Let's get one thing straight - the jobs number had nothing to do with the spike in stocks on Friday. Here's the e-mini S&P futures contract:
The market was being pushed higher in the futures market from Wednesday's close on into Thursday. Draghi's comments caused the euro to sell off hard and futures spiked to the upside. Then futures spiked higher again just ahead of the report and moved a little higher in a knee jerk response after the release of the report only to fall hard thereafter moving into negative territory on the day.
I didn't think Draghi's comments justified the spike in futures but at least I understood the move so no complaints on that one. I also understood the market's move higher ahead of the report - again no problem. I even understood the knee jerk move higher on the number - after all it was a pretty decent number.
The sell off after the report came out made sense - take a look at what happened to the dollar after the number was released:
Strong dollar/weak stocks - that has been the correlation for some time now but not Friday. Well, actually stocks did fall as the dollar moved higher before reversing direction. Here's the next chart that suggests Friday's spike in stocks was less than rational:
Here's how the logic goes with the bond market - good jobs report means the Fed will taper sooner rather than later. So the initial response to the jobs report was that the S&P sold off 20 plus points, the dollar spiked higher by 60 plus cents and the bond market fell by about 1.40.
Here's the RBOB gasoline futures - another negative that didn't seem to matter to stocks:
Are we to assume that the stock market reacted positively to higher gasoline prices? A bit of a stretch in my mind.
Here's the problem as I see it - the job's report was good enough to drive interest rates sharply higher in anticipation of the Fed's tapering sooner rather than later. High interest rates are a huge negative for stocks. It certainly won't help credit sales and a large percentage of consumer purchases over a few hundred dollars are credit sales. Housing will be hurt of course as will auto sales. Oh, and the spike in gasoline won't help stocks much as fuel costs will take a bigger cut out of disposable income leaving less for other purchases. And the higher dollar has a decidedly dampening effect on inflation - not a good situation for stocks.
Actually the jobs report wasn't all that great anyway. U4 which includes the headline number plus discouraged workers was 8.4% - up from 7.7% in May. U5 which includes U4 plus the marginally attached was 9.3% - up from 8.5% in May. And finally, U6 was 14.6% - up from 13.4% in May.
Let's call a spade a spade - I am a very frustrated bear. When I see a market move that is wholly irrational as was Friday's spike in stocks as every other market moved in a rational fashion I get frustrated but I also start asking questions as I want to know who spiked the market and why they did it. Regardless of what the pundits say we are in a huge mess and we are not growing this economy and all other markets seem to be getting it but the Bernanke bull in stocks remains oblivious to reality.
There will be those who argue that point citing things such as auto sales or the improvement in housing metrics or a one month spike in consumer spending or some other metric but the truth is we are suffering from disinflation, slowing GDP, serious unemployment issues that aren't responding to stimulus and the problem is global in scope. The idea that US stocks are a good buy at these levels as we are the best of the worst is utter nonsense. We are not going to move higher based on deteriorating economic metrics domestically and globally just because we are bad but not as bad as everyone else.
So who caused stocks to spike on Friday and why did they do it? Suffice it to say that it was somebody with the resources needed to stand in the gap and diffuse the sell off by bidding stocks up as the market sold off. Whoever it was they didn't just stabilize the market - they bid it up on purpose and very aggressively. They were not taking advantage of a great buying opportunity - they were purposely driving the bid higher to defend the market and keep it from going into free fall.
Granted the market on Friday was a low volume day but it still took a lot of money to fade the trend. More importantly they never stopped pushing as they continued to buy and continued to raise the bid all the way into the close.
Here's the point - I am really not used to being wrong on a market call. For instance in October of last year I wrote Making A Case For Buying The US Dollar Now. Here's the chart on the dollar (NYSEARCA:UUP):
The long dollar call was a good one although there were a few gyrations along the way thanks to the sharp spike in the euro followed by the BOJ's move to devalue the yen. The call wasn't made based on the currency shifts in the euro and the yen though. It was in anticipation of deleveraging and disinflation in the US economy.
My short gold call was based on the same premise - disinflation and eventually deflation in the US economy. Here is one of many comments I made on gold and this one dates back to October 9 of last year. It is the first comment I made on gold:
Seems to me the trajectory of the dollar is higher in spite of current monetary policy. Perhaps I am a little simplistic here but short of an agreement to set the price of gold how does the price of gold go up if the dollar gains in value?
Here is the chart on (NYSEARCA:GLD):
I made a number of comments on gold and have been advising my "gold bug" readers to get out of gold for a number of months now. Here's another one from November of last year:
I don't see any asset class doing that well in the next 6 to 12 months. I certainly don't see a weak dollar - to the contrary, I see the dollar strengthening. That doesn't do much for Gold.
Not sure how long corporate bonds can hold value. At some point interest rates will move higher - even in US.
Here is the bond chart (NYSEARCA:TLT):
I was a little late on the bond call and it's been an erratic ride but again not a bad call especially in light of the Fed's persistent attempts to keep rates low and bonds high. All in all not great calls perhaps but at least I got the general trajectory of the market right.
Does anybody give any thought to the idea that a global slow down is really happening. I think there are a lot of factors that are about to cause the public to run for cover.
I think iPhone sales are going to suffer. Price has to play a part here.
Am I wrong?
Here is the Apple chart:
The Apple call was a pretty good one and based on the "global slowdown" that was quite apparent back in September of last year. Additionally the short call was based on the idea that Apple would need to become more competitive on price and would lose market share going forward.
Here's the thing that makes me angry - things aren't getting better. The gold market tells us we are rapidly approaching a deflation problem. GDP printed flat in the 4th quarter of last year. Barclay's 2nd quarter GDP estimate has been lowered to 1.0%: That works out to a 3 quarter average of just 1.1% if the estimate is right.
Here's what the BEA reported on June 26:
- Real disposable personal income-personal income adjusted for taxes and inflation-fell 8.6 percent in the first quarter.
- Personal savings as a percent of disposable personal income was 2.5 percent, compared with 5.3 percent in the fourth quarter.
- Corporate profits fell 1.4% at a quarterly rate in the first quarter.
- Profits of nonfinancial corporations fell 0.5 percent at a quarterly rate in the first quarter, and profits of financial corporations fell 0.8 percent. Profits from the rest of the world fell 4.3%.
Looking at these metrics one has to ask - why did stocks rally on Friday while all other markets reacted as expected? More to the point - who back stopped the free fall and then drove prices higher right into the close with ever increasing bids? And finally why did they do it and on a very thinly traded post holiday session?
Some have called this the most hated bull market of all time and I agree. It isn't hated for the reasons so many claim though. I don't hate it because I missed the rally - I hate it because it is contrived, fake, phony and manipulated. Friday's ramp in the face of falling bonds, rising dollar and rising fuel prices is a solid testament to the truth that this market is being manipulated.
I believe the markets should reflect the truth. The stock market is not doing that. Stocks are supposed to price in future expectations - that is the way the market normally works. This market is clearly not doing that as GDP, corporate profits and disposable incomes are falling right in the face of a stock market that refuses to correct.
The answer as to who is doing this seems obvious to me - the primary dealer banks acting as surrogates for the Fed are doing it. I can't even fathom anyone else attempting to orchestrate a corner on a market on such a grand scale.
Here is a look at the S&P (NYSEARCA:SPY) just to put things in perspective:
What's most significant to me about this chart is the way the market has been propped up each time after falling back to the 50 day MA and how the market actually exceeded the 2 standard deviation band for multiple days suggesting a very overbought market. It was only when the Fed started to leak hints of a pending taper of QE that the market moved back below the 2 standard deviation band.
Another point of great interest is the Fed's move to QE4 at a time when Congress was debating the matter of the fiscal cliff. The fiscal cliff was a very serious matter as Congress was dealing with the debt and deficit. At the time it was assumed - and rightly so - that if Congress elected to tackle the deficit with tax hikes and spending cuts that the economic contraction would be severe.
The truth is we did go most of the way over the fiscal cliff as we did hike taxes and the sequestration cuts did become reality. It is also true that it has had an impact on the economy. You can listen all you want to the slow growth rhetoric but the truth is we are likely to see a 3 quarter average on GDP of just 1%. That is not the kind of economic conditions that typify a raging bull market yet that is exactly what we have had.
Here is what disturbs me - the pundits claimed that Congress avoided the devastation of the fiscal cliff and it is my opinion that the Fed announced QE4 to push money into stocks through the Fed's primary dealers in conjunction with the announcement that the fiscal cliff fiasco had been averted. The truth is we didn't avoid the fiscal cliff and GDP reflects that fact.
Notwithstanding that truth from the first of the year forward the market hugged the 2 standard deviation band and every sell off was back stopped at the 50 day MA. The overzealous market participants pushed stocks on low volume to all time highs and into overbought territory. It is my opinion that Friday's ramp in the face of falling bonds, rising fuel prices and falling gold prices was another attempt by the Fed's surrogate at micro managing stock price to prevent a free fall in stocks.
Here is the most important question though - why are they doing it? My own opinion is that the primary dealer banks may have some serious exposure to stocks and of such a magnitude that it could once again be of systemically significant proportion. Couple that with the banks exposure to bonds that are falling rapidly and the big banks may very well be right back where they were before the 2008 crash.
You can argue this if you wish and at this point I can only set forth suppositions but for my money it is really hard to explain the move in stocks on Friday in the face of so many negatives. And it is particularly hard to explain these one day counter cyclical moves when the market appears to be in position to sell off hard.
Could it be that the big banks have once again moved us to the brink of disaster and the only way they can avert it is to keep stocks in a state of suspended animation? I am open to any other plausible explanation one might offer but in my 40 years in the business I have never seen a market so contrived and so reluctant to sell off - even in the face of rapidly deteriorating economies across the globe.