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Is THIS The End?

by John Rubino on June 2, 2014 · 20 comments

Eventually, every finance geek learns that calling market tops — at least publicly — is so hard that it’s not worth the reputation risk. This is especially true in an era of pervasive government manipulation, where price distortions can persist for far longer than any kind of rational analysis can justify.

And yet. For US stocks — and by implication most other equity markets — the danger signals are piling up to the point where a case can be made that the end is, at last, near. To take just a few examples of indicators that should scare the hell out of anyone with a big stock portfolio:

Margin debt has peaked
In good times, optimistic investors tend to borrow money against their stocks to buy more stocks. This “buying on margin” generally goes hand in hand with rising share prices, and tends to peak and then decline just before the markets turn down. As the following chart illustrates, margin debt hit a record in January, turned down in February, and is now falling hard.

Margin debt June 14

Interest rates are plunging
Rising interest rates are generally seen as a sign of a growing economy in which the demand for money is strong. Falling rates point to the opposite. Since equities are valued on future cash flows which in turn depend on future growth, falling interest rates are generally associated with weak equity markets. From Wall Street On Parade:

Is the Market Crazy? Treasurys Are Screaming Crisis While Stocks Yawn

The U.S. Treasury market, which is experiencing a flight to safety (that suggests a slowing economy, lower corporate earnings and thus a lower stock market in the future) is essentially saying that the current composite wisdom of the stock market is either nuts or the market is, indeed, rigged.

Stocks have been setting new highs of late while the yields on the benchmark 10-year and 30-year Treasurys decline. The 10-year Treasury began the year at a yield of approximately 3 percent and closed on Friday at a yield of 2.49. The 30-year Treasury started the year at a yield of approximately 4 percent and closed last week with a yield of 3.33 percent.

Market breadth is contracting
In a healthy bull market most stocks move up. This indicator — the percentage of stocks that rise along with the overall market — is known as market breadth, and lately it has turned highly negative. From the above Wall Street On Parade article:

Joseph Ciolli and Lu Wang of Bloomberg News report today that only “1.8 billion shares traded each day in S&P 500 companies last month, the fewest since 2008.” Equally worrying, say the reporters, is that when the S&P 500 index “hit an all-time high on May 23, only about 20 of its 500 companies reached 52-week highs…”

A market index setting new highs while only 20 of its 500 components set new highs, i.e. less than 5 percent, is sounding the same alarm bell as the bond market. The rising tide is not lifting all boats or to put it in Wall Street parlance, this is decidedly weak breadth.

The velocity of money is still plunging
This is a measure of how many times a typical dollar is spent in a given time period. Theoretically, in an optimistic, growing economy, dollars are spent frequently and therefore the velocity of money is high, while in a shrinking economy worried citizens tend to hoard their cash, resulting in a low money velocity. The following chart definitely paints the latter picture, though it has admittedly done so since the 1990s. The question today is whether there’s a point at which all the new dollars being pumped into the system fail to offset consumers’ reluctance to spend their dollars, and where that point might be. The answer is unclear, but the chart still looks ominous.

Velocity of money June 14

Now, do these and the many other bear market signals mean the current run is over? Not necessarily, because such indicators apply to normal markets, which this one clearly is not. The world’s governments are actively trying to inflate asset bubbles to make the average person feel rich enough to start spending again (thus sending the velocity of money back up to more traditional levels), and their effectively-unlimited printing presses give them plenty of ammunition. The European Central Bank, for instance, is about to start monetizing eurozone debt on a scale that, if it’s to have an appreciable effect, will be huge. China is easing bank lending standards and talking about other stimulus measures, while Japan’s central bank is buying bonds and encouraging the national pension plan to start buying riskier assets.

One could make the case that the financial markets are responding rationally to the prospect of trillions of new dollars looking for a home in stocks and bonds (and high-end real estate and fine art and the other preferred assets of the 1%). But the case can also be made that all of this manipulation hasn’t really affected fundamentals and that more of the same is unlikely to make much of a difference.

What we’re witnessing, in short, is a truly fascinating attempt by the world’s major governments to suspend the laws that have, thus far in human history, governed economics. And the signs of their imminent failure are spreading.

  • Bruce C

    There are a whole lot more ominous signs than these.

    Not only is “breadth” very low but so is volume. Basically, that means there is not much trading – or buying and selling – which usually means that the market is topping out.

    Furthermore, the relatively fewer buyers are a handful of corporations themselves (hence the low breadth) buying their own stock back. Besides this being even less “legitimate” buying than usual, two other perverse things are happening:

    The stock buy-backs are giving false financial ratios that investors follow, the “earnings per share” or EPS in particular. The same or even lower earnings (more about that below) divide by fewer outstanding shares (Treasury stock is not included) yields the same or even rising EPS which is usually interpreted to mean the stock is not overpriced. And,

    The money to fund the stock buy-backs are coming from the sale of corporate bonds, “high yield” or “junk” bonds in particular. That means that even though there is no net change in the company’s net equity, they actually have more debt, even though the increase in Treasury stock balances it out. This is partly why you hear about companies sitting on so much “cash”. First of all, most of their assets are not liquid cash, it’s Treasury stock, etc., and no one bothers to mention the other side of the ledger which is the liability of owing principle and interest on the money they’ve borrowed from the junk bond holders.

    Corporate profits are also actually falling, even though every quarter we hear about them rising. That’s because reported earnings are often revised downwards later, and not reported by CNN, and because any time earnings exceed “estimates” they are considered an increase. If that sounds retarded to you then you understand the concept.

    Furthermore, corporate profits are famously cyclical and they have been at historically high levels for several years now, which normally means that they are due to mean reversion, as in falling. That is just starting to happen.

    There are more ominous signs as well but I’m tired of typing.

    • Bruce C

      P.S. I read somewhere that – based on some technical analysis, blah, blah, blah – that the S&P is going to roll over when it reaches 1,929. Creepy, huh?

      • MacFly1

        well its 1,924.97 right now. Time to buy!!!

  • Bill Johns

    OMG! John!! ARE YOU CALLING A TOP?!?!!

    Actually I called a top about 4 weeks ago. I live in a small town and a local farmer decided to make his bundle by selling property to build on. On the edge of town on a plot of land with a marvelous view, he built a little, high-end cul-de-sac. No homes, but offered 7 lots. A fancy little place with underground utilities, paved sidewalks (!), curbs(!!), all quite pricey for our neck of the woods, construction finished about July 2007. Did not sell a lot until about 4 weeks ago, shortly after the Russell 2K started rolling over in earnest. I was out walking and noticed that two lots had “sold” signs. I gave a shout “THE TOP IS IN!!” Did you hear?? It was quite loud. OK, we are a few miles apart. :-)

    We all have our favorite indicators for tops. I suspect all are valid.

    Bill

    • Pete

      There are vacant subdivision lots all over, just like there are skeletons of unfinished condos all over Las Vegas.

      Speaking of calling tops, I agree with James Turk (John Rubino’s co-author) that there will be undeniable signs of hyperinflation by the end of 2010, and silver will hit $35 an ounce by the end of 2008.

  • systemBuilder

    I work in silicon valley. All the companies are hiring. All are having troubles finding people. Housing is $1000/sq ft in places like Palo Alto, $700/sq ft in other places. Rentals are $3/sq-ft/month. Listings are gone in 2-3 days. Our friend panic-bought a house in Palo Alto. IPOs are happening every week. The freeways are almost as bad as in 2000. Big companies are doing acquisitions every 2-4 weeks (which means they believe their stock is overvalued). The top is near.

    • whateverdude

      The money is flowing like water? Seems to me that money flows uphill these days. I haven’t seen any increases in my wages but my rents are galloping up at a 10%/yr clip. Where’s this goddamn money you are talking about?

  • misterkel

    Doesn’t look like they’re failing to me. The S&P is going up at a ridiculous pace. I think the power of this government to prop up the fundamentally awful markets is ‘misunderestimated.’

  • MacFly1

    Yeah, I don’t think it’ll work either. I’m diggin’ out my bunker and don’t forget, you can have a roomful of guns but you’ll need a house full of bullets.

  • Antiehypocrite

    If it gets too bad the Fed will push more stimulus out — they will not go down without a fight.

    They will do everything possible to keep this going because when it stops — industrial civilization ends

    http://www.nakedcapitalism.com/2014/06/joe-costello-oil-industry-running-major-trouble.html

    • pipefit9

      Yeah, I don’t think stock prices are the thing to look at when trying to figure out when the ‘top’ is in. In hyperinflationary end games, overvalued stocks are seen as a safe haven, since the measuring stick, in this case dollars, is rapidly shrinking.

      The Japanese Yen is 102/dollar, about where it has been for 20 years. 30 years ago it was at 300/dollar. Where’s the weak Yen, lol? Japan and Europe are basket cases, but the dollar can’t meaningfully strengthen against either? This is how they devalue. They keep the major currencies tight to each other, and short gold.

      Then, when the time is right, they induce a crisis, and roll out IMF-World Bank funny notes. They will make the conversion a proposed range. Then, at the last minute, everyone gets about 1/3 their current buying power after the conversion to 1-world funny money.

  • http://theyenguy.wordpress.com/ theyenguy

    Monday June 2, 2014, marked an inflection point in world economic history, as Credit Investments traded lower, as currency traders sold the Japanese the Japanese Yen, on realization of The Failure Of Abenomics: Domestic Sales Collapse, Inflation Soars, Tyler Durden reports.
    Investors fear that the monetary policies of the world central banks have crossed the rubicon of sound monetary policy and have made “money good” investments, particularly credit investments, bad; resulting in a strong trade lower in Bonds.

    The lower Japanese Yen, FXY, stimulated Nation Investment in Japan, EWJ, JSC, and in Far East Financials, FEFN, to trade higher.

    Seeing US Government Debt, that is the US 30 Year Goverment Bonds, EDV, and the US Ten Year Notes, TLT, overvalued, the bond vigilantes called the Interest Rate on the US Ten Year Note, ^TNX, higher above 2.49% to 2.53%, and steepened the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, as is seen in the Steepner ETF, STPP, steepening, and the Flattner ETF, FLAT, flattening.

    Risk-on investing turned to risk-off investing. There was a credit market upheaval on June 2, 2014, as the ascending wave of credit that defined the paradigm and age of liberalism reversed. A review of Popular Notes And Bonds, shows Eurozone Credit, EU, Junk Bond, JNK, Global Junk Bonds, HYXU, Longer Duration US Corporate Bonds, LWC, US Corporate Bonds, LQD, International Corporate Bonds, PICB, Emerging Market Local Currency Bonds, EMLC, Emerging Market Bonds, EMB, Mortgage Backed Bonds, MBB, 30 Year US Government Bonds, EDV, US Treasuries, TLT, Municipal Bonds, MUB, and World Government Bonds, BWX, traded lower, on the failure of trust in the world central banks’ monetary authority. Bond Trader Across The Curve posts There was real money selling today and the street had no capacity to absorb it.

    The bond vigilantes effected a historic global economic coup d’etat on June 2, 2014, by calling the Interest Rate on the US Ten Year Note, ^TNX, higher above 2.49% to 2.53%. Liberalism’s dynamos of economic activity, creditism, corporatism, and globalism, failed on June 2, 2014, with the result that inflationism has turned to destructionism.

    US Government Debt is no longer a safe haven investment. The rally in Bonds, BND, that started in January 2014, cane to an end on June 2, 2014, as the longer duration US Government Debt Debt, EDV, are now starting to sell off faster than the medium duration US Government Debt, TLT, this seen in the ratio of EDV:TLT, trading lower. Bonds, BND, and US Treasuries, TLT, are no longer safe assets.

    Credit Investments failed on June 2, 2014, as the Japanese Yen, FXY, traded lower on the failure of Abenomics; confirmation comes from Convertible Securities, CWB, trading lower, and Floating Rate Notes, FLOT, trading lower from its late May 2014 high. Investors no longer trust in the monetary policies of the world central to provide investment gains and stimulate global growth.

    Eurozone Credit, EU, traded lower as Zero Hedge posts Here Comes QE In Financial Drag. David Stockman via Contra Corner blog relates the WSJ report The ECB And Bank of England Outline Options to Boost Asset-Backed Securities Market. This as Jenny Cosgrave of CNBC reports Eurozone Manufacturing Growth Slowest In 6 Months

    On June 2, 2014, the Inverse Market ETFs, as a group, traded higher; these include XVZ, STPP, EUO, YCS, CMD, DNO, MLPS, SAGG, DTYS, JGBS, GLD, GYEN, GEUR, GGBP, HDGI, YXI, EUM, DOG, SEF, EFZ, DDG, PSQ, REK. These could be used selectively and under wise management to serve as the basis for collateral in a short selling investment strategy.

    The sell of the Yen, FXY, on the failure of the Abenomics, as well as strong sell of Junk Bonds, JNK, is a wake up call to stirring investors out of their complacency, that the monetary policies of the world central banks no longer underwrite profitable investment.
    The short selling opportunity of a lifetime occurred on June 2, 2014.

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  • whateverdude

    Treasury’s are screaming crisis? Hell no! They are highlighting surging confidence in the solvency of the US Govt. When people are scared, they can take comfort hiding under the skirts of Mommy Govt.

    All praise Lord Ben and his mistress Yellen.

    /sarc off

  • Jason Carter

    Greenspan says this is not a stock market bubble. Even if it is, Obama says, if you like your bubble, you can keep you bubble.
    The time period between the 2000 stock market top and the 2007 top was roughly 7 years and 9 months. If there will exist the same length of time between the 2007 top and the next, then July 2015 should be your top. Unscientific and unlikely month but it would not surprise me if we get a pull back this year followed by a run to DOW 18,000 before the fall.

    • 10sfg

      Anticipation in the stock market is like a pregnant womans contractions. Shorter and shorter. As people start to become aware of our topping out market. It will collapse alot sooner than before. Like trying to tell a crowd to wait 5 min. The people will only wait 4:30

  • Chris

    Trying to prop up asset prices to spur economic growth is like putting the cart before a horse and going downhill with more load added to the cart as it rolls down hill. The horse will not have a chance. To explain this analogy, the horse is the equivalent of companies/people that are functioning in the economy and the cart is the assets. The companies/people make money and the excess money is used to buy assets as they grow their net worth. So the horse is pulling the cart. If the money that the Fed prints is not going to companies but to the banks to play with the asset markets, assets get more expensive and the companies/people have to use more of their profits/wages to pay for the assets. The companies/people have less money to spend to grow the economy. In a growing economy, they can make more money. So, with less disposable income, the economy will not grow and the companies/people will make less money as they have to spend more to pay for or to rent or to service interest for the loan to buy the assets. The load gets heavier as asset prices move higher. Now the horse is too weak to hold back the cart and the cart continues to pull the horse. The cart gets heavier and run faster with greater momentum. This is called point of no return.

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