Volume Paper Thin At Year's End

This is not unusual for the end of the year. I'm not trading with volume so paltry. Trading signals are unreliable and risky!

Probability of a Crash Increasing Exponentially

from Dr. John Hussman's market commentary earlier this week:

Here are two links and brief explanations of this acceleration phenomena that is depicted in this graph:
This first link is to a paper on the website of the National Bureau of Economic Research. The NBER is the group that OFFICIALLY declares when a recession begins and ends. In their paper, they explain the phenomenon that as a bubble matures, it ACCELERATES higher, and why that contributes to the ensuing crash. Here is a quote that summarizes the paper:

“The probability that the bubble ends may well be a function of how long the bubble has lasted, or of how far the price is from market fundamentals. If the probability of a crash increases for example, the price, in the event the crash does not take place, will have to increase faster, not only to compensate for the increased probability of a fall, but also to compensate for the large risk involved in holding the asset.”

And here is the paper (pdf format). The paper is very academic and arcane, with lots of complex math, so unless you are a math whiz, don't expect to be able to understand all of it:

http://www.nber.org/papers/w09 45.pdf

 This second link is to Dr. John Hussman's market commentary from earlier this week:

http://www.hussmanfunds.com/wm c/wmc131230.htm

Here is a quick summary of this rising risk of a crash, which I've taken from Hussman's most recent market commentary:

“As the price variation speeds up, the no-arbitrage condition, together with rational expectations, then implies that there must be an underlying risk, not yet revealed in the price dynamics, which justifies this apparent free ride and free lunch. The fundamental logic here is that the no-arbitrage condition, together with rational expectations, automatically implies a dramatic increase of a risk looming ahead each time the price appreciates significantly, such as in a speculative frenzy or in a bubble. This is the conclusion that rational traders will reach. This phenomenon can be summarized by the following proverb applied to an accelerating bullish market: ‘It’s too good to be true.’” Didier Sornette, Why Stock Markets Crash, 2003

“Our positions are always built on observable evidence rather than scenarios. We already have sufficient evidence to be fully defensive. Only later will we read in the headlines exactly why this defensive position was warranted.” John Hussman, PhD 12/23/2013 

 "My guess is that the present speculative advance may have a few percent to run – I’ll be particularly concerned if the market does so in a rapid, uncorrected manner in the next couple of weeks, which could suggest crash probabilities approaching 100% based on the sort of analysis above." John Hussman, PhD, 12/23/2013

The Statistical Probability of a Stock Market Crash

This from Dr. John Hussman:

The probability of a stock market crash is increasing exponentially in the past 30 days.

Dow Stocks Up Another 70 Points

Stocks Euphoric!

10-Year Hits 3%!

Higher debt service costs are likely as long as the Fed continues to taper.

Note to a Friend About Current State of Financial Markets

Following is the text of an email I sent earlier today:

I hope you and your family had a great Christmas!

I read several articles on the Kiyosaki website. I am a fan of Robert Kiyosaki, and I've read 2-3 of his books (just not recently)! I like this quote in particular from his website, written by Richard Duncan:
"The press has attributed the Fed’s decision to taper to an improvement in the outlook for the economy. I don’t believe that is the correct explanation. The recovery is still too weak and uncertain to justify tapering on those grounds. In my opinion, the real reason is to prevent excess liquidity from creating a new, destabilizing asset price bubble in stocks and property."

But stocks continue the ramp-up into record territory. The futures are higher today (Dec 26), and are set to hit the 50th all-time record high this year -- again, if stocks remain at these levels by the end of the day today. But the volume is razor thin, even for holiday trading (thin trading is typical for holidays, but this is exceptional even for a holiday)!

I also perused Richard Duncan's economics website, and saved it. He's very sharp, in my opinion. I then did some research on Mr. Duncan. He has been interviewed numerous times in the media. He has also written some best-selling books. I then remembered having seen him in a very lengthy interview several months ago, which I found on Youtube and watched again. He had just released his new book titled The New Depression in early 2012. He said that due to excessive debt over the past several decades to fuel domestic consumption, we have created bubble upon bubble, and that bubble will eventually collapse in a depression that he says will last for "generations" (HIS word, not mine).

I also read some of the reviews of Mr. Duncan's book on Amazon.com. There were two reviews that were extensive and were several pages long. You can read them there if you want, but be forewarned that they were quite lengthy! They were some of the most expansive reviews I've ever read on Amazon. They must have taken hours to write. After reading them, I decided that I didn't need to buy Duncan's book because I knew all the salient points in them.

Two of the lengthier reviews critiqued Duncan's proposed "solution" to our debt crisis. In the book, he proposes that the US government borrow even MORE, go into even deeper debt, and "invest" in advanced technologies in alternative energies, nanotechnology, etc. He said that he believes that if the government does this, it can ensure that the US "empire" will endure another century. So his solution is even MORE government debt and government programs in a bet that we can perpetuate our technology edge for the next century. The lengthy reviews were skeptical, but fair.

Over the past year, I've read at least five books that are dedicated, either in whole or in part, to describing asset bubbles and their characteristics. One of them was so arcane that I had to borrow it from the BYU library, where it had only been checked out 3 previous times in 10 years. I've taken notes of some of the characteristics of what constitutes bubbles. What we are seeing now in stocks manifests every single characteristic of a bubble that I've read. Attached is a chart that Dr. John Hussman published this week (the one with the white background) . It shows the current stock market, and is literally a textbook example of what an asset bubble looks like. In fact, in the advanced stages of what he called a log-periodic Sornette-style bubble (Swiss academic Didier Sornette was the author of the book I borrowed from the BYU library, which I heard about from Hussman), the asset bubble goes parabolic as investors not only increase their bets without abandon, but they even go into DEBT to do it. Margin debt is now at record levels, which Hussman also mentioned this week in his online commentary on his website. Margin debt not only amplifies the gains on the way up, but the losses to investors also amplify the speed of decline on the way down. Crashes occur much faster than rallies for this reason. Hussman reminds us that we have already seen TWO stock market crashes in the past ten years (2003 and 2007-2008). But he also says that stocks may increase an additional 5% before they crash again. That would put the S&P 500 at about 1920. It's trading on my futures charts at 1832 as I type this. We could reach 1920 over the next 90 days.

In Hussman's chart, note that as the asset bubble matures, the asset goes increasingly parabolic -- straight up! There are no more pull-backs or retracements whatsoever. Stocks, for example, have barely looked back since mid-2012, since the fed began QE-Infinity! On his chart, the red line is what a bubble historically looks like, and the blue line is the current S&P 500. They are virtually identical!

On my other chart that I've attached (black background), which is a screen capture from my own (monthly) charts on my PC from one week ago (and stocks have gone even higher since), you'll also see that stocks are no longer even pulling back to the exponential moving average (light blue line). They are even trading much of the time above the purple line, which is the upper Bollinger Band, which represents two standard deviations (a chance to use your statistics from biz school) outside the norm. We're now close to THREE standard deviations!

I don't try to forecast the future. I have a saying I made up: "Predicting the future is for prophets, not profits". I don't know what the future holds. I trade based upon what the charts and the market tell me, NOT what prognosticators say. Prognosticators have a historically poor track record! BUT -- I know a bubble when I see one. All it will take is another "Lehman Bros moment" that triggers a sudden collapse in confidence, and the next crash will ensue (John Mauldin wrote about this extensively in his book Endgame). I have no idea what that trigger event will be. But I am certain it will come. And the more euphoric Wall St becomes, and the more they ignore the red flags, the more likely that event will occur with immensely cataclysmic consequences.

One small note: public sentiment (measured by "consumer confidence" indicators), tends to mirror the stock market -- NOT vice versa! (see 2 Ne 28:21)

Interestingly, over the past few months, I've read information from some of Pres. Obama's advisers that indicates that they INTEND to bring "fiscal collapse" (their term, not mine) to the US government. Remember "never let a crisis go to waste"? If you don't have a crisis, you CREATE one! That reminds me of what the secret combinations did in 3 Ne 7! I'll share with you those details next time we have a chance to get together to chat.

The market just opened, and I need to go. There is a new book out by John Mauldin, called Code Red. I asked for the local library to get it so I can read it. They said it will arrive after Jan 1st (new budget). Mauldin, after being quite optimistic over the past few years, has suddenly turned somewhat pessimistic over the course of 2013. I want to read his book to learn why. His last book was about what he and others have termed "the debt supercycle" which is coming to an end soon. Duncan also expressed his worries about the same phenom. I use the term The Mother of All Bubbles to refer to US government debt. When that bubble pops, we will have a depression that Duncan says will likely last for DECADES, even generations. That's his opinion! Wow!

One last thing and then I MUST go:
re: deflation
There hasn't been broad-based deflation since the Fed was created. The dollar has depreciated 98% since then. (By the way, the Fed's 100th anniversary was Dec 23d -- the same day as Joseph Smith's birthday. One was a great day in history, and the other was a day of infamy!) I'm convinced that inflation is a better bet than deflation. We HAVE seen some deflation, most notably in housing, but the deflation was from BUBBLE levels. We all know that food and energy inflation are MORE likely, not less. Notwithstanding the gas price deflation you mentioned, the price of gas is still almost DOUBLE the price of gasoline when Obama took office. For this time of year (there are seasonal aspects to crude/gas prices), gas prices are unusually high.

Well, time to go to work. Let's keep up the dialogue. I appreciate having someone with your knowledge and background to palaver with.

Keep up the great work! I appreciate your example and ethic!

God bless!

Steve

Session Ends Higher, Another New Record

Dow finished up another 63 points today!

And Stocks Hit New Record Highs

...for the 49th time this year!

Mixed Messages In Today's Headlines

Meanwhile, stocks are hitting fresh all-time record highs.

Holiday shopping is weak this year, but that doesn't appear to have dampened Wall St.'s euphoric love of stocks.

And mortgage loan applications just sunk to a 13-year low, with refinance loan applications hitting a 5-year nadir.

But on the other hand, durable goods orders showed a healthy increase:

But there is a dark side to this news! The government used that old tool that we have all come to love -- those "seasonal adjustments" -- to inflate the durable goods figures! Furthermore, Durables Goods ex-transports was DOWN by -0.5% instead of rising by 1.2%.

Consumer Sentiment Is Up, Even As Consumer SAVINGS Slides

Bubble Acceleration Noted

This is the monthly chart of the current S&P 500 stock index. This is literally a textbook case of what a bubble looks like. There are many characteristics of a bubble, and I literally can't think of a single one that this current market circumstance does NOT manifest. 

Note in this chart the light blue line, which represents the 8-period EXPONENTIAL moving average. Take note also that as stocks accelerate higher and higher, faster and faster, they are leaving even this "exponential" acceleration far behind. Despite that stocks are already valued at excessive levels from a historical perspective, investors are willing to pay even MORE for them. Is that rational behavior?
Last week, Dr. John Hussman did analysis on his website that indicated that corporate earnings are now beginning to stagnate and are likely over coming quarters to collapse back to more historically normal levels that would be about 40% below today's levels. But even still, speculators are paying even higher prices for stocks, driving valuations beyond even these historical levels. Stocks are, after all, the price an investor pays for a stream of earnings extending into the future. If an investor pays too much for them, then their YIELD on those earnings will be poor. Dr. Hussman has calculated that at earnings levels of the past few months, an investor's yield for the next ten years, based upon historical patterns, will likely be near ZERO. Here is what Dr. Hussman said today about the current bubble market:
"Regardless of last week’s slight tapering of the Federal Reserve’s policy of quantitative easing, speculators appear intent on completing the same bubble pattern that has attended a score of previous financial bubbles in equity markets, commodities, and other assets throughout history and across the globe." (emphasis mine)
Something else that is noteworthy in the above chart:
In the past, even in this overbullish market, stocks have traded between the light blue line (the exponential moving average), and the upper Bollinger Band, which represents, from a statistical perspective, TWO standard deviations outside the norm. In the past few months, stocks haven't even dropped back to the light blue line. Stocks barely made it half way back to that level. This bubble is accelerating even faster to stratospheric levels, only guaranteeing that when reality finally can no longer be denied, this house of cards will also follow historical patterns of what a popping bubble looks like.
As further evidence of how overbought this market is, note also that the last time stocks even closed below the blue line was in mid-2012 -- a year and a half ago! Stocks have barely even looked back since then! And this, despite already stratospheric price levels!

OVERNIGHT
This chart following shows the acceleration of stocks during the overnight sessions in Asia and Europe.

This shows the Dow futures over the past few hours. Stocks are already 57 points higher than last Friday's close. This stock market bubble is advancing at an accelerating pace. 

Stocks Continue Record-Setting Climb

Friday's relatively strong GDP reading sent stocks to new record highs, and Sunday evening, stocks set still another record.

Screw Lew: Treasury Secretary Jack Lew's Signature

Screw Lew! (To the censors, NO, that is NOT mature content!)

What an amazing resemblance. Can you distinguish between them?

Or is it screw LOOSE? Why would he do that? Is he trying to make a mockery of our fiat currency, which will be worthless any day now?

Stocks Close Higher By a Hair

...and all this, despite weaker data today! Just bubbly!

So despite the quadruple whammy today of bad economic news (housing starts DOWN, claims for new unemployment benefits UP, Caterpillar sales collapse, Philly Fed survey DOWN), Wall St traders want us to believe that stocks are worth MORE today than yesterday. They want us to believe that we are more prosperous than ever before in history! Are we living in an alternate universe now? Because I sure don't see it!

Quadruple Whammy of Bad Economic News...

...even as stocks closed at new all-time record highs yesterday. Something is wrong with this picture! A great reset is coming! Stocks are barely in the red.
Here are the headlines this morning.

It's The Taper... That Isn't!

It's a "non-taper" taper! 

Fed reveals that it will ease off it's debt monetization by $10 billion/month, but will continue low interest rates indefinitely. In some ways, this is even more dovish that previous statements were. Wall St is thrilled! The bubble builds!

• *FED TAPERS QE TO $75 BLN MONTHLY PACE, STARTING IN JANUARY
• *FED SAYS `FURTHER MEASURED STEPS' POSSIBLE ON TAPERING
• *FED: EXCEPTIONALLY LOW RATES UNTIL JOBLESS FALLS WELL PAST 6.5%

Market Snapshot -- In Holding Pattern for Fed Decision

This image from Yahoo Finance provides a good summary of today's market action on the eve of another Fed monetary policy statement tomorrow.

Here's the same perspective from Fox Business:

Best Political Cartoon In a Long Time

Nat Gas Futures Plunge On Better Weather

Nat gas is today's big mover.

from Business Recorder:
"NEW YORK: U.S. natural gas futures slid more than 2 percent in early trading on Monday on forecasts for reduced heating demand this week and on profit-taking after prices reached seven-month highs last week.
"'Natural gas futures are receding this morning on a combination of a round of profit-taking selling motivated by what looks like a moderating weather pattern working its way across the country over the next week or so,' Energy Management Institute partner Dominick Chirichella said in a report."

Technical Bounce, China Worrisome, Europe Hopeful!

China is causing worry!
Seeking Alpha explains today's strange market behavior:

"...the sell-off in S&P futures came on the heels of disappointing China Manufacturing data. Almost in lock step, whether it was a nervous trader or a more concerted effort, and in conjunction with the tensions on the Street about the FOMC meeting, they reacted harshly to that China data.
"Conversely, Europe had positive news on the same front, and that is what allowed futures to recover, but the same major concern still exists. The FOMC is clearly front and center, concerns about tapering are on everyone's mind, and analysis al have an opinion. Some think turmoil could lie ahead before the year's end, but I prefer to pay attention to one simple thing, the technicals.
"The near and midterm technicals told me to expect the bounce we are getting today, but the longer term technicals tell me that the major markets, the S&P 500 (SPY), Dow Jones Industrial Average (DIA), NASDAQ (QQQ), and Russell 2000 (IWM), have not yet tested longer term support."

And their assessment going forward:
"Therefore, even with this nice bounce, our combined analysis warns us that it can be short lived, and the market can turn lower and officially test longer term support levels. Our rules tell us to short near resistance levels and buy near support levels. That is therefore what we intend to do as this year comes to an end."

Where Are Stocks "Beaten Down"?

BEATEN DOWN?
This shows the stock market today, with a tiny little red "candlestick" showing the month of December at the top right. I have highlighted it with a yellow arrow. It would be hard to see it at all if I didn't. Does that look "beaten down" to you? That tiny little red mark, if I had left all the technical indicators on the chart (I removed them so that this "beaten down" red mark could be seen more easily), would be close to the upper Bollinger Band, which indicates two statistical standard deviations outside of normal market activity.

I'm still struggling to find that "beaten down" part on this chart.

 So when the media tell you that stocks were "beaten down", show them this chart and ask them WHERE the "beaten down" part is.

It IS true that until today, stocks had closed lower 9 of the past 12 days. But the losses were relatively small, as evidenced by this chart, while the few days in the green showed much higher gains. One of those 3 "up" days had a gain of 200 points. That is another sign of the bubbly overbullishness of this market.

Interestingly, in his very arcane book (I had to borrow it from a university library, where only 3 other people had checked it out in 10 years), "Why Stock Markets Crash" by Swiss academic Didier Sornette, he mentions that one characteristic of a bubble is that the news media become cheerleaders for the bubble, buying into and promoting all the hype! They become tools in ramping the bubble even higher.

But ask yourself this: If the economy is doing so well, why has the Fed been using "unprecedented measures" (Bernanke's own term for all this QE) for FIVE YEARS? Why are we still on life support if the market is so strong? Does that make sense to you?

If these "unprecedented measures" are so effective, why are they still using them five years later? Does that really suggest that they have been INeffective instead? (In which case, if they DON'T work, it would be logical to eliminate them instead.)How much further will this bubble rise? I DON'T KNOW!

But we would be wise to be wary, because the classic pin prick of a bubble usually comes in the form of some news event that typically wouldn't be all that significant, but that causes an abrupt and precipitous loss of confidence that sends markets literally crashing.

If you look at market crashes, they tend to collapse much more rapidly than they rose. If they were rising at a 30 or 45 degree angle, then they tend to crash at a much sharper 75 degree angle.

All it takes is one small event that causes an abrupt awakening, and everyone runs for the exit doors at once. That is, in the words of Sornette, "why stock markets crash".

And by the way, the attitude held by investors that they will be the first ones to find an "exit" chair when the music stops playing, is another classic characteristic of a bubble. All the players on Wall St believe that THEY will be one of the fortunate few that gets out the emergency exit door when the trigger event occurs. That is what causes the mad and hysterical rush for the doors -- that one seat in the game of musical chairs -- when the music stops and the insane clamor for safety begins. And that is also why it is Main St investors (on Wall St they call them "retail investors) that get slaughtered and suffer the greatest losses when bubbles pop. Main St investors tend to hang on in the hopes that the market will turn around and redeem them, so they don't throw in the towel until well after their losses have produced staggering losses. And Wall St counts on continued buying by Main St to allow them (Wall St insiders) to get OUT the exit doors first. They depend on Main St continuing to hang on while they literally "take their money and run" for the exit doors.

Note also that in this poor little "beaten down" stock market chart, stocks have barely looked backward since mid-2012. There hasn't been a single month of downward market correction since May 2012. Even the few months that closed in the red were still part of a trend higher. So in the face of economic weakness, stocks have continued an unabated rally without looking back since then. Isn't that a classic description of a bubble?

Empire Fed Misses Expectations, But Stocks Leap Still Higher

This is a classic characteristic of a Fed-induced bubble. The Fed's own Empire State Index fell short of expectations, but stocks leaped higher on the news. Stocks left bad news in Asian markets in their tracks, and used some good news in Europe to leap higher still. Now, this news is sending stocks into the rafters in expectation that the Fed is less likely to reduce its debt monetization scheme on Wednesday. When all news is perceived as good news, and no news introduces thoughts of risk, then all news leads to higher prices. When all thought of proper pricing is discarded, and even the slightest dip sends investors scrambling to buy more, this is textbook bubble mentality! The Dow is up more than 130 points in just the first hour of trading!

Note the disparity divergence between this headline (above) and this one (below):

And here is the market reaction in the charts. Last night's sharp losses are already forgotten:

Bizarre: Stock Futures Erase All Losses, Leap Higher

Strange phenomenon, suggests how fragile and overbullish these market really are!

Stock Futures Plunge In Asian Trading

This occurred without much news. Someone wanted to exit in a hurry!

Indexes Closely Slightly Higher, Week Lower

Tanking Stocks

And volatility is spiking at the same time!

Dow down about 140 at this moment.

Is This What a Taper Tantrum Looks Like?

Dow down 100 points now! These are the most distorted markets I've seen!

Unconvinced by Budget Deal

Running for the exits before end of 2013

More taper rumors. Is this the beginning of another taper tantrum?

The beginning of a taper tantrum?

What? Wall St Suddenly Doesn't Like Spending MORE?

Isn't "easing spending cuts", as shown in this Bloomberg headline this morning, just another way of saying that they are going to spend MORE? Why the parsing of words? Why the games of semantics, just to tell us that they're kicking the can down the road again?

Key points in this budget "deal":
They restore $65 billion in spending cuts NOW!
They cut spending by $23 billion over ten YEARS!

Meanwhile, the US Treasury issued $409 billion of new debt in October alone -- in ONE MONTH!
Are these people insane? What kind of "grand deal" is that? It sounds like more of the same insane to me!

A Growing Cacophony of Voices Calling for a Fed Taper

Is this the reason stocks are showing weakness again, just two days after a 200-point Dow rally? There are more and more voices, even on Wall St, calling for the Fed to begin tapering it's debt monetization scheme at the Fed's meeting next week.

Inventory! The Dirty Little Devil in the GDP Details!

Stocks came to within a hair's breadth of another new all-time record high yesterday and throughout the night, but what Wall St seems to be shrugging off is that the recent stronger-than-expected GDP contains a real devil in the details. The recent GDP growth has been based all on inventory builds.

"...of the $534 billion rise in nominal GDP in the past year, a whopping 56% of this is due to nothing else but inventory hoarding.

"The problem with inventory hoarding, however, is that at some point it will have to be "unhoarded." Which is why expect many downward revisions to future GDP as this inventory overhang has to be destocked."

And when that "destocking" takes place in future quarters, it must be accomplished with REDUCED profit margins and REDUCED payroll. This means that we are robbing the future's GDP Peter, to pay today's GDP Paul. In other words, unless the American people suddenly find a strong and compelling urge to buy, buy, BUY, future quarters will be weak and there will be lay-offs in jobs.

So that dirty little devil in those GDP details forebodes disappointment ahead.

What's worse, economists over the past few days have now assessed that last Friday's surge in consumer confidence wasn't really an IMPROVEMENT at all. It was just a return to a more normal level following the the temporary shutting down of part of the government in October. It wasn't a surge in sentiment. It was just a return to the same level of malaise that has dominated for the past few years.

And there is a growing cacophony of voices -- even on Wall St -- calling for the Fed to begin tapering its debt monetization scheme NOW! The Fed board meets next Tues and Wed, and will release a policy statement at the end of their Wed meeting.

Stocks Extend Climb

No more worries of a taper? Friday's jobs report was calculated to be just high enough to suggest growth, but not enough for the Fed to begin a taper of asset purchases.