Lingering in Bubble Territory

Equities

The U.S. equities sector fell flat today, with the three major indices posting an average loss of four-tenths of a percent against Wednesday’s close. This is the first sign over the last four weeks that not everything may be rosy in the stock market, since the slowdown came amidst a much expected announcement from the Federal Reserve that QE tapering would be put on hold for the immediate future.

Ordinarily, an inflationary confirmation by the Fed would energize the investment community, but these are no ordinary markets! Despite the Labor Department propping up employment figures with EBBS numbers, or “Everything But the Bad Stuff,” the jobs growth curve declined severely for month of September, a trend confirmed by the ADP National Employment Report for the same time period.

In fact, the ADP just released their jobs data for October, which according to Carlos Rodriguez (president and CEO), was well below the average for the last twelve months. Yet some folks, like Ward McCarthy, managing director at Jefferies, argue that fiscal policy is the greatest impediment to the U.S. economy. In an interview with Yahoo Finance, Mr. McCarthy bizarrely stated that “Consumers have been doing a good job of getting their balance sheets in line. We continue to see job growth.”

Unfortunately, its distortions and outright lies like these that will continue to fuel an extremely speculative equities market. Both the Labor Department and the ADP have statistically proven that the acceleration on the jobs curve has substantially declined this year. As a result, the allocation of stock market volume that belongs to retail investment continues to flat-line. Essentially, the increase in market capitalization is occurring against the backdrop of a nominally declining workforce that has seen their wages as a ratio reduced against both against inflation (big government) and against executive compensation (big business).

In other words, there’s nothing about this lift in equities that resembles any sense of sustainability.

Other Macro Economic Issues (bonds, gold, real estate)

Another issue that has been on the sidelines is the collapse of the bond market due to the fact that 10-year yields have come off significantly from their September highs. While this is largely because of tapering being kept off the table, perhaps in anticipation of the embarrassing government shutdown, bonds are still unlikely to recover.

The shutdown for one thing has severely affected the credibility of the United States, both from a domestic perspective as well as internationally. Investors will demand more yields in exchange for greater risk, a reasonable trade-off considering that the debt ceiling debate is far from over.

That puts housing front and center of the economic recovery debate : while we have seen real estate trend positively in major cities across America, the question will become, how far will this trend go against the headwind of higher interest rates? And with a job market that is factually in the dumps, will there be enough demand to justify supply?

And then there’s the precious metals : gold and silver should act as safe-haven assets in the interim, but we also must respect the fact that the same supply-demand dynamics that move every other market will likely affect the metals as well. Gold took a bit of a tumble today, closing down at $1,324 per troy ounce, but the positive long-term trajectory is still intact. With the dollar having enormous difficulty regaining its lofty valuation from earlier this year, we could see a temporary lift in certain commodities. 

However, as we approach 2014, the real issue is, who will win the battle between supply and demand? In as much as the Fed has tried to artificially create demand, it has not been enough and that raises some very scary questions for the future.

Currencies (FOREX market)

Winners & Losers

This week’s winner is Silver Spring Networks, Inc., ticker symbol SSNI :

This week’s loser is Avon, ticker symbol AVP :