Santa Claus Delivers A Relief Rally For The Ages; Largest Point Gain On Dow In Market History

The extended holiday season - thanks to an additional week for shopping between Thanksgiving and Christmas - was exceptionally kind to retailers, who reported the best holiday season in six years, so Wall Street finally got the news that the economy was apparently not on the verge of imminent collapse, sending stocks soaring throughout the session.

How much of the gains were attributable to short-covering buyers and strict momentum chasers is unknowable, though it was likely a large percentage. Risk appetites have been under assault for months, so this one-day wonder might not be as impressive as bullish traders would have one believe. It was more a technical advance after waves of selling created a severely short-term oversold condition.

To put it in perspective, the nearly five percent gain on the Dow, in point value, was equal to only about one-fifth of the most recent decline. The Dow had lost more than 5000 points since October, so Wednesday's buying spree pales in comparison and sets up the market for further speculation as far as directional trades are concerned.

If this nascent rally is to continue - which is also likely - there has to be some catalyst to carry it forward, though it might simply run until it is exhausted. Since the gains put only a minor dent in the recent losses, momentum should carry it forward, possibly another 1500-1800 points on the Dow.

While that might seem like a huge number, it wouldn't even wipe out the losses already sustained in December (as on Monday, that was -3746.36), so investors may get something of a stock sugar rush to close out the year and maybe some fun in the first days of the new year.

This pump was long overdue, and there's also the possibility that the call Treasury Secretary Mnuchin made to the Plunge Protection Team on Sunday had some impact.

Santa has come and gone, leaving plenty of presents behind.

Ho, ho, ho.

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51
12/10/18	24,423.26	+34.31	-1115.20
12/11/18	24,370.24	-53.02	-1168.22
12/12/18	24,527.27	+157.03	-1011.19
12/13/18	24,597.38	+70.11	-941.08
12/14/18	24,100.51	-496.87	-1437.95
12/17/18	23,592.98	-507.53	-1945.58
12/18/18	23,675.64	+82.66	-1862.92
12/19/18	23,323.66	-351.98	-2214.90
12/20/18	22,859.60	-464.06	-2678.96
12/21/18	22,445.37	-414.23	-3093.19
12/24/18	21,792.20	-653.17	-3746.36
12/26/18	22,878.45	+1086.25	-2660.11

At the Close, Wednesday, December 26, 2018:
Dow Jones Industrial Average: 22,878.45, +1,086.25 (+4.98%)
NASDAQ: 6,554.35, +361.44 (+5.84%)
S&P 500: 2,467.70, +116.60 (+4.96%)
NYSE Composite: 11,204.09, +434.26 (+4.03%)

Reversion To The Mean... Can It Happen? Mnuchin Panics Markets With Calls To Banks, PPT

Stocks and math really should be on everybody's radar, if not today, then certainly every other day the markets are open. It's a major cause of angst and stupidity that people don't apply mathematic principles to investments. Math runs everything, it's immutable, and unmoved by emotion, which is what often moves stocks and other investments into absurd areas.

Speaking of absurd, how out of line were the valuations of stocks just a few months ago?

The answer is, historically speaking, VERY. Stocks were valued as if nothing negative would ever happen ever again in the world. US unemployment would forever be under four percent. GDP would always be above three percent. Politicians would never, ever lie again. Democrats and Republicans would make peace and compromise in support of the American people, and ordinary citizens in France would just accept the uber-liberal policies that are taxing them out of existence and stop their silly protesting.

Yeah, sure. Throw in some unicorns that barf up rainbows and poop gold and you'd be close to the kind of valuations the stock market was assigning to banks (bailed out in 2008), tech companies (many which have never experienced a severe recession) and plenty of other stocks. The distorted valuations of the past ten years exist because of easy money policies and corrupt corporate executives who used stock buybacks to reduce the number of shares outstanding, thus boosting the value of their stocks via higher earnings per share.

Let's put the past behind us, where it belongs. The Fed is trying, despite serious criticism from the president (he's wrong about the Fed being the real problem... the Fed can be a solution, and should be, since they created the problem originally) to right the global financial ship. The Fed and other central banks extended too much credit prior to the sub-prime debacle, and did it again in its aftermath, bailing out the banks who loaned money to people who could not make the payments.

Now, the Fed is drawing back on the easy money. Nobody likes it, but it must be done. Interest rates of two to three percent are an anomaly, unlike any time in history. The 10-year treasury note should ideally be in a range of 4-6 percent, which would make borrowers think twice about borrowing, and lenders would scrutinize their potential loans with much more dedication and diligence than to standards with which they've become comfortable.

Bad debts, many of them left over from the GFC, need to clear.

Policies are changing, and, with that, valuations will adjust, so here comes the math part of today's monologue.

Using the CAPE ratio for the S&P, stocks closed out today - another disaster, by the way - at 26.02. The mean CAPE ratio for the S&P is 15.69. If reversion to the mean occurs, at some point in the near future (3-12 months), the S&P will decline from it's current value of 2,357.54, to 1,552.20, because it is 65.84% above the mean. That would wipe out the gains of the past six years, sending the S&P back to where it peaked in 2007.

That actually would be a good outcome, since the 2007 levels were later found out to be a bubble, and they went south from there. So, it's very likely that the S&P will overshoot the mean, sending the index down to maybe 1400 or even 1300. Some people with good memories will recall that the S&P bottomed out BELOW 800 at the depths of the Great Financial Crisis of 2008-09, so 1300 or 1400 would be a pretty good outcome.

The same can be applied to the Dow, NASDAQ, NYSE Composite, Dow Transports, the Russell, or whatever US index one chooses. Take the current level, multiply by 65, divide by 100, and you'll have a good estimate of the mean valuation, and maybe even the actual bottom, but, chances are good that the bottom will be quite a bit lower than the mean, that is, if fundamentals matter once again, and we are done with the Fed backstopping every decline via asset purchases, the PPT, QE, ZIRP, NIRP, bailouts, fancy derivatives and generally speaking, voodoo economics (a favorite term of George HW Bush, BTW, in reference to Reaganomics or trickle-down theory).

Just because Money Daily likes to focus on the Dow, the mean is probably somewhere around 14,164.93. You may notice that is a further decline of more than 7000 points, but that should not be out of the equation since the Dow has already lost more than 5000 points just since October 3 (26,828.39, the all-time high) and it's down more than 3700 points just this month.

As has been the theme here for some time now, this is only the beginning of a long decline in stocks.

Treasury Secretary Steven Mnuchin made calls to six major banks and the Plunge Protection Team, and announced that he did so to the press and the general public. Talk about transparency! These kinds of inside baseball moves were, in former times, kept very, very quiet. Mnuchin's up-front attitude about this was meant to panic markets, not calm them. In that regard, he did the bidding of the Fed and his Wall Street friends. Remember, Mnuchin is a Goldman Sachs alum. Surely, his buddies at GS and JP Morgan Chase, Bank of America, Morgan Stanley, Citi, and Wells Fargo aren't losing money nor sleep over these most recent declines in the stock market. Their clients may be losing massive amounts, but, hey, they're just the little people, muppets, right?

Unless you've got a million or more for these guys to manage, you're not worth their precious time.

Merry Christmas. Ho, Ho, Ho.

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51
12/10/18	24,423.26	+34.31	-1115.20
12/11/18	24,370.24	-53.02	-1168.22
12/12/18	24,527.27	+157.03	-1011.19
12/13/18	24,597.38	+70.11	-941.08
12/14/18	24,100.51	-496.87	-1437.95
12/17/18	23,592.98	-507.53	-1945.58
12/18/18	23,675.64	+82.66	-1862.92
12/19/18	23,323.66	-351.98	-2214.90
12/20/18	22,859.60	-464.06	-2678.96
12/21/18	22,445.37	-414.23	-3093.19
12/24/18	21,792.20	-653.17	-3746.36

At the Close, Monday, December 24, 2018:
Dow Jones Industrial Average: 21,792.20, -653.17 (-2.91%)
NASDAQ: 6,192.92, -140.08 (-2.21%)
S&P 500: 2,351.10, -65.52 (-2.71%)
NYSE Composite: 10,769.83, -267.01 (-2.42%)

WEEKEND WRAP: Stocks Wrecked, Bull Market Finished; Bears' Claws Are Out

If the week prior to last was characterized as one in which "the wheels fell off" (Money Daily, 12/16/18), the most recent week was nothing short of a full-blown train wreck.

Everything was on sale, but especially stocks, as the Fed raised rates, the US federal government ground to a halt over a $5 billion border wall, and investors were spooked by collapsing long-term interest rates and the specter of a recession in coming months.

More than anything else, however, stocks were on sale mostly because they were being perceived as overpriced, and by most accounts they were and still are. According to Robert Shiller's CAPE index, the week ended with the Shiller PE ratio for the S&P 500 at 26.75, down from the peak of 30 two weeks ago, but still well above the mean (16.59) and the median (15.69) levels.

Shiller PE ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10

This is how bubbles are pricked, and, as Doug Noland candidly attests, "There is never a good time to pierce a Bubble." More from Noland:

"Expiration for the aged “Fed put” was long past due. For too long it has been integral to precarious Bubble Dynamics. It has promoted speculation and speculative leverage. It is indispensable to a derivatives complex that too often distorts, exacerbates and redirects risk. The “Fed put” has been integral to momentous market misperceptions, distortions and structural maladjustment. It has been fundamental to the precarious “moneyness of risk assets,” the momentous misconception key to Trillions flowing freely into ETFs and other passive “investment” products and strategies. It was central to a prolonged financial Bubble that over time imparted major structural impairment upon the U.S. Bubble Economy."

Noland's entire Credit Bubble Bulletin commentary can be seen here.

If Noland's perception is accurate (and there's little reason to doubt it), this week's cascading declines are merely the end of the first act in what is likely a three-act drama to be played out over the next 12-18 months. Surely, the tremors from February and March were early warnings that the persistent bull market was coming to a conclusion.

October's declines were blamed by some analysts - incorrectly - on the lack of stock buybacks during the "quiet period," and were nothing about which to be worried. Obviously, that analysis was short-sigthed and based upon the bubble hypocrisy that has guided markets since the Great Financial Crisis of 2008-09.

December's nosedive was pretty predictable. Stocks hadn't shown any inclination toward the upside for months and there wasn't a good catalyst for investors, nothing even remotely resemblant of a buying opportunity. Of course, some too the "buy the dip" bait a few times this year and have been destroyed. That concept is a dead doornail for the time being. Selling into any strength is likely to be the prevailing rear-guard action.

Once 2018 comes to an end - in just five more trading days - there will be some regrouping, repositioning, but until there's resolution of some basic issues (the Wall, Brexit, China, tariffs), there isn't going to be any kind of rally. Gains will be hard-fought, and sellers will be eager on short-term wins. The second phase of the selloff will last well past January, into the summer and possibly the fall before the endgame commences, with sellers capitulating en masse. By this time next year it may be nearing a bottom some 40-60 percent below the all-time highs. Investor confidence will have been at first shaken, then eroded, and finally, shattered. Wall Street will have a crisis of its own making, and the economy will be embarking into recession.

Markets have come full circle. Central banks have decided that the experiments of QE, ZIRP, and NIRP which propelled stocks to dizzying heights, are over, their purpose achieved, and now comes the hard work of withdrawing some level of liquidity from markets in an attempt to normalize markets.

The problems lie in execution. It's not going to be easy to take corporations off the baby bottle of leveraged stock buybacks which blew up expectations and prices but caused serious long-term harm to capital structures. This current crisis may turn out to be worse than the sub-price fiasco or the dotcom malaise simply because it involves so many companies that have gutted their balance sheets and will have no other recourse than to slash production, wages, jobs, capital expenditures or all of the above.

This week was a full stop.

There aren't going to be any more bailouts, white knights, back-room deals or "Fed Put." The coming regime is going to be one of hard and cold capitalism, where the strong get stronger and the weak are slaughtered. Wall Street brokerages are sure to be among the most celebrated casualties when everybody realizes these heroes of the past ten years aren't all that bright and that there aren't that many good stock pickers in down markets. The financial industry, already under siege, is about to be breached and downsized to more human and humane proportions.

There's only so much one can say about stock routs. The numbers are there for perusal and they are horrifying enough all by themselves. Hashing over the events of the week, as stocks slid, then rallied and slid more, and finally crashed on a Friday afternoon would be little more than overkill.

It was a very, very bad week, the worst since 2008, and some say, since the Great Depression. It may not have been the worst we will witness however, as this is only the beginning of the bear market.

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51
12/10/18	24,423.26	+34.31	-1115.20
12/11/18	24,370.24	-53.02	-1168.22
12/12/18	24,527.27	+157.03	-1011.19
12/13/18	24,597.38	+70.11	-941.08
12/14/18	24,100.51	-496.87	-1437.95
12/17/18	23,592.98	-507.53	-1945.58
12/18/18	23,675.64	+82.66	-1862.92
12/19/18	23,323.66	-351.98	-2214.90
12/20/18	22,859.60	-464.06	-2678.96
12/21/18	22,445.37	-414.23	-3093.19

At the Close, Friday, December 21, 2018:
Dow Jones Industrial Average: 22,445.37, -414.23 (-1.81%)
NASDAQ: 6,332.99, -195.42 (-2.99%)
S&P 500: 2,416.62, -50.80 (-2.06%)
NYSE Composite: 11,036.84, -185.96 (-1.66%)

For the Week:
Dow: -1655.14 (-6.87%)
NASDAQ: -577.67 (-8.36%)
S&P 500: -183.33 (-7.05%)
NYSE Composite: -718.54 (-6.11%)

Everything was not gloom and doom, however. Here's Darlene Love, in one of her many appearances on the Late Show with David Letterman, performing "Chirstmas (Baby Please Come Home)." This is one of her best.

Stock Carnage Continues; NASDAQ Down 20%; Why It Is Happening

Stocks continued to sell off on Thursday, extending the December decline to dangerous levels.

The Dow has registered what is easily the worst month of 2018, while the NASDAQ joined the Dow Jones Transportation Index in bear market territory, down 20% from its August 29 high.

Pundits in the financial media are trying to assign blame wherever they can, on the Fed's recent rate hike, fear of a coming recession, the possible federal government partial shutdown, China's slump, a looming trade war. While those are contributing factors, the real culprits are the Federal Reserve and their cohorts in central banking in Japan, China, the ECB, the Bank of England and the Swiss National Bank.

These are the architects of the past decade's debacle of debt, beginning in the depths of 2008-09 and continuing through until today. Their schemes of zero interest rate policy (ZIRP), negative interest rate policy (NIRP) and quantitative easing (QE), which made money all-too-easily available to their willing friends in the C-suites of major corporations.

The corporations took the easy money, at rates of one to two percent or less, and repurchased their own corporate stock at inflated prices. Now that the executives have cashed out, milked dry their own businesses, they are upside-down, owning shares of stock purchased at 20, 30, 40 percent or more than they will sell for today.

2018 was the culmination of this global corporate theft, inspired by the gracious money printers at the Federal Reserve and other central banks. Over the past ten years, trillions of dollars, yen, yuan, euros, pounds and other currencies were brought into existence, lent to various large corporate interests in a variety of complex and/or simple transactions and now the gig is up, though one will never hear talk of this in the mainstream media.

What happens to a corporation that is holding shares it bought at $90, when the stock is selling for $60 and may be worth less than that? Nothing good, including cutbacks, rollbacks, layoffs, and the general demise of once-strong companies.

When these companies offer shares for sale - and they eventually will - they will realize losses and they will still have the loans from the central banking system to repay. Some will file for bankruptcy. Others will cut payrolls and expenses to the bone. The past ten years have been nothing short of complete and total corruption of the financial system, from top to bottom. This is why the selling has been intense and relentless and likely will not cease until stocks are 40 to 60 percent off the artificial highs created by reducing the number of shares available through stock buybacks.

It was a swell scheme that paid off handsomely for some of the top executives at many of the largest corporations, and the general public, the people with 401k or retirement or college funds tied to the stock market, are going to end up bag-holders, broke and dismayed, as well they should be.

If there is any justice in this world, the bankers will be fingered, the corporate executives tried and jailed, and money clawed back from their ill-gotten gains. But we all know from the 2008-09 experience that that will not happen. Nobody will be tried. Nobody will serve a single day in jail, and the Federal Reserve will continue on its merry way, inflating and deflating to their heart's content, stealing from the public as they have been since 1913.

That's all there is to it. Hopefully, you are not a victim, though in many ways, we all are.

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51
12/10/18	24,423.26	+34.31	-1115.20
12/11/18	24,370.24	-53.02	-1168.22
12/12/18	24,527.27	+157.03	-1011.19
12/13/18	24,597.38	+70.11	-941.08
12/14/18	24,100.51	-496.87	-1437.95
12/17/18	23,592.98	-507.53	-1945.58
12/18/18	23,675.64	+82.66	-1862.92
12/19/18	23,323.66	-351.98	-2214.90
12/20/18	22,859.60	-464.06	-2678.96

At the Close, Thursday, the solstice, December 20, 2018:
Dow Jones Industrial Average: 22,859.60, -464.06 (-1.99%)
NASDAQ: 6,528.41, -108.42 (-1.63%)
S&P 500: 2,467.42, -39.54 (-1.58%)
NYSE Composite: 11,222.79, -149.05 (-1.31%)

Stocks Tank On Fed Rate Hike (Thank You, Captain Obvious); Transportation Index In Bear Market

What a racket!

As if there was ever any doubt that the Fed would hike the federal funds rate another 25 basis points, stocks shot up at the open and maintained a very positive stance right up until 2:00 pm ET, when the Fed did what everybody knew they would do all along.

Seriously, who in their right mind was buying prior to the rate hike? People with money to burn?

To get an idea of the kind of lunatics trading stocks on Wall Street, the Dow was up just about 300 points at 1:57 pm. By 2:08 pm - following the policy announcement - it was essentially flat... and it went down from there, eventually losing 351 points, closing at a new low for 2018.

Over the same time span, the NASDAQ was up 65 points, but 11 minutes later was down 38. The same fate that befell the Dow was true for NASDAQ, S&P, and NYSE Composite: fresh 2018 lows.

The Transportation Index was absolutely devastated, closing at 9,147.66, down 297.81 points (-3.15%), pushing the transports into bear market territory, down 21% from its September high.

OK, so it was one of those "heads, Fed wins, tails, you lose," kind of deal. There was no way the Fed was going to surprise anybody. It's simply not their style. They telegraph everything they do, because they're so, so important to the proper functioning of the economy, and they never balk at even the most obvious data or implication. Balderdash.

The Fed should be run out of town just like all other central banks have been, but the US sheeple population has put up with this particular band of thieves for the past 105 years. The Fed is why we have booms and busts, never-ending inflation, recessions, absurdly high interest rates on credit cards, and incomes that just don't quite match up with expenses for much of the former middle class.

The good news about the Fed's rate increase is that it may be the last one for a while. They may hike a few times in 2019, or, depending on how the stock market and/or ec responds, they may not hike at all. Meanwhile, they'll keep losing money by unwinding their massive, overvalued bond portfolio of US treasuries and toxic mortgage-backed securities dating from the sub-prime glory days.

Elsewhere, crude oil rallied a little bit, gaining to $47 and change per barrel. Gold and silver were punished, though each was down less than one percent. The real lashing will come tomorrow or at the latest, by the end of the year.

Thus, the Fed, in its infinite wisdom (greed), decided that it would be in its own best interests to destroy the global economy by hiking the overnight and prime rate for the ninth time since 2015.

Happy days for some. tears and more pain to come for many more.

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51
12/10/18	24,423.26	+34.31	-1115.20
12/11/18	24,370.24	-53.02	-1168.22
12/12/18	24,527.27	+157.03	-1011.19
12/13/18	24,597.38	+70.11	-941.08
12/14/18	24,100.51	-496.87	-1437.95
12/17/18	23,592.98	-507.53	-1945.58
12/18/18	23,675.64	+82.66	-1862.92
12/19/18	23,323.66	-351.98	-2214.90

At the Close, Wednesday, December 19, 2018:
Dow Jones Industrial Average: 23,323.66, -351.98 (-1.49%)
NASDAQ: 6,636.83, -147.08 (-2.17%)
S&P 500: 2,506.96, -39.20 (-1.54%)
NYSE Composite: 11,371.84, -130.32 (-1.13%)