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The Myth of Sound Fundamentals

February 26, 2018

The Myth of Sound Fundamentals

The recent correction in the US stock market is now being characterized as a fleeting aberration – a volatility shock – in what is still deemed to be a very accommodating investment climate. In fact, for a US economy that has a razor-thin cushion of saving, dependence on rising asset prices has never been more obvious.

NEW HAVEN – The spin is all too predictable. With the US stock market clawing its way back from the sharp correction of early February, the mindless mantra of the great bull market has returned. The recent correction is now being characterized as a fleeting aberration – a volatility shock – in what is still deemed to be a very accommodating investment climate. After all, the argument goes, economic fundamentals – not just in the United States, but worldwide – haven’t been this good in a long, long time.

But are the fundamentals really that sound? For a US economy that has a razor-thin cushion of saving, nothing could be further from the truth. America’s net national saving rate – the sum of saving by businesses, households, and the government sector – stood at just 2.1% of national income in the third quarter of 2017. That is only one-third the 6.3% average that prevailed in the final three decades of the twentieth century.

It is important to think about saving in “net” terms, which excludes the depreciation of obsolete or worn-out capacity in order to assess how much the economy is putting aside to fund the expansion of productive capacity. Net saving represents today’s investment in the future, and the bottom line for America is that it is saving next to nothing.

…click on the above link to read the rest of the article…

DOW JONES INDEX CORRECTION & CRASH LEVELS: A Chart All Investors Must See

February 12, 2018

DOW JONES INDEX CORRECTION & CRASH LEVELS: A Chart All Investors Must See

As the Dow Jones Index continues to drop like a rock, the worst is yet to come. Today, investors once again plowed into the markets because they are following the Mainstream Financial advice of BUYING THE DIP. Unfortunately, those who bought the dip before yesterday’s 1,032 point drop and the 400+ point drop this afternoon, have thrown good money after bad.

Of course, we could see a late day rally to calm investor’s nerves…. but we could also see an increased sell-off. Either way, I could really give a rat’s arse. Why? Well, let’s just say the Dow Jones Index has a long way to fall before it gets back to FAIR VALUE. However, my fair value is likely much lower than the Mainstream analysts’ forecasts.

I wanted to publish this post today but will be putting together a Youtube video with more detail this weekend. However, let’s take a look at the Dow Jones Index chart from my Youtube video:

If you haven’t seen this video, I highly recommend that you do. When I published that video, the Dow Jones Index was trading at 26,100. Today it is already down to 23,400. However, as I stated, we have much further down to go. Here is my newest chart:

While the Dow Jones Index has already declined by 2,500 points since my first chart, I wanted to provide the different correction and crash levels as I see it taking place on the Dow Jones Index in the future. The first level the Dow Jones will reach its Support level at about 18,000 points. Once this level is broken, then it breaks down to the 200 Month Moving Average (RED line) at 13,000. Who knows how long it would take to get down to 13,000, but it will.

…click on the above link to read the rest of the article…

BIll Blain: “The Unintended Consequences Are Finally Coming Back To Bite Us”

February 12, 2018

BIll Blain: “The Unintended Consequences Are Finally Coming Back To Bite Us”

Fundamentals ok, Technicals corrected, so why we should still be nervous on what comes next for markets…

“If the apocalypse comes, tweet me..”

That was an interesting week that was…. but what a hangover we face! What happened to the global bull stock market? Just as the party was looking likely to carry on forever, the music stopped… Reading through market the scribblers this morning, the consensus seems to be it was just a correction, and we should be buying the dips. I’m always a big supporter of buying dips…. I’m not so keen on buying into a more secular decline.

Thing is, it feels there is nothing particular we can put the finger on as responsible for last week’s stock market ructions. Bond yields rose a bit, inflation has gathered a bit of momentum, and economic fundamentals remain generally positive and are expected to improve in line with rising growth estimates. There is little threat of an oil-shock. Folk have pointed out that with so much money likely to be invested in share-buybacks and special dividends by US companies repatriating cash, the stock fundamentals look positive.

Central banks remain hawkish re normalisation and higher interest rates – but modestly so. A world with moderate on-trend inflation, still low interest rates, and solid growth prospects should be positive. A screaming buy signal.

Others say last week’s pain was technically driven – on the back of a massive sudden and shocking unwind of “short-vol” trades. Others say if was due to AI driven algorithmic traders, while the FT carries a story about insurance companies dumping massive amounts of stocks, triggered by rising volatility, linked to “managed volatility” variable annuities.

…click on the above link to read the rest of the article…

“We Are Living In A Reality Distortion” Mark Spitznagel Warns “This Is Not Over Yet”

February 11, 2018

“We Are Living In A Reality Distortion” Mark Spitznagel Warns “This Is Not Over Yet”

Just a week before the biggest spike in US equity market volatility ever – something ‘no one’ in the mainstream even thought possible – Universa’s Mark Spitznagel warned “a reckoning always follows…something really big is coming”

This is an age of massive artificial economic imbalances and systemic risks.

Repress change, and you repress all that it means. Repressing it is sheer hubris and, in Dylan’s words, “beyond your command.” You can only defer it, not stop it. (Juxtapose this view with outgoing U.S. Federal Reserve Chair Janet Yellen’s ambitious claim that there will not be another financial crisis “in our lifetimes.”) When we try enforcing stability by decree, a reckoning always follows. An unsustainable boom leads headlong to an inevitable bust. A hard rain falls.

Rather than fear it, we should “tell it and think it and speak it and breathe it.” This is Dylan’s resolve. Something really big is coming. Let the central bankers try to keep standing in its way, but as investors we need to recognize and accept its logical consequence of a return to the meaning of volatility. Change and volatility are good. “There is nothing perpetual but change”—according to Mises, who surely must have loved Dylan just as much as I do.

While this is a common theme from the guru of tail risks, his timing could not have been better. As some might say “nailed it,” and Spitznagel was asked to explain how to spot market crashes coming on Bloomberg TV this week…

Spitznagel begins by pointing out the obvious, and crushing the business models of 99% of the mainstream media’s guests:

“My job is not picking the top. My job has always been risk mitigation. Picking crashes is impossible… timing crashes is impossible. If you require a forecast in order for your investment thesis to do well, then I think you’re doing it wrong.“

…click on the above link to read the rest of the article…

Is A Massive Stock Market Reversal Upon Us?

February 9, 2018

Is A Massive Stock Market Reversal Upon Us?

I have been saying it for years and I will say it again here — stocks are the worst possible “predictive” signal for the health of the general economy because they are an extreme trailing indicator. That is to say, when stock markets do finally crash, it is usually after years of negative signs in other more important fundamentals.

Of course, whether we alternative analysts like it or not, the fact of the matter is that the rest of the world is psychologically dependent on the behavior of stock markets. The masses determine their economic optimism (if they are employed) according to the Dow and the S&P and, to some extent, by official and fraudulent unemployment statistics. When equities start to dive, society takes notice and suddenly becomes concerned about fiscal dangers they should have been worried about all along.

Well, it may have taken a couple months longer than I originally predicted, but it would seem so far that a moment of revelation (that slap in the face I discussed a couple weeks ago) is upon us. In less than a few days, most of the gains in global stocks for 2018 have been erased. The question is, will this end up as a “hiccup” in an otherwise spectacular bull market bubble? Or is this the inevitable death knell and the beginning of the implosion of that bubble?

After I predicted the election of Donald Trump, I also predicted that central banks would begin pulling the plug on life support for equities markets. This did in fact take place with the Fed’s continued program of interest rate increases and the reduction of their balance sheet, which effectively strangles the flow of cheap credit to banking and corporate institutions that fueled stock buybacks for years.

…click on the above link to read the rest of the article…

Blain: “Here’s Why This Gets Worse Before It Gets Better”

February 9, 2018

Blain: “Here’s Why This Gets Worse Before It Gets Better”

Wobble continues. Does a Correction morph into a Crash?

“They would never evolve. They shouldn’t have survived.…. Evolution was something that happened to other species..”

Not looking like a positive morning out there. Stocks are down 10% – so officially it’s a correction! Markets are still wobbling. Folk who thought they’d survived Monday’s carnage intact are new beginning to wonder if they should press the panic-button, or pull the dump-lever just in case this gets worse and liquidity dries up. The US has managed to shut itself down again. Our best hope at the Winter Olympics has broken her heel. If this all feels sickeningly familiar – Welcome to 2008 Part 2. Market wobbles, you heave a sigh of relief, and then it pukes massively all over you.

Early this morning it was raining. A storm is coming. And I must have dropped my wallet after paying for a Taxi early this morning.

My gut feel – based on active participation in every single market Donnybrook/Stamash since 1987 – is this gets worse before it gets better. And that’s a good thing – because this is when the great opportunities present themselves!! Cry Havoc and unleash the brokers…

But first we need to talk about my wallet. I appreciate most of you are more concerned with markets than my wallet, but does Life care? Losing my wallet is probably far less worse than will happen to most folk. Yet, its illustrative of something: I called my Amex card to cancel. Lots of help, new card with me early next week. Called my bank. Lots of unhelpful questions and the impression I was the 10 thousandth idiot to a lost my wallet this morning. Sympathy? Look for it in a dictionary is the best advice. New card after 6 business days? Perhaps.

…click on the above link to read the rest of the article…

Global Market Rout Resumes: Asian Bloodbath Spills Over Into Europe, US Sharply Lower

February 5, 2018

Global Market Rout Resumes: Asian Bloodbath Spills Over Into Europe, US Sharply Lower

Global markets were routed for the second day in a row on Monday, with Asian and European indexes opening lower and bond yields rising as resurgent U.S. inflation raised the possibility central banks would tighten policy more aggressively than had been expected.

Asian stocks suffered broad losses, with the MSCI Asia-Pacific index ex-Japan plunging as much as 2%, its largest daily drop since late 2016, while S&P futures extended Friday’s decline; the Nikkei dropped 2.6% while Hang Seng plunged as much as 2.7% before rebounding. The selling fed through into Europe, however without heavy continuing momentum.

Meanwhile, U.S. equity futures are above initial lows printed straight from Globex electronic re-open, helped in part by reports that China’s regulator would act to “mitigate” the equity selloff, which helped Chinese indices to rally into close, and close green.

Friday’s payrolls report showed wages growing at their fastest pace in more than eight years, fuelling expectations for both inflation and interest rates would rise more than previously forecast. That sparked a global sell-off that continued on Monday. Futures markets priced in the risk of three, or even more, rate rises by the Federal Reserve this year.

“This added fuel to a bond market sell-off, pushing US 10 year Treasury bond yields closer to the magic 3 percent level, which will only increase borrowing costs for corporates following years of cheap financing, thus ushering equities further from recent highs,” said Mike van Dulken, head of research at Accendo Markets.

As a result, all eyes remain on the 10Y US Treasury for indication if last week’s rout would continue, and while treasuries remain under pressure, with the yield briefly touching 2.885%, the selloff appears to have since moderated.

…click on the above link to read the rest of the article…

Goldman: “Expect A Market Correction In The Coming Months”

January 29, 2018

Goldman: “Expect A Market Correction In The Coming Months”

While there are reasons to be bullish on global equities in 2018 and bear market risks are low, a correction is becoming increasingly likely, Goldman’s equity strategist Peter Oppenheimer writes in an overnight note, repeating our observation from Friday that this has been the strongest start for global equity markets in any year since the infamous 1987.

As Goldman notes, this “melt-up” has occurred despite the already strong returns last year. The S&P 500 had its second-highest risk-adjusted returns in more than 50 years and MSCI World ($) had its second-highest risk-adjusted returns since the index began in 1970. More concerning, at least for the risk-party folks, is that te year-to-date sharp rise in equity returns has also continued even as bond markets are experiencing sharp risk-adjusted losses.

Confirming that a major market move lower is likely imminent – something Bank of America cautioned on Friday – the Goldman Bull/bBar Market Risk Indicator is at elevated levels – in fact at the same level it was before the dot com and credit bubble crash – though, Goldman adds in an attempt to mitigate growing fears, “the continuation of low core inflation and easy monetary policy suggests a correction is more likely than a bear market.” And while monetary policy may be easy now, is getting tighter by the day…

In this context, and expecting the inevitable, Goldman writes that “drawdowns within bull markets of 10% or more are not uncommon” and points out that “there are many historical examples of corrections — drawdowns of 10-20% – – that are short-lived and do not turn into drawn-out bear markets associated with economic weakness.”

Of course, there are many drawdowns of 10% or more which turn into full blown recessions, if not a depression. GS defines a bear market as a drop of 20% or more.

…click on the above link to read the rest of the article…

Bob Shiller Warns World’s “Priciest Stock Market” Could “Absolutely Turn Suddenly”

January 23, 2018

Bob Shiller Warns World’s “Priciest Stock Market” Could “Absolutely Turn Suddenly”

Nobel Prize-winning economist Robert Shiller told CNBC Tuesday that a market correction could come at any time and without warning…

“People ask ‘well what will trigger [a market correction]?’ But it doesn’t need a trigger, it’s the dynamics of bubbles inherently makes them come to a sudden end eventually…”

Shiller, who won the Nobel Prize for Economics in 2013 for his work on asset prices and inefficient markets, said that markets could “absolutely suddenly turn” and that he believed the bull market was hard to attribute totally to the U.S. political scene.

“The strong bull market in the U.S. is often attributed to the situation in the U.S. but it’s not unique to the U.S. anyway, so it’s hard to know what the world story is that’s driving markets up at this time, I think it’s more subtle than we recognize,”

Additionally Shiller writes in Project Syndicate that it is impossible to pin down the full cause of the high price of the US stock market, warning that this fact alone should remind all investors of the importance of diversification, and that the overall US stock market should not be given too much weight in a portfolio.

The level of stock markets differs widely across countries. And right now, the United States is leading the world. What everyone wants to know is why – and whether its stock market’s current level is justified.

We can get a simple intuitive measure of the differences between countries by looking at price-earnings ratios. I have long advocated the cyclically adjusted price-earnings (CAPE) ratio that John Campbell (now at Harvard University) and I developed 30 years ago.

…click on the above link to read the rest of the article…

Fed Fears New Record High Credit Bubble – Danielle DiMartino Booth

November 23, 2017

Fed Fears New Record High Credit Bubble – Danielle DiMartino Booth

Former Federal Reserve insider Danielle DiMartino Booth says the record high stock and bond prices make the Fed nervous because it’s fearful of popping this record high credit bubble. DiMartino Booth says, “The Fed’s biggest fear is they know darn well this much credit has built up in the background, and the ramifications of the un-wind for what has happened since the great financial crisis is even greater than what happened in 2008 and 2009. It’s global and pretty viral. So, the Fed has good reason to be fearful of what’s going to happen when the baby boomer generation and the pension funds in this country take a third body blow since 2000, and that’s why they are so very, very intimidated by the financial markets and so fearful of a correction.”

Why will the Fed not allow even a small correction in the markets? DiMartino Booth says, “Look back to last year when Deutsche Bank took the markets to DEFCON 1. Maybe you were paying attention and maybe you weren’t, but it certainly got the German government’s attention. They said the checkbook is open, and we will do whatever we need to do because we can’t quantify what will happen when a major bank gets into a distressed situation. I think what central banks worldwide fear is that there has been such a magnificent re-blowing of the credit bubble since 2007 and 2008 that they can’t tell you where the contagion is going to be. So, they have this great fear of a 2% or 3% or 10 % (correction) and do not know what the daisy chain is going to look like and where the contagion is going to land. It could be the Chinese bond market. It could be Italian insolvent banks or it might be Deutsche Bank, or whether it might be small or midsize U.S. commercial lenders.

…click on the above link to read the rest of the article…

Eric Peters: “The Next Market Cleanse Will Be Sharp, Deep, Fast And Feel Like The End Of The World”

November 5, 2017

Eric Peters: “The Next Market Cleanse Will Be Sharp, Deep, Fast And Feel Like The End Of The World”

The latest weekend note by Eric Peters, CIO of One River Asset Management, is his latest masterpiece in lyrical, stream of consciousness, financial analysis, and can be broadly divided into to broad parts: his latest take on financial markets analyzing the build up of disequilibrium which eventually culminates with discrete “flushes” that reset the system; how bold investors inevitably give up on financial sense and logic long (or just) before said flush takes place, and what this upcoming Minsky Moment could mean for the future. We have excerpted from this section in the current note, as for the remainder of his weekend observations – which deal with tectonic macro and geopolitical shifts – we will follow up in a subsequent post.

Anecdote: “The most common example is a ball sitting atop a hill,” she said, polished accent, hint of condescension. “Locally stable, but one nudge and it’s all over.”

She drove terribly fast, discussing Minsky Moments; the idea that persistent stability breeds instability. “Naturally each cycle is different in key respects, and that’s because you’re far better at preventing past problems from recurring than new ones from arising.”

I smiled, amused, insulted. “Despite knowing this all too well, you humans remain inexplicably fixated on the rearview mirror. And this blinds you to all manner of hazards ahead.”

She initiated a few perfect turns of the Tesla, dodging a squirrel or two, tumbling, unhurt. “The source of instability in this cycle is your dissatisfaction with ultra-low bond yields.” $8trln of sovereign debt carries a negative yield, still our central bankers buy. “You should logically respond to this historic rise in valuations across asset classes with a reduction in your expectations for future returns.” I nodded. “But instead you respond with indignation.”

…click on the above link to read the rest of the article…

The Greatest Fear Today: The Lack of Fear

November 3, 2017

The Greatest Fear Today: The Lack of Fear

Market crashes often happen not when everyone is worried about them, but when no one is worried about them.

Complacency and overconfidence are good leading indicators of an overvalued market set for a correction or worse. Prominent magazine covers are notorious for declaring a boundless bull market right at the top just before a crash or correction.

October 19 saw the thirtieth anniversary of the greatest one-day percentage stock market crash in U.S. history — a 22% fall on October 19, 1987. In today’s Dow points, a 22% decline would equal a one-day drop of over 5,000 points!

I remember October 19, 1987 well. I was chief credit officer of a major government bond dealer. We didn’t have the internet back then, but we did have trading screens with live quotes. I couldn’t believe what I was watching at first, but by 2:00 in the afternoon we were all glued to our screens.

It was like being a passenger on a plane that was crashing, but you had no way out of the plane. Our firm was fine (bonds rallied as stocks crashed), but we were concerned about counterparties going bankrupt and not being able to pay us on our winning bets in bonds.

What’s troubling is that a lot of commentators said that the kind of crash that took place in 1987 couldn’t happen today and that markets were much safer. It’s true that circuit breakers and market closures could temporarily halt a slide better than we did in 1987. But those devices buy time, they don’t solve the underlying fear and panic that causes market crashes.

In any case, when I hear market pros say “It can’t happen again” it sounds to me like another market crash is just around the corner.

…click on the above link to read the rest of the article…

Why One Trader Just Called It – “Today Is The Start Of The Market Changeover Process”

October 11, 2017

The record-breaking streaks of un-dipping gains; the “epic” bull market (Morgan Stanley’s words, not ours); and the total and utter collapse of all risk premia (equity and credit alike) is all about to end according to former fund manager Richard Breslow: “as the long running debate about lack of volatility in the markets continues, I’ve got some good news for you. As long as you promise to be happy with what you wish for. It’s about to change.”

Investors are fearless…

And reaching for yield, no matter what…

Even as real uncertainty soars…

Sure we have momentary bouts of hysteria which people get all excited about and extrapolate to eternity – until they run out of steam forthwith, but as Bloomberg’s Richard Breslow writes:

“I’m talking about good old fashioned two-way flow and nascent trends galore. And I’m officially declaring today the very start of the entire change over process.

Wouldn’t it be ironic if future generations of traders celebrate this epiphanic moment of a return to volatile markets by shutting the exchanges and sleeping in?”

Via Bloomberg,

So what’s the big news? I’m glad to say it isn’t war or some other catastrophe. Those have become anti-volatility events, for better or worse. The big news is the release of the FOMC minutes. Now before you get excited, or derisive, I don’t expect any profound surprises. I’m not even all that consumed by the inevitable wrangling over why inflation isn’t showing up in the measurements they’ve chosen. It’s that this is the true start down the road to tapering. Which I expect to start very tamely, orderly and with many pats on backs.

…click on the above link to read the rest of the article…

The Waiting Is The Hardest Part

October 5, 2017

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The Waiting Is The Hardest Part

Tom Petty’s anthem for today’s investors

Man, what an awful stretch of events.

When I penned last week’s article on tragedy, little did I expect something as horrible as the Las Vegas massacre would immediately follow. And nearly lost in the headlines was the untimely passing of rock legend, Tom Petty, one of my all-time favorite musicians. Sure can’t wait for this week to be over…

In memory of Tom, I’ve been listening to a lot of his and the Heartbreakers’ best hits. The lyrics to one song in particular, The Waiting, well-captures an important message today’s investors should take to heart:

The waiting is the hardest part

Don’t let it kill you baby, don’t let it get to you

Those waiting for the financial markets to experience some sort (any sort!) of pullback have been waiting a long, looong time. How long?

It has been over 100 months (more than 8.5 years) since the current bull market began in April of 2009
It has been 15 months since the last (and very brief) drop of 5% in the S&P 500
This past September saw record low volatility, including a stretch now claimed to be “the most peaceful days in the history of the markets”
Since last year’s presidential election, at which point the markets were already considered dangerously overvalued, the Dow Jones Industrial Average is up over 20%
As of this article’s publishing, the Dow, the S&P and the NASDAQ are all trading at record highs

Or, to put it visually:

The stock market is now 70% higher than it was at the previous bubble peak immediately preceding the 2008 Great Financial Crisis.

Reflect for a moment how painful the crash from Oct 2008-March 2009 was. How much more painful will a crash from today’s much dizzier heights be?

…click on the above link to read the rest of the article…

“The End Of The QE Trade”: Why Bank of America Expects An Imminent Market Correction

October 2, 2017

“The End Of The QE Trade”: Why Bank of America Expects An Imminent Market Correction

Last Friday, when looking at the historic, record lows in September volatility and the daily highs in US and global equity markets, BofA’s chief investment strategist Michael Hartnett said that the “best reason to be bearish in Q4 is there is no reason to be bearish.”

That prompted quite a few responses from traders, some snyde, a handful delighted (some bears still do exist), but most confused: after all what does investors (or algo) sentiment have to do with a “market” in which as Hartnett himself admits over $2 trillion in central bank liquidity has been injected in recent years to prop up risk assets.

To explain what he meant, overnight Hartnett followed up with an explainer note looking at the “Great Rotation vs the Great DIsruption”, in which he first reverted to his favorite topic, the blow-off market top he dubbed the “Icarus Rally”, which he defined initially nearly a year ago, and in which he notes that “big asset returns in 2017 have been driven by big global QE & big global EPS.”

But mostly “big global QE.”

As a result, Hartnett’s “blow off top”, or Icarus, targets for Q4 are: S&P 2630, Nasdaq 6666, 10-year Treasury 2.85%, EUR 1.15. At this rate, the S&P could hit BofA’s target in about 3-4 weeks, and thus Hartnett lays out the following 11th hour trade recos for Q4

long US$ vs EM FX,
long oil,
long barbell of uber-growth (IBOTZ, DJECOM) & uber-value (BKX) = Icarus trade;
further unwind of extended “long disruptor, short disrupted” trade likely (i.e. death of old Retail, Media, Autos, Advertising by Tech Disruptors);
rotational outperformance of oil>credit, EAFE>EM,
value/growth

…click on the above link to read the rest of the article…

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