This Is Why The Stock Market Is Tumbling
- The stock market plunged on Friday following a stellar jobs report that led to concerns that the Fed would begin increasing short-term interest rates as early as June.
- Pundits have cited a strengthening dollar, which will get stronger with interest rate increases, as the primary reason for the sell-off.
- I believe the stock market decline is primarily a function of the unwinding of institutional leverage in advance of the increase in short-term borrowing costs.
Profit Margins Are The Linchpin To This Bull Market
- Stock prices continue to rise despite historically high valuations and an expected downturn in corporate profits and revenues.
- The consensus expects a return to record corporate profits by the end of this year, and the linchpin is a continued increase in profit margins.
- The conflict is that nearly every tailwind that has lifted margins since the recovery began is either now or soon to become, a headwind.
This Picture Is Worth 1000 Words
- The forward price-to-earnings ratio for the S&P 500 is 17.1x, based on consensus earnings estimates.
- This figure alone could be interpreted as either bullish or bearish, but when viewed in the context of other market indicators, from a long-term perspective, the picture changes.
- While the data is open to interpretation, the picture looks to be one of a market that is very expensive by any historical measure.
Leading And Lagging Indicators Of Stock Market Performance
- Identifying which economic indicators lead and lag stock market performance is critical in managing investment risk.
- Consumer spending is a leading indicator, while employment is lagging, but conventional wisdom leads investors to believe otherwise.
- The downtrend in the annual rate of growth in spending does not support the uptrend in stock market indices.
Watch The Small Cap Canary In The Stock Market Coal Mine
- The Russell 2000 small cap index has significantly underperformed the S&P 500 in recent months.
- This could be a leading indicator of a broader market decline.
- Watch for a break down in the Russell 2000 below key support levels for confirmation, or a break out that may indicate the bull market has further to run.
Another Profits Recession Is Underway - Implications For The Stock Market
- The consensus is now forecasting a year-over-year decline in S&P 500 operating earnings for the first and second quarters of 2015.
- The historical precedents for such a decline are ominous.
- The consensus is still too optimistic in its earnings expectations for the second half of 2015, based on the assumption that profit margins will continue to climb.
- Investors should prepare for what is likely to be the first market correction in more than three years.
Man The Lifeboats Before The Crew Jumps Ship!
- While employment and consumer data remain very upbeat, businesses must now contend with a collapse in oil prices, a strengthening dollar and slower rates of global growth.
- The US stock market has stalled the past 3 months since the conclusion of the Fed's QE program, and it must now contend with the prospect of waning stock buybacks.
- With the Fed resolute in its intent to raise interest rates this summer, combined with historically high valuations, the US stock market should have a negative return in 2015.
Why 'Whatever It Takes' Won't Be Enough
- The ECB launched an aggressive new quantitative easing program last week to restore growth in the eurozone.
- What will it accomplish?
- What will it not accomplish?
- Where are the investment opportunities?
Can The State Of Our Union Be Strong When The Economy Is Not?
- The majority of Americans have still not recovered financially from the Great Recession.
- The economic expansion is very fragile due to the fact that we have yet to see a steady increase in real disposable income.
- Stimulus has been focused on consumption, rather than on investments in production that create high-quality full-time employment.
- Increasing real disposable income is the key to prolonging the expansion and supporting the financial market gains we have seen to date.
Goldman's Call On Oil - A Contrarian Indicator?
- Goldman Sachs dramatically lowered its short- and longer-term price targets for crude oil this week, driving prices to new multi-year lows.
- Early signs that supply/demand metrics are responding to lower prices, in combination with extreme price volatility, indicate that we are in the process of bottoming in price.
- A change in investor sentiment is likely to follow that will result in a much faster recovery in oil prices than the bearish consensus view is indicating.
Is The Fed Buying Stocks?
- Sudden and swift declines in the stock market have become a more regular occurrence.
- The recoveries from these declines are just as rapid, which does not characterize typical investor behavior.
- It appears as though there is an outside force, with motives consistent with those of the Federal Reserve, that is supporting market prices.
- The short-term benefits of manipulation that leads to wealth creation, should it be occurring, destroys the credibility of our markets, and ultimately leads to wealth destruction.
How The Oil Price Collapse Could Lead To A Bear Market And Recession
- The stock market is beginning to decline along with the price of crude oil.
- This implies that declining oil prices are damaging US economic growth prospects.
- A stock market correction will reverse the wealth effect that has fueled consumption, reinforcing the oil price decline, and further slowing economic growth.
- How far prices fall and how long they remain depressed will be the deciding factor.
- Wall Street speculators in the oil futures market will cast the deciding vote.
Investors Should Not Cheer Cheap Oil In 2015
- The consensus is increasing its estimates for US economic growth in 2015.
- Lower oil prices are being considered a catalyst to that growth.
- Yet the oil and gas boom in the US has been the most significant catalyst to gains in employment, income, housing and consumer spending in the US.
- The reality is that lower oil prices will likely slow US economic growth.
The Oil Price Plunge - Fiction, Reality And Opportunity
- What determines the price of oil on a daily basis?
- The fiction and reality behind the collapse in the price of crude oil.
- Where are the investment opportunities?
The Spark That Ignited This Correction
- The unwinding of leveraged positions held by hedge funds is the spark that ignited this correction.
- A withdrawal of liquidity by our surrogate market markers (HFTs) has hastened and steepened the decline.
- It is the correction in stock prices that is leading to concerns about the strength of the global recovery.
The Stock Market Is Still Broken
- The sharp decline in stock prices is being blamed on an abrupt deceleration in global economic growth.
- The stock market is still serving as a catalyst for the Federal Reserve, and not a discounting mechanism for real world economic activity.
- This correction, led by the energy and material sectors, looks more like forced hedge fund liquidations.
Of Course The Market Is Rigged!
- High-frequency trading (HFT) is the most dominant and manipulative force in our markets today.
- Its impact poses significant risks to market structure and investor psychology.
- Practical solutions that address these risks will ultimately come from the free market.
- Expect significant market volatility and a reversal of the upward bias HFT has had on stock prices as its influence wanes.
Yellen Opens Six-Month Gate
- Janet Yellen's reference to a six-month time frame for increasing short-term interest rates sent the stock market reeling.
- The consensus has concluded that the continued selling pressure in stocks that followed is a result of slowing economic growth in China and the ongoing crisis in Ukraine.
- The real reason that stocks are under pressure is the increasing amounts of reverse repos being conducted by the Fed under its Reverse Repo Facility.
The Evolution Of Quantitative Easing - A House Of Cards
- While QE policy has evolved over the past five years, it has never been successful in achieving the Fed's mandate.
- QE3 was a turning point in the policy when Bernanke abandoned the lending channel and specifically targeted the stock market.
- Using the stock market as a catalyst for economic growth and job creation has been unsuccessful.
- The combination of QE with zero-interest-rate policy (ZIRP) over the past 5 years has led to tremendous leverage in risk assets.
- The tapering of QE3 combined with the end of ZIRP will lead to an unwinding of that leverage and realign risk assets with the economic fundamentals.
A Tale Of Two Economies And A Market That Doesn't Care
- The US is comprised of two economies and the historic divide between the two continues to grow.
- The disparity between the market's uptrend and the downtrend in disposable income is not sustainable.
- Fed policy has encouraged companies to pursue short-term profits in lieu of long-term growth that widens this divide.
- There will be another re-pricing of risk assets that reflects the underlying strength of the whole economy.
- The Fed's Money Mirage
- The Fed's Third Mandate
- Where The Bubbles Lurk Today
- An Investment Strategy For The Bears
- The Good News, The Bad News And What's Very Ugly
- The Wedge Between Perception And Reality
- A Discussion With Managers That Know How To Hedge
- This Summer Slowdown Will Be Different Than The Previous 3
- The Fundamentals Are Starting To Matter
- The Fundamentals Don't Matter Anymore
- S&P 500 Earnings - Don't Conflate The Numbers
- David Stockman: Don't Shoot The Messenger