US stock market: Hope gives way to worry as stock-market investors reassess U.S.-China trade fight

Hope gives way to worry as stock-market investors reassess U.S.-China trade fight -

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US Economy: Dow closes down 450 points as Trump's ire rocks Amazon

Stocks fell sharply on the first trading day of the month and the quarter as a decline in Amazon shares put pressure on the broader tech sector Monday.

The Dow ended nearly 458 points lower after sinking more than 700 points, with Intel as the worst-performing stock in the index. The S&P 500 pulled back 2.2 percent and entered correction territory, with tech falling more than 3 percent. The index also dropped below its 200-day moving average, a key technical level. The Nasdaq dropped 2.7 percent, also entering a correction, as Amazon declined 5.2 percent.

"The market leaders are under pressure," said Marc Chaikin, the CEO of Chaikin Analytics. "It's a situation where the proven winners for the past few years are faltering." When that happens, "there is a negative psychological sense in the market."

Read more: Dow closes down 450 points as Trump's ire rocks Amazon

US Stock Market: Investors flee junk bonds in troubling signal for stock market - Jeff Cox

udging from the flow of money out of high-yield bonds, investors are getting increasingly leery of a market that continues to hover around record levels, despite a handful of rough trading sessions in November and a rocky start Friday.

Funds that track junk bonds saw $6.8 billion of outflows over the past week through Wednesday, according to Bank of America Merrill Lynch. That's the third-highest on record.

The sector is considered a key proxy for the stock market, with performance that has followed almost a perfect correlation with the S&P 500 in terms of direction. Bonds are normally thought as a safe-haven trade that benefits when stocks weaken, but high-yield represents a risk similar to equities.

The correlation in 2017 has varied: September was the high for the year at 76 percent, while June was just 42.4 percent, according to DataTrek Research. (100 percent would mean the assets move exactly in tandem.)

Read more: Investors flee junk bonds in troubling signal for stock market

Global Economy: Is it time to ‘just say no’ to the US stock market, the most overvalued in the world?- by Proinsias O'Mahony

A record number of fund managers believe global equities to be overvalued, with an overwhelming majority seeing the US market as the most overvalued in the world. Is it time to “just say no” to the S&P 500?

The “just say no” message refers to the title of a new white paper co-authored by high-profile GMO strategist James Montier. GMO, headed by iconic investor Jeremy Grantham, has $77 billion in assets under management and is famous for having predicted past market crises, such as the Japanese bubble that burst in 1989 as well as the 2000-02 dotcom implosion and the 2008 global financial crisis. 

The title of Montier’s latest paper sounds like an anti-drugs warning, and the content of the paper is similarly stark.

Those US gains have been largely driven by an expansion in profit margins and valuation multiples to historically lofty levels. Future gains, says Montier, require either that dividends and earnings start growing at a much faster pace – unlikely, as both are “remarkably stable” over time – or that valuation multiples and margins continue to expand. 

“The historical record for this assumption is quite thin, to put it kindly,” says Montier. Margins and multiples tend to revert to the mean over time, so buying US stocks “now requires a belief that ‘it’s different this time’ with respect to the valuations that people will put on stocks, and the margins that companies can command”. 

The S&P 500, Montier notes, has “trounced the competition” over the last seven years. It has risen 173 per cent, compared to just 71 per cent (in dollar terms) for the MSCI EAFE, the most widely-followed index tracking non-US developed markets. Emerging markets lag even further behind, rising just 30 per cent over the same period.

Still, while Montier’s bearish message may be an especially blunt one, he is far from being a lone voice on the subject of US valuations. Out of 20 valuation metrics tracked by Ned Davis Research, 16 suggest US stocks are extremely overvalued. As noted earlier, Merrill Lynch’s latest fund manager survey shows a record number see global equities as overvalued, with concerns largely centred on the US investment universe. 

The last time fund managers were nearly as concerned was back in the late 1990s. Goldman Sachs recently cautioned that 10-year returns have been negative or below historical norms 99 per cent of the time when valuations were as high as they are today. Vanguard founder John Bogle, who has spent his life preaching the buy-and-hold message, estimates the US market will be hard-pressed to deliver annualised returns of more than 2 per cent over the next decade. 

While there is broad agreement that US stocks are overvalued relative to history and that low future returns are likely, most observers agree valuation cannot be used as a timing tool. An expensive market is not necessarily ripe for a fall; it simply means future long-term returns are likely to be disappointing. Rather than selling, concerned commentators like Robert Shiller suggest investors rotate into non-US markets or underweight the US in their portfolio.

Read more: Is it time to ‘just say no’ to the US stock market?

US Stock Market: Wall Street’s Earnings Hopium - by David Stockman

This time IS different. Normally they don’t ring a bell at the top, but right now the bell couldn’t be any louder. Or clearer.

Indeed, anyone left in the casino needs a powerful hearing aid.

The record stock market made a record run during the Donald’s first 100 Days — a period in which the vaunted Trump Stimulus on which it is all depended has sunk into the Imperial City’s swamp…

Trump’s tax proposal amounted to a $7.5 trillion add-on to the nation’s crushing public debt over the coming decade. That means there is no possible GOP majority to pass it. It also included $6.5 trillion of tax relief to business and the top 5%. That means that Dems won’t touch it with a ten-foot pole, either.

The very idea that there is going to be smooth hand-off of the “stimulus” baton to a giant Trump tax cut is by now just ludicrous. Its persistence is evidence we’ve reached the stage in the bubble cycle where Wall Street stock pushers have already gone full George Orwell.

They are now claiming a deflating economy is bounding back and that soft earnings are blowing the lights out. That is to say, when the bubble reaches its manic peak, the lies and hopium become outright comical.

That was evident in the alleged “blow-out” earnings of bellwether stocks like Amazon last week, which were nothing of the kind. Actually, they stunk.

Likewise, I heard some knucklehead from Morgan Stanley on Bloomberg yesterday morning urging not to be troubled at all by the tiny 0.7% annualized first quarter GDP gain because it was all temporary and the economy would come bounding back at 3% + in the next quarter.

My goodness, Wall Street economists have been saying that for six years now. But the ballyhooed arrival of “escape velocity” has never happened — notwithstanding that we are supposedly recovering from the worst recession of the post-war period. The rebound should have been greater on a purely statistical basis alone.

In fact, real GDP for the last quarter was up 1.9% year-over-year (Y/Y). And that compared to a 1.6% Y/Y gain in Q1 2016… a 3.3% Y/Y for Q1 2015… and 1.6% for Q1 2014.

This hardly looks like a sustained breakout after each periodic lull.

So the latest Y/Y growth blip was actually a tad weaker than the average Y/Y rate during the previous six years (2011 thru 2016). That has averaged 2.1% — despite repeated assurances by the Morgan Stanleys that every bout of sluggish growth during that period was just “temporary.”

So what we got again in Q1 was more of the same low growth rut. There’s no evidence for an energetic, sustainable recovery that could possibly justify a 24X valuation multiple on the S&P 500 at month 95 of a weak recovery.

But no matter. The Wall Street earnings narrative has become so corrupted that there really isn’t any need at all for actual economic growth. It has literally become the case that “down” is the new “up.”

For instance, Amazon’s operating earnings actually fell during Q1. It reported an operating margin of 3.7% for Q1 2016. That figure was down to 2.8% during the quarter just completed.

Nevertheless, the Wall Street propaganda machine, which is pleased to call itself the financial press, gushed all the same:

While retailers continue to struggle and dead malls pile up in characterless suburbs across America, Amazon just keeps cashing in, as the e-commerce and media behemoth delivered first-quarter earnings that blew past expectations, sending its stock up 4% in after-hours trading.

It’s certainly true that retailers are struggling and dead malls pile up in characterless suburbs across America. (I covered the topic extensively in yesterday’s Daily Reckoning.)

And it’s true that Amazon is bringing down the entire house of retail cards.

What remains of the the brick-and-mortar industry is resorting to ever more desperate competitive responses.

But as the rally in Amazon stock certainly demonstrates, “down” is indeed the new “up.”

My point is not merely to expose the absurdity of Amazon’s valuation.

The point is that the casino is now so unhinged that the robo-machines added $12 billion to Amazon’s market cap in the face of stunning evidence that its earnings have vaporized entirely.

Amazon has become a profitless engine of retail mass destruction. Because the wild west casino enabled by the Fed has abolished honest price discovery and radically suppressed the cost of risk to the gamblers and structured finance speculators who operate there, Amazon has become egregiously overvalued.

So Amazon’s extreme valuation is just plain irrational exuberance having one more fling. Spasms like this $12 billion gain are absolutely reminiscent of final days before the tech collapse of April-May 2000.

In case I haven’t made myself clear: Amazon is not a profit-making enterprise in any meaningful sense of the word and its stock price measures nothing more than the raging speculative juices in the casino.

In an honest free market, real investors would never give a near one-half trillion dollar valuation to a business that refuses to make a profit, never pays a dividend and is a piker in the free cash flow department — that is, in the very thing that capitalist enterprises are born to produce.

But there is more. The Amazon rampage through the brick and mortar world of retail is not remotely a case of “creative destruction” where new technologies, innovative entrepreneurs and better mousetraps demolish the old and usher in the new to the benefit of rising output and higher standards of  living for all.
 
Au contraire. Amazon is not only hideously over-valued on the stock market. It is also an economic mutant that is destroying wealth and capitalist prosperity because of the perverted incentives for cancerous “growth” at any price that have been fostered by the Fed’s destructive regime of Bubble Finance.

 Read more: Wall Street’s Earnings Hopium - The Daily Reckoning

The head of the No. 1 investment bank in the world explains why Brexit, Trump, and everything else have been great for trading - by Matt Turner

A bunch of events in 2016 had the potential to send the market into a tailspin.

From the Brexit decision in June to the election of Donald Trump in November and the Italian vote against constitutional changes in December, there have been unexpected election results and breaks with the status quo.

And while these events spurred trading activity, they did not roil the market in the way that many had predicted. In recent weeks, the US stock market has regularly topped record highs, for example.

According to Daniel Pinto, the CEO of JPMorgan's giant investment bank, the events all triggered what has been called "good volatility." That is to say that trading has been continuous, trading volumes have been healthy, and markets have been liquid.

That kind of trading is "our business" and a "positive thing," Pinto said. Here's the relevant passage from the interview, which you can read in full here:

Turner: Brexit, the election of Trump, the Italian referendum maybe, they all seem to be breaks from the status quo. Everything is new. There's a new party in government in the US. The UK is leaving the EU. Who knows what is going to happen in Italy. The market suddenly has to make sense of a lot more new information. Does that create more volume going forward?

Pinto: Probably. The important thing is that the market functions rather than the events or nonevents. The important thing is that at the time an event happens, the market should continue providing liquidity. When asset managers or clients need to reposition their books, in whatever direction, the market liquidity is there at a certain price. Higher volumes and more volatility in a continuous market, where it doesn't gap, is a good thing. That's our business. That is a positive thing. The last two or three events were positive events because there was volatility in a market that was functioning.

Read more: The head of the No. 1 investment bank in the world explains why Brexit, Trump, and everything else have been great for trading