Stocks ended last week back near all-time highs after a string of more bad economic news. At this point in an aging bull market,that's like saying stupid is smart, black is white, or Hilary Clinton has not been running for President since stepping down as Secretary of State.
Not only is bad economic news problematic for the market, but it is being rendered even worse by the policy response by central banks who are destroying the value of money and regulators who have drained markets of liquidity.
What The Talking Heads are Saying…Still
For all the Wall Street flacks parading on television crowing about 20-year bull markets and a 3000-S&P 500 by the year 2020, I say "Have at it!"
Like the Pied Piper leading his flock over the cliff, your intellectual and analytical flaws will soon be exposed for all the world to see.
The Dow Jones Industrial Average jumped by 1.66% or 294 points to end back above 18,000 at 18,057.65 while the S&P 500 gained 1.7% to close above 2,100 at 2,102.06. The Nasdaq Composite Index, continuing to worship at the altar of Apple Inc. (Nasdaq: AAPL) who is launching its over-hyped Apple Watch shortly, rallied by 2.23% to just under 5,000 at 4,995.98. If the incessant inflation in overvalued stocks wasn't getting tiresome, you at least have the opportunity this week to turn on the Masters and pray for Tiger or Phil to make a run. Next week it will back to drinking central bank Kool-Aid and watching CNBC's incessant infomercials for the Apple Watch disguised as financial reporting.
Bonds were paying no attention to this nonsense as the yield as the benchmark 10-year Treasury stayed below 2% and ended the week at 1.95%. In Europe, the 10-year German bund now yields 0.15% and more than €3 trillion of debt yields less than zero (reflective of the market's intelligence). Switzerland was the first country to sell a 10-year bond at a negative yield last week, an even more dubious accomplishment for the buyer than the seller. Not to be outdone, Mexico sold a 100-year Euro-denominated bond at a 4.2% yield. Presumably Mexico will still be around in 100 years although thankfully none of the buyers will be to admit their mistake, and if any of the buyers were working for me they would be seeking new employment next week.
All of these bonds should be heavily shorted because the mad scientists running the monetary experiments that have led to negative yields and other market distortions are leading global markets straight into another crisis. When that crisis hits, the value of these toxic negative and low-yielding bonds are going to plunge. Those buying them now should be seeking psychological assistance or a new line of work (I say that as a friend).
How to Interpret Two Big Deals This Week
The week was punctuated by two big deal announcements. European oil giant Royal Dutch Shell plc (ADR) (NYSE: RDS.A) purchased British energy giant BG Group plc (ADR) (OTCMKTS: BRGYY) in a $70 billion deal that reflected the pressures on both companies resulting from the plunge in oil prices. BG suffered a $5 billion fourth-quarter loss after lower oil prices lowered the value of its assets by $9 billion. The deal will boost Shell's proven oil and gas reserves by 25%. Shell paid a 50% premium to BG's closing share price the day before the deal as befits a megamerger in this era of funny money. Investors love M&A deals despite the fact that they are largely an expression of an inability of companies to grow organically and usually lead to large job cuts, and the deal helped the Stoxx Europe 600 Index move to a 15-year high.
While the Euro is off its recent low, it weakenedagain last week to $1.06 from a recent high of $1.10, helping to drive the prices of European stocks higher as the region's economy continues to struggle.
The other big announcement was termed by some "the final triumph of Dodd-Frank" as General Electric Company (NYSE: GE) sold off most of its financial arm, GE Capital, and announced a $50 billion stock buyback. Readers will remember that GE suffered a near-death experience during the financial crisis as a result of its ownership of GE Capital. GE can now head into the next financial crisis as a pure industrial company with its biggest challenge being its enormous energy business. The news sent GE's stock up 10.8% to $28.51 per share. The stock is now likely to trade in line with the overall market without the risk of owning a large leveraged financial business.
GE may have chosen a market top to sell its real estate and other financial assets to Blackstone Group LP (NYSE: BX) and Wells Fargo & Co (NYSE: WFC). The last time a real estate deal of this size was announced, Blackstone was the buyer as it purchased Hilton Hotels and also Sam Zell's real estate empire was on the cusp of the financial crisis at peak prices. In both cases, Blackstone struggled with the purchases but was ultimately bailed out (as were many others) by the Fed. With infinite amounts of free money on offer, Blackstone is opportunistically taking advantage of what the market has to offer to help GE make the regulators happy.
Earnings season starts to accelerate next week and the news is not expected to be good. Those expectations have obviously not deterred investors from owning stocks. Neither has the effective 200 basis point tightening that has occurred since last summer from the move in the dollar. With few if any alternatives available to investors other than equities, the only thing they are focused on is when the Fed will raise rates. In economic and market terms, it will make very little difference whether the Fed moves in June, September, December or sometime next year. The damage has already been done. For the market, the real issue is psychological. It has been 8 years since the Fed last raised rates. The Fed has enabled one of the most epic bull markets in history.
"The Big One" is Near
Investors are being forced to take more risk than they should in order to generate a decent return on their money. The problem is that at this point in the cycle, when stocks are extremely expensive and bonds offer literally no value at all, investors should be consider more than just the return of their money.
It has been more than 800 days since a true market correction (i.e. a sell-off of 10% or more). Like an earthquake zone, the market needs to let off some steam lest it ultimately crack in half and fall into the ocean.
The preview for the upcoming film San Andreas starring The Rock shows what it might look like if the "Big One" were to hit California. Investors could do worse than watch that trailer as a metaphor to what the next market crisis is going to look like.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.