Now is the time when Wall Street is most dangerous to your financial health.
After being 100% wrong about the market all year, Wall Street's big shot strategists are now telling investors to "get ready for a big fourth quarter rally."
You never hear a discouraging word from these so-called experts. They all read off the same script – and that script is designed to get John Q. Public to buy as many stocks and bonds as Wall Street can sell them.
Wall Street strategists are one-trick ponies, and they wouldn't see bad news if it smacked them on the forehead – because they wouldn't keep their jobs if they told people that the markets might go down.
That's why when you see the heartwarming commercials about how big financial institutions are looking out for your interests, you should throw something at your television – something with the weight of this…
You Can Take This to the Bank
So naturally, when Barron's surveyed a group of so-called "top" strategists on September 7, these geniuses called for the S&P 500 to end the year at 2150, up 10% from where it was at the time (1921).
Since then, a couple of members of the group have actually lowered their year-end forecasts, but none of them is calling for the market to actually go down. That would be like the Pope denying the existence of God!
Nothing these people say is worth the paper it is written on.
They continue to downplay the problems that caused markets to experience their first correction in four years…
China is a house of cards and is not going to miraculously recover. Commodity prices are going to remain depressed.
The U.S. economy is weak, as the horrible September jobs report confirmed. Global instability is rising under the incompetent non-leadership of the Obama administration.
And the all-important dollar remains strong and will continue to place enormous deflationary pressure on the global economy.
Oh – I almost forgot to mention that after completely mismanaging the credit cycle, the Fed has now left markets totally confused about what it will do next.
As the surviving passengers on the Titanic reported, other than the iceberg, the cruise was wonderful! I'm sure there were many future Wall Street strategists among them.
This Sense of Stability Won't Last
Markets managed to hold steady last week in the face of all of this nonsense although serious cracks appeared in a couple of systemically important stocks.
First, let's talk about the averages. The Dow Jones Industrial Average rose 1% or 158 points to close at 16,472.37 after falling 8% in the third quarter. The S&P 500 also added 1% or 20 points to 1951.36 after losing 7% during the quarter. The Nasdaq Composite Index rose 0.5% last week to 4707.78.
Below the surface, however, serious trouble was brewing. The shares and bonds of Glencore PLC (LON:GLEN) dropped sharply in the early part of the week before stabilizing late in the week.
As the dominant commodities trader in the world, Glencore is a bellwether for the industry and an important link the global financial markets. It is at risk of losing its investment grade rating, which would require it to post additional cash collateral for its $19 billion of derivatives contracts, cripple its trading business and potentially push the company into a tailspin from which it couldn't recover.
Another company that got clobbered was Valeant Pharmaceuticals Intl/ Inc. (NYSE:VRX), whose shares were down sharply after its records were subpoenaed by Congress. Valeant has been a stock market and hedge fund darling based on its business model of buying other drug companies using junk bond financing and sharply raising the prices of their drugs.
This ugly business model is running into political resistance, and several large hedge funds were hit with huge losses on the stock. This was part of the rout in biotech shares, which was long overdue for a bubble sector that is nothing more than venture capital in disguise.
The Damage Is Spreading Fast
Finally, the junk bond market is coming apart at the seams.
The average yield and spread on the Barclays High Yield Index hit 8.09% and 635 basis points at the end of the week. These are key levels as yield and spreads haven't hit 8% and 600 basis points for years and started the year more than 2% lower.
In addition to the obvious weakness in the energy and basic industry sectors, both of which are trading solidly in distressed territory with average yields of roughly 12% each, retailers and telecoms are now trading at 8% for the first time in years.
The total return on the Barclays High Yield Index is -2.65% year-to-date, which is bad enough for an asset class that is supposed to provide high yields, but that only tells part of the story. Many individual bonds are down much more and investors are licking their wounds.
The two big high yield bond ETFs – JNK and HYG – are back down to 2011 levels. I see opportunities in individual bonds, but this is a dangerous area that is going to get worse before it gets better unless you know what you are doing.
Finally, the yield on the 10-year Treasury bond sunk below 2% for the first time in a while. I expect the yield at the long end of the Treasury curve (10+ years) to keep trending down as the US economy weakens further.
Third quarter GDP is tracking at around 1.5%. Second quarter GDP of 3.9% was an anomaly. The US economy isn't that strong. How could it be with the nitwits in Washington crushing us with endless regulations and zero interest rates?
The best advice I can give to readers is to ignore the Wall Street pundits and cluckers on CNBC. They are paid to help you lose money.
You should also ignore the rallies, which are based on nothing more than hope and a prayer. The problems that got us here – China, commodities, a weak economy home and abroad, the strong dollar – are not going away.
Keep an eye on this column for the straight scoop. My job is to show you how to preserve your wealth and profit from the rest of the world's stupidity.
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.