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Commodity prices are plunging, the dollar is powering higher, Obamacare is collapsing, economies everywhere are faltering, and terrorism is spreading across the globe.
That's bad news. Unless you happen to be among the stock market investors who in the U.S. spent the last week bidding up stock prices like there is no tomorrow. They are playing with fire and are likely to get burned.
The Dow Jones Industrial Average rallied 3.5%, or 579 points, to 17,823.81, while the S&P 500 jumped 3.3%, or 66 points, back to 2,089.17. The Nasdaq Composite Index added 3.6% to reach 5,104.92.
Below the surface, however, market internals were horrible with anything energy related getting "schmeissed" in the words of legendary market guru Doug Kass.
And the high yield bond market, which we will get to in a minute, is even worse.
"Bad News Is Good News" Comes Roaring Back
It wasn't just U.S. investors ignoring obvious threats to their financial well-being. Stock markets around the world rallied last week. Asian markets were up around 1.5% while Germany jumped 3.8%, London 3.5%, and France over 2%.
The reason, of course, was the old "bad news is good news" idiocy that believes that the worse things get, the more central banks will do to prop up markets with more easy money. This was an odd reaction in the face of increasing signs that the Fed is getting ready to raise rates in December.
The Fed still has time to chicken out if markets turn south again, but investors decided to ignore the evidence of economic weakness to interpret signals of a coming hike as evidence that the Fed believes the economy is strengthening.
In view of the fact that the Fed has consistently misinterpreted jobs and inflation data throughout the Yellen years, this is not the conclusion I would reach or on which I would base investment decisions. The U.S. economy is not improving; it is faltering.
On the other hand, European Central Bank President Mario Draghi didn't disappoint. He promised another round of QE in the near future.
So, rather than face up to the fact that years and trillions of dollars of QE have failed to fix broken economies, investors decided to play along for another week and push stock prices to even more unsustainable levels.
In recent years, Europe has demonstrated that it cannot manage its economies or defend its borders. Why anyone would believe a word spoken by any European leader, especially Mr. Draghi, is a mystery to me.
The Picture Isn't Much Better Here
Back in the United States, the credit markets are falling apart. The average price in the leveraged bank loan market has dropped below $0.90 on the dollar, a warning sign to investors that serious problems are lurking in leveraged companies. After all, bank loans are the first to be paid back if a company goes bankrupt and rarely lead to significant losses.
The high-yield bond market has given back all of its October gains. The average yield and spread on the Barclays High Yield Index were back at 7.95% and 597 basis points on Friday, just below key 8% and 600 basis point levels breached in November.
But just as the market cap weighted stock market indexes don't tell the story of the stealth bear market in equities this year, the index data doesn't begin to describe the destruction in the bond market...
Liquidity is non-existent. Anything energy or commodity-related is trading at prices that signal that investors do not believe they are going to be repaid. Even highly leveraged companies that can pay their bills but have little prospect of reducing debt like iHeart Media Inc. (OTCMKTS: IHRT) (the old Clear Channel Communications) have seen their bonds plunge to well below $0.50 on the dollar.
Few if any credit hedge funds are showing positive returns for the year and most are sporting losses. Those of us who have been doing this for a long time know that credit markets are better readers of the economy than stocks. The warning signs are flashing red for anybody willing to pay attention.
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.
interesting
Bad News Is Good News
Anyone who is FOR fracking (as Lewitt seems to imply he is) needs to have his head examined.
So the fracking industry is hurting because the supply of oil already exceeds demand.
In the words of Martha Stewart, "That's a good thing." But for Lewitt it means he won't be able to waste a more precious resource (water) and contaminate the environment in the hopes of turning a profit.
You'd think that after all these years, Lewitt (who professes to be an expert at making money) would have more than enough money for himself and his family.
You're reading a bit much into it, I think. That Mr. Lewitt did not seize the opportunity to pout and stamp his little foot over fracking, in an analytical article on broad, macroeconomic trends, says nothing about his position on the technology itself.
I do agree that water, not oil, is the most precious resource. But at present, there is no global water benchmark equivalent of Brent or WTI. Interestingly, France — the world's largest exporters of bottled water — may have been enticed to join the overthrow of Moammar al Qadhafi, in France's former colony of Libya, by the huge reserves of fresh water Qadhafi created with his Great Man-Made River Project.
Looking forward to your info and data regarding safekeeping investments.
Have enjoyed your thoughts and analysis on Money Morning and I feel that your predictions
are 'on the money'.
Well said, Michael. Agree on all accounts.
Dan Moskowitz (Investopedia)
Good report.Very helpful
What you are saying makes a lot of sense and something that has caused my mind great consternation. As much as I would like to jump back into the market, I am extremely defensive at this point…hurts watching a melt up, but I sleep fairly well.
Michael,
Considering a lot of facts back up what you are saying why do so many send out so much in the way of get rich plans and advice to buy this or that within 24 hours if the whole system is a sinking ship? I see no problem in setting aside an amount to gamble with that one could afford to lose like going to a casino, as for the rest of our money or assets I wish there was another game in town but I don't know of one since all the rules are mostly broken and anything can or does go in this day and age of what largely amounts to legalized crime at most all levels.
If global markets around the world would adopt the " one given item, one given price " policy, it would level the price of commodities, since you'd pay the same price for gasoline ( g.e. ) where ever you'd be around the world. And since Obamacare is going down the drain, investing in PHI is a logical strategy ( BCBS, AHI ). And since terrorism is spreading across the globe, investments in CCTV and metal detectors sounds like an appropriate measure ( CEIA ), for it will become a must for public sites ( shopping centers, and where ever people gather ), just like airport facilities. Home security providers ( ADT and so on… ) is a promising venue as well so should be S&W for personal security means. Robotics is a promising venue as well, with an approximate 800M jobs lost to it. Go out and try, you'll find out.
Spot on. Well said.
Thank you for bringing us to reality, Michael. You opened my mind to what is happening to our economy and the world around us.
What you said at the end of your article should be embedded in your readers brains: "Commodity prices are plunging, the dollar is powering higher, Obamacare is collapsing, economies everywhere are faltering, and terrorism is spreading across the globe. If you think that environment is good for stocks, you know something that I don't."
Your message is clear: It is to invest with extreme caution in the days, weeks and months ahead.