Most Popular
1. THE INFLATION MONSTER is Forecasting RECESSION - Nadeem_Walayat
2.Why APPLE Could CRASH the Stock Market! - Nadeem_Walayat
3.The Stocks Stealth BEAR Market - Nadeem_Walayat
4.Inflation, Commodities and Interest Rates : Paradigm Shifts in Macrotrends - Rambus_Chartology
5.Stock Market in the Eye of the Storm, Visualising AI Tech Stocks Buying Levels - Nadeem_Walayat
6.AI Tech Stocks Earnings BloodBath Buying Opportunity - Nadeem_Walayat
7.PPT HALTS STOCK MARKET CRASH ahead of Fed May Interest Rate Hike Meeting - Nadeem_Walayat
8.50 Small Cap Growth Stocks Analysis to CAPITALISE on the Stock Market Inflation -Nadeem_Walayat
10.Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - Nadeem_Walayat
Last 7 days
The NEXT BIG EMPIRE WILL BE..... CANZUK - 25th June 22
Who (or What) Is Really in Charge of Bitcoin's Price Swings? - 25th June 22
Crude Oil Price Forecast - Trend Breaks Downward – Rejecting The $120 Level - 25th June 22
Everyone and their Grandma is Expecting a Big Stocks Bear Market Rally - 23rd June 22
The Fed’s Hawkish Bite Left Its Mark on the S&P 500 Stocks - 23rd June 22
No Dodging the Stock Market Bullet - 23rd June 22
How To Set Up A Business To Better Manage In The Free Market - 23rd June 22
Why Are Precious Metals Considered A Good Investment? Find Out Here - 23rd June 22
UK House Prices and the Inflation Mega-trend - 22nd June 22
Sportsbook Betting Reviews: How to Choose a Sportsbook- 22nd June 22
Looking to buy Cannabis Stocks? - 22nd June 22
UK House Prices Momentum Forecast - 21st June 22
The Fed is Incompetent - Beware the Dancing Market Puppet - 21st June 22
US Economy Headed for a Hard Landing - 21st June 22
How to Invest in EU - New Opportunities Uncovered - 21st June 22
How To Protect Your Assets During Inflation - 21st June 22
AI Tech Stocks Current State, Is AMAZON a Dying Tech Giant? - 20th June 22
Gold/Gold miners fundamental checkup - 20th June 22
Personal Finance Tips: How To Get Out Of A Tough Financial Situation - 20th June 22
UK House Prices Relative to GDP Growth - 19th June 22
Will Global Markets Be Pushed Deeper Into Crisis Event By The US Fed? - 19th June 22
Useful Things You Need To Know About Tweezer Top Candlestick Pattern - 19th June 22
UK House Prices Real Terms Sustainable Trend - 17th June 22
Why I’m buying the “new” value stocks… - 17th June 22
Optimize Benefits from R&D in Software Product Development with an R&D Tax Credit Software - 17th June 22
Want To Save On Your Business Energy? Here Are Some Helpful Tips - 17th June 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The World Has Entered the Terminal Phase of Central Banking

Stock-Markets / Stock Markets 2014 Nov 23, 2014 - 06:37 PM GMT

By: Money_Morning


Michael E. Lewitt writes: Stocks traded to new record highs last week on the back of new central bank initiatives to prop up struggling economies around the world. The People's Bank of China announced an unexpected cut in its benchmark lending and deposit rates for the first time since 2012.  Hours later, ECB President Mario Draghi made another promise that his central bank would take new steps to bolster European growth and the ECB announced that it had begun buying back asset-backed securities.

Coming two weeks after the Bank of Japan and Japan's large public pension fund announced manic interventions into financial markets to support that country's failing economy, investors have dismissed any concerns that the end of QE in the U.S. will deny them the liquidity they have feasted on for the last few years.  Since the October flash sell-off, markets have gone parabolic and totally disconnected from the struggling economies that are supposed to support them.

The world has things backwards and when it straightens itself out, there will be blood…

One Area of Market Weakness

Last week, the Dow Jones Industrial Average rose by 175 points or 1% to close at a record 17,810.06 while the S&P 500 jumped 24 points or 1.2% to a record close of 2,063.50.  Both indices are up roughly 13% from their October 15 low in a mere five weeks.  The Nasdaq Composite Index added 24 points or 0.5% to end the week at 4712.97 while the small cap Russell 2000 finished unchanged at 1172.52.  The Russell has outperformed larger stocks since mid-October.  In the bond market, rates remain low with the yield on the benchmark 10-year Treasury ending the week at 2.32%.

The only notable market weakness in the U.S. has been the high yield bond market where spreads and yields have widened about 30 basis points in November, most notably in the lowest rated names.  While there are no immediate large credit problems stalking the market other than the Caesars Entertainment Corp. mess, there appears to be a buyer's strike among the investors who traffic in these types of bonds as they reduce risk at the end of what has been a difficult year for many of them.

"The future is now…"

With stock markets running far ahead of economic growth, investors should be asking whether the markets are getting ahead of themselves.  Of course, they were asking the same question a year ago as well.  And for much of 2014, it appeared that 2013's spectacular returns had borrowed from the future.  But the recent run suggests that as long as central banks keep printing money, the future is now.

Goldman Sachs hit a cautious note, however, in its market forecast for 2015 with a 2100 year-end target that we might hit before the end of this year at the rate we are going.  A major Wall Street firm calling for only a 5% rise in stocks next year should raise serious questions since these firms are paid to be bullish.  It appears that Goldman, a firm that can't be easily fooled, is trying to warn investors without coming right out and saying it that things are not as wonderful as they seem on the surface.  Goldman actually expects the market multiple to drop slightly to 16x, again an extremely unusual call for a major Wall Street firm in the business of dishing out pure hogwash.

It also expects ten-year rates to rise to 3% in the U.S., 0.80% in Japan and 1.25% in Germany.  While this forecast would still leave rates low in absolute terms and do little to upset markets, they would signal very large percentage moves of 30% in the U.S., 60% in Japan and 50% in Germany that could inflict serious harm on traders (especially leveraged ones).  On the other hand, rising rates will handsomely reward investors who are properly positioned for them (as they should be – with rates at such record lows only a global depression would make shorting bonds a dangerous trade today).  Finally, Goldman calls for the Euro to drop to $1.15 and the Yen to drop to 130.  While all forecasts are best served with salt, Goldman's forecast has a great deal to say about the fragile state of markets if one reads it correctly.

All the World's Dealmaking

The other thing driving markets higher is a record volume of M&A transactions that have now hit more than $3 trillion in 2014.  Many observers view M&A as a sign of confidence in the economy.  I tend to view them more of a sign that corporate executives are finding a dearth of organic growth in their businesses.  Further, mergers tend to result in cost savings in the form of layoffs and other efficiencies that subtract rather than add to economic growth.  Nonetheless, they unquestionably lead to short-term stock gains so the market (and financial media) celebrates them.  Last week, we saw two megadeals announced.

In a massive deal in the oil services industry, Halliburton agreed to acquire Baker-Hughes a $34.6 billion deal.  The purchase price is $78.62 per share, a 31.3% premium to BHI's closing price of $59.89 before the deal was disclosed.  HAL was threatening to go hostile if BHI did not agree to the merger.  As the Houston Chronicle wrote, BHI was facing "a tough choice: surrender control on a rival's terms or face months of sunken oil prices and cost pressures alone…

Halliburton's demands come as crude oil prices have fallen dramatically and as the U.S. oil industry looks to an uncertain future.  Much is unclear: how much producers will rein in equipment and service spending, whether oil prices will sink or swim, and how much Baker Hughes would be worth in six months after what would likely be a bruising battle for control of its board."  On a pro forma basis, the combined companies had 2013 revenues of $51.8 billion, more than 136,000 employees and operations in more than 80 countries around the world.  BHI was trading at 20x earnings before the deal was announced so HAL is paying a high price for its rival.  No doubt many of those employees will lose their jobs since the companies expect to realize $2 billion in annual cost savings.

No Moral or Legal Niceties

In a second megadeal in the pharmaceutical industry, Actavis plc (NYSE: ACT) agreed to buy Botox maker Allergan Inc. (NYSE: AGN) for about $66 billion.  The purchase price is $219 per share, 10% above AGN's closing price on the day before deal was announced although the offer was widely rumored.

Allergan turned to Actavis to ward off a hostile bid from Valeant Pharmaceuticals Intl. Inc. (NYSE: VRX) and hedge fund activist Bill Ackman.  Valeant and Mr. Ackman's fund will end up with more than a $2 billion profit on their investment – and lingering questions about whether they violated insider trading laws – but all their investors will care about is that they made money.  Remember: we are in a bull market where moral and legal niceties are ignored.

They Fought the Fed and the Fed Won

Markets appear hell-bent on rallying through the end of the year as active managers desperately try to dress up another year of underperformance. Goldman Sachs points out that the average hedge fund index is -1% for the year compared to +13% for the S&P 500 and +11% for the average large-cap mutual fund (and with much higher fees obviously) largely due to the "smart money" having serious doubts about economic growth and corporate earnings.

Put another way, hedge funds have chosen to fight the Fed and they have lost.  This is true of other active managers in strategies that are supposed to make money when the market rises.  Now everyone is chasing performance heading into year end and this is contributing to the market's rise.  Like the reaction to desperate moves by central bankers, this performance-chasing has nothing to do with fundamentals and could end badly in January.

A Dangerously News-Driven Market

The question remains when markets will begin to pay attention on a sustained basis to anything other than monetary policy.  There is a political showdown shaping up in Washington, D.C. in the lame-duck session of Congress now that President Obama has moved ahead unilaterally on immigration.

Political gridlock could lead to a government shutdown or other signs of political paralysis that make it clear to the market that there will likely be no movement on important issues like tax reform or fixing Obamacare over the next two years.  Markets may be willing to live with bad government as long as they keep rising, but the minute they falter they will start screaming for effective leadership.  For the moment, however, it appears that investors are focused on dressing up their performance for year-end and accepting the gifts being given to them by increasingly desperate central bankers.  As T.S. Eliot famously wrote, we live in an era of hollow men.

Editor's Note: Michael Lewitt publishes the highly regarded The Credit Strategist , and was recognized by the Financial Times for forecasting both the financial crisis of 2008, and also the credit crisis of 2001-2002. His 2010 book, The Death of Capital: How Creative Policy Can Restore Stability (John Wiley & Sons) was included in the curriculum at the University of Michigan and Brandeis University.

Source :

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in