While the S&P500 gained another 2% last week, the gains were built on fumes. Volumes were far below the levels seen in January 2011. Why does this matter? Simply because all sustainable bull markets are built on expanding—not contracting—volumes. In a nutshell, current anemic volumes suggest that the bull run is unsustainable. Another concern is the utter lack of fear in the equity markets. VIX and other measures of volatility have collapsed. It’s as though investors have concluded that there’s very little to worry about…..what could go wrong when the Fed will virtually guarantee that risk markets will go up, right?
In macro news, the news was mixed, and the good parts were as good as they appeared. First, the bad parts. Personal spending stalled in January, showing no growth at all. Case-Shiller’s home price index (through November) is in the process of crashing…again…in slow-motion. Prices fell across the nation, far more than expected. The 20 city index has now fallen to a new post-peak low. And the really bad months (December, January and February) for home prices are yet to come. The Chicago PMI disappointed. Consumer confidence plunged; it was supposed to rise. ISM manufacturing disappointed, as did factory orders. Initial jobless claims pretty much hit expectations.
The big positive number was jobs. The Bureau of Labor Statistics reported a gain over 200 thousand jobs for January. But here’s the catch, the reason this number was essentially a lie: ACTUAL jobs fell in January (naturally in the post-holiday season, retailers cut back on all the extra help they brought on in November and December) by about 2.7 million. But the BLS added back—via a mysterious seasonal adjustment—2.9 million jobs, creating a REPORTED gain of about 200 thousand.
The problem is that the BLS added back FAR MORE in this January than it did in all the other January’s over the last three years. Had they simply added back the average of the last three years, the reported jobs gain would have DISAPPOINTED.
What’s worse is that the BLS will not reveal, at all, how it calculates and applies its “seasonal adjustment”. For some reason, this year’s positive January adjustment surged, and the public should just applaud the good news?
Now that the equity markets have priced in perfection and an almighty Fed, the markets are not worrying too much about things that could go wrong. And to test this confidence and complacency, the Greek default risk is again returning.
After the markets closed on Friday, the Greek government suggested that it will NOT be able to meet the latest round of austerity measures demanded by Europe, measures needed for Greece to get another round of bailout money and avoid default in March.
The European leaders also hinted that Greece is NOT meeting expectations, and will NOT get any more money if it doesn’t comply with severe cutbacks in spending. And the European leaders will not accept promises, letters, etc.; this time, they want a law passed ASAP to ensure that the austerity measures are put into effect.
So two years after Greece first began to teeter fiscally, and after two years of kicking the can down the road, Greece is literally on the edge of a disorderly default, an official bankruptcy.
Keep in mind that Greece has effectively defaulted already, but since many private creditors voluntarily accepted reductions in the value of their bonds, this problem was not called a “default”.
But if this current obstacle isn’t overcome, then an official default will be declared. And the default would be the first in 60 years for a developed nation.
Will the markets worry then? We’ll see.
In the meantime, market prices are generally high. So risks are higher. And prospective returns are lower. Bargains can still be found, especially overseas and in US small caps. But given the generally high-priced environment, it’s best to maintain larger cash balances.