October 26, 2020 – I have warned people for over a year now about the highly over-valued commercial Real Estate and Big Tech stocks, and how they were creating a massive bubble that will eventually burst. It looks like these predictions are finally coming to pass. According to Market Watch, in an article entitled “It’s been years since investors have been this fearful of a stock market crash, Nobel-winning economist warns” it appears investors are finally starting to pick up on some of these things:
That’s Robert Shiller, a Nobel Prize-winning economist and Yale professor, urging a cautious approach to investing in the top-heavy stock market in an op-ed for the New York Times.
The coronavirus crisis and the November election have driven fears of a major market crash to the highest levels in many years,’ Shiller wrote. ‘At the same time, stocks are trading at very high levels. That volatile combination doesn’t mean that a crash will occur, but it suggests that the risk of one is relatively high. This is a time to be careful.’
He said he reached this conclusion based on what he’s seeing in several stock-market confidence indexes that he began to develop decades ago.
Specifically, his Crash Confidence Index is sounding the alarm bells. Shiller said he asks investors this question: ‘What do you think is the probability of a catastrophic stock market crash in the U.S., like that of Oct. 28, 1929, or Oct. 19, 1987, in the next six months, including the case that a crash occurred in the other countries and spreads to the U. S.?’ He said the bearish answers to that question registered one of the lowest readings in confidence he’s ever seen.
Shiller also pointed to the Cyclically Adjusted Price Earnings (CAPE) ratio, a measure he helped created. It compares stock market valuations from different eras by averaging the earnings over 10 years, thereby reducing some of the short-term volatility of each market cycle. The CAPE ratio, he explained, is currently at levels higher than any period in history, aside from the lead-up to the Great Depression in the 1920s and just before the popping of the dot-com bubble about 20 years ago.
‘Despite these signs of distress, the stock market has been trading near a record high, stretching the valuations of stocks to fairly rich levels,’ Shiller said, adding that investors could be at a ‘crossroads’ in this climate. ‘The question now is whether another reminder of crashes past could emerge to create a psychological sense of the risk,’ he wrote. ‘A further pickup in coronavirus cases, a chaotic or violent election or any number of other events could well shake people up.’
With more than one third of S&P 500 index components scheduled to report quarterly earnings results this week, investor jitters are clearly showing up in Monday’s trading session. The Dow Jones Industrial Average DJIA, -2.61% was off more than 600 points early, while both the S&P SPX, -2.05% and Nasdaq Composite SPX, -2.05% were firmly lower, as well. – Market Watch
Apple, Inc. was valued at over 2 trillion earlier this year, and the company clearly is not worth that much. This is something that no one seems to understand, Apple’s products have been declining since the death of Steve Jobs and the insertion of Tim Cook. From an ABC News article entitled “Apple Reaches $2 Trillion Market Value as Tech Fortunes Soar” that misses the mark and is worded more like a PR piece than an actual news article:
Apple has become the first U.S. company to boast a market value of $2 trillion as technology continues to reshape a world where smartphones are like appendages and digital services are like instruments orchestrating people’s lives.
The stock later backtracked to close at $462.83, but it didn’t diminish a remarkable achievement that came just two years after Apple became the first U.S. company with a $1 trillion market value. It comes amid a devastating pandemic that has shoved the economy into a deep recession and caused unemployment rates to soar to the worst levels since the Great Depression nearly a century ago.
Apple’s stock has climbed nearly 58% this year. In recent weeks, the rally has been bolstered by excitement over a four-for-one stock split that Apple announced late last month in an effort to make its shares more affordable to a wider swath of investors. – ABC News
How did the reporters miss how heavily over-valued this is for a company that is declining? The problem is that big tech now comprises 20% of the entire U.S. stock market, and they are monopolies that are totally over-valued, this is setting the market and investors up for failure.
In the past, during times of chaos and economic uncertainty, investors would flee into what had been traditionally seen as safe choices, FANG. In finance, the acronym “FANG” refers to the stocks of four prominent American technology companies: Facebook (F), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOG). In 2017, the company Apple (AAPL) was also added, causing the acronym to be rewritten as “FAANG.”
It was precisely this behavior that helped prop these companies up, and make them so overvalued in the first place. They are not a safe haven anymore and increasingly they will face antitrust litigation in the U.S. and abroad.
Sean Williams of the Motley Fool is also warning investors of a potential imminent crash in the market, in an article entitled “New Data Suggests a Stock Market Crash May Be Imminent” he writes:
It’s been a buckle-up-and-hold-on sort of year for Wall Street and retail investors. The unprecedented uncertainty created by the coronavirus disease 2019 (COVID-19) pandemic shaved 34% off of the benchmark S&P 500(SNPINDEX:^GSPC) in a matter of just 33 calendar days during the first quarter. We also witnessed the fastest snap-back rally to new highs from a bear market low on record. All in all, we’ve crammed about a decade’s worth of volatility into a six-month window.
The scary thing is, we may soon be doing it all over again.
Aside from volatility, one thing the stock market isn’t short of these days are doomsday predictions — and you’re about to hear another one.
Previously, I’ve suggested that a stock market crash or correction was highly likely because historical data said it was. Following the previous eight bear markets, dating back to 1960, there were a grand total of 13 corrections/crashes of between 10% and 19.9% within three years of these bear market lows. This is to say that each new bull market underwent one or two sizable corrections relatively soon after bouncing off a bear market low.
However, this may not be the most damning evidence that the stock market is in trouble. The most concerning data point comes from Refinitiv Lipper, which has been reporting U.S. weekly mutual fund and exchange-traded fund (ETF) cash flows on a weekly basis for well over a decade. For the week ending Oct. 21, 2020, investors were net redeemers of fund assets (conventional funds and ETFs) to tune of $7.6 billion.
Here’s what’s concerning: This was the 11th consecutive week of fund outflows, when taken as a whole, and the 26th consecutive week for conventional fund outflows (excluding ETFs). Domestic equity funds are also riding a 19-week streak of ongoing outflows. The stock market might be near its all-time high, but this data suggests that investors aren’t exactly thrilled with the prospect of putting their money to work in equities right now.
What makes this even more worrisome is that these ongoing outflows come at a time when U.S. Treasury yields are within a stone’s throw of their record lows. Investors looking for guaranteed income are scraping by with only a 0.8% yield on the 10-year Treasury note. It’s almost certain that inflation will outpace 0.8%, on average, over the next decade, meaning T-bond buyers are going to lose real money while holding to maturity.
If investors aren’t tempted by equities with yields that are virtually nonexistent, Wall Street could be in some serious trouble.
Keep in mind that equity fund outflows are just one of many potential problems for the stock market.
The coronavirus pandemic remains an issue in many respects. Putting aside a vaccine for a moment, there remains the possibility of additional restrictions both within and outside the United States. Ireland, for example, is imposing a six-week lockdown that requires residents to stay within three miles of their homes and restricts access to retail stores and restaurants. With each state in the U.S. managing its coronavirus response independent of the federal government, it’s not out of the question that additional restrictions could become necessary this fall or winter.
As for a COVID-19 vaccine, Wall Street appears to be expecting a miracle. I mean, why would the S&P 500 be within striking distance of a new all-time high if not for the expectation of a vaccine with exceptional efficacy? If late-stage trials fail to completely wow Wall Street, a lot of downside could await the market.
Fundamentally, I think it’d also be foolish (with a small “f'”) to overlook the strong likelihood of a rise in delinquency rates for mortgages, rent, credit cards, and personal loans in the coming months. Remember, funds from the Coronavirus Aid, Relief, and Economic Security Act served as a financial buffer for tens of millions of Americans through July. But with enhanced unemployment benefits now gone and the unemployment rate still more than double where it was prior to COVID-19, our nation’s financial institutions are bound to feel the pain.
Even election uncertainty could become a problem. Although the polls appear to be in agreement that Democratic Party challenge Joe Biden will be victorious on Nov. 3, surveys have proved wrong before. Anything but the utmost certainty when it comes to politics usually plays out poorly on Wall Street. – Sean Williams
Sean has looked at many different data points, and he is saying that there are a number of factors that are combining and coming together to create a perfect storm in the markets. I have previously discussed a number of these factors, and I warned people that the market broke in 2008 and has never recovered. The plans they decided to implement only worked as a temporary patch in the short-term, but would make things worse overall in the long-term. I hate being right.
CNBC has picked up on the problems in the commercial real estate sector, in a report “Commercial Property Prices are a risk for Banks and Bond Investors” they state:
Commercial real estate prices have plunged this year as people stopped going into offices, and retail businesses were disrupted. That could lead to a significant amount of losses for banks, according to a recent report.
In previous downturns, commercial property loan losses were ‘heavy’ and there are worrying signs that such a trend could be repeated this time during the coronavirus-induced slowdown, Oxford Economics’ Adam Slater said in a report.
In a worst-case scenario, Slater said these loan losses would ‘materially erode’ bank capital.
‘Large (commercial real estate) price declines generally translate into big losses for banks. Write-offs of (commercial real estate) loans made a big contribution to overall bank losses in the last two major downturns,’ wrote Slater, an economist at the firm.
During the 2008 great financial crisis, for example, such loan losses accounted for between 25% and 30% of total loan write-offs in the U.S.
This time those risks look highest in the U.S., Australia, and parts of Asia such as Hong Kong and South Korea. In these economies, lending growth has been high, with ‘significant’ loan exposure. But commercial property prices are already sliding, especially in Hong Kong, the report said.
In Singapore, office rents had their steepest decline in 11 years in the third quarter, official data showed on Friday. Rents for office space fell 4.5% in the latest quarter till September.
The firm’s index of global commercial real estate prices based on seven large markets show they are down 6% from last year.
‘Could the coronavirus crisis lead, via the commercial property sector, to long-term problems for the banking and financial systems? … we think it is a genuine concern,’ Slater wrote.
‘Currently, hotels are running at very low occupancy rates, retail units have seen sharp declines in customer footfall, and many offices are closed or running with very low staffing levels,’ he said. ‘In these circumstances, rental income and debt repayments from affected sectors are in grave doubt.’
Oxford Economics analyzed 13 major economies and found that write-offs of 5% of loans would amount to the equivalent of a loss between 1% and 10% of banks’ tier 1 capital, their primary funding source including equity and earnings. The biggest impact would be felt in Asia, it said.
Bond investors may also be at risk.
In the U.S., around half of the lending by this sector is not made through bank loans, and that includes the issuance of bonds in the sector, according to the report. In parts of Europe and Asia, that proportion of borrowing through the non-bank sector has risen to 25% or more, in recent years.
‘In the case of property funds, (commercial real estate) downturns could see a rush by investors to redeem their holdings leading to fire sales of assets — amplifying price declines and broader loan losses,’ said Slater.
But there’s one bright spot. Banks are in better shape to absorb them as compared to a decade ago. Their capital and leverage ratios are around double the levels a decade ago, Slater said. – CNBC
Here we can see the so-called “reforms” that were implemented to mitigate risk and prevent fraud have not had the impact that they were projected to have.
Sam Shead reports on the current market meltdown in a piece called “SAP Market Cap Plunges by $50 Billion as Covid Takes Its Toll” the harsh policies enacted in the wake of the “pandemic” are finally starting to be felt:
German enterprise software group SAP saw its market valuation fall by 29.48 billion euros (nearly $35 billion) on Monday as shares collapsed by over 20% following disappointing third-quarter results.
The company, which slashed its revenue and profit forecast for 2020, saw its market cap fall from 147 billion euros to 118 billion euros and its worst trading day in at least 12 years.
SAP said coronavirus lockdowns would affect demand for its business relations and customer management software well into 202. It also announced plans to go all-in on cloud computing, competing with the likes of Oracle and Salesforce.
While customers pay considerable sums upfront for SAP’s on-premise software packages, most of the payments for cloud subscriptions come down the line, SAP said. As a result, the companyis abandoning medium-term profitability targets and warned that it will take longer than expected to recover from the pandemic.
‘As the CEO of SAP, I have to be focused on the long-term value creation of this company,’ Chief Executive Christian Klein told CNBC’s ‘Squawk Box Europe’ on Monday.
‘So I cannot trade the success of our customers and the significant revenue potential of SAP against short-term margin optimization.’
SAP now expects to almost triple its cloud revenues to over 22 billion euros by 2025, Klein said.
However, the switch to focus on cloud computing will bring the company’s 2023 operating margin down by approximately 4 to 5 percentage points.
‘We will stay committed to our profitable growth with over 11.5 billion euros of operating profit in 2025, which includes a double digit profit growth from 2023 onwards,’ said Klein.
JPMorgan cut its price target for SAP to 120 from 160 euros, and downgraded the stock to neutral from overweight. – Sean Shead
This is just the beginning, as the market finally starts to feel the blows that it was deal when the policies were first pushed. We can expect to see a lot more of this.
CNBC published a piece today “Stock Market Today: Dow drops more than 400 points as U.S. hits record daily coronavirus cases” we can see how reporting on the “pandemic” also has negative effects on the markets:
Stocks fell sharply on Monday as coronavirus infections jumped and negotiations for a fiscal stimulus package before the election came down to the wire.
The Dow Jones Industrial Average traded 424 points lower, or more than 1%. The S&P 500 slid 1.1% and the Nasdaq Composite dipped 0.5%.
The decline came amid a record surge in new coronavirus cases in the U.S. The country saw more than 83,000 new infections on both Friday and Saturday after outbreaks in Sun Belt states, surpassing a previous record of roughly 77,300 cases set in July, according to data from Johns Hopkins University. The data also showed the country has reported an average of 68,767 cases per day over the past seven days, a record.
White House chief of staff Mark Meadows said Sunday that the U.S. will not get control of the pandemic amid the surge in new cases.
Optimism also dimmed that the White House and Republicans could strike a stimulus deal with Democrats before the election. Meadows and House Speaker Nancy Pelosi in separate interviews accused each other of moving the goalposts on stimulus talks. White House economic advisor Larry Kudlow also told CNBC’s ‘Squawk Box’ that talks had slowed down, but noted they are still ongoing.
‘The market is likely to drift lower near term (first SPX support at 3,209) in the face of Stimulus disappointment … Virus resurgence, and intensifying Election uncertainty,’ said Julian Emanuel, strategist at BTIG.
Stocks with the most to lose from rising cases and a stalled stimulus plan led the decline Monday. Royal Caribbean shares fell 5.7%. Delta fell 2.8%.
Tech stocks were also under pressure after SAP, one of the biggest software companies in Europe, saw its shares plunge more than 20%. The company warned that businesses are holding back from spending; it also cut its earnings and revenue estimates for 2020.
Microsoft shares dipped 0.8%. Oracle stock was down by 3.3%.
This week marks the last week of October and the final trading period before Nov. 3. Major averages are on track for modest gains for the month, with the S&P 500 and the Nasdaq both rising more than 3% so far. The 30-stock Dow is up about 2% this month. – CNBC
Most of Wall Street had thrown their hat into the presidential race behind Joe Biden whose campaign is being financed largely by corporate lobbyists, big pharma and bankers. One has to wonder if the recent revelations about Hunter Biden has anything to do with this latest market upset.
A number of factors that have been a problem all seem poised to break at the same time, in addition to the effects of the harsh lockdown polices, which are only beginning to be felt. This also would be another massive transfer of wealth from Main Street to Wall Street yet again. The Central Banks, the Federal Reserve and the major banks always get bailed out, while citizens and small businesses get screwed over.
There’s an old saying that goes … “It’s a mighty ill wind that doesn’t blow somebody some good.” Our president and his team have been working assiduously to return control of our commerce and enterprise to the hands of our industrious and independent entrepreneurs. That’s what all the loosing of rules and regulations, restoration of U.S. manufacture and opportunities for growth have been about – to put your futures in your hands.
POTUS and his team are doing their part, and we can now see that. We must be diligent to do ours in concert with all their hard work. We are seeing two bubbles collapse. We The People need to prepare for market dislocations and in some cases collapses. As far as the stock market is concerned, you might consider diversifying your portfolio, and reconsider investment in these big tech companies. Otherwise, people need to seek local solutions making sure you stock up on medicines, food and water. Our supply chains have been hit hard. Shortages could get worse before they ease up. Prepare your families and children for cutting back on non-essentials.
Remember, we are a nation of entrepreneurs, builders, inventors. As a child many of us learned that we should never say “I can’t” because American ends with I CAN! Trite, but absolutely true as we have seen our families do many times. Most of all, Americans are optimistic survivors who leave everything better than they find it. And we will do so again, God willing.
We will continue to keep you updated on the market, please check back for updates.