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Commentary on The Capital Markets- Category [Market Musings]

Last night a very curious thing happened.

The Shanghai market, for those who haven't been living under a rock, has been on an absolute tear this year, rising some 70%.  That's reminiscent of the Nasdaq in 1999 and early 2000, of course.... during which it doubled, and in fact if you just look back a couple more months on the Shanghai you find the same pattern.

Last night, however, it was down 6.4% on the back of a gap up two days ago and then a failure to follow through over the previous two sessions.

Technically, the market is in a very-clear blow-off pattern; the trendline from back around November which confirmed in mid-March is way below the current price, today sitting around 535-540.  Last night's close was 630, or another ~13% decline.  As such those who look at last night's slaughter as something of moment may well be right, but the more-serious problem here is the vulnerability that decline presents, as anyone who bought into the index on a broad basis since roughly mid-March has no trend protection nor any clear indications on a technical basis that they should head for the door until a roughly 20% loss has been incurred.

On a monthly closing basis in the United States it's even worse than in Shanghai; there has been no third confirming trendline contact and on a weekly basis while we got close to confirmatory contact twice in 2012 it never happened.  This means that for those in the United States they have no clean signal either, and the level at which one would get either confirmatory contact (and a bounce) or a failure is at SPX 1800, a decline of close to 20%!

One must be a student of history in the markets to avoid making the same mistake over and over.  This very same blow-off pattern has shown up in both of the last two bubbles -- the Tech bubble and blowup and the housing bubble. In the 1990s your last confirming touch of the advancing trendline in the SPX happened in late 1998; you didn't know that it was going to fail until the start of 2001.  There was, however, a very scary false break at the end of 1998.  If you sold there you "missed" a 50% run-up in the S&P over the next year and a half, roughly, but if you bought any time during it you also had no clean indication whether the former trend was real any more and you didn't know you were in trouble (if you believed it was valid) until you broke 1300 -- a loss of close to 20% from the highs.

In the "recovery" from 2003 (all of which was a bubble) your first trend setting level that turned out to be valid didn't come until more than three years later in mid 2006.  The problem is that there was no secondary confirmation at all until the swoon in mid-2007, but the good news is that it did fail shortly thereafter at the end of the year (at which point I was warning everyone to get the hell out!)

In the 1990s Tech Wreck you had no warning in the Nasdaq that was worth anything at all; the last "touch" of a confirmed trendline was in late 1998 after which the NDX tripled and the trend break didn't come until 2001 when virtually all of those gains were erased.  If you bought after that last touch you had zero protection of any sort, which was a big part of why I declined to come out and play in the late 1990s.  This time around it's a bit better in tech in that the last confirmation of the trend was in late 2012 but the confirmatory level is at ~3500 right now which means you get to risk 30% on price before you know if the trend is going to break or not.

My point is simply this: This particular so-called "recovery" has all of the same sort of price action in this regard as did the last two bubbles, neither of which was founded on "real" anything.

Those who claim "there is no bubble" and this is a "secular" bull market are full of crap, in short.  What the chart says is that price advances are happening in a geometric (that is, exponential) fashion which is exactly what happens in a bubble.  Indeed, that's the marker of a bubble!

The problem is that this bubble is much worse than the last one and has characteristics more-similar to the 1996-2000 run than the 2006-07 one.  In 2007 you at least had reasonably fair warning on the impending collapse in the SPX.

This time around you're not going to know when it hits the fan until you've taken at least a 20%, and quite-possibly as much as a 30% loss.

No thank you.

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Bloomberg raises an interesting point I've raised a few times over the last number of years:

If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over. That, in a nutshell, is the math behind a bear case on equities that says prices have outrun reality.

Now notice what the criticism is:

“The issue we have with Tobin Q is that it does a very poor job at timing the market,” Rubin said from Westport, Connecticut. “The followers of Tobin Q never told us to buy in 2009, yet now we are warned that we should sell. Our response is sell what? We were never told to buy.”

So what?  A market that is non-functional -- that has been distorted -- is only "buyable" if you are gambling, and there is no means to evaluate such a market rationally because it is a game of chance.  

If you get paid some price per share (e.g. you're a broker) you don't care if your clients win or lose; you just want volume.  But if you are someone who actually wants to invest instead of gamble then such a market is not investable on the whole, irrespective of retrospective results, because while hindsight is 20/20 it is useless in predictive value since none of us have a Tardis!

So yes, you were out.  But then again you were out in 2008 too, so exactly what have you lost?

I'll tell you what you've gained: A lot of restful nights' sleep.

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America Online still exists? smiley

This "combination" is utterly amusing.  The idea that now the market will "consolidate" ad platforms and this somehow will "add value is amusing beyond words.  So is the premise of "monetizing" mobile platforms in particular, and the premise of playing the "direct delivery, individualized content" game.

Come talk with me about this when firms like Netflix pay for all of their own transport instead of forcing their operating costs on other people, including through government agitation -- costs that are large enough to render their business model uneconomic were they not to engage in their current tactics.

I'll be waiting a long time for that.... but in a bubble world where only "making the deal" counts, whether it makes sense or not, well, you get announcements like this.

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Liquidity?  What's that?

The bond market is moving on lots that are a tenth of what they used to be but the magnitude of the shifts are the same.  The Fed has basically bought up enough of the market for Treasuries to turn that market illiquid!

That is very, very bad folks.  While it doesn't necessarily mean there will be a dislocation if there is one it will be very ugly.

Like 2008 ugly.

Except for one small problem -- the Treasury market is a lot bigger in notional value, which means the "ugly" has the potential to be much worse.

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Rotation into an ever-narrowing group of stocks, particularly when estimates are coming down (instead of going up) and those into which traders are rotating are high-flying ridiculous-PE (or negative PE) issues is a fairly-reliable marker of waning confidence -- despite the screeching coming from the media.

Macro indicators have been deteriorating for quite some time; asset prices have been driven higher by "cheap money" at the expense of actual consumers who have to make the final purchases.

How far are we from the proverbial wakes in a cold sweat moment?  I have no idea, but the conditions are ripe for it right here, right now, and when (not if) it occurs I will be hoisting the old "told 'ya so" flag once again.

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