Monday, January 4, 2021

Morning Note: The Fiction

The first trading day of the new year has seen the Dow move within a 400+-point range within the first hour. It's currently near the bottom of that range.

The one thing that jumped out at me at the open was that while stocks were green across the board, so was the VIX, notably. That's a sign that options traders, at least this morning, aren't feeling the new year's optimism. Actually, its persistently staying above 20 for months, historically-speaking, says we're in a precarious situation right here; but of course we knew that already...

Asian stocks rallied overnight, with 14 of the 16 markets we track closing higher.

Europe's mixed this morning, with 10 of the 19 bourses we follow currently in the red.

U.S. major averages, after rallying at the open, are now off across the board (although barely for the Russell): Dow down 288 points (0.93%), SP500 down 0.57%, Nasdaq down 0.22%, Russell 2000 down 0.06%.

The VIX (SP500 implied volatility) is up 8.88%. VXN (Nasdaq vol) is up 6.50%.

Oil futures are down 0.33%, gold's up 1.75%, silver's up 3.34%, copper futures are up 1.26% and the ag complex is down 0.01%.

The 10-year treasury is down (yield up) and the dollar down 0.13%.

Led by silver, gold, emerging market equities, Eurozone equities and AT&T, our core portfolio is notably besting equity markets to start the day, up 0.45% as I type. 

In the conclusion to our year-end letter I noted:

"...sustainable bull markets tend to emerge from economic setups consisting of higher interest rates (that can come down), and low debt levels that allow room for the private sector to borrow, spend and invest. The exact opposite of the current setup!"
John Hussman, in his excellent piece, A Good Response to a Bad Situation, makes the same point with regard to coming off of low vs high interest rate regimes, and adds valuation into the mix. 
" the high interest rate, low valuation situation, investors face outstanding prospects for long-term returns. In the low interest rate, high-valuation situation, investors face dismal prospects all around."

We're currently deep into the latter setup for the broad equity market...

And I share his deep concern: 

"...deeply concerned by the fiction – increasingly bordering on propaganda – that depressed interest rates somehow “justify” what are now easily the most extreme stock market valuations in history, based on the measures that we find best correlated with actual subsequent market returns."

Recognizing that bubble conditions can last a long-time, I also stated in our year-end conclusion:

"Renowned economist and strategist Dave Rosenberg and I are 100% on the same page when it comes to stocks, presently:   emphasis mine...

 "While I say we are in a bubble, I'm not saying it is impossible to invest in a bubble -- just know the environment and make sure you have some hedges.""
Have a nice day!


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