MorningWord 12/16/14: Here We Go Again? – $SPX

by Dan December 16, 2014 9:28 am • Commentary
I generally like to keep out of other people’s business, especially when it comes to money. While I speak and write daily about the markets/investing/trading I do not consider such punditry as advice, merely informed opinions. But every so often I find myself giving unsolicited advice to the people closest to me when I feel they have the potential to be swept up in something they wouldn’t have otherwise seen coming.  Below is an email I wrote my parents and in-laws yesterday:
From: Dan Nathan <>
To: Mary Jane Nathan; Steve Nathan; Sarah Nathan; John Lowe; Jackie Lowe
Sent: Monday, December 15, 2014 12:21 PM
Subject: your money
the equity markets are not far from their recent all time highs, down about 4.5%, but as u know OIL prices have crashed.  the financial media and your broker are going to try to convince you why this is great for the US economy, which it may well be in the near term, but it wont be fantastic if US energy producers start mass layoffs, stop investing in R&D, cut dividends, layoff workers, with the weakest links defaulting on debt and possible bankruptcies. While the latter may be a low probability event, it is just those sorts of events that  have caused sustained sell offs in equities in the last 15 years with two incidences of peak to trough draw-downs of 50%. Another sort of back swan if you will, and very related to a sort of corporate credit event, that for now appears to be brewing in the U.S. Junk bond markets, would be some sort of sovereign default by countries like Russia, Brazil or Venezuela that are very levered to the price of oil. These two put together could be the spark for what would be a fairly symmetrical end to the bull run that started in early 2009. We crashed in 2000, topped in 2007 that led to crash in 2008, and then a potential top that started in late 2014 with a potential crash in 2015.
All I am saying, which i have mentioned on a couple times this year, the value proposition to committing new capital to US equities when the Fed has ended unprecedented easing is NOT great, and I would be selling a little every month as opposed to adding profits back into the markets.  I am not saying to call your broker and panic, but I think at your age it makes sense to be prudent as opposed to opportunistic. I am shocked by what appears to be massive complacency by most market participants and pundits given the dramatic moves in industrial commodities, the strength of the U.S. dollar and U.S. Treasuries, weakness in high yield and the equity crashes in Russia and Brazil.  All of this with the backdrop of weak economic data from China, Japan and Europe.  
It is my view that the oil collapse is a direct response to the Fed’s end to QE, this was the asset bubble that was inflated by $4 trillion of asset purchases, demand for energy and other industrial commodities as the world was convinced that the central banks would bail out the global economy, so just build and buy.
So from where I sit, the Fed is done with crisis stimulus, after 6 years, that turned into monetary policy that inflated risk assets for a very few.  China and Japan are easing but doesn’t seem to matter much as their data continues to be weak, despite recently strong stock markets.  Brazil and Russia are a disaster.  I suspect Russia about to do something very dumb from a geo-political standpoint.
In Sum 2015 gonna be a messy year.  I would be a seller on sharp rallies, raising cash and look to be opportunistic on sharp declines, north of 25%, that’s where u start stepping back in with recently raised cash, start, not all in, cause the Fed has used most of its favored arrows in its quiver and not sure what they have left if the global economy takes a turn……oh and it is very unlikely that the U.S. economy can de-couple from that of the rest of the world.
Happy to discuss.
The note summarizes my views on how this bull market could end. I don’t know exactly when that happens but the sense that it could be soon has been crystallized by what I feel is abnormal dislocations in almost every risk asset class in the world except U.S. equities. After the low volatility bull run we’ve had the past few years, it’s easy to forget just how painful a pullback, or even worse a bust like 2000 or 2008 feels to people that are retired or retiring. While this cycle of booms and busts is becoming very commonplace for those like me that entered this business in the mid to late 1990s, the shortening of such cycles for those who have invested in the markets for decades is troubling. The purpose of the note was not to have them run for the hills but to thoughtfully consider that the next 25%+ drop may result in a sustained market downturn, more like that of 2000 to early 2003 as opposed to the V bottom that we got in early 2009.
It is important to note that as bad as the financial crisis was, the actions taken by the Government (TARP, Stimulus, Auto Bailout etc.) and the Fed (QE) meant that amazingly the only down year in the last ten for U.S. equities was 2008. But I am hard pressed to think that if we were to crash again that the Fed or has enough ammo to orchestrate a quick V bottom. And I can’t imagine another stimulus bill, bank and auto bailout given the current political situation in Washington.
All that is BIG PICTURE though, and something to think about with your asset allocation if you are retired or about to. On a more immediate time-frame, the set up into tomorrow’s Fed meeting seems a bit treacherous for shorts (spoke of this yesterday in this space (MorningWord 12/15/14: Don’t Fight The Fed Week $SPY). We’ll continue to trim shorts on down days and only add to them on rallies. Some sectors are getting to an oversold situation alot faster than others and we’ll start sniffing around in those from the long side.