Notes From Underground: The Stock Market Says, “I Think Icahn, I Think Icahn”

One of the great contemporary financiers warned on September 29 that the stock market was “extremely overheated ” and was being “supported by an “unsustainable earnings mirage.” Well, since that video release from Carl Icahn, the SPOOS have rallied more than 7 percent, defying the wisdom of Ichan, as well as many other highly regarded  investors. Today’s equity rally was in the face of what has been a continuing onslaught of negative economic releases. The market has rallied off the August 21-24 lows but has paused when confronted with weak data, such as September’s unemployment report. But today the weak economic releases  failed to dent the powerful rally: a weak Empire State, a weaker-than-expected Philly Fed Manufacturing report.

The stock markets treated the bad news as yesterday’s garbage and powered ahead. Are we back to the paradigm of bad news is good news as the market just wants interest rates to remain at ZERO RATES? The NASDAQ closed above its 200-day moving average today and this is problematic for the BEARS. However, it is only one day and the rest of the global equity markets all remain below their 200-days:  DAX, Footsie, French CAC, Nikkei, Shanghai Comp and the Aussie All-Ords. Will the Nasdaq be the leader or will it be lonely at the top? Many of the algo-driven correlations are breaking down as not all assets are reverting to the risk on/risk off model. Since the Ichan statement the GOLD has rallied 5 percent and even with the EQUITIES being strong investors have continued to seek some safety in the historic haven.

The U.S. dollar has also weakened almost 3 percent during the Icahn period, sending a signal that investor sentiment is shifting as risk-on does not preclude the buying of DOLLARS. The ECB is also perplexed by DOLLAR weakness and went so far today to send out ECB Board Member Ewald Nowotny (Austrian Bank President) to discuss possible moves by the ECB to enhance its tool box in an effort to drive inflation off the floor. (The statement by Nowotny came as the Euro was approaching the 1.15 price level.) The IMF may proclaim there is no currency war but with the Fed noting the power strength of the dollar as an economic headwind and the ECB desiring to weaken the euro, the central banks are all trying to weaken their fiat currencies.

Even Andrew Haldane of the Bank of England’s Monetary Policy Committee was out  pushing a DOVISH position for the BOE and proclaiming the strength of the British pound an economic headwind. Icahn may be correct in his analysis of the U.S. equity market being “extremely overheated” but the power of zero interest rates and the search for yield  can force us all to be Keynesian: “Markets can remain irrational far longer then I can remain solvent.” Again, pay close attention to the beginning of the dissolution of previous highly correlated trades for politics has the ability to disrupt long-held economic assumptions, especially in a ZERO INTEREST WORLD. This is the greatest case for proving the theorem that 2+2=5.

***Hot political issues:
1. National elections are in Canada on Monday. Canadian Prime Minister Stephen Harper is expected to lose his position in a closely fought election. The Canadian economy has been plagued by the steep downturn in energy prices and the liberal party candidate Trudeau may form the next government. If so, the Canadian may react negatively until the fog caused by a change of government lifts and investors become aware of where Canada is financially headed. Prime Minister Harper has been a good steward of the Canadian economy as the it did not suffer the mal-effects of the global credit crisis. In fact, the Canadian dollar was a stalwart of the world’s currencies until the steep drop in energy prices.
2. Putin’s intervention in Syria to preserve the Assad regime and battle ISIS (secondarily) has caused great uncertainty. Except Putin’s goal is to remain relevant on the international scene, especially in the Middle East where instability reigns. There are so many moving parts to the Putin plan so the possibility of a mishap between the Russian and NATO forces is very great. Turkey and Russia have already had locked onto each others’ planes and there are all types of NATO forces operating in the region. Turkey is also having elections soon and President Erdogan is vulnerable to electoral defeat, setting the stage for an uncertain outcome for the Turkish economy. The Turkish military has a history of intervening into domestic affairs and though decimated by Erdogan when he feared a possible coup, an unstable environment or elevated crisis can make for strange bedfellows.
3. The Portuguese elections have created uncertainty in Europe as the Socialists may be able to form a government with the extreme leftist parties that  garnered enough votes to have seats in Parliament. The Socialists and extreme-left have an anti-austerity platform would disrupt the budget plans emanating from Brussels. The Spanish government has recently angered the Brussels Eurocrats for failing to adhere to previously agreed upon budget deficits. And it is the Spanish and the Irish economies that have been heralded as the poster children of growth through austerity. The Greeks will be watching anxiously to see how the Iberian Peninsula budget problems are resolved. The world is in a fragile state and as Tobias Harris so poignantly stated in reference to the current global situation: ”I always wondered what it was like to live in the 1930s.”

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11 Responses to “Notes From Underground: The Stock Market Says, “I Think Icahn, I Think Icahn””

  1. silverbug2155 Says:

    If the mother of all bubbles is the bond market, could it be that money rather park itself in something that is not bankrupt like say Illinois.

  2. Asherz Says:

    With the gulf between global economic slowdown and equity prices widening and threatening to become a chasm, believers in the integrity of markets are scratching their heads. It is hard to admit that the fix is in, in making a living in an unleveled playing field.
    The obvious answer of course can be expressed in three letters, PPT or formally known as the President’s Financial Group on Financial Markets, created after the October 1987 market crash. It has been used sometimes for all to see (Long Term Capital Management) or more often in a clandestine manner.
    I urge your readers to reread Ben Bernanke’s two speeches given at the end of 2002, the first titled “Asset Price Bubbles and Monetary Policy” in front of the New York Chapter of the National Association for Business Economics in October, and then “Deflation: Making Sure ‘It’ Doesn’t Happen Here” in front of the National Economics Club one month later. Buying equities was one of the tools implied in fighting off his big bugaboo, preventing deflation.
    A market crash in a time of enormous global debt that is being sustained by ZIRP would bring down the capitalist financial system. Central bankers are fighting tooth and nail to prevent that and the markets of NFP announcement on October 2 and yesterday’s market can be rationalized as bad news as good news. Or taking Bernanke’s words before his Fed Chairmanship as being how our monetary policy formulators in the last 20 years, post the Greenspan rational “Irrational Exuberance” speech at the American Enterprise Institute, as how our markets have been influenced by our monetarist elites.

  3. Joe Says:

    Asherz, Many thanks for that reminder of not so ancient but significant history. I’m sure much of what Bernanke said was left undigested, being that his’ “helicopter” comments became the lasting impression. Can’t help but wonder if the financial press had any journalists left in their ranks and among their editors and producers, the public perhaps could have demanded policy makers pursue a prudent path of correction. Unfortunately, the new buzzword in today’s private-public partnerships, “sustainability,” is taken literally in a financial world created by “modern” central banking.

  4. yra Says:

    Asherz–great post and an important reminder.I have those two sppeches in my files all yellowed lined so this weekend I will take a reread.I am sitting on a blog about Bernanke and his proclaiming “bad luck” when he refers to to why the economy slowed following the disasterous tsumani in japan and the crisis in Europe–amazes me a man so steeped in MATHS claims “bad luck” as a headwind.Bad luck exists but intuition has no place in efficient market theory

    • yra Says:

      asherz—also dust off the economic dictionary for INTERTEMPORAL DISLOCATION—coming to a theatre near you soon

  5. Rob Syp Says:

    Re; Illinois here’s the story in Calumet City, IL homes selling for 25 to $30,000 with $4,200 yearly property taxes. Go over Stateline Road into Hammond, IN under a mile the same home sells for 75 grand with 2,000 property taxes.

  6. Asherz Says:

    Yra-Those thrusting the Intertemporal Choices on the markets are disregarding Newton’s Third Law. The Piper always demands payment. Hamelin comes to Wall Street.

  7. yra Says:

    Asherz–you are on your game—thanks

  8. yra Says:

    TO ALL READERS____WILL BE ON SANTELLI AT 9:20 Chicago time

  9. Chicken Says:

    I nearly spit out my coffee, is this how it feels in Japan? ”I always wondered what it was like to live in the 1930s.”

    Perhaps it does, I don’t recall unemployment ever being greater than 3% and interest rates have been super low for decades now?

    I don’t see a depression around me here, but the economy isn’t what it was in say, (overheated) 2005 IMO then again a lot has changed since, AMZN and AAPL for instance have changed the game in profound ways?

    I don’t know the answers, 100’s more questions than answers.

    Hmm, maybe GE has figured out the new economy?

  10. 2 +2=5 Says:

    Reblogged this on financialcurrenciesdotcom.

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