How near is the next bust?

Are we in bubble territory again?

The talk that financial markets have created/are creating another bubble has become louder and louder with every upward move of the Dow Jones Industrials and the Standard & Poor’s 500. We’re in uncharted, all-time high territory and that has increased worries that we’re about to see a replay of the busts of 2000 and 2007.

How worried should we be?

I think worries about the stock market, in particular the U.S. stock market, are over-stated at this point.

That doesn’t, however, mean that there aren’t parts of the financial market to worry about.

In particular I’m worried about parts of the fixed income market where traders and investors seem willing to overlook risk if they can just pick up a bit of yield. Read more

A small-ball strategy for the uncharted territory that is 2013

Selling on valuation has felt like a mug’s game for the last six months or more.

The question now is this about to change. The last significant drop we’ve had in the U.S. stock market came in late spring/early summer of 2012. Wall Street is clearly worried about a replay of that late spring drop and it’s not overstating the case to call the current market jittery.

Are we about to see a drop that’s large enough in volume and long enough in duration so that selling on valuation will finally pay off? Or is this just enough head fake from a market that will keep on going up until global central banks take the punch bowl away?

If you’re sitting on cash do you keep sitting on it looking for drop? If you don’t have much cash should you be raising it hand over fist?

I wish I could give you one of those big dramatic “Sell everything” or “Buy everything” calls that make the headlines and sell lots of newsletter subscriptions. But I think this market is way more complicated than that. Valuations are high, economic fundamentals in much of the global economy are weak or weakening, but then cash flows from global central banks are simply off any recent scale.

We’re in uncharted territory. And that makes big calls tempting. But it also makes it very easy to get them wrong.

This post is instead a little call. Read more

10 stocks for a potential correction–revised for a new market

On February 25 I wrote a post naming 10 stocks to buy after a correction—just in case we were about to see one http://jubakpicks.com/2013/02/25/10-stocks-for-after-a-correction-if-we-get-one/

Turns out the weakness in February didn’t turn into a correction. The U.S. Standard & Poor’s 500 fell from 1531 on February 19 to 1487 on February 25, but then rebounded to 1593 by April 11. That 2.8% drop from February 19 to February 25 never reached the 10% decline to qualify as a correction.

But here we are again—in late April—with the U.S. market looking weak enough so that a correction is certainly not out of reason. Some economic and market conditions even make a correction now more likely than back in February. Just like in February I’m not predicting a correction—there are just too many moving parts right now to give me any confidence in a prediction here. I do think the odds of a more extended decline are now higher than they were in February. I think raising some cash makes sense here as a way to reduce the volatility of your own portfolio—and to give you some money to put to work at lower prices—if we do get a correction.

Just in case I think it’s a good idea to put together a list of stocks that you’d like to buy if we do get a correction here.

And because so much has changed since February I think it’s important to revise that list of potential buys. Read more

I don’t think Monday was the beginning of a market bust–but the conditions for one are certainly out there

Just so we’re all clear on this. I wrote this piece about another way that central bank cash could lead to a market bust on Sunday night before Monday’s big market sell off. It isn’t in any way a prediction of Monday’s sell off.

I don’t think that a market decline like that of Monday or even Monday’s decline followed by similar drops for the rest of this week comes anywhere near a market bust or would add up to a bear market. The kind of bust I’m talking about s much more serious than a dip or a correction. Think Lehman Brothers. Not a retrace of 50% of the April rally.

But I do think the ingredients for another bust like the global financial crisis are out there. And I do think markets aren’t pricing in that possibility. And there is a connection between what happened on Monday and efforts by governments and central banks in developing economies to head off the chance of this kind of bust.

Anyway, when I put together my list of possible financial market busts on April 12 I did miss one.

An important one. The most likely scenario of all for a financial market bust in 2013 or 2014.

I want to hit myself over the head with a 2×4.

This bust scenario is one the markets have played out recently—within the last two decades, anyway. You can even see the beginnings of the bust in cash flows in global financial markets. And all you have to do is follow the money. The global central bank money that is.

Remember at the end of my April 12 post http://jubakpicks.com/2013/04/12/why-markets-arent-worried-about-inflation-even-as-central-banks-flood-the-world-with-cash/ I gave a brief list of possible bust scenarios that weren’t factored into the current rally in U.S. stocks or into stock prices in general. Central banks could produce a spike in interest rates when they begin reducing the size of their balance sheets. The Bank of Japan could produce a yen panic. The EuroZone could either break up in chaos or descend into a deep, deep recession. A run of bad loans in China could result in a government bailout of the banking sector.

All those are possible bust scenarios, I concluded, but the odds for any of them happening are relatively low.

But that list didn’t include the most likely bust scenario of all—one that actually seems to be increasing in probability now, although it is by no means guaranteed. Read more

Retracement,correction or panicky plunge: Initial thoughts on today’s falling markets

As if April 15 wasn’t already painful enough…

Today we’ve got either a standard retracement of the April rally, a sell off in growth-related stocks on a disappointing report on first quarter GDP out of China, or a panicky plunge in oil, industrial materials, silver and gold.

It’s certainly a down market today but the nature of the “down-ness” depends on how your portfolio is positioned.

It’s hard to judge a downturn while it’s in progress—either for severity or duration—but here’s how I understand what we’re seeing today.

Doubts about growth prospects have been rising for months as analysts cut their earnings forecasts for U.S. stocks even as stock priced rose. Last week, earnings reports from Alcoa (AA), Wells Fargo (WFC), and JPMorgan Chase (JPM) that showed year over year declines in revenue. That added to a general sense of worry over economic growth resulting from projections for lower growth in the EuroZone and disappointing retails sales growth in the United States. The clincher for investors worried about growth came overnight when China announced first quarter GDP growth of “just” 7.7%. That was below economist projections of 8% and below the 7.9% growth posted in the fourth quarter of 2012.

If global growth is going to be lower than expected, you’d expect commodity prices to fall. That decline today, however, has been amplified by a previous retreat in commodity prices. So commodities aren’t just retreating today—they’re reacting to today’s move lower as if it is a continuation of a longer bearish pattern. Today benchmark Brent crude is down 2.2% and London Metal Exchange 3-month contracts on copper are down 2.7%.

The biggest damage, though, comes in gold and silver where today has just accelerated a move that turned from correction to plunge last week when Goldman Sachs recommended going short gold. Read more