Fear and Loathing on Wall Street

 | Apr 15, 2014 | 3:43 PM EDT
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You want the two best emotions to describe this market? How about fear and loathing?

Yep, you have to resurrect the works of that consummate stock market genius Hunter Thompson to truly fathom the depths of derision professional investors feel about this market. The fright and the hate define this darned tape every day and today's no different, not one bit.

First, what do the pros fear? I think they fear three things.

The first is Japan. We don't talk about this country enough because, frankly, it is downright scary what's happening there. This country's pretty much left the grid with what now looks like a failed strategy to get some sort of boom going. The Japanese stock market's down 14% this year, by far the worst major market in the world, and the country's retail sales have plummeted since a recent hike in taxes. Japan is a patient that seems almost comatose and it's not responding to any meds.

Then there's China. I kept thinking that there had to be a way that Chinese estimates would be so lowered that they would be beaten, kind of like an underpromise-overdeliver kind of thing. But no matter how low the estimates go for purchasing manager's reports or import or export or money supply data, the news still disappoints. I think China's growth, at one time double digits, right now is falling to 5% from 7%. I know, I know, most countries would kill for that kind of growth, but in China they actually might kill the leaders if that growth path continues with that rate of decline. Never forget it isn't earnings per share or GDP that China's worried about. It's revolution and these numbers aren't reassuring.

Then there's Ukraine. I think this issue is at the fulcrum of much that goes wrong these days. Every time there is a provocation by Russia, we sell off. Every time. Some of that is our knee-jerk following of the selloff in Europe. Some of it is we worry about sanctions put on Russia that could end up slowing world growth.

But if you live in Europe, including Germany, you are thinking of only one thing: if Putin isn't stopped he will end up invading the West. Don't laugh. It's what they think about it. You would too if you believe that Putin's Hitler reincarnate. To refresh, before World War II, Hitler created provocations everywhere and then told the West that he was simply protecting ethnic Germans in other countries and to do so he had to punish those countries or annex them.

Isn't that exactly what Putin's doing in Ukraine? Now, while I don't like Putin, I don't believe Putin's Hitler. I don't believe he is about to invade the West. But so far, the stand the West has taken against Putin is something tougher than appeasement, but frankly not very coherent. The lack of coherence on the part of the West creates a lot of fear and that fear is reflected in money flowing into our bond market, including what I believe to be a considerable amount of Russian money.

That brings me to the final fear: U.S. bonds. Right now you can chart this market by simply looking at the the iShares 20+ Year Treasury (TLT), which trades up or down with bonds. It's been soaring, meaning that bond prices are going higher and interest rates are going lower. Professionals fear this move down in interest rates for all sorts of reasons. One is that it shouldn't be happening at all as we have had strong retail sales, strong employment claims, strong profits from the handful of companies that have reported already and, yes, even strong inflation figures, meaning we actually have accelerating inflation numbers.

All that cuts for what should be much higher yields, not lower. The professionals live in fear of the bond market now and every tick down in interest rates, which again means higher prices for the TLT and sends shivers down the spines of the pros. It's a sign that something's very wrong and that makes these big money managers so nervous that any time the market sells off they dump stock furiously. Then, if the TLT stops rallying intraday and rates climb back up, the stock market goes higher, too. Again, that's entirely counterintuitive, because ever since the great bull market began in 1981, any time that rates went down was considered to be good and a terrific opportunity to buy stocks and any time rates went up you were supposed to sell. This pattern is so ingrained that when rates shot up last year the stock market was just crushed. I don't know a soul who can explain that for the first time in 34 years the stock market wants higher rates. It is ingrained that we fear the unknown and this down-interest-rate-down-stocks move is frightful given that it's never been the case. Plus, there are all of these ideologues running around saying that the Fed's propping up this market with their bond buying. That's just dead wrong. If anything, because of this new pattern we want the Fed to sell its trillions of dollars in bonds. Considering the sudden decline in the deficit, the Treasury isn't issuing enough bonds to sate the buyers. Only the Fed can help by selling its holdings. More counterintuitive, but quite true, thinking.

This brings me to the chief reason why this market's loathed. When rates go down, you are supposed to buy the highest-growth stocks because lower rates typically means sluggish growth. What companies do best in a sluggish growth environment? Historically, it's been biotech and high-growth tech, notably social, mobile and cloud plays. And what's doing the worst in this market? How about biotech, down 22% for the year, and social, mobile and cloud plays? That the pattern, the linkage, is broken just makes people darned angry because they can't believe that sellers are in there every day knocking down what they should be buying.

Another hateful subject? The intraday moves. Both yesterday and today we saw huge intraday swings in high tech and biotech. The pattern of up openings followed by vicious swoons that may or not precede a rally has simply unnerved people and caused a level of loathing seldom seen before.

Plus, it's not really clear why it's occurring. As near as I can tell, what happens is that the fundamentals of many companies are quite good and the analysts are pretty rah-rah each day and almost every morning it seems that the coast is clear for the buyers. Then, the market rallies and the sellers appear and start pummeling just the stocks that should be going higher. Then the buyers disappear and the sellers get even more aggressive rather than waiting for buyers to come in. That's usually either high-frequency traders running ahead of the liquidators and short sellers pounding down ETFs to profit from the motivated sellers' pain. But then something will happen. Perhaps interest rates will reverse and start going higher, perhaps the liquidation is done, perhaps the sellers are at last working away and the market springs to life as if by magic for no reason at all. Investors hate rallies that can't be figured out as much as they hate selloffs that can't be figured out because they are scared to be opportunistic and do any buying for fear that they will be down 3-4% by the time they get their reports.

So, we end up with a market that defies logic, one that is feared and loathed on a daily basis where stocks of companies that aren't doing well, like Hewlett-Packard (HPQ) or McDonald's (MCD), are flying high and stocks of companies with amazing growth prospects, again the biotechs and the social, mobile and Internet plays, get hammered. Oh, and insult to injury, each day there's one or two high-growth stock that shocks you with a rally when the others falter. Today is the time for Twitter (TWTR) and Workday (WDAY) to shine. Maybe tomorrow it will be Netflix (NFLX) and Amazon.com (AMZN). Who knows? The loathing intensifies.

Unless we see the end to all of these patterns, the market will be feared and loathed and ultimately scorned and ignored as it's become just too hard to fathom. Until then, it's become one big crapshoot and if I want a crapshoot would rather fear and loathe in Las Vegas than on Wall Street.

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