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Friday, 11 April 2014

NASDAQ Heading For Worst Market Ever

Stocks derailed by high-flyers; worst day since 2011 for Nasdaq

U.S. stocks were slammed on Thursday, with high-flying technology and biotech shares leading the declines that had the Nasdaq Composite posting its worst session in more than two years.
"The market is coming to its senses in some of the high-flying tech names; it looked like there were some pretty hefty amounts being paid for the prospect of eventual earnings. Any of us in the market more than 15 years feels the hot breath on the backs of our necks when we see such high prices being paid for tech stocks," said Jerry Webman, chief economist at Oppenheimer Funds.
"One of the interesting ironies is when you see a shift towards stocks with pretty low prices and away from momentum that tends to happen when the underlying economy is still growing," Webman added.
The Nasdaq Composite declined as much as 141 points, and ended down 129.79 points, or 3.1 percent, at 4,054.11, its hardest hit since November of 2011.
Momentum, mass, velocity diagram

Momentum stocks including Tesla Motors FacebookGooglePriceline Group and declined, along with biotechnology companies, withPacific Biosciences of CaliforniaZogenix and ChemoCentryx among those hit.

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Do these markets smell like a sultry spring of 2000 or the crisp autumn air of 2008? Maybe we should go back to 1987? There is something in the air.

On the one hand, you have Faber calling  "all-in" for a crash, while on the other; Miller says there is not much out there to bring prices down. Hmm. Markets are  based on emotions not always rational. Market momentum is emotional energy conceptually pushing the mass of stocks to new levels.  Who knows when that emotional energy will suddenly turn south?  There is no realistic device to gauge that turn, so we are left with observing conditions that could  possibly change the "emotional or conceptual energy" dramatically.

Let's start with the FBI's crackdown on the "Flashers" who have come to represent about 50% of volumes on both New York and London exchanges. All the new scrutiny could put a damper on their activities. That, in short, translates into a lowering of energy levels. Strike one.

Now let's not just talk about emotional energy, but what about "real energy" ? Here we should keep in mind that we hit peak oil back in about 2005, and sooner or later we are going to see rapid declines in global production. That means less real energy in the economy that lowers activity, GDP, earnings and thus valuations. We are probably past peak global oil production. Strike two.

Then there's that pesky concept of mean reversion sitting on the bench. When it comes to the plate then present value mathematics could clobber values by 50% or more as interest rates rise. The smart money has been shifting out of stocks for months now. That smells. Strike three.

International events do not portray a sense that the global economy is recovering, at all. The Ukraine, Cyprus, Greece, Spain and many other are still out there with the possibility of imploding without notice. Yet, those are small big concerns as the really big problems are China and Japan that are wobbling due to high leverage, falling business activity, shaky real estate and shrinking trade balances. Now we are not talking about hiccups like say Portugal, Ireland or Italy - no rather, they are the second and third largest global economies. Yikes, that's Strike four!

And why could they becoming unglued - well, go back to oil and real energy noted above, then we can start to see scarcities, including raw materials restricting the growth of these nations  - that should also flow into emerging markets. Combine this with a highly inter-connected global banking system that has more aggregate credit leverage than in 2008 - oh my, only two words to come to mind ...Strike Five!  

From the outfield, this brief suggests that the mathematics, energy, activity risks, emerging physical scarcities and credit leverage are all running in the wrong direction, along with the so-called smart money. There are way too many strikes, so Faber's call looks sound. Just one problem; however, ...

... he appears to be overly optimistic!

Investors' Insights 
April 11, 2014 
7:00 am, EST


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