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The Stock Market, The Sopranos, and My Crazy Dream About the US Fed

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With the death of James Gandolfini in the news, my troubled subconscious mind merged two of its preoccupations. Up for some dream analysis?

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I know this has been a long and exhausting journey for most people lately. At least, I know it has been for me. But it seems that every day, I'm learning more and more as we, as investors, try to navigate our way through the minefields created by the launch of QE and its tapering.

I'm also learning that I may need a vacation. I have never let markets or work consume me, but I had a very strange dream the other night. They say dreams emanate from our primal mind and not our conscious mind. As I put this dream into context -- for me, at least -- it tied up what has transpired across markets last week through this week.

Just one month ago, the S&P 500 (INDEXSP:.INX) was sitting at a new all-time high of 1686 and the 10-year US Treasury was at 1.91%. Abe and Bernanke were keeping markets humming along with their drugs and Draghi was puttering behind on his 8-horsepower "Rupp" pull-start minibike. Corporations had meandered through earnings season with 70%+ beating the bottom line, much less beating the top line, but many were locking in record low rates on long-term debt, changing capital structure, raising dividends, declaring buybacks, and making shareholders happier than all those people in the GEICO commercials. China was slowing, albeit from 8% GDP growth to 7.5%; Moreover, things in Syria -- and the Middle East by extension -- had continued to worsen. But the US was going to be energy independent in five years.Some market pros were declaring a secular bull market as the Dow Jones Industrial Average (INDEXDJX:.DJI) again reached a new all-time high, confirmed by a new all-time high in the Dow Jones Transportation Average (INDEXDJX:DJT). The quality of jobs were not great in April, but the private sector added 176,000 jobs, a "sweet spot," a Nirvana scenario. Decent, but not good enough to stop the party (stimulus). Housing continued to crank in step with record low interest rates and market pros were finally saying not only should we not adhere to the ole' axiom "Sell in May and go away," but we may in fact embrace "Buy in May and stay."

Then, on May 22, Big Ben said "could" (In the context of the taper). Imagine the party ripping, the beat thumping, and all of a sudden, a big scratch on the turn table as the music stops. The S&P closed last Friday at 1592, 4.6% off of the all-time high, confirming a break of the vaunted long-term uptrend line at 1618 dating back to November 2012. All of a sudden, the 10-year US Treasury went out at 2.52%, up from a yield of 1.63% on May 1. Perhaps even more stunning was the fact that US Treasures simply could not find any liquid buyers and/or a bid as Dodd-"Beans and Frank" has ironically changed the risk profile at the seven large dealers as their balance sheets have been reduced by some 90%. Conflicting articles emerged last Friday from Fed puppets. One said the Fed "was not surprised by the market's reactions," while the other, by the Wall Street Journal's Jon Hilsenrath, claimed that investors were "misreading" the dove signals of what Bernanke said on Wednesday. Then, it seemed people suddenly realized that more than 19,000 people have died in Syria, and Vlad Putin is trying to recreate Rocky IV and the Cold War while stealing Robert Kraft's Super Bowl ring.

Suddenly Barron's -- which had bulls charging through 15,000, and then possibly 17,000, a month or two ago -- was sporting a cover two weekends ago that alluded to eerie empty cities and bridges to nowhere popping up in China, and it read like a Stephen King novel. Barron's also spoke of monstrous train stations that do not have the passengers to support them and referenced a mall in China that's bigger than the Mall of America but is 95% vacant.

All of a sudden, China is finished if the "great migration" from the countryside to the "new" cities constructed with state-sponsored money does not come to fruition. The trickle-down effects are being felt everywhere from cement to steel to gold teeth and pinkie rings. Debt to GDP in China has suddenly grown in proportions (from 130% in 2007 to 210% as of last quarter) that rival M.C. Hammer, Mike Tyson, and Japan in the late '80s, sending all three into a spiral. Now there's a cash crunch prompting the People's Bank of China (PBoC) to inject cash for the first time since February 7, bringing overnight repo rates from 13% to 8% to 4+%. Nothing like having central bank reserves of CNY 19 trillion, right?
No positions in stocks mentioned.
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