Well, the equity bubble continues. The senior US indices all made new highs last week. The advance was narrow…a very few, very large stocks drove most of the gains. Here’s the proof. This chart shows the ratio of the equal weighted S&P500 to the market cap weighted version you usually see. The equal weighted index values each company equally, whatever its size. As you can see, the trend in this ratio is down, indicating that smaller stocks are underperforming. Probably it’s all those index ETFs buying the same stocks.
We have been reporting on the collapsing bubbles in the auto industry and public employee pensions. You may not be aware of these unfolding crises because the main stream media is reporting 24/7 on the Russia-Trump connection, a total non-story if ever I heard one. Let’s look at some real news.
Yesterday (Wednesday) we got a hint of just how fragile equity markets are. The Nasdaq led the rout with a decline of 2.8%, closing on its lows. That’s because market performance is not based on a firm foundation of a strong economy and rising earnings. The markets are hanging on to current elevated levels based solely on a wounded President’s promises, promises of tax cuts and infrastructure spending that we said were a fantasy back when he was elected.
My sources tell me that Commercial and Industrial (C&I) lending has collapsed Banks have essentially stopped making C&I loans. It’s not because of tightened credit conditions. Demand for credit has collapsed. For an economy totally dependent on credit, this is not good news.
The big story in the markets is record low volatility, with the VIX dropping to a level not seen since 1993 while shares are trading at record levels. There have only been three moves in the S&Ps of 1% or more since the start of the year; based on the norm, there would have been 19. Investors have never been more complacent, according to sentiment measures.
The New Orders component in last week’s Purchasing Managers’ Index (PMI) reports on the Chinese economy tumbled to their lowest levels in at least 6 months. So what, you may ask? These downbeat reports came despite Q1’s record surge in new credit creation.
Stock market volatility is at all-time lows. Valuations are near all-time highs using any number of different measures. Yet the key economies are having a historically weak recovery. It looks crazy and it is. What has made it possible is the greatest debt bubble in history.
In case you haven’t noticed, capital has been flooding out of active investing (where managers buy stocks and build their own portfolio) and into passive vehicles such as Exchange Traded Funds (ETFs).
The stock market ripped higher again yesterday. The last couple of days, the Nasdaq, Nasdaq 100, Dow and S&P, have gapped higher with the former two making new highs. Why? Apparently because Trump’s tax plan is about to be revealed. Do we need to be reminded that Trump’s health care, extreme vetting, infrastructure and border wall initiatives have all failed? Thank goodness for Syria and North Korea, where Trump can make decisions without Congress.
Lately, I’ve been reporting to you on the troubling slow-down in auto sales and production. Is this data trying to warn us about a wider slow-down?