Category: problem isolated or contained

Where are the ominous headlines?

Biotech Index - 140413


The momentum stock bubble burst last week, with highflying stocks showing significant declines from their February/March highs:

  • brokerage stocks: -10.8% (high set on March 20)
  • housing stocks: -9.4% (February 27)
  • Internet stocks: -17.1% (March 4)
  • biotechnology stocks: -21.1% (February 25)
  • Tesla Motors: -20.0% (March 4)
  • Netflix: -28.2% (March 4)
  • Twitter: -45.4% (December 26)
  • 3D Systems: -50.1% (January 3)

Yet a brief scanning of the financial headlines shows little concern:

  • – “Stocks fall as volume rises, but here’s why not to worry”
  • The Wall Street Journal – “Stock-Market Jitters Put Investors at Ease; Recent Turbulence Is Seen as a Healthy Sign”
  • CNBC – “Last week’s big selloff ‘probably over': Pro”
  • – “Don’t let these stock market gyrations scare you; It’s likely that we’ve seen the end of recent declines”

The common theme among pundits is that the momentum bust is isolated, contained, healthy, and even predictable.  CNBC quoted Jonathan Golub, chief U.S. market strategist at RBC Capital:

“I think the selloff is probably over.  If you look at the economically sensitive stuff in the market, it’s not really selling off. It’s tech. It’s bio-tech [which makes up about 10 percent of the market.]  The other 85 to 90 percent is in perfectly fine shape.

This weekend Barron’s patted itself on the back for predicting the tech bust several months ago:

In November, when pundits began to natter about a stock market bubble, we pointed out in a prescient cover story that it was a tech bubble, not a market bubble.  Our advice has paid off handsomely.

Barron’s quoted perma-bull Jim Paulsen, chief investment strategist at Wells Capital Management:

My guess here is that we’re having a valuation adjustment in one small part of the market, in the highflying momentum stocks that got ahead of themselves and are now correcting.  I think this is more of a buying opportunity.

The article concluded:

All this suggests that despite some ominous headlines, the stock market’s health is still good. [emphasis added]

Where are the ominous headlines?  We don’t see any.  We see complacency as far as the eye can see with the assuredness that the momentum stock bust is “contained.”  We heard these same words in April, 2000 after the dot-com bust and March, 2007 after the subprime bust… early warning signs that were overwhelmingly ignored.



Todd Harrison chronicles cluelessness of central bankers

Minyanville’s Todd Harrison penned an article on MarketWatch today about the role of central bankers in the credit bubble and their assurances that matters are under control:

At the beginning of the summer, when “collateralized debt obligations” and subprime mortgages” were first introduced into the mainstream vernacular, Treasury secretary Hank Paulson was quick to assure us that the problems were “contained.”

To be fair, Mr. Paulson wasn’t alone. In fact, he was in very good company. See Minyanville article. San Francisco Fed President Janet Yellen, Federal Reserve Chairman Ben Bernanke, Dallas Fed President Richard Fisher and Federal Reserve Governor Fredric Mishkin were unanimous in their assuring voices that we had nothing to fear but fear itself.

When the credit cockroaches began streaming out of the closet, the world’s central bankers went into crisis mode:

Fast forward a few months. That’s when things really started getting strange.

The European Central Bank, in an “unprecedented response to a sudden demand for cash,” injected $130 billion into the financial machination.

The U.S., Japan and Australia also stepped up to the plate with piles of dough, upping the ante to more than $300 billion.

Even Canada — Canada! — chimed in to “assure financial-market participants that it will provide liquidity to support the stability of the Canadian financial system and the continued functioning of the financial markets.”

We wondered aloud at the time: What do they see that we don’t? See Minyanville article. Why, with the mainstay averages still up nicely for the year, was there a coordinated global agenda in calm investors and stabilize a system that we were told was strong, normalized and fluid?

Just how bad is this?

On Monday, we learned that Deutsche Bank (DB) borrowed money from the FOMC’s 5.75% discount window. While the amount wasn’t disclosed, sources say that the move was orchestrated to show support for the Fed as it continued to combat the credit squeeze. I don’t claim to be an expert on these market machinations, but it’s my understanding that banks traditionally tap the discount window only as a measure of last resort.

Harrison concludes that central bankers will be impotent in the face of market forces, and that their charade will be revealed:

As we continue to listen to the vernacular from the powers that be around the world, the onus is on us to assimilate the cumulative dynamic that has evolved over the past five years.

The Federal Reserve attempted to buy time on the back of the tech bubble with fiscal and monetary stimuli that encouraged risk-taking, reward-chasing behavior. It was a grand experiment of sorts, and it continues to brew.

While debt is front and center as the issue at hand, credit of a different breed — credibility — has emerged as the issue at hand for markets at large.

If and when investors begin to perceive that central banks are no longer larger than the markets — and this, in my opinion, is simply a matter of time — a crisis of confidence will ensue.

My comments:

  1. This credit cycle is playing out, with unswerving faith in central bankers at the top to utter contempt at the bottom. The CBs are in desperation mode. If their latest attempt to plug the dike fails, the crowd will turn against them… with a vengeance.
  2. This is a global credit bubble and the world’s CBs are all in this together, points the U.S. dollar perma-bears seem to miss. All fiat currencies are in a race to the bottom.

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