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Ageing Bull

Will the least loved bull market in history throw a taper tantrum...?
 
IT HAS been dubbed the "Least Loved" Bull market in history, writes Gary Dorsch, editor of the Global Money Trends newsletter.
 
The US-stock market rally is now 57-months old, and over this time period, the S&P500 index has climbed a "wall of worry", rising +170% from its 9 March 2009 low, and hitting an all-time high, above the 1800-level. But only this year, did it begin to earn the grudging respect of smaller retail investors.
 
They've plowed $175 billion into equity funds so far this year, after withdrawing $750 billion in the previous six years. The "Least Loved Bull" now ranks as the fourth biggest percentage gainer in history. If it can manage to avoid a -20% swoon over the next three months, it would become only the sixth Bull market to celebrate its fifth birthday.
 
It's managed to accomplish this impressive feat, amid the weakest US-economic recovery from a recession since the 1930's. Since Barack Obama took office as president, the pre-tax profits of Corporate America have doubled to $2 trillion per year. However, for Middle America, real disposable income has declined.
 
The median household income fell to $51,404 in Feb '13, or -5.6% lower than in June '09, the month the recovery technically began. The average income of the poorest 20% of households fell -8% to levels last seen in the Reagan era. Higher paying jobs lost during the "Great Recession" are being replaced by lower paying, or part-time jobs in the Obama recovery, which hurts the middle class. Hourly pay grew by just +2% /year, on average, for the past 4 years, the weakest 4-year stretch on record.
 
According to the latest data from the Census Bureau, the US has already passed the tipping point and is officially a welfare society. Today, more Americans are receiving some form of means-tested welfare than those that have full-time jobs. No, that's not a misprint.
 
At the end of 2011, the last year for which data are available, some 108.6 million Americans received one or more form of welfare. Meanwhile, there were just 101.7 million people with full-time jobs, including both the private and government sectors. The danger is the US has already developed a culture of dependency. No one votes to cut his own welfare benefits. Thus, the vast wealth on Wall Street hasn't trickled down to Main Street. Instead, shareholders reaped the rewards of increased profitability, at the expense of workers.
 
 
Federal and state governments have spent a combined $5 trillion on various welfare programs over the past five years. However, that pales in comparison to the Fed's handouts to investors on Wall Street. US-equity values have increased $14 trillion over the past 57 months.
 
Across the Fortune-500 companies, the average chief executives pockets 204 times as much as that of their rank-and-file workers, that's disparity is up +20% since 2009. Perversely, the compensation of the S&P500 chieftains is often linked to the ruthless slashing of jobs and wages in order to increase the companies' profitability. In theory, that boosts stock prices, and CEO's collect about 90% of their compensation through the exercise of stock options.
 
The widening gulf between the struggling masses, and soaring corporate profits, CEO pay and the stock portfolios of the Ultra-rich, is the result of policies being carried out by central banks and their political masters around the world for the benefit of the financial elite.
 
This year, the Fed is printing $85 billion every month to buy Treasury bills and mortgage-backed securities. Similar measures are being carried out by the Bank of Japan. The European Central Bank, and the Bank of England are keeping their lending rates pegged near zero percent to support the banking Oligarchs. This coordinated policy is intended to channel speculative funds into the stock markets, inflating share prices, while, state treasuries are saddled with even bigger debts, and leaving the working class to foot the bill.
 
On Wall Street, the Nasdaq-100 index is +32% higher compared with a year ago, and is trading at its highest levels in 13 years. The S&P500 index is +27% higher, enjoying its best year since 1998, even though S&P500 company profits are only +4.5% higher than a year ago, on average, with revenues up just +3%.
 
Small-caps, whose fortunes are largely linked to the US-economy, outperformed the Multi-national large caps by a large margin. The Russell-2000 index soared +35%, its best year since 2003, and is trading at 75-times its 12-month trailing earnings, even though the US-economy is on pace to generate growth of only +2.3% for 2013.
 
Furthermore, the money-minting bull has gone 790 days without a drop of -10% or more – ranking as the third longest streak ever. Since 1928, there have been 94-corrections of -105 or more, occurring 322-calander days apart, on average. Many traders suspect the Fed is clandestinely buying stock index futures to enable the market to defy the law of gravity.
 
Still, no matter how profitable, popular, or resilient – the bull market won't live forever. The average lifespan of a bull market is 58-months, as in four years and ten months, which would be reached in early January. Of the five bull markets that made it to their fifth birthdays, they posted gains of +21% in Year Five, on average.
 
The current bull is up +27% this year.
 
Traders need to keep their fingers on the pulse of the aging bull rally as it enters its retirement years. Nobody rings a bell to let everyone know when to run for the exits before the bull eventually dies. However, the most common causes of death for bull markets are well-known, such as:
  • overvaluation – when stocks are selling at dangerously high price-to-earnings ratios;
  • "A can't-lose, stocks-can-only-go-up" mentality also signals market mania and trouble ahead;
  • the onset of economic recessions and job losses, frequently preceded by a sharp rise in interest rates;
  • less frequent are unexpected events with shock value, known as "black swans," which rattle investors.
Over the past few years, whenever the stock market suffered a -5% pullback, traders didn't panic. Instead, they figured the Fed would ride to the rescue, with the "Bernanke Put," by injecting more of the performance-enhancing and life-sustaining QE-drug. The Fed's massive injections of liquidity – funneled into the coffers of the Wall Street banks, were a shot of adrenalin that artificially inflated the stock market, but bypassed the vast majority of Americans. There is also the invisible hand of the Fed, through intervention in the stock index futures markets that provides a safety net for the financial aristocrats.
Traders began to notice the US stock market performed better and suffered short lived pullbacks of -5% or slightly more, and lasting for about one month, from peak to trough, then took 2-months to recoup the losses, while the Fed was inflating the money supply.
 
For instance, over the past 18 months, the high octane MZM money supply increased $1.3 trillion to as high as $12.2 trillion. At the same time, the combined market value of NYSE and Nasdaq listed stocks increased +$6.5 trillion to an all-time high of $24 trillion. That's a super charged beta of 5-to-1. Belatedly, the small retail investor began to recognize that the stock market is ruled by the Fed, not by fundamentals. Everyone wanted to jump on the QE bandwagon, after super-dove Janet Yellen was anointed as the next money printer in chief at the Fed.
 
The Fed has turned the rules of the game – upside down, making bad economic news a reason to buy stocks, and good economic news a reason to sell them. Good news is construed as a reason to sell stocks, if traders think the Fed might use the data as an excuse to scale down the size of its QE injections. For example, the Dow Industrials dropped -700-points in mid June, after Fed chief Ben "Bubbles" Bernanke hinted at winding down its money printing operation. In simple terms, what matters most to the stock market is the easy money flowing from the Fed, and to a lesser extent, the profits and buybacks of the listed companies.
 
On Nov 12, Dallas Fed chief Richard Fisher admitted:
"We've changed and impacted the markets because of our intervention and I understand there's sensitivity, but markets should also bear in mind that this program cannot go on forever."
However, what matters most, is not what is actually the case, – but what traders believe is the case, and how they choose to act on that thinking. It doesn't necessarily need to be true to matter; sometimes, it just needs to be believed by enough people. In the case of Bernanke, Yellen and Chicago Fed chief Charles Evans – the widely held belief is that their hard core addiction to QE is unshakeable, – as is the unrelenting pressure from the White House to monetize the Treasury's debts.
 
 
Could the QE-Infinity crowd be in for a rude awakening in the weeks or months ahead?
 
On Nov 14, Morgan Stanley chief James Gorman told viewers of CNBC:
"Everyone has had ample warning that the Fed is going to taper quantitative easing. And the markets can expect to see it happen in the next couple of months."
Expectations that the Fed would scale down QE has already rocked the G-7 government bond markets and the precious metals this year. The yield on the US Treasury's 10-year note has surged 120-basis points (bps) higher compared with a year ago, to 2.85% today. In turn, Treasury bond yields in Australia, Canada, and England also climbed higher, mostly in lockstep, while the price of gold has tumbled -29% and Silver fell -44% from a year ago.
 
Taper Tantrum could begin on Dec 19. "If it hadn't been for the debt ceiling debacle and government shutdown, the Fed would have tapered already. I would expect it definitely in the first half of next year," Gorman told CNBC.
"We know we're going to have tapering. We know we're living in an artificial state of excess liquidity right now. If someone is surprised by this over the next couple of months – and it will occur over the next couple of months – then shame on them. There's been plenty of warning here."
Gorman believes it's best for economies to be allowed to stand on their own and "demonstrate they truly are recovering," and for tapering to happen. "It's a good outcome," he argued. Stated by the chief of a Treasury bond dealer – it's wise to heed Mr Gorman's warnings.
 
The Bernanke Fed might decide to pull the trigger on "Tapering," as early as the Dec 18-19 meeting, now that it has ample evidence of a labor market that is steadily generating 180,000-jobs per month. A private survey by payroll processor ADP said on Dec 4 that companies and small businesses added 215,000 jobs in November. And ADP said private employers added 184,000 jobs in October, much stronger than its initial estimate of 130,000. Last month, Labor Department apparatchiks said public and private employers added an average of 202,000 jobs a month from August through October. That was up from of 146,000 from May through June. As such, the Fed could soon begin to unwind QE-3.
 
Perversely, the US jobless rate could fall substantially early next year as belt-tightening in Washington throws 1.3 million long-term unemployed Americans off the benefit rolls. The loss of benefits would mean these workers are no longer considered to be part of the labor force. As such, economists estimate this could lower the jobless rate as much as half a percent to 6.8%, and bringing the Fed closer to its self imposed threshold of 6.5%, that it said could trigger a hike in the overnight federal funds rate. Of course, the Fed can always move the goal posts to accommodate the wishes of the White House and the Richest-1% of investors.
 
 

GARY DORSCH is editor of the Global Money Trends newsletter. He worked as chief financial futures analyst for three clearing firms on the trading floor of the Chicago Mercantile Exchange before moving to the US and foreign equities trading desk of Charles Schwab and Co.

There he traded across 45 different exchanges, including Australia, Canada, Japan, Hong Kong, the Eurozone, London, Toronto, South Africa, Mexico and New Zealand. With extensive experience of forex, US high grade and corporate junk bonds, foreign government bonds, gold stocks, ADRs, a wide range of US equities and options as well as Canadian oil trusts, he wrote from 2000 to Sept. '05 a weekly newsletter, Foreign Currency Trends, for Charles Schwab's Global Investment department.

See the full archive of Gary Dorsch.

 

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