TheCenterLane.com

© 2008 – 2019 John T. Burke, Jr.

Rampant Stock Market Pumping

Comments Off on Rampant Stock Market Pumping

It has always been one of my pet peeves.  The usual stock market cheerleaders start chanting into the echo chamber.  Do they always believe that their efforts will create a genuine, consensus reality?  A posting at the Daily Beast website by Zachary Karabell caught my attention.  The headline said, “Bells Are Ringing!  Confidence Rises as the Dow –  Finally – Hits 13,000 Again”.  After highlighting all of the exciting news, Mr. Karabell was thoughtful enough to mention the trepidation experienced by a good number of money managers, given all the potential risks out there.  Nevertheless, the piece concluded with this thought:

The crises that have obsessed markets for the past years – debt and defaults, housing markets, Europe and Greece– are winding down.  And markets are gearing up.  Maybe it’s time to focus on that.

As luck would have it, my next stop was at the Pragmatic Capitalism blog, where I came across a clever essay by Lance Roberts, which had been cross-posted from his Streettalklive website.  The title of the piece, “Media Headlines Will Lead You To Ruin”, jumped right out at me.  Here’s how it began:

It’s quite amazing actually.   Two weeks ago Barron’s ran the cover page of “Dow 15,000?.  Over the weekend Alan Abelson ran a column titled “Everyone In The Pool”.  Today, CNBC leads with “Dow 13,000 May Finally Lure Investors Back Into Stocks”.   Unfortunately, for most investors, the headline is probably right.  Investors, on the whole, have a tendency to do exactly the opposite of what they should do when it comes to investing – “Buy High and Sell Low.”  The reality is that the emotions of greed and fear do more to cause investors to lose money in the market than being robbed at the point of a gun.

Take a look at the chart of the data from ICI who tracks flows of money into and out of mutual funds.  When markets are correcting investors panic and sell out of stocks with the majority of the selling occurring near the lows of the market.  As the markets rally investors continue to sell as they disbelieve the rally intially and are just happy to be getting some of their money back.  However, as the rally continues to advance from oversold conditions – investors are “lured” back into the water as memories of the past pain fades and the “greed factor” overtakes their logic.  Unfortunately, this buying always tends to occur at, or near, market peaks.

Lance Roberts provided some great advice which you aren’t likely to hear from the cheerleading perma-bulls – such as, “getting back to even is not an investment strategy.”

As a longtime fan of the Zero Hedge blog, I immediately become cynical at the first sign of irrational exuberance demonstrated by any commentator who downplays economic headwinds while encouraging the public to buy, buy, buy.  Those who feel tempted to respond to that siren song would do well to follow the Weekly Market Comments by economist John Hussman of the Hussman Funds.  In this week’s edition, Dr. Hussman admitted that there may still be an opportunity to make some gains, although the risks weigh heavily toward a more cautious strategy:

The bottom line is that near-term market direction is largely a throw of the dice, though with dice that are modestly biased to the downside.  Indeed, the present overvalued, overbought, overbullish syndrome tends to be associated with a tendency for the market to repeatedly establish slight new highs, with shallow pullbacks giving way to further marginal new highs over a period of weeks.  This instance has been no different.  As we extend the outlook horizon beyond several weeks, however, the risks we observe become far more pointed.  The most severe risk we measure is not the projected return over any particular window such as 4 weeks or 6 months, but is instead the likelihood of a particularly deep drawdown at some point within the coming 18-month period.

Economist Nouriel Roubini (a/k/a Dr. Doom) provided a sobering counterpoint to the recent stock market enthusiasm in a piece he wrote for the Project Syndicate website entitled, “The Uptick’s Downside”.  Dr. Roubini focused on the fact that “at least four downside risks are likely to materialize this year”.  These include:  “fiscal austerity pushing the eurozone periphery into economic free-fall” as well as “evidence of weakening performance in China and the rest of Asia”.  The third and fourth risks were explained in the following terms:

Third, while US data have been surprisingly encouraging, America’s growth momentum appears to be peaking.  Fiscal tightening will escalate in 2012 and 2013, contributing to a slowdown, as will the expiration of tax benefits that boosted capital spending in 2011.  Moreover, given continuing malaise in credit and housing markets, private consumption will remain subdued; indeed, two percentage points of the 2.8% expansion in the last quarter of 2011 reflected rising inventories rather than final sales.  And, as for external demand, the generally strong dollar, together with the global and eurozone slowdown, will weaken US exports, while still-elevated oil prices will increase the energy import bill, further impeding growth.

Finally, geopolitical risks in the Middle East are rising, owing to the possibility of an Israeli military response to Iran’s nuclear ambitions.  While the risk of armed conflict remains low, the current war of words is escalating, as is the covert war in which Israel and the US are engaged with Iran; and now Iran is lashing back with terrorist attacks against Israeli diplomats.

Any latecomers to the recent festival of bullishness should be mindful of the fact that their fellow investors could suddenly feel inspired to head for the exits in response to one of these risks.  Lance Roberts said it best in the concluding paragraph of his February 21 commentary:

With corporate earnings now slowing sharply, the economy growing at a sub-par rate, the Eurozone headed towards a prolonged recession and the American consumer facing higher gas prices and reduced incomes, a continued bull market rally from here is highly suspect.   Add to those economic facts the technical aspects of a very extended market with overbought internals – the reality is that this is a better place to be selling investments versus buying them.  Or – go to Vegas and bet on black.


 

Those Smart Bond Traders

Comments Off on Those Smart Bond Traders

There seems to be a consensus that bond traders are smarter than stock traders.  Consider this thought from Investopedia’s Financial Edge website:

Many investors believe bond traders understand the economy better than equity traders.  Bond traders pay very close attention to any economic factor that might affect interest rates.  Equity traders recognize that changes in bond prices provide a good indication of what bond traders think of the economy.

Widespread belief that Ben Bernanke’s Zero Interest Rate Policy (ZIRP) has created a stock market “bubble” has led to fear that the bubble may soon pop and cause the market to crash.  It was strange to see that subject discussed by John Melloy at CNBC, given the news outlet’s reputation for stock market cheerleading. Nevertheless, Mr. Melloy recently presented us with some ominous information:

The Yale School of Management since 1989 has asked wealthy individual investors monthly to give the “probability of a catastrophic stock market crash in the U.S. in the next six months.”

In the latest survey in December, almost 75 percent of respondents gave it at least a 10 percent chance of happening.  That’s up from 68 percent who gave it a 10 percent probability last April, just before the events of May 6, 2010.

*   *   *

The Flash Crash Commission – containing members of the CFTC and SEC – made a series of recommendations for improving market structure Friday, including single stock circuit breakers, a more reliable audit trail on trades, and curbing the use of cancelled trades by high-frequency traders.  They still don’t know what actually caused the nearly 1,000-point drop in the Dow Jones Industrial Average in a matter of minutes.

*   *   *

Overall volume has been very light in the market though, as the individual investor put more money into bonds last year than stocks in spite of the gains.  Strategists said this has been one of the longer bull markets (starting in March 2009) with barely any retail participation.  Flows into equity mutual funds did turn positive in January and have continued this month however, according to ICI and TrimTabs.com.  Yet the fear of a crash persists.

Whether or not one is concerned about the possibility of a market crash, consensual ambivalence toward equities is on the rise.  Felix Salmon recently wrote an article for The New York Times entitled, “Wall Street’s Dead End”, which began with the observation that the number of companies listed on the major domestic exchanges peaked in 1997 and has been declining ever since.  Mr. Salmon discussed the recent trend toward private financing of corporations, as opposed to the tradition of raising capital by offering shares for sale on the stock exchanges:

Only the biggest and oldest companies are happy being listed on public markets today.  As a result, the stock market as a whole increasingly fails to reflect the vibrancy and heterogeneity of the broader economy.  To invest in younger, smaller companies, you increasingly need to be a member of the ultra-rich elite.

At risk, then, is the shareholder democracy that America forged, slowly, over the past 50 years.  Civilians, rather than plutocrats, controlled corporate America, and that relationship improved standards of living and usually kept the worst of corporate abuses in check.  With America Inc. owned by its citizens, the success of American business translated into large gains in the stock portfolios of anybody who put his savings in the market over most of the postwar period.

Today, however, stock markets, once the bedrock of American capitalism, are slowly becoming a noisy sideshow that churns out increasingly meager returns.  The show still gets lots of attention, but the real business of the global economy is inexorably leaving the stock market — and the vast majority of us — behind.

Investors who decided to keep their money in bonds, heard some discouraging news from bond guru Bill Gross of PIMCO on February 2.   Gus Lubin of The Business Insider provided a good summary of what Bill Gross had to say:

His latest investment letter identifies four scenarios in which bondholders would get burned.  Basically these are sovereign default, currency devaluation, inflation, and poor returns relative to other asset classes.

In other words, you can’t win.  Gross compares Ben Bernanke to the devil and calls ZIRP a devil’s haircut:  “This is not God’s work – it has the unmistakable odor of Mammon.”

Gross recommends putting money in foreign bonds and other assets that yield more than Treasuries.

I was particularly impressed with what Bill Gross had to say about the necessary steps for making America more competitive in the global marketplace:

We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again.  We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship.  We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up.  America requires more than a makeover or a facelift.  It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system.  It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola.  Are record corporate profits a fair price for America’s soul?  A devil’s bargain more than likely.

You can’t discuss bond fund managers these days, without mentioning Jeffrey Gundlach, who recently founded DoubleLine Capital.  Jonathan Laing of Barron’s wrote a great article about Gundlach entitled “The King of Bonds”.  When I reached the third paragraph of that piece, I had to re-read this startling fact:

His DoubleLine Total Return Bond Fund (DBLTX), with $4.5 billion of assets as of Jan. 31, outperformed every one of the 91 bond funds in the Morningstar intermediate-bond-fund universe in 2010, despite launching only in April.  It notched a total return of 16.6%, compared with returns of 8.36% for the giant Pimco Total Return Fund (PTTAX), run by the redoubtable Bill Gross  . . .

The essay described how Gundlach’s former employer, TCW, feared that Gundlach was planning to leave the firm.  Accordingly, TCW made a pre-emptive strike and fired Gundlach.  From there, the story gets more interesting:

Five weeks after Gundlach’s dismissal, TCW sued the manager, four subordinates and DoubleLine for allegedly stealing trade secrets, including client lists, transaction information and proprietary security-valuation systems.  The suit also charged that a search of Gundlach’s offices had turned up a trove of porn magazines, X-rated DVDs and sexual devices, as well as marijuana.

*    *    *

He charges TCW with employing “smear tactics … to destroy our business.” As for “the sex tapes and such,” he says, they represented “a closed chapter in my life.”

That’s certainly easy to understand.  Porn just hasn’t been the same since Ginger Lynn retired.

Jeff Gundlach’s December webcast entitled, “Independence Day” can be found here.  Take a good look at the graph on page 16:  “Top 0.1% Income Earners Share of Total Income”.  It’s just one of many reminders that our country is headed in the wrong direction.


wordpress stats


The Invisible Bank Bailout

Comments Off on The Invisible Bank Bailout

August 23, 2010

By now, you are probably more than familiar with the “backdoor bailouts” of the Wall Street Banks – the most infamous of which, Maiden Lane III, included a $13 billion gift to Goldman Sachs as a counterparty to AIG’s bad paper.  Despite Goldman’s claims of having repaid the money it received from TARP, the $13 billion obtained via Maiden Lane III was never repaid.  Goldman needed it for bonuses.

On August 21, my favorite reporter for The New York Times, Gretchen Morgenson, discussed another “bank bailout”:  a “secret tax” that diverts money to banks at a cost of approximately $350 billion per year to investors and savers.  Here’s how it works:

Sharply cutting interest rates vastly increases banks’ profits by widening the spread between what they pay to depositors and what they receive from borrowers.  As such, the Fed’s zero-interest-rate policy is yet another government bailout for the very industry that drove the economy to the brink.

Todd E. Petzel, chief investment officer at Offit Capital Advisors, a private wealth management concern, characterizes the Fed’s interest rate policy as an invisible tax that costs savers and investors roughly $350 billion a year.  This tax is stifling consumption, Mr. Petzel argues, and is pushing investors to reach for yields in riskier securities that they wouldn’t otherwise go near.

*   *   *

“If we thought this zero-interest-rate policy was lowering people’s credit card bills it would be one thing but it doesn’t,” he said.  Neither does it seem to be resulting in increased lending by the banks.  “It’s a policy matter that people are not focusing on,” Mr. Petzel added.

One reason it’s not a priority is that savers and people living on fixed incomes have no voice in Washington.  The banks, meanwhile, waltz around town with megaphones.

Savers aren’t the only losers in this situation; underfunded pensions and crippled endowments are as well.

Many commentators have pointed out that zero-interest-rate-policy (often referred to as “ZIRP”) was responsible for the stock market rally that began in the Spring of 2009.  Bert Dohmen made this observation for Forbes back on October 30, 2009:

There is very little, if any, investment buying.  In my view, we are seeing a mini-bubble in the stock market, fueled by ZIRP, the “zero interest rate policy” of the Fed.

At this point, retail investors (the “mom and pop” customers of discount brokerage firms) are no longer impressed.  After the “flash crash” of May 6 and the revelations about stock market manipulation by high-frequency trading (HFT), retail investors are now avoiding mutual funds.  Graham Bowley’s recent report for The New York Times has been quoted and re-published by a number of news outlets.   Here is the ugly truth:

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group.  Now many are choosing investments they deem safer, like bonds.

The pretext of providing “liquidity” to the stock markets is no longer viable.  The only remaining reasons for continuing ZIRP are to mitigate escalating deficits and stopping the spiral of deflation.  Whether or not that strategy works, one thing is for certain:  ZIRP is enriching the banks —  at the public’s expense.



wordpress visitor