Month: February 2018

After a number of years of increasingly compressed volatility and an endless supply of greater fools willing to buy any asset price dip and sell any asset vol spike, something changed last week. However, as former fund manager Richard Breslow notes, while assets are on the move, there’s no need to be scared… yet.

Via Bloomberg,

One thing I’m pretty sure we shouldn’t be doing is taking the recent market moves and trying to compare the relative attractiveness of various assets based on some recalculated dividend yield.

We didn’t get here following classical value-investing techniques nor will the path out follow such a comforting script.

For too many years, we’ve had central banks relentlessly providing front-running opportunities for investors. Just about the easiest environment, in theory, in which to make money. Yet a shocking number of funds grossly underperformed. You either got risk-parity or you didn’t. And leverage wasn’t meant to be used to turbo-charge your best ideas but to double down on the good faith and easy credit of monetary authorities.

The market is only at the earliest stages of coming to terms with the notion of the punch-bowl running dry. That’s why watching the reaction, both official and institutional, to these minuscule corrections to long-standing trends will be an important guide going forward. So far the Fed is sticking with their script and traders are scared they mean it. The BOJ is pushing back on market surmise that less accommodation is coming and being met with skepticism. The ECB seems deeply conflicted and everyone seems happy with that. But the build-up to today’s speech by President Mario Draghi felt like we were waiting for a post- Governing Council press conference. No one is quite sure what the PBOC is up to, but if financial stability is assumed to be high up on their wish list, they will get increased allocations over time.

It’s fair to say that many of the moves we’ve recently been seeing are grounded on nascent global economic optimism given pretty much universally improving numbers. So it’s somewhat ironic that market participants are spending as much time as they are speculating on when they will end rather than on how to reposition themselves for a potential long-term change in the investing environment. This explains why the path to normalization can’t be as painless as we are constantly promised. And why, secretly, investors think somewhere down below the CB puts will always exist.

So where to from here? Positioning will have a lot of say in the matter and on a level that goes beyond speculative leanings. The big investment kahunas will have to maintain a long-horizon, hold-to-maturity strategy, or we are just getting started. CFTC data will provide the noise. Pension funds, other LDIs and reserve managers the resolution. We can only forecast what the future will bring and at the moment and it’s fair to say the situation is fluid.

The best thing to do is look at the closest pivot points to be found and key off of them while waiting to see if and when things quiet down.

The starting point might be based on using a very simple trend line drawn on a chart of the S&P 500 from the November 2016 low to the Dec. 29 year-end close. It beautifully defines the latest impulsive up move. And extends almost perfectly to where the market closed last week (2,762). And not coincidentally where today’s rally off the lows in futures failed.

The dollar is equally on a lot of minds. Watch three things. If the dollar index can’t get back above 90, it isn’t a good sign. And not much of an ask given all the rate talk.

USD/JPY has had a bunch of moments over the last year when circa 110.85 showed up as resistance or support, as the case may be. If the currency pair can’t get back above that, it also is telling. On a less scientific note, ask why EUR/USD refuses to eschew another attempt at 1.25.

The Bloomberg commodity index looks ill. It has to hold above 88 for the global demand story to remain credible.

Last Friday’s selloff did a lot of technical damage and that day’s high major resistance.

My advice on bond yields is: be impressed with the strength of the moves we’ve seen and keep a very close eye on the yield curve which is trying to steepen making last week’s tights look like blow-off lows. If 2s hold 2.05% and 10s 2.71%, then they are trying to send a pretty clear message.

The other thing to keep in mind is that what manifests itself as higher market volatility also means greater sloppiness. You do need your levels and to stick with them.

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Authored by Charles Hugh Smith via OfTwoMinds blog,

The last time the U.S. Congress pushed back against the Imperial Presidency and the over-reach of the nation’s Security Agencies was 43 years ago, in 1975.

The last time the U.S. Congress pushed back against the Imperial Presidency and the over-reach of the nation’s Security Agencies was 43 years ago, in 1975. In response to the criminal over-reach of the Imperial Presidency (Watergate) and to the criminal over-reach of the security agencies (FBI, CIA, et al.), the Church Committee finally resusitated the constitutional powers of the Congress to serve the interests of the citizenry rather than the interests of political elites and the rogue agencies of the federal government.

The erosion of congressional power (or more correctly, the surrender of power by Congress) long pre-dates 9/11. The rise of the Imperial Presidency and the Shadow State of “national security” agencies dates back to World War II. Those interested in tracing this long-term and troubling decline of the constitutional powers of the elected representatives may find value in these two books: The Imperial Presidency (Arthur M. Schlesinger, Jr.) and Takeover: The Return of the Imperial Presidency and the Subversion of American Democracy

The constitution grants the greatest powers to the elected representatives of the citizenry. The power to declare war, for example, has been eroded to the point that the Imperial Executive can wage essentially unlimited wars with little actual oversight by Congress.

There is a bitter irony in the Democrats’ rush to “defend” the indefensible over-reach of the FBI and CIA to those whose rights were abused by the FBI and the CIA in the blatantly illegal COINTELPRO programs aimed at destroying the anti-war/ anti-civil rights movements in the 1960s and early 1970s.

(It has been estimated that up to 80% of the FBI’s resources were devoted to targeting a handful of draft resisters and civil rights groups in this era. While TV programs presented a propaganda facade of incorruptible crime fighters, in the real world FBI and CIA agents broke into private offices, hired thugs to beat up anti-war leaders, conducted illegal surveillance, and so on.)

The irony is that the agencies the Democrats are now rushing to defend were targeting the “progressives” who dared to resist the foreign policies and domestic oppression of the federal government.

(So much for the bona-fides of the current crop of self-proclaimed “progressives.” Those of us hauled in for interrogation by the FBI for resisting state policies have a different definition of “progressive;” note to Democrats: rushing to defend the politicized American Stasi is the opposite of “progressive.”)

We know from the Church Committee reports that the FBI and CIA broke numerous federal laws and violated every constitutional limit on their powers as a matter of daily policy. The abuses of power were not the work of rogue agents; they were the work of rogue agencies, from the top down.

For more on COINTELPRO, please read War at Home: Covert action against U.S. activists and what we can do about it and/or Cointelpro: The FBI’s Secret War on Political Freedom.

And here we are again, with rogue security agencies abusing their powers. All that’s changed is the political parties have switched places; where the Republicans were defending the status quo abuse of power then and the Democrats were pushing for a transparent investigation of the agencies’ abuses of power, now it’s the Democrats who are defending the agencies’ abuses of power while the Republicans are pushing for a transparent investigation of the agencies’ abuses of power.

I don’t care which party is pushing for the unmasking of these undemocratic Shadow State agencies; I only care that Congress awakens from its decades of surrendering power to the out-of-control “security agencies” and the Imperial Presidency, which characterizes both Democrat and Republican presidents.

The task of uncovering security agencies’ abuses of power is made more difficult by the rise of political polarization. Unmasking abuses of power shouldn’t be a partisan issue, and the nation’s best hope is the rise of independents who view both parties with revulsion born of the status quo’s profound failures to defend the rights and livelihoods of the bottom 95%.

I’ve written extensively about state over-reach and illegal suppression of dissent: remember, the state exists to enforce the dominance of Elites: everything else is propaganda, misdirection and obfuscation.

We’re in a Boiling-Point Crisis of Exploitive Elites (June 19, 2017)

Welcome to the United States of Orwell, Part 3: We had to Destroy Democracy in Order to Save It (March 28, 2012)

State Over-Reach: Stripmining the Citizenry for Fun and Profit (November 13, 2009)

When It Becomes Serious, First They Lie–When That Fails, They Arrest You (March 16, 2015)

*  *  *

My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition. Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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As we discussed just minutes ago, with market volatility surging (and sliding), opinions about what happens next to the market are coming just as fast and furious, and while two noted technicians, Evercore ISI’s Rich Ross and Oppenheimer’s Ari Wald predicted that the selloff is almost over, more “fundamental”-based strategist are far less sanguine. 

Speaking to CNBC, Blackstone ‘s bilionaire resident and COO Tony James said that equity markets could fall as much as 20% this year: “Every historic norm says that stocks are very, very fully valued,” James said on Monday, adding that the market decline could be 10% to 20%

Echoing familiar concerns, James said that since the U.S. economy has been picking up for a while, any further stimulus from recent tax cuts may not have been necessary, and in fact could be destructive: “If you’re worried about interest rates and inflation, the stimulus could be the thing that tips us over into a rate spike,” James said.

Does this means that James is out of the stock market? In the interview, the Blackstone president said that he is investing his personal money in New York-based Blackstone’s products, and also holds floating-rate bank debt instruments yielding about 6%.

Separately, Guggenheim Partners CIO Scott Minerd also commented on the fate of the rally, saying that in a “Bull markets don’t die from old age. They typically get shot in the head.“

Two weeks ago, Minerd prudently warned that Davos might be a flashing contrarian indicator and that investors should consider the positive message from what MarketWatch dubbed the “gilded boondoggle” as a potential reason to sell. In retrospect, he was right.

What’s next? Minerds was more sanguine than James, saying that “I’m a bull for the next year or so,” he told Barron’s. “There is another 15% of upside in the stock market from 2017’s close, but after a 300% run [from the 2009 lows], the question is how to time the exit. What are the signs?”

Minerd said he doesn’t think all the pieces are in place for a bear market just yet, though the parabolic nature of stocks right now is a bit unsettling. “Now, individual investors aren’t in the market yet, and that’s why I’m still bullish,” he explains, adding that he’s looking for a flat yield curve in the first quarter of 2019 as the signal to end the bull.

“Historically, once the yield curve goes flat, stock returns for the next 12 months approximate zero. Then, a year later, you get the recession and bear market,” Minerd told Barrons.

“On the S&P 500 index, the current level [2819] is roughly where we could be a decade from now. Elevated stock valuations portend weaker returns over the next decade, and retaining some dry powder in the final year of expansion will allow equity and credit investors to take advantage of more attractive valuations,” he said.

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If Congress doesn’t pass another continuing resolution – what would be its fifth since September – by midnight Thursday, the federal government will shut down for the second time in the span of a month.

And as CNN points out, there are two pressing priorities that must be worked out if lawmakers want to eventually open the door to a more-permanent spending agreement.

Lawmakers are up against two key deadlines that were put in place as part of the negotiations to reopen the government last month, creating a short window to show substantial signs of progress on a deal to protect undocumented immigrants who came to this country as children and their families. Immigration negotiators say they’ve taken steps in the right direction, but no deal to address the contentious issue has thus far emerged.

The first deadline is Thursday, when government funding runs out. The second is to reach a long-stalled deal on immigration before Senate Majority Leader Mitch McConnell opens a promised freewheeling floor debate to try to settle the contentious issue.

Lawmakers from both parties insist there won’t be another shutdown: But then again, they said that last month, before a three-day shutdown that ultimately left Democratic leaders looking impotent in the eyes of progressives who want them to show more of a backbone on immigration.

At the behest of their base, Democrats are insisting that Congress pass an immigration bill before they agree to a budget caps deal, which is needed to write a massive omnibus-spending bill for the rest of the fiscal year, as the Hill explains.

In a maneuver that’s becoming a hallmark of legislative procedure during the Trump era, House Republicans are planning to hold yet another “wing it” vote, this time on a bill to keep the lights on until March 22. But if the past is any guide, we imagine the vote will be canceled at the last minute once it becomes clear that the bill has no chance of passing. The Senate hasn’t planned a vote, and it’s unclear if GOP leaders would be able to muster enough support in the House.

Bloomberg reported Monday morning that House Republicans are planning to meet tonight at 7 pm to discuss their plan to avert the shutdown.

Even if it were to pass in the lower chamber, 60 votes will be needed in the Senate, meaning at least nine Democrats must vote yes. It’s too soon to know if they will back the House’s six-week proposal – in part, because it blows past a March 5 deadline when the Deferred Action for Childhood Arrivals program expires.

This time around, there appears to be a degree of comity in the negotiations, as both Republican and Democratic leaders have said the negotiations have made strong progress and that they don’t expect another shutdown.

Democrats apparently expect Mitch McConnell to uphold his promises about bringing an immigration bill for a vote and, as the GOP Senate leader so eloquently put it, “there’s no education in the second kick of a mule,” McConnell said about the short-lived shutdown.”

Already, Republicans are signaling that they might be willing to agree on an immigration deal without including funding for 700 miles of border wall, as the White House has insisted.

According to CNN, John Thune, a member of Senate Republican leadership, told reporters last week that he favors narrowing the immigration debate from President Donald Trump’s suggested “four pillars” to two: legal status for DACA recipients and border security.
The framework suggested by the White House would provide 1.8 million undocumented immigrants a pathway to citizenship in exchange for $25 billion for border security, in addition to the eradication of the diversity lottery and changes to curtail chain migration.

Senators John McCain and Christopher Coons have taken things one step further, announcing that they will introduce a bill Monday that omits funding for a southern border wall while providing a path to citizenship for more “Dreamers” than President Trump has agreed to, and calls for a study to determine whether additional border security measures are needed.

The announcement swiftly provoked a reaction from President Donald Trump, who tweeted that there will be no DACA without “STRONG border security and the desperately needed WALL”.

Any deal on DACA that does not include STRONG border security and the desperately needed WALL is a total waste of time. March 5th is rapidly approaching and the Dems seem not to care about DACA. Make a deal!

— Donald J. Trump (@realDonaldTrump) February 5, 2018

If no immigration deal is reached this week, McConnell is expected to call for an open-ended floor debate to begin some time next week. The threat of an open debate is essentially another incentive to get a deal done quickly. An open debate would probably be extremely chaotic, resulting in marathon discussions until an agreement is hammered out.

Adding another layer of complications to the already fraught negotiations between Republicans and Democrats, conservative Freedom Caucus Republicans in the House are demanding spending hikes for the military and have already declared a deal without funding for the wall to be a non-starter.

In addition to the defense spending issue, lawmakers are also facing pressure to approve more disaster relief for areas affected by hurricanes and wildfires. And Democrats and some moderate Republicans are also calling for a deal to restore some of the federal cost-sharing for Obamacare that Trump scrapped last fall.

After months of negotiations, it appears lawmakers aren’t substantially closer to striking an immigration deal – let alone solving these other priorities. That’s certainly a lot of ground to cover in three days. And while lawmakers have tried their hardest to reassure markets, one detail that’s been lost amid the shuffle is that lawmakers will also need to raise the US borrowing limit again to continue funding the government – a detail that has not been lost on the $2 trillion market for short-term Treasury bills.

Critically, with Treasury expected to exhaust its borrowing authority as early as the first half of March, a four-week bill sale on Tuesday will serve as the latest gauge of investor anxiety.

Indeed, the bill curve spread is already blowing out, as we pointed out earlier.

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Amid a flurry of comments on what the market will do from here, with some analysts predicting a continuation of the selloff, especially if bond yields continue their upward ways, one especially bullish comment stands out.

According to Evercore ISI’s technical analyst, Rich Ross, the equity selloff that hammered the S&P 500 3.9% over last week, its biggest drop since January 2016, is almost done as volume spike signaled “climax” selling.

According to Bloomberg, Ross said that the index is likely to be 1 to 1.5 percent away from reaching its nadir, he said.

Specifically, the Evercore technician eyes the 93% NYSE downside volume observed on Friday, the highest since September 2016, and not notes that it is “consistent with climax.”

Meanwhile, he writes that the backdrop across currencies, commodities, and global equities remains “sound, bullish and intact”, although he failed to mention yields which, of course, is what caused the selloff in the first place.

Finally, Ross notes the VIX’s “doji” pattern which sets up for a “potentially exhaustive downside reversal.”

And speaking of the VIX as a bullish signal, Oppenheimer’s technical analyst Ari Wald agrees with Ross, and writes that last week’s 50% rise in the VIX is a “buyable spike”, which he defines as a reading that is 50% higher than its 3- month low, which helps normalize for different volatility environments

He adds that spikes in the VIX typically occur around short-term market lows and have found it’s a more compelling signal when trend is positive. This can be seen in the chart below.

For now the S&P remains in no man’s land, unchanged after starting the day deep in the red, helped by renewed tech strength as the Nasdaq surges to day highs.

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Highlighting something we discussed over the weekend, namely the rising, and now positive correlation between bonds and stocks…

… SocGen’s Andrew Lapthorne writes overnight that as equity market investors digest some unfamiliar volatility, what will be concerning asset allocators is the now positive correlation between bonds and equities as bond yields rise. “Or put simply, it is becoming very hard to avoid losing money.”

As an example, Lapthorne points out that as equity markets fell last week (MSCI World -3.4%) due to rising bond yields, pretty much every other asset lost money as well.

“This harks back to the 2008 period when the New York Times – among many others – wrote about the failure of diversification leading to much head scratching and ultimately helped spawn the alternative risk-premia industry. Given the shorter duration and relatively limited downside risk of bonds relative to equities, if the sell-off persists we expect increasing pressure to take money out of equities and rotate into bonds”, Lapthrone adds.

This observation leads Lapthrone to note that “asset markets have an inescapable problem, i.e., historically low level nominal yields on a global balanced portfolio and depressed real yields at a time of low inflation.”

To get higher real yields from here, either inflation needs to head even lower (risking deflation), or yields rise due to falling prices. Neither outcome is very positive.

And another thing worth noting: normalcy appears to be slowly returning to the market, with losses for companies boasting the worst balance sheets double those with the best:

In down markets, balance sheet risk is always the most  important factor, and this bout of equity market weakness is proving no exception. Our equal-weighted index of US companies with the worst balance sheets was down 6% last week vs a 3% drop for those with the best.

And visually:

So is this the end of the bull market, especially for the most heavily levered companies? For now the answer is unclear:

“We never know if a sell-off is part of a longer-term trend as this can only be judged ex-post, but we don’t think managing an orderly decline in asset prices and the associated rise in volatility at a time of record valuations and high corporate leverage is going to be a ’healthy exercise’.”

Then again, judging by the sharp rebound in risk this morning which was kicked roughly when the White House said that it is getting “concerned” about the selloff, we may have to shelve predictions about the end of the bull market for another day yet again…

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Well that de-escalated quickly…

White House comments? AAPL 200DMA bounce? Powell Plunge Protection Team?

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