Ten Reasons for an Imminent Stock Market Crash 108 comments
an article to
-
Font Size:
-
Print
- TweetThis
1. Insider Selling: An Oversupply of paper
Insiders have been quick to recognize that the market is hungry for paper. Thus, they are selling shares, and issuing debt and/or equity at an alarming rate. Investment bankers, who were very recently idle, now have a backlog of paper ready to go to market which will eventually flood the market and offset the fragile balance of supply and demand.
Why are they doing this? They are cashing out while they can. Nobody understands a business better than its insiders. Irrespective of what the Wall Street “paper pushers” say, if this is the next bull market, insiders would be buying shares, not selling.
2. A Rally Based on Short Covering, Low Volume, and Bankrupt Companies
The rally since the March lows has been relentless and sharp, and one of the primary catalysts for its vicious move up is the combination of low volume with short covering, especially in high beta, low quality stocks. Liquidity is exiting the system, not entering and for some reason, those who are still trading are infatuated with such names as FNM, FRE, WaMu, AIG and Lehman.
These are not the signs of a healthy system rather it is panic buying similar to that of the NASDAQ in 2000 when investors piled into internet stocks based on “page views” given the absence of revenue as a basis for investing. Even rational investors began to question the old business model of revenues minus expenses equals net income. They did not understand why a solid brick and mortar business would not be as “sexy” of a buy as the profitless internet companies. We all know how that turned out.
3. Bullish Sentiment and Market Psychology
At present date, market consensus is short-term bullish and long-term bearish as a result of the aforementioned buying frenzy. Everyone wants to buy the markets and exit before the bubble pops. Guess what? If you want to participate in this bubble—it’s too late. The time to buy the markets was when everyone was bearish, when the WSJ had an article titled “Dow 5000,” and the S&P was at 666. Even if you missed the move from 666 to 800, you could have bought the markets at S&P 800. But with the S&P at 1100, everybody fully invested, and Wall Street shops paper like there is no tomorrow, right now is the time to sell!
Irrespective of factors like momentum and technical indicators, selling is wise because momentum and technical indicators fail to incorporate deteriorating fundamentals in their formula, and therefore have no way of detecting “market moving” bad news. In an environment where fundamentals deteriorate and equities get more and more overvalued on a daily basis, any taste of bad news can crack the momentum. Being bullish in the “short-term” because of momentum is a flawed rationale and soon the last piece of research from bullish technicians will become obsolete. The market has become delusional and is living in fantasyland in the same way people were dancing in the Titanic on the eve before it crashed into an iceberg.
4. Short the USD, Long Everything Else
The market is crowded in one trade—short the dollar and long everything else—a dollar carry trade. For example, you short the dollar and buy Macy’s (M) shares, Gold, Silver, the Brazilian Bovespa, Venezuelan bonds, New Zealand Kiwi, Washington Mutual, Goldman Sachs (GS), you buy anything and you do not discriminate. With the positioning in the market so concentrated, we have the potential for a moral hazard as when the trend reverses, there will be no one on the other side. This is why markets crash!
Correlation is not causality; we can say the same thing by blaming the USD weakness for every market movement. Is everything bad for the buck or is the dollar bad and everything else is good? The short selling inherent in the dollar carry trade puts added pressure on the dollar and reinforces its inverse link with risk appetite. This also implies a substantial rebound in the dollar once stock markets globally sell off because carry traders will need to unwind their bets by buying back the dollars that they shorted.
5. Deteriorating Fundamentals and Rising Income Dispersion
According to a government report earlier this month, household incomes in the US decreased and more Americans were living in poverty in 2008. The poverty rate climbed to 13.2 percent last year from 12.5 percent in 2007. The number of people living in poverty rose to 39.8 million last year, an increase of 2.6 million from 2007.
Yet the paper pushers on Wall Street continue to accord themselves record businesses and record profits. In the same year that the US reported that 39 million people were living in poverty and a record use of food stamps, Goldman Sachs reported record profits. Now if Goldman Sachs were operating a manufacturing facility that employed thousands and they invented the cure to the common cold and now was selling a billion vaccines to China, their “record profits” would be justifiable. But, instead Goldman Sachs is “trading away” after being bailed out by the government with tax payer money and they get to enrich themselves while the rest of the country impoverishes itself.
This is defined by John Williams of shadowstats.com as a rise in income dispersion. A high level of income dispersion indicates heavier income concentrations in the extremes. Conditions surrounding extremes in income variance usually help to fuel financial-market bubbles, followed by financial panics and economic depressions. The poverty report is enough to clearly depict the economy’s deteriorating fundamentals—we need not mention the state of the country’s commercial real estate business or the slow down in shopping or an infinite other number of things that are deteriorating on the micro front.
6. The Chinese Commodities Bubble
The rapid rise in commodity prices is not because China is growing at a very rapid pace together with its BRIC brothers and other emerging nations—it is quite the opposite. China has inundated its market with excess cash, and this cash is being converted to commodities because they would rather hold physical assets than worthless paper money like the US dollar.
This conversion from dollars to commodities is conveying the message that China is growing. However, China’s business model is as broken as that of the US. They depend on a huge export manufacturing base of gadgets that are to be sold to the US consumers using borrowed funds. For China to grow internally and build its own consumption, it will take years/decades not months. So this theory that the Chinese will get the world out of a recession because they are buying commodities is a fallacy, nothing more than that.
As John Horseman points out, the China story is just how large many of her basic industries such as steel and cement have become and just how much excess capacity now exists. To put this into perspective; China has capacity to produce some 660 million tons of steel per annum, more than the EU, Japan, the US and Russia combined with another 60 million tons of capacity currently under construction. She currently produces around 500 million tons, suggesting that idle capacity exists which is equivalent to the total of Korean and Japanese output. China's consumption of steel is already equal on a per capita basis to the EU and higher than the US, raising the question as to just how much higher steel consumption can go. Despite China's efforts to stimulate, Chinese steel companies are racking up large losses. Much of this surplus represents a severe limit on the prospects for growth. The bottom line here is whether the Chinese government’s growth story while global trade is shrinking can prevent the financial markets from derailing.
7. Trade Protectionism, Socialist Tones, and Government Intervention
The objective of Reaganomics during the 1980’s was to: a) reduce the growth of government spending, b) reduce income and capital gains marginal tax rates, c) reduce government regulation of the economy, and d) control the money supply to reduce inflation. The objective of Obamanomics is exactly the opposite. In addition, the rhetoric between nations cannot be worse. All we need to figure this one out is to read the newspaper—will imposing tariffs on Chinese tires be positive for global growth and trade? No further discussion is necessary.
8. Money Supply and Credit Contraction
The money supply and credit is contracting at an alarming rate. No matter how you spin this it can only lead to bad news for the economy. If credit continues to contract as a result of banks reducing their lending and/or consumers not borrowing, it can reach levels that can disrupt normal day-to-day commerce. Once this happens, the economy hits a brick wall and collapses—i.e. what happened with Lehman Brothers a year ago.
The situation is only getting worse as credit continues to deteriorate. The worse is ahead of us not behind us and if no imminent action is taken by the government to accelerate lending, the country can find itself in the Great Depression—Part II. If the necessary action indeed is taken, it will not be positive for equity markets which are operating under the assumption that the worst of the systemic and financial crisis is behind us and that banks can operate without a hand from the government. Again, Lehman is history and the future is rosy and pretty.
9. Market Complacency
Expanding on the issue addressed above, the market seems to be very complacent. The VIX and all the “fear” indices are at 12-month lows and the market is no longer paying for “protection.” Basically, the market is assuming the system is “risk free” as it was during 2003-2007 when maximum risk taking was rewarded and encouraged. Black swan events were impossible back then.
10. Europe
What happened to all the troubles brewing in Europe? What happened to Latvia’s currency crisis or the Swedish Banks? Are Hungary and Poland ok? Has the Austrian Banks’ exposure to Eastern Europe disappeared? Is Spain back on its feet? Is the UK solvent again? Are Irish banks lending like there is no tomorrow? How about Germany’s manufacturing base—is it solid with a EUR at 1.48 and the US consumer missing-in-action? Is Deutsche Bank’s $3 trillion balance sheet made up of only physical Gold? Are German banks profitable and healthy again? I guess somebody waved a magic wand and fixed all Europe’s problems overnight!
Disclosure: Long SPX Puts
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication in the last week
Seeking Alpha 100 » -
Fastest Climbers
Those with the largestSee all
increase in followers
in the last week
Fastest Climbers » -
Top Commenters
Top commenters,
as ranked by their peers-
1
User 353732
-
2
Moon Kil Woong
-
3
doubleguns
-
4
optionsgirl
-
5
Mayascribe
Top Commenters » -
1
-
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
In the late 1990s, some stock market commentators were predicting and imminent stock market crash for a couple of years before it actually happened. Even Alan Greenspan coined the phrase 'Irrational Exuberance' to discourage investors from driving up stock prices too much. But at that time, his words had little effect on the market.
Perhaps this time it will take a lot less than a couple of years for the imminent stock market crash to happen. But it still might take a few months.
The stock market has basically priced in a V-shaped recovery in the earnings of companies. And quite possibly this pricing in was done by the big investment banks as a way of intervening in the stock market using free money from the Fed and possibly with the blessing of the Fed.
ftalphaville.ft.com/bl.../
This V-shaped recovery in the earnings of companies is unlikely to happen in the near future due to rising unemployment and poor consumer spending. And sooner or later disappointed investors might sell.
But if it's the Fed in cahoots with the investment banks who has driven up the stock market so much. Then a stock market crash might be engineered too in order to help the government sell US Treasury bonds some time in the future.
The US government is planning to sell an awful lot of bonds. And sooner or later a stock market crash might be just what the doctor has ordered to help the government sell its bonds.
October 1 is the start of the new fiscal year for the US government. And some time after that a stock market crash might be needed to help the government sell its bonds.
1) A near term concern is the valuation of the market. From David Rosenberg: An unprecedented eight-point price/earnings multiple expansion during a six-month faith-based rally has left the market at its most expensive (26 times operating profit, 180 times reported profit) in seven years. On a reported basis, this market is nearly four times overvalued, as it was during the tech bubble! Indeed, when we look at the history books to see what happens after the P/E multiple on trailing earnings pierces the 25 times threshold, the average total return a year out is -0.3 per cent and the median is -6.2 per cent. The total return is negative a year later 60 per cent of the time, so when we say that there is too much growth and too much risk embedded in the equity market right now, we like to think that we have history on our side.
2) An intermediate term threat is the health of the banking sector which has been declared healthy but still suffers from it earlier disease. Malignant assets are plaguing bank balance sheets as seen in rising delinquencies and escalating charge -off rates; after the theatrical stress tests, we simply pretend the cancer is not there. Shrinking loan balances point to hoarding, fear and insider knowledge that bank balance sheets are not healthy. CRE and Option ARM and ALT-A resets will aggravate the underlying problem and refocus attention on the true health of banks.
3) The long-term threat to the economy is its inability to growth from within and produce increases in employment and incomes; there can be no recovery without organic growth. The economy is no longer in a free fall and there are many indications that aggregate economic activity is stabilizing; there is nothing to suggest resumption of internal or organic growth. Virtually all of the growth is attributable to fiscal stimulus and accommodating monetary policy; what will happen when this is withdrawn?
(Some people mistakenly think that a Black Swan is a very low probability event, usually with a negative connotation.) A Black Swan is something you couldn't have, or chose to not be able to, contemplate, given that your head is stuck in that particular paradigm.
See: The Black Swan: The Impact of the Highly Improbable. New York: Random House. ISBN 978-1-4000-6351-2.
On Sep 24 11:51 AM chap08 wrote:
> If there is a "crash", it will not be because of anything on your
> list - because they are all well known. It will be because of something
> we don't know yet.
> If there is a "crash", it will not be because of anything on your
> list - because they are all well known. It will be because of something
> we don't know yet.
Hmmm why is the market breadth so good? Look at a/d line. The Volume is low, but only relative to the ridiculous crash levels of last fall. And alot of the dow companies....not all of which were bankrupt, last I looked....have participated fully in this rally.
If you can't get THOSE facts straight, who cares about the rest of your spiel?
This will flood the system with even more liquidity and propel equity markets higher. Equities and Commodities will go up as the real economy is still weak (and will be weak for some time) to absorb all the excess liquidity.
So given the current liquidity scenario, I expect minor to significant correction. But not a crash.
If the Fed raises the rates and stops the MBS purchase plan too quickly the economy will convulse and go into shock. The challenge going forward will be to wean the economy off its liquidity drip without creating systemic shocks and causing other withdrawal symptoms.
The Fed has essentially chosen to trade recession breadth for depth by incurring future debt obligations today that will weigh on the economy in the out-years. As compared to complete economic collapse, this is probably the lesser of two evils, but is hardly an end to the recession -- rather an extension of it.
The other concern is the danger of a lack of liquidity itself. Money doesn't grow on trees, and the people who ultimately supply the money may grow reluctant to continue to supply it. Taxpayers and Treasury bond holders may revolt at some point causing the liquidity to dry up. Some might say this already occurred in May when the 10 yr treasuries hit 4pc following the Treasury buying $300B of its own paper. But then, the Fed started to secretly purchase treasuries which brought the rates back down again. Either way, at some point the Fed balance sheet may become so badly out of shape that it won't be able to continue these practices. This is probably why the Fed won't allow anyone to see what is really on their balance sheet right now.
We essentially have a zombie economy that died over the course of last fall and this spring but is being maintained in some not-fully-dead but still not-quite-alive state by massive infusions of government stimulus. It goes through the motions of a normal economy but it lacks the vibrancy, vitality, and excitement of a real, living, breathing, free-market economy. Welcome to the unreal state of the new reality!
On Sep 24 02:23 PM Faisal Humayun wrote:
> I would certainly not buy the argument that stock markets would crash.
> The reason is not strong fundamentals of the economy but another
> fundamental factor (liquidity). Moreover, if the Government gets
> a sense of the economy getting weaker again and the markets fall
> 15-20% we will see Stimulus Package -2.
>
> This will flood the system with even more liquidity and propel equity
> markets higher. Equities and Commodities will go up as the real economy
> is still weak (and will be weak for some time) to absorb all the
> excess liquidity.
>
> So given the current liquidity scenario, I expect minor to significant
> correction. But not a crash.
On Sep 24 09:28 PM perceptions_now wrote:
> Based on the following government Budget figures, Corporate Tax will
> drop 50% for 2009 and barely pick up in 2010.
> www.gpoaccess.gov/usbu...
>
> I suspect these govrenment budgets may be overly optimistic, as seems
> prevalent at the moment.
>
> However, even if these figures turn out to be correct, they suggest
> Corporate profits are likely to remain very subdued for some period
> ahead.
>
> Given this and other indications, including -
> 1) The Debt to GDP ratio is heading north quickly, to 100% and beyond.
>
> 2) Consumers have taken a massive hit, via falling housing equity,
> lower share values & reduced access to credit.
> 3) The economy is deleveraging and will do so, for some time to come.
> Derivatives is the other Elephant in the living room!
> 4) Two of the three major growth drivers (Oil & Population),
> have Peaked and are heading south.
> 5) Unemployment and Taxes are both rising.
> 6) Bankruptcies are rising.
> 7) Consumer activity is down.
> 8) Massive increases in Health and Social Security Costs, are on
> the way, again expanding government deficits.
> 9) Problems arising from Climate Change and Food Production are also
> set to interfere with future plans.
> 10) Share Markets have already fallen 50% and have since increased
> some 50%, still leaving a massive reduction in total wealth.
>
> I would consider that markets are currently trading at lofty P/E
> ratios and that the markets will shortly fall into line with more
> realistic earnings!
On Sep 24 10:26 PM ardon wrote:
> Excellent commentary! I'd like to ad that America has been coming
> to this moment in history for the past 30 years. You can't be a prosperous
> country if you outsource your manufacturing base, become the biggest
> debtor nation, run one of the biggest negative trade imbalances,
> make finance and health care your biggest industries. America does
> not make real things anymore, we just shuffle paper from one place
> to another and instead of the products we create financial "products".
So whats the time line for the expiry of this analysis i.e. being wrong ?
Monday 28th Sept ?
I called for an IMMINENT stocks bear market bottom on 8th March - and it bottomed the NEXT DAY.
www.marketoracle.co.uk...
I recently came up with my own list, from a Technical Analysis perspective. For those interested it can be found here:
www.economicgreenfield.../
On Sep 24 10:53 AM Nick36 wrote:
> An imminent stock market crash can stay imminent for a long time
> before the stock market actually crashes.
>
> In the late 1990s, some stock market commentators were predicting
> and imminent stock market crash for a couple of years before it actually
> happened. Even Alan Greenspan coined the phrase 'Irrational Exuberance'
> to discourage investors from driving up stock prices too much. But
> at that time, his words had little effect on the market.
>
> Perhaps this time it will take a lot less than a couple of years
> for the imminent stock market crash to happen. But it still might
> take a few months.
>
> The stock market has basically priced in a V-shaped recovery in the
> earnings of companies. And quite possibly this pricing in was done
> by the big investment banks as a way of intervening in the stock
> market using free money from the Fed and possibly with the blessing
> of the Fed.
> ftalphaville.ft.com/bl.../
>
>
> This V-shaped recovery in the earnings of companies is unlikely to
> happen in the near future due to rising unemployment and poor consumer
> spending. And sooner or later disappointed investors might sell.
>
>
> But if it's the Fed in cahoots with the investment banks who has
> driven up the stock market so much. Then a stock market crash might
> be engineered too in order to help the government sell US Treasury
> bonds some time in the future.
>
> The US government is planning to sell an awful lot of bonds. And
> sooner or later a stock market crash might be just what the doctor
> has ordered to help the government sell its bonds.
>
> October 1 is the start of the new fiscal year for the US government.
> And some time after that a stock market crash might be needed to
> help the government sell its bonds.