Shoe Shine Boy?

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The market fell again and we are now in precarious levels. We are roughly back to the previous lows in which we bounced from, only to revisit them a few short weeks later. The pattern we are experiencing is frequently referred to as a “Dead Cat Bounce”, in which we sold off then bounced, only to fall again. However, in many, if not most cases, when a market revisits its previous low and we see a strong rally. This is sometimes referred to as a “Double Bottom” or “Flying W”. We are now in that area that this is either the start of a “Double Bottom” or we begin to head lower.

Shoe Shine Boy

In typical market conditions these patterns and chart formations are a visual display of how order flow enters and exits the markets, combined with GTC (Good Till Cancel) orders, margin calls, and short-covering. Catalyst that drives these decisions and subsequent patterns can be anything from earnings to releasing new products or lawsuits. However, what we are experiencing is not particular to anyone stock, but to the market as a whole.

Market Driver

We need to come to terms in what ultimately drives the market. It is simply capital investment or lack thereof. Whether the capital is borrowed (margin) only determines the acceleration of growth or the rapidity of collapse.

After the market crash in 2008-2009 a swath of capital investment was wiped out. The capital generation engines were stalled and that meant any real strength to drive the market higher would need to come from borrowed capital.

The Fed’s drop in interest rates provided two avenues of capital for the equity markets. First it redirected traditional capital that would flow into the bond market for interest returns into the market and second it made borrowing capital (margin) very cheap. The combined effort was the single largest influence in driving equity markets higher.

Courtesy of FRED

This incredible amount of intervention to drive capital worked despite any real economic recovery, earnings, top-line / bottom-line revenue, or any of the traditional fundamental data in which we measure economics. I am certainly not denying that some sectors, industries, and business have done exceedingly well, but their actual success was less relevant to the core driver of order flow in the equity market. That came down to one factor – zero interest rates.

The Fed’s broader QE policy also included; funding government deficit spending by purchasing U.S. treasuries, removing risk from the private sector by purchasing mortgage back securities, and increasing the money supply. All of which should, theoretically, not only boost the equity market but also spur economic activity. To some extent it worked, but not as it was intended. It certainly masked any true economic growth, for it is hard to determine real economic growth with the layers of Fed interventionism. Even though “QE” has ended, it has in name only. The Fed by their own admission is still buying government treasuries and mortgage back securities. The reason they said “QE” ended, is that to enact their policies, rather than printing NEW money to do so, they are just reusing the money they already printed (as bonds mature).


Courtesy of marvel wiki

Several economists and market participants have raised concerned about the markets and even the economy, based on this ongoing Fed interventionism. Some of them have been moved back into the “fringe” camp in which they once existed. Many of them no longer seemed or considered credible. Some have been dubbed “Dr. Doom”, “Perma Bears”, even idiots or that they are always wrong. Rhetoric, name calling, and a plethora of ad hominem attacks have been leveled, rather than addressing their actual concerns. It’s fair to disagree with a “Dr. Doom”, but use facts, math, and the merits rather than name calling. The most common refute of these naysayers is, “Well it hasn’t happened yet!” Not only is that a fallacious argument, but it is also ignorant. If someone has a hypothesis and thus has generated a forecasted conclusion, to retort with – “It hasn’t happened yet” fully ignores the hypothesis and forecast.

Shoe Shine Boy

I was working in the financial markets in San Francisco Bay Area during the boom. In 1998 I begin seeing, hearing, and concluding that there was a bubble forming. Revenue for many companies was nonexistent, the business math made no sense. I would frequently attend events, parties, and dinners with those working in the new booming industry, they were so deeply down the rabbit hole that any criticism, concern, or conversation about math and business (revenue, profits, capital) was simply ignored. When you even hinted at a possible collapse, they would retort “When is this collapse going to happen? It hasn’t happened yet!” It was the NEW economy; I and others did NOT get it. It was about how many “aggregated eyeballs” they could get and when they would go “IPO”. Revenue didn’t matter. We all know how that ended.

Another story which I have frequently shared was my own “Shoe Shine” boy experience. The “Shoe Shine” boy story is a famous one that took place during the 1920s stock market crash. I believe it was JP Morgan who showed up at the stock exchange one morning and the shoe shine boy proceeded to give him a stock tip. JP Morgan went into the exchange and told his staff to sell everything they owned and to SHORT the market. When they asked WHY, he said the shoe shine boy just gave me a stock tip, when the shoe shine boy is buying; there is no one left to buy.

My personal shoe shine boy experience happened in late 2006. I was heading to the coffee shop I went to every morning before heading into the exchange. The barista behind the counter, a young pimply face lad, was studying. I asked him what he was studying, believing he was going to college. He said his real estate exam and he was going to be a “house flipper”. He then proceeded to give me advice on the new “hot” flipping market. My friend and I walked out of the coffee shop and in unison said to one another “shoe shine boy”. We both sold our places within 6 months, I started renting.

These are certainly antidotal stories, but there is some fundamental truth to them. For me they are manifestations of the math and data that only has to be reviewed, objectively. It is possible we don’t like what we see or hear, or even what we fundamentally know – but to ignore it can do far more harm. Objectivity is certainly hard, our own biases creep in and sometimes it grates against our fundamental core or even moral justifications. But math and data knows no right or wrong, it is not about morals or ideological bias, it just is. To ignore it is to remain blind to reality.

Carl Icahn, time to listen?

More respected individuals are coming forth to level concern. Today it was Carl Icahn who made a video about his concern . Even Warren Buffet, in his tepid way, has brought forth concern, as well as Kyle Bass and Jeff Gundlach. These are credible individuals, people even the main stream media doesn’t blast as fringe or idiots. Some have been echoing for the last couple years their concern like Mark Faber and Jimmy Rogers have been given less creditability as the market continues to climb higher. Then of course there is vocal and critical Peter Schiff, whom has been blasted by the media and even called an idiot. Yet all these people, credible or fringe, have one common concern. Their tone and message might be different, but fundamentally they all are speaking of a common issue. When is it time that we give them any consideration?

The talk now has return to the Fed raising rates and the market has come under pressure again. The debate and consideration is not whether they should, but rather will they? Yellen and the Fed are driving this bus and we are riding on the bus. Those that are leveling concerns are talking about what they SHOULD do, but it is not a debate – Yellen is in charge and she is not listening to back seat drivers, especially from the likes of capitalist (Icahn, Buffett, Bass, Gundlach, Rogers, etc.)

End Game?

I think we are reaching an end game scenario in which the Fed will be forced to do something, but that will not come for some time – perhaps not until 2017. The Fed still can ramp up QE again, continue to participate in the market, can expand their interventionism. Japan has been playing this game going on three decades, so whether we agree or not – I still believe the Fed has some cards to play from their ultimately loosing hand.

Courtesy of FRED

My expectations, for all the talk, the Fed will not be on a tightening cycle and certainly will NOT shrink their balance sheet. I place the odds close to zero for a rate hike in October and miniscule in December. There will be some excuse, some reasoning, and some justification they will use to say why they did not; of course it is all data dependent. If there were to be a rate hike, the Fed would do something miniscule, like 10 basis points and back that with a firm “one and done” message – to get the media and everyone off their back about raising rates – perhaps buy some time. Of course the bigger problem is message crafting, which I previously reviewed.

For now the market hovers around this support area and we, investors and traders, must determine if we are going to bounce or break into new lows. I believe we will bounce, only because I do not believe the Fed will tighten or raise rates in October. My only concern that may ultimately prove me wrong is if the Fed continues with the recent hawkish comments and sets a perception that they WILL raise rates, the market may continue to sell off in anticipation, until we reach the October FOMC meeting.

Courtesy of FRED

The market is driven by the Fed and perception right now, I had hoped that the September meeting would put that to rest, but Yellen couldn’t keep her mouth shut and has set expectations again of uncertainty with empty promises and more confusion.

Ultimately, in the long term, we need to take heed and pay attention to Icahn and others, regardless if you consider them fringe and determine whether their concerns have any merits.

Support & Resistance

INDU 16,000
The question is whether this will be a support and if we will be some consolidation around 16,000. A visit to 15,800 or even 15,600 is a possibility as well as a bounce; however I would think we might take a reprieve and consolidate here first.

NDX 4100
I don’t know if I would have the confidence to hang my hat on 4100 as a support area or whether we could head to 4000. This index can be extremely volatile, so expect anything.

SPX 1880
This index seems to hit bottom, for now and we could see some consolidation in the 1870-1890 range, with a brief visit to 1900. I am not expecting any big bounces – but rather some sloppy consolidation as we absorb whether or not the Fed is going to take action.

RUT 1060
If we are to measure the market as a whole, the Russell is showing us a rather bleak expectation. It blew below the previous support area and hit new lows. It is telling us that the other indices have more room to head lower and we should NOT be looking for a bottom yet. We have to go back to September of 2014 to find a 1060 support area. Right now the Russell is trying to determine what support is.

Yellen, please stop talking!

Yellen and the constant parade of Fed officials expounding what will or what they think the Fed should do is only mucking up the water. Is not the FOMC statement and policy the OFFICAL word of that Fed? If it is, then how come everyone from the odd Fed President to the Chairperson herself contradicting their OWN statement and policy measures they just released a couple of week ago?

It seems the Fed, to some extent, has lost some control. Yellen is certainly an intelligent academic, but as a leader and spokesperson, she has fumbled the ball and disrupted the world markets. 10 year yields are moving around like tech stocks, the VIX is roaring back higher, and the market is jerking around trying to figure out what’s next. All this volatility is based on the Fed’s action or inaction and their subsequent lectures and speeches are only adding more confusion to the mix.

I implore Yellen and the Fed to SHUT UP! Issue your FOMC statement, have your press conference, and then SHUT UP! They also need to work on MESSAGE CRAFT – and clearly delineate that their policies are NOT temporary and that interest rates and monetary policies are set and/or will change based on economic conditions. We are still stuck in belief that years long monetary policy is an emergency temporary measure, thus setting our expectations from meeting to meeting.

2 Responses to “Shoe Shine Boy?”

  1. McRocket says:

    Great preview, IMO.

    I characteristically bold…I like it.

  2. McRocket says:

    Dang…I meant ‘uncharacteristically bold’