Cash is King

I have been out of step with the market for several years.  The valuations and underlying fundamentals are pretty much outrageous.  Perhaps the proverbial bell rang this week.

Market internals have been horrible for quite some time, that’s why most market participates have been left behind despite the rising stock market of the last few years. The strength in the large momentum names is gone, there is no where left to hide.  The narrow market has reached exhaustion.  Already 74% of NYSE stocks are below their 200 DMA, a downtrend started early 2013.  Yesterday (8-21-2015) the NYSE had zero new highs and 627 new lows. The VIX has had the largest one week spike in history, from 12.83 to fear 28.03 in 5 days.  Yet YTD the S&P 500 index is down just 4.3% and the Nasdaq Comp is down only 0.63%.  The Biotech’s are still 10% higher in 2015 and 28.3% year over year; manias end badly for investors.  Initial public offerings as a froth indicator peaked last fall.  The Nasdaq 2000 and 2015 are a double top if I’ve ever seen one; perhaps she’ll punch through permanently in a decade.

This market cycle was dependent upon QE:Maybe it's spurious, but the market has shown an inability to push meaningfully higher in the absence of QE. $SPX

Don Coxe: Bond Bull Coming to an End and Bonds Now a Center of Risk is an excellent listen for those who haven’t run across Coxe’s commentary in a while.  The junk bond market has cracked with credit spreads at multi-year highs, something which began, ironically, with the energy issues.

When a stock market break occurs, the record margin debt will be a downside catalyst.  The familiar margin debt charts show margin debt 40% above previous peaks.  Further, margin debt as a percent of market value is high, with free cash being particularly frightening.  Just two days ago the DJIA and Nasdaq entered corrections (first since 2011!), and these newfound speculators will become forced sellers.

Commodity Weakness Persists.

In light of this decades financial advisor meme to charge 2% of assets for putting investors in index funds, this chart is particularly scary:Chart of the Day

The DJIA:Gold chart looks to finally reassert itself southward: Chart of the Day

Cash ought be the largest position of any investor.  Period.

Gold will be the asset of choice for the next recession (which is not imminent).  Central bank bond buying and ginormous fiscal stimulus (budget deficits) will drive the mania.  In the meantime, gold bulls will have to be content with a currency war.

Gold ought to be the second largest position of any investor.  Another bell was rung:  The 491 million ounces traded in two weeks is highest volume in history.

A little schedenfruede:  In mocking gold bugs he called the bottom!  Joe is right about the inguinity of humans, it’s the folly of the political class he missed:
That was fast!  Precious metals have already reached short term rebound targetsAdam Hamiliton provides a starting point for speculators in junior gold equities.  Student loans will be the next big political fight.
Little else is investable. Many speculative situations, however, do exist:
Silver is extremely interesting long term as a play on the remarkable booming solar build out worldwide.  Maybe the next silver bull market has already started.
Twice in this young century investors have made (and lost) fortunes in the energy complex.  Consider conservative Baytex Energy (BTE).  This heavy oil producer with low production costs has collapsed again.  Two days ago the income security cut the dividend to zero. In a stable $100 oil price environment Baytex provided shareholders with an annual C$2.88 dividend.  Yes, Virginia, that implies a return to robust oil prices means patient buyers of the stock could realistically see a 50% dividend yield on today’s shares.  It’s just not a bet I can recommend at this time.  Shares may be more likely to get cut in half before any sustained move higher and are a function of an unlikely oil price rebound.
House prices should remain stable (and homebuilding will be a tailwind for economic growth in the years ahead).  Higher interest rates are a financial pricing negative.  However, fundamental household formation supply-demand is strong.


The world outside of the United States is experiencing anemic economic growth.  But stateside conditions are better and job growth is not a bad as thought.  The difficult environment for asset prices can exist with decent economic growth.  The dynamic seems strange at first, but is the norm  in a rising interest rate environment.

“Overall, the U.S. “startup rate”—new firms as a portion of all firms—fell by nearly half between 1978 and 2011…” (WSJ).  Might be the right direction to head…


“Warren Buffett’s favorite valuation model is screaming that stocks are overvalued.”  (Ed Yardeni ) “The most important observation an investor can make is that foreign equities (EU and EM) have not made any progress since October 2009, while majority of the gains in the All Country World Index (NYSE: ACWI) has come from the US equities outperformance.”  Short Side of Long

In the extremely low interest rate environment many investors chased yield, and have begun to learn “investing for high income can sometimes be extremely risky…”  Richard Bernstein.

In short, Asset prices are very rich.  Stocks and bonds.  This isn’t the year 2000 either, when Russell 2000 stocks were in the bargain bin.  Precious little is investable.

The economy continues to plod along:  Employment, Housing & Autos Point To Continually Improving Economy at Value Plays.  Jobless claims are at a 40 year low (WSJ) though inflation adjusted incomes stinks (Doug Short).  Pent-up demand for housing is real and underappreciated (WSJ).

The commody complex disaster has continued, and even accelerated this summer.  “The Bloomberg Commodity index fell 3.3 per cent on the week, to the lowest level since 2009.”  Financial Times

Fortunately in the real world, “The long run economic benefits of structurally lower energy prices and energy security are slowly feeding through to the wider economy.”  In the Long Run

Salman Partners economist calls bottom in copper (Mining).  Many a commodity bull has said the same the last four years and been wrong all the way down.  Base metals are a tough business, and interetingly:  “But since 2005, the world’s copper industry has consistently produced 7% less copper than planned.”  TCK sports a $7 handle.

In commodities meltdown, natural gas is a bright spot at the Finacial Post.  The delinking arguement is at least interesting.

The entilement program picture with color:  Social Security, Medicare Outlook: Better but Still Bleak at the WSJ.

Commentary regarding the credit fiasco leading to the financial crisis often led to ‘gold to the moon’ as the investment conclution.  Perhaps the goldbugs were just an economic cycle early.  Household balance sheets have not improved.  The governement’s balance sheet worsened significantly.  Business balance sheets were strong going into the financial crisis, but the siren song of cheap money has turned out to be too much temptation for corperations as Companies May Be Running Out of Time to Borrow From Bond Investors to Pay Shareholders (Bloomberg).  With a Kansas City Fed research paper finding changes in the economy and financial markets are blunting the effects of Fed policy, the money printing to arrive with the next recession will be larger than can be imagined (WSJ).  We just don’t think it’ll be anytime soon.

“It could take many months — or even years — for the precious metals to form a bottom” says Peter Brandt.

Chart of the Day

Upside Down

“The yield on 10-year U.S. Treasury securities averaged 1.8% during 2012, the lowest levels in 60 years. But that episode may now be behind us.” (Econbrowser).  Pimco’s Bill Gross Says the Bond Rally Is Over (Business Week).

The fundamentals of gold are remarkable.  Consider:  “Moody’s Investors Service, dissatisfied with the way states measure what they owe their retirees, released its own numbers on Thursday, showing that the 50 states have, in aggregate, just 48 cents for every dollar in pensions they have promised.” (Dealbook).  Additionally, the world’s third largest currency is in the Mother of All Painted-In Corners (Mauldin).

Meanwhile in the investment world, gold can not be owned.  Consider:  Gold is not yet as oversold as it was during the bottom in ’76 at The Short Side of Long.

“It’s been an incredible run… but gold’s 12-year streak of price gains will end in 2013.”

A Big Correction Means Gold Streak is Over

The Ups and Downs of the Gold Stock Market

U.S. Oil Boom Affecting Global Prices at the WSJ.

Is Oil is the Next Major Commodity to CrashEconmatter

Coal shares tumble as investors see no sign of turnaround at ReutersWhat Happens When You Buy Assets Down 80%? (Mebane Faber), though I’m not so sure asset prices always come back.

“There was no discussion of exports in Bernanke’s assessment of the economy during his press conference last Wednesday. They’ve stopped growing because global economic growth has been depressed by Europe’s recession.”  Ed Yardeni

Here We Go Again in Europe (Economic Policy Journal).  Also, “It’s likely that the days of the super-powered Chinese economy are over” says Michael Pettis.

In the U.S., “four powerful forces coming together over the next year are poised to support stronger growth and job creation.”  Stronger U.S. Growth Ahead at Economix.

On the one hand, “Since May 1, rising mortgage rates have reduced the purchasing power of U.S. home buyers by 18%” (Dollar Collapse), while at the same time the shortage of supply we’ve long discussed is manifesting:

Housing Returned 684% During the 1970s

Chart of the Day

“I would add that it does appear based on the last month of data that rail
traffic seems to be picking up.  This gives further evidence that we might see GDP increase at higher rates as we go through the second half of 2012.”  Value Plays  The Private Economy is Doing Just Fine says Davidson.

Yet U.S. stock valuations are uninspiring:

Chart of the Day

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Limited Opportunity

Paul, I’m not sure what the future holds.  The U.S. relative strength against Europe and China continues on the back of oil (Mark Perry) and natural gas production.  “Home construction is booming in the United States, but it remains severely depressed.” (Ritholtz)  Yes, housing has legs:

Chart of the Day

Weakness in China has the commodity trade looking bad and feeling worse:

Commodities Have Been Volatile, But Move Sideways

After all, The Oil and Gold Booms Are Over (Bloomberg).  Grim BRICs news pushes copper to 5-week lows (Mining).  Oversupply pushes thermal coal price to 2009 levels (Mining).

Yet, Commodities poised for revival says Cam HuiA Case for Owning Commodities When No One Else Is by Frank Holmes.

Meanwhile, the S&P 500 at new highs with modest valuation has the stock market uninteresting.  (Vitality katsenelson)

Chart of the Day

Avoiding interest rate risk seems prudent:

Chart of the Day

Additionally, being a gloom and doomer is so passe.  (Albert Edwards)

Perhaps the best opportunity is the shorting the Yen, using the break this week to attempt to initiate a position.  It’s The Mother of All Painted-In Corners (John Mauldin) with horrible demographics.