Month: February 2017

Just because…

 

The Record Winning Streak Is Over…

 

They desperately tried to ramp it but failed

NOTE: Today was the worst day for Small Caps since October

*  *  *

Banks, Bonds, Bullion, and Broad equity indices were all up in February…

 

So was VIX…a massive divergence for a month

 

Dow led the way this month with a 4th monthly gain in a row for stocks

 

Bonds were bid for the month with 2Y underperforming…

 

The USD Index closed the month lower…(Loonie weakest among the majors)

 

March rate-hike-odds have soared in the last few days from 37% to 54%…

 

But the Dollar isn't buying it at all (and nor are bonds)… So WTF is going on in Fed Funds Futures?

ForexLive has some ideas…

There hasn't been much in the way of economic news in the past few days. Durable goods orders and GDP were weak; consumer confidence was strong. Fed speak was repetitious. But Fed funds futures hike probabilities have shot to 54% from 37% since Thursday.

 

Why?

 

One idea is pure manipulation. A bank that wants to see a hike might be buying Fed funds futures to try and somehow manipulate the Fed's thinking.

 

Or it could be some other kind of leak from the Fed?

 

Or maybe someone is just making a big bet it's going to happen as they take a closer look at the data.

 

What's curious is that the US dollar hasn't gone along for the ride. That suggests it's not fundamental.

While on the topic we note that 1 Year OIS topped 1.00% for the first time since Nov 2008…

*  *  *

Mixed picture for today in bond-land with the long-end rallying and short-end dragged by the shift in FF futures… (Note the major flattening of the curve)

 

The US Treasury Curve has collapsed to its flattest since the election… but banks don't care…

 

But stocks dropped and erased yesterday's gains (before a desperate ramp into the close again)

 

Orrin Hatch comments at around 12ET that it's "very difficult to change the current tax system because the Democrats are very uncooperative" seemed to spark the selling (and VIX buying). Of course that was ramped back above 20,800. Then again we saw selling pressure in the last 30 mins but once The Dow breached 20,800, a sudden buying panic resurfaced…

 

Target was monkeyhammered…but most retailers had an ugly day (SIG on sexual harrassment suits)

 

For the second day in a row, the dollar index rallied during the US day session after overnight weakness (and the Loonie was smashed lower)

 

WTI and RBOB ended the day lower but bounced back notably on OPEC cut compliance and White House ethanol mandate denials…

 

Gold topped $1250 and Silver topped $18 on the month…

via http://ift.tt/2lvDfDM Tyler Durden

For nine straight days, the buy-the-f##king-dip crowd has been ubiquitous. Day after day the 'checkmark' pattern has confirmed what JPMorgan detailed about retail ETF-flow-driven buying panics into the end of day liquidity.

We previously showed how, according to JPMorgan (and BofA), the recent market levitation has been entirely on the shoulders of "animal spirited" retail investors plowing money into ETFs, coupled with CTA's forced to cover into a gamma squeeze, even as hedge funds and institutions have been selling to retail investors. Well, as it turns out, the mechanics behind the recent move higher also explain such observations as Friday's last second levitation.

As JPM's Nikolaos Panigirtzoglou explains, "the picture we get is of institutional investors either lowering their equity exposure YTD or keeping it unchanged. This apparent unwillingness by institutional investors to raise their equity exposures YTD reinforces the argument that it is retail rather than institutional investors that most likely drove this year’s strong inflows into equity ETFs and as a result this year’s equity rally. And the fact that retail investors use passive rather than active funds to express their bullish equity views has important implications."

The main implication is that this shift towards passive funds is elevating the importance of retail investors in driving markets. And retail investors’ sentiment is transmitted to markets more quickly via passive funds. This is because these passive funds have to rebalance by the end of the day, different to active funds that have the discretion to wait before they deploy their cash balances.

In turn, JPM adds, this end of day rebalancing means that equity trading becomes even more concentrated at the end of the day as passive funds grow. Passive funds typically rebalance at the end of the day because transacting at the closing price better aligns the performance of passive funds to the performance of the index they track.

And this end of day trading concentration is reinforced by the secular reduction in market depth and liquidity since the Lehman crisis. As market depth declines, the execution of large trades is postponed until the end of the day when more trading takes place, reinforcing the end of day trading shift induced by the expansion of passive funds. To get a sense of the underlying market transformation, YTD 37% of the NYSE trading volume took place during the last 30 mins of trading.

In fact, as Bloomberg's SMART Money Flow Index shows (which tracks the relative performance of the closing ramp to the rest of the day), the last 13 days have not had one down day…

But as Bloomberg notes, there is another explanation for the afternoon strength in U.S. stocks. According to FBN Securities technical analyst JC O'Hara, cash is going into stocks as sovereign wealth funds re-allocate to equities from bonds, "using the U.S. as their primary market of choice."

Who can blame then when they see a 7% gain for Norway's sovereign wealth fund last year, thanks in part to the U.S.?

O'Hara says "sovereigns like the end of day liquidity, giving each day a 'checkmark' look."

So his advice is to "trade with the trend" and not overthink or over-analyze stocks.

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Submitted by Nicholas Colas of Convergex

The (Tax Refund) Check Is Not In The Mail

No one likes paying taxes, but this year Americans are taking things to extremes. Through last Friday, the IRS had received 13.3% fewer returns than the same period last year.  And it seems like we’re not even really interested in starting the process: visits to IRS.gov are down 16.2%.  All this means tax refunds – an important piece of disposable/savable income for many Americans – are down 14.4% versus last year.  What’s going on? 

A few explanations. First, the IRS has not been able to issue refunds to filers claiming the Earned Income Tax Credit, which last year totaled 27 million returns. That will start to be fixed next week and may encourage more filings. Also at issue: the 100% increase in Obamacare penalties to $695/adult and $348/child, something that concerns many filers.

Lastly, there seems to be some broad confusion about President Trump’s campaign promise of lower individual taxes and eliminating Obamacare and its penalties. The upshot: tax refunds add $250 billion to US consumer liquidity from February – May. This year’s payment cycle will be harder to predict and likely make an accurate read on the US economy more difficult for the next few months.

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You probably know that Benjamin Franklin said something like “The only sure things in life are death and taxes”.  That is, however, just the tail end of a sentence written in a letter back in 1789. The whole thing goes like this:

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

Now, life expectancy when Franklin wrote these words was 37 years due largely to very high infant mortality.  Thanks to medical science, it is now 79 years, or double that of Franklin’s age.  Death is still inevitable, of course, but we’ve managed to put it off for a while.

As it turns out, Americans are trying to replicate this trend with the other unavoidable feature of life: taxes. As of the end of last week, the Internal Revenue Service had received 13.3% fewer tax returns from individual filers than last year (42.5 million versus 49.0 million).  Moreover, visits to the IRS.gov website are down 16.2%.  All this has put a crimp in tax refunds, which are down 14.4% versus last year ($103 billion versus $121 billion) even though the average payment back to taxpayers is essentially the same ($3,137).

To see the data, check these out:

• The latest IRS report here: http://ift.tt/2lLpbJ9
• The history of this and prior year refund cycles here: http://ift.tt/2lLpTpO
• Our own data is in the PDF version of this report, available by clicking on the link at the top of this note. We have tracked actual total refund payments through the Daily Treasury Statement since 2008, and the numbers here show the magnitude of the problem.  Year to date 2017 is the worst start to tax refund season in at least the last 10 years.

* * *

What are the reasons for this sudden procrastination?  A few ideas:

#Reason 1: The IRS announced last year that it would delay refunds for tax filers who claimed the Earned Income Tax Credit until February 15th 2017. The EITC is a credit for lower income households (the cutoffs are $39,296 – $44,846 for a one child household filing single/married, for example) and can be as high as a $5,572 credit for a two child household.  In other words, this is real money and last year 27 million households received the credit, which averaged $2,455.

The IRS is concerned about fraud here, and is taking steps to do more diligence on those individuals who claim the EITC.  Payments should finally start hitting bank accounts next week.

With the delay, households that claim the EITC may have put off filing, knowing that there was no point until this week.

Sources:

• About the EITC (http://ift.tt/2aAGTK6)
• Income Limits (http://ift.tt/2fWWd7v)

Reason #2: Rising Obamacare penalties.  Last year, if you did not have qualifying health insurance, your fine maxed out at $325 (based on income). This year, the equivalent fine is $695/person. Now, the IRS will still accept your return if you don’t fill in the line item about your insurance status.  Professional tax preparers, however, don’t like to file incomplete returns, so for uninsured taxpayers who use such services this is going to be a discussion with their accountant.

More details here: http://ift.tt/1QBFIVj

And a Politico article that explains the chatter of “Repeal and replace” may also be pushing tax payers to delay filing: http://ift.tt/2lA4hdN

Bottom line: some tax payers may be delaying filing until they decide what to do here. 

Reason #3: Upcoming revisions to the US tax code.  Hope springs eternal, and with all the talk of tax cuts coming out of DC some citizens may be taking a wait and see attitude about filing their taxes.  Yes, the chances of that happening by April 18th (that’s the actual deadline this year) AND being retroactive are both zero.

A good description of this phenomenon here: http://ift.tt/2mBKmeI…

Summary point: Ultimately, the cadence of tax refund payments is one of the most overlooked drivers of the American economy in Q1/early Q2, so understanding the unusual start to Tax Season 2017 is very important.  According to a recent National Retail Federation survey, consumers plan to save 48% of their refund (which averaged $2,860 last year) and spend/pay down debt with the balance.  See here for the full findings: http://ift.tt/2lfn2SU

The key question now is “How unusual will this tax reporting season really be?”  So far, the answer is “Very”, with unusually slow filings and delayed EITC return refunds.  In the end, Franklin’s observation will prove out: everyone will have to file by April 18 or face the consequences.  But with so many other moving parts (Obamacare fines, consumer hopes for tax cuts), the next two months will be very different from the usual.

via http://ift.tt/2lQjucG Tyler Durden

Over the past week we reported on multiple occasions that according to two major banks, Bank of America and JPMorgan, institutional investors and hedge funds have been quietly selling stocks, while the “last man in”, mom and pop retail investor, have been waving it in, riding high on the animal spirits and delighted brokers who finally get to collect some retail commissions, and using ETFs for their purchase, whose end of day rebalancing has had the added benefit of sending the market surging in the last 30 minutes of trading as JPM explained.

Fast forward to today when BofA released its latest weekly client flow trends report, and what it found was even more of the same. As Jill Carey Hall writes, Bank of America clients’ optimism continued to wane last week as clients sold US equities for the second consecutive week after having been net buyers the prior 14 weeks since the election, with four-week average flows turning negative for the first time since November as well.

Net sales were $988mn, with sales of single stocks eclipsing small purchases of ETFs. For the second week in a row, hedge funds, institutional clients were all net sellers; hedge funds have the longest selling streak at four consecutive weeks. Even private clients, aka rich retail investors, who have been the most aggressive buyers in the past few months, finally joined in selling bandwagon.

What did they sell? Pretty much everything. Clients sold large and mid caps but bought small caps, after sales of
all three size segments the week before.

BofA clients were net sellers of single stocks across all 11 sectors last week – the last time this occurred was two weeks prior to the Brexit vote in early June (where the market subsequently sold off 6% from peak to trough).

Clients continued to buy ETFs last week, though purchases of ETFs were their smallest since the week prior to the election. Utilities still have the longest selling streak, with outflows for five consecutive weeks, while no sector has a recent net buying streak. Based on less-volatile four-week average flows, Health Care has seen net sales since last March, while Financials have the longest buying streak (since early January of this year).

Meanwhile, corporations continue to pull back on buybacks and year-to-date are tracking the lowest of any comparable period since 2013. As BofA concludes, given elevated market valuations and a near-record-low proportion of investors wanting companies to return excess cash to shareholders (according to the latest BofAML Global Fund Manager Survey).

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Via Chris Hamilton of Econimica blog,

Some simple themes today…

Population growth, economic growth, and resultant energy consumption are inexorably slowing.  The Federal Reserve knows it can not stop this and is simply slowing the inevitable with interest rate cuts to incent greater consumption via skyrocketing credit/debt (particularly government debt….debt that is undertaken with no intent of ever repaying it and is really just pure monetization).

The chart below highlights that employment among 25-54yr/olds (the foundation of US consumption) ceased growing in '00.  Once employment among this group ceased growing, total US energy consumption also ceased growing, and accelerating debt was substituted to maintain growth thanks to nearly 40yrs of interest rate cuts.

The impact of the declining rates and rising debt can be seen in the Wilshire 5000 (chart below).  The Wilshire represents all publicly traded US equities radically moving upward with surging US federal debt but inverse to US total energy consumption, jobs creation, and economic activity since '00.

The driver of the Fed's federal funds rate was and continues to be the rate of population growth and the growing demand this population growth represents.  The adult population growth rate peaked in '79 and the federal funds rate peaked in '80…rates plus population growth have been decelerating/declining together since.

The chart below showing the 0-64yr/old population growth vs. 65+yr/old growth.  The demographic and population situation only continues to get worse.  In fact, it's unlikely the 0-64yr/old population growth will hit the already low estimates from 2017–>2030 due to the ongoing decline in birth rates and slowing immigration.

What about employment?  Chart below shows total full time jobs growth has slowed to a trickle (net basis from peak to peak) and total energy consumption growth likewise decelerating, peaking in '05, and now declining.  Federal funds rate moving inversely, all the way to zero.  Finally, Public US Federal debt (w/out Intra-governmental holdings) skyrocketing.

All right, perhaps a different way of looking at this is net new full time jobs per period vs. new houses and new vehicles (generally hard to be a home owner without a full time job…cars, well apparently it's a far lower standard).

• 1971-85 –> 1.4 net new jobs per new home and/or new car
• 1986-00 –> 1.5 net new jobs per new home, 1.3 per new car
• 2001-16 –> 0.7 net new jobs per new home, 0.5 per new car

 

via http://ift.tt/2m4eYro Tyler Durden

In a dramatic confirmation of the relentless growth of online video, at the expense of the agonizing, slow death of conventional TV, YouTube said that its worldwide viewers are now watching more than 1 billion hours of videos a day, on pace to eclipse total US TV viewership over the next few years, a milestone facilitated by the Google aggressive embrace of artificial intelligence to recommend videos. By comparison, Americans watch 1.25 billion hours of live and recorded TV per day according to Nielsen, a figure that has been steadily dropping in recent years. Facebook and Netflix said in January 2016 that users watch 100 million hours and 116 million hours, respectively, of video daily on their platforms.

According to the WSJ, YouTube surpassed the “psychological” figure, which was far higher than previously reported, late last year. Indicatively, in 2012 when Google started building algorithms that tap user data to give each user personalized video lineups designed to keep them watching longer, users spent 100 million hours on its platform, a ten-fold increase in under five years, growing at a pace of roughly 200 million hours per year. Of course, what makes YouTube so unique, is that a vast majority of the content is crowdsourced: feeding the AI recommendations is an unmatched collection of content: 400 hours of video are uploaded to YouTube each minute, or 65 years of video a day.

What is surprising is that despite YouTube’s massive size, it remains unclear if it profitable. Google’s parent Alphabet doesn’t disclose YouTube’s performance, but people familiar with its financials said it took in about $4 billion in revenue in 2014 and roughly broke even. Like most of its social network competitors, YouTube makes most of its money on running ads before videos but it also spends big on technology and rights to content, including deals with TV networks for a planned web-TV service. When asked about profits last year, YouTube Chief Executive Susan Wojcicki said, “Growth is the priority.”

Meanwhile, in a near-monopolistic synergy, YouTube benefits from the enormous reach of Google, which handles about 93% of internet searches, according to market researcher StatCounter. Google embeds YouTube videos in search results and pre-installs the YouTube app on its Android software, which runs 88% of smartphones, according to Strategy Analytics.

That has helped drive new users to its platform, and the statistics are staggering: about 2 billion unique users now watch a YouTube video every 90 days, according to a former manager. In 2013, the last time YouTube disclosed its user base, it said it surpassed 1 billion monthly users. YouTube is now likely larger than the world’s biggest TV network, China Central Television, which has more than 1.2 billion viewers.

A recent adjustment to the YouTube algorihms helped:

YouTube long configured video recommendations to boost total views, but that approach rewarded videos with misleading titles or preview images. To increase user engagement and retention, the company in early 2012 changed its algorithms to boost watch time instead. Immediately, clicks dropped nearly 20% partly because users stuck with videos longer. Some executives and video creators objected.

 

Months later, YouTube executives unveiled a goal of 1 billion hours of watch time daily by the end of 2016. At the time, optimistic forecasts projected it would reach 400 million hours by then.

 

YouTube retooled its algorithms using a field of artificial intelligence called machine learning to parse massive databases of user history to improve video recommendations. Previously, the algorithms recommended content largely based on what other users clicked after watching a particular video, the former manager said. Now their “understanding of what is in a video [and] what a person or group of people would like to watch has grown dramatically,” he said.

And while it hardly needs it, YouTube’s reliance on algorithm-driven traffic expansion continues: “last year YouTube partnered with Google Brain, which develops advanced machine-learning software called deep neural networks, which have led to dramatic improvements in other fields, such as language translation. The Google Brain system was able to identify single-use video categories on its own.”

Meanwhile, per just released research from the EIA, according to the latest Residential Energy Consumption Survey (RECS) the number of TVs in active use per US household is declining: an average of 2.3 televisions were used in American homes in 2015, down from an average of 2.6 televisions per household in 2009.

As shown in the chart below, the number of homes with three or more televisions declined from the previous survey conducted in 2009, and a larger share of households reported not using a television at all. Televisions and peripheral equipment such as cable boxes, digital video recorders (DVRs), and video game consoles account for about 6% of all electricity consumption in U.S. homes.

The study also found that entertainment and information devices vary by age: younger households tend to have a lower concentration of televisions per person and a higher concentration of portable devices such as laptops.

The good news: the slow death of corporate-owned, legacy mainstream media continues; the bad news: it is being replaced by the hyper-corporate Google and FaceBook, which in recent months have decided to put on the mantle of supreme arbiters of what is and isn’t considered “fake news.”

via http://ift.tt/2mHs7DR Tyler Durden

T-day has arrived for markets, says Bloomberg's (and former FX trader) Mark Cudmore,  warning that Trump’s speech to Congress will probably terminate the last vestiges of market hope for early inflationary action from the new administration.

It’s not a done deal though. He could still surprise positively. It seems improbable given his track record, but it’s the possibility that’s kept this moment in focus as being so critical.

 

Expectations have been guided much lower during the past few days, which has lowered the bar for Trump to exceed them, on the headlines at least Trading shouldn’t be an emotional business, but it so frequently is. Too often, traders find their reasoning evolves to suit their positions rather than their positions evolving to match fundamentals.

 

This has led more and more people to start saying that the rally since the election was not really to do with any hopes of Trump stimulus, and purely about a clear trend of improving economic data.

 

 

 

Just like the most-effective fake news, there’s a large core of truth to this. Since last summer, there has absolutely been a clear trend of improving global growth – this column has covered the topic frequently.

 

However, a look at any relevant chart, whether it’s equities, bonds or currencies, shows Trump’s victory was the binary moment that changed investors’ outlook. And that huge paradigm shift in outlook hasn’t yet been fully unwound.

 

 

Trump’s address is likely to be the catalyst for the ultimate capitulation. It may take a few days, as he is a performer and will be sure to deliver some exciting soundbites. He may announce an expansionary budget even if there are less clear tax or infrastructure details than once hoped.

 

The problem for those still clinging to Trump-fueled reflation trades is that Congress will be crucial in approving any budget. And there’s insufficient evidence to have faith that he is fully in tune with Republican lawmakers.

We note that while European uncertainty is likely playing some role, exuberant VIX shorts have started to unwind in recent weeks…

And Open Interest is surging, suggesting positions being built on hedges…

 

As Mark Cudmore conclude rather ominously:

"Trading on the back of U.S. stimulus could be a dead theme by Friday."

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Via Dana Lyons' Tumblr,

The 10-Year U.S. Treasury Yield is testing the “ultra low-rate” bounds again.

A month ago, we noted the significance of the post-election spike in bond yields. Of course, yields have been in a secular decline since topping out in the early 1980′s.  However, since 2007, just prior to the financial crisis, yields experienced an acceleration to the downside. This acceleration marked what we considered a new regime for bond yields: an “ultra low-rate” regime. For nearly 10 years, this ultra-low rate regime in the 10-Year U.S. Treasury Yield (TNX) was contained by a Down trendline stemming from the 2007 peak in yields. The post-election move sent the TNX breaking above that trendline. Thus, while yields still remained well within the 30-plus year secular downtrend, the breakout, we surmised, signified the end of the ultra low-rate regime.

 

Of course, this is all subject to change if yields decide to cross the threshold back into the ultra low-rate zone. That threshold in the TNX, in our view, would appear to be the broken post-2007 Down trendline. Presently, that trend line is in the vicinity of the 2.31% level. Also in that vicinity are two key Fibonacci Retracement levels:

• The 23.6% Fibonacci Retracement of the July-December rally
• The 38.2% Fibonacci Retracement of the post-election rally

The TNX is presently testing this level, closing on February 24 at 2.31%.

 

Whether or not this line is truly a regime-defining line is obviously up for debate (the 30-Year Yield, FYI, has not broken above a comparable post-2011 Down trendline, so that complicates the story). However, in practice, the long-term narrative may be irrelevant anyway. As long as the lines/levels are respected in the immediate term, that’s all we care about. And the TNX does, in fact, seem to be respecting the 2.31% level.

Twice, in January and early February, the TNX bounced off the level, suggesting it is indeed a line of importance so we will continue to consider it so. Should the level continue to hold, the TNX would seem destined to eventually test the secular downtrend in rates. Presently, there are a couple trendlines to take note of in that respect. A steep Down trendline stemming from the 1981 TNX peak currently stands around the 3.50% level.  A shallower trendline beginning at the 1987 high presently lies in the vicinity of 3.80%. It may be worthwhile taking note of these levels should we see yields begin to rally again.

On the other hand, should this 2.31% level fail to hold, it will likely open up immediate downside to the 2.13% level. It would also put the TNX back within the confines of the post-2007 Down trendline and potentially much lower yields again.

These disparate paths have yet to be determined and the direction may well depend on the outcome of this battle at the 2.31% level.

*  *  *

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via http://ift.tt/2mpFUD9 Tyler Durden

VIX and stocks have decoupled for two weeks now…

And we note that Catalyst Fund NAV has continued to tumble.

 

Today’s sudden spike in VIX, however, ahead of Trump’s big speech tonight, has started to crack The Dow…

 

Which just broke back below 20,800…

 

We note that exuberant VIX futures shorts have started to unwind in recent weeks…

And Open Interest is surging, suggesting hedging positions being built…

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