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Russian Bear Rattles markets, but PPT Rides to the RescueGary Dorsch Investing is an inherently risky business with lots of uncertainties. At any given moment, the bullets can fly from any direction, and at a bare minimum, the investor hopes to emerge unscathed from the battlefield. But of course, the goal of investing is not just to break-even, but to earn a sizeable profit in the marketplace. And for the past 5-½ years, there has been no better way to maximize gains, than sticking with the traditional “Buy-and-Hold” strategy. It requires a lot of patience, a lack of emotion, and a firmly held belief that the Federal Reserve and its central bank allies will always bail you out of a difficult position. Billionaire investor Warren Buffet reminds us that most investors are often blinded by the markets’ gyrations and the latest quotations, and foolishly listening to market pundits, rather than dollar cost averaging for the long-term. “Forming macro opinions or listening to the market predictions of others is a waste of time,” Buffet says, and warns against “letting the irrational behavior of other investors, make you behave irrationally as well.” Instead, “Ignore the chatter about markets, the economy, interest rates, price behavior of stocks, etc, and don’t listen to pundits and, don’t consider acting upon their comments.” Legions of analysts have tried to predict the future trends in the marketplace, by collecting whatever information is available, connecting the dots, and making deductions about the future. However, there are so many moving parts in the equation, such as P/E ratios, central bank intervention, geopolitical events, the macro outlook, corporate revenues and profits, the direction of interest rates, terrorism, droughts, bumper crops, and leveraged trading, etc.), which makes it very difficult to accurately predict the future. “The only value of stock forecasters is to make fortunetellers look good,” Buffett says. Instead, computer programs have replaced human analysts and traders, and the US-stock market is now mostly running on algorithmic auto-pilot. New developments, including high-frequency trading, a proliferation of exchange-traded funds and free information via bloggers and social media, are behind this seismic shift. Algorithms can analyze 150 different variables at any moment in time, and fire off trades in milliseconds based on complicated fundamental and technical models and front-run the average small investors, before the human eye can read company or government news releases. This kind of trading accounts for up to 70% of volume on some days with the full support of the US-exchanges. However, there are very rare events that occur somewhere around the world, otherwise known as “Black Swan Events” that can befuddle “financial science” and the best designed computerized models. For example, heading into 2014, few traders could’ve predicted that the Kremlin would act to seize Crimea’s territorial waters along with the region itself, and that Moscow would deploy 20,000 to 45,000 troops along the eastern and southern borders of Ukraine, thus marking the start of the biggest confrontation between Moscow and the West since the Cold War, and triggering a round of economic sanctions with Europe and the US.
By definition, a “Black Swan” is a chain of events that radically deviates beyond what is normally expected and with only a 1% chance of happening. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader. “If it’s a Black Swan Event, - it’s unpredictable.” Yet, “the odds are very good that unpredictable things will happen in a lifetime,” in a manner that can stump even the most sophisticated algorithims, because one just cannot include the truly unknown into a computer program. The 9/11 attacks would qualify as a Black Swan event. Some would argue that the sequence of events that led to the bankruptcy of Lehman Brothers in Sept 2008 was a Black Swan, certainly by those who never dreamed that half of the value of their homes could be wiped out. Likewise, the recent sequence of events that led the European Union and the United States to launch stinging sanctions against Russia’s energy, banking and defense sectors, - can probably be regarded as a “Black Swan” sequence. The situation worsened dramatically after another unforeseeable event, - the downing of Malaysian flight MH-17 over Ukrainian territory on July 17th by what the West says was a Russian-supplied missile. As such, over the course of the past 4-weeks, the German DAX-30 index, - Europe’s top benchmark stock index began to stumble, skidding -11% from the psychological 10,000-level to as low as 8,920, as the specter of economic warfare with Russia became a reality. In turn, the slide in the German DAX acted as a catalyst that knocked the Dow Jones Industrials index -4% lower. German companies are some of Russia’s biggest trade partners, and if the deepening standoff between the West and Moscow is sustained for an extended period of time, Germany’s blue-chip DAX-30 companies could feel the pinch. Germany exported about €36-billion worth of goods to Russia last year, from defense to car manufacturing, almost a third of the EU’s total, and some 6,200 German firms are active in Russia with €20-billion of direct investments. Despite active lobbying by German industrialists, Chancellor Angela Merkel has backed a hard line with Moscow, supporting the imposition of tougher economic sanctions by the EU. Mr Taleb says protecting against Black Swan Events should be the cornerstone of any financial planning. However, die-hard “Buy-and-Hold” investors disagree, arguing that the Fed can always be relied upon to come to the rescue of the ultra-wealthy class, no matter what unforeseen crisis erupts and upends the markets. With a long-term view, any correction of -10% or more is considered by “Buy-and-Hold” enthusiasts as a chance to buy US-stocks at a bargain price, with new found profit potential. And history does show this has been the case. The US-stock market has overcome varying degrees of economic recessions and unexpected financial and geopolitical crisis over the past few decades, - because the Fed has always come to the rescue of the equity markets, with injections of cheap money and clandestine intervention in the futures market, dubbed the “Greenspan – Bernanke Put.” Central Bankers and Cohorts warn about Market Risks. By now, it’s almost universally recognized that main aim of the Fed’s radical monetary policies, supported by its G-7 central bank allies, is to push investors into the stock markets. Dallas Fed chief Richard Fisher warned 2-½ years ago that the markets were hooked on the Fed’s “monetary morphine,” and Bank for International Settlements (BIS) noted 1-¼ year ago that the European and US-stock markets were “under the spell” of the world’s central bankers, with cheap money driving stock prices to record highs despite a lack of good economic news. Even though the Euro-zone’s economy has remained stagnant, and corporate earnings are disappointing, investors continue to bid-up EuroStoxx prices. On Wall Street, there hasn’t been a correction of -10% or more, for the past 36-months. There’s only been four other times since World War II that US-stocks evaded a correction for as long as the current 36-month stretch. Historically, corrections of -10% or more occur about one every 18-months. While Fed officials are happy to see the stock market hit new all-time highs, there’s also a growing concern, that if left unchecked, - “irrational exuberance” could kick in, and the stock market could suddenly go parabolic - into what’s called a “Melt-up.” If that happens, the rally would become unsustainable and would inevitably be followed by a nasty -10% correction that could possibly morph into a grizzly Bear market, - or a loss of -20% or more. In turn, losses of -20% or more could cause serious problems for the US-economy. As such, several actors in the brokerage business and central bankers have started to issue a chorus of cautious comments on the stock markets in recent weeks, in what appears to be a concerted effort to take some the of steam out of the “Least Loved” Bull market, and shake out some of the speculative froth. In doing so, central planners aim to restore the framework of two way market, and prevent the outbreak of a “Melt-up.” Policymakers usually turn to “Jawboning” as the first line of intervention to influence trader psychology. First in the batter’s box was Goldman Sachs chief Lloyd Blankfein who told viewers of CNBC on June 12th, that the “low level of volatility (in the stock market) won’t last forever.” With the S&P-500 index opening at the 1,942-level, Blankfein warned quite prophetically that, “Stocks are rather calm, but investors need to be vigilant against complacency, because it can lead to shocks in the market. The luxury of a steady, calm, quiet market might last for a while, but it can’t last forever. The danger of some exogenous event that’s going to cause people to have to reset their portfolios, - constantly lurks. There is always something coming that we don’t know about because nobody knows what the future is. My most important skill is to worry about everything. I am highly paranoid,” Blankfein added. Five weeks later, Blankfein’s warnings appeared to be prophetic. On July 19th, there was a “Black Swan” event that occurred out of nowhere and began to ruffle the markets’ feathers. US-intelligence officials concluded that Moscow gave the SA-11 Gadfly surface-to-air missile antiaircraft system to pro-Russia separatists in eastern Ukraine that shot down Malaysia Airlines Flight-17, killing all 298-passengers aboard. On July 21st, Senate Intelligence Committee chairwoman Dianne Feinstein declared the US was in a new “Cold War” with Russia. “I think the world has to rise up and say, we’ve had enough of this,” she said.
One June 29th, the BIS reiterated its warning that the G-7 central banks could keep monetary policy “too loose for too long, with potentially damaging consequences.” “Ultra low interest rates and the failure of policy to lean against the build-up of financial imbalances are in danger of making the global economy permanently unstable.” Instead, “monetary policies are needed to “tame the financial cycle” and “lean against financial booms, rather than just ease aggressively and persistently during busts,” the BIS advised. On July 15th, the Federal Reserve issued an unusual warning, saying the valuations of small cap companies, listed in the Russell-2,000 index, social media and biotechnology shares, and lower-rated corporate debt, (junk bonds) appear to be “stretched,” with ratios of prices to forward earnings remaining high relative to historical norms,” the Fed said in its semi-annual Monetary Policy Report delivered to Congress. On July 16th, Carl Icahn, the “King of Corporate Raiders,” - told CNBC that he was “very nervous about the US equity markets.” On July 17th, Bank of America Merrill Lynch joined the growing ranks of Wall Street strategists who think a -10% correction isn’t too far away. “A necessary condition for an equity market correction is greed and measures of greed are increasingly boosting the case for volatility and a correction in the autumn, in our view.” On July 22nd, German Finance chief Wolfgang Schäuble added his voice to the naysayers, in a interview with newspaper Handelsblatt. “We cannot just leave the prevention of (asset) bubbles to the state supervisors. Central banks must keep that in mind when they take their decisions about money supply,” Schäuble said. On July 26th, Goldman Sachs analysts did a 180-degree turnaround, suddenly warning about a pullback, saying “Global equities and bonds may retreat in the next three months, with stocks at risk of a brief selloff, as rising inflation boosts yields.” On July 30th, Pimco’s bond chief, Bill Gross warned; “investors should say “good evening” to the prospect of future capital gains in asset markets as interest rates are set to rise while the economy grows at a slow pace.” However, when these words of caution failed to nudge the markets out of their serene sense of complacency, it was left to former Fed chief “Easy” Al Greenspan to throw down the gauntlet and strike a little bit of fear into the marketplace. On July 30th, Greenspan rocked the markets, saying, “The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction,” he said in an interview on Bloomberg Television’s “In the Loop.” “Where that is, I do not know,” he added. The impact of Greenspan’s verbal intervention was felt the next day, when the S&P-500 index plunged 40-points lower, to close at the 1,930-level and the Dow Jones Industrials plunged -317-points, to close at 16,563-points. The CBOE’s Volatility Index, known as VIX, which measures the cost of purchasing insurance as a hedge against a decline in the S&P-500 index jumped to above 16.5 on July 31st, after trading at a seven year low of 10.5 in the beginning of July. Greenspan was able to engineer the minor pullback, even though S&P-500 companies were beating earnings and revenue estimates by a significant margin. To read the rest of this article, please click on the link below: http://sirchartsalot.com/article.php?id=193 ### Aug 14, 2014 321gold Ltd |
