But a whole generation of investors has never been through a Nasdaq-bubble unwind, and they’re shocked.
I just dug out my “Dow 20,000” hat, but I might not need it for a while because nothing goes to hell in a straight line. And I still have my “Dow 10,000” hat somewhere just in case, though I doubt I’ll need to go look for it anytime soon for the reasons I’ll explain in a moment.
I have to admit, this was a beauty of a Santa rally. We were promised a Santa rally by the buy-buy-buy hype organs on Wall Street, so here we go with our Santa rally:
The Dow dropped 6.9% this week, to 22,445, and is down 9.2% for the year. It’s down 16.3% from its all-time peak in September. It’s only about 11% away from my “Dow 20,000” hat. The last time we saw 20,000 on the way up was in January 2017. But rolling back 21 months of gains in the stock market — from September 2018 back to January 2017 — is nothing. The big deal is how much the Dow has surged over those 21 months from 20,000 to the peak in September: 35%.
Over the same period, the economy grew maybe 5%. So going back to 20,000 will just surgically remove the very tippy top off the bubble.
The S&P 500 Index dropped 7.1% this week and is down 9.6% year to date, down 17.5% from the peak in September, and back where it had first been on June 1, 2017.
The chart is not exactly pretty, with that nearly straight red line south, but let me assure you again: Nothing goes to hell in a straight line, and in a moment, I’ll get to why this one won’t either.
The long-term chart puts this into perspective: The nine-year surge has been so huge that the current sell-off doesn’t really measure up, especially not compared to the last major sell-off during which the S&P 500 dropped by about 50%:
The Nasdaq dropped 8.4% this week to 6,573, and is down 8.3% year to date. “Nasdaq 5000” not yet. But those who promised us Nasdaq 10,000 will have to be patient, very patient. The Nasdaq is down 22% from its peak at the end of August, and is back where it had last been in September 2017.
But when the Nasdaq, which is powered by the FANGMAN stocks — Facebook, Amazon, Netflix, Google, Microsoft, Apple, and Nvidia — heads south, it’s good to remember the stocks on this index are huge bubble-blowers, and they can plunge hugely. In the 2000-2002 sell-off, the Nasdaq plunged 78%. So a 22% decline in the Nasdaq is fairly minor.
But there is a whole generation of investors out there who have never been through a Nasdaq-bubble unwind. For them, this is the first real tech stock sell-off, and they’re shocked. For them, tech stocks can only inflate. They can never deflate. They don’t know from experience that hundreds of the companies on the Nasdaq will fold during such a sell-off because they run out of money to burn and just disappear. A real Nasdaq sell-off entails a real shake-out, where the wheat is separated from the chaff, and this chaff in your portfolio goes to zero.
So how bad can a Nasdaq bear market get? Well, from experience, it can get a lot worse than expected. That’s what Nasdaq sell-offs have taught us.
In terms of magnitude, the FANGMAN stocks have provided much of the fuel for the Nasdaq bubble. So let’s step back and reflect on what Goldman Sachs said about these tech stock in June 2018. I covered this propitious event with an article titled, “FANGMAN Stocks Are Not a Bubble, Pleads Goldman Sachs. This time, it’s different, said the strategists.” I wrote: “With regards to tech stocks, no matter how high they’ve soared, there is no bubble, based, believe it or not, on fundamentals, Goldman Sachs strategist Peter Oppenheimer and Guillaume Jaisson pleaded in a note. And the fun is going to continue, they said. And it’s different this time.” And then I debunked them with some numbers, such PE ratios and price-to-sales ratios.
The FANGMAN stocks combined reached a market capitalization of $4.63 trillion on August 31 that has since plunged 27%, or by $1.26 trillion – just these seven stocks, all of them traded on the Nasdaq! By the sheer size of their gargantuan market capitalization, they were the powerhouse on the way up, and they’re the powerhouse on the way down. Their combined market cap is now back where it had first been on October 25, 2017:
This list shows the illuminating plunge of the individual FANGMAN stocks from their highs earlier this year:
Facebook [FB] at $124.95 (-43%), back where it had first been in August 2016.
Amazon [AMZN] at $1,377.45 (-33%). But this is the mind-boggler: the stock has plunged 33% and is still up year-to-date, which shows just how far the stock has bubbled this year! But this is not atypical for hyperinflated Nasdaq stocks, which is why the Nasdaq tends to go so much lower.
Even after the plunge, Amazon’s PE ratio is still 77. Given that it’s still a growth company, it should have a higher PE ratio than companies with stalling sales, so maybe 25. At current earnings, that would cut today’s stock price to $460! That price would mean a 78% decline from the peak. See the theme here?
Netflix [NFLX] at $246.39 (-42%). The company is massively cash-flow negative, is junk-rated, and needs to borrow enormous amounts of money every year to do what it does. Amazon never had to borrow money to survive. Netflix does. Its PE ratio, despite the 42% plunge in share price, is still a stratospheric 88.
Alphabet [GOOG] at $979.54 (-23%).
Microsoft [MFST] at $98.23 (-15%). Feathers barely ruffled so far.
Apple [AAPL] at $150.73 (-35%). Once the most valued publicly traded company in the world with a market cap of $1.12 trillion, it is now in second place at $715 billion, behind Microsoft.
Nvidia [NVDA] at $129.57 (-56%), back where it had been in May 2017, which shows just what a ludicrous bubble it had experienced from May 2017 to October 1, 2018: It shot up 133%. But in the three months since October 1, it has given up all of those gains. That’s what it means to gain 133% and to then lose 56%.
But let me assure you again, nothing goes to hell in a straight line. Near term, there are a couple of reasons.
Investors who bought these FANGMAN shares — or most other Nasdaq shares, or most any shares — this year have some sizeable paper losses on their hands that they can harvest for tax purposes by selling the shares and turning the paper losses into real losses on their tax returns. These tax losses will have to be incurred by year-end. So part of the selling we’re seeing now is tax-loss harvesting.
We haven’t seen tax-loss harvesting in any magnitude in years because the losses were limited to some individual stocks, as markets overall have risen year-after-year since 2009. So we have forgotten what this can do at year-end.
But this will abate before year-end. And then early next year, this headwind is gone.
In addition, a lot of money has been set up in specialized hedge funds for the specific purpose of trading the sell offs. Individuals too play this game. This has been the case all year, and it continues to be the case. These are institutional dip buyers, many of them algo-driven, and individual dip buyers too, that together have lots of firepower. And they’re short-term traders: buy low, sell higher. Let others worry about the rest.
So early next year, with tax-loss harvesting out of the way, and with institutional and individual dip buyers waiting for their chance, there is bound to be a rally, maybe a sharp one that will rattle some short-sellers, causing a brief short-squeeze. And then the market will be ready for the next leg down.
This is why this stock market downturn will be highly volatile with many big ups and downs, and with an overall down-trend that is likely to last for years.
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Why is TSLA still up? Even green on Friday!
A large majority is owned by big institutional investors and Musk himself. They’re not selling. They’re buying when the stock drops to prop up the illusion. They depend on it because Tesla will have to raise funds, and a high stock price makes this possible. Hence their joint efforts to keep up the stock price. They’re the ones that run the show, not the short sellers.
They’re down 15% in 6 days.
Are you not entertained!
I am NOT sure about Tesla’s backers but for TSLA itself, they have 1.5Billion 360$ convertible bonds NOV 2018 and March 2019. If stock price is below 360$, bond holders will ask for cash and buy in the market at lower than 360 to cover their shorts or just get their money back if they have NOT shorted. If the stock price is above 360$, they will ask for shares to cover their existing short OR sell at market price higher than 360$. Elon wants to keep cash, so he wants the bond holders to convert to stocks as opposed to drain him cash. So he and his backers will do what they can to keep the shares up at 360$. I have been shorting at 375 but I got out at 345 because I think “THEY” will squeeze it back up over 360$. I am shocked to see it is 320 now. Either go back above 360$ or Elon lose 1.5Billion cash. I am NOT sure what’s going on. If they get it back above 370, I will short again.
Great post. Hands down great post. Musk is an erratic visionary perhaps more than a finance guru. And yes, he is beholden to his big dog investors.
TSLA is up because it is tightly held and easily pushed around. This will go on until one day it can’t and it goes to zero. That could be a while. Basically until the credit markets lock up and they can’t borrow to cover losses any more.
Their tax credit gets cut in half at the end of the year and again on July 1.
Wolf, what effect do you see on the market now that Trump is threatening to fire the Feds Jerome Powell as punishment for the current bear market.
Everyone other than Trump has been trying to walk this back. Mnuchin tweeted that Trump told him it’s not going to happen. Tons of legal scholars have come out and said that it would be nearly impossible. Republicans have spoken out against it. They’re all scared the market could spiral out of control.
My theory about “nothing goes to hell in a straight line” may turn out to have one exception, which occurs when a President, who stupidly has taken ownership of the stock market on the way up, tries to fire the Fed chairman over the Fed’s unanimous refusal to inflate the stock market further.
Let’s hope not. President Trump should concern himself with the growth of the economy, not an inflated stock market that has been highly manipulated.
Trump’s big problem is his China trade war and other trade wars.
One of the runs of fake-news that gave a temp upturn in this down market was before the G-20 when Trump and friends were talking about how a great deal was coming when he met President Xi
Trump got nothing. Trump had to give up on his tarriff hikes to 25% just to be able to say there was an agreement. What Trump did get was a 90-day period to negotiate. And it seemed like Trump was forced to set that time-limit just to pretend that he wasn’t in full scale retreat.
Now, Trump has a deadline where he either has to deliver or retreat again. The markets won’t mind a retreat, as they don’t like the trade war to begin with. But Trump will politically suffer when the Chinese tell him to take his demands and go stuff them. At that point, Trump has to either raise tarriffs and thus panic the markets even more, or to signal that he and his ‘easy-to-win’ trade war are in full retreat.
Every day that Trump spends tweeting about the Fed is a day he isn’t solving the China problem he’s created.
I think all politicians, especially P45 do NOT care about real stuff. It is all slogans and labels and index numbers. P45 will never increase your income or lower expense so that your economic life gets easier. That is NOT a symbolic thing and it will NOT get people’s blood and emotions reactive and vote. S&P rally and ShangHai crash is what get people excited. Trade war China to death is what people want to see. P45 will play game of chicken with Xin to see who lose it first, that gets the attention. I think this is what populist mean. P46 wants the trophies and win on all measurable numbers even at the cost of wrecking the economy. You think trade war will help economy? Trade war is about P45 winning. Powell makes P45’s winning path difficult. Everybody asks, “Shanghai is down 40%, we are heading there too, who is winning?”
To him, the stock market is the economy. Stock market up, economy good, that’s his thinking. By now, he probably has realized that the trade war is bad, but Pooh bear isn’t giving him enough to end this little spat, or may be he hopes he can milk it enough through the next election. Who knows.
But the stock market IS “the economy…”
The “stock” market is no longer a market. It is a casino. Fundamentals don’t matter to the machines. Just trends.
And, since Trump knows so much about casinos, he just naturally adopted this one as his own. Too bad because most observers realized that the house was about to change the game during Trump’s tenure and let him take the fall.
The same message Bob Novak (WaPost?) gave to 43, he described the market as a bunch of “liberal” stock pickers , and he advocated building an economy for “business”.
Wolf, please tell us you’re taking Christmas off, you deserve at least one day break from this craziness ;)
I’m taking Christmas Eve off (after 5 pm). We’re having a bunch of friends over for a festive dinner. Just adults celebrating and forgetting for a moment the craziness of this world. We do that almost every year. It’s a huge amount of fun.
Just about 10 days ago RBI governor Urjit Patel resigned mostly due to of pressure from Modi government for rate cuts and other matters which government wanted RBI to implement undermining RBI’s autonomy. Of course rumours about possibility of his resignation was already circulating in market with dire warnings of stock market and Indian Rupee spiraling down the drain if Patel actually resigned due to pressure from Indian government. Everybody , and I mean absolutely everybody from business media to stock market pundit to economists , were predicting dire consequence of Patel’s resignation. However when Patel actually resigned , instead of all the doom and gloom which was predicted , markets actually went up. And now business media and market pundits have took a U-turn pretending that market went up as was predicted by them , as now rate cuts are certain in future and lending standard will be softened.
That is not to say that market will definitely go up if Powell is fired. But nobody knows what will happen if Powell is fired, markets may go up or down or don’t move at all. All this warnings of collapse may turn out to be hyperbole.
Agreed. The departure of Mattis made me very nervous. Firing the Fed Chair would move me firmly into the ‘remove Trump’ camp, either by impeachment or the 25th amendment.
It is the height of Economic Irony, the capriciousness of the Economic Gods, that once the real economy shows any sign of life, then the Fed rushes in to kill it.
The absolute waste of resources as a consequence of the Fed’s ZIRP will never reach the public square since all Media has succumbed to publishing the party line.
Merry Christmas Wolf.
And yet, if this were to occur (a US president attempting to or successfully firing a fed chair) the event would be well worth the price of the ticket.
And then that line could go straight down a very long way.
Junk is playing up. I have written here for years. When Junk Bond Market plays up in this insane party.
He with the tiny hands could be the uncontrollable outside forces, that turn into chinas, and so global. Huge black swans.
I don’t know whether or not Trump is thinking or threatening anything. But I have learned to never believe any news stories claiming that Trump said anything, or is thinking anything, unless I can watch the video and read the transcript myself. Far too often since 2016 I have checked the facts and drawn the opposite conclusion from that being advanced by the media (of all stripes).
Bloomberg’s article on this is a typical example of how the media attempt to turn rumor or conspiracies into news:
“Trump has discussed firing Powell as his frustration rose following this week’s rate hike and months of stock tumult, according to four people familiar with the matter. Advisers close to the president aren’t convinced he would move against Powell and are hoping his anger dissipates over the holidays, the people said on condition of anonymity.”
Left undiscussed: Who are the “four people” and what are their personal agendas? To what extent did they coordinate to put out this hearsay-based story? How did Bloomberg get four such sources so quickly?
Let’s go a bit further on this: What exactly was the context for “discussed firing Powell”? Was it a serious policy discussion? An offhand comment? A joke? An irritated random snippy comment by a President who clearly has a lot on his plate at the moment?
Or was it perhaps a setup, a question asked by someone else of Trump so that he would have to reply, such that witnesses could all say he had “discussed” something? A discussion does not imply an endorsement of the idea or even a decision. Was there a call from Wall Street leaders angry with Powell for his tone-deaf policy, trying to blame him for what is really a self-induced decimation of their portfolios? (People who live in bubbles should expect the usual outcome, after all.) Why can’t Bloomberg be bothered to report at this level of detail?
“On Saturday, Treasury Secretary Steven Mnuchin said in a pair of tweets that he’d spoken with the president about the matter and included a statement he said came from Trump. “I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so,” Mnuchin quoted Trump as saying. Earlier, White House Press Secretary Sarah Sanders said she doesn’t know of a plan to fire Powell.” ”
It’s known to be fairly typical of governments that when they have to issue a formal denial, the accusation is plausibly quite true. Implausible accusations don’t get any reaction. What we do not know is whether the “plausible” story about Trump is real or just more of the fake news BS put out by media in times of anxiety and panic.
I’m not losing any sleep over this without a lot more evidence.
re: “… “I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so,””
Way too literate (and grammatically correct). Trump didn’t say this.
Trump got caught venting in an “open mike ” Type incident Over powel.
Now White house has to play CYA (His A) again.
Trump’s venting has done way more damage to global Markets that the FED.
Kudos to your post. You said it all so I will not add anything.
I know what you’re saying. Someone can tell me water is wet and, nowadays, I won’t believe them till I get some splashing over my hand. And even then too…
I don’t think Donald Trump is a stupid as some of you think.
I was not a voter being a UK citizen in Thailand.
In my opinion you Americans have a good president in Donald Trump as he doesn’t seem to be controlled by anyone yet and is pretty impressive as he is in conflict with the MSM and democratic side and even republican politicians.
I am actually surprised he has not been assassinated as yet.
I am going to bet that he will be re-elected as well.
re: “I am going to bet that he will be re-elected as well.”
You may be correct. It depends on who the Democrats–who usually shoot themselves in both feet–run.
No it doesn’t.
you need to read “Fear”
I was going to say the same thing. If anything, we’re shielded from much of Trump’s idiocy.
Frankly, this is so uncharacteristic of Trump, to think of firing the Fed chief.
He should listen to his own advice to “Think BIG!” by removing the WHOLE FED organization in one fell stroke.
Now is the opportunity of a lifetime for an apparent madman to inadvertently do-good for the world by removing this FED stink, that is a non-federal, non-government controlled institution with undisclosed PRIVATE shareholders, who are not even democratically elected.
Yeah, put the blame of the entire FED for the crash and then let the free market decide on the real interest rates henceforth; instead of having a bunch of old fogeys sitting behind closed doors, divining on animal bones and arbitrarily deciding where interest rates should move for US, and consequently for the rest of the developed world.
How can Capitalism and its corollary the “Free Market” truly work, if we are having a CENTRALLY-planned system of interest rates (which then works to determine practically every aspect of our economic lives from your mortgage rates, to insurance premiums to what you get for your cash deposits)?
A centrally-planned economy is a Marxist-Socialist one, NOT a capitalistic one at all.
If the FED is abolished and outlawed, I can bet with you the global markets will find its own equilibrium in any case, and be a far better indicator of the true health of the economy absent all the manipulative distortions.
For some strange reason, I’m rooting for Trump, only because an incorrigible and impetuous madman would dare to do the unimaginable but necessary.
Let’s hope the Cabal don’t do him in first (like what they did to JFK )
I like this idea. There are good reasons for FED to exist. Imagine natural disasters (droughts that kill all crops) or foreign enemies causes financial system to seize up, you need to FED to un-seize. This “power” is needed to get good things done. This is called “Elasticity” of the financial system. And like all “powers” it attracts social path and corruptions, and the FED is corrupted into a state of losing “discipline” of the financial system, that is bad companies need to die and bad actors need to go jail as opposed to get bailed out. I do NOT know where is the perfect balance is for “elasticity” and “discipline”. I do know FED is causing large inequality and causing lots of pain and corruption for normal people. Like all life forms, it may be the time for FED to die and give rebirth to something that is tilted towards “discipline”. I see no hope of creating yet overnighting powers to regulate FED power. So maybe a reset is the best outcome. 4th turning.
JZ, its curious that your last statements ends with the 4th turning, because this FED is actually the 4th iteration of Central Banking in the United States (the other 3 didn’t end so well, needless to say :)
Here’s a link to the a great read although lengthy one, by Edward Griffin, on the long-running Federal Reserve scam:
PS: better download it quick, before Wolf removes the link for whatever reasons…
Have a Merry (perhaps not so merrily Crashing) Xmas!
Trump can no more fire Powell, under the law, than he could fire Pence.
Like almost all Pol’s, what DJT says is generally a distraction, including any saber rattling relative to Powell. Better to focus on what Pol’s do and then attempt to analyze actions with the results, especially over time. My approach with the Fed is similar. JP has done what he said he would do…SO FAR. I give him credit for shooting straight, but we don’t know the results yet. Most would probably agree that he inherited a mell of a hess. This is some of the fruit of past Fed actions….or in the case of Yellen, many years of inaction due an economy that she said was too weak. Over a very long period of time, the Fed’s track record simply sucks.
Many of my most educated friends have very little understanding of the Fed. Frankly, if I am honest, I have to lump myself in with them. Price fixing is illegal and for some reason the Fed is allowed to fix the most important and fundamental economic price. I don’t understand that.
As an individual investor, it can be pretty painful to watch the fall; as a capitalist, markets actually require periodic correction (this one probably hasn’t yet gone down far enough).
Bubble markets and wild fires have a lot in common: if “creative destruction” doesn’t clear out the tinder (no pun intended), the inevitable wild fires just get worse.
As an individual investor, I have been through worse. The 1973-74 sell off was accompanied by high inflation, lots of layoffs, especially in the auto industry and the Arab oil embargo.
To be fair politics has played a role in this selloff. If the market goes back to those 2008 highs there will some serious capitulation.
I seem to think of the term : “dead cat bounce”. They are nice to watch, just before a “major correction” where all the dip buyers “get taken out the back and shot” :-)
Nasdaq? I’m thinking longer. The bull run started with the creation of tax advantage retirement accounts (early 1980s) that were buy-only during the worker’s employment life, causing a massive positive feedback loop.
More money into retirement accounts->higher stock market->more money
The game works as long as more money keeps getting put into the stock market, kinda like a Madoff scheme. If more cash leaves the loop than is put in, we enter runoff mode. Because of demographic and employment trends, we’re here. I think 2018 will be peak stock/real estate for a generation, until buying > selling pressure.
“Fundamentals” won’t matter, since we’re getting shifts in both the demand and supply curves. This is repricing, with everything but government-debt affected.
So it dawned on me this morning that the the 1970’s saw high unemployment and high inflation. It was literally a lot more people (not money) chasing the same jobs/goods, leading to high unemployment/high inflation. Now 40 years later, we’re seeing record low unemployment and low inflation… fewer people chasing the same jobs/goods…
I have the same feeling on the generational bear. As the market implodes, boomers who need what’s left of their retirement accounts will panic sell, and I think many will also be forced to sell houses that they either can no longer afford or need to monetize to replace lost income (particularly since many of them are sitting on large properties that they don’t really need). After a third large crash in twenty years, people of all ages will be hesitant to jump back into the stock market–and perhaps the housing market as well. Also, the bonds sold to fund the unbelievable fiscal deficits to come will suck much liquidity off the equity and housing markets.
Chris Hamilton over at Econimica is all over that thesis.
PIMCO has published an analysis with the thesis that high earners will keep on working, pushing the peak retirement fund inflow out to 2025 or later.
Of course, in their analysis they never provide any evidence this is happening. It appears to be an effort to soothe the concerns of institutional investors. Everyone knows this market is living on borrowed time, the only question is how much time.
To be clear, PIMCO avers that older high earners will mostly retire at 70-75 rather than 60-65. My personal observation is that this is not happening at all. High earners have the money to retire, and extra motivation from corporate policies requiring retirement at 65, and they reture between 60 and 65. Maybe you are seeing something different.
70 is the new 60, if a high earner is motivated and properly compensated, sure they’ll keep working. There is a skills shortage after all – employers are begging them to keep working. I’m talking highly specialized, high paying executive level jobs here, not packing bags at Walmart.
@Nicko2 — that makes sense to me. I just don’t see it happening. My data points are in the top 5% of earners, and may be swayed by the increasing emphasis on technology. In Silicon Valley, age > 31 is considered over the hill; not so bad in my neck of the woods but still a factor.
There’s one more tool left: “privatization” of social security, using payroll taxes to keep the con afloat.
Lol. That will show all those millenials who refuse to invest in the stock market.
The bull market got going a few months after the 1982 peak in US interest rates and the stock and bond markets became convinced that Fed Chairman Volker would wring inflation out of the economy. I left the retail brokerage business when the Dow was about 778, where it had been some 4 years earlier when I had obtained my securities license. The rally got going shortly thereafter. Talk about bad timing.
The old, defined benefit pension plans worked well for people who worked at the same employer for many years. But they were of no value to those who switched employers before the 10 year vesting period was reached, a long vesting period which was common in the old days.
In many respects, the economy we have now is much less regulated than the one that existed in the early 1970’s and consumers have more choices. My guess is that my current desk top computer has a lot more power than an IBM 370/168 mainframe had in 1973 when such mainframes cost about $5 million. Stock brokerage commissions are way below 1973 levels, even before adjusting for inflation. TV’s have far more features and cost less as well.
I would expect much further pain ahead … I cannot shake the feeling that some of the cov-lites that financed some buybacks will start getting pulled out.
I expect that a lot of hedges might actually go tits up relatively soon , pre christmas business diners around here have started to take a rather grim shade and I could not wait to get out of those parties where you feel that the paint is about to come off the walls at the first breath! Insider selling in September had reach what i considered an worrying level already. I expect a further rush to the exit come next year.
Of all things an indication was the “fed” but all of the sudden the insiders started to act as if all of the sudden the music was suddenly replaced by the screeching noise of claws on a chalkboard. And you would see them getting quickly away from the clients at those celebrations , to the point it started to look ludicrous to even organize such events. One of these put up a nice little questionnaire as you left wether you would consider futhering your investments in the company organizing the event etc and the tally would show discretly on a terminal closeby …
The host made the speech etc , picked a drink and then did not even mingle , whooshed straight off site , the poll showed nothing short of a disaster as people felt on a gut level something was coming unscrewed , but this is not the only example and my gut is telling me we are looking at a confidence crisis that will hit the markets overall not only in 2018 but further down the road.
QE helped kick the can down the road but my guess is that at this point the can is still here but we are running out of road , and what remains of the road is now going up !
And yet you have some supposedly rational actors (NOT the Whiner in Chief) agreeing that the Fed has gone crazy because the first few baby steps back to normal threaten to bring stocks back to where they were six months ago.
This is the problem with leaving the punch bowl filled after midnight.
You are under estimating the level of leverage used for the buybacks ! We are seing a 20 percent correction already from the All time High so i would guess the level of collateralization to be closer to 50 percent of market caps.
Keep in mind as well the level of HFT presence shot up as well … and those vacuum tubes now represent i would guess over 60 percent of markets… most of them use heatseaking algorythms to make their insert and trades avoiding to be net holders at all cost at the end of the day … They are not asset holders and just ride volume and amplify it.
Now Collaborative Tracking Algos are sending strong sell signals , they parse news feeds and act concurrently as a group as to the orientation of their trades.
Their algo is not even complex since they act on speed alone. But a good regex and a heatmap seeking algo is enough to make such an algo run. But now they have reached a level of presence that they are capable of orienting whole markets!
I know personally a few quants and the math is not even complex per se, just that their are taking advantage of network latency from exchange to exchange to clinch in a man in the middle way , it simply cannot be since they are using CUDA for the algorithm itself … so the data set being treated is kept small … when volume on the sell side increases suddenly such as CTA would do other CTAs AND HFTs react in a cascade following further in the red. This is the way the flah crashed happened but now we are dealing with MUCH larger orders and spikes.
Oh and by the by all their operating capital is leveraged off the mortgages ! just to give a perspective to the depth of the cluelessness of the lender that went full cov-lite into the venture. I was dismayed and decided to take my distances , and keep them from that group!
A typical example is BTC / Crypto exchanges and the latency charts you see in exchanges , there is a quite a good piece of research on the issue here .
If there is any similarity in between what is happenning to the stock market and BTC and the overbearing presence of HFTs , some of them creating fake volume on exchanges you can expect a LOT of further surprises. The amount of “book stuffing” on crypto exchanges is pure madness and shall at some point be banned from those parties but that is another matter.
But bear in mind that a lot of those algos are pretty similar to the ones used by High Frequency Traders , and i would not be surprised to see a lot of bid / cancels in the books .
The regulators are just sitting on their hands waiting for the whole thing to crack before meddling into the issue and they are so far behind the curve that I do not think they can measure how deep the problem is.
What can you do ? My advice , stay cash ! at the present time we don’t know how deep the rabbit hole goes. Nor does the Fed or the regulators.
I agree we have much further to fall before reaching fair value. My point is that cry babies are blaming the Fed’s piddly last one percent of raises when obviously that wouldn’t make much difference to the appropriately priced stock of a healthy company.
They are saying the Fed has gone ‘crazy’ (the Chief’s word) when it is the market that went crazy.
WOLF !!! “I don’t believe it! “Nothing goes to HELL?” HELL???
What has this market done to you??
I hope you are ok because in my book you are best in class – no contest.
right? wolf said the aitch eee double hockey sticks word! i’m shorting everything!! ;-)
There’s still tons of delusion out there. Everything is still way overpriced. The recent price drops haven’t created any bargains.
Wake me up when Microsoft is trading at 20x earnings, instead of the current 40x.
Agreed; but youre starting to see some value in certain pockets, even within FAANG. (I.e whereas NFLX and AMZN have legitimate business model issues given capex and amount of cash they burn through, AAPL now trading at 11-12x earnings seems at least digestible with that cash horde).
Caveat emptor on some of the former tech darlings though.
Agreed, I’m looking closely at AAPL. Their dividend yield is less than 2%, which makes it less attractive than CDs or 12-month Treasurys. They could easily double that or quadruple that given their P/E.
So far they have been throwing that money away on buybacks (since buybacks = executive profits); $73B lost this year to obtain a lower stock price. Shifting to dividends would be a sign that their management is no longer trying to shaft the shareholders.
Look a little closer though Dale. Aapl has an impressive gap fill down in the 120’s area. I’m not holding this prince overnight until I see a traumatic wash-out gap fill.
Thank you, Wolf.
I am a daily follower of your posts and always find them educational.
Your chart on the S&P 500 corrections since 2008 is intriguing.
Based on the last 2 corrections in 2011 (-18%) and 2015 (-19%), since the S&P is now at -17%, should we be close to a bottom?
Was the -50% correction in 2008 a six-sigma, black swan event?
Is there something more to this drop (other than the tariffs and gradual interest rate rise (.25%)) that would indicate this correction will be worse than the last 2?
Thank you all for your inputs.
No, the 2007-2009 50% “correction” wasn’t a six-sigma event. The prior 50% “correction” was 2000-2002. We’re overdue for another 50% “correction.”
2 corrections of 50% within the same decade would indicate that it is not a six sigma event.
I agree that a correction of 50% is overdue.
Those who have sold in the end 2018 to claim the realized capital tax losses cannot buy back the stocks they sold for 30 days without raising the ire of the IRS. We’ll see who has the intestinal fortitude to go back into the market and repurchase those stocks they sold at a realized loss.
Those who want to know when the market turned after the 2008-2009 massacre can check out a historical BPI indicator P&F chart. The inflection point (bottom/turning point) of the S&P 500 was October 30, 2010. There were 2 years of bear traps before the market finally turned. Those who were early value hunters/bottom fishers died the death of a thousand cuts trying to catch that falling knife.
Nvidia mirrors the whole crypto-currency thing. The GPUs could be programmed to do the crypto-mining calcs. So, Nvidia was selling a lot of graphics cards to crypto-miners who would build a mining computer with maybe 5 or 10 of the expensive hi-end graphics cards in them.
Thus, as crypto-currencies have declined, firms like Nvidia which were selling the gear also would have dropped.
I did recently note that a lot of nice Nvidia stuff is up for sale on fleabay and elsewhere.
There’s an oddity in graphics cards nowadays. About 7 months ago I built a new rig. I bought a graphics card for £750. That same graphics card is now selling for £900. This is due to the demand from crypto miners so I don’t think the crypto story is over quite yet. As an aside the same applies to memory. The memory I purchased is now selling for £100 more than I paid. This is due to a reduction in manufacturing PC memory as resources have been diverted to make memory for mobile devices, especially phones.
Nvidia has been well known to restrict or even stop shipments of certain products precisely to create artificial scarcity and hence justify their pricing policies: for example they haven’t shipped any “midrange” Turing family GPU’s in Q4 precisely to help sell the the present Pascal family products at full price, while they are overstocked with them. It’s a policy that works until you can use the piles of unsold stock as a replacement for furniture. Nvidia is headed in that direction.
All PC component manufacturers, down to those making humble Power Supply Units, have jacked up prices since cryptocurrency mining and high end gaming became fashionable on Wall Street, some of them considerably so and others obscenely so.
Since now they cannot pin the price hikes on crypto-miners and high-end gaming is basically the same market as it was last year, they are pinning the blame for their own avarice on “other causes”, not unlike when Corsair Components jacked RAM prices 40% and blamed unspecified “natural disasters” hitting their factory in Taoyuan. Yes, I am old enough to remember that… :’-(
The reasons for Nvidia shares (NVDA) clocking such obscene gains and getting destroyed at such a rapid pace are a bit more nuanced than ,mere cryptocurrency hopes and woes.
Back in 2016 NVDA started to become very responsive not merely to financial and business statements, but to product reviews as well. Good reviews for Nvidia products usually helped stocks bumping higher.
It also helped that Wall Street was gaining an appetite not merely for cryptocurrency mining, but for “high end gaming” as well, despite both markets being a minuscule fraction of, say, the market for smartphones or soft drinks. It’s a periodic love affair which usually overlaps tech bubbles: just look at all the money that has been sunken into that non-starter, virtual reality, since the 90’s.
Finally it helped that Nvidia obliged Wall Street by announcing big price hikes along the way citing demand.
But what goes up must come down as well and 2018 saw Wall Street discovering not just that “high end gaming” is not the huge market they expected it to be, but that those raving reviews that helped fuel NVDA are now turning against it, with the most common complaint being “the product is nice but way too expensive for what it delivers”. News-driven trading works both ways.
Finally there’s the issue of all the unsold stock Nvidia has in their warehouses around the world which is the result of a vicious circle: Nvidia has been ramping up production to meet increased demand but that demand either doesn’t exist or is lower than anticipated. Were Nvidia to simply dump this stock on the market it would drive those high prices Wall Street love lower… damned if they do, damned if they don’t.
It was not just NVDA. NVda has a smaller float of under or about 500 million. Easy to goose. It was just another story pony for Wall Street to ride First gaming chips then AI driverless cars then the crypto bs. There were and are others in the 500 million float range. One by they get their turn. They did the same back in 2006 and like Icarus the wax melted and they all fell back hard to earth.
So what might be some options for common folks with their retirement savings in a fidelity managed portfolio, to save their 401 k or 403 b during a downturn in equities and high risk in bonds? Also, what are the risks of putting it all into an annuity/short term treasuries?
Please, do yourself a huge favor, and before you put anything into any annuity, research them very carefully, including the fees, the scandals, and ripoffs in that space. An annuity can be a legit product for certain people, but the space is full of ripoffs, high-pressure sales tactics, and big-fat commissions for the sales people. Buyer beware!
The stocks and bonds in the annuity can all drop with the markets and the institution that offers and administers them can also go bankrupt. The belief that an annuity is a buffer could be a grand illusion that gets exposed some day.
Yes. Before buying an annuity, check the fine print to see which institution is actually contracted to provide the payments which is probably very different from the well known brand name that is used to make the sale. The guarantor is very likely an organization you have never heard of, has no track record, and/or obscure or shaky finances.
In other words, a lot of annuities are ‘guaranteed’ by firms that are considered disposable, and will die — along with your payments — in the event of a financial conflagration.
I don’t recall you ever expressing an opinion on the “Back to the Land” movement. Successful practitioners sustain themselves more or less independently of the banking system, etc.
While you weren’t a back to the lander (you were literally at sea), you know the feeling of being a financial absentee, so to speak.
How can a farm boy be able to compete in the financial wealth transfer game? We should let the wall street farm and then farm boy will have a shot to win. Seriously, this is sooo sad. To me, a farm boy “SHOULD” do nothing other than save half in cash, work for 40 years and retire on saved cash. But the system is such that “hey, don’t save, inflation will kill you, you HAVE to invest!” and then you throw farm boy into the shark pool and he will never retire. To save farm boy, we do NOT need annuities. We need sound money. End the FED! As opposed to let a farm boy figure out how to navigate the FED and the wall street sharks.
I’d be happy if the Fed just enforced the statutory inflation rate: “zero percentum”. If they had done this, rates would already be normalized. Instead, they have supported a ‘2% target’ that is in willful violation of the law.
That is designed to throw farm boy in the shark pool. Subsequently this is why farm boy is reading wolf’s articles. This creates a entire population of speculating the financial market, which is the wealth transfer game. If farm boy could spend the time and effort on farming, he may be much more productive
Right on, nothing goes in a straight line too long ..if this were the case the averages would hit the ground 0 in about 48 days (at this weeks rate)….. unless its the end of the world? hehe.
What if the market rallied big here Monday, few would expect that! Looks like a crash but could be the opposite Monday. I say an up day Monday close (tails).
Mine came up Heads.
“Ride the lightning” all the way down. Use a powerful ETF like TZA at three times the inverse to maximize your gains being short.
I wonder if Netflix will go back down to $3, where it was 10 years ago. With credit breaking down, and Netflix’s equity cushion depleting, it certainly seems possible. It might be the first and last $100B company to never generate any positive cash flow, ever.
Look at their ‘creative’ output. Netflix sure makes a lot of crap movies and TV shows. That can’t continue much longer.
That’s exactly what the disappointed viewers thought when they heard that Marco Polo was cancelled because it overshot it’s budget, a phenomenon unheard of at Netflix.
“I wonder if Netflix will go back down to $3, where it was 10 years ago?” – Bobber
I have a good till cancelled order to buy Netflix at $2.50 because markets tend to overshoot to the down side as well as to the upside.
Maybe stupid question but hey it is what it is; I’m new. Anyway the examples you provided to massive drops (2000-2002 and 2009) were doing recessions, one being “The Great Recession”. Do we necessarily need a recession for these numbers to keep dropping even further? Thanks!
No, it’s not a stupid question. It’s an important question, with answers going in both directions.
The stock market plunge started in March 2000, when the economy was still hot. Exactly a year later, in March 2001, the recession started (and it was over by Nov 2001). The sell-off didn’t bottom out until late-ish 2002. So it may be that the big stock market sell-off helped cause the recession. And outside of tech and tech-dependent areas, the recession wasn’t that bad, compared to the Great Recession.
In 1987 the stock market dropped 37% from top to bottom without a recession. It is now referred to as the 1987 crash and was more horrid than the 2007-2009 market drop because it all happened in two months instead of 1.5 years. It was the closest thing in 80 years to the 1929 stock market crash that went down 50% in 2.5 months. The 1929 stock market crash was the first of 7 stock market crashes (a crash defined as a 30% + drop in a few months) that took place over a 3 year period from 1929-1932. One crash in 1929, 2 crashes in 1930, 3 crashes in 1931 of about 40% each (the cruelest year), and one 55% crash in the first half of 1932 that ended the bear market in June/July 1932. Between each crash there were counter rallies that reclaimed about 50% back of the previous loss. When it was all said and done, from top to bottom tallied a total loss of about 90% of the surviving companies. An estimated 10,000 banks and tens of thousands of companies had gone bankrupt. The 2007-2009 bear market was a mild picnic compared to the 1929-1932 blood bath.
The legendary trader Jesse Livermore was short the 1929 crash and netted, according to wiki, about $3 billion in today’s money. Something must have gone wrong in the succeeding 6 crashes as he apparently lost his fortune and reportedly filed for bankruptcy. Too bad he didn’t just sit on his cash and live happily ever after. He committed suicide on November 28, 1940 in New York City by shooting himself in the head at the age of 63 years old.
“Too bad he didn’t just sit on his cash and live happily ever after. He committed suicide on November 28, 1940 in New York City by shooting himself in the head at the age of 63 years old.”
Greed imposes penalties beyond finances
It wasn’t necessarily greed – Livermore was a trader – it was probably more about the “action”…like a compulsive gambler
I certainly agree with the point about how the current people in the stock market didn’t experience the last downturn. It was only 10 years ago and all that remains are children. I just noticed recently that even in my mid 30s when I go to my local bank I am older than everyone except one assistant manager. I am the same age as the manager, feels weird since I remember all the previous managers being in their 40s or 50s.
I don’t trust 20 somethings with money, and they likely are in control of a lot of it right now.
I wonder how much of this drop in stock market has to do with the Fed retiring the money it injected into the system. If the money is floating around, it can always get actors on its behalf to buy to get the market back up and sell afterwards. But since the fed has been retiring the assets it ‘printed’, that liquidity is now gone. So isn’t it possible that the recent retirements led to the market hemorrhaging, may be because some kind of critical mass was reached (via loss of faith etc.)
Wolf, what are your thoughts on Technical Analysis? Many of the TA’s that have been around for 20 plus years have been predicting this sell off for a while…many of them way too early?
There are many, many gaps in the leg up since 2009…both Big Board and Nasdaq…
I know some TA traders they could see the long term distribution from last winter
All the index charts are frightening. Especially the last two years. Parabolic
Will the charts tell us the low? All bets are off on supports. But a guess can be back to the 2016 break up. That will the acid test of support. We have not seen this kind of selling action since 2000. But then we have not seen these kind of charts since 2000! NVda Adobe NFLX Aapl HD
And many more. The fundamentals were not there. Nothing goes straight up forever and what goes up hard and fast , comes down harder and faster. It was false ,fake ,abnormal and so all will pay for that party. The market is like the ocean. It cares not. Sailing is great when the weather is good and the winds push you forward. Its now smashing on the rocks time. There was plenty of time to be safe there still is. But one has to overcome the fear ( of missing out and recouping lost gains ) and greed
It’s been insane for a long time and now the participants will pay for it. I am truly very sorry and feel badly for the retail who were sucked back in the last 18 months
Once again wallstreet gets their muppets
Great job wolf richter. You get read by traders. I find you a must read. Keep up the great work.
I think TA is a useful tool. When you think about it, TA is trying to quantify and visualize mass psychology of the market. Part of it is self-fulfilling prophecy: when TA says convincingly that stocks will go up, and enough traders and algos see it, then they follow this buy signal, and stocks go up. It works — until it doesn’t. The problem is that it doesn’t work many times, and therefore is unreliable. But then, everything else is unreliable too.
It’s a tool of many tools in your toolbox. But if it’s the only tool in your tool box, I don’t think you’ll be able to do the job well — I’m talking long-term investing, not short-term trading specific stocks, which is a different ballgame.
BTW, there was quite a bit of TA that predicted that stocks would continue to rise this year. Which is the other part of the problem with TA: people can pick and choose what they want to see.
There are two other big issues with TA
Who paid for it ,and who really owns the entity, that produced it.
I know you asked Wolf and not me but my two cents…
TA, especially pure charting, is visually compelling and it sure looks like it should be meaningful. I’ve run many, many TA strategies through statistically controlled models and none of them have been significant at < 0.05 over the long term. Those that use TA are/have at least one of:
1. Know modeling that works but that they keep to themselves. This is definitely possible but I haven't found one myself. Certainly the commonly advertised approaches in most books do not work out of sample.
2. Lucky and they don't realize it
3. Lucky, and they do realize but pretend they don't, making them liars
4. HAve been unlucky, lost their capital, and have disappeared.
After the 87 record percentage drop, unforseen by techs, Lois Rukeyser asked head tech Bob Nurock: ‘so do you still believe in this stuff?’
All it measures is sentiment. Note the daily phrase: ‘The psychologically important level of (any round number)’
If you’d charted the Japanese after Pearl Harbor the chart would have looked great. But fundamentals were not.
It really doesn’t matter any more whether market sentiment is positive or negative. The fundamental facts, aka reality, are overtaking perception. We are at peak debt.
As long as financing is available buyers will bid sellers to the moon.
But financing is not going to be available. The rush to the cash window has begun. and there are multiple demands on each dollar.
Correction: Louis Rukeyser
Wolf, hope you have a Merry Christmas and a very Happy New Year and I wish you many blessings so you can continue to provide in 2019 and beyond an excellent and honest voice in this disinformation era.
You shoud be very proud of your work and the fortitude to speak out.
And your name Wolf, says it all. The one who rules the wilderness.
Maybe it’s time to revive the Harry Brown Permanent Portfolio:
25% long bonds
25% bitcoin whoops, not digital gold, physical gold
All kidding aside, up until recently, everybody laughed at this allocation, now there is silence.
It will also be interesting to see if all those people that took a tax loss on Bitcoin for 2028, will go back in on the first week of January (since wash sales don’t apply to bitcoin). Once burned, twice shy will be my guess. Maybe physical gold will come back in fashion. We will know in the next several months…..
“Maybe physical gold will come back in fashion.”
Junk silver, for us peons.
I’ve never seen a good explanation why physical gold is better than something like the fund GLD, which holds physical gold in a truly safe place. I know people that have had their houses ransacked by thieves who found gold.
I think the crooks tell you to buy physical gold so they can reap a huge commission.
if you can’t touch it, you don’t own it.
I think if we’re back to using physical gold as a medium of exchange, I’d rather be invested 25% in guns.
nobody said as a medium of exchange, rather a store of physical value
“They” are letting some air out the bubbles and trying to get interest rates up to better levels for those that took it on the chin during ZIRP.
“They” are fine with this causing pain for Trump as we all know most of “them” want him out of office sooner than later, but definitely no reelected. A second term for “them” would be unthinkable. Or as Trump himself would say, “Bad, very bad. Very bad, very, very bad.” It’s a disaster.” :-)
After all the dust settles, an effort will be made to move things back up a bit. It is not in “their” interest to have a languishing stock market.
Tax loss harvesting is the reason the market is going down?! No.
agreed. ludicrous. reached maxuimum saturation. Only so many people to sell iphones to
wolf thanks for a great year. I learned plenty from you and comments by others, which has saved (made?) me some $. I hope to continue to learn from this site. Some of the best analysis anywhere.
Best of Luck to you.
Joan, that gtc order won’t happen for a loooooong time. Here’s a piece from CNBC describing the “circuit breakers” that were put in place to slow, then stop, a market crash (from 2/2/18):
“The NYSE, Nasdaq and other exchanges put these circuit breakers in place after the October 1987 crash and a subsequent one in 1989.
The first level gets triggered if the S&P falls 7 percent between the opening of trading hours at 9:30 a.m. in New York and 3:25 p.m. (or 12:25 p.m. on days when the stock market has a scheduled early close).
The next trigger, level 2, kicks in when the index falls 13 percent, another 15-minute halt. To get there on Monday, the S&P would have to fall to 2,403.
Level 1 and 2 halts can only happen once per trading day. If the S&P fell 20 percent (that would be to 2,209 as of Friday), trading would stop for the rest of the day.”
Well, you may be right about the rally, but wasn’t there supposed to be a big stock buyback which would keep the market up? And that didn’t happen.
The buybacks have been played out all year; the ONLY reason the market peaked in Oct as opposed to crashing sooner.
I find your subtitle very telling.
In my profession, the most highly paid on earth (if you exclude the outliers such as professional athletes, world class business etc..) I read many blogs dedicated to “retirement”.
And a huge chunk of those professionals have a religion: faith in the markets.
They follow the accumulate blindly thru indexing and even calculate projections as to their target number.
Not even knowing that the generation that preceded them got decapitated 18 years ago , following the same strategy.
I hope they succeed. I really do.
But the risks loom large in my mind that a major correction/bear will devastate portfolios just when some have finally decided that “based on a 4% withdrawal rule I can live without work forever”
Yes, we’ve heard that before.
May God bless the faithful.
My parents lived through the depression, and entered their retirement years just about the time the market (and USG spending) went on a tear in 1980. They distrusted the stock market, emphatically. This may well be the flipside to that distrust, the generational reversal of “buy and hold”. There are two forces at work; one is that the stock market is becoming commoditized, two the way to raise money is bonds, all children should be born with a bond. Despite the excesses, and abuses on the bond market, it remains the future of investment.
Yes as Buffett says people invest with a rearview mirror.
Your parents were wrong at the bottom of the market, and I’m afraid an entire massive generation has fallen pray to the untested buy and hold mantra at exactly the peak.
It’s a common feature of investing. Being completely wrong at market turns.
I hope that i’m wrong. But if not, the retirement dreams of many millions of people will be shattered.
There’s someone up there who said 1/4 cash 1/4 bond 1/4 gold, art, 1/4 stocks, that’s about true for half of my stuff, the other half being RE.
Wolf said: “This is why this stock market downturn will be highly volatile with many big ups and downs, and with an overall down-trend that is likely to last for years.”
I agree with this 21 trillion percent. The Fed is out of ammunition, our government is more corrupt and incompetent than ever and, lastly, one plus one still equals two. Oh shoot!!
Here comes the Piper my fellow Americans, and he’s not dressed like Santa Claus.
Clearly, the FED sees inflation potential dead ahead, and is trying to front run that problem.
However, the front run is causing the wheels to fall off the markets.
So, one or more of the central banks will throw in the towel and live with inflation just to keep the wheels on.
That is my base case. Get ready for inflation with slowing growth. That is the new normal.
The Fed sees full employment, and assumes subsequent inflation based on its outdated playbook that has constant population growth hardwired into the models (kinda like they assumed real estate always went up). Because of demographic trends in Japan and Western Europe (and soon the US), it’s disinflation everywhere.
Any redesign of the US – China trade rules will certainly be substantially inflationary. That is the big dog.
If you want robust economic growth, look to SE Asia and Africa. That’s where the people are.
Totally disagree about the ‘head wind’. We are entering a global recession. I think the best we can hope for in 2019 is sideways trading, after another round of sell offs in Jan.