We are often told that one sign of the end of a Bull market is the emergence of Mom and Pop investors who are the last in and the first to lose their shirts. While there's some debate about the degree to which the retail investor has returned to the market since 2008, there's no question that there are articles that do affirm, with little evidence, that the market is a safe investment. One of them appeared in Yahoo finance: "Wall Street Week Ahead: U.S. stocks a safe haven, even after panic selloffs." The article was brief, pointing out that stocks had a hit from which they recovered completely. 'If you're concerned about increased tension in Ukraine, that's the trade - at least for now,' said Art Hogan, chief market strategist at Wunderlich Securities in New York. 'We are the cleanest shirt in the hamper,' he said of the U.S. stock market.
The article continued: "Brian Reynolds, chief market strategist at Rosenblatt Securities in New York, believes tech, healthcare and large-cap biotechs are in position to lead the U.S. stock market higher for the next several weeks. He sees the S&P 500 rising on Monday if tensions do not become worse. 'If Russia does not escalate, stocks are likely to open above the 1,960 they were at earlier today as people who put on knee-jerk shorts cover,' he wrote late on Friday."
The overall message from this Yahoo piece was that investors remained positive even in the face of brutal news from around the world. "'These are horrible human tragedies and that's worthy of mention every time this comes up,' said Lawrence Creatura, portfolio manager at Federated Investors in Rochester, New York. 'However, the economic impact (in the United States) has been small.'"
That was the heart of the article. It seemed like a hand-holding piece for the retail investor, the notorious "mom and pop" investor who generally lose money from their untimely buys and sells while the banksters profit. The comments from readers ripped the article to shreds as just another bit of propaganda to deceive and manipulate the small investor. Since much the same article could have been written on Friday, August 29th, to soothe the retail investor into a happy complacency for the post Labor Day opening bell, it is instructive to appreciate the comments and analyses of a sharp group of anonymous commentators who blasted the Yahoo piece to smithereens.
The commentators focused on two aspects of the title as well as gave their advice about what a reader should do. (I will put the online name of each commentator I quote into italics and bold so it will be easy to recognize an online name.)
The idea that the stock market was a safe haven drew a number of sharp retorts. Mike [online name] reminded us of the double-talk in George Orwell's Nineteen Eighty-Four : "'U.S stocks a safe haven', War is peace, Freedom is slavery, Ignorance is strength, G-d Bless the Ministry of Truth!" Starstick also seemed in a chastising mood: "Tell the investors that were in the stock market in 2008, that stocks are a safe haven." Rick wrote that "stocks and safe haven should not be used in the same sentence nowadays." Jim observed, "when S&P was at 660 nobody thought US stocks were a safe haven, now 300% later it suddenly becomes a safe haven!!!! Really......BS." Mack had some good advice for the author of the article: "A safe haven would not have a sell off. Please learn how to lie better."
The other aspect of the title that wasn't getting any kudos was the claim that there had been a "panic selloff." Guttersnip wasted no words: "That was by no means a panic sell off." Lightning Strikes added some emphasis: "Panic sell-offs? As the group BTO would sing, 'You ain't seen nothing.'" Rocky suggested what you would see in a panic sell off: "When you see the values of those stocks you think are worth so much drop by 20-30-then 40 or even 50%, that will be the panic sell off." I found that very persuasive since I was investing when we all watched the panic sell-off on Black Monday, October 19, 1987. I believe Not Convinced overstated what we'd see when a panic sell occurs, but it is a sobering reflection: "You will know it's a panic selloff when the National Guard is called out."
Mr. Yuk noticed a very interesting connection between safe haven and panic selloff : "'U.S. stocks a safe haven, even after panic selloffs' - Yes, nothing says safe haven like a good old fashioned panic selloff." You're obviously not going to pull one over on Mr. Yuk.
The advice drawn just from seeing the headline created a consensus clearly expressed by Avidor Lingeman: "When you see propaganda at this level, get everything out of the stock market right now. Bankers are going to rob you." Or as harry put it: "'Safe haven' when you see a headline like that run the other way."
The commentators clearly had no difficulty realizing that the article was biased financial analysis that was properly referred to as propaganda.
Propaganda has a point. The propagandists are pushing a view or an agenda for the masses that the elite know is BS. The aim is to keep the "not-insiders" uninformed for some purpose or other. Often the purpose is political - keep U.S. citizenry believing that Putin is an evil incarnate so that we can blame what's wrong with our dollar on that evil Russian. The purpose of a propaganda can also be economic. Keep Mom and Pop investors believing the markets are healthy, are safe havens for their hard-saved money, and they'll keep putting it into the market. What's the point of economic propaganda? Paul said it clearly: "Setting up the sheep for the kill." Media Watcher agreed: "Soros and Buffet got theirs, now leave Mom & Pop holding the bag."
Propaganda is a very serious term, especially for us Americans who tend to believe that no one is going to use propaganda on us. The following long analysis by Wrekins is intended to encourage us to reflect on the possibility: "There is no such thing as free advice. If the internet has proven to be anything, it is that it is a propaganda tool of breath-taking proportions, making what Goebbels did in #$%$ Germany look like child's play. Whether it's ads made out to look like news articles, or constant "free' advice in the form of recommendations and upgrades and downgrades of stocks, or celebrity "news" planted by the PR machines, or "news" articles with misleading headlines written to get you to click on them and thus get some click revenues for ads, it's all so very manipulative and fake."
How are they going to rob Mom and Pop investors? Wrekins provides his answer (which we need to verify of course): "Just like every stock downturn that preceded it, when the next big one strikes, you will be caught flat footed again and wonder why you let your money sit there to lose 20% or more in a short period of time." That would hurt and be a form of robbery if articles like this one set the retail investor up to be complacent with what's going on. Let's follow our commentators in addressing the question: how risky is the stock market at these levels?
3. HOW RISKY IS THE STOCK MARKET?
Our commentators provided four reasons for being concerned that there are serious risks.
The first is that this market is overdue for a correction. Frogman was quite clear on this point: "I think this article is overlooking the impending correction that is long overdue." Les confirmed the view that "it's going to correct big time." Tony tells us that "A fierce correction is coming as illustrated in my book The Art of Investing (Amazon)." Looking up Tony Pow's book on Amazon, the first thing that struck me was the beautiful and enticing cover: a bee crawling into the center of a light purple flower reaching down for the pollen. Inside, the table of contents do not include anything on corrections, fierce or otherwise. There is a section of a chapter "When Will DOW Double?" Maybe the illustration of the coming fierce correction is exactly that: an illustration not mentioned in the table of contents. Andrew gives us his gut reading of the overall market situation: "I don't know when the masses realize the emperor has no clothes, but my gut tells me that this has to end really ugly."
We don't have to look far to notice that a correction is overdue. According to an August 21 article on Bloomberg, "the S&P 500 has almost tripled since its March 2009 low, helped by three rounds of Fed stimulus, coupled with better-than-projected corporate earnings. The S&P 500 has not had a decline of 10 percent in almost three years. It trades at 17.8 times the reported earnings of its companies, near the highest level since 2010." CNBC reports that Russ Koesterich, the chief investment strategist at the world's largest asset manager, warns that a correction is likely ahead - and it's time to get some sort of protection.
"In the near term, I think you could keep pushing higher, which is why we've remained overweight stocks versus bonds. What investors may want to consider, though, is that even with all the good news, there's a lot of complacency in the market," Koesterich said on Thursday's "Futures Now." "It's hard to predict the timing, but we know that with volatility this low, there's not a lot of bad news discounted into the price of stocks."
What could cause this correction?
Koesterich fingers a pair of potential factors on CNBC. "I think there are two things in the near term that could lead to a correction, one of which is impossible to predict. If the geopolitical situation worsens in Ukraine or the Middle East in a way that impacts oil - to me, that's the key transmission mechanism that can derail the rally. The second issue, which I think is going to come up closer to the fall, is when investors start to think about when the Fed's going to tighten rates, changing monetary conditions at the margin. That typically leads to higher volatility, but that may still be a few months away."
On CNBC, Koesterich claimed the ultimate takeaway is simple. "We know that while valuations are reasonable, stocks are no longer cheap. So if they can use this low-volatility environment to get some longer-term insurance," such as by purchasing relatively inexpensive out-of-the-money put options, "that's a way to still be in the market and have some insurance for where and if that correction does happen."
Koesterich above jumped the gun and introduced the second major reason for thinking that the market is looking at a serious downturn: rising interest rates. Commentator PEACE MAKER pointed out the awkward truth of the coming interest rate hike: "MORE "BS"...SAFE HAVEN...BUY NOW AND HAVE YOUR HEAD TAKEN OFF!....FED RAISES INTERESTS RATE LOOK OUT!!!!!" Bo Yo raises the same alarm: "it's inevitable... rates will rise soon... the longer the fed waits... the more OUT OF CONTROL... the rate rise will be..." Higher interest rates are to stocks what an Ebola epidemic is to the heath of a nation.
The third factor for thinking that stocks will be coming down is the fragility of the dollar. Brea writes that "economic or physical war is launched between East and West, while the dollar is killed in the process." The dollar's problems are only increasing as we read this. After the US abandoned the gold standard, the main support for the dollar has been its role as the currency of international trade. The US worked out a deal with Saudi Arabia and eventually with the OPEC so that only US dollars could be used to purchase oil. As the international currency for oil, the dollar has remained strong. The dollar's vulnerability in the 21st century begins with Bernanke's qualitative easing, which did not inspire other nations to feel as secure about the value of the dollar In the past few years some countries, notably Iran, Russia, China and Brazil, have made efforts to reduce their need to hold dollars for settling their trade accounts. Any country dropping the dollar for another currency to settle international trade weakens confidence in the dollar and risks putting the dollar on a slippery slope.
BRICS, which will form an international bank that will compete with the US-controlled IMF that trades in US dollars, is the most recent poster child of the eventual diminishment of the value of the dollar. According to a joint statement from Russia and China on the partnership and strategic cooperation, Russia and China are planning to bypass the dollar and increase the volume of direct payments in their national currencies. This would threaten even more the dominance of the petrodollar and would be a devastating blow to our US economy if other nations follow suit. The dollar will eventually be losing its dominance in petro-trade and the formation of BRICS is a clear indication that this will happen sooner than later. As the dollar weakens, the Fed will be forced to raise interest rates to try to strengthen it. We've already seen what higher interest rates will do to the stock market.
The above are four threats to the market. These four are "internal" to the structural relationships between the dollar, interests rates, and the technically overdue correction. As Koesterich pointed out, there are also external factors that can affect the market. Ken senses that there will be a big problem: "The Russians have been entering Ukraine for some time, this time they were attacked. Meanwhile what are they holding up the relief for? Perhaps we should send our useless border guards there? It sure FEELS like we're heading for some kind of big event doesn't it? Is it just me?" Commenter reminds us that there are other issues percolating that could also tackle the market: "Forget the Ukraine, is that plant at Fukushima still leaking?" Donato summed all of this up succinctly: "The global landscape is so brittle everywhere, how much longer before contagion becomes unstoppable?"
I think it is impossible to believe that the market is a safe haven for anything but risk. Commenter also pointed out the interesting affect the market is having on our national psyche: "I think the markets have become some sort of happy pill. Even though things in this country and around the world are in the toilet, the bathroom smells clean thanks to a manipulated stock market that seems to rise on any news and even takes just small hits on even the worst news." There is a silver lining.
4. WHAT TO DO NOW?
The commentators on the Yahoo propaganda article, as well as Koesterich, have suggested that we take action to hedge our portfolios against what they see as the coming downturn. Robin tells us that she is "hedged with lots of GOLD and VIX."
a) Hedging with GOLD
We know what gold is. How does one hedge with gold? The obvious thought is to purchase some. But to buy the metal itself requires getting involved with insurance, storage, moving, and reselling, which for most of us requires expertise in worlds we have no part in. Fortunately, David Nelson has made it easier for us to understand how to invest in gold. He tells us that he's "often found that other investors know very little about investing in gold and how a gold ETF can allow them to easily participate in the gold market."
Nelson recommends we consider three ETFs. The first is "SPDR Gold Trust (NYSEARCA:GLD) was the very first Gold ETF fund and still the most popular. They purchase 400 ounce gold bars from London Good Delivery Bars, and issue the shares at one tenth of the price of an ounce of the gold."
The second is "ProShares Ultra Gold (NYSEARCA:UGL)." Nelson says this one "is for the seasoned investor who is very aggressive and not averse to risk. Also known as a double gold ETF, it is designed to double the investment return, in other words, if the price of gold increases by 10% the value of the shares should increase by 20%."
The third ETF Nelson mentions is the "Market Vectors Gold Miners fund (NYSEARCA:GDX) [which] attempts to mirror the NYSE Arca Gold Miners Index as closely as possible, before any fees are removed from the investment. Using index investing, your portfolio will have 32 mining companies behind it. Keep in mind, this type of Gold ETF is made [up of] gold company stocks, thus it tracks the gold stock index, not the gold price index." E-Trade adds some more information that may be helpful: "The fund normally invests at least 80% of its total assets in common stocks and depository receipts of companies involved in the gold mining industry. Such companies may include small- and medium-capitalization companies and foreign issuers. The Gold Miners Index is a modified market-capitalization weighted index primarily comprised of publicly traded companies involved in the mining for gold and silver."
Just as investing in gold can seem daunting until one knows about these ETFs, so hedging against a risky market with the VIX is equally mysterious to many investors.
b) Hedging with VIX
The VIX is one of the standard quotes we get when we pull up market quotes. We typically get the DOW, the NASDAQ, the S&P 500, and the VIX. The VIX is an indicator: stocks go up, the VIX goes down; VIX goes up, stocks go down. How do we hedge with the VIX? Unlike gold which we can buy, we cannot buy the VIX.
The CBOE tells us that "VIX is often referred to as the "investor fear gauge." But, more than that, VIX is also a risk power-tool - giving investors the ability to leverage volatility via options and futures traded exclusively on CBOE and CBOE Futures Exchange (CFE®)…. VIX options and futures provide investors with new and effective ways to gain protection and provide diversification when you need it most. Plus, VIX options and futures give investors exciting new trading opportunities to potentially profit from volatility."
According to Investopedia, "one advantage of the VIX is its negative correlation with the S&P 500. According to CBOE's own website, since 1990 the VIX has moved opposite the S&P 500 Index (SPX) 88% of the time. On average, VIX has risen 16.8% on days when SPX fell 3% or more. This makes it an excellent diversification tool and perhaps the best market disaster insurance. Buying VIX calls seems to be an even better hedge against drops in the market (S&P) than buying SPX puts." The chart in Figure 1 shows how the VIX moves in opposition to the SPX in big moves down in the SPX. In 2008, the VIX reached its highest close at 80.86.
Here is a trading example of what would have happened if you purchased calls on the VIX on July 30th or a few days before (on July 30th, the VIX was 13.3). On Thursday, July 31, 2014, the Dow Jones Industrial Average [DJI] fell 317.06 points, or 1.88 percent, to 16,563.3, while the S&P 500 [SPX] lost 39.4 points, or 2.0 percent, to 1,930.67 and the Nasdaq Composite [IXIC] dropped 93.13 points, or 2.09 percent, to 4,369.77. The VIX jumped 27.2% to close at 16.95, its highest level since April 11. Had you purchased calls a few days earlier, you would have made a very tidy profit.
In 2008, the VIX reached its highest close at 80.86:
With Figure 1, Investopedia shows the VIX indicator from April 2007 to February 2009. As Investopedia tells us, "the VIX spiked in September 2008. This unprecedented rise in the VIX coincided with extreme panic and one of the sharpest drops in the history of the financial markets. The VIX values near the dotted trendline portray a much different picture; they could be used to predict bullish sentiment and a much less volatile period of investing. Given the unfolding of the credit crisis in late 2008, it is not surprising to see that the VIX was suggesting that panic was dominating the market." The dramatic rise of the VIX in 2008 offers a clear example of the VIX as a hedge against volatility and a striking clear example that serious money can be investing in the VIX as well.
5. WALL STREET AHEAD: SAFE HAVEN AFTER PANIC SELL-OFFS
The commentators of "Wall Street Week Ahead: U.S. stocks a safe haven, even after panic selloffs" perceived the title to be propaganda. The article's commentators exposed the propaganda, ripped to shreds the thought that the market was a safe haven, and made several other observations that are worth sharing. I will end with two.
Texian: "There are way too many inexperienced mutual fund managers, they pump and dump like lemmings running off a cliff." That certainly is true. How many of these advisers and managers where working in the financial realm on Black Monday, October 19, 1987? Those who weren't on the scene have no idea what it's like when the market crashes, stocks and options cannot be sold, trading desks are abandoned, or how far down it is from the top of that cliff to where the market can wind up.
4 more Beers!: "I talked to a Russian today and told him, "how you like them apples?" and he said, in Russia we don't have apples. hahahah LMAO."
Acknowledgements: I am grateful to all the knowledgeable, witty, and plain fun-loving commentators who commented on: "Wall Street Week Ahead: U.S. stocks a safe haven, even after panic selloffs." Keep up the good work and know that some of us do read your stuff and, at times, not only learn, but also enjoy your sarcasm and your humor. Thank you.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.