Latest fad: buy the dip

Now that the S&P 500 has had all of a 3.4% correction, rationalizations for dip buying are coming out of the woodwork.  E.g., the latest headline from Yahoo Finance: “Fear not. The VIX is flashing a buy sign.”  Seriously?

VIX - 140805


There are better indicators of bullishness:

Rydex bear fund assets


“Spikes in the VIX tend to indicate heightened investor fear,” said Ari Wald, head of technical analysis at Oppenheimer. “From a contrarian standpoint we use that as ‘buy’ signals, and the numbers agree.”

We wholeheartedly disagree.  Investment professionals have adopted the Orwellian logic that up is down, black is white, stimulus is sustainable, and bravado is fear.  The true contrarian position is to raise cash, get short, and fasten the seat belt.

Addendum: Recent quotes from some of our favorite talking heads:

This is not a weak economy, it’s a pleasantly strong economy.  This is a nicely strengthening economy.  This is a very well demeanored economy.  It’s not an excited one.  It’s one that’s doing quietly better…  Let’s all be calm and not be panicked at this point.  I turned from being quite bullish of stocks to being neutral early last week and I have to tell you, I never thought we’d see the market fall several hundred Dow points in the course of three or four days.  I got very lucky, and I’m going to turn back to being bullish again.

~ Dennis Gartman, as appeared on CNBC, August 4, 2014

Tony Dwyer


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.



Barbarians at the trough

“Activist investors” have become momentum chasers, another example of how far the market has untethered from reality.  Is Time magazine tempting the investment gods with this cover?



Peak profits, stock prices?

Recently a respected colleague said our strategy was rational but markets, and the world for that matter, were highly irrational.  After participating in financial markets for the last 25 years I thought my experiences allowed me to see it all-wrong!  So after reflecting on our irrational state of affairs the logical side compiled some of the glaring data sets signifying a massive market top. 

First, a chart created by John Hussman ( indicates how much excess we’ve witnessed in corporate profitability vs GDP lately.  Keep in mind his data includes financials which to this day remain a subsidized black box.  (Click on image to enlarge).New Picture (1)

Of course this hasn’t stopped wall street from expecting further net margin expansion:


Profit margin growth

Before Wall Street follows Congress out the door for the holidays maybe they should scrutinize this:

profits vs labor

To derive this unprecedented profit picture both consumers and government went on a spending binge.  US national debt, through 5 years of record deficits, added almost $7.7 trillion to our balance sheet-can you say malinvestment?personal savings govt deficits profits


Now, if we remove the creators of financial alchemy we notice the real economy topped many quarters ago. 


Nonfinl corp profits

So if you care to break away from CNBS and look at the graphs above rational behavior would suggest profit taking and or short exposure.  In fact, it was just 7 years ago that many of these same signals were sent to the market yet we were labeled as the boys crying wolf.  If your timing is perfect the crowd labels you a genius but too early, a chump. 



Bullish investor sentiment continues to set records

Doug Wakefield of Best Minds Inc. just made the following insightful comment about unprecedented levels of investor optimism:

One of my sources is where Jason Goepfert pulls together several dozen indicators on an ongoing basis.  All year he would rarely make a comment that would signal a “bull” or “bear” indicator that would go on his general list of “bulls” and “bears” worthy of notice. In fact, as of the Sept 18th “no taper yet” announcement, there were only 4 indicators that had made the list for the year (both bulls and bears for stocks).

However, since that time, the pace and number has picked up to the point that where there have been 13 bear posts since Sept 18th against only one bull post.  All of these a major indicators are very rare, or highest ever.

One of my favorites for a full blown mania, is a recently reported figure of 21 dollars in double long NASDAQ funds at Rydex for every 1 dollar in double inverse NASDAQ funds. Of course, another record.

Below are several snippets from the daily emails of over the past five weeks:

Oct 31

  • Active investment managers have added to their exposure to stocks and are now carrying among their heaviest loads in 7 years.
  • As an update to Wednesday’s report, the Rydex Total Index Bull / Bear Ratio hit 5.0 as of that day’s close.  It is now equivalent to the levels seen at the past three market corrections.
  • According to Lipper, investors have contributed a net $41 billion to equity mutual and exchange traded funds over the past three weeks.  Going back to 2002, that exceeds the prior 3-week record inflow by more than 17%.

Nov 4

  • Safety-seeking behavior among traders in a popular mutual fund family (Rydex Funds) has just dropped to a 12-year low.

Nov 5

  • Trading in penny stocks, the Wild West of the stock market, jumped higher in October, more than 50% above September’s levels.

Nov 6

  • The spread between Smart Money and Dumb Money has reached a troubling extreme.  The last three times we saw such a divergence, stocks peaked quickly.
  • Traders and investors appear to be very comfortable trading individual stocks as opposed to “safer” exchange-traded funds.  The Liquidity Premium, particularly for the Nasdaq 100, has reached the 2nd-most-extreme level since 2002.  It was only higher in mid-August 2012 and nearly this extreme in early March 2011, both preceding corrections.  Stocks usually do quite a bit better when investors aren’t quite so complacent in their trading activity.

Nov 7

  • Speculative activity has increased sharply, particularly when looking at indicators focused on the tech-heavy Nasdaq 100 index.

Nov 8

  • Buying climaxes among stocks in the S&P 500 have added up to more than 125 during the past three weeks, one of the highest totals in 20 years.
  • We touched on speculators’ positions in the Nasdaq 100 futures on Thursday, and the latest data from the Commitments of Traders report confirmed that they got even more net long this week, to a new all-time record degree.
  • According to Bloomberg data, the skew on options for the S&P 500 tracking fund, SPY, has dropped to its lowest level since at least 2005, the earliest for which data is available.  While there are many possible structural reasons for this involving arcane options trading strategies, the knee-jerk interpretation is that traders have decided to pay up greatly for call options, betting on a further market rally.  This has a consistent history of being a contrary indicator, which would suggest that this is market-negative.

Nov 15

  • This is the 3rd time since 1997 that the S&P rose at least 0.4% to a 52-week high but with less than 2/3 of stocks rising on the day for three days in a row.  The others were 10/6/97, 3/23/00 and 11/22/05, all preceding short-term corrections.  Historically, it marked market peaks in 1950, 1955, 1959, 1968, 1975 and 1980, with an overall return over the next three weeks that averaged -1.0% with 41% of days showing a positive return.

Nov 19

  • The SKEW Index from the Chicago Board Options Exchange jumped to 137 on Monday, which is one of the highest readings in history.  It suggests an approximately 12% probability of a “black swan” event – a rapid, 2-standard-deviation market move – within 30 days.

Dec 2

  • Investment managers have never been this exposed to the stock market, this aggressively (at least since 2006).
  • We looked at a moving average of the Options Speculation Index on November 19th, and it was nearing all-time highs.  The weekly reading last week jumped to 131%, tied for the 2nd-highest level of speculation among options traders in 13 years.
  • The latest Commitments of Traders report shows that speculators have been pushing short-side bets on precious metals.  Total speculator positions in gold, silver, copper, platinum and palladium are nearing decade-long lows, second only to several weeks in late June and early July.

Dec 3

  • Traders in the Rydex family of mutual funds have moved to a new level of speculation in the major index funds.  With $5.30 riding on bullish funds for every $1.00 in bearish funds, they’ve never been more exposed.

Dec 4

  • Assets in equity mutual funds and ETFs have now eclipsed assets lingering in safe money markets by a ratio of 3.7-to-1, a three-decade record.
  • The Rydex bull / bear ratio mentioned in Tuesday’s report climbed even further on Tuesday, now with another new all-time high reading of 5.5.  In the Nasdaq 100, there is now nearly $21 invested in the leveraged long fund for every $1 in the leveraged inverse fund.

“Unprecedented” levels of bullishness is an understatement.

Investors Intelligence poll shows most bullishness since 1987

The granddaddy of sentiment indicators is the weekly Investors Intelligence poll which grades investment newsletters as bullish, bearish or neutral.  Latest reading: 57.1% bulls vs. 14.3% bears.  The ratio of bulls/bears, at 3.99, is the highest since early 1987.  Prior to the ’87 Crash the ratio peaked at 3.48 on August 14, 1987 (less than 1% off the year’s high).  Two months later the S&P 500 had plunged 33%.

"Buy high, sell low"

“Buy high, sell low”

Rydex timers most bullish since 2000 tech bubble

As of the close last Friday, just 9.8% of assets in Rydex bull and bear funds bet on the downside (weighted for leverage).  This is the highest level of bullishness since January 30, 2001.

Greenspan sees no bubble

The Maestro’s crystal ball is the gift that keeps giving.  With an uncanny knack for completely missing most of the major inflections points in financial markets over the past five decades, Greenspan added this gem to his resume in a FOX Business News interview yesterday:

“There are a lot of things that can go wrong, but to say that the market is bubbly and in a position where it could conceivably create a serious problem, I think is overstating it.”

Let’s put this prediction in perspective by filling in some of his resume…

“It’s very rare that you can be as unqualifiedly bullish as you can now.”  ~ Alan Greenspan, The New York Times “Economic Survey”, January 7, 1973

1973 and 1974 turned out to be the worst years for economic growth and the stock market since the Great Depression.  (as noted in Jason Zweig’s commentary in The Intelligent Investor)

On October 2, 1990, then Federal Reserve chairman Greenspan made this prediction:

“At the moment it isn’t raining.  The economy has not yet slipped into a recession.”

It was later revealed that a recession had actually begun three months earlier, in July.

In April 2000 (one month after the NASDAQ peak), Greenspan was asked if rising rates would prick the stock market bubble.  His response:

“That presupposes I know that there is a bubble…  I don’t think we can know there’s a bubble until after the fact.”

From The Age of Turbulence (2007), Greenspan recounted his thoughts on the 2003-2006 housing bubble:

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy.”

The December 26, 2005 issue of BusinessWeek confirmed his complacency:

“The view of most economists, including Fed Chairman Alan Greenspan, is that a national home-price bust is highly unlikely.”

Greenspan also whistled past the subprime lending grave:

“With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . . As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. . . . This fact underscores the importance of our roles as policymakers, researchers, bankers and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”  ~ Alan Greenspan, from a speech given April 8, 2005

Housing prices peaked in Q1 2006 and by Q4 were in full retreat, yet Greenspan was unconcerned:

“Most of the negatives in housing are probably behind us.  The fourth quarter should be reasonably good, certainly better than the third quarter.”  ~ Alan Greenspan, October 26, 2006

Even as late as Q2 2008 he thought the worst was over:

U.S. financial markets, roiled by the collapse of the subprime-mortgage market, have shown a pronounced turnaround since March. The worst is over for the credit crisis, or will be soon, and there’s now a reduced possibility of a deep recession.  ~ Alan Greenspan, June 13, 2008

The S&P 500 plunged nearly 45% over the ensuing five months.

Alan Greenspan is a stark reminder that central bankers have only one productive use: as contrary indicators.

A bubble in talk of “no bubble”

It doesn’t matter how untrue a thing is. If enough people (especially people we look up to) repeat it often enough, it soon becomes conventional wisdom.  A hundred years ago, Gustave Le Bon understood this when he wrote his classic work on crowds. He realized that the popular mind wanted most of all to simplify things.  Le Bon called the process – by which an idea gets simplified, repeated, imitated, and spread by the crowd – contagion.  ~ Bill Bonner and Lila Rajiva, Mobs, Messiahs, and Markets (2007)

The contagion du jour is talk of “no bubble.”  For example, here are a few headlines just from this morning:

“If bubbles are out there these 10 sages will warn us” – MarketWatch

“Resistance is futile for staunch market bears” – MarketWatch

“Nasdaq tops 4000: why it’s nowhere near a bubble” – Yahoo!Finance

Here is what the experts have to say on the subject:

“Stocks are not selling at bubble levels, and, what do you diversify into? Do you want to diversify into cash? I think it’s a terrible investment compared to equities.  ~ Warren Buffett

“Stock prices have risen pretty robustly.  You would not see stock prices in territory that suggest…bubble-like conditions.”  ~ Janet Yellen

Of course, these are the same pied pipers who walked investors into the fire during the 2006-2007 credit bubble:

“Overall, the consumer is never going to sink the economy.”  ~ Warren Buffett, CNBC, May 7, 2007

“I’m waking up less at night than I was [over the slowdown in housing]. So far, there’s been remarkably little effect on the rest of the economy.”  ~ Janet Yellen, San Francisco Fed President, MarketWatch, February 21, 2007

In fact, at least one economist is so unconcerned about bubbles that he thinks they come with a silver lining:

“We may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest.”  ~ Paul Krugman

This is the same economist who was egging on the Fed to foment a housing bubble in 2002:

“Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”  ~ Paul Krugman, “Dubya’s Double Dip?,” The New York Times, August 2, 2002

Personally, we subscribe to the views of Marc Faber:

“I see a bubble in everything that relates to the financial sector.  We have a bubble in bonds. We have a bubble in low-quality bonds. We have a bubble in equities…We have a huge debt bubble and it’s only getting bigger, it’s not getting any smaller. So we are the bubble, everything that is in the financial sector is the bubble, and it’s been pumped up by central banks.”


Global asset deflation: nowhere to run, nowhere to hide

Over the past several months global stocks, bonds and currency markets have hit a wall.  Just 6-8 months earlier the central banks of Europe, Japan and the US were signaling endless monetary accommodation which initially emboldened global speculators and their reach-for-yield mantra.  Now we look around for evidence or confirmation that the four year stimulus experiment is DOA.

First, emerging market stocks, bonds and currencies have all dropped somewhere between 7% and 12% the last few months as the carry trade (borrowing in low cost currencies in order to buy higher returning risk assets, thus capturing the spread) comes off the boil.  Second, political commentary out of China confirms our earlier thoughts that a credit bubble for the ages has begun to burst.  Since the central banking talking heads opened their mouths last month, Shibor rates (Chinese overnight unsecured lending rate amongst 16 largest banks)  have spiked to levels not seen since 2004:


Here is the latest on the Chinese banking system from Bloomberg:

Policy makers could be taking advantage of tight funding to “punish” some small banks, which previously used low interbank rates to finance purchases of higher-yielding bonds, Bank of America Merrill economists led by Lu Ting wrote in a report. Tight interbank liquidity could last until early July, according to the report.

‘Warning Shot’

“The PBOC [People’s Bank of China] clearly has an agenda here,” said Patrick Perret-Green, a former head of Citigroup Inc.’s Asian rates and foreign exchange who works at Mint Partners in London. “To fire a massive warning shot across the banks’ bows and to see who is swimming naked. Moreover, it fits in well with the new disciplinarian approach” adopted by the government, he said.

Chinese regulators are forcing trust funds and wealth managers to shift assets into publicly traded securities as they seek to curb lending that doesn’t involve local banks, so-called shadow banking, according to Fitch Ratings.

The tightening is “emblematic of some of the shadow banking issues coming to the fore as well as some of the tight liquidity associated with wealth management product issuance, and the crackdown on some shadow channels,” Charlene Chu, Fitch’s head of China financial institutions, said in a June 18 interview. She earlier estimated China’s total credit, including off-balance-sheet loans, swelled to 198 percent of gross domestic product in 2012 from 125 percent four years earlier, exceeding increases in the ratio before banking crises in Japan and South Korea. In Japan, the measure surged 45 percentage points from 1985 to 1990, and in South Korea, it gained 47 percentage points from 1994 to 1998, Fitch said in July 2011. [Emphasis mine.  Japan and South Korea experienced bubble economies during these periods which both burst.]

Look at the massive growth in nonbank (shadow) lending in China post 2008 credit crisis while keeping in mind most of this was indirectly backed by the largest banks under the “wealth management” label:

Chinese shadow banking

Maybe this is why China made the news last week when a proposed 15.5 billion renminbi bond offering failed (for the first time in nearly 2 years), receiving only 9.5 billion renminbi.

Over in Russia and Korea we see even more instability permeating the credit landscape.

Romania’s Finance Ministry rejected all bids at a seven-year bond sale yesterday because of market volatility, while South Korea raised less than 10 percent of the amount planned in an auction of inflation-linked bonds. Russia scrapped a sale of 15-year ruble-denominated bonds June 19, the second time it canceled an auction this month, and Colombia pared an offering of 20-year peso debt by 40 percent. A cash shortage led to failures last week of China Ministry of Finance debt sales.

More than $6.9 billion left funds investing in developing-nation debt in the four weeks to June 19, the most since 2011, according to Morgan Stanley, citing EPFR Global data. The exodus is reversing the $3.9 trillion of cash that flowed into emerging markets the past four years as China’s annual economic growth averaged 9.2 percent and spurred demand for Brazilian iron ore, Russian oil and gas and Chilean copper.

Romania rejected all 688 million lei ($200 million) of bids at a bond sale yesterday because of “unacceptable price offers,” according to an e-mailed statement from the central bank. It was the first failure since August.

South Korea sold just 9 percent of the 600 billion won ($524 million) it targeted from 10-year inflation-linked bonds this week. Colombia’s government pared an auction on June 19 of 20-year inflation-linked peso bonds by 40 percent, to 150 billion pesos ($77 million).

Russia canceled planned sales of 10 billion rubles ($311 million) of notes this week, citing a lack of demand within an acceptable yield range of 7.70 percent to 7.75 percent. Yields on ruble bonds due in 2028 jumped 30 basis points, or 0.30 percentage point, yesterday to 8.1 percent, the highest level since the debt was sold in January.

After endless monetary interventions the prior 3-4 years governments around the world temporarily created the illusion that interest rates would stay below nominal GDP growth targets.  The sleight of hand only lasted this long because so many of the “professional money managers” never questioned the actions of central bankers (a.k.a. asset inflationistas) .  As currencies, bonds and stock markets decline in unison around the world, one might pose the question “Have central bankers lost control of their monetary experiment?”  Or better yet, why would so many “investors” believe that a group of central banks with combined reserves of $11.5 trillion could levitate with over $240 trillion in global assets?   Which then begs the question,  where does one hide?

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