came in ahead of expectations. Nonfarm payrolls missed expectations slightly. The headline unemployment rate beat, but only because three hundred thousand unemployed folks abandoned the workforce. Reflecting similar trends, the labor force participation rate fell to a new secular low, the lowest rate since 1983. Average hourly earnings fell; they were supposed to rise. And the average duration of unemployment rose to 40.9 weeks, the highest level ever recorded.

In Europe, PMI readings across the major eurozone  states are all in contraction territory, almost confirming that Euroland is already in a recession.  China’s most recent PMI also plunged into the 40’s, which is a stark warning that its economy is about to hit the reefs.  And Japan’s latest export figures have been plummeting.

Technically, the S&P in merely one week has completely eliminated its oversold status, from the prior week.  As suggested here last week, a bounce was due.  We more than got one.  And given how the markets are now reacting almost perfectly in concert with government interventions, it’s  now very difficult to tell which way the next couple of weeks are headed.  If hints of further intervention keep arriving, then there can certainly be more upside movement in stock prices.

But sooner or later reality—or gravity—will kick in. It always does.

In fact, one of the world’s prominent experts on global financial and economic matters, Willem Buiter, recently published his outlook for Europe, and it was not good.

Simply put, Europe will either choke slowly for the next ten years, or it will die suddenly of a heart attack.

Assuming Europe doesn’t die of sudden cardiac arrest, Buiter condemns the continent to recession over the next two years.  And eurozone output won’t recover to its 2008 level until after 2016.

As a result, Buiter believes that Europe overall picture will be “similar to, or below” Japan’s Lost Decade.

Terrific. And keep in mind, Buiter is assuming that Euroland will not implode in the meantime.

So the stock market can merrily whistle past the graveyard, as it did last week, and several times in late 2007 and early 2008. But one of these days, weeks, or months, the policy gimmicks will no longer fool even the perma-bulls in the stock markets.  Credit markets seem to better understand the downside risks, and sooner; stock markets always seem to be the last to ones to “get it”.

But “get it” they will. They always do, in the end.