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.