IF YOU THINK THAT WAS A CRASH….

Last week’s volatility to the downside was entirely predictable, as the first leg down during this ongoing market crash reached the correction stage of 11%. The technical bounce was a given, as the 30 year old HFT MBAs on Wall Street have been trained like rats to BTFD. In their lemming like minds, it has worked for the last six years of this Federal Reserve created “bull market”, so why wouldn’t it work now. Last week was their first lesson in why it doesn’t work during bear markets, and we’ve entered a bear market. John Hussman seems amused at the shallowness of the arguments by Wall Street shills and CNBC cheerleaders about the future of the stock market in his weekly letter. After this modest pullback from all-time highs, the S&P 500 is still overvalued by 92%:

Following the market decline of recent weeks, the most reliable valuation measures we identify now project average annual nominal returns for the S&P 500 of about 0.5% in the next 10 years. On a broad range of historically reliable valuation measures (see Ockham’s Razor and the Market Cycle) the May peak in the S&P 500 reached valuations averaging about 114% above run-of-the-mill historical norms – more than double the valuation levels that have historically been associated with the 10% average expected market returns that investors have enjoyed over the long-term. At present, those measures have retreated to about 92% above historical norms.

Keep in mind that low interest rates don’t raise the estimated 10-year expected return on stocks from the current 0.5% level. Low interest rates only make the low expected return on stocks somewhat more “acceptable” because the alternatives are similarly dismal. The Federal Reserve’s policies of zero interest rates and quantitative easing have done nothing but to encourage yield-seeking speculation, bringing valuations to extreme levels, and leaving prospective future investment returns equally depressed.

Those who assert that high equity valuations are “justified” by low interest rates are actually (and probably unknowingly) saying that 0.5% expected returns on equities over the coming decade are a-okay with them. But it’s critically important to understand that while low interest may help to explain why current market valuations have been driven to obscene levels, low rates do not change the relationship – the correspondence – between elevated valuation levels and dismal subsequent long-term market returns.

It is time to assume crash positions because we have not experienced anything approaching a crash thus far. We’ve hit nothing but an air pocket.  As Dr. Hussman points out so succinctly, market crashes do not happen at the peak. There is usually an initial 10% to 14% decline as the smart money exits stage left, then the lemming dip buyers pile in and drive the market back up, but fail in bringing it above the initial high. It’s only then that sentiment deteriorates, support levels are broken, and all hell breaks loose. That time is coming.

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For Oil Price, Bad Is The New Good

Lately, oil prices have gone up when they should have gone down. In the last week, OPEC decided not to cut production and the two major energy agencies reported that the world over-supply problem is getting worse.  Brent futures increased from $62 to $65. Bad is the new good.

The expected bad news on Friday, June 5 that OPEC would not cut production was skillfully cloaked in positive statements about growing demand. On Monday, June 8, Brent opened at $62.69 and rose to $65.70 over the next two days.

On Tuesday, June 10,  the EIA published its monthly Short-Term Energy Outlook (STEO) that showed that the production surplus responsible for low oil prices had increased in May to almost 3 million barrels per day (bpd).

http://www.artberman.com/wp-content/uploads/World-Liquids-Production-Surplus-or-Deficit-Brent-Crude-Oil-Price_June-2015-.jpg
Figure 1. World liquids production surplus or deficit and Brent crude oil price. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

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