THE NEXT TIME YOU HEAR

For anyone who bothers to spend a little time with stock market history the following quotes are well-known.

         John Maynard Keynes in 1927: “We will not have any more crashes in our time.”

H.H. Simmons, president of the New York Stock Exchange, Jan. 12, 1928: “I cannot help but raise a dissenting voice to statements that we are living in a fool’s paradise, and that prosperity in this country must necessarily diminish and recede in the near future.”
Irving Fisher, leading U.S. economist, The New York Times, Sept. 5, 1929: “There may be a recession in stock prices, but not anything in the nature of a crash.” And on 17, 1929: “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.”

W. McNeel, market analyst, as quoted in the New York Herald Tribune, Oct. 30, 1929: “This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan… that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years.”

Harvard Economic Society, Nov. 10, 1929: “… a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall.”

We have lifted them from an excellent piece http://www.zerohedge.com/news/2014-11-12/economic-end-game-explained because they are so relevant to what's going on today.

One must remember that when another person's economic territory is jeopardized or in any way threatened, the manipulation intensifies. It's the same everywhere, politics, economics, the stock market notwithstanding.

Main stream media is one of the main manipulators, usually via what Lenin called useful idiots. These are often well-known, even well-meaning people the media provides with public exposure. They come from a variety of areas, academia, corporate suites, Hollywood and so forth.

They are not necessarily evil people or conspirators. They're believers for the most part. Zealots at the extreme, Myrmidons at the center and the edges. Many are infatuated with the sound of their own rhetoric. People like New York Times economist Paul Krugman should come to mind.

Krugman's probably a decent sort and most likely when he was a kid even his mother loved him. In the military one quickly learns that it isn't only the enemy who can snuff you. Who are the ones in your own squad, well-meaning or otherwise, that can get you done in?

Danger is often much closer than most of us realize. Weapons are suppose to be kept up and down range. And MSM is suppose to reveal the truth and so they do. But it's their truth. And most likely not yours or mine.

This is hardly new. The history of news is rife with manipulations and falsehoods. It's different this time is one of their biggest falsehoods. See Alan Greenspan and just in time inventories around the 2000-2002 period. These are people who thrive in the world of half truths and selective data picking. Many of them masquerading as revisionists.

A good example appeared in yesterday's WSJ in a book review by Princeton economic professor Burton G .Malkiel, best known for his efficient-market hypothesis as expressed in his 1973 book, A Random Walk Down Wall Street. If you're like many us you've had a copy on your bookshelves for years.

And you know that if you mention a guy named Malkiel, you just mentioned another guy named Bogle and a huge mutual fund organization many know by the name of Vanguard.


Malkiel was reviewing James Grant's newest book, The Forgotten Depression, a review of the economic downturn in 1920-21, just after the great war to end all wars. Grant's the publisher of Grant's Interest Rate Observer and a known gold enthusiasts. He is also often cited for his bearish views.

Malkiel begins his review by quibbling with Grant's use of the term "Depression" in the title, saying "recent research suggests that the decline in the early 1920s wasn't as severe as that term usually signifies...." 

The point of Grant's book is the 1920-21 downturn happened and recovered without any government intervention, a point Malkiel concedes.

No fiscal stimulus was administered in 1920-21, and a powerful, job-filled recovery followed. Today our 'overmedicated' economy is in its fifth year of a 'lackluster recovery.' In the current environment, he (Grant) believes, we should take a more laissez-faire position.

There's an old saying that if your neighbor gets laid off it's a recession, but if you lose your job it's a depression. But who gets to define depression, the statistics crunchers, government officials and academics or those going through it, those who were there?

 Grant's point is it was a serious downturn for those who endured it that was turned around without any government interference.

Perhaps so, but there are important differences between then and now, and there is more to the story, Malkiel writes, rolling out one of the shills for government intervention's favorite arguments.

Malkiel then notes "...monetary policy did not cause the recession of 2008. The crisis was precipitated by the unraveling of a housing bubble and excessive leverage by individuals as well as financial institutions, creating a crisis whose remedies are different from 1920-21.

Malkiel conveniently skips the question of why it was necessary to unravel anything in the first place--that is, who helped not only create but stimulate the housing bubble--politicians with there push at the time every American should be able to afford a home and the Federal Reserve. 

Teaser lower interest rates tied to short-term Treasuries that will soon need refinancing coupled with low or no down payment incentives pushed by so-called well-meaning politicians and government bureaucrats are mighty tempting.

The financial institutions and individuals were just walk-ons to the program. It's there we'll give it a go. How many politicians who penned pitiful legislation at the time are being called out, let alone fined or prosecuted. 

Malkiel concludes his review with the old academic trick of damning with faint praise.

One can disagree with Mr. Grant's analysis and still admire his ability to produce a readable and carefully researched history.  People who believe in the inadequacy of the current macroeconomic orthodoxy will find him to be an articulate spokesman. 

In residency training, medical residents are judged by their fund of medical knowledge. It's the pure basics of medicine, the stuff they were suppose to learned and mastered before they showed up in residency.

If they fail early on to measure up, the department chief frequently asks them to move on and conveniently writes them a letter of damning faint praise. In essence, kicking the can onto the next fool and ultimately to the public at large.


It might be a stretch for you, but think of that pubic at large as the taxpayers the next time you hear it's different this time and government wants to help.






       

NOT SO PRECIOUS TO WHOM?

Silver Bars

Silver just hit a four year low.

Who cares, you say, backed up with a big yawn, as the stock market toys with new highs almost daily.

Well, if a recent WSJ post means anything, mom-and poppers do.

Mom-and-pop investors are loading up on silver despite a price drop that has left the metal at a four-year low.

The enduring interest can be seen in iShares Silver Trust , the largest exchange-traded fund that buys silver bars and is a popular bet for individual investors. As cash pours in, the ETF has accumulated 345 million ounces of silver, close to a 3½-year high.

From all indications, silver is benefiting from a variety of things like reports the U.S Mint a week ago announced it sold out of one ounce American Eagle silver coins. And October booked the strongest sales of  silver coins since the beginning of 2013, the last time the mint apparently sold out it silver coins.

Silver is more a favorite of individual investors for many reasons, not just the price differentials between it and, say, gold. 

An ounce of gold costs about 70 times more than an ounce of silver, so even a small investment in silver can buy a relatively large amount of the metal. Some retail investors say they view silver as a bargain after three years of plunging prices at a time when stocks and bonds are hitting new highs.

Gold attracts the much larger players like hedge and big mutual fund that many believe control trading, according to the WSJ. The inverse relation here between the metal making new lows and the world of paper assets hitting new highs apparently is bringing out the contrarian in mom and poppers.

Two other reasons mom and poppers like silver is they tend to be buy and holders, opting for a longer view, using the shinny stuff as insurance against falling paper asset prices. Others see silver as an actual currency since it has been used for that purpose before.

Silver has dropped from around $22 an ounce in January to a recent close of $15.67. Despite the faith of the M&P folks, some observers say silver could hit $8 an ounce before the slide is through. 

OVER NIGHT

 

Japanese Prime Minister Shinzo Abe is expected to delay a tax hike on consumption.

The expected move, if it turns out to be correct, proved to be another example of the old Wall Street bromide "Buy on the rumor, sell on the fact." And that Wednesday appears to be what Japanese investors did, pushing the Niiki to a seven year high in overnight trading, according to Reuters.

Japan's Nikkei (.N225) stole the limelight, jumping 1.6 percent to a fresh seven-year high after local media said that Abe will postpone a planned tax increase and call a general election for December in an effort to lock in his grip on power before his voter ratings suffer a slide.

Abe has said he will make up his mind on the tax increase after assessing the July-September GDP data due next Monday, widely expected to highlight the fragility of the rebound following a sharp contraction in the second quarter.

The first increase in the two-stage sale tax hike in April knocked the Japanese economy hard, and markets view a delay in the second-phase of the tax hike as positive for growth.
----

Those who follow us know we've been suggesting oil stocks irrespective of the feared glut are cheap and they represent value and opportunity for a while now. See our most recent post.
http://financialspuds.blogspot.com/2014/11/use-your-own.

Here's another view. http://www.bloomberg.com/news/2014-11-12/oil-futures-swing-bolsters-u-s-energy-stocks-chart-of-the-day.
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BE CAFREFUL HOW YOU COURT

Who doesn't love predictability?

One of the things you learn in life about courting women--if you haven't learned this yet, you need to--most claim their looking for a reliable, dependable, predictable guy.

But that's like some of the market advice you hear, don't take it to heart, because as soon as you become too predictable, most will dump you like a pump and dump penny stock as boring and predictable.

Predictability in most cases is the antithesis of volatility. Too much of either can scare the hell out of folks. And that's why the stock market is getting a bit scary to many investors.  With the exception of the quick October decline, 2014 has been pretty much a predictable, reliable year. And ditto 2013.

Much of the upswing in the S&P 500 came from just a handful of stocks. Cyclical companies were carted off to the equity orphanage based to a large part on all the deflation fears. One of the major worries stems from the Fed's end to tapering as it became known and when is the next interest rate hike coming.

Sure the ECB and BoJ have picked up the gauntlet, but they're not backed by the for now steroid-laden U.S. greenback. So there's an element of doubt here, as in where did all the liquidity go? 

Liquidity is to predictable as mysterious is to successful courting. If everyone today knew what was going to happen next week in the market, how much liquidity do you think there would be and how boring and predictable would it get?

For most of the last couple years volatility was flatter than one of my old girl friend's chest before she discovered Beverly Hills.

If the Fed came out tomorrow and said:"We're definitely raising interest rates January 2, 2015," the market would probably tank based on predictability. The Fed would then come under fire for yelling fire in a crowded market venue.

The recent pick up in volatility, one of the things worrying investors, has its upside. Take, for example, as the WSJ  pointed out today, "Cheap Oil's Hidden Fee for Airlines," volatile and high fuel prices "can have some important benefits for the airline industry. They make airlines less certain about future costs, thereby making them more cautious about adding capacity.

They also prompt state-backed foreign airlines, which generally lack incentives to keep expansion plans in check, to behave more rationally. And expensive fuel also discourages new entrants, in part because it is harder to turn a profit with less-efficient used planes—often leased by startup airlines—and because lenders are less willing to provide funding.

We don't know about you, but that's sounds a lot like courting the ladies.

.

WIND-AIDED FOLLIES

 
Defenders of the Greenspan-Bernanke-Yellen-led Federal Reserve Bank claim the Fed's policies don't cause asset bubbles.

But a quick look at the junk bond market seems to be saying otherwise. Everyone knows that energy prices have been falling.

Like any water filled balloon, pressure put at one point causes a bulge at another. Falling energy prices help some and hurt others. Those being hurt are not just oil exporting countries, like Venezuela, Kazakhstan and others.

Owing to the Fed's ZIRP or what we call wind-aided follies, investors, as everyone knows, have been pushed into riskier places, like high yielding junk energy bonds.

In most bubbles one or two sectors at most make up a good portion of their respective indices. In other words, the index gets a bit top heavy in that sector.

Back in the good old high tech days something noted then as TMT, technology, media and telecommunication stocks, made up a large proportion of the S&P 500. That is, they did before the bubble burst.

There have been numerous other examples to make the point. Money flows to where it flows. It's almost a staple of markets.

Well, if you've been tracking low-rated energy junk bonds recently you know they've taken a hit since oil prices started their swan dive. 

For the last nine of 10 years much of the U.S. oil and gas shale industry that folks like MSM and others love to celebrate has been propped up by cheap, low-rated junk bonds.

According to today's Financial Times, those low-rated, cheap, higher yielding bonds yield-starved investors have been chasing-- thanks in part to central bankers--comprise nearly 16 percent of the $1.3 trillion junk bond market.

In 2004 that same sector accounted for less than five percent. Even by our feeble grasp of mathematics that's about a four-fold increase.  

According to a recent Fortune article, The 10 largest public U.S. energy stocks lost $297 billion in market cap between June and October. To put this into perspective, we’re talking about the equivalent of the market caps of Disney, Ford, Starbucks, and General Mills being vaporized in just a few weeks. Exxon Mobil XOM 0.06% lost $75 billion alone from the peak to the trough of the energy stock selloff.

Market cap is a proxy for percent of an index. Even in 100 meter sprints there's something  known as a wind-aided time. It usually gets corrected.

USE YOUR OWN

 "It's turning into a stampede away from fuel-efficiency,"  noted the WSJ quoting in today's paper Mike Jackson, the chief of AutoNation, the numbero uno auto chain dealer in the U. S.

In case one doesn't recognize it, that's just one impact of lower energy prices, one that some environmentalists might not like very much.

Most recognize that airlines, auto manufacturers, even corn farmers among others benefit from lower energy prices. In the auto business it makes dealers happy because they will sell more utility vehicles and big trucks like the Ford F 150 since profit margins are greater on these big boys than it is on smaller vehicles that reportedly hold down green-house emissions.

There's been a lot of hoopla lately about lower energy prices and how it puts more money in consumer pockets. In a consumer based economy like America's that an important yard stick. And this week several retailers are reporting  earnings.

Some say, notwithstanding wages, the consumer is the last leg needed to push the U.S. economy where all this easy money our beloved friends at the Fed have been printing for the past several years, full recovery.

Lower oil prices hit big oil first. But big oil like most smart people alter their behavior when that happens.They start to cut costs. That excludes most governments and all those haters of austerity out there.

Those cuts in capex sooner or later have a way of trickling into the economy. Money saved there can wind up somewhere else like in increased dividends. We recently alluded to this in our post, http://financialspuds.blogspot.com/2014/10/like-good-motorist., when we mentioned British Petroleum (BP) which recently hiked its dividend more than 5 percent.

And as an aside, when you look at BP and it's fundamentals which are far lower than the other oil companies of it size, sure there's still some legal drag, it could easily be a takeover candidate in a low energy price scenario.

That may be a mouthful, and we're not predicting it, but stranger things have happened.

By some reports auto dealers have tons of fuel efficient cars, especially the smaller versions, sitting in dusty inventories on their lots. Lower gas prices bring out the gas-guzzling crowds who love their trucks and SUVs. That should tell you something about human nature.

So if you ever want to own one of those gas-saving smaller vehicles, you might want to buy one now while energy prices are falling. Remember bond yields compete with dividends The longer bond yields stay low the more attractive higher dividends appeal to the yield starved.

Falling energy prices have their own deflationary effect. So besides one of those gas-saving little ditties you might also want to pick up some energy stocks on the cheap where the prospect for higher dividends is most likely a no brainer.

UPCOMING WEEK

 

The bond market  may be closed next week on Tuesday for Veteran's Day, but there is still much on the menu. The hawk-dove sideshow continues as Plosser (hawk) and Kocherlokota (dove) speak on Wednesday, Plosser in London and Kocherlokota in Wisconsin.

More earnings are on the agenda as retailers Macy's, Wal-Mart , Kohl's and JC Penny report along with the University of Michigan Confidence report. Winding up the week are those 3Q GDP numbers for the three largest EU economies, Germany, France and Italy.

So it should be an interesting week.

---

Monday, November 10

US Economics (Time Zone: EST)

10:00 Labor Market Conditions Index (LMCI)
11:30 Treasury to sell $24b 3-month bills and $30b 6-month bills
1:00 Treasury selling $26b 3-year notes

Fedspeak

5:10pm Rosengren (moderate, nonvoter) speaks at Washington and Lee University

Global Economics (Time Zone: GMT)

CNY New Yuan Loans
00:30 AUD Home Loans
01:30 CNY CPI & PPI
09:30 EUR Eurozone Sentix Investor Confidence
13:15 CAD Housing Starts

Earnings

Before:
Dean Foods (DF)

After:
Forest Oil (FST)

Sotheby's (BID)
3D Systems (DDD)
Rackspace (RAX)
WhiteWave Foods (WWAV)

Tuesday, November 11

US Economics (Time Zone: EST)

US bond markets closed for Veterans Day
10:00 NFIB Small Business Optimism - expected 95.6, prior 95.3

Global Economics (Time Zone: GMT)

JPY Trade Balance
05:00 JPY Consumer Confidence Index

Earnings
Before:
DR Horton (DRI)

After:
Fossil Group (FOSL)

Wednesday, November 12

US Economics (Time Zone: EST)

07:00 MBA Mortgage Apps
10:00 Wholesale Inventories MoM (Sep) - expected 0.2%, prior 0.7%
11:30 Treasury to sell 4-week bills, $25b 52-week bills
1:00 Treasury to sell $24b 10-year notes

Fedspeak

3:00am Plosser (hawk, voter) speaks in London
12:00pm Kocherlakota (dove, voter) speaks in Wisconsin

Global Economics (Time Zone: GMT)

09:30 GBP Jobless Claims
09:30 GBP ILO Unemployment Rate (3M Sep)

10:00 EUR Eurozone Industrial Production
10:30 GBP BoE Inflation Report

Earnings

Before:
Macy's (M)
ADT (ADT)
Seaworld Entertainment (SEAS)

After:
JC Penney (JCP)
NetApp (NTAP)
Cisco (CSCO)

Plug Power (PLUG)

Thursday, November 13

US Economics (Time Zone: EST)

08:30 Initial Jobless Claims, expected 280k, prior 278k
08:30 Continuing Claims - exp 2340K, prior 2348k
10:00 JOLTS Job Openings (Sep) - expected 4775K, prior 4835
2:00 Treasury Budget Statement - exp -$112.9B
1:00 Treasury to sell $16b 30-year bonds

Fedspeak

11:45am Yellen (dove, chair) gives welcoming remarks at Fed/ECB event

Global Economics (Time Zone: GMT)

JPY Japanese Investors Purchases of Foreign Bonds/Stocks
JPY Machine Orders
05:30 CNY Retail Sales, Industrial Production, Fixed Asset Investment
07:00 EUR German CPI (Oct final)
09:00 EUR ECB Monthly Report
13:30 CAD New Home Price Index

Earnings

Before:
Kohl's (KSS)
Wal-Mart (WMT)

After:
Nordstrom (JWN)
Applied Materials (AMAT)

Viacom (VIA)

Friday, November 14

US Economics (Time Zone: EST)

08:30 Advance Retail Sales (Oct) - expected 0.2%, prior -0.3%
08:30 Retail Sales ex Auto - exp 0.2%, prior -0.2%
08:30 Retail Sales ex Auto & Gas - exp 0.4%, prior -0.1%
08:30 Import Price Index YoY (Oct) - exp -1.6%, prior -0.5%
09:55 University of Michigan Confidence (Nov prelim) - exp 87.5, prior 86.9
10:00 Business Inventories (Sep) - exp 0.3%, prior 0.2%

Fedspeak

9:10am Bullard (unsure, nonvoter) speaks in St. Louis
2:00pm Fischer (dove, vice-chair) and Powell (moderate, voter) speak in Washington

Global Economics (Time Zone: GMT)

06:30 EUR French GDP (3Q prelim)
07:00 EUR German GDP (3Q prelim)
09:00 EUR Italian GDP
10:00 EUR Eurozone CPI (oct final)
10:00 EUR Eurozone GDP (3Q advance)

Earnings

No major reports


Twitter: @MichaelSedacca

PLEASE READ TO FEEL BETTER

This is what academics waste their time doing. As if we needed an academic study to find this out.

What it does show, however, is how little faith one can put into those bureaucratic reports that purport to know what's going on. For example, the statement that "traditional inflation measures" don't apply to all parts of the economy.

Does that come to you as a real surprise? 

Or the one about making "bursting statements." Followed by this gem: "There's still a possibility that the Fed and government can steer the economy toward a soft landing."

Don't know about you but we feel a lot better now after reading that.

Let’s put all the questions about whether we’re in a bubble to rest. With the market recently hitting new highs, two professors who published a paper in the 40th-anniversary issue of the Journal of Portfolio Management entitled “Can We Predict Stock Market Crashes?” say we are probably in one. But that doesn’t necessarily mean it’s going to burst and create another crisis.

“When you see markets grow at five times the speed of the economy—the current situation—clearly we are in a bubble scenario,” says Sergio M. Focardi, a visiting professor of quantitative finance at Stony Brook University, who co-wrote the paper with Frank J. Fabozzi, a professor of finance at Edhec Business School.

The paper uses what’s known as the Buffett Ratio, which compares growth in market capitalizations to that of the underlying economy. They posit that the economy is one of increasing complexity, where traditional inflation measures don’t apply equally to all parts, and where globalization has made measuring underlying processes more difficult. A flood of money has also been injected into the financial sector, which doesn’t always find its way into the economy.

Focardi notes that “one has to be very careful in making bursting statements.” The reason? “There’s still a possibility that the Fed and the government can steer the economy toward a soft landing.” As to the probability that today’s bubble is in danger of bursting, or when, we’ll have to wait for their next paper.

-- Robin Goldwyn Blumenthal

A WILLING BET

 

If you have not noticed, it's really a two-tiered or bifurcated market led by, in its rush to the top, so-called safety net stocks: health care, utilities and consumer staples.

Now that energy has done it recent version of a market swan dive, joining basic materials and consumer discretionary goods, these sectors for the most part have failed to bring up the rear in investor minds.

Energy once the most popular kid on the block and representing a big chunk of the S&P 500 suddenly caught a cold and many now are predicting something even worse. What's the magic number the price of a barrel of oil will have to hit before production in American shale fields will start to dry up?

The safest answer is your guess is as good as anyone else's. There's yet another fly buzzing just above the political hydrocarbon ointment bucket here, that of the 1975 law banning U.S. oil exports. This situation reeks with the smell of money and light sweet crude versus the heavy more polluting kind.

 As one columnist puts it, in this case the bifurcation is "Hardly a ringing endorsement of a robust economy." Either that or the pallor hanging over much of the globe is preventing them from seeing the forest for the aspens.

This year was supposed to be one of rising interest rates and falling bond yields hardly one in which stodgy utilities are expected to lead. But lead they have for much of the year. Buying what you need rather than what you like is a sentiment indicator.  And most of us know about the importance of health care.

Yet recent reports show consumer confidence is running at record highs. Is that just another lagging indicator or what? The party's getting ready to shut down when all of a sudden most of the guests show up.

Generals are noted for fighting last year's war. Could it be that investors will be making the same mistake when 2015 rolls around? With all the gloom and deflation doom hanging in the air, that's a bet we're becoming more willing to take.