Markets Respond Suddenly to Structural Deficiencies in Global Economy

In case anybody was not noticing, stocks haven't exactly been on fire through the first few sessions of 2014 (eight of them, including today), but, apparently, a solid number of investors have been taking note and today decided to take action.

Friday's non-farm payrolls report may have been the initial impetus to really kick off today's selling spree, which accelerated throughout the session with stocks ending near the lows of the day on the major indices, sending all of the major exchanges into the red for the year.

Beyond the horrifying labor situation outlined by the aforementioned December payroll report, retail holiday sales figures have been coming in at well below anybody's best guesses and many retailers are now forecasting less-than-optimistic projections for January and beyond.

A few of today's highlights from the retail field (in addition to the meltdowns already underway via Sears and JC Penny) are Express (EXPR 18.15, -0.87(4.57%)) and Lululemon (LULU 49.70, -9.90(16.61%)), bot of which lowered their guidance on Monday. Others on the retail decliners' hit list include Coach (COH 54.30, -1.78(3.17%)), Gap (GPS 38.25, -1.59(3.99%)), and Michael Kors (KORS 76.67, -3.13(3.92%)).

Multi-faceted are the reasons for poor performances in stocks, from a stalled-out labor market to continued de-leveraging by consumers to the Obamacare fiasco to rising college tuition costs, these are just a few of the market-roiling scenarios playing out in the US and global economy.

There's more to today's selling than meets the eye, however, because there are serious cracks in the facade that is the US government, the status of the dollar as the world's reserve currency and the generally-frayed fabric of the Federal Reserve. Those in the know realize that time may be running short on fiat currency, of which all of the world's currencies are concurrently backed by nothing more than people's blind willingness to accept paper money in exchange for real goods and services.

That's at the root of the world's worries, but it is gaining prominence because individuals and businesses continue to shed debt, while the Fed, the Bank of Japan and the Eu monetary masters continue in their vain attempts to create more debt, which is, after all, their lifeblood. The only entities continuing to create debt are governments, making theirs and the days of their central bankers, numbered and in decline.

Losing faith completely in a particular government, national currency or system of exchange takes time, and when it comes to global currencies, such as the US dollar, even more time, but, as the events of 2007-2009 showed with sensational alarm, when faith becomes frayed in the minds of investors and speculators, events can spiral out of control, and, while that may not be precisely what's happening at present, it sure has the allure and feel of a full-blown currency/competency/confidence crisis in the making, one which actually started five to seven years ago, depending on which aspect one assigns as the starting point.

Demographically, the planet's population is aging and retiring; the current crop of up-and-coming youths don't inspire much in terms of leadership skills and a world dependent on handouts from government programs when the government itself is the main culprit and cause of the deterioration of global society is not a model upon which any sentient, thinking being would wager to last very long.

Gloom and doom scenarios such as this have roots in reality, though the psychological paradigms of cognitive dissonance and normalcy bias keep the general population in a state of suspended stupidity, though even the dullest among us can see the writing on the wall. Acceptance of such a harsh reality is not ready-made. It takes time, fear, and eventually, lots and lots of pain.

The time is growing short, the pain increasing (Have your wages gone up lately, while your costs continue higher and government regulations gain in stupidity, complexity and lack of enforceability?) and the fear, finally making a grand appearance at Wall Street, is beginning to spread.

Best to be prepared, and keep one's head while all about are panicking, because the panic is about to go mainstream.

As for the Fed, and how they create debt-money out of thin air, this brief, four-second clip should sufficiently explain:


DOW 16,257.94, -179.11 (-1.09%)
NASDAQ 4,113.30, -61.36 (-1.47%)
S&P 1,819.20, -23.17 (-1.26%)
10-Yr Note 99.20, +1.15 (+1.17%) Yield: 2.83%
NASDAQ Volume 2.17 Bil
NYSE Volume 3.58 Bil
Combined NYSE & NASDAQ Advance - Decline: 1526-4234
Combined NYSE & NASDAQ New highs - New lows: 325-42
WTI crude oil: 91.80, -0.92
Gold: 1,251.10, +4.20
Silver: 20.38, +0.162
Corn: 434.50, +1.75

It's a Three-Day Weekend. Go Enjoy It, But Take Some Time to Read This

Catchy headline, huh?

If anybody really wants to spend time this holiday weekend wondering when the global financial system is going to finally melt down, this is not the place to look.

Our team of 300 editors (j/k) was let go at noon today for a weekend at the Hamptons, so all we're leaving you with are a few tidbits.

The most overlooked story of the day was how big retailers took it on the chin in the first quarter, most blaming "weather" as the root of their revenue and earnings misses.

Among the losers reporting on Friday were Sears (SHLD, 50.25, -7.92(13.62%)); Abercrombie & Fitch (ANF, 50.02 -4.35(8.00%)); Aeropostale (Aro, 14.76 -1.72(10.44%)) and; The GAP (GPS, 40.66 -0.70(1.69%)). While the mainstream tended to overlook these stunning losses - as they do all negative economic stories - consumers are apparently changing their spending habits, more along the lines of frugality and austerity, shunning brands and big-ticket items. Sears, BTW, is a dead entity. The market and the BOD just haven't realized it yet.

The other "tells" from today's disorderly trading were the low volume (nothing new there, move along), the drop in the NYSE Comp, which nobody pays any attention to, except us, since it is only one of the broadest measures of corporate America, the tape-painting which brought the Dow into positive territory and the other exchanges close to unchanged, the ongoing slippage in the A-D line and the compression in the new highs-lows (many fewer new highs the past few days, more new lows).

Make sure to remember what Memorial Day is all about, preserving the memory of those who died defending our values and freedoms. Semper Fidelis.

Dow 15,303.10, +8.60 (0.06%)
NASDAQ 3,459.14, -0.27 (0.01%)
S&P 500 1,649.60, -0.91 (0.06%)
NYSE Composite 9,427.63, -38.68 (0.41%)
NASDAQ Volume 1,364,804,375
NYSE Volume 2,753,824,000
Combined NYSE & NASDAQ Advance - Decline: 2894-3506
Combined NYSE & NASDAQ New highs - New lows: 128-37
WTI crude oil: 94.15, -0.10
Gold: 1,386.60, -5.20
Silver: 22.50, -0.012

Perverse Dollar Trade Sends Stocks South

The US Dollar was stronger against most world currencies on Thursday. Stocks fell.

If that sounds odd to you, it should. The normal relationship of a strong dollar to strong stocks has been undercut in recent days as the new carry trade of borrowing cheap dollars and investing in risky equities has produced one of the more remarkable rallies of the past 100 years.

Sadly, it cannot continue. Eventually, days like today, when the dollar strengthens and stocks are obliterated as traders are forced to liquidate out of positions, will proliferate, killing the stock market rally. Either that, or, stocks continue to climb while we kill the dollar. Today's trading may have been illustrative in just how perverse and destructive the inverse relationship has become. One way or another, somebody's got to lose, when the truth is that a stronger dollar should encourage more investment in stocks and US companies, rather than the reverse.

There's a bit of illogic to this trade, so excuse me for thinking out loud here. If it's true that many of the hedge funds are already out of this market, then today's trade would not have occurred. There would have been honest bets on stocks, not liquidity-driven hedge-type activity. So, that argument is probably full of large holes.

Then there's the idea of trillions on the sidelines - some say as much as $3 trillion invested in money market funds, some more in bond funds and plenty in cash. Just because those people don't want to engage in the high risk of equities, it does not necessarily follow that they'll want to jump in when stocks are cheaper. Were that the case, they had ample opportunity back in the Winter of 2009-10. So, toss that rationale.

What makes sense is that the dollar will continue to weaken until the Fed signals that they're going to begin raising interest rates. Estimates of when that might happen range from June 2010 to some time in 2011. What's certain is that the Fed cannot keep rates at "near-zero" for much longer. Other nations have already begun raising interest rates - Australia and Norway to name two - while more are hinting at doing the same. When the Fed decides to begin raising rates the dollar will stop sliding against other currencies. It will actually begin gaining when our blessed federal government decides to start acting like adults and do something about the enormous deficits they are running.

Both of those events - Fed tightening and government responsibility - are inevitably tied to politics, and, with mid-term elections upcoming in less than a year, there's a good bet that there will be action by then, in fact, 4-6 months before the elections. So, June sounds like the right time for the Fed to boost 25 basis points, maybe even 50. It's also likely that the federal budgeting process will begin sounding more Republican, even though it will be dominated by Democrats.

So, where does that leave stocks? Little changed until then. The bull market remains intact, the carry trade goes on for a few more months, because, as the market is the ultimate discounting mechanism, the Fed moves will be baked in long before they actually occur. The rally should run nicely through January, and even into Spring, with a small respite during the summer and glorioski! another rally just in time for the election!

That's one way to play it. Ignore all the talk and chatter about the carry trade, weaker dollar, etc. and focus on good companies making money. Sooner or later, fundamentals will be your friend, and, by all indications, they're not too bad right now. A year from now, the crash of 2008 will be a fast-fading memory.

Dow 10,332.44, -93.87 (0.90%)
NASDAQ 2,156.82, -36.32 (1.66%)
S&P 500 1,094.90, -14.90 (1.34%)
NYSE Composite 7,117.64, -109.07 (1.51%)

Today's final numbers could have been much worse. The dollar actually weakened throughout the session, and stocks pared their losses after 10:30 am. The Dow was down 170 in the early going and gained much of that back by the closing bell. At the end, declining issues outnumbered advancing ones, 5210-1381, or nearly 4:1. It was one of the more lopsided days in recent memory, though hardly a rally-killer. It should be noted that options expire tomorrow, so much of the trading had to do with gains and losses on option trades. There were only 108 new highs, as compared to 67 new lows. The indication is that stocks are weak, though this measure cannot be trusted on a one-day move. We'll need more evidence that the bears have control before changing strategy, which remains bullish with a target of 10700 on the Dow by year end.

NYSE Volume 4,909,767,500
NASDAQ Volume 2,148,559,000

Commodities would be expected to take a hit, especially oil, which fell by $2.12, to $77.46, but gold actually rose $1.00, to $1,142.20. Silver gained 5 cents, to $18.46 per ounce. The precious metals markets have shown a recent trend away from the dollar trade. They can now be considered almost anti-currency, as they act as a hedge against all fiat (paper-based) currencies, which just happens to be everywhere in the world.

Other then the dollar movement, there was a little bit of news that might have moved markets so severely. Tim Geithner testified to the committee looking into financial reform, and any time Timmy opens his mouth in congress, it's usually a bad thing. A couple of members actually think he should resign. Not surprisingly, most of those requests for Mr.Geithner to step aside came from Republicans.

Early in the day, the entire world was reminded that bureaucracies seldom function perfectly, as air traffic across the nation was grounded due to an FAA "glitch."

Unemployment claims data was benign, and the week come to an end with no important economic data due out on Friday, and just 35 days until Christmas.

Leading Indicators for October were down slightly, while the Philadelphia Fed index was up. We have reached what is known as an inflection point.

After the bell, Dell (DELL) announced 3rd quarter results below expectations. The stock was trading down about a point, or 6.5% in after-hours activity. Gap Stores (GPS) reported a 25% improvement in profits, but the stock was being sold off after-hours, down about 1/2 a point, or 2.5%. Shares of the retailer, which includes GAP stores and Old Navy, have more thn doubled since their lows in March.