Tag Archives: stock bubble

The Historical Stock Bubble And Undervalued Gold And Silver

When the hedge fund algos inevitably turn the other way and unload stocks, a meaningful amount of the capital that leaves the stock market will likely rush into gold and silver.  The record hedge fund net short position on the Comex will add fuel to the move in gold/silver.

James Anderson of Silver Doctors/SD Bullion invited me to discuss the largest stock bubble in U.S. history and why gold is extremely undervalued relative to the U.S. dollar.  (Note:  at the 20:44 mark I reference China’s foreign reserves to be $1.2 trillion. This is the dollar amount of China’s reserves; China’s total foreign reserve is $3 trillion).

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

The Stock Market’s Great Fool Theory

The current stock market is the most dangerous stock market I have seen in my 34+ year career as a financial markets professional. This includes 1987, 1999-2000 and 2007-2008. The run-up in stocks has been largely a product of momentum-chasing hedge fund algos on behalf of the large universe of sophisticated hedge funds which are desperate for performance. In the context of the obviously deteriorating economic fundamentals, the performance-chasing game has become a combination of FOMO – “fear of missing out” – and the Greater Fool Theory – praying someone else will pay more for the stock than you just paid. There’s also likely some official intervention going on as well per the chart below.

Most, if not all, of you are aware of the degree to which the Trump Administration – primarily The Donald and Larry Kudlow – are using the ongoing the trade negotiations to issue opportunistic headline statements about the progress of a potential deal at times when the market appears ready to drop off a cliff and for which Trump’s advisors know the hedge fund fund algos will respond positively. This chart shows this “positive trade war news” effect (from Northman Trader w/my edits):

The problem with relying on this device is that eventually the market will fatigue of “false-positive” news releases and revert to bona-fide price-discovery.

To see an example of the algos’ response to a headline report and the subsequent “price-discovery” action, let’s examine the release of Bed Bath and Beyond’s (BBBY – $17.99) earnings. BBBY announced its Q4 2018 earnings on Wednesday this past week after the close:

The initial headlines reported an earnings “beat.” The algos drove the stock from its $19.40 closing price to as high as $21.27 on those headlines. But in the real world, the details of BBBY’s financial statements showed that sales declined both in Q4 vs Q4 2018 and for the full-year 2018 vs 2017. Even adding back the large impairment charge which BBBY took in Q4 this year, operating income was still down 37% vs Q4 2017. The stock closed Wednesday’s extended hours trading session 18% below the headline-driven high-tick. This is what happens when reality gets its claws into the market.

The best example of the Greater Fool Theory right now is the semiconductor sector. Semiconductors are “hyper” cyclical. The companies mint money in a strong economy and come close to hemorrhaging to death in recessions. The SMH ETF has gone up 55% since the Fed/Trump began re-inflating the stock bubble. Some individual stocks have nearly doubled.

I’m sorry I missed the opportunity to get long this sector on December 26th. But, given that the move up has been in complete defiance of the actual industry fundamentals, would I have held onto a long position until today? Probably not. The momentum-junkies have been chasing the sector higher with fury based on the faith in the “second-half of 2019” recovery narrative currently preached by CEO’s who have to deliver bad results in Q1 and take a chain-saw to guidance for 2Q. But the message is: “trust me, there’s a huge recovery coming in Q3”

Semiconductor CEO’s are notorious for rose-colored forecasts for the market out in the future. Interestingly, a German wafer manufacturer issued stern, if not refreshingly honest, guidance for 2019 when it said that previous guidance was “under the condition that order intake would need to revive meaningfully in the second half of 2019.” The Company went on to explain that “because of the general economic slowdown and geopolitical uncertainties as well as ongoing inventory corrections in the whole value chain, the timing of a market rebound is not visible.”

Wafers are the building block for semiconductors and integrate circuits. Siltronic is a leading global wafer manufacturer. If Siltronic is seeing a meaningful decline in wafer orders, it means the companies that make the semiconductors and integrated circuits are flush with inventory that reflects lack of demand from companies that use chips to manufacture the end-user products.

The higher probability trade right now is to short the semiconductor sector (along with the overall stock market). Trading volume across the board is declining, standard market internals are fading and sentiment is back to extreme bullishness (Barron’s cover two weeks ago wondered, “is the bull unstoppable?”).

I can hear a bell in the distance signalling the top. I suspect a large herd of price-chasers will realize collectively all at once that there’s going to be a rush to find the next Greater Fool but the Greater Fool will be those stuck at the top.

The above commentary is an excerpt from my weekly subscription newsletter. I bought puts on a semiconductor stock today that has gone parabolic despite horrendous numbers for Q4.  I’ll be discussing that stock and a couple others this Sunday. To learn more, click on this link:  Short Seller’s Journal information

Gold And Silver May Be Setting Up For A Big Move

Gold and silver are historically undervalued relative to the stock and bond markets. The junior mining stocks overall are at their most undervalued relative to the price of gold since 2001. Gold’s relative performance during the quarter, when the stock market had its best quarterly performance in many decades, is evidence of the underlying strength building in the precious metals sector.

Furthermore, the stock market is an accident waiting to happen. By several traditional financial metrics, the current stock market is at its most extreme valuation level in history. This will not end well for those who have not positioned their portfolio in advance of the economic and financial hurricane that is beginning to “move onshore.”

Bill Powers invited on to his Mining Stock Education podcast to discuss the precious metals sector and the economy:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

When The Stock Market Reversal Happens, It Will Be A Whopper

“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman

Before I saw that quote from Hussman on Twitter, I was contemplating how the trading patterns this year in bond and precious metals markets remind of the way they were trading in 2008 before the financial system de facto collapsed.  Similarly,  the tech stocks right now remind me of the blow-off top that occurred in tech stocks in January/February 2000 just before the Nasdaq collapsed. Whether intentional or not, the Fed has quickly re-inflated the tech bubble that was punctured in September 2018.

Semiconductor stock bubble – The tech bubble in the late 1990’s was led by the semiconductor sector and the dot.coms. 98% of the dot.coms taken public during that time are no longer around. The semiconductor industry is “hyper”-cyclical. It has a beta of 11 vs. the economy. Right now the global economy is in melt-down mode. Just ask the IMF, BIS and World Bank. The Fed and Trump have recklessly reflated the stock bubble that led to the all-time high in the stock market. The semiconductors closed at an all-time high on Friday. It’s sheer insanity given that industry fundamentals are melting down.

The semiconductors seem to be the most responsive to trade war headlines that promote optimism. But the stock prices of these companies have completely disconnected from reality. Every possible consumer-driven end-user product market that uses semiconductors is contracting. As an example, Samsung warned on Thursday that it’s Q1 profit would be down 60% from Q1 2018, citing declines in prices for memory chips and lower demand from OEMs for screens, like the OLED display that Samsung makes for Apple’s iPhone.

Samsung’s inventory is now twice the size of two of its primary competitors. One of those competitors is Micron (MU – $41.72), which admitted that its inventory had soared to 137 days and was on its way to 150+ days in the current quarter. The slashing of capex by chip manufacturers has barely begun.

Semiconductor sales fell 7.3% in February from January and 10.6% from February. Globally semiconductor sales fell across all major categories and across all regional markets (not just China) in February. In North America, chip sales were down 12.9% from January and 22.9% from February 2018 (vs. down 7.8% in February in China sequentially from January and down 8.5% from Feb 2017).

The trade war has nothing do with the sales crash in the chip industry. And the “green shoots” seen in the “blip” in China’s PMI which ignited the stock market last Monday is not confirmed by the PMI data coming from Japan and South Korea, two of China’s largest trading partners. In short, when semiconductor stocks reverse from this insane run higher, they will literally rip in reverse. DRAM average selling prices (ASP) plunged over 20% in Q1 2019. The ASP is projected to drop another 15-20% in Q2 and a further 10% drop in Q3. So much for the 2nd half “recovery” that several chip company CEO’s saw in their crystal ball during the latest quarters’ conference calls (Micron, Lam Research, etc).

Inventories of all categories of semiconductors are extremely high because the demand for the end-user products (smartphones, autos, electronics) is plummeting, which means the inventory of those products is soaring as end-user demand contracts. The best news is for shorts looking for contrarian signals is that Cramer has been on his CNBC show recently pounding the table on chip stocks. This can only mean that his Wall Street sources are trying to move big blocks of stock out of their best institutional clients.

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The commentary above is an excerpt from my latest Short Seller’s Journal.  In that issue I present a detail rationale with data to explain why the U.S. economy is tanking and I provide several stocks to short, along with put option suggestions and capital management advice.  You can learn more about this weekly newsletter here:  Short Seller’s Journal information.

“Man, this is high-value newsletter.  Especially for me.” – Subscriber “Scott” from Michigan

The Divergence Between Stocks And Reality Is Insane

“They may try to run this poor thing straight up and over a cliff. Recall the 2000 top was in March but they briefly ran it back in Sep 00. Ditto in Oct 07. When warning signs are ignored, the endings are abrupt. Maintain safety nets, but don’t assume stupidity has limits.” – John Hussman

This is the nastiest bear market rally that I have seen in my over 34 years of experience as a  financial markets professional. It would be a mistake to make the assumption that there has  not been some official intervention to help the stock market recover from the December sell-off.

Rob Kientz of goldsilverpros.com – a relatively new website that focuses on gold and silver market news and research – and I had a conversation about the extreme negative divergence between the economy and the stock market. And, of course, we discussed gold, silver and mining stocks:

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If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:   Short Seller’s Journal  information and more about the Mining Stock Journal here:   Mining Stock Journal information.

Will Gold Continue Higher Despite Efforts To Keep It Capped?

“At the exact time that the one asset is supposed to defend against reckless Fed monetary policies should be going higher, it’s going the opposite way…and you’re telling me this isnt’ a  manipulated market?”

The current period reminds of 2008.  The price of gold was overtly manipulated lower ahead of the de facto collapse of the financial system. It’s highly probable the Central Banks are once again setting up the markets for another financial collapse, which is why it’s important for them to remove the dead canary from the coal mine before the worker bees see it.

Craig “Turd Ferguson” Hemke invited me to join him in a discussion about the large drop in the price of gold last week and why it points to official intervention in the gold market for the purpose of removing the warning signal a rising gold price transmits about the growing risk of financial and economic collapse.

You can click on the sound bar below or follow this link:  TF Metals Report to listen to our conversation.

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Larry Kudlow Wants A 50 b.p. Cut In Fed Funds – Why?

The stock market has been rising relentlessly since Christmas, riding on a crest of increasingly bearish economic reports. Maybe the hedge fund algos are anticipating that the Fed will soon start cutting rates. Data indicates foreigners and retail investors are pulling cash from U.S. stocks. This for me implies that the market is being pushed higher by hedge fund computer algos reacting to any bullish words that appear in news headlines. For example, this week Trump and Kudlow have opportunistically dropped “optimistic” reports connected to trade war negotiations which trigger an instantaneous spike up in stock futures.

“U.S. economy continues to weaken more sharply and quickly than widely acknowledged” – John Williams, Shadowstats.com, Bulletin Endition #5

The real economy continues to deteriorate, both globally and in the U.S. At some point the stock market is going to “catch down” to this reality.

The graphic above shows Citigroup’s Economic Data Change index. It measures data releases relative to their 1-yr history. A positive reading means data releases have been stronger than their year average. A negative reading means data releases have been worse than their 1-yr average. The index has been negative since the spring of 2018 and is currently well south of -200, its worst level since 2009.

The Treasury yield curve inversion continued to steepen last week. It blows my mind that mainstream media and Wall Street analysts continue to advise that it’s different this time. I would advise heeding the message in this chart:

I’m not sure how any analyst who expects to be taken seriously can look at the graphic above and try to explain that an inverted yield curve this time around is irrelevant. As you can see, the last two times the Treasury curve inverted to an extreme degree, the stock bubbles began to collapse shortly thereafter.

The data in the chart above is two weeks old. The current inversion is now nearly as extreme as the previous two extreme inversions. This is not to suggest that the stock market will go off the cliff next week. There’s typically a time-lag between when the yield curve inverts and when the stock market reacts to the reality reflected in an inverted curve. Prior to the great financial crisis, the yield curve began to invert in the summer of 2006. However, before the tech bubble popped, the yield curve inversion coincided with the crash in the Nasdaq.

Another chart that I believe reflects some of the information conveyed by the inverted yield curve is this graphic from the Fed showing personal interest payments. Just like in 2000 and 2008, households once again have taken on an unmanageable level of debt service expense:

Obviously the chart above is highly correlated with stock market tops…

The Conference Board’s measure of consumer confidence dropped in March, with the Present Situation index plunging to an 11-month low. It was the biggest monthly drop in the Present Situation index since April 2008. What’s interesting about this drop in confidence is that, historically, there’s been an extraordinarily high correlation between the directional movement in the S&P 500 and consumer confidence. The move in the stock market over the last three months would have suggested that consumer confidence should be soaring.

The Cass Freight Index for February declined for the third straight month. Even the perma-bullish publishers of the Cass newsletter expressed that the index “is beginning to give us cause for concern.” The chart of the index has literally fallen off a cliff. Meanwhile, the cost of shipping continues to rise. So much for the “no inflation” narrative. The Cass Index is, in general, considered a useful economic indicator. Perhaps this is why Kudlow wants an immediate cut in the Fed Funds rate?

FOMC Statement: Reading Between The Lines

“No more rate hikes period…rate cuts to begin sometime this spring…tapering the balance sheet taper starting in May…QT ends in September even though our balance sheet has only been reduced by roughly 10% of the amount of money we printed…Quantitative Easing  aka “money printing” to resume in October…our hidden dot plot shows that you should buy as much physical gold as you can afford and keep it as far away from any custodial safekeeping as possible.”

Just for the record, the Fed’s “Dot Plot” has to be one of the most idiotic props ever created for public consumption. It far exceeds the absurdity of the “flip chart” that Steve Liesman uses.

A Financial System Headed For A Collision With Debt

The retail sales report for December – delayed because of the Government shut-down – was released this morning. It showed the largest monthly drop since September 2009. Online sales plunged 3.9%, the steepest drop since November 2008. Not surprisingly, sporting goods/hobby/musical instruments/books plunged 4.9%. This is evidence that the average household has been forced to cut back discretionary spending to pay for food, shelter and debt service (mortgage, auto, credit card, student loans).

I had to laugh when Trump’s Cocaine Cowboy – masquerading as the Administration’s flagship “economist” – attributed the plunge in retail sales to a “glitch.” Yes, the “glitch” is that 7 million people are delinquent to seriously delinquent on their auto loan payments. I’d have to hazard a wild guess that these folks aren’t are not spending money on the latest i-Phone or a pair of high-end yoga pants.

Here’s the “glitch” to which Larry must be referring:

The chart above shows personal interest payments excluding mortgage debt. As you can see, the current non-mortgage personal interest burden is nearly 20% higher than it was just before the 2008 financial crisis. It’s roughly 75% higher than it was at the turn of the century. The middle class spending capacity is predicated on disposable income, savings, and borrowing capacity. Disposable income is shrinking, the savings rate is near an all-time low and many households are running out of capacity to support more household debt.

I found another “glitch” in the private sector sourced data, which is infinitely more reliable than the manipulated, propaganda-laced garbage spit out by Government agencies. The Conference Board’s measurement of consumer confidence plunged to 120.2 from 126.6 in January (December’s number was revised lower). Both the current and future expectations sub-indices plunged. Bond guru, Jeff Gundlach, commented that consumer future expectations relative to current conditions is a recessionary signal and this was one of the worst readings ever in that ratio.

This was the third straight month the index has declined after hitting 137.9 (an 18-yr high) in October. The 17.7 cumulative (12.8%) decline is the worst string of losses since October 2011 (back then the Fed was just finishing QE2 and prepping for QE3). The expectation for jobs was the largest contributor to the plunge in consumer confidence. Just 14.7% of the respondents are expecting more jobs in the next 6 months vs 22.7% in November. The 2-month drop in the Conference Board’s index was the steepest 2-month drop since 1968.

This report reflects a tapped-out consumer. It’s a great leading economic indicator because historically downturns in this report either coincide with a recession or occur a few months prior.

Further supporting my “glitch” thesis, mortgage purchase applications have dropped four weeks in row after a brief increase to start 2019. Last week purchase applications tanked 6% from the previous week. The previous week dropped 5% after two consecutive weeks of 2% drops. This plunge in mortgage purchase apps occurred as the 10yr Treasury rate – the benchmark rate for mortgage rates – fell to its lowest level in a year.

Previously we have been fed the fairy tale that housing sales were tanking because mortgage rates had climbed over the past year or that inventory was too low. Well, mortgage rates just dropped considerably since November and home sales are still declining. The inventory of existing and new homes is as high as it’s been in over a year. Why? Because of the rapidity with which number of households that can afford the cost of home ownership has diminished. The glitch is the record level of consumer debt.

The parabolic rise in stock prices since Christmas is nothing more than a bear market, short-covering squeeze triggered by direct official intervention in the markets in an attempt to prevent the stock market from collapsing. This is why Powell has reversed the Fed’s monetary policy stance more quickly than cock roaches scatter when the kitchen light is turned on. But when 7 million people are delinquent on their car loan and retail sales go straight off the cliff, we’re at the point at which stopping QT re-upping QE won’t work. The stock market will soon seek lower ground to catch down to reality. This “adjustment” in the stock market could occur more abruptly most expect.

As The Fed Reflates The Stock Bubble The Economy Crumbles

I get a kick out of these billionaires and centimillionaires, like Kyle Bass yesterday, who appear on financial television to look the viewer in the eye and tell them that economy is booming.  Kyle Bass doesn’t expect a mild recession until mid-2020. Hmmm – explain that rationale to the 78%+ households who are living paycheck to paycheck, bloated with a record level of debt and barely enough savings to cover a small emergency.

After dining on a lunch fit for Elizabethan royalty with Trump, Jerome Powell decided it was a good idea to make an attempt at reflating the stock bubble. After going vertical starting December 26th, the Dow had been moving sideways since January 18th, possibly getting ready to tip over. The FOMC took care of that with its policy directive on January 30th, two hours before the stock market closed. Notwithstanding the Fed’s efforts to reflate the stock bubble – or at least an attempt to prevent the stock market from succumbing to the gravity of deteriorating fundamentals – at some point the stock market is going to head south abruptly again. That might be the move that precipitates the renewal of money printing.

Contrary to the official propaganda the economy must be in far worse shape than can be gleaned from the publicly available data if the Fed is willing to stop nudging rates higher a quarter of a point at a time and hint at the possibility of more money printing “if needed.” Remember, the Fed has access to much more detailed and accurate data than is made available to the public, including Wall Street. The Fed sees something in the numbers that sent them retreating abruptly and quickly from any attempt to tighten monetary policy.

For me, this graphic conveys the economic reality as well as any economic report:

The chart above shows the Wall Street analyst consensus earnings growth rate for each quarter in 2019. Over the last three months, the analyst consensus EPS forecast has been reduced 8% to almost no earnings growth expected in Q1 2019. Keep in mind that analyst forecasts are based on management “guidance.” The nearest next quarter always has the sharpest pencil applied to projections because corporate CFO’s have most of the numbers that go into “guidance.” As you can see, earnings growth rate projections have deteriorated precipitously for all four quarters. The little “U” turn in Q4 is the obligatory “hockey stick” of optimism forecast.

Perhaps one of the best “grass roots” fundamental indicators is the mood of small businesses, considered the back-bone of the U.S. economy. After hitting a peak reading of 120 in 2018, the Small Business Confidence Index fell of a cliff in January to 95. The index is compiled by Vistage Worldwide, which compiles a monthly survey of 765 small businesses. Just 14% expect the economy to improve this year and 36% expect it to get worse. For the first time since the 2016 election, small businesses were more pessimistic about their own financial prospects than they were a year earlier, including plans for hiring and investment.

The Vistage measure of small business “confidence” was reinforced by the National Federation of Independent Businesses confidence index which plunged to its lowest level since Trump elected. It seems the “hope” that was infused into the American psyche and which drove the stock market to nose-bleed valuation levels starting in November 2016 has leaked out of the bubble. The Fed will not be able to replace that hot air with money printing.

I would argue that small businesses are a reflection of the sentiment and financial condition of the average household, as these businesses are typically locally-based service and retail businesses. The sharp drop in confidence in small businesses correlates with the sharp drop in the Conference Board’s consumer confidence numbers.

The negative economic data flowing from the private sector thus reflects a much different reality than is represented by the sharp rally in the stock market since Christmas and the general level of the stock market. At some point, the stock market will “catch down” to reality. This move will likely occur just as abruptly and quickly as the rally of the last 6 weeks.