Friday, January 29, 2021

Morning Note: Twist to Fit

If, like a lot of folks, the GameStop story has you intrigued, and you happened to have missed this week's main message, give it a look, in it you'll find my take. News this morning is that it very much has the attention of the SEC.

SEC violations, or otherwise, make no mistake, what you're witnessing has zero fundamental import, it's all about behavior and market structure. 

While, again, I took readers into the weeds on Wednesday, just a note on behavior: 

As I keep stressing herein, our market sentiment indicators score at levels you seldom see outside of stock market tops. That's not a prediction, mind you, just risk recognition.

Of course Wall Street, in its perpetual bullishness, is efforting mightily to keep markets afloat with its promise that record high valuation is no thing as long as credit flows and rates stay low.

Well, here's from JK Galbraith's take on the 1929 crash:
"Far more important than rate of interest and the supply of credit is the mood.
Speculation on a large scale requires a pervasive sense of confidence and optimism an’ conviction that ordinary people were meant to be rich.
People must also have faith in the good intentions and even in the benevolence of others, for it is by the agency of others that they will get rich."

Again, the present market environment is not about fundamentals -- the economy, interest rates, company earnings, etc., -- it's about behavior. It's about mood!

And here, on the leadup to 1929, is from Graham and Dodd's 1934 classic, Security Analysis -- this should sound eerily familiar:   emphasis mine...
"The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. Yet the new-era theory led directly to this thesis. If a public-utility stock was selling at 35 times its maximum recorded earnings, instead of 10 times its average earnings, which was the preboom standard, the conclusion to be drawn was not that the stock was now too high but merely that the standard of value had been raised.
Instead of judging the market price by established standards of value, the new era based its standards of value upon the market price. Hence all upper limits disappeared, not only upon the price at which a stock could sell but even upon the price at which it would deserve to sell.
This fantastic reasoning actually led to the purchase at $100 per share of common stocks earning $2.50 per share. The identical reasoning would support the purchase of these same shares at $200, at $1,000, or at any conceivable price.
An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy “good” stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.
Countless people asked themselves, “Why work for a living when a fortune can be made in Wall Street without working?” The ensuing migration from business into the financial district resembled the famous gold rush to the Klondike, except that gold was brought to Wall Street instead of taken from it."

A hugely positive industrial production print out of Korea, and the same coming in as expected out of Japan, didn't do anything for Asian equities overnight; all but 3 of the 16 markets we track closed notably lower.

Europe's data releases were net positive as well. But, like Asia, that news hit with a major thud; all 19 bourses we follow are in the red so far this morning.

We'll cover US data in our upcoming (today or tomorrow) macro update. In the meantime, the major equity averages, save for the Russell, are having a rough go of it so for this morning: Dow's down 344 points (1.13%), SP500's down 1.07%, SP500 Equal Weight's down 0.68%, Nasdaq's down 1.22%, Russell 2000's up 0.52%.

The VIX (SP500 implied volatility) is up 6.52%. VXN (Nasdaq i.v.) is up 5.28%.

Oil futures are up 0.19%, gold's up 0.81%, silver's up 1.82%, copper futures are down 0.01% and the ag complex is up 0.61%.

The 10-year treasury is down (yield up) and the dollar is up 0.08%.

Silver, gold, ag commodities, utilities and AT&T are our green positions so far this morning. The rest are being led lower by all things Asia and Europe, along with energy, tech and emerging market equities. Net result so far, -0.54%...

One more from Graham and Dodd:
"Irrationality could go no further; yet it is important to note that mass speculation can flourish only in such an atmosphere of illogic and unreality.
The self-deception of the mass speculator must, however, have its element of justification.
This is usually some generalised statement, sound enough within its proper field, but twisted to fit the speculative mania.
In real estate booms, the “reasoning” is usually based upon the inherent permanence and growth of land values. In the new-era bull market, the “rational” basis was the record of long-term improvement shown by diversified common-stock holdings."
Yep, Wall Street, and, not to mention, the Fed, are twisting to fit their respective narratives in historic fashion these days...

Have a great day!

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