The Evidence Is Mounting

More and more economic indicators are pointing out that Q2 2014 GDP will come out poorly, or at least below Wall St economists expectations, which is nothing new. I highly recommend David Stockman's blog to anyone who desires far more technical articles, beyond my 'readable' musings.

In a post on today, entitled The Keynesian Endgame Is Near; No Escape Velocity This Year, Either., He writes:

"Not only did American consumers not come bounding out of their winter ice caves as predicted by virtually every “sell side” economist, the number actually embodied a case of groundhog economics. That is, the May constant dollar PCE (personal consumption expenditure) print of $10.881 trillion suggested that consumers went back into hibernation! It was nearly the same as that during frigid February and actually below the March level of $10.916 trillion. Stated differently, the American consumer is dropping, not shopping, and the winter weather—-that surprising thing called snow and cold—had nothing to do with it."

"Dan Greenhaus, chief investment strategist of BTIG—-had an even more preposterous point. Based on the sentiment surveys and other factoids, he had divined that the negative Q1 number reflected January and February results and that the US economy had strongly rebounded in March.

In other words, he had done what amounted to an intra-quarter seasonal adjustment and explained away the following true facts. There have been 265 quarterly GDP prints since 1947; only 18 of these posted a number below the -2.9% recorded for Q1; and in only one of these 18 deeply down quarters was the US economy not in recession. "

To put it as I already have, it doesn't look good, and the awful GDP number was bad - consistently bad. It was not a fluke. The Government calculates GDP for a quarter four times, and each time they calculated it for Q1 it was revised downward. The -2.9% figure is officially in the books.

And to make the more broader point, where the hell are all the bear arguments?! Has everyone just decided that the Fed will pump markets up indefinitely, regardless of corporate earnings, consumer spending, inflation, and   junk yields?!

Lance Roberts of STA Wealth Management provides this chart to explain:

As junk bonds near their cyclical lows, stocks on the S&P 500 hit their cyclical highs, as shown by the dotted boxes. With the CPI coming in at 2.1% y/y, is it really possible for junk bonds to have a real yield of ~ 3%?! Junk bonds are for companies in poor financial condition, basically the worst possible companies to lend to and therefore some of the riskiest bonds (aside from CDOs and things of that nature on OTC markets). 

I'm really trying to spell it out here - S&P 500 is stretched, and stocks are vulnerable. But does it even matter anymore? Anyone who has tried to short the market in the last 5 years has had to very quickly cover after a short period of time because of the Fed's pumping scheme! It's gotten so bad, that the primary risk of fund managers is career risk. Again, here's Lance:

There are increasing tensions in the Ukraine and Iraq, the economy will show -2% growth for the first quarter next week (-2.9%), real retail sales declined in the latest report, and employment remains primarily contained to population growth and inflationary pressures are rising.

These issues are all known. The bigger risk for money managers and investors is to be “out” of the market. The belief is that regardless of what happens the Federal Reserve will step in to support the markets, so the “real perceived risk” is underperformance by managers which equates to career risk.

This is a VERY CRITICAL point to comprehend.

• Your mutual fund manager is PAID to pace the returns of their benchmark index. 
• They are not paid to worry about YOUR investment position.
• If the index rises by 10% and the fund rises by 9% – you take assets from that fund to move them to a fund that was up 10%.
• Therefore, the “risk” to a fund manager is the LOSS of assets by underperforming the benchmark index.  Fewer assets under management – lower income, or loss of job, for the manager.
• However, you THINK that this manager is going to “manage” the fund to protect YOUR money when the market declines. 
• However, if the manager “sells high” and misses a further rise in the markets waiting to “buy low,” you take your assets away from that manager to move it to a manager who is chasing performance.
• When the market “corrects” and you lose roughly as much as the market, you now get angry that the manager did not “get out of the market” to protect YOU – even though YOU wanted him to match the index. 

And you mean to tell me that there is no bubble, that the Fed has no role in pushing stocks waaaay past 'acceptable' valuations? Every time Yellen opens her mouth to spout out foul-smelling lies, stocks go higher. Always. Literally after every damn near every Fed meeting, when the FOMC minutes come out at 2pm, the markets go higher.

The question now is... will a poor number for Q2 GDP even do anything? Are we back to the "bad news is good news" days of 2013?? 'Oh, a bad number huh? Eh, Fed will keep rates low past 2015. Buy Buy Buy!!!'

Will the short thesis then even play out? I got 49 DTE on the SPY put spread. Tick-tock...

THE WHOLE THING STINKS.