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5 Things To Ponder: Through The Looking Glass

Submitted by Lance Roberts of STA Wealth Management,

 “If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?”?Lewis CarrollAlice's Adventures in Wonderland

Is this the beginning of a bigger correction, or just a respite before the next advance? This is the first correction, since the beginning of the Federal Reserve’s latest round of quantitative easing, where the market has broken decisively through its shorter term moving average as shown below.

As I discussed yesterday, the Federal Reserve is unlikely to raise rates soon.  With spreading global weakness due to the recession in Japan, the Eurozone and slowdown in China and U.K the global wave of “deflationary” pressures will likely weigh on domestic growth in coming quarters. Such would prove a disappointment to market bulls.

Wednesday’s performance (S&P +33 pts) raised the question as to whether it was the start of a return to recent highs, or just another counter-trend rally within a still-developing downtrend? Thursday’s collapse through critical moving average support at 1945 puts the current bullish trend in danger. 

Walter Murphy points out that: “Our focus in coming days will be on 1977-1986 for the S&P 500. This range represents a significant amount of chart resistance and important Fibonacci resistance. The inability to break this benchmark will indicate that the downtrend is still in force and that bears are in control. Conversely, a decisive breakout will open the door for at least a temporary challenge of the S&P’s all-time high.”

This week’s “5 Things To Ponder” will peer through the “looking glass” for insights as to what we may expect next and things that we should be considering.

 

1)  A Remembrance Of 2014 by David Hay via Investor Insight 

“Do you remember back in 2014 when the stock market was as hot as napalm? When it just never went down? When millions believed the Fed could control stock prices by whipping up a trillion here and a trillion there?

 

Looking back from the vantage of today, it all seems so obvious. We should have known better than to believe that the S&P 500 had years more of appreciation left in it after having already tripled by the fall of 2014 from the 2009 nadir. The warning signs were there. But, before we rehash what went wrong, let’s focus on the upside of what some are calling “The Great Unwind” – the hangover after years and years of the Fed recklessly driving asset prices to unsustainable heights.”

 

2)  Echoes Of 2011 – Wild Stock Swings Are Backby Steven Russolillo & Kevin Kingsbury via WSJ

“Investors might find the recent action reminiscent (on a smaller scale) of what transpired in August 2011, when Europe’s debt crisis was in full throttle, and S&P downgraded the U.S. from its AAA rating. That downgrade, announced late Friday Aug. 5, prompted the Dow to slump 635 points the following Monday. It then rebounded by 430 points on Tuesday before skidding 529 points the next day and then rallying 423 points that Thursday.

 

The cumulative four-day move was just 301 points, but it surely didn’t seem like it at that time. And of course, the declines in the wake of the U.S.’s credit downgrade proved to be quite the buying opportunity; the Dow and S&P 500 bottomed in October that year and haven’t suffered 10% pullbacks since.”

 

3)  Companies Poised To Spend 95% Of Earnings On Buybacks by Lu Wang & Callie Bost via Bloomberg

“They’re [companies in the S&P 500] poised to spend $914 billion on share buybacks and dividends this year, or about 95 percent of earnings, data compiled by Bloomberg and S&P Dow Jones Indices show. Money returned to stock owners exceeded profits in the first quarter and may again in the third. The proportion of cash flow used for repurchases has almost doubled over the last decade while it’s slipped for capital investments, according to Jonathan Glionna, head of U.S. equity strategy research at Barclays Plc.

 

‘You can only go so far with financial engineering before you actually have to have a business with real growth,’ Chris Bouffard, chief investment officer who oversees $9 billion at Mutual Fund Store in Overland Park, Kansas, said by phone on Oct. 2. ‘Companies have done about all that they can in terms of maximizing the ability to do those buybacks.’”

 

4)  Carl Ichan Warns A Big Correction Is Coming via Zero Hedge

 

5) Stocks Are Artificially Priced – Bill Gross’ First Letter From Janus Capital

“Financial markets are artificially priced. In the bond market, there is nothing normal about a three year German Bund yielding a “minus” 10 basis points. Similarly, UK Gilts and U.S. Treasury’s have in recent years never experienced such low yields and therefore high prices. The same comparison can be applied to stocks.

 

While profits in many cases are at record highs, the discounting of future profit streams by an artificially low interest rate results in corresponding high P/E ratios. Real estate cap rates, which help to price homes and commercial shopping centers, are affected in the same way. While monetary policy with its Quantitative Easing and forward guidance for low future interest rates have salvaged a semblance of growth and job gains – especially in the U.S. – they have brought prosperity forward in the financial markets.

 

If yields can’t go much lower, then bond market capital gains are limited. The same logic applies in other asset categories. We have had our Biblical seven years of fat. We must look forward, almost by mathematical necessity, to seven figurative years of leaner: Bonds – 3% to 4% at best, stocks – 5% to 6% on the outside.

 

That may not be enough for your retirement or your kid’s college education. It certainly isn’t for many private and public pension funds that still have a fairy tale belief in an average 7% to 8% return for the next 10 to 20 years! What do you do?”

Bonus:  Saving Investors From Themselves by Jason Zweig via WSJ

“I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.

 

That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good."


 “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” JP Getty.

Have a great weekend.