Is This Wall Street's Last Liquidity Orgy?

Leo Kolivakis  |

Image source: Pension Pulse

Fred Imbert of CNBC reports the Dow jumps more than 800 points, Nasdaq hits a record after surprise jobs surge boosts recovery bets:

Stocks rallied on Friday after a historic and surprising gain in U.S. jobs raised hope the economy is starting to recover from the coronavirus pandemic.

The Nasdaq Composite became the first of the three major averages to climb back to an all-time high, advancing 2.0%, or 198.27 points, to 9,814.08 on Friday and touching an intraday record of 9,845.69. After tumbling as much as 25% earlier this year, the tech-heavy index is now 9.3% higher for 2020.

The Dow Jones Industrial Average jumped 829.16 points, or 3.1%, to 27,110.98. The S&P 500 rose 2.6%, or 81.58 points, to 3,193.93.

Friday’s rally put the S&P 500 down just 1.1% for 2020. At one point this year, the broader market index was down 30.3%. The Dow was only down 5.0% year to date after dropping as much as 34.6% in 2020.

“We’re back,” CNBC’s Jim Cramer said on “Squawk Box.” “I think there were a lot of people who felt that the layoffs would be permanent and it’s obvious that there’s so much demand that people have to bring people back.”

The Dow was up 6.9% week to date. The S&P 500 had gained 4.9% and the Nasdaq Composite was up 1.9%.

U.S. employers added a shocking 2.5 million jobs last month — the largest gain on record — while the unemployment rate slid to 13.3%, the Labor Department said Friday. Economists polled by Dow Jones expected a drop of more than 8 million jobs and the unemployment rate to nearly reach 20%, which would have been the highest since the 1930s.

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“The unemployment rate was solid; the participation rate was higher. This checks all the boxes for a solid report,” said Drew Matus, chief market strategist at MetLife Investment Management. “So even though this was coming off a horrendous report the previous month, there’s nothing that screams this is some sort of error that can be ignored. If anything, it suggests we should be looking for more good news next month.

President Donald Trump touted the strong data in a series of tweets, saying: “It’s a stupendous number. It’s joyous, let’s call it like it is.”

The report boosted confidence of a swift economic recovery among traders, leading them into stocks that would benefit the most a broad reopening.

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Shares of airlines jumped, adding to their big gains this week, as the industry added more summer flights. American Airlines jumped 28.6%. United Airlines shares surged 21.3%. The US Global Jets ETF is up 44.6% this week. Cruise-line operators such as Norwegian Cruise Line and Carnival both advanced more than 17% while Royal Caribbean gained 13.2%.

MGM Resorts jumped 8.2% while Kohl’s and Nordstrom advanced more than 12% each. Mall operator Simon Property gained 14.1%.

Shares of banks, which have been decimated during the pandemic as lending activity and margins dried up, soared as the jobs report suggested a quick bounce back for the economy. JPMorgan Chase, Citigroup, Wells Fargo and Bank of America all rose at least 5%.

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Those gains came largely at the expense of stocks that benefited from people staying at home in the early stages of the coronavirus pandemic. Netflix fell 0.8% and Zoom Video lost 3.5%. Amazon slid 0.2%.

“The economy and the stock market have generally moved in the same direction over time, though rarely in lock-step,” said Willie Delwiche, investment strategist at Baird, in a note. “The gulf between current headlines for Wall Street (best 50-day rally ever for the S&P 500) and Main Street (one-in-four American workers have now filed for jobless benefits) seems more extraordinary than normal.”

“While not looking past the current pain, the hope is that from these moments of uncertainty, a path toward a more hopeful future (and more robust economic participation) will emerge,” said Delwiche.

Friday’s gains put the S&P 500 up more than 45% from a March 23 intraday low and less than 6.5% from its Feb. 19 record. The Nasdaq Composite has rallied over 47% in that time and is less than 1% from its all-time high.

Alright, it's Friday and stocks exploded up on today's "shocking" jobs report which stunned everyone on Wall Street:

But while many people are applauding today's unbelievable jobs report, others are more tempered and downright skeptical:

Still, Wall Street doesn't care, the new narrative is "America is back" and there's a "healthy rotation going on" out of Technology (XLK) into cyclical shares like Financials (XLF), Industrials (XLI) and Energy (XLE).

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But if you dig deeper, it's all the industries that were decimated the most due to the pandemic and shutdown -- airlines, cruise lines, casinos, hotels, retailers and mall operators -- that are the biggest gainers by far this week, just based on reopening optimism. Here are the large cap gainers this week....THIS WEEK!!!!:

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And if you look at the main indexes, they are all rallying like it's 1999 and COVID-19 is eradicated in what is now officially the greatest V-comeback in stock market history:

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What is driving this week's frenzy in stocks? In my mind, there's no doubt this is a classic liquidity melt-up as the Fed's balance sheet soared past $7 trillion.

There's also a classic speculative bubble going on as novice traders are buying anything that moves up in hopes of striking it rich:

I also think the large quant hedge funds are having fun pumping and dumping stocks, basically preying on retail traders, exacerbating the frenzy.

How else can you explain Hertz shares were up 130% on massive volume earlier today before the wind got sucked out of them?

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Keep in mind, Hertz filed for bankruptcy, so this is nothing more than dangerous and dumb speculation.

How does all this end? Most strategists will tell you as long as the Fed is backstopping markets, stay long and strong.

The Fed has basically eviscerated the bears, infecting them with monetary coronavirus, they are nowhere to be found.

But if the May positive jobs surprise was so good, some think the Fed will start tapering off:

I doubt it because it is on record stating it wants to see inflation and over in Europe, the ECB is also going all out:

The problem? As I stated last week, money printing can't Trump a depression, it exacerbates wealth inequality, creates more social tensions and ultimately, it will usher in a prolonged deflationary cycle:

Also, all these bailouts aren't free, the US faces a series of fiscal cliffs and the Fed can't monetize debt fast enough which is sucking up liquidity:

So how does Wall Street's liquidity orgy end? The way it always ends, once markets climax and the cocaine wears off, reality sinks in and a lot of traders high on monetary stimulus will experience severe withdrawal symptoms:

Of course, nobody wants to hear about the grim reapers, everyone is pissed they didn't buy the market back in late March when Bill Ackman called the bottom by scaring the daylights out of retail and institutional investors.

I guess Gundlach, Bianco and others are wrong, there will be no retest of March lows, stocks can ONLY go up now that the Fed and other central banks are backstopping global risk assets.

All the bullish strategists on Wall Street -- Tom Lee, Ed Yardeni and plenty of others -- are thumping their chest stating "we were right, never fight the Fed."

All the brokers working in "wealth management" can rejoice, the Fed has saved the day and their clients' portfolios.

All the robo-advisors and passive indexers are also rejoicing, telling their clients to stay invested at all times, markets always bounce back and passive always beats active management:

All the portfolio managers lagging their index are now forced to buy the latest momentum stocks to make up for their severe underperformance and elite quant funds will be frontrunning them, as they did this week with stocks like Boeing:

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I can go on and on, we've seen this movie before and even though people are convinced the "unprecedented monetary and fiscal stimulus" will save the day, it won't, it made Wall Street's day but the liquidity orgy will eventually dry up and wreak havoc on markets for a very long time.

But have fun watching the cheerleaders on CNBC. I'm sure they'll have plenty to talk about as markets melt up during Wall Street's last liquidity orgy.


Below, CNBC's "Halftime Report" team is joined by Tom Lee of Fundstrat to discuss how the market is trading. Lee is sticking with his epicenter stocks and thinks markets will make a new high this summer. His year-end target for the S&P 500 is 3450 but said it can close higher.

Also, Scott Minerd, chief investment officer at Guggenheim Investments, discusses the impact of the Federal Reserve's efforts to stabilize the U.S. economy on credit markets, corporate debt, and defaults. He speaks with Bloomberg's Sonali Basak on "Bloomberg Markets."

Lastly, CNBC's Meg Tirrell interviews White House health advisor Dr. Anthony Fauci about his outlook for the coronavirus pandemic in the United States. Dr. Fauci thinks virus cases are plateauing and in general things are going in the right direction but states the country needs to prepare for a potential second wave this fall.

Leo Kolivakis is a Canadian-based senior analyst specializing in pension funds and investments across public/private markets.

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Equities Contributor: Leo Kolivakis

Source: Equities News

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer. The author of this article, or a firm that employs the author, is a holder of the following securities mentioned in this article : None

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