Apparently the markets, that wonderful forward looking discounting mechanism, did not see or have fear what is happening in Greece. It is safe to assume that this proves that the markets are not efficient and it fails to see potential problems. What is interesting is that Greece and Portugal were not or should not have been a surprise to the markets since we have all known about the issues with the PIIGS for months now. How anyone could have been surprised by this news today is beyond me. I guess the junk rating on Greece may have been a surprise, but come on, when the 2 year note was yielding 11% how in the world can it be anything other than junk?
The market has gone up for 8 weeks in a row and while the talking heads thought this perpetual “tortoise rally” was normal anyone who has even a little investment experience knew it was not. I still remember Dennis Kneale, last week, calling people who held cash “fraidy cats” because the market is back and it will be a bull market forever. The world does not work like that and the risk trade has been, frankly, out of whack. Money has been pouring in to everything from high yield to emerging markets in the expectation of a steady 1-2% a day. This was verified from mutual fund flow data reported last week which showed investors moved more money into equity funds, for the first time in a longtime, and, in my mind, confirmed we must be near a top, dumb money always moves in after fantastic rallies.
Whether or not this was a top remains to be seen, but it certainly looks like it from my lens. I have been wrong before and might be again, which I admit. However, even though I was wrong it doesn’t mean that the markets were right either. Earnings are better, I still see some misses in revenue though, but the underlying macroeconomic data has merely gone from very bad to just plain bad. When we cheer a 57% confidence reading that is a problem because that it is a horribly low number. The housing data is not verifiably strong when you have, like in October, a rush of people buying for the tax credit right before it expires. If the housing numbers stay “strong” for May then you may say housing is rebounding, but I highly doubt we will see such strong numbers at that time. Housing is a key indicator because it employs so many people and homes were the collateral that were the bad debt sitting on bank balance sheets.
Unemployment remains incredibly high, use the U-6 data not that foolish headline number, which is a severe problem. Given that weekly claims have stabilized at -450K is horrendous at best. That number shows that private employers are still shedding jobs and I am confident that the employment report next week will show “stellar” job creation in the government sector and in the temporary help area, those are not good areas to see growth in. I am a believer that the temporary help is just that, temporary and will not convert into fulltime employment, we would be seeing that conversion by now, but we are not. Housing problems plus high unemployment will keep the economy down for some time.
On top of the squishy soft economic data being heralded as a full blown recovery, don’t get me wrong less bad is a welcomed improvement, we have a sovereign debt crisis. People claim that Greece is only 2% of Europe’s GDP and dismiss their troubles. That is a bad idea because while they are right about Greece they conveniently forget that all the PIIGS account for some 13% of Europe’s GDP and they are all in trouble. Spanish and Italy’s bonds have been trading lower pushing their yields up over 4% and Portugal was officially downgraded, that is all really bad news. Each country, individually, is not a big deal, but combined we are talking about the potential to default on hundreds of billions of dollars worth of sovereign debt.
To put this into prospective, France owns some $781B of PIIGS debt, if they all default what will happen to France? They will be in trouble, of course. Then there is Germany, how much PIIGS and French debt do they have? I do not know, but I assume a lot. What will happen to Germany if they get stuck with declining value of all that paper? They will have to bailout their banks, I assume France would have to do the same for their banks as well. That, basically, puts the banking system in jeopardy again, in less than 2 years. What I am explaining, probably in a horrible way, is what contagion looks like and it doesn’t end there either. The U.K. has exposure to all these countries and they are already in horrible financial shape and the series discussed above makes the U.K. susceptible to the contagion.
U.S. banks have exposure to both European banks and sovereign debt which means out fragile banking system could face another challenge. Let us not forget that the U.S. is also heavily indebted, along with Japan, and people may start to question the safety of U.S. Treasury debt, as they should I might add. From my lens, in a worst case scenario, meaning this all happens, it would be a coin toss as to which country goes next, either Japan or the U.S. given their immense debt loads. This scenario is unlikely or has a low probability of happening, but it is possible and it could trigger a global currency crisis.
This explains why gold went up today in the face of a stronger dollar and a rush of selling from the market. Even silver held its own today in the face of dollar strength. This shows that gold is still a flight to quality, it is also in a bull market as well, and it is a trusted currency. In fact, gold’s rally today is why I think it is possible for a global currency crisis because if this was another credit crisis, like 2008, it would have sold off for liquidity, but it did not. I am not sure if I would be buying gold right now because I already own a position, but if I did not own any gold I would be a buyer.
All is not well in the global markets and people should stay nimble as to where to put their assets until things settle down. I would say this decline is extremely bearish and way overdue, the higher the market went the worse the selloff would be, which could make it worse. It was insane to think that volatility would not comeback and that people went from sheer panic a year ago to such utter complacency this year. The worst part about all of this is if this does trigger another crisis what can the Fed or the governments do to calm the markets or remedy the situation? Nothing, they already spent all their ammo and they even had to borrow some to boot. I am not saying this will trigger another crisis, but it certainly has all the ingredients for one, if you look at the big picture.
It is always fun to make forward looking statements or predictions even though no one knows what is really going to happen. I decided to write this piece because Dennis Kneale was bragging about his wonderfully generic and completely mindless 2009 predictions he wrote last year which he claims was 90% accurate, even though it was the equivalent of a John Edwards show accurate list of junk.
Sorry, but predicting ‘corporate smashup,’ which I am not even sure if that is an actual technical term or not, but regardless, is as pretty generic as you can get as the government was passing out bailout money like mad. My other favorite prediction was that the Big 3 would get bailout funds as they were begging Congress for, drum roll please, a bailout, I mean seriously. The mindlessness went on of course, but that is Dennis for you, so I figured I would actually go out on a limb and make real predictions, and not use general ‘corporate smashup’ terminology.
I am not picking on Dennis, ok I am, but its fun! In all fairness to Dennis 2009 was a tough year for him as CNBC teased him with his own show only to take it away from him. He clearly is putting all that weight back on again, hey we all face the battle of the bulge at one point or another though. He got smacked by multiple guests for being an idiot because, well, he’s an idiot. The real irony is his 2010 prediction of Twitter going under is already in the can as they just inked 2 deals worth millions, wrong again Dennis and it is not even 2010 I guess VC money is a lot smarter than you, go figure.
Here we go, 2010 predictions:
Sovereign debt issues will escalate in Eastern Europe, meaning defaults because no one cares about that area. Dubai will not receive more exceptional help because they will be “made an example of” by its neighbors. Greece will be bailed out by the EU, go figure. However, emerging market debt will be OK.
Unemployment does not improve and will reach 11.2%, unfortunately. U-6 unemployment/underemployment will reach 20%+.
A third party will be formed in the US, but not in time for the midterm elections.
Democrats will lose the majority in the Senate and the super majority in the House, but not the majority.
Obama’s approval ratings will mirror Bush’s as he pushes cap and trade which is unnecessary and punitive to the American people. He will learn that there is a price for over exposure, seriously, we do not need to see him every day and he is no FDR. Unfortunately, if we give anyone any credit for the BS growth we are witnessing it is the, I can’t believe I am going to say this, the Fed.
Bank failures will reach over 300 for the full year.
We will see a spectacularly large bank failure next year, obviously not a too big to fail, but a large institution. I actually would place the FHA in this category, but it could also be a large regional about the size of a Key Bank, I refuse to give my prediction because of legal reasons and Key Bank is for comparative purposes only, but they are not in great shape.
We will see inflation and the Fed will be unable to raise interest rates due to the unemployment picture. For the first time we will have a recession, or whatever we are calling it by then, with rising prices.
Health care premiums will go sky high because the biggest sham of “reform” just got past by our elected officials who do not understand how the system actually works.
Some nut job attempts to shoot investment bankers because of high bonuses they will receive. I am not advocating it, I think it is stupid and it will be senseless, but there is a high probability that some nut job will do it.
High frequency trading, dark pools and other questionable practices will be regulated or severely restricted by Congress through legislation. Whether or not this is a good thing remains to be seen, but I would suspect it is.
The market suffers a sharp and severe correction as people realize that stocks do not go straight up and the markets actions have deviated from the realities of the economic conditions. When this happens is anyone’s guess, but it will happen.
We may see a 5% GDP print, but those numbers will be severely revised down and we will see the weakest ‘recovery’ ever in the history of recoveries from recessions. After we had spent some $2T+ fighting this economic downturn which will astound the public. The average recovery in terms of GDP growth is well above 6%, but the latest revision for 3Q09 GDP is 2.2% which is appalling. Remove government spending, just forget it because you don’t want to know.
The dollar will have some strength before the Fed realizes that it must double its balance sheet again and we will then see new lows in the DXY by year end.
Gold will reach new nominal highs.
The debt ceiling will be raised again to $16T before they eliminate the debt ceiling completely. I am kind of kidding here, but seriously why have a ceiling when as soon as they hit it they just raise it?
Emergency tax hikes will be enacted by summer bringing top marginal rates to 40%. Capital gains tax rates will increase to 25% and dividends will revert to ordinary income. I would not be surprised to see a VAT enacted as well, just because.
Google takes over the world because Android is really a secret mind control device that when Eric Schmidt gives the secret command, I hear the word is ‘snicker doodle,’ everyone with an android phone will do Google’s bidding.
Obama will finally fess up and admit that he was born in Kenya followed up with the following statement; “what are you going to do about it?”
Mark Haines finally snaps on the air and starts babbling incoherently to himself while swatting at invisible bugs… wait he already does that.
There you have, Ray’s long list of predications for 2010. Some will happen, most won’t, but they are fun to guess at. I also have a wish list that involves people joining that 11.2% projected unemployment rate because they deserve it, but since its Christmas I will refrain from printing such a negative list. However, I am sure you have guessed that one of those wishes, projections, is that Dennis’s contract will expire at CNBC and we never see him again, I can dream. However, as we have seen from other failures like Ron Insana no matter how bad you screw up that network will always take you back. Man, how do I get a job there? Merry Christmas, yeah I am not politically correct.
Well, I am not sure if I should feel bad or not. I actually had this conversation on Friday with a reader as we watched the market plummet and break through the 50 day moving average. Frankly, I was a bit concerned with the GDP print on Thursday and the rally that followed. However, I stuck to my guns and held on to my shorts, actually added a bit more to them on a reversal bet that did not pan out. My whole premise is valuation, I place fair value of the S&P 500 at 875, but given how irrational the markets are I am not sure where I will cover.
I have been extremely vocal and honest about where and what I have been doing in the markets, especially when it bounced at the 1100 area. I also look for confirmation in the people I talk to and the articles I read, the more bullish people were the more skeptical I became. Especially with the lack of conviction we saw on the way up, there was no volume. Perhaps the lack of volume is part of the new normal, but that does not explain the crushing volume n the downside, as we saw Wednesday and Friday. Regardless, a long position in this market, in my opinion only, is dangerous.
There will be a bounce, I have no doubt about that, but no matter what news that went out on Friday, jobs or whatever, it did not save the market at all. I would have liked to see a close on the lows, but actually the close off of the lows tells me there is more to go. There are a couple of things that worry me, being short of course, that is a stronger than expected ISM number, but given the mixed Beige book reports I will be shocked to see a number above consensus. Frankly, I am in the camp of David Rosenberg and think we have seen the highs of the ISM for the year and a number lower than 52 will be devastating to equities, perhaps 300 points on the Dow, but who knows for sure. However an upside surprise may provide a bounce in equities.
If we do get that upside surprise I do not think it will be a very strong move or last very long and would be a very good time to close long positions, in my opinion. I do not think earnings are sustainable, I do not see how 500K a week initial claims are good news nor do I see how creating more debt to encourage more spending is going to get us out of this problem we have. I think some of the more sobering news that was a big deal on Friday was the Citi rumor where they are said to have more write downs against earnings, if they have any, and Citi never outright denied the rumor. If this is true, we are talking about 10% of the company’s capital requirements, that’s a major problem. Furthermore, if Citi has this problem, does BoA or Wells?
Regardless, this is a sobering reminder that these problems are still with us and have not gone anywhere. Not only that, but all of these banks must start moving their offshore accounts onto their balance sheets, that is a huge issue. As I have said many times before, it is a year later and nothing has really changed except for trillions in liquidity and government spending, big deal. The underlying problems are alive and well and may rear their ugly head at anytime.
I believe last week’s move was the beginning of something larger and the volume confirms that. A further move next week, especially below 1020 of the S&P 500 will fully confirm that this is a correction. Then the question will be, was the last 6 months a bull trap? Is there an actual recovery happening at all? Since we use the market as a barometer, which is ridiculous, this mean we are going into another recession? It will be extremely interesting to see all the bulls on CNBC and the other networks explain their way out of this one. Especially of I am right and all of my price targets are hit, man where is Dennis when I need him? He owes me an apology.
For about 6 seconds, but that is all we hear about from the talking heads on CNBC who haven’t put together that even though stocks have been on an unprecedented rally, that I cannot deny, your buying power has still declined and the real return in equities is still negative. Since they like to point to real and nominal returns in other investments, except for stocks, they are horrible at pointing out or even realizing that the dollar is getting pounded and that the rally is simply because the dollar declined.
They haven’t even figured out that Intel’s earnings were because the dollar has been debased. Did you hear them tell you that US demand for Intel’s products is down 2%? Nope. Will you hear them tell you about that? Not a chance because they want you to believe that the US is in a recovery mode. They want you to believe that there are bubbles everywhere, in commodities, in bonds everywhere except for stocks which are extremely over valued based on current and even forward valuations.
Forget that JP Morgan also is reserving more for defaults and announced that Prime mortgages are blowing up. Let’s just not even talk about commercial real estate defaults, actually they lied about that yesterday claiming there is no shoe to drop when banks, according to several articles, are not writing down the bad debts. Credit card defaults are climbing and show little sign of stopping and all of the YoY comps on credit look horrible. They won’t tell you that because it’s Dow 10,000 time again!
Even at this moment they are pointing out that ETF’s are driving commodities higher and that they are not an asset class. What they do not tell you is that there are more mutual funds than there are stocks traded on the exchanges. At their peak there were some 6,400 hedge funds available which is an enormous number and that influenced the markets in ways we will never really know. What is absolutely clear is that these clowns, and they are clowns, do not understand much of anything about the markets and how they work. They warn you about chasing performance in gold or commodities, but buy stocks all day long, from 14,000 to 13,000 to 12,000, to, well you get the point.
Is it no wonder that their ratings are slipping so badly? Typically when a channel is in its death throes they bring on Heather Locklear, but not CNBC they bring on Michelle Caruso-Cabrera. This woman’s only redeeming quality, and it is not her unbridled free market ideals, which she mutilates daily in the most perverted of ways, are her, well, other womanly attributes. Other than that she has no idea what real life is like and believes that the free market can answer all of life’s complicated questions, like health care. Michelle, until you try and buy health care making only $75K a year without an employer sponsoring it you should really just shut up because it costs about $2K a month and is not affordable. The free market fails us there versus an employer sponsored plan which has the power of numbers and discounting. She needs to be fired to learn all of this first hand, in my opinion.
A little bit of knowledge is dangerous, but no knowledge at all is just sad and when you sit her next to Dennis Kneale the stupidity goes nuclear. I do not know how Bill does not go home and drink himself into a coma every night, the pay cannot be that good. Anyhow, the Dow 10,000 wasn’t that exciting the first time around since it was a bubble then and guess what? It is not exciting now because it, so far, hasn’t stuck and is a bubble again.
So sorry to hear that your show was cancelled, how’s that hope selling? I knew it was merely a matter of time before it happened and I want to assure you that it was your fault that CNBC Reports was cancelled. You picked a fight with a bunch of bloggers, who are all still here I might add, which you could not win. I know this was a case of trying to bump up ratings and it worked, until no one could stand to see you or hear you anymore.
Yes, you did make the gutsy call about the end of the recession, but is it really over? Sure we have improving data, but, the underlying data was not as good as you always claimed. Since you have zero market knowledge to begin with, which baffles me after 16 years at the WSJ, it is really no surprise that you never really looked beyond the headlines anyhow. Frankly, if you did you would see things were simply just hideous and without government spending we would have drastically lower economic data.
I guess we should never look at the facts when you are, and I quote, “selling hope.” You were selling the sizzle, but the steak was rancid and you did not even know it, you probably still don’t realize it. Now you are feeling your own personal recession, welcome to the real world! I hope you have just as much luck finding a new gig as the hundreds of thousands of people that you cheered about when the employment reports were issued, thank God for Karma.
In closing, I will always remember you as the Super Dip Shit Dennis Kneale and may you be treated the same way as you treated other people in the future. I can only hope that this means you actual contract has concluded and we no longer have to see you on CNBC at all, but that would simply make sense and we know that CNBC never likes to make sense.
Be the First to Comment 
Subscribe to Annuity IQ's Feed
