So let’s go backwards and reiterate all our reports of the past 6 months. In those reports, we stated that all the characteristics that showed up in advance of a top of importance were being put in place. We just did not know at what point in time that the markets would react. Back in 07, it took months of deterioration before the markets caved in.
One must remember, tops do not happen in a flash. They happen over time as the “termites” chip away at its strength. Let’s review:
Several months ago, we stated that a few things were occurring that woke us up. This includes:
MASSIVE AMOUNTS OF MARGIN. Margin is your best friend in bull markets but worst enemy in bearish phases. Margin went to all-time highs in the past month.
A TON OF SECONDARIES AND IPOS. Not only does this add supply to the market but more importantly, just another characteristic that shows up in the late stages of bull phases. One can also add in how far the bar has dropped on the IPOS as most IPOS in recent months lose money and a few had no sales. We repeat: NO SALES.
EXCESSIVE FROTH AND SPECULATION. When you see biotechs with no sales have multi-billion dollar market caps…that’s froth. When you see 10 cent stocks go to $3…that’s froth. When you see a biotech with no sales announce a good trial and triples overnight…that’s froth.
BULLISH READINGS AT MULTI-YEAR HIGHS AND LOW BEARISH READINGS NOT SEEN SINCE 1987.We’ll let this one speak for itself.
MERGERS,BUYOUTS AND MORE MERGERS AND BUYOUTS. To be blunt, mergers and buyouts do not happen at lows.
All this is meaningless as long as the market acts well…but something happened during this latest rally that also is a characteristic of a potential late stage in a bull phase.
NEW HIGHS VERSUS THE MARKET have been horrid. The best way to explain this is by telling you with some of the major indices at recent all-time highs, new highs could not bust through the 200-300 range. 1000 dow points lower saw 500,600,700 new highs. This tells you fewer stocks are doing the job while money is flowing into the mega-cap names which have the most influence in the indices. This is easy to see by taking note how weak the small cap indices have been compared to the NASDAQ 100, S&P and others. Money will tend to get more defensive near highs.
THE SMALL CAP VERSUS THE LARGE CAP DIVERGENCE. The last paragraph does all the explaining.
Lastly…and most importantly, the Fed is finally in the midst of rolling back the insane money printing that Mr. Bubble created. There has been a definitive correlation between money printing and assets…not just in the past few years but throughout history. We have explained time and time again that people like Mr. Bubble and Greenspun are good at one thing…creating booms and busts and then blaming the busts on others.
This leads us to today. While the mega-cap indices have been at highs, the divergences we have been seeing are the widest we have seen in ages. Just get a look at the smalls versus the bigs and you will see what we were seeing. Look at the lack of new highs. Look at how many sectors and stocks have already gone into their private bear markets.
At this juncture, we just take it day to day. The small caps are aazingly below the 200 day moving average while the large caps are just off highs. We do make note the DOW has sliced through the 50 day while the S&P has also by a smidge. The NASDAQ and NASDAQ 100 remain the strength but amazingly with the these indices above the 50 day, only 40% of stocks in the NASDAQ are above the 200 day…another gigantic divergence. We hate using the cliche’ but this market is at an important juncture as several indices are at a place where they have held on every correction over the past year. We can’t overstate enough the need for a good hold.
OUR BIGGEST WORRY IS THE ONE-SIDED TRADE…which simply means too much margin and everyone comfy on the long side. But time and time again, the market has held. We just think with every time down and every rally up, the internals worsen…which always leads to a bigger correction of consequence. Again…day to day.
In 2004-2007, we witnessed a housing bubble…caused by many players. You can start with Greenspan for loose lending policies and advocating subprime lending but one also has to look at the criminal activities at the lending companies. The lenders realized prices became to high to afford so many decided to give loans to people that did not have the first dime to pay the loans back. We should always remember what happened because the Fed fixed the problem with the same thing that caused the problem in the first place…that being easy money. But this time, it is not only easy, but outlandishly easy as trillions of dollars have been printed. We are certainly not where we were back then with lending but there are some things happening that you should pay attention to.
Back then, flipping properties was the thing to do. Television shows were all over your tv glamorizing it. We are getting the same now. Back then, priced appreciated markedly in many areas. While many areas aren’t even close to the old highs, others are. And in the case of places like NYC and San Francisco, prices just go up and up. We were all told prices would never come down…and told by all the supposed geniuses. Try buying a place in these areas. You can get something the size of a kitchen for $1 million.
We could not have have had the bubble and crash without the lenders. They dropped all norms in lending because of prices being too high…leading to a ton of people who should have never received a mortgage. This added to the bubbling up. To be clear, we are not saying that these lending practices are happening in today’s market. Lenders were jolted in ’08 and have learned from that and are being much smarter today. Some argue that the fall in the housing market, should it happen, would not be as bad because many purchases are being done with cash as opposed to borrowing. A market still has the ability of falling in price even if it was purchased with cash. We are not saying that we are in a housing bubble like 2007 or that you should not buy a home. We are simply suggesting that you should be wary as some similar signs are appearing again. We are just here to let you know we are worried as to why housing is better. Interest rate markets…and we use the word “markets” loosely…are not what they used to be. It is no longer a two-way market where buyers and sellers trade based on fear and greed. The interest rate market is rigged by central banks which has led to asset prices bubbling up. The worry is what happens when the music stops and things start to normalize. Pay attention!
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Gary Kaltbaum owns Kaltbaum Capital Management, LLC (“KCM”), an investment adviser registered with the U.S. Securities and Exchange Commission. The opinions expressed herein are those of Mr. Kaltbaum and may not reflect those of KCM. The information offered in this publication is general information that does not take into account the individual circumstances, financial situation or individual needs of an investor. The information herein has been obtained from sources believed to be reliable, but we cannot assure its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results.