As most clients know I have a negative bias toward Janet Yellen, even more so than her predecessor. Ben at least was an accomplished communicator of misperception which is another word for liar. I understand the need to keep up perception as confidence is key to keep an entire system based on debt and funny money running. But Yellen is just beyond awful. Evasive, nonspecific, and outright misleading her entire show yesterday was a pitiful exercise in faking it.
She has “no timetable, no formula”, she doesn’t know “what the appropriate size of the Fed balance sheet should be” nor when or how she would reduce it, but she is certain that “stocks are not in a bubble” except small caps perhaps. Her evasiveness was widely noted:
“Michael Feroli, chief United States economist at JPMorgan Chase, labeled Ms. Yellen, who grew up in Bay Ridge, a “Brooklyn Dodger” in a note emailed to clients after the hearing. “Yellen successfully dodged any attempts to attach more specific guidance on the timing of the first rate hike,” he wrote. “She did not say anything that sent a novel signal about the Fed’s reading of the economy or the outlook for policy.”
Nice she is keeping tabs on stock market valuations tough. Yet not since Greenspan’s “irrational exuberance comment” has any Fed chair voiced any concern about the stock market in advance. Ben Bernanke famously stated the housing market was fine before it blew up in everybody’s face. And why would they? Stock market valuations are essential to keep their game afloat. It used to be that stock market valuations were achieved as a result of economic growth. Now Fed chiefs want to manipulate stock market prices to achieve economic growth under the auspice that high market valuations produce job growth. Nonsense of course and Barclay’s announcement yesterday of 20,000 layoffs coming was another reminder of that stark reality. The structural reality remains the same: With advancing technologies fewer people are needed or hired more cheaply overseas.
While Yellen and her team completely misjudged Q1 GDP growth she is confident that the economy is on “track for solid growth in the current quarter” even as Goldman Sachs cuts its 2014 GDP forecast from 2.8% to 2.4%. What’s a 15% reduction among friends anyways?
She is stating these things with a straight face as yesterday’s productivity & cost report came in with disastrous numbers with productivity declining to -1.4% vs a prior 2.3% whith costs soaring to 4.2% vs a prior -0.4%. Anyone understanding basic finance can tell you these numbers are regressive on both ends.
While Yellen is not responsible for the structure of our current economic machinations she is now a key contributor holding the keys to large parts of the kingdom. The larger trends our society is producing should concern everybody just the same no matter one’s political orientation. Labor participation is dropping, high schools students graduate with limited reading and math skills, child poverty rates above 20%, and with millions on food stamps all the while wealth inequality reaching Egyptian pharaoh levels. One example highlighted yesterday using the income earned by the top hedge fund managers instantly gives the perspective:
“The top 25 hedge fund managers. If you ignore the bottom 22 and just focus on the top three, it turns out that David Tepper, John Paulson, and Steven Cohen earned a combined $8.2 billion last year. By contrast the BLS reports that there were 157,800 kindergarten teachers earning an average of $52,840 per year in the United States. That comes out to about $8.34 billion, so lightly more. Then throw in the #4 hedgie and it looks like James Simons made $2.2 billion. In other words the earnings of just four guys absolutely dwarf the combined salaries of all 157,800 kindergarten teachers in the entire country”.
Now making money is fine. I obviously have no problem with that, but if society continues on this path with the vast majority of the population just barely subsisting while an economic system fueled by unprecedented levels of debt benefits only the few while burdening the majority with all said debt I fail to see where there will be a long term happy ending. The reality is: The word recovery remains fake for most.
And speaking of fake: All those sky high valuations for the likes of $AMZN, $TWTR, NFLX, $PCLN, $TSLA, etc? It was all fluff, we all knew it, but those that spoke of it where again mocked by those spouting fantasies of unlimited growth and true recovery. The truth is unfolding in front of our very eyes and yet people are getting hurt. Sure if you chased MoMo stocks and are getting run over it’s your own fault, but who put that gleam of greed in their eyes? The show parade of banks, media, analysts that are again telling people not to sell in May. And they have to as banks are getting hit by low trading volumes, ie. $JPM seeing a 20% drop in trading revenue and so it is not wonder that their underlings are on CNBC shouting: Stock prices will rise, buy!
Oh it’s all so fake and obvious, but it is working still. Yesterday was no exception as we saw another exercise in fake signals. As the $VIX hit its 50/200MAs and was only 15 cents from breaking above its descending trend line with the $RUT collapsing to new lows below the 200MA and the $SPY dropping below the 50MA Yellen uttered the only word that mattered: Stimulus.
That’s all the algos wanted to hear and off we went for another V bottom. The easy answer would have been to just close shorts again and buy. But I chose not to. Doing so would have required me to abandon process and all analysis. Process and analysis do not make me right 100% of the time, but they keep me from being wrong most of the time. And that is a subtle but very important difference.
While we are finding ourselves in a very odd market marked by dislocations and huge divergences I cannot with a good conscience advocate reckless trading behavior even though the market seems to currently dictate it. The V patterns have and continue to suggest to just buy every breakdown even as divergences are getting worse and the larger backdrop is deteriorating.
When I see good risk/reward I trade aggressively, but when I don’t I won’t. Keeps me safe and with positive results in the long term. Going long yesterday was not good risk reward technically, but it was a successful play for those who wanted to play the Yellen put. Fair enough.
As it stands we haven’t accomplished anything from a market perspective. We go up, we go down, we go up…it’s one chop after another. My view remains that these divergences will resolve themselves to the downside, yet this market will continue to take everybody to hell and back before it happens.
Yesterday was a good shot for it to finally happen, but Yellen prevented it. Today she speaks again and Draghi is up for another round of empty pablum as well. Once those two are done markets can go back to reality a bit. It is Thursday before monthly OPEX and as you know markets tend to make their weekly lows on either the Thursday or Friday before. So my plan is to add to volatility long plays and sell scales on any early morning spikes today. As it stands markets have tons of supply ahead of trapped longs. None of this would resolve itself quickly and the structurally healthier direction is still a filling of gaps and a test of the 200MA on the $SPX. Blocking and tackling until we see the break.
Charts below. Can you spot the fake-outs?
To end on a lighter note to find an appropriate definition of ‘faking it’ I turn to a classic scene from Seinfeld. Enjoy: