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There is no question about
it, the age of paper is on the way out. The mania peaked long ago
and what we are witnessing at this juncture is the dying throes of the
capital markets. Despite bouncebacks after the 2002 lows and the
2008-2009 lows, we expect the current downturn will wind up as having a
far more significant long term impact. The market was given a second
chance and thrid chance by investors but the financial industry and the
federal government completely blew it, proving to be enemies of the public.
It's not a secret any longer. Self interest rules...
Despite brand new cycle highs for all major indexes,
Dollar Trading Volume (DTV) fell in 2011 and is on target to fall again
this year. Although we cannot completely vouch for our 2010 tally,
we believe it is accurate enough for a fair comparison. Our 2011
tally should be very close to whatever the actual number was and we believe
we are spot on with our 2012 estimate, which equates to more than a 12%
fall from the 2010 peak in DTV.
If new index highs has been insufficient to catalyze
greater transactional volume, we have likely arrived at a major inflection
point for stocks specifically and for the capital markets as a whole.
High Frequency Trading (HFT) is apparently contracting as well. From
previous estimates that pegged HFT responsible for as much as 70% of all
trading, we now see estimates as low as 53%. Our own calculations
(admittedly back-of-envelope) place HFT at somewhere between 55%-62% of
all trading, levels that can only harm the investment markets since long
term valuation judgments are missing entirely. The result is grossly
inefficient pricing of the constituent issues.
As we pointed out in our last issue, exchanges
offer rebates for HFTs, supposedly to provide liquidity. They flood
the system with bids and offers that are almost always canceled within
microseconds, thus the bids and offers serve essentially no purpose at
all. The liquidity provided is not real and is an illusion.
We hasten to remind readers of one of the most important comments about
trading made in the last several years;
"Oversized rebates have distorted
the price discovery process....HFT's can essentially make a profit by buying
and selling a stock at the same price due to these rebates."
- Joe Saluzzi of Themis Trading
The U.S. stock market is no longer a market for
investors. HFT's now operate on the exact same level as highly placed
insiders who can trade ahead of the public. The capital market is
for all intents and purposes, now utterly useless for the public because
value is no longer an issue or consideration.
For the first five months of the year, DTV is running
at a pace that equates to $57.15 trillion in transactional volume, 3.7
times the country's gross domestic product (GDP) and 3.6 times the entire
market capitalization of stocks. DTV has grown by an annualized rate
of 16.5% over the last 20 years and more than 12% annually over the last
15 years, despite two huge market collapses. The only other trend
that can match this incredible pace is the growth in notional values of
derivatives, where growth is an astounding 18.8% for the last 20 years.
All that matters is the industry
of finance and stocks.
While this process did indeed enhance valuations
for awhile, in the same 20 years, GDP has grown by only 4.7% annually.
Stock market wealth rose 4.5-fold from 1991 to the 2000 manic peak and
then doubled from the 2002 lows to the 2007 peak. One would be excused
for thinking GDP might have shown a more robust long term trend, but then
one would have to factor in that stock prices and wealth were halved twice
from 2002-2002 and again in 2008-2009.
If the cost of 4.7% GDP is
an occasional mania
followed by an occasional
a mania cannot possibly be
The Roaring Twenties (at left on our chart) were
the epitome of the short term view. Buy. Buy on margin.
Buy more. Forget the long dated future. If stocks were higher
tomorrow, you could be a wealthy man. Thus, the focus was on the
short term and a mania was born.
And then died....
Wall Street's theme had to change and it did -
buy for the long term. Eventually, a long term investor would be
proved right... and quite probably rich. It took many years for the
theme to take hold but finally, it brought the American public back to
the fold and stock investing once again became big business. The
magic of the longest secular bull market in history from 1982-2000 allowed
a complete change in character for investors, back to the attractive impetus
of riches built over the short term. Why wait for gains?
Thus trading once again took precedence and average
holding periods contracted to under six months. And then along came
HFT and overall holding periods contracted to less than three months, skewed
greatly by high frequency traders holding positions for microseconds.
In an environment where it became unnecessary
to hold onto stocks for any substantial length of time, participants were
led to believe that leverage was reasonable. And then, they believed
that more leverage was more reasonable. Finally, they
believed that still more leverage was the only sane way to go.
The combination of increased
leverage and increased trading had dramatic effects.
As we see above, there is a
finite limit for all effects.
Too much of a supposed good
can easily turn out to be
a bad thing.
For all the false demand created
for all the false demand created
by increased trading,
total stock market wealth
has gone nowhere for a dozen years.
These are death throes....
The following article was the
lead article in our April 9, 2012 issue.
Wall Street still debates the
relative merits of stocks and bonds but ignores the bull case for gold.
Bullion's consolidation since
last summer's run to new highs is extremely bullish..
Peter Oppenheimer of Goldman Sachs went on record
recently that the present time was the “Best Time in a Generation to Buy
Stocks, Sell Bonds” (see http://yhoo.it/H6U65g).
Really? While the statement is qualified by the distinction between
bonds and stocks as Mr. Oppenheimer is comparing what he perceives as relative
valuations between the two asset groups, this is clearly a bull call for
stocks. As usual, the media grasps at every straw and everywhere
we looked, the straws were touting this bull market call. Why push
for the bull’s prospects at this juncture, after stocks have doubled over
the last three years? Hey, a bull market is always good for business.
A bear market? Never. We see things much differently.
Stocks are already up 21% from the October lows and have had an incredible
bull run. It has taken three huge rounds of Federal Reserve manipulations
via Q1, Q2 and Operation Twist to stave off an economic collapse and to
generate even a modest recovery of sorts. Operation Twist is slated
to end in June and given past history wherein the end of Q1 and Q2 presaged
downside for stocks, we believe the downside will be anticipated and acted
on sooner than later.
We’d far rather heed the words of John Hussman
or Walter J. Zimmerman, featured in a BARRON’s article by Randall Forsyth
(see “The Worst of Times to Buy Stocks?” http://on.barrons.com/GQA1yc).
Frankly, we continue to present the bear case in each issue because we
feel any mention at all of a bull case is at best, misleading and at worst,
If there is a dichotomy that is meaningful, it
is the relative distinction between stocks and gold. Given
the Fed’s commitment to the printing press, there will be an ever increasing
supply of money, which must eventually cheapen every dollar invested in
stocks and especially bonds. While soft assets like stocks, will
offer some protection against inflation, hard assets like real estate or
gold, will offer far more protection against the debasement of currency.
The last three years of upside for stocks still
illustrate bullion in a far superior position. Why do we adjust for
inflation? Why wouldn’t we? If the CPI indicates the cost of
living is 28.2% higher than in September 2001 when we made our super bull
market call for gold, then you would need that much more just to stay even
with where you were before. Stocks, as measured by the Dow (ex-dividends),
are 14.7% higher. Gold bullion is 347% higher. That’s some
dichotomy. Even when measured from their last major lows, stocks
are up 71% from March 2009 and gold is up 98% from November 2008.
While the dichotomy has lessened in the big rally
from August 2011 and the Dow/Gold ratio has climbed from a low of 6.4:1
to currently 8:1, we believe the ratio is poised to reverse again almost
immediately. Lest we forget, bullion had a tremendous rally, rocketing
over 60% higher in just over a year and likely getting quite a ways ahead
of the fundamentals. Gold still receives virtually no sponsorship
in the media and the focus, if any, is on how far down bullion is from
last year’s highs. This is very curious, since there is virtually
no mention that the major stock averages remain well below their all time
peaks. Nevertheless, the precious metal is still up 18% over the
last year and given super bull market status, the correction, albeit scary,
was a necessary element for another bull leg. In our view, this has
been a very constructive consolidation.
We strongly believe the Dow/Gold ratio is eventually
headed for 5:1 and will likely remain at roughly the same level until paper
assets can once again prove their worth. That circumstance will take
a great unwinding of the debt cycle, which is likely going to take many
years to unfold. Thus, gold is now greatly undervalued vis-à-vis
stocks. A decline in the Dow/Gold ratio from 8.1 to 5:1 could be
accomplished with many iterations, three of which we offer below:
Dow 15,000 = Gold $3000
Dow 12,000 = Gold $2400
Dow 10,000 = Gold $2000
No matter how we compute it, every iteration must
favor gold. It would appear that the bull case for stocks strongly
hinges upon on the Fed’s continuing creation of money to assist the economy,
but that will only favor bullion that much more. Clearly, the economy
is not gaining the kind of traction that indicates an all-clear.
Consumer confidence recently came in at 70.2 for March, down from 71.6
in February, but more importantly, far from the 90 reading that indicates
a healthy economy. As well, on March 26th, it was reported that the
Case-Shiller index for home prices dropped for the fifth straight month
in January, reaching the lowest point since the end of 2002. Thus,
investors are now advised to buy stocks for all the wrong reasons.
After generations of being prodded to buy because things were getting better,
one should now buy because the Fed will print more of the stuff with which
you can buy more stocks. This might only make sense in Oz, but we
would not pay particular attention to the bearded man behind the curtain.
While printing more of the green will indeed lend support to stocks over
the very long term, it will also eventually kindle a far higher rate of
inflation and far more interest in gold.
So, now that we’ve established the dichotomy that
favors gold over stocks, what about gold stocks? They have suffered
for months as the rest of the equity market has rallied and with the XAU
Gold/Silver Index trading no higher than it was last October and lower
than in the summer of 2010, one wonders if there is indeed, a bull case
ahead. We emphatically believe there is. The caveat is that
since we see the stock market headed for a significant correction, the
timing to accumulate gold shares is not quite right. We would be
far more inclined to be buyers after the major stock indexes correct, but
not before. For now, we would stress patience. Below right,
the one year rate of change is still positive and since we believe gold
is likely headed for new highs later this year, may remain positive throughout
the summer. For all intents and purposes, this has been an ideal
consolidation. Fear has knocked weak hands out and doubt pervades;
and all the while the fundamentals argue strongly that each dollar printed
ensures an increase in value for each ounce of gold.
In a Special Update to Crosscurrents
readers on May 19th,
we added Newmont Mining (NEM)
and Goldcorp (GG) to our Investment Stance.
These were positions we had
previously excised at huge gains.
In less than two weeks, NEM
is up 9.4% and GG is up 13.2%.
Year over year, bullion has
outperformed stocks consistently,
yet still receives bad press.
Can gold break its 2011 record
high in 2012?
We expect it will.
The following article was published
in the March 12, 2012 issue.
The first peak in the Dow's
triple top occurred only four days later.
A One Stock Market On The Verge
Since late 2003, when we first posed our belief
that the stock market was metamorphosing into a form that threatened the
capital formation system, we have attempted to buttress our theory with
commentary and charts. Over the last couple of years, we have accelerated
the publication of our perspectives, cognizant that we are likely witnessing
the death of a vital aspect of our economic system. Capitalism is
all about the raising of capital to invest in new ideas, new production
and new technology. However, in very recent years, the theme of investment
has changed significantly. In effect, the companies that employ our
worker population have become far less important than the markets and exchanges
in which they trade and the people that drive the economy have become less
important than the companies that drive trading. As a result, Wall
Street has become so self-regulated that we can no longer argue “potential”
for abuse because abuse is inevitable. Simply put, if you allow the
foxes to regulate their own behavior, there will eventually be no hens
left. And those who are alleged to remain at the top of regulatory
chain, such as the SEC, have gone derelict in their duty. Bear in
mind the SEC’s mission statement; “The mission of the U.S. Securities
and Exchange Commission is to protect investors, maintain fair, orderly,
and efficient markets, and facilitate capital formation.” It’s
bad enough over the last decade to see the many scandals in which the SEC
was asleep at the switch or elected to punish wrong doers with a slap on
the hand, but the massive implementation of high frequency trading has
wrought an unbelievable transformation of our capital markets. Despite
the present lack of volatility on the way up from the late November 2011
lows, the threat of disorderly markets continues. For reasons we
will outline a bit later on, the markets remain highly inefficient.
The withdrawal of the public from the markets, as clearly shown by today’s
featured chart, confirms that investors no longer trust the “protection”
offered by the SEC. Lastly, as we pointed out last week, despite
the recent headlines for Facebook and Yelp, the market for IPOs is shrinking
at a rapid pace, not the kind of situation one wants when employment is
still at intolerably high levels. [ED NOTE: PROPHETIC!
LOOK WHAT HAPPENED TO FACEBOOK TWO MONTHS AFTER THIS WAS WRITTEN!!!]
Above, the last bar on our chart represents the
current year through last Friday. Although much of the year remains,
this is the most inauspicious start this writer can remember in 48 years
of observation. If no one is going to attend, the party will be a
resounding failure and everyone is going to go home unhappy. If anything,
the picture confirms our view that stocks remain in a strong downwards
secular trend. Secular trends can be extraordinarily long lived,
as evidenced by Japan’s Nikkei Index, still down 75% from its 1989 bubble
Last month, Apple (AAPL) traded 330 million shares,
better than three of every eight shares traded in the Nasdaq 100 Trust
(QQQ). The last time AAPL traded as significantly compared to the
“Qubes” was in April 2006. Within three months, APPL was crushed
by a “correction” of over 30%. It was no mere coincidence that the
bottom for APPL’s volume vis-à-vis the Qubes came only a few weeks
after the shares bottomed in early 2009. From that point on, AAPL
has been in the sights of almost every player, especially hedge funds.
Recent stats from Goldman Sachs show that 20% of long/short hedge funds
count APPL amongst their ten largest positions and at least one share can
be found in the portfolios of approximately 30% of the hedge funds.
Apple has become way too popular. While we believe Apple is a terrific
company, the current thesis is that the shares must be owned or the trading
entity risks under performance. This tactic becomes self fulfilling
as all pile aboard. Think momentum. In the meantime, as the
shares go from grossly over owned to absolutely essential in every portfolio,
AAPL’s capitalization grows so large that it can distort entire indexes,
such as the Nasdaq 100 Trust, the Nasdaq Composite and even the S&P
500 (see http://bit.ly/xxBMgR).
In the last decade and change, indexing has been touted as the cure all
for investors of every stripe but if one stock can sway a major index,
then what is the point of owning the index?
Of course, it doesn’t and can’t possibly work all
the time, as evidenced by the near 80% collapse of Netflix (NFLX) in only
four-and-a-half months last year. While the same risk is not in store
anytime soon for AAPL, corrections are inevitable and the risk of a pullback
of 15% or more would not disturb the long term trend but would clearly
impact the major indexes. Since the risk of a correction is likely
quite large now for Apple, the risk is correspondingly large for the major
We have noted for quite some time how the total
of issues traded lines up fairly well with the S&P 500 when lagged
by approximately one year. The theory is that if there is an increase
in issues traded daily, investors are seeking out stocks as investments,
a necessary ingredient of rising prices. Clearly, the opposite is
true as well. A decline in issues traded daily, investor discontent
is fomenting, a precursor of falling prices. While the lagged nature
of this indicator means it can never be precise, it is clearly pointing
to difficult times ahead.
Less volume overall, more volume
concentrated in fewer issues.
In only three months,
AAPL gained the equivalent
of Microsoft's entire market cap.
AAPL gained the equivalent
of Intel & Oracle COMBINED.
This was surely the greatest
short term ramp
of capitalization in stock
....death throes of the mania
We May Still Be Far From A
Over the course of history, stocks have not been
up as much on an annualized basis as many investors believe. The
trouble is, the greatest bull market of all time has convinced many that
super bull markets are the rule, instead of the exception. Below,
you see the truth. Going back 115 years, stocks are expect to gain
roughly 5% per year, ex-dividends. Our regression line grows at exactly
5% per year and ironically shows the Dow Industrials under the line 74%
of the time. In fact, the Dow remained under the line from October
1930 through January 1996, a period of more than 65 years. So, does
the Dow belong above the line or below?
As well, consider that it took many years for the
Dow to finally break out in the 1920s (see highlighted box). The
same occurred from 1966-1982 (second highlighted box). Perhaps the
same will occur now (third highlighted box). If so, we have quite
a ways to go before the right edge of the box is reached.
The regression line stands
at Dow 11,585.
The regression line will not
reach the Friday, June 1st close of 12,118.57 until April 2013.
The regression line will not
reach the 2012 May 1st high of 13,338.66 until April 2015.
The regression line will not
reach the October 2007 record close of 14,198.02 until June 2016.
Over the last 50 years, which
includes all the mania years,
the Dow has traded on average,
more than 19% UNDER
the regression line.
There are likely more death
throes to come....
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The good news is the bear market bottom of Dow
6400 that we first forecast back in 2003-2004 and occurred in 2009, is
now quite likely to wind up as the bottom for the secular bear market that
began at the March 2000 highs. Our projected worst case low for 2012
has been raised to Dow 10,404 and would likely be sufficient for us to
bullish for at least the intermediate term, provided the mutual
fund cash-to-assets ratio expands significantly from current record low
levels and if margin debt is cut significantly from today's levels.
If mutual fund cash remains near record low levels and margin debt remains
high, the secular bear market will continue.
Projected Best Case
Highs for 2012
13,436 /// SPX 1425 /// Nasdaq Composite 3150
odds the highs are already in)
Case Lows for 2012
10,404 /// SPX 1060 /// Nasdaq Composite 2200
Ratio: Very Poor - Favors
expect a dramatic expansion in volatility.
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I hope you have enjoyed your visit. Please
return again and feel free to invite your friends to visit as well.
Alan M. Newman, June 2, 2012
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All information on this website is
prepared from data obtained from sources believed reliable, but not guaranteed
by us, and is not considered to be all inclusive. Any stocks, sectors
or indexes mentioned on this page are not to be construed as buy, sell,
hold or short recommendations. This report is for informational and
entertainment purposes only. Persons affiliated with Crosscurrents
Publications, LLC may be long or short the securities or related options
or other derivative securities mentioned in this report. Our perspectives
are subject to change without notice. We assume no responsibility
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