The Market Ticker
Commentary on The Capital Markets- Category [Market Musings]

That's simple -- when the smallest hint of stopping the robbery -- in this case, credit emitted by those with no ability to pay causes said market to collapse by upwards of 7% in a single day.

That's what happened last night in China, and it leads one to ask: Are you really dumb enough to think this is local to China?

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Go read this Ticker again.

Then think on the following:

  • Most of the employment improvement since the 08 crash has been in the energy sector, net-net.  This is particularly true if you look at employment ex-McJobs (low-paying, part-time work.)

  • The S&P 500's energy sector is about 10% of the index.  Those firms are going to miss, and most will miss badly.  A material number of them are likely to have negative earnings (and maybe by a lot in the current and forward quarters.)

  • Saudi Arabia and the UAE have said they will not protect oil prices.  They appear to mean it.  The UAE recently said that our shale and fracking production needs to be "curbed"; the way to do that is to make it uneconomical.  Of course if that causes bankruptcies, well, too damn bad.

  • Most of these firms and the governments in the vicinity of their projects have entered into commitments to spend money that can only be generated by profits and taxes if oil is around $100/bbl.  It's currently less than half that.  Good luck with those plans.

  • Nobody does this sort of spending with cash any more -- they all borrow the money, and most of it has already been borrowed.  Worse, nobody ever bothers to repay borrowings any more -- they just roll it over and increase the amount.  This is going to get very amusing when the cash flow is revealed to be insufficient....

The entire premise of the market has been easy money and more credit leading to financial engineering.

When the backing for that credit turns into a puff of smoke what floor is present under the market?

None!

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The pump-monkey crap is out on full display today.  Don't be fooled -- you're fixing to take a terrible beating if you don't pay attention.

Here's reality: Paper gains, that is, the balance in your account when it is comprised of stocks or other securities, are not real any more than your claimed "value" in your house is.  Your "holdings" of such assets are worth exactly zero until a willing buyer shows up and exchanges that holding for cash.

I know, you'll protest, the prices are shown every single day on your TeeVee.  Uh huh.  Sure they are, and they're valid at that instant in time too.  But that instant in time is of no value to you because you're not selling at that instant in time.  That is, you're seeing what someone else exchanged for similar kind and quantity, not what you will receive.

There is no way to know the latter other than to actually make that exchange.  The market rises because people believe that when they desire to make the exchange that same value, or more, will be given.

That belief has no foundation in fact; it is nothing more than faith.

The problem with such faith is that it relies on continuation of the conditions that have made the past happen.  As this article points out there's a demographic problem staring us in the face -- the next generation, which must buy those assets in order for prices to continue to rise, have had their cash flow severely damaged by "pull forward" game such as college debt.

So as far as that article goes, it's good.  But it, like most of the others, miss the biggest issue of all -- the secular trend in interest rates that has now ended.

This is not to argue for much higher rates, or even higher rates at all.  It is, however, a fact that rates cannot continue to fall and thus power ever-larger amounts of borrowing at fixed or declining coupon payments -- and that, more than anything else, has driven asset price appreciation whether it be in stocks, homes or anything else.

Without that the prospect of "forward P/Es" becomes meaningless; there is no "growth" other than actual organic expansion of business -- a trend driven primarily by productivity improvement.  And that has a historical basis of about 3% including the crazy expansion years (such as the 1990s when the Internet was introduced.)  Ex those "burst" periods it's closer to 2%.

Is a P/E of 16 (or 25, or whatever, depending on how you're computing it and over what timeframe) reasonable?  No, it's not if you can't use ever-falling rates to take on more financial leverage and thus expand the top line in that fashion by cooking the books.

This is the fallacy of the message.  Whether 2015 is the year that it all comes apart is an unknown.

That it must do so on a mathematical basis, however, is and when (not if!) it does asset prices are likely to contract by 50-70% -- or more.

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