Top Calls and Catcalls

It is extremely difficult to call a top in anything. But sooner or later, someone has to stick his or her neck out and do it. Typically, it gets chopped off. Things go on far more than bears can imagine. They always do.

Nonetheless, I was fortunate to call the top in real estate in the summer of 2005. A few others did, too. My rationale was the cover of Time magazine touting "Why We’re Going Gaga Over Real Estate" in conjunction with people camping out overnight to buy Florida condos. My thought at the time was, "It can’t get any sillier than this."

Well, it didn’t get any sillier than that in housing. But I sure was wrong about how long it would take for housing to finally start affecting the markets. The housing bubble morphed into a debt-financed stock buyback bubble, into a merger-mania bubble, and, finally, into buyout bingo.

The markets have a way of humbling nearly everyone. You either get humble or you go broke. The Bear Stearns hedge fund blowups should be proof of that. Two Bear Stearns hedge funds essentially went to zero. A third is waiting in the wings with redemptions suspended.

Based on intuition, greed, and other factors, I thought that Blackstone was going to mark the end of the LBO (leveraged buyout) silliness. Given that CDOs (collateralized debt obligations — typically, subprime mortgages) were plunging like mad, and given that LBOs, CDOs and merger-mania transactions were accounting for a huge portion of Wall Street profits, I thought that Blackstone was ringing a bell in complete silliness.

And with (or rather, because of) Chuck Prince, the Citigroup CEO, announcing, “No end to the buyout boom,” I decided to take a stab at calling a market top on July 10 on my Global Economic Analysis Blog daily commentary. The post was called “Quotes of the Day/Top Call.”

Here is a snip:

“[From the Reuters article] No End Soon to Buyout Boom: ‘When the music stops, in terms of liquidity, things will be complicated…But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’”

Chuck Prince was, in essence, telling everyone to keep playing the "Greater Fool’s Game" on the basis that buyout bingo would keep on running.

Since then, over 60 leveraged buyouts have been canceled or delayed, and Citigroup is stuck in a commitment to finance TXU, whether the deal makes any sense or not (and it doesn’t). And it may cost Citigroup $1 billion to break the deal, if the deal can be broken at all. If not, Citigroup is stuck financing the deal, as opposed to securing financing for it. The difference is extremely significant.

Here is a chart of the S&P 500 when I issued my top call.

SPX – S&P 500 Weekly


Note: The above charts were compiled last weekend and do not reflect Monday’s rally or anything since.

Perhaps it would have been prudent to allow for one last blast to blow out the remaining bears. Who knows? I still could be wrong yet, as we are now bouncing off the 200-day moving average. But so far, the call has missed by about four days and 15 spoos points — not bad, given where we are today.

Nonetheless, I have been amazed by the taunts and jeers of bulls in the face of the decline since then. The more the markets plunged, the louder the catcalls became, smack in the face of this.



I will get to the catcall specifics in a moment, but first, let’s take a look at what Hussman is saying about the latest decline: Strong Economic Optimism (…Is a Contrary Indicator).

“‘The way to wealth in a bull market is debt. The way to oblivion in a bear market is also debt, and nobody rings a bell. Easy access to credit facilitates the marginal transaction. It enlarges the gross national product, expands the debt industry, and creates the rationale for a future relaxation of lending standards.’ …

[Mish’s Note: Hussman attributes the preceding quote to James Grant, “Michael Milken, Meet Sewell Avery,” 1989.]

“Despite credit concerns, Wall Street remains exuberant about economic prospects. Last week brought a six-year high in consumer confidence, evidently supporting the idea that the consumer remains strong and the economic expansion remains intact. Unfortunately, if you examine the data, you’ll quickly discover that consumer confidence is a lagging indicator, well explained by past movements in GDP, employment, and capacity utilization. Worse, for the stock market, it’s a contrary indicator (especially when it is well above the ‘future expectations’ component of the same survey). This is a fact that I’ve noted at both extremes, not only in early 2000, when new highs in consumer confidence supported a defensive position, but, conversely, in the early 1990s, when new lows in consumer confidence supported a leveraged position in stocks (prompting that ‘lonely raging bull’ comment in the L.A. Times ).”

With that backdrop, let’s look at some catcall arguments posted recently on my Global Economic Analysis daily commentary. Space considerations require that I break the catcalls down into basic ideas, rather than explicit comments. Here are those ideas:

Catcall Ideas

  1. Consumer sentiment
  2. GM earnings
  3. Earnings in general are catching the inflationary gravy train
  4. Rate cuts will save housing
  5. Rate cuts will save the market
  6. VIX went to 24; Bears will get roasted
  7. Put call ratios
  8. Low unemployment
  9. Valuations are sound
  10. Stocks are now selling at 16.5 times a conservative estimate of 2007 earnings
  11. I am predicting Dow 15K by year’s end and 20K by the decade’s end
  12. We are on the edge of a very huge boom that will astound us all
  13. We are well above the 200-day moving average, and that is bullish
  14. We are climbing a wall of worry
  15. The weak dollar is pumping new life into manufacturing
  16. Signs of a rebounding housing market are there if you look (pending home sales up 5% in June)
  17. Man, the shorts were really covering hard, the last hour or so. Can’t the bears do any better?
  18. We haven’t even had a 10% correction
  19. Sitting in cash is stupid
  20. I suspect today’s monster rally was the beginning of the next leg up in the bull. 15,000 by Christmas, along with 5-plus growth in Q4, indicating the economic boom has arrived along with a job boom.

Wow. All those reasons for a resumed bull market were presented, and the vast majority of them during the recent plunge. Oddly enough, No. 17 was presented last Thursday evening right before the huge plunge on Friday. No. 20 was extreme optimism about a one-day rally on Monday.

Hussman provided one answer to the consumer sentiment conundrum. My post Consumer Sentiment vs. Gasoline Prices provides another.

“Gasoline Prices

“I was thinking about the recent rise in consumer sentiment and I was asking, ‘How can this be? What has changed? Is the economy really getting better?’ Then it occurred to me that gasoline prices have been falling. That is odd, given that crude prices have been rising and are near all-time highs. Nonetheless, consumers do not give a damn about crude prices. They do, however, care about gasoline prices. And gasoline prices here have recently fallen over 45 cents (or more), even as crude prices are hitting all-time highs.

“Acting on a hunch, I phoned Bart at NowAndFutures on Thursday and asked him to put together a chart of consumer sentiment versus gasoline prices for me. Bart was happy to oblige. Thanks, Bart. Here is that chart.

“Wholesale Gasoline Prices vs. Consumer SentimentphpCdGJax

“In the above chart, gasoline prices are declining in scale. The previous reference to a six-year consumer confidence high by Hussman is based on the Conference Board Consumer Research Center, not the University of Michigan consumer sentiment index. But the correlation should be obvious: Consumer sentiment has tracked gasoline prices in the UMich poll ever since gasoline prices hit $2, back in January 2004.”



The VIX hit all-time lows earlier this year. Is that really supposed to be bullish? Of course, we can rally a bit from here. Why not? But the chart suggests this move up has yet to peak. It might take years, too.

As for being significantly above the 200-day moving average…Well, that comment was obviously written in the very initial stages of the plunge. The charts are now struggling to hold those averages.

Wall of Complacency

About that wall of worry…Where is the worry? When the VIX plunged to all-time lows, complacency abounded and the market rallied. The market has since declined with the breakout in the VIX. Conclusion: The market was climbing a wall of greater fools, not a wall of worry.


One cannot help but laugh on the GM comment. It was posted the day before GM sales in the U.S. plunged 22%, Ford sales by 19%, and Chrysler sales by 8.4%. Let’s see how the auto companies fare in a consumer recession.


The idea that housing is rebounding now is so silly that all it takes to refute it is one look at permits, starts, or inventories. Eventually, housing will rebound, but there are simply no signs of it now. Nonetheless, bulls are finding signs (and have been finding signs for 12 months running).

Low Unemployment

Low unemployment is an interesting argument. The question is not where unemployment is currently, but where it’s going. Please consider my blog post Martian Economists and BLS Moonbats.

“The Fed’s biggest fear should be of a collapsing economy, falling jobs, and a rising unemployment rate. And all three are going to happen. Look at the unemployment rate. It has bottomed and only has one way to go up.


“Already, foreclosures are at record levels nearly everywhere. Clearly, consumers are cash strapped. Even a modest 1% rise in the unemployment rate would wreck the consumer’s ability to meet debt obligations. All those who foolishly plowed into housing at absurd prices they could not afford (making Wall Street insiders filthy rich by unloading worthless CDOs for enormous fees to unsuspecting and/or greedy pension plans and insurance companies) are now facing margin calls of their own.

“Essentially, that is what is happening. Overleveraged consumers are now facing margin calls on their houses. For a while, homeowners were able to meet those margin calls by borrowing still further against rising asset prices. Now that home prices are no longer rising, there is no means to make those margin calls. Rising unemployment is sure not going to help any.”


The idea that valuations are sound is certainly questionable. Merrill Lynch, Lehman, Goldman Sachs, Citicorp, etc. all made countless billions underwriting CDOs, LBOs, and mergers. In addition, debt-funded stock buybacks helped keep P/Es reasonable. All of the above were made possible by cheap funding. Profits have peaked for financials, housing, and transportation. For more on valuation, please see Tightening Cycle.

Will Rate Cuts Save the Economy?

Finally, I would like to address the idea that the Fed can save the economy and the markets by slashing interest rates. The idea is actually rather silly. The short rebuttal is that the Fed created the housing bubble by slashing interest rates to 1%. If that were the problem (and it was), that is simply not going to be the cure. It is simply illogical to assume the problem and the cure are the same. But Jim Cramer thinks otherwise.

I take on Jim Cramer in Will Rate Cuts Save the Economy? I would appreciate it if Whiskey & Gunpowder readers would click on and read that last link. It explains a lot about Cramer, bulls, and the idea that the Fed should be willing to react to save the stock markets.

But while I comment daily on my blog and weekly in Whiskey & Gunpowder, opinions about what to do about the twists and turns in the market are reserved for readers of The Survival Report. Seeing what’s happening is one thing. Understanding what’s happening is another. Knowing what to do about it is still another. The Survival Report is all about the latter.

Mike Shedlock ~ “Mish”

August 8, 2007

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