Rosenberg Daily - An overextended market

Of course, the market is at least as complacent now and confident over the prospects of vibrant economic growth and double-digit earnings as it was this time last year and at least as overbought and in some respects more expensive too. The end of QE and signs that the first quarter GDP was going to be the peak for the year alongside debt problems in Europe were all critical in engineering what was quite an unexpected near-20% correction from last April through to the tail end of the summer. We may be on the precipice of seeing something similar (check out what bond yields and CDS spreads are doing in the eurozone periphery today — not a pretty picture).

Those of us that chose to watch the speculative fervor will have another kick at the can in coming weeks and months as the “trapped longs” on this market are forced to liquidate. The Chinese, Indian, and Brazilian stock markets are all down double-digits from their nearby peaks and bond markets there are weakening substantially, which may be telling us something about the policy, liquidity and macro (inflation) outlook in these regions. And let’s keep in mind that S&P 500 revenues have been growing 8x faster from overseas operations than from what has been happening at home where the trend is still barely in low single-digit terrain. India’s stock market, one of the world’s darlings not too long ago, just traded down to a seven-month low.

At a time when there are at least three times more market bulls as there are bears, the VIX index is south of 16x, and signposts of bullish sentiment and complacency at extreme levels, it will be interesting to see how this plays out. All we can say is that the probable end to QE is likely going to prove to be a very big deal (see more below). Sorry, but there are some serious folks at the Fed, Mr. Fisher from Dallas is one example and there are others, who really do not want to see oil at $130 a barrel, gasoline at $5 a gallon or wheat at $50 a bushel, even if that means the stock market has to correct 20% from here.

A rising stock market may do wonders for the 20% of the U.S. population that actually own equities; but as we saw in the first two rounds of QE, they do not bring down bond yields, and as such they do not bring down mortgage rates which in turn does very little to help the one sector with the most powerful domestic economic multiplier impacts — otherwise known as housing.
---Today