Financial Intelligence Report 4/23/2017
Why Nothing Matters
Us Alternative type newsy folks are a strange breed. We're not looking to shock anyone, we're not trying to con anyone, we're simply trying to spread the truth about things. Well, because of the Main Stream media and their agendas, the fact is that most people wouldn't know the truth if they heard it. Why? It would sound so outlandish they couldn't accept it as fact. I encounter that reaction almost daily.
That's why when we get some corroboration from others in our space on a topic we've been hitting on, we get a chance to smile broadly and feel good about things. For me this really hit home on Friday with a piece that Zero Hedge put up. Why? Because for years I've been telling anyone that would listen that this market is rigged. That it's rising ONLY because of Central banks buying stocks, Central banks keeping zero rates "forcing" people to buy risk assets, encouraging companies to borrow money and use that very money to buy up their own stocks. That's it folks. Not fundamentals, not organic market growth... just Central bankers.
It's quite funny really. Week after week we say things that go 100% against the main stream of thinking when it comes to the market. You all know the tired lines...they trot these guys out on Financial TV every day telling us how wonderful things are, and that earnings are improving and blah blah blah. Meanwhile in the real world, the Atlanta Fed lowers its GDP estimates from + 2% to + 0.4%. Retails sales fall, housing starts fall....but the talking heads still tell us that the "market" is up on wonderful things. Their favorite line is always "the bottom line is that the market moves on earnings".
No. It doesn't. Individual stocks move on earnings... for a short period of time. But the "market?" That moves on Central bank intervention. However they can't admit that to the public, or 50 years worth of "financial advisor" BS, would fly right out the window. Can you imagine the conversation? Patty goes to her advisor and asks "should I invest in XYZ, it seems they might have a case for growing earnings?" and the advisor says "Earnings? Who gives a crap about earnings, look at Caterpillar! 50 months of continuing lower sales. Or how about Tesla? They don't make a dime, in fact they're burning a billion dollars a year. Or how about Amazon? They're almost 1000 dollars a share, and only made money once in 20 years! No, don't buy earnings, buy the indexes or the "hot stocks".
Could you imagine that conversation being broadcast as say a TV commercial?? You'll NEVER hear it, yet truer words were never spoken.
So, what was it that got me all smiles on Friday? Well as I said, there was a post at Zero Hedge, called...why nothing matters. This is a topic I harp on almost daily.
Take Thursday for example. We've got false flag attacks in Syria, we've got N. Korea bumping chests with us, we've got Goldman Sachs missing estimates, we've got poor retail sales, we've got a Shaky French Election coming, we've got terrorist killings, we've got a ton of completely nasty things....and the DOW gained 200 points out of the clear blue. Was there really any "organic, fundamental reason for that gain? Hell no! But up we went.
Let's take the only quote we need out of the article...
A quick, if familiar, observation to start the day courtesy of Bank of America which in the latest overnight note from Michael Hartnett notes that central banks (ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, "the largest CB buying on record."
As Hartnett notes, the "Liquidity Supernova is the best explanation why global stocks & bonds both annualizing double-digit gains YTD despite Trump, Le Pen, China, macro..."
Now, he's only looking at verifiable numbers out of the European Central bank and the bank of Japan. See there's no verifiable numbers out of OUR central bank as far as their stock buying goes, because they do it through proxy outfits like Citadel. But you can rest assured that they too have very special accounts that buy up futures and stocks when the spirit moves them. How do I know this, instead of just speculating or tin foil hatting? Easy.
One year after the great stock market crash of 1987, US President Ronald Reagan launched the "Working Group on Financial Markets." The idea was for this group to come up with ways to spot problems before a crash occurs. Conspiracy theorists believe, however, that the real task of this committee is to protect against a renewed slump in the stock market. In the jargon of Wall Street, the working group is known as the "Plunge Protection Team."
However, as Dr. Pippa Malmgren - a former member of the U.S. President's Working Group on Financial Markets - says...it is not conspiracy theory, it is conspiracy fact: "there's no price discovery anymore by the market... governments impose prices on the market."
When you have a group designed to keep order in markets, and one of that group admits that governments set the prices, and then you see day after day where out of the clear blue, a soggy market gets turned around with multi billion dollar futures orders, from an "unnamed" account... go ahead, you tell me that our Fed isn't buying just as much or more as the ECB, and the BOJ. They are.
But it is their very interventions that make this market so damned dangerous. I've screamed for years now that the market is over priced, over extended, over..everything. Yet it holds up and pushes higher. Why? Because the plunge patrol makes it so. Here's how...
The SPY is the ETF proxy for the S&P. If someone comes in and buys up a billion dollars worth of SPY futures, in a "tail wag the dog" scenario, the arbitrage guys instantly go to work closing the gap between the higher futures, and the lower index. To do it, they buy the SPY. Well the S&P is 500 stocks, and the SPY is a representative index of those 500 stocks. Thus, the SPY ETF actually has to put "X" money into all those components ( weighted) to move the index.
Now here's the rub. Let's suppose you're the XYZ company and you stink. Your stock has done a lot of nothing because your sales stink, your margins are poor and you're just getting by. Well if you're in the S&P 500, when that big order trickles through the system, YOUR stock is going to get bought right along with the "amazing 4" like Amazon.
Now, if a Central bank can Print money out of thin air, and use leverage to buy S&P futures ( and the index itself) and some amount of that money goes to every stock in the index...those stocks will rise. NOT because of rising sales. Not because of cost cutting. Not because of better management. No...they'll rise because an entity with Bottomless pockets that prints money has "forced" them up.
So you as an investor get stymied. You look at this stock trading at 22, 23, 25 times earnings and shake your head. Why is this stock so expensive, you ask?? But I have a better question. If the Central Bank hadn't done its stock buying spree...what is the REAL PRICE of XYZ? It might truly be "worth" only half of where it's at. That's a problem.
Why is that a problem? Well, if XYZ isn't way way up on its own merits...what happens if the Central banks stop buying? Can XYZ support itself at the high price? No. XYZ will fall. But here's another question...What if the Central banks start to SELL their holdings? That my friends would be the rug pull of the century. If the Fed, the ECB, and the BOJ started selling their assets, prices would fall by more than 60%.
YOUR fate is in the hands of our world's Central banks. I don't say that lightly. Everything you know is connected to the market. Got a pension? A portion is in the market. Got an insurance policy? That company has money in the market. Got a 401K? You're probably fully invested. Got a sovereign wealth fund for your nation? 50% of it is in stocks. On and on it goes.
The CB's know this. They know that the ONLY reason we're not in a horribly deep recession/depression is because they have become the buyers of last resort. So many financial items are cross linked via derivatives to the market, that they can't let it fall, or...the wheels fly off the global economy.
The Central Banks didn't buy 1 TRILLION worth of financial assets because they thought they were good investments. They bought them to keep the world out of depression. That is why the market has been able to ignore war, Syria, terror, Korea, falling PMI's, falling retail sales, etc., etc. etc.
This is why some two dozen hedge funds have shut down. This is why some very bright money managers have done squat for years. This is why nothing makes sense. They're investing like the market is still free. I assure you, Mr. Fisher assured you, Miss Malmgren assured you... it is not. It's supported, and rigged to the upside. How long that plays out, is anyone's guess. (And the problem.) They could yank the rug tomorrow, or continue this ponzi until it collapses on itself.
Quite the world we live in folks. Every day is a new adventure in market land. Brought to you by money printing CB's with no regard for price discovery, earnings or anything else remotely fundamental. Ever get the feeling this might not end well? Yeah, me too.
The Market...
On Thursday "it" happened. What happened? The very same thing that happened last Monday. A totally random, out of the blue, based on nothing romp for a couple hundred DOW points higher. It had everyone oohing and aaahing and there was much high fiving and joy at the stock exchange.
On Friday, they did their best to "keep" the lions share of that big up day, and for the most part they pulled it off. When the bell rang to end out the day, we had lost just 30 DOW points, and 7 on the S&P. The 7 lost points on the S&P were indeed a tad bit more than I expected, but it wasn't horrific. However there's more to the story as you'll see below....
So, where do we go from here? Well that's a good question, because you're receiving this letter ahead of the election going on over in France. There's a ton of speculation about what global markets will do, based on who wins the first round of those elections.
The common thinking is that if Le Pen wins, the market might get soggy as she's in favor of leaving the EU and ending their insane migrant immigration nightmare. So, they think the markets might not like that outcome. However, didn't we hear that about the market if Trump was to win the election? We did and the day after the election, the DOW gained 300 points. So take common thinking with a grain of salt.
But there's more in play than just the French election. While we ended the day Friday with the DOW off just 30 points, that's a bit deceiving. Why? Because before the Trump people came out with an announcement about taxes, the DOW was down 100 points and the S&P was down 11. Then out of the blue, the Trump people came out and said that next week they were going to announce the biggest tax cut plan "maybe in history". Well everyone loves a tax cut, and right after that announcement we soared higher.
So, we have 1) the outcome of the French election and 2) the "possibility" of some announcement about an upcoming tax plan. How all this works out is anyone's guess at this moment. If I had to wager my guess, I'd say that "they" come in and push the market higher no matter who wins in France, and if Trump brings out some new improved miracle tax plan... ( Even if it can't work mathematically) they'll use that for even more gains.
Why? Did you read the commentary above? Central banks are in control. If they want up, we'll get "up" no matter who wins what or why. Since they've already bought 1 trillion worth of financial assets in just the first quarter... it doesn't sound like they're ready to let markets fall apart yet. So my guess is that they poke and prod this market to regain its 50 day moving averages and then trade "sideways" as we have for months now. Let's see if I'm right or all wet. I'll see you all on Wednesday.
AI
