January 27, 2016

2016 market not comparable to 2008 panic sell off

It seems to me that Wall Street's 2008 panic was driven in part by a vicious cycle in the Markit index, a small proxy derivative that supposedly correlated to mortgage bonds and their expected cash flows.

I believe that driving the price of this small "cog" down caused the markets to mark to the index. This is the tool that I think was used to short Lehman Brothers into oblivion, with horrible results.

Sure, if Lehman wasn't 30x leveraged, that never could have happened. And in the end, many of the bond classes performed way better than the indices expected. One particular example of that was collateralized mortgage-backed securities.

Fast forward to 2016 and I think oil is the proxy of choice today.
It's obviously not a housing proxy, but there are more oil consumers, more manufacturers who use petroleum as an input and more jobs created as a result of crude than there are oil producers.

This isn't a dead-weight loss -- so the comparison that many are now making between the Wall Street of 2016 and the Wall Street of 2008 isn't accurate in my view.

January 25, 2016

Markets may have made an important bottom last week

From my perch, Wednesday's selling seemed indiscriminate, likely impacted by risk-parity strategies and gamma-hedging clowns rebalancing their portfolios on the way down.

Some 43% of New York Stock Exchange issues reached new 52-week lows at midday Wednesday. That's only the third time that's happened since the October/November 2008 market meltdown, and just the fourth time since the October 1987 crash. 

In fact, there have been only 21 events of this kind since 1966. Here are the median subsequent returns the affected stocks saw afterward:

-    One week later: A 3.4% gain (up 16 times out of 21, down five times)

-   One month later: A 3.7% rise (up 17 times, down four times)

-    Three months later: A gain of 6.7% (higher 14 times, lower seven)

-    Six months later: An 11.6% advance (up 13 times, down seven times)

-    One year later: A 19.7% gain (higher 15 times, lower five times)

Oil is also trading some 5% higher today (oil prices might have bottomed).

I've been aggressively accumulating the SPDR S&P 500 ETF (SPY) since midday Wednesday for as low as $181.30, reducing my individual short exposure. Since then, the S&P 500 has risen by nearly 80 handles!

I'm in an uncustomarily bullish stance now. It's my view that Wednesday's selloff could have marked an important market bottom, with a reasonably high probability that the midday red ink represented a capitulation low.

Regarding energy prices, I also noted yesterday that the CBOE Crude Oil Volatility Index "is back to the high it made when it bottomed for a rally last August. As oil prices go, so does our market -- but with crude down around $26 a barrel, the brunt of energy prices' decline is probably behind us. And as has been the case over history when stocks fixate on one independent variable, the correlation eventually begins to lose its influence."

I take comfort in the fact that there's so much resistance to the notion of a bottom.........
Of course, I'm aware of the fundamental economic and other risks that we face -- I've been chronicling them for the past year. But many individual securities might have already materially discounted those risks.

My conclusion: To reiterate, I believe the market might have made an important market bottom during the "noon swoon" on Wednesday.

Position: Long SPY 

via www.thestreet.com/story/13430024/3/this-time-is-different-from-2008-was-that-a-bottom-best-of-kass.html

January 21, 2016

Thinking its different this time could be an expensive mistake

Market watcher John Hussman has eloquently pointed out that those who still embrace the bubble in global stock prices will eventually sit down to a banquet of consequences.
“At the peak of every speculative bubble, there are always those who have persistently embraced the story that gave the bubble its impetus in the first place. As a result, the recent past always belongs to them, if only temporarily. Still, the future inevitably belongs to somebody else. By the completion of the market cycle, no less than half (and often all) of the preceding speculative advance is typically wiped out.”
Citing Carmen Reinhart and Kenneth Rogoff’s classic book This Time Is Different, Hussman added: 
"Every boom and bust have the same qualities. The hubris and arrogance of financial 'experts’ and government apparatchiks makes them think they are smarter than those before them. They always declare this time to be different due to some new technology or reason why valuations don’t matter. The issuance of speculative debt and seeking of yield due to Federal Reserve suppression of interest rates always fuels the boom and acts as the fuse for the inevitable explosive bust.”
I’ve written repeatedly over the last year that the one question I ask myself every morning is: “Are we as citizens and investors as safe in a flat, connected and networked world as markets presume we are?”

That question, coupled with a slew of fundamental concerns (geopolitical, social, political, economic and profit-related), forms the basis of my cautious market view.

I’ve expressed my view that both the fundamental and technical deterioration – i.e., the narrowing market leadership that began in late 2014 – were sowing the seeds for an important, broad-market top.

In my columns Short in May and Go Away and A Touch of Red May Be Ahead, I long ago identified last spring as the start of a cyclical S&P 500 top. And last month, I even expressed my negativity with some hyperbole (and a measure of frustration that the market had not yet conformed to my design) through two Dr. Seuss parodies, Green Eggs and Stocks: Neither Rocks and The Bull in the Hat.

I juxtaposed the above with my expectation that an “Ah Ha Moment” was at hand  – a point in time when investors would lose confidence in the Fed and its policies. I also summarized all of this in my 15 Surprises for 2016, which took a very negative tone and warned of a difficult year ahead.

A Broken Market Mechanism

The market mechanism has become broken, with machines and algos taking a more-dominant role – filling the vacuum left by the exit of individual investors and a less-active hedge-fund community.

Distortions and mal-investments are occurring as a result, meaning strategies that worked in the past begin to fail – as do the money managers who relied on them.

More “liquid-alternative” mutual funds closed last year than in any previous other year on record, including those run by JPMorgan Chase and Guggenheim Partners. We’ve also recently seen several hedge-fund firms (including Whitebox, Lutetium, SAB Capital and Seneca) announce plans to close some or all of their funds.

If these “Masters of the Universe” – the supposed best and brightest minds on Wall Street – can’t figure out our markets, what chance do we mere mortals have?

If my market fears come true this year, it’s inevitable that Main Street and the real economy will suffer the adverse impacts of a broken market mechanism and falling stock prices. The word “contagion” hasn’t been heard a lot since 2008, but it might appear again in 2016. Actually, we might have already been feeling the market’s contagious effects over the past two weeks. 

What I’m most fearful of is the possibility (as expressed above) that once the market moves down decisively, risk-parity and gamma-hedging strategies will exacerbate the market downturn – just as portfolio insurance did during the 1987 Wall Street crash.

This is no drill. I’ve consistently argued that investors should err on the side of conservatism these days, and that T.I.N.A. ("There Is No Alterative” to stocks) is B.S. As an expression of my negative market view, I’m currently short on the Chinese, U.S. and European stock markets. 

via http://dougkass.tumblr.com/post/136821477353/somethings-wrong-sell-sell

Earlier Stock Market Warning posts from May 2015

Negative returns for stocks this year

Buying the dips over

Market Selloffs could get ugly and fast

January 18, 2016

Is this a bear market ?

Many "experts" are now declaring a bear market after the S&P 500 closed at 1,890 yesterday.

But before you jump and sell every stock you own, consider this -- some of the same people were bullish only months ago when the S&P 500 stood at 2,120. Hindsight is always 20/20.

Personally, I reduced my S&P 500 fair-market-value calculation to 1,860 on Monday from a previous 1,890. That's not meant to be a precise forecast, but does give a sense of the S&P 500's "intrinsic value -- and by my calculation, the index ended yesterday's session within just 2% of FMV.

I obviously see a chance for an overshoot to the downside, as I've previously predicted the S&P 500 might ring up a low-double-digit percentage decline for 2016. But that's looking out a bit toward later in the year.

And of course, there are always stocks at any given time that are overpriced, as well as others that are underpriced.

For instance, retailers and banks are where I see intermediate-term value.

Position: Long JPM, C, FITB, BAC, M, BBY, BBBY 

via www.thestreet.com/story/13426445/3/amazon-jpmorgan-netflix-doug-kass-views.html

January 11, 2016

China problems leading to US market weakness

Years of the Federal Reserve Zero's Interest Rate Policy and massive liquidity infusions have yielded a central-bank "put" on the markets, replacing natural price discovery with asset-price inflation.

But now, it looks like that movie is being run in reverse. That's because players are beginning to lose faith in the Fed and other central banks, or what I call the "Ah-Ha Moment."

We appear to now be at a place that I've been warning about for the past year. By inflating asset prices, central bankers have compressed risk like a coiled spring -- and money managers have all crowded into the same trade of being long on overvalued equities and other asset classes. But the past few days have shown what happens when many of these players want to exit the same trade at the same time.

Many of business TV's "talking heads" have been saying this week that investors should ignore China's woes, citing things like the fact that trade with the Asian nation represents just a small part of U.S. gross domestic product.

They're clueless!

I remain short on the iShares China Large-Cap ETF (FXI), and I issued another warning about China just two days ago in my column Don't Say We Didn't Warn You About China.

The Chinese markets are overleveraged, and after losing real estate/construction as an engine of growth, the government is devaluing China's currency in an attempt to resuscitate domestic economic growth.

Meanwhile, I've consistently argued that China's stock markets are much more broken than America's. Perhaps that's why the Chinese markets' circuit breakers -- which shut off trading early today for the second time this week -- are having the opposite effect of what the authorities intended.

Unfortunately, China's potential to "export" risk through capital flight and a devalued Chinese currency (one of the "surprises" I predicted for 2015) and could cause problems for Western markets as investors lose faith and unwind long positions.

In a world of tepid growth, the system's fragility and overvalued nature -- coupled with a loss of confidence in central bankers -- represents an outsized risk to our markets. So does the notion of America as an "oasis of prosperity" in a flat, interconnected and networked world.

Position: Short FXI


January 4, 2016

Doug Kass unveils 15 Surprises for 2016

Below are my "15 Surprises for 2016," a rundown of events that have a reasonable chance of occurring during the coming year.

These aren't predictions, but what I call "possible improbable events." The list below should help you position a portion of your portfolio in case these potential events actually happen.

While some might accuse me of being apocalyptical, I contend that I'm simply raising the flag of common sense in a most uncertain world. But again, it's important to note that my surprises aren't set in stone, just possibilities:

Surprise No. 1: Terrorism Dismantles an Already Fragile Global Recovery
I fear we'll see attacks that demonstrate how terrorism incidents are systemic and not simply isolated. It could become apparent that we face a broad, aggressive wave of terrorism aimed (as expressed by ISIS) at defeating the West's world domination.

Acceptance of this notion would cause significant disruption in global markets and the world's economies. Shares in airlines, hotels, entertainment companies (especially theme-park related) might suffer the most throughout the year.

Surprise No. 2: Terrorism Goes Cyber
Middle Eastern, Russian and Chinese hackers successfully invade the U.S. financial system's computers at various points throughout 2016. They consistently launch destabilizing attacks against multiple trading platforms (the New York Stock Exchange, the Chicago Mercantile Exchange etc.) and the overnight electronic settlement system.

This causes a series of temporary multi-day trading halts, shattering confidence in our markets.

Surprise No. 3: 'The Mother of All Flash Crashes'
One of these cyber-attacks causes "The Mother of All Flash Crashes," which scares the hell out of many market participants. The Dow Jones Industrial Average falls by 1,100 points -- the largest one-day point decline in history.

Almost immediately following a Democratic presidential win in November, President-elect Hillary Clinton attacks the market-rigging, unholy alliance between high-frequency traders and the stock exchanges. A special congressional commission is formed after the flash crash to address the HFT industry and its fellow travelers.

In an attempt to correct the unfair playing field that's evolved, the government declares co-located servers illegal and bans "spoofing" and other dirty work that's become routine in the HFT industry. The market's fragmentation and illusion of depth that have allowed quants to profit at the expense of other investors reverses as new, punitive and costly regulations threaten Wall Street's "dark pools."

Surprise No. 4: Terrorism Hits Mideast Oil Infrastructure
The Islamic State destroys a significant amount of Mideast oil-producing countries' infrastructure. This occurs at the same time more violence erupts in the Niger Delta, Algeria suffers from political chaos and a coup disrupts Venezuela's oil production.

While outsized oil inventories initially stem energy-price increases, crude rises above $60 a barrel in 2016 -- sparking, among other issues, fears of reflation. (Energy stocks continue to falter at first, then soar in response to the Mideast hostilities.)

Surprise No. 5: America Falls into Recession and Stocks Tank
Too much debt, too little growth, fiscal-policy paralysis, a "spent" Federal Reserve and limited capital spending (which adversely impacts productivity) weigh down stocks in 2016. So do crony capitalism, geopolitical instability a further narrowing of market leadership and a further technical breakdown.

The current U.S. expansion is now more than 70 months old, one of the longest in history. There have been six recessions since 1971, and the S&P 500's average drop during them is 36%. I predict 2016 could see the seventh recession in the last 45 years, with stocks experiencing a 20% decline.

Few asset classes will be spared, and household net worths will suffer. Rising bond prices had the effect of somewhat buffering falling stock and home prices in the last downturn. But we won't be so fortunate this time as stocks, real estate and bond prices will likely all decline at the same time.

Surprise No. 6: Stagflation
I think stagflation could join "screwflation" as a concern for 2016. Wages could rise and non-energy commodities (particularly agricultural) could pass the Federal Reserve's inflation target despite disappointing U.S. growth.

Although we could see slowing and recession-like growth in 2016's third and fourth quarters, the yield curve won't invert. But oil and a drought that causes higher agricultural prices could raise headline inflation to well above the Fed's target.

Surprise No. 7: The Federal Reserve Doesn't Raise Rates
I think 2015's Fed rate hike will prove to be a policy error. Despite the consensus of two to three more hikes in 2016 (and the Fed's own forecast of four increases), it's possible the central bank won't raise rates at all in 2016.

Surprise No. 8: China and Russia's Economies Falter
China's real GDP growth rate (at least as stated) could fall below 5%. Unemployment rises and riots ensue, forcing the government to clamp down on social media. As a form of distraction (and an attempt to expand its political and economic reach), China flexes its military muscle and gets more aggressive in the South China Sea.

Despite a rise in oil prices, Russia's economy implodes. Russian leader Vladimir Putin grows increasingly irrational and retaliatory towards his perceived enemies, precipitating more confrontations and crises.

Surprise No. 9: The European Union Begins to Unravel
German Chancellor Angela Merkel's open-door immigration policy backfires and causes her to resign, while Britain leaves the EU (a "Brexit") under the assault of Euro-skepticism.

Separatist initiatives in Scotland and other countries advance and France's National Front party rises to new heights in the face of immigration fears. Support to Greece and other EU peripheral countries diminishes, causing another emerging-market crisis. European borders are shuttered and trade comes to a halt.

Surprise No. 10: It's Hillary vs. The Donald
Despite his rude and crude campaign, a series of terrorist acts within U.S. borders propels Donald Trump ahead of all of his Republican competitors.

He takes on Democrat Hillary Clinton, and their first televised debate attracts nearly 100 million viewers. Given the world's chaotic landscape, the November election is much closer than expected, but Clinton beats Trump 293 electoral votes to 245.

As her first initiative (even before her January inauguration), President-elect Clinton adopts a populist crusade that immediately attacks income and wealth inequality by recommending a large "wealth tax" and an increase in the U.S. minimum wage.

Surprise No. 11: Housing and Autos Tank
The housing and auto industries are exposed as Potemkin Villages on weak foundations. Home prices drop by over 5% as affordability gets stretched, mortgage rates climb and unemployment rates bottom out.

As for cars, rising interest rates, the fear of sooner-than-expected smart mobility and autonomous vehicles (coupled with a sharp drop in SAAR) pummels Ford and General Motors. Fierce competition appears from Alphabet (Google), Tesla and Apple for a share of the emerging mobility market. Add in a spike in auto-loan delinquencies and autos become one of 2016's worst-performing sectors.

Surprise No. 12: Warren Buffett Stumbles (Literally and Figuratively)
The Oracle of Omaha's core investments -- Coca-Cola (KO) , IBM (IBM) , Walmart (WMT) , Deere (DE) , American Express (AXP) and Wells Fargo (WFC) -- continue to falter as their protective "moats" dry up.

Investors become further concerned when Buffett falls and breaks a hip, causing him to be away from Berkshire Hathaway for several months. As result (and in the wake of move lower in Berkshire's share price to below book value), Buffett is forced to announce the name of his successor, who begins to pick up some of the Oracle's responsibilities in 2016.

Surprise No. 13: Goodbye FANG and NOSH, Hello CRABBY
The FANGs and NOSH -- Nike (NKE) , O'Reilly Automotive (ORLY) , Starbucks (SBUX) and Home Depot (HD) -- fall back to Earth and join the market's soldiers.

FANG and NOSH's market leadership is replaced by a new market leader: CRABBY. That's Citigroup, (C), Radian (RDN) , Allstate (ALL) , Bank of America (BAC) , the Blackstone Strategic Credit closed-end fund (BGB) and Allegheny Corp. (Y) .

Surprise No. 14: More Unicorns
Expect more private-equity unicorn dropouts in 2016 than you'd find truants in Animal House's Delta fraternity.

Excessive valuations will again remind Silicon Valley that "fat, drunk and stupid is no way to go through life, son." Cue the music.

Surprise No. 15: Individual Situations
Here are some individual stock, market sector and other surprises for 2016:
   - Apple makes a $20 billion+ acquisition and the shares trade at $90 after two consecutive, large earnings misses.
   - JPMorgan Chase (JPM) and Morgan Stanley (MS) merge. Goldman Sachs (GS) significantly bolsters its money management operations by acquiring T. Rowe Price (TROW) .
   - Two private-equity firms compete to acquire retailer Macy's (M) .
   - Web entrepreneur David Rosenblatt replaces Marissa Mayer as CEO of Yahoo! (YHOO) .
   - 2016's best market sectors: Defense, banks and fertilizers.
   - 2016's worst market sectors: Media, transports (particularly airlines and autos), electrical utilities, pharma/biotech and REITs.
Marissa Mayer of Yahoo

Position: Long C, RDN, BGB, BAC, M, WMT (small); Short AAPL, F, GM, SPY, QQQ, IYR, FXI, EWG, EWQ, EWU, DIS, AAPL, CMCSA, SBUX, NKE, BRK.B (small), FB (small), NFLX (small), TSLA (small) 

via http://www.thestreet.com/story/13408663/4/15-surprising-predictions-for-2016-rip-meadowlark-lemon-best-of-kass.html