We Might Not Have Seen the Market Peak, But We're Close
"I'd unravel every riddle for any individ'le,
In trouble or in pain.
With the thoughts I'd be thinkin'
I could be another Lincoln
If I only had a brain."
-- "If I Only Had A Brain," from " The Wizard of Oz" ( Harold Arlen and E.Y. Harburg)
Like the Scarecrow (Ray Bolger) in " The Wizard of Oz," investors and legions of self-confident perma-bullish talking heads need a brain.
For if they don't acquire a brain shortly, they may shortly lose their asses!
Deteriorating high-frequency economic data in the U.S. and a multimonth low in the Citigroup Surprise Index (U.S.) is being reflected in the message of another low in the 10-year U.S. note's yield and a further yield curve flattening.
As I expected two months ago, the buoyant soft data dominated by confidence readings is now receding and the hard data that predictably failed to move correspondingly to the soft data is now falling as well:
* Durable goods down for a second month in a row.
* Capital investment remains subdued and shows no signs of recovery.
* The evisceration of the retail industry continues apace.
* Growing evidence of " peak autos."
* Disappointing housing numbers as affordability issues threaten the residential recovery.
* Stated simply, "Peaks" lie everywhere.
Our markets -- and the mostly bullish commentators who discuss the factors impacting equities -- previously have focused on the massive improvement in the soft data (confidence, etc.), explaining that the "animal spirits" in soft data likely will presage an improvement in hard data.
Now that this has not happened, "machine spirits" have replaced animal spirits and investors who place trust in machines and algos are likely on a slippery slope.
All this is occurring at a time in which valuation metrics are approaching in excess of the 95% decile and some evidence of a possible technical breakdown and a loss in momentum in the market's leaders (e.g., (T)FAANG).
Meanwhile, the promises of fiscal, regulatory and tax initiatives are fading post-haste.
"I would not be just a nothin'
My head all full of stuffin'
My heart all full of pain
I would dance and be merry
Life would be a ding-a-derry
If I only had a brain
Gosh, it would be awful pleasin'
To reason out the reason
For things I can't explain
Then perhaps I'll deserve your
And be even worthy of you
If I only had a brain."
Pundits are walking on sunshine and the lambs may be walking to slaughter.
Dr. Seuss once said that he likes nonsense because it wakes up the brain cells.
However, thus far the market's brain cells are still asleep, to this observer.
Slowing economic growth is occurring as most companies have increased their debt loads and leverage. Indeed, the bottom half of companies that already are committed to spending more than 30% of profits on interest expenses/costs face the potential toxic cocktail of rising interest rates, near-peak Ebit margins and even peak Ebit (cash flow). Indeed, in a recent report, Societe Generale's "Time to Re-Focus on U.S. Leverage - Who Will Burst the Bubble?," the author, Andrew Lapthorne, presents a chart (we don't have authorization to reproduce it!) that depicts the persistent rise from late 2010 of interest rate costs as a percentage of Ebit for all non-financial companies.
While we may have not yet seen the absolute peak in stock prices, we are likely extremely close. With the other peaks growing in quantity and with a widening divergence between the real economy and stock and other financial asset prices, this peak may not be far behind.