Our precious Green-back / Dollar looks very oversold

Step back for a bit and reflect upon the 10-year interest rate and put yourselves in the shoes of foreign holders who now see both the disturbing trend in yields and the fall in the dollar since March it must be increasingly and very painfully (financially) obvious to foreign holders that holding onto dollars almost guarantees they will lose money. 

And the interest compensation on their bonds is very-very inadequate to recompense them for the risks of holding a deteriorating foreign currency (our dollar, one reason why I see it rallying back to $96.00-97.00 in the weeks and months ahead (especially if it double bottoms at $87.50-88.50) and given the acceleration of the FED’s massive wave of monetary inflation, the general loss of capital values for time deposits and fixed interest bonds has been significant. Furthermore, the increasingly immediate prospect of the latter, which is the story being told by the golden cross in the chart above, is likely to quicken the pace of foreign selling of bond holdings, driving yields higher, they would compensate foreign currency holders for future losses of purchasing power. But this is one of those times where a rise in yields worsens the situation for government finances and will require a huge reassessment in the market to even higher yields. In short, foreign sellers of dollars will begin to drive interest rate expectations higher in my opinion, taking over the led role from the FED.

The false safety of equity markets will soon be borne out as an insight into the thinking of central bankers with respect to financial assets...Since 2014 QE has been a dominant feature of monetary policy, and it has become increasingly the means of bolstering bank reserves held at the FED without the pass-through to real investing institutions. QE is an official policy for central bankers to inflate equity markets in order to create a so-called wealth effect. Presumably, the FED is confident that a manipulated equity market can continue to be openly manipulated through QE, dismissing the possibility any policy failure on their part.

The Fed will almost certainly lose control over financial markets as it is forced to hyperinflate the dollar. Foreigners could quickly dump the dollar, fixed interest holdings and equities, reducing their $28.7 trillion exposure to a level of liquidity that relates to more closely to their trading prospects. Stocks are being pumped up by the FED through massive QE (debt) to valuation extremes, a policy set to fail when interest rates are forced to rise. It will almost certainly lead to a nasty bear market.

Yellen vs. Bernanke

Yellen’s tenure as FED chairwoman was far worse than B-53 Bernanke’s. At least Bernanke’s money-printing insanity was misguided by his credentials as a lame so-called scholar of the Great Depression and the mistaken conclusion that the Wall Street meltdown of September 2008 was another prelude to such an occurrence. IMHO the Great Depression of the 1930’s was caused by way too much FED-nurtured foreign borrowing on Wall Street during the roaring 1920’s. They stimulated a massive and unsustainable boom in US exports, soaring domestic CapEx in order to expand production capacity and then a stock bubble which in turn fueled a massive consumer-spending boom in cars, appliances and other durable goods. Therefore, when the Wall Street bubble burst in October 1929, foreign borrowing literally dried up, US exports and CapEx crashed and spending on consumer durables fell off a cliff.

·        This was likely the main cause of the massive recession/depression in 1930 -1933, which took the GDP down from $95 billion to $58 billion in dollars of the day.

·        By contrast, the crash likely had nothing to do with Milton Friedman’s crashing M-1 (money supply), which was a consequence of unavoidable and necessary bad debt liquidation by the banking system.

·        Nor was it the result from any lack of credit availability to solvent borrowers, as demonstrated by market interest rates that remained ultralow (under 2%) throughout the recession/depression.

The depression of 1930–1933 was not owing to the tightfistedness of the FED, which actually expanded their balance sheet by 72% between August 1929 and early 1933. Consequently, Bernanke’s lame and reckless move of flooding the system with fiat credit during 2009 - 2013 was a significant mistake.

Now fast forward a few years when Yellen became Fed Chairwoman in February 2014, there was no plausible excuse at all for keeping B-52 Ben Bernanke’s extremely bloated FED balance sheet in place or continuing to keep interest rates at or near the zero bound. If there was ever a chance to normalize Bernanke’s significant mistaken depression-fighting policy, it was during the 48 months of Yellen’s tenure. Needless to say, Yellen’s FED did no such thing. After 50+ years of dedication, and devotion to the BS” Keynesian theory of full employment economics, Yellen kept real interest rates buried into the cesspool during the entirety of her term.

During the sweet spot of the longest manipulated and FED intervened upon business cycle expansion in history; from month 55 to month 103 when the economy should have been left to expand on its own merits without massive “stimulus” from the central banking branch of the state, Yellen kept real money market rates pinned at historic lows. The justification for such economic insanity was the claim that the US economy was not at its full-employment level (pure “BS”) as measured by the very dubious U-3 unemployment rate and that the job of the central bank was to keep injecting “demand” into the economy until the system was briming over and at 100% of “potential GDP” was attained. Potential GDP and full-employment labor markets are purely “BS” lame Keynesian hogwash. In a economy in which domestic labor competes with China’s price for goods, India’s price for internet-based services and Mexico’s price for manufactured goods assembly, full employment cannot be measured by the headcount metrics of the BLS, nor can it be achieved by injecting massive amounts of credit into the bank accounts of Wall Street dealers who in turn use it to foster their accounts and stock market positions.

With total outstanding credit now standing near $81.8 trillion, or 384% of GDP, the FED’s liquidity injections never really leave the coffers of Wall Street. The result is increased speculation on Wall Street and accelerating massive inflation of financial asset and commodity prices. Money markets do not finance the working capital or fixed asset investments of business, nor do they fund consumer borrowing for homes, automobiles, and other durables. Instead, short-term money markets are where Wall Street dealers finance their inventory and where speculators fund their positions in the options markets or via margin and repo credit against stocks and bonds held outright by Wall-Street and the TBTF-bankers.

These real negative real interest rates were and are the mother’s milk of financial speculation and the resulting massive asset bubbles. Yellen’s stupid policies constituted an epic monetary mistake that has fueled bond and stock market bubbles that are basically off the charts!  Yellen (our new Treasury Secretary) sowed the wind of monetary excess, and now we are reaping the whirlwind of a gargantuan bubble that is a clear and present danger to the economic future because it will crash, and the resulting financial and economic damage will be biblical. Ironically, Yellen likely will be sitting in the captain’s chair when the most violent and destructive financial storm in history finally blows ashore.

US (FED and government) DEBT; Debt glorious debt as far as the eye can see

This market is running on the back of massive debt, once consumed then what manipulative game will the FED introduce

Master Asset inflator Powell (who kisses the asses of the elite and most wealthy): dares to warn about DEBT, so then he stealthy (through many back-doors and “BS” lending programs of the day” decides to give more crack-cocaine DEBT to enslave the crack-cocaine “DEBT junkies” many are zombie firms that are massively over-indebted and fiscally irresponsible run by braindead corporate idiots whose only goal is self-enrichment via cheaper free-flowing monies...they are still taking on debt wherein they will run up even larger debt (to buy-back-stock, as the FED has reduced borrowing to ~0.5%....they will not use the new debt to grow their business, as many of these firms are also laying off hundreds and thousands of employees) where is the logic in that...then again its perfect logic if your primary goal is to enslave the masses & working class, as the “taxpayers” become the back-stop for this reckless endeavor, basically the rich get richer the poor get poorer!  Government DEBT is almost at the unserviceable level right now!

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 The re-awakening of the potential “Blue Wave” Democrats winning in Georgia brought some serious risks today, and King-Trumps antics and exploits added to the risk...add in escalating Covid-19 pandemic-related lockdowns/restrictions (that are coming in worse than expected, and the so called vaccination roll-out has been botched by the King’s administration and Covid-19 hospitalizations are soaring used in some panic-mongering like we saw in 2018) and it basically sparked the worst start to a new year for the SPX-500 since 2001...The entire broad market was hit with a selling wave after the open after some giddy buying overnight. Interestingly the markets all moved together for most of the day...all sectors were lower led by Utilities and Energy stocks led...Just maybe the massive dip-buying Robinhood traders will be back tomorrow...time will tell! The VIX surged higher today...to 29.19 before pulling back into the close [26.97]...with the short end now inverted as expectations around tomorrow's Georgia Senate runoff vote (over 3-million mail in votes have already been cast) it has likely left traders with massive end-of-the-year profits looking to hedge uncertainty...by booking those gains into the New-Year (JMHO)....

I found it very interesting that treasury yields were wildly unchanged today...but real yields collapsed to record lows (suggesting support for higher precious metals maybe even crypto’s)...as breakevens surged (10Y above 2%)...Our precious greenback managed to crawl modestly higher today, bouncing off the old 2018 lows which were critical support...while the dollar ended flat, it was the Yuan that made headlines overnight, surging to It's best level against the dollar since June 2018...

Carl Icahn stated today that “In my day I’ve seen a lot of wild rallies with a lot of mispriced stocks, but there is one thing they all have in common. Eventually, they hit a wall and go into a major painful correction. Nobody can predict when it will happen, but when that does happen, look out below,” ominously adding that “another thing they have in common is it is always said, it’s different this time. But it never turns out to be the truth.”

 

 

 

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Happy New Year to all....may 2021 be 10,000 times better than 2020

Happy New Year, from the Wise Owl (Big Steve)

WHEN WE DRINK, WE GET DRUNK.

WHEN WE GET DRUNK, WE FALL ASLEEP.

WHEN WE FALL ASLEEP, WE COMMIT NO SIN.

WHEN WE COMMIT NO SIN, WE GO TO HEAVEN.

SO, LET’S ALL GET DRUNK, AND GO TO HEAVEN!

COUNT YOUR BLESSINGS INSTEAD OF YOUR CROSSES.

COUNT YOUR GAINS INSTEAD OF YOUR LOSSES.

COUNT YOUR JOYS INSTEAD OF YOUR WOES.

COUNT YOUR FRIENDS INSTEAD OF YOUR FOES.

COUNT YOUR SMILES INSTEAD OF YOUR TEARS.

COUNT YOUR COURAGE INSTEAD OF YOUR FEARS.

COUNT YOUR FULL TIMES INSTEAD OF YOUR LEAN.

COUNT YOUR KIND DEEDS INSTEAD OF YOUR MEAN.

COUNT YOUR HEALTH INSTEAD OF YOUR WEALTH.

LOVE YOUR NEIGHBOR AS MUCH AS YOURSELF.

ALWAYS REMEMBER TO FORGET

THE TROUBLES THAT PASS AWAY.

BUT NEVER FORGET TO REMEMBER

THE BLESSINGS THAT COME EACH DAY.

TBTF Bankers are above the law, they skate and shareholders and the public get screwed

Bankers have become legalized whores, and I cannot understand why their CEO’s are held in esteem... Far too many times when the "too big to fail" bankers are caught with their hands in the till (or placing the entire global economy on the precipice of collapse, as was the case in 2008), no one (those in charge) were arrested or went to jail and the banks and their shareholders wound up paying a hefty fine and putting the so-called violations of law (criminal activity) behind them as they laughed their asses off. This inevitably leads to jokes about how paying fines is just part of the cost of doing business for the TBTF bankers if you or I committed such larceny

You and I would be doing 15 years to life behind bars...

But it isn't until you aggregate the sums paid over the last 2 decades, which the Financial Times did in a scathing report published this past weekend, pointing out that its very apparent that you can really see just how much these fines (due to illegal activity) actually are becoming a basic cost of doing business for banks and their CEO’s/CFO’s. Over the past 20 years, the (6) largest U.S. banks have paid out nearly $200 billion in fines and penalties (this is monies that belong to the shareholders).  An advocacy group Better Markets found that Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo have paid nearly $195 billion, collectively, since 2000. Thet claim the significant upsurge indicates that overall banker’s behavior has significantly deteriorated (becoming more and more criminal), and they have suffered more fines since the Great global financial crisis than prior to it...as they learnt nothing except thet the penalties for their criminal behaviors were a joke and just a part of doing business. 

 here were 85 major legal complaints against banks between 2000 and 2008. Between 2008 and 2012, that number was 110 cases, most of which were mortgage related. But since 2012, the group found that there had been another 204 legal actions. Better Markets chief executive Dennis Kelleher said: They were all major legal actions... It was not like it was a “broken windows” theory post-crash where prosecutors are fining every little violation. If they were held to a real standard of obeying the laws of our Nation, a moral higher standard they all would have been put out of business because the recidivism is really quite shocking. He continued: “It’s absolutely shocking that JPMorgan has now pleaded guilty to three separate criminal charges for egregious years-long criminal conduct.”

Banks and bankers like JP Morgan and Jamie Dimond are repeating past offenses as in October, the bank paid $920 million for direct manipulation of the metals market this comes after the bank admitted AML failings in 2014 and pleaded guilty in 2015 to manipulating the FX markets.

Ø  JP Morgan “Jamie Dimond” was second only to Bank of America in fines and penalties. Bank of America has paid about $91 billion for 86 legal cases since 2000,

Ø  While JP Morgan has paid slightly over $40 billion as a result of 83 cases.

Ø  Goldman Sachs has also entered into massive multi-billion-dollar settlements, most notably for looting Malaysia’s 1MDB development fund.

However, when you compare the fines to the combined $1.3 trillion in net income the banks have earned over the same 20 years, it becomes clear: the their illegal acticost of doing business" in the investment banking world is well worth it. 

 

Stock ideas 12-30-2020

 MRNA Coming back to solid LONG-Side tradable support   JMHO

Moderna finalizes an agreement with Recipharm for aseptic drug manufacturing and fill-finish for COVID-19 vaccine supply outside the US

Moderna and Recipharm, a contract development and manufacturing organization, have reached an agreement to support formulation and fill-finish a part of the Moderna COVID-19 Vaccine supply outside of the US. The activity will be performed in Recipharm's drug product manufacturing facility located in France.

Subject to regulatory approval of the vaccine in relevant countries outside of the US, it is anticipated that supply will commence in early 2021.

Some NEW Wise Owl Thoughts

If 2020 was dominated by the huge human costs of Covid-19, the years ahead will be all about the nasty and dismal economic aftermath, including the massive Tsunami wave of US debt and corporate debt. 

During 2019, the assclowns spending fools in Congress suspended the debt ceiling until after the 2020 presidential election (bless them). While they sought to avoid a repeat of the 2011 and 2013 debt crises during an election year, new spending contributed to King Trump’s new military rearmament push. Now the new

Congress must decide the future of the debt ceiling by the summer 2021.

By the end of this year Covid 19 cases worldwide could be heading into the 80-100 million. As a result of utter mismanagement, and we could easily exceed 20 million. While this nasty pandemic continues to spread and the health system becomes more overwhelmed, the King-Trump White House has taken upon themselves record amount of debt at a record pace.

Remember that during his campaign, King Trump pledged to eliminate our national debt completely in 8 years. At the time, total public debt was closing in on $19.7 trillion. In the past 4 years, it has rocketed to more than $27.7 trillion, a staggering $8 trillion.

Of course, all major economies have taken record amounts of debt during this nasty global pandemic. But the United States is not like other economies. First, it has more Covid-19 cases relative to all other major economies. The US remains the world anchor economy. The, US dollar dominates international transactions. As a result, massive excessive US debt will have a disproportionate nasty economic global spillover.

 

Due to the lecherous enabling manipulative FED, depressing interest to near “0” screwing over savers and others as a share of GDP, the cost of servicing US debt has deteriorated since 2000, even as federal the amount of debt has ballooned. The incessant manipulative environment of low-interest rates has made it far easier that it should be to service and pay down the massive debt loads. Nevertheless, the likely policy stance of the Biden administration whether implicit or explicit, will likely be predicated on unsustainable debt-taking in the future.

According to the recent projections by the nonpartisan Congressional Budget Office, federal debt held by the public will surpass its historical high of 106% of GDP in 2023 and will continue to climb thereafter. By 2050, debt as a percentage of GDP (a vastly undervalues matrix) will amount to close to 200% of the GDP. Despite peaceful conditions, it is already at the level is seen during World War II; by 2050, it could be twice as high

Worse yet, our debt is likely to increase far faster than most so-called gurus anticipated (JMHO). Current projections do not include the actual costs of the pandemic stimulus packages, for one. 

Deficits will more than double from an average of 4.8% of GDP from 2010-19 to excess of 10.9% through 2041-50 adding to more debt. As a result, net spending for interest will account for much of the massive increase in total deficits in the past two decades. In the CBO’s projections, growth in outlays will continue and accelerate to outpace growth in revenues, resulting in larger and larger unsustainable budget deficits over the long run...measured as a share of GDP, net spending for interest could increase 4x to 5x over the last 2-decades of the projection period.

The New Biden administration has promised to be tough on China, Russia, and several other countries, which could translate to rising defense and security costs which, in turn, would further amplify our ballooning a massive wave of debt, twin deficits and real interest rates. Remember what history has taught us repeatedly that when great powers fail to balance their wealth and their economic base with their military power and strategic commitments, they risk vast overextension. In the coming decades, that will likely become a US risk.

 

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 All my technicals and interpretation of the fundamentals point towards a full-blown mania in the U.S. stock market. The SPX-500 trades near or above record valuations across virtually every metric. Retail traders are speculating in a manner not seen since the massive “Greenspam” fueled Dot-Com bubble. Welcome my friends to the greatest FED show on earth, the newest central-banker great stock market mania of 2020.

Meanwhile, the general investing retail crowd is partying like its 1999 donning massive rose-colored glasses on in both the stock and especially the massively growing option derivative markets. Historically, when these two combinations meet it does not end well for herd-chasing newbie investors.

In today's weekend report, I will dive into each of my premises as to why in greater detail, using both hard data and anecdotal reports. All signs point towards a mania on parity with the Great Dot-Com bubble. That leaves extraordinarily little long-term upside, and significant downside risks in today's overheated stock market.

Perhaps the most ironclad law of financial markets says that valuation is providence. While valuations cannot tell you what prices will do next month or even next year, they do a good job of providing information for the long-run return expectations for longer-term buy and hold investors.

One of the most reliable valuation metrics for gauging future returns is the CAPE (cyclically adjusted price to earnings) ratio. This ratio compares stock prices against their average earnings over a trailing 10-year timeframe, also its adjusted for inflation. Historically, the CAPE ratio provides an extremely accurate indicator of future returns:

Thus, when the CAPE ratio is high, you can expect significantly lower future returns over the next 10-year time horizon and vice versa. That is bad news for anyone long the broader market today, given that the SPX-500 CAPE ratio now exceeds the peak reached in 1929 just before the Great Depression ensued.

 

But wait, did not I say the most expensive stock market ever and the chart indicates that the Dot-Com Mania was distinctively higher...well, it all depends on which valuation metric you choose. Yes, it is true that the CAPE ratio was briefly higher at the peak of the Dot Com bubble but there is just one problem: what if the definition of real “earnings” changes over time? That's precisely what's happened in recent years, given an massive epidemic of fake engineered (through stock buybacks)!  As far-far-too many firms are addicted to making creative accounting modifications that increase operating profits known as EBITDA (due to self-serving greedy CEO’s and CFO’s) and investors are again turning a blind eye...as I have repeatedly pontificated about!

In months/years past a growing proportion of reported profits have been blatantly engineered and manufactured by adjusting away very real costs of doing business and using stock buybacks fueled by debt. We saw a similar ploy in the final years of the Dot-Com bubble, in the form of earnings restatements (I use to cringe when I saw such). As the herd of locoweed feeding investors were led to believe in 1998 into the 2000 period that profits were rising, but when future revisions were considered, they had in fact been lackluster at best or falling.

One way to avoid falling prey to such a trap involves simply valuing stocks on sales instead of earnings. The reasoning is of course logical and straightforward: it is much more difficult to massage revenues than it is for earnings (trust me). Using the basic price to sales ratio, the SPX-500 today trades at its richest valuation ever - even exceeding the Great Dot-Com bubble peak!

The CNBC hyping bullish cheerleaders argue that the market is a forward-looking mechanism, and the data points presented so far are all backward and present conditions looking.

So, let us consider the forward earnings outlook. Coming into this year, the FactSet consensus analyst estimate pegged 2021 SPX-500 profits at $196.70. Today, the same analysts forecast 2021 earnings of just $169.20, per the latest FactSet data. 

Meanwhile, the S&P 500 is up more than 10% YTD despite the forward earnings outlook dropping by 14%. If the market were rationally pricing in future earnings at a constant multiple, you would expect prices to be roughly 25-30% lower. And even then, we would still be at the high end of the historical valuation spectrum. Of course, I have talked about lofty valuations as a reason for caution since at least 2018... and yet, the market continues marching ever higher. But the key difference between 2020 and the past few years of stretched valuations is the sea change in market sentiment and overall speculative fervor has become rampant 

For the prior several years, the market has been missing one key element needed to mark a potential euphoric top: the “cabbie” indicator. You know it is time to sell when cabbies give you stock tips that cannot lose and are perceived to only rise into the stratosphere (when this happens this bull market is over). As market manias do not die due to massive overvaluation; they only die when speculators can no longer find another willing bag holder “greater-fool” to buy at ever-higher prices. When every marginal speculator has ventured into the shark-infested pool and is basically fully committed to this one-directional FED manipulative market. When you can no longer walk down the street without getting a stock tip, it is an obvious sign that the supply of new locoweed infested/induced herd of speculators is running extremely low as everyone is already in the game (believing no one can lose).

Remember that it was common knowledge that stocks were grossly overvalued for several years before the peak of the Dot-Com bubble in March of 2000 (I issued my world-class SHORT / SELL alert [I was early by 3+ months the day after Thanksgiving of 1999) even Fed-head Greenspam famously called out the stock market's “irrational exuberance” in 1996...but we were not constantly hearing about our so called neighbors or their kids getting rich on the latest Dot-Com IPO, or your co-workers quitting their jobs to become day traders....fast forward to 1999, and all of these things were now happening.  I remember reading a TIME article referencing that Barton Biggs, an analyst at Morgan Stanley Dean Witter, confirming wherein he laments the story he sent to clients about his plumber, who is so busy trading he will not come to his house to fix a leaking pipe. He also spoke about the guy “cabbie” leafing through Barron's for that day's stock trade. It was an epidemic, which was extremely alarming to me. And as I have mentioned that was the “cabbie” indicator I often relief upon flashing bright RED in 1999, and that is exactly what is been missing from the current bull market monster rally until now.

But before you can fully appreciate the speculative fervor I am speaking about here as we close out 2020, it helps to first step back and consider the massive driving forces that are propelling the markets here. And once again, we can draw lessons from the Greenspam massive liquidity pumping into Y-2K that fueled the Dot-Com era. 

Also, remember before the internet, trading stocks meant physically calling your stockbroker and paying hundreds of dollars for each transaction. If you wanted live stock quotes, you had to pay thousands of dollars, or call up your broker to manually check prices one stock at a time. These barriers effectively prevented an entire class of Americans from speculating in the market. But everything changed with the rise of the “Al Gore” internet in the 1990s. For the first time, the vast majority of average Americans could monitor their favorite stocks and trade instantly with the click of a button. Online trading also helped as they dramatically reduced overall brokerage commissions from around $70 per trade in the early 1990s down to around $14.99 by 1999 so my slippage dropped considerable. The combination of vast lower transaction costs and greater ease of access unleashed a record “speculative” boom in retail participation in the markets by “cabbies, stay-at-home-moms, and others”. By 1999, almost 10.5 million Americans were now trading stocks online. These new retail traders and the FED provided the critical fuel for inflating the Dot-Com bubble, and of course, we all know how that story ended...

Now fast forward to 2013, a mere 4-years after the great TBTF banker led Great-Recession a new hyped incessantly new bull market was emerging just as the Millennial generation began entering the workforce. We saw that significant progress was made lowering trading fees, but investors were still paying $4.99 to $9.99 per transaction. Then a market disruption came in April of 2013, when a service called Robinhood launched its zero-commission mobile trading platform, with no minimum deposits required (they just allowed others who paid a fee to see order flow and step in ahead of their clients) Interestingly Robinhood also offered the unique ability to instantly trade even as deposited funds were supposedly being processed. So a psychological instant gratification system was built into the platform, including the highly gamified trading interface, which many describe as addictive and encouraging of speculative behavior (how could that happen by chance 😊) within a mere five years, Robinhood had amassed over 3 million users, or roughly the size of E-trade. This parabolic rise forced a competitive industry into making a simple choice: follow Robinhood's lead, or risk losing even more market share. The industry relented in October 2019, when Schwab matched Robinhood's zero commission fee structure and within mere weeks, Fidelity, TD Ameritrade and E-Trade all followed Schwab’s lead. Then bang almost overnight, free stock trading went from a niche product to industry standard.

The result: by late 2019, practically all remaining cost barriers to stock market speculation had been erased. For the first time ever, anyone with a few dollars and a smartphone could download an app and begin instantly trading stocks, options, and even cryptocurrencies. And they believed it to be child’s play. That was some of the fuel along with the FED’s free-flowing liquidity that sat waiting for a spark... and it was a short wait for the spark...as when King-Trumps and the various governors started their lockdowns in response to the Covid-19 pandemic which started in March 2020, millions of newly unemployed Americans found themselves without a job, a government $1,200 stimulus check and extremely generous unemployment benefits ($600 a week over and above state benefits) and few if any solid options for leaving the house and to be in potential harm’s way of Covid-19. As far too many found themselves out of a job without benefits, and extremely limited options for replacing that lost income. And the government was handing out bailout checks to any firm that wanted one whether they needed it or not, and the FED was backstopping reckless debt issuance... It was the perfect force 5-hurricane storm that unleashed a record flood of new money, and importantly retail money into the stock markets and it was aided by the hyping financial media who projected Dow 50,000 and Nasdog 40,000 and the SPX-500 should rise to 6,000 and I am not just talking about a Robinhood phenomenon. Every major brokerage firm reported record new account openings in the first quarter of 2020:

Basically, the Covid-19 pandemic produced the “cabbie” moment that transformed a bull market into an outright raging incessant mania.

I am quite certain that the recent boom in retail trading has been turbocharged by the elimination of retail commissions. Interesting that for far too many Americans the stock market has become an economic lifeline for replacing lost income during the Covid-19 pandemic. It is not just the younger generations catching day trade fever. A Wall Street Journal reporter recently described how the pandemic turned her parents into day traders:

During my four years writing about financial markets for The Wall Street Journal, my parents and I almost never discussed stock trading... When I returned to Iowa to visit them in August, it was all they wanted to talk about. I hope that you get the picture. For the first time in this very long in the tooth long bull market, the “cabbie” indicator is flashing red. We are now at that point in my opinion in this highly manipulated bull market when novice investors are aggressively speculating in some of the market's riskiest plays; and for the most part they are playing a game that's unwinnable as they speculate on short-term stock price movements. Sure, some will succeed but 90% of those who try will fail. Unless it's different this time, when any amateur can suddenly become a “master” successful day trader overnight, it's almost certainly an indicator of a massive type of mania. If only 10% of day traders succeed in the stock market, you can probably cut that number in half to 5% in the options market the deep end of the riskiest cesspool pool, where retail traders have recently piled into in mass. Once upon a time, the options market was originally designed to provide institutional investors the opportunity to hedge portfolio risk. It also provides the opportunity for speculators to make leveraged bets on stock prices. However, the odds are heavily stacked against the options speculator, for many reasons as the speculative option buyer is always fighting both time and the spread between the underlying stock price and the option strike price. But during a mania, the pay-off in call options can be huge as we have seen of late. So do to the GREED emotion we have seen that this upside potential has attracted the same speculative fervor among retail traders that we are seeing in the stock market. In many ways, this record call buying activity adds more fuel to the melt-up in the underlying stock market.

My premise is simple: it is not different this time. When the price momentum ultimately reverses, and it will there is major downside risks 30-50% in today's stock market. I advise that you all exercise extreme caution is advised.

 

 

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