Santa’s Sleigh runs out of nitro!

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Had the Santa Claus rally already come to pass? We had a strong rally after what can be only being called the Ebola Sell Off – a mere correlation which is certainly not proof of causation. However, the rally seemed to have some significant legs and we not only quickly made up the previous losses but pushed to new highs.


Santa’s Sleigh runs out of nitro!

Black Friday and Cyber Monday weak
Heading into Thanksgiving there was some early signs there would be some weakness in holiday sales; domestic same-store sales were down, several major retailers lowered 4th quarter forecasts, steeper discounts earlier in the month, and margin compression looked to curb bottom line profits.

The data on Black Friday was a disappointment regardless of what data point you looked at. Some reported actual contractions while some reported growth, but any growth reported was tepid. The Cyber Monday data was significantly better, but it didn’t off-set the weakness over the big holiday weekend sales spree. The data mostly reflected a shift in sales from brick-n-mortar to online, rather than a general boom in consumer spending.

The rocketing rally heading into the holidays perhaps got a little ahead of itself. Perhaps the marketing effort that our economy was roaring back was more hype as the warnings from companies, followed by the lack-luster holiday weekend sales told a different story.


Need more optimism!

Perhaps the market needed more proof and a solid injection of optimism – something that would definitely let the market know the economy WAS roaring back – despite what the major retailers were telling us. That news came in the form of a Labor Report that blew the doors off even the most optimistic expectations – with over 320,000 jobs created. Numbers we hadn’t seen or even dreamt about since the boom of the Dot.com economy, was it real? Once we peered into the BLS report the data was as mixed as it was confusing. Of the two surveys the BLS uses – for the first time in a very long time they were almost at polar opposites. The net was only 4,000 jobs were created, full-time jobs declined as part-time jobs increased. The participation rate (unadjusted) actually declined again. The hype was more about a single headline number being paraded about as proof the economy was roaring – despite the retail numbers, companies lowering forecasts, and even other BLS data within the Labor Report. It did give the market a slight and yet short-term jolt higher, but would it be enough?


NITRO!

Yet despite these disappointments the market continued to push higher. However for those paying closer attention saw the Russell Index had stalled and contracted, while the other indices pushed a higher. Had Santa run out of nitro? The Russell, probably the best gauge of general market order flow was stalling since November 1st. Unlike its highly touted and watched brethren like the Dow Jones or S&P 500, the Russell never made it back to make new highs.

The market is driven by order flow and to continue to generate strong order flow you need money to continue to pour into the market. Where there is lack of money there is credit (margin) – the margin is the nitro that gives a market rally real horse power. Strong bursts of leverage capital drive the market higher. In strong jolts higher, fueled by additional margin it begins to feed on itself as the “shorts” are then forced to cover, ushering in a whole new wave of buyers. It is at these times we see powerful and unstoppable rallies – despite and regardless of any real economic data, earnings, or fundamentals. As Greenspan stated during these instances, “irrational exuberance”.

When the nitro runs out and the “shorts” are done covering, the market stalls. The question one must ask at this instance – is there enough money still in-flowing to keep it aloft and what will be the next catalyst to either drive the market higher or will the market fade and move lower?


Nothing to see here, move along!


Courtesy of watchdogwire

The market has been resilient, ignoring the plethora of issues that weave their way around the globe; Iran, ISIS, Ukraine, China, oil production, Washington DC, Ebola, who knows. Many of these issues don’t really have direct economic impacts to our markets in the short-term, but psychologically they can spark panic selling. Additionally there are some of these issues that can certainly bring direct impacts to the market; Central bank policies, bonds, and oil prices.

I had previously and repeatedly mentioned the problems of the West have been “papered” (using debt by central banks) to buy time. So far in the U.S. it has worked – the economy is humming along with tepid growth, suckling at the teat of the Nanny State (Fed zero interest rates, bond buying, government subsidies, interventionism, extended emergency unemployment benefits, and stimulus). I am not here to debate the merits or moral hazards of such policies, but to state the fact the economy has been tremendously supported by the government interventionism, rightly or wrongly.

The same Keynesian philosophy is true for Europe, as we saw the PIGS (Portugal, Italy, Greece, and Spain) on the verge of collapse; the Troika (ECB, IMF, EU Commission) stepped in with huge bailouts. Yet this too only bought time as there was hope that these technically failed nations could get their fiscal house in order. Meanwhile, the nations that had not failed yet have already started seeing some credit downgrades – like France. There is still time, but the more heavily socialist nations will not let go of their death grip and the previous bailout money is starting to run out.

Japan is far too afraid to let the real economy try to stand on its own. It has launched into unprecedented levels of money printing and asset buying; trillions of yen printed, while the state buys not only bonds, but stocks as well to keep the market aloft. They have been and will be the proverbial “canary in the coal mine”. They are approaching their third “lost decade” on government money printing and zero rate policy. It has bought time, but nothing has changed in decades as the nation limps along with no real GDP growth. Some non-Keynesian economists had joked, with hints of truth, at the start of our own crisis that we too would be following in Japan’s footsteps. Here we are, almost a decade later and we have followed almost step-for-step in Japan’s footsteps ready to ring in our own “lost decade” in a couple of years. But will we get there and can we buy more time?


Concerns, really?

The broad concerns are that first we will reach a point of no return, in which the government and central banks will no longer be able to end their massive stimulative efforts without severe pain coupled with an economic downturn. We have become far too dependent, much like Japan on their government and central bank. The second concern is that once we reach this point, as Japan has, the only choice is to continue and go “all in” with what can only be described as an absurd and insane level of interventionism. The last concern is the realization that there is no end by choice or design, the end comes because the game is over.


The FIAT Game!

What is this game? It is the game of fiat currencies and the rules that govern them are simple and clear. A fiat currency has no intrinsic value, it is simply a medium of exchange backed by “faith” and “credit” of the issuing government.


Courtesy of changeinadvance.com

The Western governments have run out of “credit”, this is simply revealed in that the nations of the West are no longer able to legitimately borrow money from other nations to pay for their government spending. In the U.S. the Federal Reserve has to buy government bonds since there is not enough legitimate buyers of bonds to fund government deficit spending. Even though QE has ended, the Fed continues to buy new bonds with existing balance sheet. In Europe, the ECB has bailed out several nations with more loans by printing more money, since these nations cannot legitimately buy bonds through third-parties. They have already technically defaulted by taking up to 50% haircuts on existing debts. In Japan, the most egregious of them all is printing at an epic scale and has gone from just supporting government deficit spending to supporting their actual stock market buy directly buying stock.

The Keynesian West is out of credit – period! There is no if, than, or buts about it – if a central bank has to buy their governments bonds then there is no more REAL credit. The absurdity is that the Fed’s balance sheet has expanded by trillions as it created money to add trillions to the government’s balance sheet.

So we now run of “faith” and faith alone, the second backing of our fiat currency. As long as the world has “Faith” in our currency and will accept it for the exchange of goods and services it will continue to work. But what if they don’t? The catalyst will come when one no longer accepts our paper fiat money and they want to be paid in something else. Perhaps in a new currency or some commodity (gold, silver, oil, wood, coal).


BRICs are watching you!

The BRICs are watching the story of the Western Fiat currency unfold and are waiting. China has not increased their net U.S. treasury holdings in years and has been a larger buyer of other currencies and has been building their gold and even “rare earth” metal reserves. The BRICs have formally discussed and started building their own world bank. They have talked about a new reserve currency and the BRICs (namely China) have stuck more deals for Middle East oil, even with rouge nations.

The problems of the West continue to simmer and while many have been moved to the back-burner and “papered” over with more printed fiat currencies. It is only a matter of time before one of them again boils over and is moved to the front burner in which it makes its way bank into the 24 hour news cycle, as if it is some breaking news. I would argue it has been there all along, we just tend to ignore it until reminded of it.


Greece trips, again!

This morning, our Socialist (boarding on Communists) European nation, Greece has made headlines again as their market is crashing (down over 10% as I write this). The government is going to hold another vote for confidence – but it could lose. The Socialist has taken mild steps to dealing with their debt and deficit spending, but they don’t like the pain of responsibility and accountability. The movement of the spending spree deficit fueled times is gaining traction. This is a renewed headache for the ECB as it was hoping it could wait until after the New Year before launching their own robust QE program that could continue to buy time, but it looks like the ECB may have to step in again to shore up the dam of the failed states.


Perma-bulls concerned?

The U.S pre-market futures are under pressure as we see Europe unravel and there are some investors that would rather take the profits off the table before the year is out and wait. Even the perma bulls, like Jeremy Siegel is concerned that in 2015 we could see a correction of 10% or greater. Shiller, who recently won a Nobel Prize in economics and his model which predicted the collapse in 2008 is also turning nervous and says his indicators are reflecting significant concerns about the market. When perma-bulls and those that had predicted previous collapses become nervous, perhaps we should take heed.

Economist John Williams had moved his 2018 market correction prediction several months ago to the end of 2014 – early 2015. He sees the gap between government headline data reporting and actual economic data widening. Other economic indicators show structural problems of maintaining massive margin levels, like the NYSE margin index hitting all-time highs.

Damage to investors and the citizens of our nation comes from the fact that we rely so heavily on government headline data and then when a crisis comes we are ALL surprised because the government data didn’t see it coming. Yet for those like Bass, Rogers, Schiff, Faber, Shiller, and others who don’t just look at government headline data – but the big picture – it didn’t come at a surprise at all.

I am not sure if today is the today and it most likely is NOT. I hate to ever try to call a top or bottom, but I am reminded when reading the Greece news this morning, Japan’s renewed efforts in money printing, and the continual oil battle we are coming to a boil.

Are Siegel, Shiller and Williams correct about their concerns about a coming correction? Is it coming sooner or later? It is not a question of if, but when.


Support & Resistance

INDU 17,600
Is this a support level? The pre-market futures are off significantly after yesterday’s weakness. I would look at 17,600 for short-term support.

NDX 4200
We could quickly get to 4200, the question is does it hold and does it become a new buying level?

SPX 2040
Looking the pre-market I think we could get here today. The VIX got into that 11 range and now we look to rocket back up into the 16+ range.

RUT 1150
The Russell is the one to watch, if we get to 1150 and hold and bounce – then we could see some reprieve from the sell-off. If it breaks lower then I think we could get to 1120 and that could bring this Santa Rally crashing.


One last Fed meeting!

The Fed has one last meeting on Dec 17th, I don’t expect anything to come of it as far as changes to monetary policy. However, I am sure the words will change and I suspect more dovish – which will certainly bring some contention from our only two Hawks that remain voting members of the Fed.

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