That’s bad news. Unless you happen to be among the stock market investors who in the U.S. spent the last week bidding up stock prices like there is no tomorrow. They are playing with fire and are likely to get burned.
The Dow Jones Industrial Average rallied 3.5%, or 579 points, to 17,823.81, while the S&P 500 jumped 3.3%, or 66 points, back to 2,089.17. The Nasdaq Composite Index added 3.6% to reach 5,104.92.
Below the surface, however, market internals were horrible with anything energy related getting “schmeissed” in the words of legendary market guru Doug Kass.
And the high yield bond market, which we will get to in a minute, is even worse.
“Bad News Is Good News” Comes Roaring Back
It wasn’t just U.S. investors ignoring obvious threats to their financial well-being. Stock markets around the world rallied last week. Asian markets were up around 1.5% while Germany jumped 3.8%, London 3.5%, and France over 2%.
The reason, of course, was the old “bad news is good news” idiocy that believes that the worse things get, the more central banks will do to prop up markets with more easy money. This was an odd reaction in the face of increasing signs that the Fed is getting ready to raise rates in December.
The Fed still has time to chicken out if markets turn south again, but investors decided to ignore the evidence of economic weakness to interpret signals of a coming hike as evidence that the Fed believes the economy is strengthening.
In view of the fact that the Fed has consistently misinterpreted jobs and inflation data throughout the Yellen years, this is not the conclusion I would reach or on which I would base investment decisions. The U.S. economy is not improving; it is faltering.
On the other hand, European Central Bank President Mario Draghi didn’t disappoint. He promised another round of QE in the near future.
So, rather than face up to the fact that years and trillions of dollars of QE have failed to fix broken economies, investors decided to play along for another week and push stock prices to even more unsustainable levels.
In recent years, Europe has demonstrated that it cannot manage its economies or defend its borders. Why anyone would believe a word spoken by any European leader, especially Mr. Draghi, is a mystery to me.
The Picture Isn’t Much Better Here
Back in the United States, the credit markets are falling apart. The average price in the leveraged bank loan market has dropped below $0.90 on the dollar, a warning sign to investors that serious problems are lurking in leveraged companies. After all, bank loans are the first to be paid back if a company goes bankrupt and rarely lead to significant losses.
The high-yield bond market has given back all of its October gains. The average yield and spread on the Barclays High Yield Index were back at 7.95% and 597 basis points on Friday, just below key 8% and 600 basis point levels breached in November.
But just as the market cap weighted stock market indexes don’t tell the story of the stealth bear market in equities this year, the index data doesn’t begin to describe the destruction in the bond market…
Liquidity is non-existent. Anything energy or commodity-related is trading at prices that signal that investors do not believe they are going to be repaid. Even highly leveraged companies that can pay their bills but have little prospect of reducing debt like iHeart Media Inc. (OTCMKTS: IHRT) (the old Clear Channel Communications) have seen their bonds plunge to well below $0.50 on the dollar.
Few if any credit hedge funds are showing positive returns for the year and most are sporting losses. Those of us who have been doing this for a long time know that credit markets are better readers of the economy than stocks. The warning signs are flashing red for anybody willing to pay attention.
Behind This Bad News Is a Rising Dollar
The U.S. Dollar Index (DXY) ended the week at 99.61, its highest level in more than a decade. The euro and yen are faltering again. More European QE will trash the Euro. Japan is back in recession, which will pressure its central bank to engage in more stimulus.
A strong dollar makes it virtually impossible for global commodity prices, including oil, to rally. Oil is back at $40 barrel (WTI crude), a price that is unsustainable for frackers and extremely painful for the majors.
When the price of the most important commodity in the world collapses by more than 60% and stays there, people need to pay attention. It means that something is wrong with the global economy. As I have been saying for more than a year, the price of oil is going to stay low for much longer than people think. Believing otherwise has already proven to be a very expensive mistake.
Lower oil prices are not the boon to retailers that everyone expected. This is primarily due to the ability of people to shop online and the necessity of consumers to divert their energy savings to pay for higher healthcare costs.
Higher premiums and deductibles under the law, as well as skyrocketing drug costs and defensive medicine, are sapping spending power from consumers. Analysis of consumer spending and GDP numbers shows that the only area of real growth in the economy is healthcare spending… as millions of uninsured are added to the healthcare rolls (without asking anything of them in return) and the government shifts some of the burden of paying for the uninsured to the private sector.
If you want proof of what is happening with the typical consumer, look at the numbers and ignore Wall Street analysts – or political hacks trying to prop up a broken law.
What does this mean for investors through the end of the year? Frankly, your guess is as good as mine. A lot of investors are praying that markets will keep melting up to reduce their 2015 losses. But stock prices are rising based on nothing more than empty promises from central bankers.
I will end this piece the way I started it: Commodity prices are plunging, the dollar is powering higher, Obamacare is collapsing, economies everywhere are faltering, and terrorism is spreading across the globe. If you think that environment is good for stocks, you know something that I don’t.
We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.