Bet Against the House at Your Peril

The stock market’s on edge.  After dropping 278 points last Friday and climbing back 139 points on Monday…the DOW purged 332 points on Tuesday.  Wednesday the DOW gave back another 27.  By yesterday the storm had past.  Sunny skies were out…the DOW bounced back 259 points.

From what we gather, signs of an improving economy are considered bad for stocks.  The initial selloff, which began last Friday, was triggered by the Bureau of Labor Statistics February jobs report.  According to the government bean counters, 295,000 jobs were added for the month.  All the new jobs pushed the official unemployment rate to 5.5 percent.

Speculators understood this good news for the economy to be the rationale the Federal Reserve needs to finally raise its federal funds rate from practically zero.  If you recall, the federal funds rate has been pushed down to the floor for six plus years.  Not by coincidence, the current big bad bull market run just turned six years old on Monday.

Raising the federal funds rate increases the cost of credit.  This means less borrowed credit will likely be put to work in the stock market.  Following this logic, the credit expansion that has been puffing up stocks over the last six years may soon run out of gas.

Just the prospect of the Fed raising rates appears to be enough to spook speculators, traders and investors.  No one wants to be stuck inside the crowded theatre when someone yells fire and the masses stampede for the exit.  However, for the time being, Jim Cramer thinks it is too soon to panic…

This Is Not 2008

“Well, the market has lately experienced the same kind of incredible run that we saw leading up to the great recession,” said Jim Cramer on Tuesday.  “It was just one week ago that Nasdaq (NASDAQ: .IXIC) was hitting new highs and stocks were picking up immense gains.

“The problem is that a lot of U.S. companies do business overseas and will be hurt because of the strength of the dollar.  That will only get worse if the Fed decides to raise rates.

“Many multinational companies would have earnings estimates cut because of the reduced exports due to a declining local currency overseas.  That means stocks of companies that do business overseas will plummet.

“Additionally, the same companies with business overseas will have a damaged bottom line because of unfavorable exchange rates.

‘“So, considering all of those negatives, how come I’m not yelling ‘fire’?  One simple reason: we don’t have systematic risk.  We aren’t about to fall apart at the seams.’

“Let’s not forget that consumer sentiment is strong, and the banking system has plenty of cash, he said.  This is not 2008.”

Bet Against the House at Your Peril

“History doesn’t repeat itself, but it does rhyme,” goes the oft-attributed quote to Mark Twain.  This is not 2008, indeed.  But there are some rhythms and rhymes for conscience observers to bob their heads to.

The S&P 500s up more than 200 percent in six years…  The recent rise in the U.S. dollar…  The recent oil price collapse…  The peaking of margin debt…  The spike in price/earnings ratios…  The collapse of industrial commodities…

…all of these things also presaged the 2008 stock market crash.

Of course, timing the exact peak of a bull market is nearly impossible.  In fact, Paul Farrell, at MarketWatch, believes the stock market crash won’t be this year.  He believes it will be in 2016 and will coincide with the presidential election.

“Let’s compare 2016 with earlier crashes: 2008 to 2000 to 1929, knowing all bulls drop into bears eventually,” notes Farrell.  “Basic cycles theory.  And this next one will trigger losses bigger than 2000 and 2008.  So bet against the house at your peril.

“Jeremy Grantham’s already on record predicting that ‘around the presidential election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse.”’

“That will translate into the DOW crashing from today’s 18,117 down 50 percent to about 9,000.”


MN Gordon
for Economic Prism

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