Complacency anyone? (Wall of Worry vs. What, Me Worry?)

We have discussed the general complacency of traders as evidenced by the market climbing higher despite a universe of potentially ugly issues.

In one camp, we have the Wall of Worry crowd (WOW!), that claims the market needs this negativity to create sellers and short interest, reluctant cash holders, all of whom eventually become buyers who drive the market higher. This group sees the market rallying despite Oil at $75 and Gold over $600 as proof of economic strength.

Standing inapposite to the W.o.W. crowd is the What, Me Worry? group (including your humble scribe). These folk have looked at the historical data, the cycles, view past as prologue to present. The commodtiy boom and inflation present specific dangers. We see longer term structural issues as a situation that can only end badly.

Those are the battle lines. Its not so much the Bulls versus the Bears; Rather, we see each group projecting onto the other the shortcomings they identify in each: The Bulls see the Bears as worrywarts missing all the fun; The Bears see the Bulls as Alfred E. Neuman, blithley ignoring the coming debacle.

Its not too hard to figure out where the aforementioned Up and Down Wall Street Column comes out in the debate:

DOLLAR LOSING ITS HEGEMONY? No worries, says the stock market. Neither about crude oil topping $75 a barrel Friday nor copper climbing past three bucks a pound, nor about President Bush’s approval rating hitting 33% in a new Fox News poll, new highs and new lows, respectively. And higher-than-expected consumer-price increases or bigger-than-expected falls in housing starts? Fuhgeddaboutit…

The reason for the bulls’ devil-may-care attitude was the strongest hint yet that the Federal Reserve may be at the end of a tightening campaign that started back in June 2004, when it began to raise the federal-funds target from just 1% to 4¾% currently. "One and done" has become the rallying cry, with the all-clear set to be sounded when the Federal Open Market Committee kicks the overnight rate up a quarter to 5% on May 10. Minutes of the March FOMC meeting, released Tuesday, suggested the panel was getting concerned about going too far in raising rates, which was good enough to tack a couple of hundred points on the Dow."

As we noted earlier today, this is the "Pause that Doesn’t Refresh." During the prior 9 interest-rate cycles, stocks have fallen an average of 7% between the time of the last Fed tightening and its first easing.

Why would this hearten the Bulls?  The two exceptions to the rule: 1989 and 1995:

"The bulls’ euphoria no doubt is born of their memories of 1995, when it was off to the races when the Fed called a halt to its year-long series of rate hikes. But history suggests they may be getting ahead of themselves. According to a study from Birinyi Associates, since 1962, the Standard & Poor’s 500 has suffered an average decline of 7% from the time of the Fed’s last rate hike until its first rate cut. Only in two of these nine "limbo periods" did the market rise."

As we have repeatedly observed, these examples were aberrations, coming as they did in the middle of an 18 year secular bull market. I continue to see the most apt parallel as the secular Bear Market of 1966-82, with 2006-07 most similar to 1973-74 era.

You may also recall our Pause/Resume scenario. It turns out to be the usual historic pattern:

"Moreover, the Fed may not be finished with its tightening cycle next month, but may only be entering a pause period before reaching the ultimate peak in rates. Indeed, that is the usual historic pattern, according to Livingston Douglas, president of Mountain View Advisors in Denver. That was true case in the late 1970s until the 1981 peak, during the 1987-89 up cycle, and during the 1990s until 2000. Notably, the pauses in the ‘Eighties and ‘Nineties were punctuated by financial crises — the October 1987 stock crash and the 1998 Long Term Capital Management collapse — after each of which the Greenspan Fed resumed tightening."

Barron’s advises to "be careful what you wish for. An accelerating decline in real estate or some other financial accident certainly could bring about lower rates, though it’s hard to see how that would be bullish for stocks."


Bull Market in Bull
MONDAY, APRIL 24, 2006   

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  1. vfoster commented on Apr 22

    this will be the real conundrum. the bond market won’t care about a weak real estate market if the dollar is falling and commodities are still rallying. if the fed stops too soon, whether 5% or 6% i don’t know, but the yield curve could still widen if the dollar is falling and this market won’t be able to deal with a rising 10YR note yield. i would point out that 10s/30s has been steadily widening on this sell off in bonds that has corresponded to the rally in commodities and sell off in the dollar and could be pulling the 10YR note with it. just in this last cycle from 2000-2003 we saw the fed invert the curve and subsequently ease a few months later only to see the dollar fall apart. most of the real damage in the S&P and Dow was done after the telecom and internet bubble had already popped but while the dollar was falling and the 2s/10s curve went from -50bps to +250bps.. when the carnage stopped in stocks it corresponded with a top in the 2s/10s spread.
    point being the yield curve didn’t care about the twin bubbles of 2000 popping so it could very well not care about the real estate bubble popping (which may have already occurred).. it cares about inflation and the dollar falling is inflationary (especially when you are trying to get the Chinese to float)

  2. Bob A commented on Apr 22

    a lot of investment money that has been in real estate the past few years could end up back in the stock market…

  3. Barry Ritholtz commented on Apr 22

    Please explain how:

    -Home equity loans go into the market?

    – sell the house, move into a rental, and plow the profits into equities?

  4. Becky commented on Apr 22

    I think there will be two countervailing forces. One is that the market falls when the Fed stops, and the other is that the 3rd year of a presidential term is historically the very best year! Wonder which one will win?!? I wonder if there have been any studies on that.

  5. Jnavin commented on Apr 22

    Nasdaq Composite close on Friday: a bearish engulfing on a 15% expansion of volume and a negative divergence on the MACD vs. the 4/7 high.

  6. Robert Falco commented on Apr 22

    “I wonder if there have been any studies on that.”

    Why don’t you make a remark on this to irk Altucher again. Maybe then a challenge will be made so that he will run the data and give us another nice report of the result with no time or energy expended on your part.

  7. Fred commented on Apr 22

    A lot of investment money that has been in real estate the past few years could end up…


  8. gary lammert commented on Apr 22

    More Than Ever… Expect The,,,, Very Unexpected ….
    The Unbalanced Global Macroeconomy …… And The US Long Term Debt Market.

    The Wilshire bested the 7 April 2006 key reversal day with an hour’s
    worth of frenetic activity – only to end in a caricatured double top
    below the 7 April high.

    The Wilshire’s most recent daily fractal progression from October 2005

    24/60/48 of 48 or X/2.5X/2X. The nonlinear break near the end of the
    second fractal of this progression is seen best on the NASDAQ 100:

    GM, propelled by the recent interest in gas efficient SUV’s and modest
    oil and gas prices has made a surge within the confines of a:

    5/13/33/ – 34 fractal which when integrating 5/13/33 into the first
    two fractals becomes a 14/35/ 34 of 28-35 maximum progression.
    GM’s financial position has been improved only transiently by the
    value of its stock, which is providing low element blow-off for both
    the DOW and the Wilshire.

    Gold stocks and gold have received a nice influx of eastern and
    speculative western money that has propelled metal values to about
    30 percent of their 1982 dollar values. The best fractal count for gold
    stocks and gold are from a near term bottom:

    10/20 of 25/25. X /2x of 2.5X with a breakdown at 2x or day 20

    Fractal progression of equity, bond, commodity and asset valuations
    and the global macroeconomy,…. the global macroeconomy and fractal
    progression of equity, bond, commodity and asset valuations…. are
    intertwined; are one in the same. The mechanistic daily valuation
    fractals represent the precise barometric quantification, the
    integrated summation zero’s to nine’s numbers of actual money
    investment distributed in the complex money-debt-asset system.

    Today the world currency is the US dollar. The US uses this Superpower
    backed valuable commodity to import about 13 million barrels of oil a
    day. At 10 dollars a barrel that’s 130 million dollars a day. At 70
    dollars its closer to a billion a day. For the last year the US has
    traded over 250 billion of its IOU dollar currency in exchange for
    foreign oil. A good piece of the US foreign trade deficit arises
    precisely from that indispensable and essential commodity.

    Other energy poor countries, our ‘trading partners’, who own over 2
    trillion of US debt instruments, convertible at present with little
    difficulty into dollars, likewise use the utility of the US dollar to
    finance their own more modest energy needs.

    Something has happened to the actual IOU dollar- somewhat convertible
    long term US debt interface. The US long bond and ten year note since
    March 2006 have begun a critical inexorable at-a-minimum short term
    and perhaps longer term fractal climb correlative to rising long term
    interest rates that is on a head-on freight train collision course
    with equity and commodity asset valuations. The three investment
    locomotives: equities, commodities, and bonds are 120 degrees apart;
    travelling at 200 miles an hour; and are arriving at the same point in
    the wheel house simultaneously. The coming twisted metal of these
    colliding forces aligns with the non complex and curious complex
    fractal solution of the last posting and reiterated again below.

    The possibility of a 20 March 2006 Iranian transitional change from the dollar to the
    Euro for oil has been fingered as the triggering event for the US
    bond’s recent activity. Indeed the long term US debt instruments’
    close call inversion with the shorter US T Bill was arrested on 22 March 2006, 2
    days later. With the recent highly publicized inflammatory rhetoric of
    the Iranian president and the earlier economic Armageddon predictions
    of the famous 911 Saudi renegade, a case could be made for an Iranian
    precipitated global economic weapon of mass destruction in its
    conversion from US dollars to Euros for oil trade. The case could be
    made – but it would be false.

    The Iranian conversion to the Euro would have been a serendipitous true, true, and
    unrelated occurrence, small, even minute, in comparison to the
    gathering storm building into a global economic hurricane. US recent
    bond activity is a result of terminal unsustainable and tipping point
    imbalances in the global macroeconomy. All informed sources understand
    that paper will not forever be traded across sovereign borders for
    useful items and services. There is a point where a transition must
    and does occur. It has never been a question of if, but rather when.
    It is the fractal evolution of investment items that delineate when.

    For the US this transition point is not being caused by Iran, whose
    country produces only 5 per cent of the world’s oil. Its radical
    Islamic regime’s threatened change to denominate oil in Euro’s is not the
    trigger; rather this transition point is a result of the full
    saturation of the overly-consumed American consumer who has been painted
    into the very small domestic service wages parts of a vanishing corner, having been
    earlier enticed to incur debt at excessively low interest rates with
    reckless and predatory lending practices. That American consumer, the
    primary engine of recent global economic expansion, is faced with the
    reality that has been directly caused by excess borrowing and money
    creation – inflation of raw commodities and the predictable Fed response
    of raising interest rates.

    The American consumer is a member of the interconnected global economy
    and is indirectly and directly competing with the Asian service and
    manufacturing worker. Further loss of American manufacturing jobs will occur.
    Unbalanced US wages relative to those foreign workers must and
    inexorably will reequilibrate. US wage earners with their two cars,
    extra investment house, and high debt load have been, are, and will
    be, unlikely buyers of US debt instruments.

    Foreign owners of US debt instruments are now choosing between
    ownership of dollars or debt instruments. While both are backed by a
    military and an arms legacy of an earlier American tradition,
    ingenuity, and engineering value system, both are poor long term
    investments in a country sans manufacturing, tradable international
    services, huge unpayable entitlement programs in a reequilibrating
    rebalancing global macroeconomy.

    From 22 March 2006 the rising fractal evolution of long term interest
    rates, TNX annd TYX are:

    First fractal: 5/13/7 days = 23 days

    Second fractal 9/11 of 21-23/18-23 days = 46-47 plus days.

    How high will the long term US debt instrument rise in the next 27-32
    trading days? This time progression matches a weekly precious metals
    devolution of 12/25 of 30 X /2.5x and a daily equity devolution of
    X/2.5x/2x and 1.5x or 24/60/48 and 35 days.

    Expect the very unexpected.

    Gary Lammert

    April 22, 2006 3:27 PM

  9. Michael C. commented on Apr 22


    Is there a study on how the market performs 1-3 months prior to a Fed halt? Because that’s where we are now I believe.

  10. John V. commented on Apr 23

    The reason that the bear arguments are having no effect is that these effects have not yet shown up in corporate bottom line profits. Thus it makes sense that stocks have shrugged things off. All of the bear arguments will start sticking when companies begin to miss their numbers due to commodities, oil, etc.

    In case you haven’t noticed estimates have already come down for the S&P 500. Go to the S&P website and look at the index earnings and estimate report. You’ll see their estimates for reported earnings in the spreadsheet. I check this about one every 1-2 weeks…guess what’s started dropping?

    The tide is going out and soon we’ll see who’s been swimming naked.

  11. Douglas Nast commented on Apr 23

    I know its been said, and you think you’ve absorbed it, but you young folks don’t REALLY understand it because you can’t feel it. Us boomers are 50ish now, and at what we thought was the peak of our powers we got our 401k clocks cleaned in the millenium bust. Flat between 1998 highs and the recovery in 2003, while shoveling 15k a year into a bonfire. This has made us extremely sensitive to “signals” either perceived or real. On the one hand we have vowed “never again”. On the other, we are plowing every spare shekel into investment, and can’t afford to miss out on a single rally if we are going to make up for lost time. This schizoid, pent up demand I think is awfully hard to break with just bad news. There has to be something more, maybe an energy-induced slowdown… Then when that happens or is perceived or begins to be discounted, it will be Katie bar the door. 5% will turn into 20% within days. Every manjack I know would rather slit his wrists than accept a 5% drawdown on his retirement nest egg.

  12. Get Long Vega commented on Apr 23

    Grrr, biatch!

    I was walking down Lex this morning and I saw a bear.

    Then I was down in the Village, lost, but I saw another bear.

    What are your breakevens? Risk-free: close to 5% up, zero down; stocks: maybe 5% up, prolly 25% down.

    …And a big shout-out to D. Nast, above, who worked an old-school southern saying into his post. Long live Athens, long live r.eeeeeeeeeeeeeee.m.

    “…Katie bar the door.”


    Let’s name a god we all agree
    Secret stop-stop it will end
    We could bind it in the cyst
    We could gather throw a fit

    Up to par and Katie bars
    The kitchen signs my nightmare ends
    Sit in trafic but not vacated
    Wasted time sitting still

    I’m the sun and you could read
    I’m the sun and you’re not deaf
    We could bind it in the cyst
    We could gather throw a fit

    … … …

    I can hear you
    I can hear
    I can hear you

    … … …

    Can you hear me? :) Certainly off-topic, so thank you for indulging me.

  13. D. commented on Apr 23


    I’m born to 1st year Boomers. I don’t directly live the angst but I”m living it vicariously through them.

    Both my parents and parents in law think and act exactly the way you described and it freaks me out!

    I keep on reminding them that since the mid 50s markets have turned negative results 1 yr out of three but they keep on retorting that they need 10% returns so as to not eat into their principal.

    Then I ask how they’d cope with a quick 10-15% decline in their portfolio. I can see a sliver of fright in their eyes but they brush it off and robotically repeat: “Can’t afford to not get maximum returns”.

    I’m convinved that one of them will die of a heart attack if much is ever lost. And in the final analysis, I know in my heart we’ll be holding up the fort because that bad year will come and they’ll be exposed.

    Please don’t tell me that I don’t understand because I know darn well I’ll be picking up the broken pieces thank you very much.

    We’re all in this together and I’m so sick of this competition for who’s suffering the most.

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