July 17, 2014
- Not even a downed passenger plane in Ukraine can move the stock market
- Three reasons there’s next to no volatility in stocks now
- Obama punishes Russia, all the BRICS yawn
- The rush for the exits out of U.S. Treasuries has been delayed
- Post-recession profanity from CEOs… a reader’s scheme to strike back at the BRICS… Godwin’s law reconsidered… and more!
The Dow touched another record yesterday — the third in six weeks. As we write an hour into the trading session, it’s off a mere nine points, to 17,129.
The market action lately has been so boring it’s nearly… making us… nod off…
[Zzzzzzz….]
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And now back to a very boring issue of The 5…
The S&P 500 hasn’t moved more than 1% in a day since April 16. Bloomberg declares this “the longest streak of calm since 1995.”
That calm is borne out in the VIX, the market’s “fear gauge” and the most commonly used measure of volatility. It’s based on the action in S&P 500 index options. Except for a brief emerging-market scare in late January, the VIX has been a snooze all year.
And by late May, it slipped into delta-stage sleep. Even the Portuguese banking scare last week couldn’t awaken the VIX from its slumber…
“Such placid sailing,” says our Chris Mayer, “has led to all kinds of theories. Most people seem to lay it at the feet of central banks and their low interest policies. Or they say something about how investors are ‘too complacent.'”
“I would like to share another theory,” Chris says: “The S&P 500 has not been volatile because people are trying their best to make it less volatile.
“If everyone is trying to dampen volatility or avoid it, doesn’t it make sense that those actions would have some effect on volatility?”
Case in point — the cash held by some of the biggest S&P 500 companies. “This is important,” Chris explains, “because the more cash a firm holds as a percentage of its assets, the less volatile the stock is likely to be.”
With that in mind, check out this list of the top 12 nonfinancial firms in the S&P…
“Those 12 firms,” says Chris, “make up nearly 20% of the market, and cash makes up 23% of their assets on average. That is a big number.”
Indeed it is. The researchers from Horizon Kinetics point out the titans of decades ago like General Motors and U.S. Steel had nowhere near that level of cash on the balance sheet… and their earnings were much more volatile.
“In addition,” says Chris, “the makers of the indexes tend to drop the more volatile stocks.” Like Sears, whose cash amounts to only 3% of its asset base.
“So when you look at the S&P 500, what you see is really an index dominated by large cash-rich companies. The S&P is often used as a proxy for the market. But it reflects an awful lot of volatility dampening.”
“Finally, we have to consider investors themselves,” Chris observes. “They don’t like volatility. There are all kinds of psychological studies that back this up.
“A purely rational investor ought to care only about the final outcome and shouldn’t care about the smoothness of the path (or lack thereof) to get there. But in fact, people are not purely investors. They are highly sensitive to that path.”
A survey by Fidelity found that investors who check their portfolio only once a year have 70% of their portfolios in stocks. Those who check once a month? Only 41% in stocks. They can’t stand to ride the ups and downs.
Fund managers know this. “They want to point with pride to numbers showing how their fund has not bounced around as much as the market,” Chris says. They adjust their allocations accordingly, and that too acts as a brake on volatility.
So there you have it: Portfolio managers, company management and the guardians of the stock indexes are all acting to keep a lid on volatility. “Might this not go some way in explaining, at least in part, why the market seems so calm?” asks Chris.
“I think it does. And if this is right, then perhaps we shouldn’t expect volatility to ‘normalize’ anytime soon.”
No, if it’s thrills-n-chills you want, you have to turn to the commodity complex.
Shortly before 11:30 a.m. EDT, news started coming in about a Malaysian passenger plane going down in Ukraine near the Russian border. It might have been hit by a missile; Ukraine’s government is seizing on the opportunity to accuse pro-Russian rebels of shooting it down, although we’re hard-pressed to come up with a motive for them to do so on purpose.
Whatever the case, gold has popped $22 as we write, to $1,322. That makes five moves of 1% or more the least three months, including Monday’s big smackdown.
Crude — also a good place for volatility — is pushing toward $103. Two days ago, it was dipping below $100.
But stocks? Even now, the major indexes are down only a half percent or so, traders unable to come out of their long summertime nap…
The BRICS summit is over, but there’s no shortage of news about the BRICS nations and a slow ramp-up in their financial warfare against Washington.
The White House is ramping up the sanctions against Russia, supposedly because Russia isn’t doing enough to rein in the pro-Russian rebels in Ukraine. The U.S. Treasury is cutting off medium- and long-term dollar funding to two Russian banks and the energy giants Gazprom and Rosneft.
Not that the BRICS much care, as The Death of Money author Jim Rickards points out…
Meanwhile, if China is looking to pull Uncle Sam’s credit card, it’s not in any hurry.
The latest numbers from the Treasury Department show China adding $7 billion to its Treasury holdings in May, totaling $1.27 trillion — about the same level as nine months ago.
Japan — not a member of the BRICS, but the second-leading holder of Treasuries after China — also added to its holdings, now the highest in at least a year.
Put all the foreign Treasury holders together and they bought $19.4 billion of Uncle Sam’s debt in May.
Muses EverBank’s Chris Gaffney: “Apparently, these foreign investors have more than compensated for the decreased bond buying by our Fed — keeping prices high and interest rates low in the U.S. 10-year Treasury.
“But the question remains, what happens if/when these foreign investors decide they are ‘full’ of U.S. Treasury exposure and inflation expectations start to increase? Could be trouble for the ‘Treasury bubble’!”
And now the world’s most useless — but nonetheless amusing — lagging economic indicator.
“It turns out that public profanity among top executives is sensitive to economic conditions,” Bloomberg News reports. Bloomberg went back over thousands of CEO calls with investors and analysts from the last 10 years. Conclusion? “It spiked in the aftermath of the recession in 2009 and has been decreasing as the recovery gathers steam over the last couple of years.”
To be clear, Bloomberg analyzed only four words, and in keeping with Agora Inc. founder Bill Bonner’s Presbyterian Standard — we won’t repeat words we wouldn’t use in front of Mom — those four words describe intercourse, defecation, taking the lord’s name in vain and the orifice from which defecation occurs.
If you’re curious, the s-word was used by far the most among the four. For example: James Hagedorn, CEO of Scotts Miracle-Gro on a February 2012 conference call: “2011 was a productive year for us, a pretty good year. Now, if all you do is look at the P&L, it clearly was a s****y year.”
Moving along…
“Thanks again, Dave, for the additional information and coverage of the BRICS,” writes one of our regulars, “and their de-dollarization agenda. Please continue to cover this story.
“Now that you’ve brought up the fact that the good ole US of A is in fact bankrolling the IMF, World Bank and, for that matter, the United Nations: I don’t run this country, but I can’t be the only one that thinks, heh, if you’re all so damn anxious to make the dollar obsolete, why don’t we just cut them off?
“Let’s try a month or a quarter for starters. I can just imagine the BRICS are still sucking at the teat of the U.S. dollar, aren’t they? Cut them off for a little bit. Oh, I know, we will ‘plunge the world into recession.’ It seems to me it’s overdue anyways.
“They’re planning our demise. Let’s not just roll over and let them! Let them experience some pain too and drain their coffers. Let’s see how that works out for them. $50 billion doesn’t sound like much of a start for their new BRICS IMF idea.
“It doesn’t take a rocket scientist to figure this out… Thanks again for some great reading in my daily dose of The 5!”
The 5: Hmmm…
“As someone pointed out to me yesterday,” another reader writes, “perhaps the fatal flaw in the BRICS Development Bank is that their funding is denominated in U.S. dollars.”
The 5: True… but for how long?
“I was not attempting to compare the results of the Nazi regime, just the way it came into power,” writes a reader clarifying after yesterday’s episode.
To back up a bit, he said Washington is clueless about what the BRICS are up to, and if a currency collapse results, a dictatorship could arise. We playfully accused the reader of violating Godwin’s law — the notion that if you invoke the Nazis, you automatically lose an argument.
He continues today: “I tend toward George Santayana’s those that do not learn from history are doomed to repeat it. The scenario has happened in one way or another many times in the past. Desperate people will follow anyone that they think will improve their lot in life. I use the Nazis as an example only because it is the one that most people now know about.”
The 5: We hear you, and we’re sorry for any misunderstanding; our reply bringing up Godwin’s law was strictly tongue-in-cheek.
Indeed, two years ago we asked an impertinent question in this space: At what point is Godwin’s law effectively repealed? We cited Milton Mayer’s book They Thought They Were Free. It’s worth revisiting.
“To live in the process,” a university professor told Mayer, “is absolutely not to notice it — please try to believe me — unless one has a much greater degree of political awareness, acuity, than most of us ever had occasion to develop.
“Each step was so small, so inconsequential, so well explained or, on occasion, ‘regretted’… Believe me, this is true. Each act, each occasion, is worse than the last, but only a little worse. You wait for the next and the next. You wait for one shocking occasion, thinking that others, when such a shock comes, will join you in resisting somehow…
“Suddenly, it all comes down, all at once. You see what you are, what you have done, or, more accurately, what you haven’t done (for that was all that was required of most of us: that we did nothing).”
Sorry to end this episode on a downer. But as Edward R. Murrow said years ago, “A nation of sheep begets a government of wolves.”
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. “How Russian Hackers Stole the Nasdaq” is the headline on a new article in BusinessWeek, discussing an incident in October 2010.
We’ve saved it for our lunchtime reading… but already we’re reminded Nasdaq still hasn’t explained what happened when a “glitch” shut down trading for three hours one day last August.
The investing possibilities are legion, as our expose on the “new Cold War” explains in depth. Click here for the whole story.