Central bankers took center stage once again in the week just past. The much-anticipated press conference by the European Central Bank on Thursday provided another boost for stocks in Europe and in the U.S., as ECB President Mario Draghi lowered short term interest rates (again) and also appeared to remove the so-called "sterilization" of monetary accommodation that had been in place (i.e. securities-market purchases had been offset by ECB actions to reduce bank liquidity). And equally important, Mario Draghi was emphatic in his statement to the press that the ECB is NOT done with its efforts to boost growth in Europe. However, he did stop short of introducing "quantitative easing" programs like those used by the U.S. Federal Reserve and the Bank of Japan.
Here in the U.S. on Thursday (June 5th), most stock index futures were higher in the morning ahead of the ECB press conference, but then sold off sharply in the middle of Draghi's statement. At that moment, for the 24th time over the last 18 months, I thought that the top in U.S. stock prices was in place and that a massive correction was underway. And for the 24th time my bearish view was immediately trashed as buyers stepped in and stock prices then advanced further into record high ground. While I didn't see the interview, David Tepper, the legendary hedge fund manager, apparently made some bullish comments in a CNBC interview at the time when stocks were selling off on Thursday morning. Mr. Tepper had been "cautious" on U.S. stocks in recent interviews, but he has apparently changed his mind and is now more constructive given this newest tranche of monetary stimulus from the European Central Bank.
For those who are regular readers of this column, you already know that I am aggressively short the S&P 500 in my managed accounts. Fortunately, I am hedged with a large position in Gold/Silver mining stocks which performed very well in the week just past. In hindsight, perhaps the words "Don't fight the Fed!" should have held more sway in my view of the financial markets. And maybe the words "Never sell a dull market!" should have also been a factor in my decision making.
At this point, there are two key questions that need to be addressed:
1. Are Central Bankers omnipotent?
2. Has the U.S. economy reached "escape velocity"?
The first question is the easier of the two. Central bankers are not omnipotent, but they are clearly winning the day right now against the "gloom and doom" forecasters who see disaster on the near-term horizon. The printing press is a valuable weapon against the deflationary forces that have gripped many global economies over the last five years. And Central bankers are using this weapon with great success, but for how long? The U.S. Federal Reserve is already scaling back its quantitative easing program and will almost certainly complete this process before the end of this year. Is the so-called "Taper" of bond purchases another way of saying that the Fed is tightening? I THINK SO, but most stock investors don't seem to agree right now as major indexes continue to post record highs on a daily basis.
The second question is more complicated. In an ideal world, central banks are supposed to be there to smooth the business cycle and act as a lender of last resort. In my view, the U.S. Federal Reserve saved the world from a global depression not seen since the 1930's when it initiated massive quantitative easing efforts five years ago in response to the post-Lehman economic meltdown. And now, the Federal Reserve is scaling back its quantitative easing effort under the assumption that the U.S. economy has reached "escape velocity" and can generate sufficient economic growth on its own, without additional stimulus from the Fed.
Is this a correct assumption? Has the U.S. economy reached escape velocity?
U.S. stock market investors have voted with their money and they clearly say YES, as major indexes are marching higher on a daily basis and P/E multiples are expanding in kind. For stock market bears to be right, corporate earnings growth ahead must be less than forecast, which will then make the current expansion in P/E multiples unjustified. Bears also need the Federal Reserve to continue its taper program to its logical end. Since both of these outcomes appear likely to me, the current bull market is therefore doomed.
What else?
For the first time in many years, I am now seeing the word "melt up" in comments from many Wall Street pundits. For contrarians like me, this is music to our ears. I also see the words "new normal" everywhere. This, of course, is another way of saying "this time is different" when it comes to justifying the extreme valuation metrics that are currently being witnessed in the equities marketplace.
Bottom Line: I continue to believe that a major top is being formed in the U.S. stock market and that a serious correction will begin very soon. In the interest of full disclosure, I remain short the S&P 500 Index against long positions in several Gold/Silver mining stocks. The Gold/Silver mining shares finally perked up last week, with many Gold/Silver issues rebounding 5% to 15% from recent intra-day lows. A weekly chart buy signal was triggered within my computer trading system in the Silver Mining Shares ETF (symbol SIL), which bodes will for continued advances in this sector. I strongly believe that Gold/Silver mining shares will be the star performers for all of 2014.
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| Silver Mining Shares ETF (symbol SIL) Weekly Bar Chart with Computer-generated Buy & Sell Signals |
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