Monday, September 8, 2014

2015 Gonna Be a Whopper

2014 has been a tame year.  A ho-hum market filled with low volatility periods with very brief bouts of mild worry.  But it is setting up a whopper for 2015.  I believe 2015 will be the year equivalent of the 2007 that people feared last year, and this year.  The economy cannot hold on much longer.  The long term economic weaknesses are being masked by a strong stock market and animal spirits.  There is no escape velocity for this economy.  I am a bigger believer in Harry Dent Jr., and his Demographic Cliff, than I am in economic optimists who believe the job market is strong and economy strengthening.  I am in the minority here, and that only strengthens my belief that when others come around to my view, the repercussions in the market will be vicious.  In 2015, I can envision a move down to 1740 in the S&P 500, a move to 1.80% in the 10 year Treasury.  A move to 0.6% in the 10 year Bund.

The higher the equities goes, the spring just gets more coiled for an explosion.  You are building up potential energy for future volatility.  You don't get volatile periods out of the blue.  It has to be set up by overvalued markets that tip over into less stable entities.  To a certain extent, you need excess to build up in the economy in order to set up a fall.  That excess can be present in the real economy, in the form of overcapacity in the tech sector, or overcapacity in real estate.  Or it could just be excessive supply of stocks or excessive stock prices.

But all this is looking beyond the peak and into the next valley.  Is it not of immediate concern.  It is just in the back of my mind, something to pull out when the time is ripe.  We must first deal with the coming peak, which we are still climbing.

The market should struggle with the current levels, as we are heading into a monster amount of supply in the Alibaba IPO, and other IPOs lined up afterwards.  A lot of free cash will need to be freed up at the funds in order to sop up the new supply.  It is looking like post opex starting the week of September 22 looks the most vulnerable for a decent pullback.

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