Living in Denial, The Sky Is Falling
Last Monday marked both the first day of the month and first day of the quarter. As previously reported by Adam Hamilton and then here, the first day of the month has positive bias due to monthly (and in this case quarterly) deployment of investment funds. We should not be surprised then to see last Monday turn out as a fairly strong up day.
Tuesday was all about the FOMC meeting notes. While stock prices started the day slightly off before the notes were released, upon release, the stock market indices dropped sharply, erasing Monday’s gains, while Treasury interest rates spiked. The news changed the perception that the leaning of the committee was less strongly in favor of further increasing the size of the bloated Federal Reserve balance sheet. By the end of the day, losses moderated. What’s telling, of course, is that this disappointing news did not trigger a significant sell-off.
Wednesday started with a further negative tone. Do you see the pattern here? On down days, stock prices before the open and at the open in New York track strongly down. Then, through the mid part of the day, they recover somewhat. At the end of the day they trail off again but not down to opening levels.
In the old days, when market manipulation was more blatantly obvious, the pattern was to rescue the market after 2:30 PM or even more frequently after 3:30 PM. Now it seems to me the banksters are trying to be more subtile with their machinations. Earlier in the day a Yahoo Finance reader wrote the following poignant comment in response to the early headline article describing the decline:
The markets are addicted to cheap money. Printing money is the only reason the markets have been going up since 2009. If you even hint about not giving more cheap money, the markets throw a tantrum. Just like a crack addict.
Here’s an article by a guy who seems to me to be an alarmist, but he makes some good points. This second article offers a good counterpoint to that article that gives a nice picture of the composition of the current FOMC.
It seems to me that this low interest rate quagmire exacerbates market volatility. That makes sense, since low interest rates enable and encourage greater leverage. When the market rises consistently, investors enlist more cheap margin, due to unnaturally low interest rates, to enhance their profits. However, when investors smell a downturn, they run for cover to avoid suffering big losses.
Recent action of the gold market, the dollar, and the 10-Year U.S. Treasury Bond bolsters this theory. These days, gold follows the stock market when stocks drop sharply. Leveraged investors must sell real assets (like gold) to meet margin requirements. For example, before the open Wednesday, stock market indices were down a bit less than 1% while gold was down nearly twice that amount. This behavior may seem a bit counter-intuitive to the gold investor who normally expects gold to shield assets from stock market declines.
The following article makes the case for gold when real interest rates are low. While interest rates certainly influence the cost of holding gold, we must keep in mind that this rationale has its limits in a world where the price of precious metals far exceeds production costs (currently less than $1000 per oz).
We also ought to pay close attention to the Dow / Gold ratio (currently around eight) to gain perspective of where we are in terms of secular bulls and bear markets of these investments. From that perspective, the stock market has a very long distance to fall relative to the price of gold.
When the stock markets fell less than 2% from a multi-year high made last Monday, people were in utter despair. The sky is falling! Is it now a right or cast in stone that markets must rise each day? This is nuts! Demands have already started for the Fed to act to support the stock market. What mandate gives them that authority?
Last week I mentioned that the storm clouds are gathering on this bogus rally. Here’s another prognosticator weighing in on that side with the wrinkle that oil and inflation will provide the final tipping point.
Thursday was a non-event with a little moaning about the “worst week this year.” That amounted to a whopping 0.7% decline of the S&P 500 Index for the week.
On Good Friday, the real action happened. With the stock market closed, the futures market reacted to the dismal jobs report by sinking more than 1%. Downward pressure on stocks this morning reflects this news.
While previous articles recommended Adam Hamilton and Dr. John Hussman as required reading, they also promised to alert you to those weekly commentaries that were particularly noteworthy. Today’s Weekly Market Comment by Dr. Hussman “Is the Fed Promoting Recovery or Desperation?” falls into the classic category as it spells out the effects of QE and references a previous classic. Here’s a quote from that letter:
Immediately after the payroll number was released, CNBC shot out a news story titled “Disappointing Jobs Report Revives Talk of Fed Easing.” Of course it does, because this remains a market dependent on sugar. And with little doubt the Fed will eventually deliver it – perhaps following a market plunge of 25% or more – but with little doubt nonetheless, because like the indulgent parent of a spoiled toddler, the FOMC can’t stand to see Wall Street throw a tantrum without reaching for a lollipop.
Filed under: Investment
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