Will CNBC Market Negativity Again Bail Out Short Hedge Funds?

All during the run-up in the stock market over the past couple of years, the major cable news outfit covering the financial markets, CNBC, has been relentlessly pushing the idea that the market needs to have "correction" of at least 10% to warrant further investment equities. Day after day, night after night, the CNBC website carries stories with ominous headlines predicting a coming dramatic fall in the market, trotting out gloom and doom prophets on its programs like Marc Faber, to renew their predictions of a crash of 30-50% just around the corner because they perceive the market to be "ahead of the curve" of the real US economy.

Here are some examples from just the past couple of days of CNBC's own fear-promoting stories, despite the fact that that US unemployment is down to 5.9%, job growth per month at 227,000 for 2014 is the best year-to-date performance since the heady days of 1999, and US dollar is reaching the "King dollar" heights advocated by leading CNBC commentator Larry Kudlow: fear of "black swan," fear of earnings; fear of the rising dollar trade.

CNBC "Armageddon" scare stories have been cited previously in this blog, going all the way back to the previous CNBC promotions of the theory that Greece was going to collapse, that the Euro was going to collapse, that Germany was going to leave the Euro, that Spain was going to collapse, that Italy was going to collapse, that the US was going to default on its debt, etc., all of which of course would potentially trigger a market crash. Not one of which actually happened. But, never mind. For a while, each of these hysteria scenarios heavily promoted by CNBC drove down the equity markets for a few days or weeks. This provided enough time to allow short hedge fund positions to be unwound at a big gain and for the same funds to buy into leading stocks more cheaply to reap gains when the scenarios turned out to false - which the hedge fund managers probably knew they were!

The same pattern emerged last fall when CNBC actively promoted the outright lie that the Federal Reserve had decided to begin to unwind its extraordinary stimulus at its September meeting, which many market participants thought would be too early given the state of the economy. Not surprisingly, this led to a sharp drop in stock prices and an even more pronounced rise in bond yields. In fact, the Fed deferred its decision to "taper" its bond purchases until later in the year, and bond yields have actually come down as it has continued an orderly pace of wind-down to the present moment. Again, the equity markets also quickly recovered to gain a massive 30% increase, as measured by the S&P 500 for all of last year, once it was clear that the doom scenarios promoted by CNBC did not hold water and the short hedge funds had relatively poor results, which carried on into 2014.

But on CNBC, hope (and hype) springs eternal for a "correction" to bail out these hedge funds. At first, there was a gift from Mother Nature to the short side. The past winter was terrible and GDP fell by 2.6% in Q1 (along with expectations for the economy for the rest of the year). Stock markets were moribund, and bond prices surged, and the shorts began finally to look smart. But, as Chauncey Gardiner of "Being There" predicted, "In the Spring' there turned out to be real signs of growth. In late July, we learned that the economy grew in the second quarter by 4%, a figure later revised up to 4.6% in the final data. Suddenly the shorts didn't look so smart and in fact were fighting off more losses. The stock market revived, but CNBC, right on cue, was ready with a new chamber of horrors facing the market: the Gaza war, the Ukraine war, the ISIS emergence, the Ebola outbreak, the European near-recession and deflation, the Chinese students in the streets of Hong Kong.

It's not that any of these occurrences haven't in fact been happening. All of them are real. But are they signals for a US stock market correction or crash? Do they singly or collectively threaten the surge of growth in the US economy? Do they justify a fall to 2.0% in the ten-year treasury bond interest rate, a level consistent with a US recession, confidently predicted currently by a leading trader on CNBC's "Fast Money" program?

Granted that any TV news organization would rather cover a train wreck than an on-time arrival at the station. But CNBC's constant denigration of the equity market raises a question: why on earth would the cable network do their level best day in and day out to scare viewers out of the markets that they covers? If the only players left in equities are machines run by hedge funds, who needs to bother watch CNBC? CNBC seems to daily go out of its way to talk down the market and talk investors out of investing. So why should they bother watching TV when it constantly tells the viewers that "Stockmageddon" is just around the corner? Or as one "Fast Money" trader said last week about Ebola: "Sell first and ask questions later!"

CNBC is not alone in this game. Without a shred of data to back up its assertion, USA Today warned that the surprisingly good jobs report of October 3 could lead the Federal Reserve to increase base interest rates sooner than the financial markets expects in 2015, despite the absence of any evidence of emerging inflation. But CNBC is leading the charge to warn viewers that the fall in the Russell "small cap' stock index by over 10%, technically a "correction," is "trying to tell us something" about a coming downward direction of the US economy (multiple quotes from CNBC trading guru Guy Adami, who is the one who predicts the 2.0% ten-year note, consistent with a coming US recession). Seems to this blog that traders are trying to tell the rest of us to sell out of the market so they can swoop in to buy it cheap because they know darn well the US is not heading or a recession.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.