The market is speaking to us and it is nervous. Beware the Ides of March, eh, Brute? Perhaps we can still get our ‘Sell May (maybe April) and Go Away’ peak, but models are bearish for 2014, despite Janet Yellen and despite Jeremy Siegel. And, what does Alan Greenspan have to say? While some financial commentators argue that the stock market has turned into a bubble, former Federal Reserve Chairman Alan Greenspan disagrees. “That’s not to say we may not be near highs, but you don’t get the buoyancy, the type of movements – what I would call the equity premium that characterizes a bubble or euphoria,” he told CNBC. Recall, I compared Greenspan to a New York City Taxicab driver who repeatedly slammed on the accelerator, the breaks and then the accelerator during his tenure. Remember, ‘irrational exhuberance’ from the mid 1990s – way, way ahead of the market peak? He was dead wrong. The fact he has now take the opposite position should be warning enough to all of us.
The major averages finished the Tuesday session near their lows with the Russell 2000 (-1.0%) leading the slide. The S&P 500 lost 0.5% with nine sectors ending in the red. Equities indices started the day with modest gains and spent the first two hours of action in the neighborhood of their flat lines.
The DJ was down 67.43 at 16351.43. The record high was posted on December 31 at 16588.25. Downside potential is 14720 when and if the correction resumes under the February 5 low. If I’m wrong and we breakout, the potential toward DJ 18000 emerges.
The S&P 500 was 9.54 at 1867.63, touching 1883.57, a new bull market high on March 7. Upside potential is now ultimately toward 2000. Downside potential is 1627 and then 1480 if we break under 1737.92.
The Dow Transports were down 20.18 at 7560.07, touching 7627.44, a new record high on March 7.
The Russell 2000 was down 13.49 at 1187.05. On March 4 we touched a new bull market high of 1212.82.
The Nasdaq Composite was off 27.26 at 4307.19, touching 4362.50, a new bull market high on March 6. The Nasdaq Composite is being ‘engineered’ higher back up to its record high of 5132.52 from 13 years on March 12, 2000!
Wednesday’s economic data was limited to the Wholesale Inventories report:
Wholesale inventories increased 0.6% in January after increasing an upwardly revised 0.4% (from 0.3%) in December. The Briefing.comconsensus pegged inventory growth at 0.4%. Inventory growth in the durables sector slowed, increasing 0.4% in January after a 1.2% gain in December. Nondurable inventories rose 0.8% in January after falling 0.9% in December. Unfortunately, the strong gain in inventories was likely not planned. Sales, which edged up a slight 0.1% in December, crashed in January and fell 1.9%.
Today, the weekly MBA Mortgage Index will be released at 7:00 ET while the Treasury Budget for February will be reported at 14:00 ET.
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Greenspan: Stocks Aren’t in Bubble Territory
“That’s not to say we may not be near highs, but you don’t get the buoyancy, the type of movements – what I would call the equity premium that characterizes a bubble or euphoria,” he tells CNBC.
“Two or three years ago, we were at the highest level of equity premium, a rate of return on equity that the markets require. We had had the highest equity premium in 50 years. It’s come down a bit.”
Greenspan says the Fed can’t prevent bubbles. “You can try to defuse it. You’ll fail, as we did in 1994,” he explains. “Unless you break the back of the actual euphoria that generates the bubbles, you’re bound to fail. And the result of that is something that is outside the hands of the Fed.”
Asked if there’s a bubble in Silicon Valley acquisitions, Greenspan answers, “Bubbles are not the problem. Bubbles, by definition, will deflate. It’s the institution which holds toxic assets which is a critical issue.”
For example, when the dot-com stock bubble burst in 2000, huge losses resulted. “But it was essentially in those types of institutions which were not leveraged,” he notes.
“At the time, households, they weren’t. Other pension funds, mutual funds, they took a huge hit. But to get a crisis, you need serial default.”
And, of course, no serial default occurred then. “If you look at the effect on the GDP, it was virtually negligible,” Greenspan argues.
He is very concerned about banks being adequately capitalized. “There’s nothing superior to that.” But he’s not too impressed with the Dodd-Frank financial reform law.
“Coming from what’s in Dodd-Frank, the diagnosis is basically wrong,” he maintains.
“We’re getting into a situation where the problem is wholly in the capital area. We went into the Lehman Brothers [crisis] with Lehman holding 3 percent tangible capital. You can’t function that way.”
Dodd-Frank is holding back the economy. “The difficulty is when I was at the Fed we had a few rulings a year,” Greenspan says.
“Those rulings were extended because you had to go through all sorts of loops and circles of discussing with your colleagues and regulatory areas. And we managed to do that.”
But Dodd-Frank includes a huge number of requirements, he adds. “I don’t think there’s enough time to do it,” he said. “And I don’t think it’s going to work. In fact, I wrote an op-ed piece immediately after Dodd-Frank carried on. I said this isn’t going to work, and it hasn’t.”
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