Economist David Rosenberg is famous for turning from a bear to a bull. Now he's reconsidering.» Read More
The bulls are looking for the market's mild 2014 rally to resume in the week ahead, as investors digest data that suggest the economy is growing but not quickly enough to turn the Fed more hawkish.
On Thursday, the S&P 500 suffered the worst session since mid-April, and followed up those losses with further declines on Friday. But Friday also brought the employment report, which many saw as a near-perfect number for the market.
According to the Bureau of Labor Services, 209,000 jobs were added in July, which was below economist expectations of about 230,000, but still marked the sixth straight month of plus-200,000 job growth. Meanwhile, the unemployment rate ticked up to 6.2 percent as more people entered the labor force, and average hourly earnings were almost perfectly flat.
The instant takeaway? That the economy is growing fast enough to power corporate results, but not so quickly as to spur the Federal Reserve to raise the key federal funds rate earlier than anticipated (widely regarded as the market's key concern right now).
This is "not what the bears wanted to see," Mizuho Securities chief U.S. economist Steven Ricchiouto wrote in a Friday note. "The net is that the economy is growing at or slightly below trend on average. There is no reason for the market to move out of its trend."
While S&P futures gained a bit of ground immediately after the report, the market did trade lower on Friday. But Michael Block, chief strategist at Rhino Trading Partners, was sanguine.
"We're going to be fine here," Block said. "I think it creates buying opportunities."
Gina Martin Adams started out the year with the lowest S&P 500 target on the street, at 1,850—a wager that stocks would end 2014 roughly flat. That target came a bit closer into view on Thursday, as the S&P 500 slid about 1.5 percent and got as low as 1,937.
But Wells Fargo's institutional equity strategist said on Thursday's "Futures Now" it could get even worse for the market than that target implies.
"You know, our price target for the end of the year implies that we're probably about 5 percent down, at the very least, at some point in the second half of the year," Adams said.
"I would say that you have to prepare yourself for up to 10. Ten is very, very normal in the grand scheme of markets, and would actually be fairly healthy, I think, washing out some of that excess optimism we've developed, and some of the complacency we've developed."
She says the decline is to be expected, given that the Federal Reserve is pulling back on stimulus. On Wednesday, the central bank reduced its asset purchasing program by an additional $10 billion per month, and is now contemplating when to raise its target on the key federal funds rate.
"When you look at history, it is very typical for the market to start to show some volatility, start to show some weakness in areas when the Fed is shifting gears. And I think that's the overall structure here," Adams said. "We're starting to get a little nervous for what it's going to be like to fly on our own without the support of the Fed behind us, and we're set up for a period of volatility here."
Investors certainly expect volatility to rise. The CBOE Volatility Index (commonly known as the VIX), which measures implied volatility shot up some 20 percent on Thursday to hit a three-month high.
Shortly after the market hit the lows of the day on Wednesday, one trader spied an opportunity. And in one huge options trade that caught the eyes of market participants around the globe and appeared to help out stocks in the afternoon, this major player made a wager that the S&P 500 will rise into the end of the year, perhaps getting above 2,050 as soon as October.
In a single combination of purchases and sales of S&P 500 options that occurred at about 12:20 p.m. ET, this trader sold 6,000 December 1,850-strike puts, bought 12,000 October 2,050-strike calls and bought 18,000 December 2,125-strike calls.
Options experts will tell you that this specific kind of trade is called a "ratio calendar risk reversal stupid" (seriously). But the bottom line is that by doing all this fancy footwork, the trader immediately took in a $2.7 million credit, but could make a lot more if the market continues to rise.
For every point that the S&P is above 2,050 at October expiration, the trader will make another $120,000 (given that 12,000 contracts were bought, and S&P options have a 100-times multiplier). And for every point the S&P is above 2,125 on Dec. 19, the trader will make $180,000. That means that if the market closes the year 15 percent higher, for example, this trade will yield some $25 million.
Despite the constant drumbeat of geopolitical turmoil, gold, which investors often buy in times of uncertainty, has fallen 6 percent from its March highs. But even with the sell-off, bullion's biggest gold bug isn't throwing in the towel anytime soon.
In an interview with "Futures Now," Euro Pacific Capital CEO Peter Schiff said gold is poised for a big move higher, and the catalyst could come as soon as this week with the release of second-quarter GDP and FOMC statement.
"I think Q2 is going to be the high-water mark for the year," Schiff said, referring to tomorrow's GDP report. "I think it's all downhill from here. We might not even get a 3 percent [GDP], we might get less than that. And that can be bullish for gold."
Schiff said the recent spate of soft GDP data is evidence that the economy can't seem to grow at an acceptable pace, this despite the Fed's best efforts to stimulate the economy. And according to Schiff, once investors realize that the Fed's policies have failed, they will dump stocks and buy gold.
"The stock market will collapse. The housing market will collapse," Schiff said.
Ron Paul, the former U.S. representative from Texas and perhaps America's most popular libertarian voice, has long said that the nation's monetary and fiscal policies would result in massive inflation. According to the common measures of inflation, this has not yet occurred. But Paul maintains that the inflation he has warned of has indeed come to fruition in asset prices, and that once it unravels, a market crash will ensue.
"I think there's plenty of inflation, but my definition of inflation is a little different than the rest, because I think prices going up in the different areas is a consequence of inflation," Paul said on Tuesday's "Futures Now." "There's a lot of inflation in the stock market. I think there's a bubble there."
He says that what's occurring asset prices simply don't comport with what's happening in the economy.
"The growth isn't there. The only thing that grows is the debt, and just think about how much money they have to create value in the stock market," he said. "The unemployment is very, very bad, despite some of the optimism that is expressed with Wall Street, but that's all deception. I think you still have to see a healthy economy and people aren't complaining about structural employment, which is really insidious."
But he says that thanks to the low interest rates fostered by the Federal Reserve's stimulative policies, people are buying stocks regardless.
"One thing we have to remember is that when you get false information from artificially low interest rates, that mistakes are made, they're inevitable. You make mistakes even when you have market rates of interest. But when the market rate of interest is so low for everybody, there's a lot of mistakes, and that's why you have the bubbles, and that's why you go through the catastrophe we had in '08 and '09, and I think the conditions are every bit as bad as they were in '08 and '09."
Permabear Marc Faber said Monday he expects stocks to drop 20 percent 30 percent by October.
"Don't forget many stocks are already down 10 percent. The home builders are down roughly 15 percent. Airlines have just dropped around 10 percent," he said on CNBC's "Halftime Report."
Faber, publisher of the "Gloom, Boom & Doom Report," also noted that several large-cap stocks were down by double-digit percentages.
"So, we're not exactly in a uniformly strong market," he said. "The Russell 2000, which represents 2,000 companies, is down 2 percent for the year. And big deal, the S&P is up 6 percent, whereas the Philippines, Indonesia, India, Thailand, Vietnam are all up between 15 percent and 25 percent."
Are companies beating earnings expectations? Well, yes and no.
All eyes are on earnings this week, as investors eagerly await to find out how well American companies did in the first quarter of 2014. So far, fewer than 20 percent of S&P 500 companies have reported. But already, a few disturbing trends are emerging.
Of the 85 S&P companies that have already reported their first-quarter earnings, 67 percent have beaten analyst estimates on the earnings side, and 51 percent have beaten on the revenue side, according to FactSet. That sounds pretty good—until one considers that over the past four years, 73 percent of companies have tended to beat earnings estimates, and 58 percent have tended to beat revenue estimates.
It's not just the number of companies beating—the aggregate amount of earnings has been similarly light. Companies have reported earnings 2.0 percent above expectations, which is well shy of the 5.8 percent "surprise percentage" that companies have tended to report over the last four years.
The overall sales numbers have also been soft, with companies reporting revenue 0.3 percent below expectations in aggregate.
At this point, S&P 500 companies look to report a year-over-year earnings decline for the first time since the third quarter of 2012. By combining the earnings that have already been reported with the analyst estimates of the S&P 500 earnings we have not yet seen, FactSet senior earnings analyst John Butters arrives at a "blended" earnings decline estimate of 1.3 percent.
Is the economy actually picking up steam? Investors will get another indication this week, when cyclical giants like Caterpillar and Ford report earnings
"I'm looking at CAT, I'm looking at Ford, I'm looking at Microsoft. And I'm taking them all together and kind of putting them in the category of an economic datapoint from a macroeconomic standpoint," said Jim Iuorio of TJM Institutional Services.
He expects that the reports will give investors another reason to be optimistic.
"I think that it's going to be good, based on the fact that most of the numbers we've seen over the last couple of weeks have been pretty good," Iuorio said.
So far, earnings season has brought decent news. 65 percent of the S&P 500 companies that have reported have beaten earning per share estimates — which just slightly below the 71 percent average. On the revenue side, 51 percent of reporting companies have beaten.
Not only is long-term economic stagnation possible, but current conditions in the United States could lead to this nightmare scenario. That's the shocking conclusion presented by Brown University economists Gauti Eggertsson and Neil Mehrotra, whose recent paper, "A Model of Secular Stagnation," explains how secular stagnation could come about.
This flies in the face of the popular theory that long-term economic stagnation is not possible. After all, economic agents are expected to adjust to whatever the current economic conditions are, and once they do, the framework for growth should be laid anew.
But by adjusting economic models to allow for the fact that different groups have different needs, the two economists bring a new truth to light.
"In models in which there is some heterogeneity in borrowing and lending, it remains the case that there is a representative saver whose discount factor pins down a positive steady interest rate. But moving away from a representative saver framework to one in which people transition from being borrowers to becoming savers over time due to lifecycle dynamics will have a major effect on the steady state interest rate and can open up the possibility of a secular stagnation," Eggertsson and Mehrotra write.
Using complex models, the paper goes on to show why a "deleveraging shock," a "drop in population growth," or "an increase in income inequality" could all increase savings. And with a short-term nominal interest rate permanently at zero, the central bank will be "unable to generate a sufficient monetary stimulus because the nominal interest rate cannot be negative." Instead, the result is a "permanent drop in output."
Gold suffered its worst day of the year on Tuesday, as bullion fell 2 percent. And when it comes to where gold is going next, Peter Schiff and Paul Krake have completely opposite perspectives.
Krake, of View from the Peak, has a target on gold of $1,000, roughly $300 below current levels. But Schiff, CEO of Euro Pacific Capital, says gold is heading above $5,000.
Schiff's bullish case is premised on the idea that central bank actions will create inflation, which will lead to much higher gold prices.
"Central banks are creating too much money, there's too much inflation, interest rates are too low, and so I want to store my purchasing power in something that central banks can't print," Schiff said on Tuesday's episode of "Futures Now." "I think we're headed much higher because they are not going to stop the presses. They are going to run them into overdrive."
One obvious problem with this thesis is that the Federal Reserve has been reducing, not increasing, the size of its bond-buying program. But Schiff says that quantitative easing will never end.
"If the Fed continues with their taper and ends QE, we will be back in a recession. The stock market will be in a bear market. The real estate market will be in a bear market. And then what is the Fed going to do to respond to that? The only thing it can do is print more money and restart the presses and do more QE," Schiff said.
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But Krake pointed out that even if Schiff is right, more QE will not necessarily send gold higher.
"Peter, how do justify the following: Last year you had the greatest balance sheet expansion across global central banks in history, yet gold had its worst performance in 30-odd years?" Krake asked.
"Did you ever trade anything? Buy the rumor, sell the fact? Gold rallied for over a decade in anticipation of that," Schiff responded. "We shook out some of the weaker players. Meanwhile, gold is outperforming all other assets in 2014."
That counterargument flabbergasted Krake.
"To make the argument that 'buy the rumor, sell the fact' justifies the greatest move in 30 years versus the greatest balance sheet expansion in central banking history? That is a bit of a lame argument, I'm sorry," Krake said.
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