One of the salient themes of our analysis is the bizarre nature of the stock market, driven principally by extreme leverage and short-term speculation, leading to what will likely become the worst liquidity in decades, cautions Alan Newman, editor of CrossCurrents.
Despite the Fed’s overreaching attempts to convince the investing public to plunge into stocks and build wealth, it is clear that investors are wary.
Domestic mutual funds have been in a significant liquidation phase since the broad market peaked in 2007. There have been negative inflows for 66 of the past 88 months totaling $609 billion.
Nevertheless, prices have risen in a constant manner, with a few brief exceptions. This is probably the most stunning development of this new era of central bank sponsored and induced manipulations.
What makes the strategy all the more scary is that to date, it has worked. Indeed, the entire world seems to have taken notice of what the printing press can accomplish and to date, at least 14 central bankers have taken an additional step, actively buying shares of stock. We believe this new era is creating great danger.
Meanwhile, stock buyback schemes of many large corporations are fraught with risk, as each time companies buy their own shares, they are spending money that could otherwise be spent to grow their business.
These purchases are coming at historically inflated prices, and given the boom in corporate debt, are utilizing too much leverage for comfort. Share purchases at inflated prices are always a recipe for disaster.
The fundamental flaw in the Fed’s strategy is obvious; this new era of central bank manipulations cannot work forever. The higher prices are, the less the same amount of money can buy. Eventually, a point is reached at which so little can be bought that supply must exceed demand. At that point, prices fall.
We are not looking for an end of the financial world scenario, but would caution that derivative events represent the great unknown and have the potential to be cataclysmic.
Our bear market target of Dow 12,471 remains far shy of the March 2009 low of Dow 6469. For all intents and purposes, that was an epic low and will likely never be seen again. The offset will likely be very slow or no growth for stocks for the next decade.
Amazon (AMZN) has been around for 17 years and still can’t make money? Two gaps down on the chart imply AMZN’s problems are getting worse. The shares need to get past resistance at $311.40—and fast—to dispel doubts. Below the October 24 low of $284 and it is “Katy, bar the door.”
A breakdown in shares of eBay (EBAY) reveals the worst of all possible worlds for a growth company. The simple truth is that EBAY is no longer growing. It’s hard to see how this bounce could reverse EBAY’s problems.
Walgreen (WAG) held support above $57.75 but it appears resistance at $66.50 will be extremely strong. Wal-Mart Stores (WMT) broke through resistance, then faded and should remain shy of the October 10 peak of $79.37.
The huge $120 breakdown in Nertflix (NFLX) tells you all you need to know. Ditto IBM (IBM). Breakdowns like these are typically very late in the bull’s game. The worst of the banks, HSBC Holdings (HSBC) looks ghastly.
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