In an extraordinary week that saw Donald Trump anointed as the Republican nominee for president with a genuine chance at winning the November election, and Roger Ailes kicked out of FOX News for allegedly sexually harassing one of the women on which he built his conservative infotainment empire, we also witnessed a far darker event that has become all too ordinary: a mass shooting at a Munich shopping mall that killed nine and injured more than 16 innocent civilians, mostly teenagers.
Markets, of course, were unfazed by all of these signs of genuine upheaval in the political and media status quo as well as growing threats to public safety.
And frankly, until somebody launches a political attack that throws central bankers off their current course, it appears that little will dissuade investors from voting with their pocketbooks – and that is an extremely dangerous prospect because their pocketbooks are not using their heads.
If investors smartened up, they’d see these events for what they are…
The “Market Heroin” Re-Up Will Be Delayed
Last week, central banks failed to deliver on hopes and prayers to infuse more monetary heroin into the financial system.
Markets are conditioned to view such disappointments as temporary lapses. Both the Bank of Japan and European Central Bank stood pat rather than accelerate their efforts to drive their currencies and economies into oblivion.
The Wall Street Journal also reported that Fed officials, who long ago gave fecklessness a bad name, are starting to feel more positively about the economy and more confident they can raise interest rates at least once this year.
Wow – let’s all take a deep breath and admire the lion-hearted courage such a move would signal from the former tenured economics professors whose intellectual follies are destroying the fabric and vitality of our economy.
When the Fed meets this week, we know with near-100% certainty (nothing is 100% certain) they aren’t going to do anything other than flap their botox-infused lips and babble incoherently about what they aren’t going to do until someone puts a gun to their heads and forces them to man up and lift their boots off the neck of the economy.
The Fed Funds market is pricing in the odds of a rate hike this year at less than 50% and doesn’t see better than even odds of the Fed doing anything until March 2017.
I agree with these traders who are battling it out in the pits every day. They’ve looked into the whites of the eyes of the Fed governors, and seen the abject fear and trembling.
Nonetheless, the stock market marched onward and upward last week, insuring that any correction or worse will be even more painful for investors.
Markets Are Outrageously Expensive for the Earnings You Get
The Dow Jones Industrial Average added another 54 points or 0.3% to close at 18,570.85, just below its record high of 18,595.03. The S&P 500 added 13 points or 0.6% to finish the week at a new high of 2175.03. The Nasdaq Composite Index jumped 1.4% to 5100.16.
All three indices are now trading at extremely expensive levels that are not justified by four consecutive quarters of declining earnings, revenues and cash flows.
The only thing holding the market up is the cult-like belief in central banks. Investors have taken a deep gulp of the Kool-Aid.
Members of another cult – the Cult of Tesla – were treated to the latest installment of Elon Musk’ grand plan for Tesla Motors, Inc. (Nasdaq: TSLA) and SolarCity Corp. (Nasdaq: SCTY), which Mr. Musk advertised in another in a series of illegal, market-manipulating tweets that are making a mockery of the SEC’s authority.
While cult-members waited with bated breath for the latest pronouncement from Ayatollah Musk, the plan he published was, to put it mildly, underwhelming.
In fact, it was little more than you would expect from a bright applicant to college trying to impress the admissions committee with a clever plan for a futuristic business.
What it neglected to mention is that Tesla cannot possibly come close to meeting its unrealistic production goals, that it is losing huge amounts of money in the process, that its proposed merger with Solar City, a business with which it has little synergy, is an obvious attempt to bail out a bad investment by Mr. Musk while loading Tesla’s balance sheet and investors with billions of dollars of debt and losses, and that the fantasies of even one of the brightest entrepreneurial minds in history are insufficient to overcome the harsh realities of business.
Tesla recently terminated its hare-brained scheme to buy back every car it sells after three years, no doubt realizing that it was burying its balance sheet in another obligation it won’t be able to meet.
The Tesla story is going to start coming apart any day and frankly only the complicit mainstream media starving to celebrate green energy stands between Tesla’s current ridiculous stock price and reality.
Tesla stock remains a screaming “Short!” and Tesla investors continue to exhibit an astounding ability to delude themselves. You can read my full TSLA report, and get my recommendations, here.
Stock market investors are not the only ones living in outer space.
Chasing Yield on the Road to Hell
Investors have been pouring money into junk bond and emerging market bond funds despite the fact that they offer low yield and high risk.
Wall Street Journal columnist Jason Zweig finally gave investors some advice befitting the name of his column (The Intelligent Investor) to warn them that their move into these funds is ill-advised.
Since June 30, investors poured $1.2 billion into emerging market bond exchange-traded funds (ETFs) and $2.8 billion into junk bond ETFs.
Following the adage that “in the kingdom of the blind, the one-eyed man is king,” investors are viewing the 3.8% average yield on emerging market bond ETFs and 5.5% on high yield ETFs as generous compared to the less than 1.6% yield on 10-year Treasuries and less than 2% yield on investment grade bonds.
The problem with chasing these pathetic yields is that they will render everyone blind before the next credit cycle is done, because emerging market and high yield bonds are extremely risky.
Furthermore, on a real (i.e. inflation-adjusted) basis these yields are barely positive even if you use phony government inflation data and negative if you use real world prices as your reference point.
Even worse, if you risk-adjust these returns, they are well in negative territory.
Martin Fridson, the dean of high yield analysts and chief investment officer atLehmann Livian Fridson Advisors in New York, warns that high yield bonds are at “unquestionably extreme levels of valuation” based on his analysis of their risk relative to U.S. Treasuries.
According to Mr. Fridson’s analysis, junk bonds have only been this overvalued in nine months over the last two decades.
The largest high-yield ETFs are the iShares iBoxx High Yield Corp Bond ETF(NYSE Arca: HYG), and the SPDR Barclays Capital High Yield Bond ETF (NYSE Arca: JNK). The largest emerging market ETF by assets under management is the iShares MSCI Emerging Markets ETF (NYSE Arca: EEM).
Rather than pouring money into these vehicles, investors should be running the other way, if not shorting. (As always, I recommend puts as a less risky way to play the short side.) You can lose years of returns in the blink of an eye in a credit sell-off.