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Three Reasons Why The Market Is Setting Up To Crash



January 14, 2014 – Comments (10)

Stocks are rebounding today after an ugly decline yesterday. The S&P 500 has gotten back about two-thirds of the losses in total, by the early afternoon. This is the classic mentality of buy the dip and has become common place in the last few days. After-all, average investors have been programed to buy every minor dip, no matter what...or risk missing the next up move.

While many believe 2014 will be another year of double digit gains in the stock market, I for one do not. I believe this market is setting up for an epic collapse of 30% between 2014 and 2015. Why? The three main reasons are listed below.

1. The Federal Reserve has started to make it clear that they do not believe QE (printing money) is helping the recovery anymore. Essentially they look at it like it may be hurting the economy in the long run (inflation issues). There is a mega disconnect between investors and these comments. The market still believes the Federal Reserve will not let the economy or the stock market take any sort hit. QE has been the main culprit for the epic run in the stock market over the last few years. Removal of this, leaves a drug addict without its precious drug.

2. Earnings growth has been small and mainly due to stock buybacks. In simple terms, companies have been buying back shares which increases earnings per share without actual profit growth. This can be seen as revenue numbers have remained unchanged or dropping in the last year. In recent days, constant warnings from retailers like Lululemon Athletica inc. (NASDAQ:LULU) and Sears Holdings Corp (NASDAQ:SHLD). In an economy that is supposed to be growing, this raises major concerns.

3. The cycles are aligning. First, compare the time period between the 1993-4 to the epic collapse. Then take that same time frame and note the collapse that started in 2007. Then take that same time frame and add it to 2007 and look at what you get. You get 2014-15. This is scary as the cycle is telling us something big is on the verge. As if that was not enough, take a look at the chart of the Dow Jones Industrial Average and compare it to the Dow chart from 1928-30. They are almost identical. In 1930 the stock market took a 30%+ hit.

The bottom line is obvious and must be expressed. This market has major risks and it is wise to be on the careful side. 

Gareth Soloway

10 Comments – Post Your Own

#1) On January 14, 2014 at 5:42 PM, awallejr (39.43) wrote:

You are starting to make Peter Schiff look good with these constant fearmongering posts.  Your arguments are shallow and some are pretty much asinine.

The market's direction is dictated by events and earnings.  As for your #3 argument you simply compare apples to oranges without discussing the events leading to those various crashes.  It had NOTHING to do with little chart squiggly lines.  Past crashes were caused by bubbles involving liquidity, chasing of valueless tech stocks, a housing bubble and a financial crash.  

Events caused them, not cycles or coincedental chart patterns.

As for #2, you give Lululemon and Sears as the harbringers of doom?  Did you notice the retail sales numbers for December or maybe listen to Macys? While stock buybacks can have the effect of pushing up a stock's price that is not a bad thing.  Buybacks can influence  price since you are reducing supply.

Look at the underlying businesses instead and while some deserve to get crushed many corporations are sitting on solid balance sheets, lots of cash and are very profitable.

First is last. Janet Yellen is not coming in office and slamming the breaks on everything.  That would simply throw the Country back in recession.  You think her that stupid? Eventual removal of QE will happen but as is said over and over and over it will be data dependent.  When she feels the econcomy is strong enough to stand on its own then you will see a tempered, careful withdrawal.

The bottom line is obvious, you simply fearmonger.  In the future it would be nice if you actually presented a series of EVENTS that will occur to cause a 30% crash in the foreseeable future, because I don't see any at the moment and you certainly didn't present any here.

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#2) On January 15, 2014 at 9:26 AM, GirlsUnder30 (32.52) wrote:


Some good points but is it really so unreasonable to assume we'll see some form of correction? Profits are okay in general but too many stocks are trading at several times book and unnaturally high multiples for things to keep going full steam ahead. In my opinion, those corrections will pressure a downturn.

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#3) On January 15, 2014 at 9:32 AM, awallejr (39.43) wrote:

30% is not a correction it is an outright bear market.  All last year Gareth has been telling people to short the market.  All last year I was challenging him. One of the greatest market increases and he has people out of it.  If you have listened to me over the years you would have made a ton.  And I don't sell anything.

I see some froth in certain sectors but for the most part there is still room to run.  I still can get yields of 8-12%.  Where do I get that from cash?

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#4) On January 15, 2014 at 11:03 AM, jiltin (47.31) wrote:

Earnings will go up and stocks will go up this qtr and next qtr. Every time, FED says that they are tapering further, market will be up telling that it is expected.

More the tapering, higher the stocks index.  

If this happens, it is repeating 2000 and 2008 symptoms.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” 

Broken clock is right on two times a day. This time, it is going to be right.  

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#5) On January 15, 2014 at 1:36 PM, awallejr (39.43) wrote:

Jiltin it is not a good investing thesis by concerning if a broken clock is going to be right or not.  It will 2 times out of 24 yet it will be wrong 22 times out of 24. 2000 and 2008 EVENTS are not even close to be reappearing at the moment.

2000 crashed over euphoric investing into a ton of valueless tech stocks, heavy on the margin.

2008 crashed over euphoric lending on a ton of over priced houses, heavy on the margin.

While I think social media stocks are being chased beyond valuations, even 3D plays, yet these really are a small portion of tradeable equities.

I fully expect corrections.  Contrary to Valyoo's opinion, I consider them healthy. 

But a correction and a crash are two different things. Gareth has been calling for a crash for over a year now, never citing any events that would cause one, just silly comparisons to the past.

People have been scared silly ever since the last crash and many will never get their money back.  And people like Gareth continue the fearmongering for whatever agenda they may have.

As I said elsewhere I started making money when I decided not to listen to anyone but myself and Uncle Ben Bernanke. People are free to ignore me but my track record on this site is open to public view.  I do this, not to make money off others (and I don't), but for the love of the game.

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#6) On January 15, 2014 at 11:19 PM, jiltin (47.31) wrote:

No doubt, when you say "a correction and a crash are two different things", it is exactly right.

What I am saying is correction and is under own visibility, but not like 2008 crash.

FED is trying to stabilize the economy, but not hurt the economy. Their method of implementation is by stoping MBS and raising the interest rate. Both are going to be phased out slowly after careful review and monitoring. I too consider them healthy, satabilze economy and stabilize USD value.

There are fat money or easy money is revolving around the market. The current sensational market will be changing to really rational way. 

During this time, correction duration is likely take longer so that impact to the economy is gradual.

However, correction action is started and market is crazily reacting.

Assuming MBS is fully withdrawn by around Aug 2014, money flow is restricted. Buying spree will be stopped. Presently, banks are not booking real estate finances as refinances are stopped due to interest rate hike. Inventory is low and homes sales are less. Naturally, home projects, spending will be less when MBS is fully out (I am not against stopping MBS, but analyzing the effect). 

When interest rate is increased, credit based (most of the us companies) bottom line gets affected. They resort to lay off, stop projects, stop buying etc. This creates cyclic efforts. Cash rich companies resort to minor lay offs and expense reduction to maintain the profit level.

This creates a vicious cycle and It resembles same way like 2000 and 2008 market peak.

Jan - Aug 2014 - MBS withdrawal

Jan 15 to Oct 2015 - rate increase 

Within the time, Profit margin comes down, lay offs start between Oct 14 to Mar 2015.

Economy has to come up on its own. It takes long time to come back.

These days are my guess estimate and close watch is important and careful invest strategy is required. 



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#7) On January 16, 2014 at 8:39 AM, awallejr (39.43) wrote:

I don't think QE will be over by August of this year without exceptional data to support it.  Also Fed is not raising interests rates until 2015 at the earliest.  While tbill rates may go up at most you will be seeing 10 year rates at 3-4 pct.  Mortgage rates maybe 5-6 pct.  While this will have an impact on housing on marginal buyers such rates are still affordable compared to rates we saw prior to the last crash. 

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#8) On January 17, 2014 at 10:52 AM, jiltin (47.31) wrote:

The unemployment is going to drastically change as they reduced to 26 weeks alone. Hence, it easily goes from 7% to 4.5%.

Hence, supporting data is very easy across USA less employment.

QE reduction will not set back the economy, but strengthen economy, strengthen USD and reduce inflation. It will reduce the money flow, the extra free money circulating across USA.

When all MBS is fully removed, we will see consumer buying rate reduction.  In addtion, rate hike is imminent anytime thereafter within 6 months.

Until this year election is over, we will not see any interest rate hike, but any time after it is possible. By that time, jobless rate may be within 3% and 4%.

If these are happening, my guess is right. If not, I am wrong. I still invest/day trade wild stocks (True one day it goes +10k, next day -10k!! TSLA & TWTR) and waiting for last MBS reduction.



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#9) On January 22, 2014 at 2:41 AM, awallejr (39.43) wrote:

Jil you are playing with high beta stocks that will trade off mementum not valuation.  Look at BBEP and KKR.

The unemployment rate will decrease because Baby boomers are retiring not because job rate is growing.

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#10) On January 22, 2014 at 2:45 AM, awallejr (39.43) wrote:

Also wanted to point out how I said "generational" buying opportunity in April of 2009, way before Cramer started to say it ;p

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