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Authored by Lance Roberts via RealInvestmentAdvice.com,

I was digging through some old charts over the weekend and stumbled across this gem from AlphaTrends which explains the “best time to buy stocks.”

“Is it possible to time the market cycle to capture big gains?

Like many controversial topics in investing, there is no real professional consensus on market timing. Academics claim that it’s not possible, while traders and chartists swear by the idea.

The following infographic explains the four important phases of market trends, based on the methodology of the famous stock market authority Richard Wyckoff.

The theory is that the better an investor can identify these phases of the market cycle, the more profits can be made on the ride upwards of a buying opportunity.”

So, the question to answer, obviously, is:

“Where are we now?”

I’m glad you asked.

Let’s take a look at the past two full-market cycles, using Wyckoff’s methodology, as compared to the current post-financial-crisis half-cycle. While actual market cycles will not exactly replicate the chart above, you can clearly see Wyckoff’s theory in action.

1992-2003

The accumulation phase, following the 1991 recessionary environment was evident as it preceded the “internet trading boom” and the rise of the “dot.com” bubble from 1995-1999.

As I noted last week:

“Following the recession of 1991, the Federal Reserve drastically lowered interest rates to spur economic growth. However, the two events which laid the foundation for the ‘dot.com’ crisis was the rule-change which allowed the nations pension funds to own equities and the repeal of Glass-Steagall which unleashed Wall Street upon a nation of unsuspecting investors.

The major banks could now use their massive balance sheet to engage in investment-banking, market-making, and proprietary trading. The markets exploded as money flooded the financial markets. Of course, since there were not enough “legitimate” deals to fill demand and Wall Street bankers are paid to produce deals, Wall Street floated any offering it could despite the risk to investors.”

The distribution phase became evident in early-2000 as stocks began to struggle.

While the names of Enron, WorldCom, Global Crossing, Lucent Technologies, Nortel, Sun Micro, and a host of others are “ghosts of the past,” relics of an era the majority of investors in the market today are unaware of, they were the poster children for the “greed and excess” of the preceding bull market frenzy.

As the distribution phase gained traction, it is worth remembering the media and Wall Street were touting the continuation of the bull market indefinitely into the future. 

Then, came the decline.

2003-2009

Following the “dot.com” crash investors had all learned their lessons about the value of managing risk in portfolios, not chasing returns and focusing on capital preservation as the core for long-term investing.

Okay. Not really.

It took about 27 minutes for investors to completely forget about the previous pain of the bear market and jump headlong back into the creation of the next bubble leading to the “financial crisis.” 

During the mark-up phase investors once again piled into leverage. This time not just into stocks, but real estate, as well as Wall Street, found a new way to extract capital from Main Street through the creation of exotic loan structures. Of course, everything was fine as long as interest rates remained low, but as with all things, the “party eventually ends.”

Once again, during the distribution phase of the market, the analysts, media, Wall Street, and a rise of bloggers, all touted “this time was different.” There were “green shoots,” it was a “Goldilocks economy,” and there was “no recession in sight.” 

They were disastrously wrong.

Sound familiar?

2009-Present

So, here we are, a decade into the current economic recovery and a market that has risen steadily on the back of excessively accommodative monetary policy and massive liquidity injections by Central Banks globally.

Once again, due to the length of the “mark up” phase, most investors today have once again forgotten the “ghosts of bear markets past.” Despite a year-long distribution in the market, the same messages seen at previous market peaks have been steadily hitting headlines: “there is no recession in sight,” “the bull market is cheap” and “this time is different because of Central Banking.”

Lost And Found

There is a sizable contingent of investors, and advisors, today who have never been through a real bear market. After a decade long bull-market cycle, which only seems to go up, you can certainly understand why mainstream analysis continues to believe the markets can only go higher.

What is concerning is the rather cavalier attitude the mainstream media takes about bear markets.

“Sure, a correction will eventually come, but that is just part of the deal.”

What gets lost during these bullish cycles, and is found in the most brutal of fashions, is the devastation caused to financial wealth during the inevitable decline.

Let’s look at the S&P 500 inflation-adjusted total return index in a different manner. The first chart shows all of the measurement lines for all the previous bull and bear markets with the number of years required to get back to even.

What you should notice is that in many cases bear markets wiped out essentially a substantial portion, if not all, of the previous bull market advance. This is shown more clearly when we look at a chart of bull and bear markets in terms of points.

Whether or not the current distribution phase is complete, there are many signs suggesting the current Wyckoff cycle may be entering its final stage of completion. 

Let me remind you of something Ben Graham said back in 1959:

“‘The more it changes, the more it’s the same thing.’ I have always thought this motto applied to the stock market better than anywhere else. Now the really important part of the proverb is the phrase, ‘the more it changes.’

The economic world has changed radically and will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my cliché is sound,  then the stock market will continue to be essentially what it always was in the past, a place where a big bull market is inevitably followed by a big bear market.

In other words, a place where today’s free lunches are paid for doubly tomorrow. In the light of recent experience, I think the present level of the stock market is an extremely dangerous one.”

He is right, of course, things are little different now than they were then.

For every “bull market” there MUST be a “bear market.” 

While “passive indexing” sounds like a winning approach to “pace” the markets during an advance, it is worth remembering that approach will also “pace” the decline.

The recent sell-off should have been a wake-up call to just how quickly things can change and how damaging they can be.

There is no difference between a 100% gain and a 50% loss.

Understanding that investment returns are driven by actual dollar losses, and not percentages, is important in the comprehension of how devastating corrections can be on your financial outcome. So, before sticking your head in the sand and ignoring market risk based on an article touting “long-term investing always wins,” there is a huge difference between just making money and actually reaching your financial goals.

via RSS http://bit.ly/2TLUIZe Tyler Durden

While traditionally it is JPMorgan Chase that kicks off bank earnings season, this quarter, Citigroup is taking the spotlight with its just reported Q4 results (followed by JPMorgan and Wells Fargo & Co. on Tuesday), and its earnings numbers are anything but a welcome harbinger for what to expect.

Citi reported adjusted EPS (excluding tax reform effect) of $1.61, slightly better than the consensus estimate of $1.55, thanks to a drop in the company’s effective tax rate, which dipped to 19% in Q4, and would have been 21% ex-tax reform 21%, both lower compared to the 25% a year ago.

That was it for the good news, because one look at the top line reveals an ugly miss as 4Q revenue $17.1BN missed the consensus estimate of $17.6BN badly, as a result of a sharp drop in fixed income markets revenue which fell 39% sequentially and 21% y/y to $1.94b vs estimate $2.23b. This was the lowest fixed income print since 2011, and the worst performance under CEO Michael Corbat.

It wasn’t just fixed income: equity markets revenue also fell 16% q/q, however despite rebounded 18% y/y to $668MM, it also missed the $672MM consensus estimate.

Indicating just adverse the trading environment of the past month was, Citi missed a full-year profitability target by an even bigger margin than it signaled only five weeks ago.

The silver lining: investment banking revenue rose 8% q/q, and yet despite the 1% Y/Y decline, at $1.28BN it modestly beat estimates of $1.18BN, as M&A advisory revenue jumped 47% to $463 million. According to Bloomberg, the combined revenue from stock and bond underwriting dropped more than estimates. Revenue from stock underwriting slumped 28% to $181 million, worse than analysts anticipated, while revenue from bond underwriting fell 13% to $634 million, a smaller drop than estimated.

Meanwhile, on the expense side, 4Q operating expense fell 4% y/y to $9.9b, driven by lower compensation costs, efficiency savings and wind-down of legacy assets, partially offset by investments and volume growth; the bank’s 4Q efficiency ratio dropped again to 57.4% vs 57.7% in 3Q.

There were no major shocks in the bank’s balance sheet, as 4Q loans rose 3% to $684BN, while excluding FX translation, loans rose 4%. According to the report, the bank’s 4Q cost of credit fell 7% y/y to $1.93BN, primarily driven by an episodic charge-off in Institutional Clients Group in prior-year period.

The bank’s Net Interest Margin was virtually unchanged in Q4, rising fractionally to 2.71% from 2.70% in Q3.

Citi’s credit card revenue rose 1% to almost $5.1 billion: as Bloomberg notes, investors have become increasingly worried as rising interest rates temper consumer demand. Citi has been cutting promotional offers and encouraging existing customers to maintain balances.

The bank’s allowance for loan losses in Q4 was $12.3BN, or 1.81% of total loans virtually unchanged from the $12.4BN, or 1.86% a year ago, suggesting that the bank sees neither an improvement nor deterioration in the broader economy.

Some more balance sheet details:

• 4Q book value per share rose 6% y/y to $75.05, driven by a lower share count
• 4Q CET1 Capital ratio 11.9% vs 11.7% in 3Q

In Q4, Citi as one would expect, repurchased 74 million common shares in 4Q.

“A volatile fourth quarter impacted some of our market sensitive businesses, particularly Fixed Income,” CEO Michael Corbat said, offset by strong performance in Institutional Clients Group accrual business and underlying growth in U.S. Branded Cards and solid performance from Mexico franchise. “For 2019, we remain committed to delivering a 12% ROTCE and continuing to improve our operating efficiency during the year.”

The market was clearly displeased with the collapse in Fixed Income revenue, which however had been telegraphed earlier by another weak report from Jefferies, and now the risk is that the other big banks will follow with similar slumps in the highest-margin business segment at a time when Net Interest Margin has collapsed thanks to the near inversion of the yield curve.

via RSS http://bit.ly/2M8o01C Tyler Durden

As was widely expected after a Chinese court ordered a retrial of Canadian national Robert Schellenberg on drug trafficking charges last month, the Canadian national has now been sentenced to death for allegedly smuggling “an enormous amount of drugs” into China. He had earlier been sentenced to 15 years.

Breaking- Chinese state media: Canadian Robert Schellenberg sentenced to dead for drug smuggling after Chinese prosecutors appealed his 15-year original sentence.

— Wei Du 杜唯 (@WeiDuCNA) January 14, 2019

The harsh sentence, like the arrests of Michael Kovrig and Michael Spavor  on vague charges of threatening national security (an investigation is reportedly ongoing, according to Chinese officials), is widely suspected to be retaliation for the arrest of Huawei CFO Meng Wanzhou (who is also the daughter of the conglomerate’s founder).

Few details about Schellenberg’s case have been shared with the media, other than the fact that he was arrested in 2014, long before the Huawei dispute erupted. Canadian diplomats had reportedly been working with the Chinese government on the case. The retrial was ordered after Chinese prosecutors argued that Schellenberg’s sentence was too lenient.

Robert Schellenberg

In a report published late last week, Canada’s Globe and Mail carried remarks from Schellenberg’s family, who said they feared his life was being used as a bargaining chip in the international dispute.

“There’s no way they are not using him as a pawn,” said Lauri Nelson-Jones, Mr. Schellenberg’s aunt, in an interview.

“And it’s just harsh. That’s someone’s kid. That’s someone’s brother and nephew. And to just say, ‘we’re going to think about ending his life now over this’ – it’s not warranted. It’s not deserved. It’s heartbreaking.”

A legal scholar and expert in Chinese law said Schellenberg’s case was “almost certainly being manipulated.

The case against Mr. Schellenberg “is almost certainly being politically manipulated,” he said, although “in a much more subtle legalistic way than the other cases. It will bring more pressure on Canada but because it has been going on for a while, the Chinese have a more plausible legalistic defence.”

They pointed out that Schellenberg’s trial and sentencing took four years, but his retrial and second sentencing took just two weeks.

We imagine we’ll be hearing more from Canadian Prime Minister Justin Trudeau about the importance of respecting the “rule of law” as Canada struggles – probably unsuccessfully – to secure Schellenberg’s return.

via RSS http://bit.ly/2QJEA8M Tyler Durden

In a late-night tweet, President Trump finally weighed in on the corporate news story of the week – the impending divorce of Jeff and MacKenzie Bezos and the former’s tawdry affair with TV personality Lauren Sanchez –  by praising the National Enquirer’s work in breaking the story of Bezos’ affair (and the many tawdry details that have since been reported).

“So sorry to hear the news about Jeff Bozo,” the president tweeted, using a play on the tech CEOs name.

In a remark that will undoubtedly irk Bezos, Trump gloated about how the WaPo owner – a paper that Trump has derided as a “lobbyist newspaper” – was taken down by a competitor “whose reporting, I understand, is far more accurate than…the Amazon Washington Post.”

Referencing the impending division of assets between the couple, which could result in MacKenzie Bezos becoming the world’s richest woman, Trump added that “hopefully the paper will soon be placed in better & more responsible hands!”

So sorry to hear the news about Jeff Bozo being taken down by a competitor whose reporting, I understand, is far more accurate than the reporting in his lobbyist newspaper, the Amazon Washington Post. Hopefully the paper will soon be placed in better & more responsible hands!

— Donald J. Trump (@realDonaldTrump) January 14, 2019

During a press conference last week, Trump said he expected the Bezos’ divorce to be “a beauty”. And Trump – no stranger to high-profile divorces – would be one to talk.

via RSS http://bit.ly/2AK3gsp Tyler Durden

Blain’s Morning Porridge, submitted by Bill Blain

Unfortunately… I suppose I should comment about the B word. I shall start by admitting – like everyone else – I really don’t have a clue where we’re go from here. The political maths doesn’t work. There are no apparent solutions. There are multiple scenarios to game – but none of them seem to lead anywhere positive.. The only thing I’m completely sure of: tomorrow, as MPs finally vote on the UK/EU divorce bill, we will hear lots of UK politicians spouting pointless blustering pompous nonsense moving us forward not a jot.

But, I also sniff great market opportunity. If you could afford to magically remove all UK chips from the table, you probably would… But you can’t. Where else would you invest? If you think British politics is crazy… tell me where isn’t? Yep, better to spread your bets across a globe of dysfunctional politics – for that is the reality of the new Trumpist populist age.

The second issue for UK Inc is more fundamental. Alongside our bafflement at the amateur blundering ineptitude of the UK political system leading us to this place of befuddlement, I can’t help but wonder if we’re missing some fundamental positives about UK Inc, that the pros and cons of Brexit have been massively overexaggerated, and this is the time to buying? What if things are NOT really so fundamentally hopeless and bad as the hyped-up political rhetoric and verbiage suggests? What if  Brexit isn’t so bad, or a good compromise can be found?

In the next few days I think I can confidently predict a complete and utter clusterf**k in parliament, the absolute disintegration of political common sense, unprecedented journalistic hyperbole, and profound disbelief across the economy. Confidence will collapse, the tinned goods shelves at the supermarkets will be empty. End of the world.. again.

It will be the perfect moment to scoop up UK Inc.

Is UK housing really so over-priced? Are consumers about to stop consuming? Are the prospects for our world class aerospace, auto and computing industries really so limited? I would not for one moment try to argue Brexit will be painless. There will be damage, a loss of trust, and division. Leaving the EU will be costly. But, so would staying in. Pros and cons, but the UK voted to leave, without understanding how. It’s also more likely we’ll find a compromise.. somewhere? There are good comprises that will benefit both the UK and Europe to be found.

The Remainers assure us everything can and will be fixed if we reject Brexit, vote again, and embrace Europe. Sure… but nonsense. That won’t restore a single job at Land Rover – which is losing money because of ill-executed diesel legislation. It won’t save Jaguar workers – sorry, but they don’t build cars folk want to buy.

The bottom line is any economy has great intrinsic value if producers are producing goods folk want to buy, and folk have the resources to buy. The UK is not going to switch off overnight on whatever Brexit vote is finally (dis)agreed. Trade will find its own level. The UK has historically been rich in inventive, commercial and legislative skills – these provide a base (not perfect, but functional) that makes UK Inc worth far more than the zero value some now ascribe to it.

Its interesting to hear Brexiteer fund managers – like Crispin Odey, reversing bets against the pound. The FT reports he’s long sterling, and said: “Markets have already decided.. Brexit isn’t going to happen.. The pound should rally; its very oversold.” He’s also being buying retail stocks like Dixons. A soft-Brexit (much like the one on the table for tomorrow) would be massively sterling positive.

Sure, the whole Brexit thing has been deeply flawed since the get-go. Tough. Let’s get over it. And staying in Europe doesn’t mean Europe would be fixed. I have a lot of sympathy for the perspective of being a small cog in a functional global economy than a big cog in a barely working Europe. Personally, I just don’t think Europe works – its imbalanced in favour of the few.  

To give an example: tomorrow I’ll be in Vienna, taking part in a debate on how much damage Global Trade wars will do to the economies of Central and Eastern Europe. I’ll be arguing its inevitable they will suffer because they have become little more than manufacturing floors for German industry – if Deutschland’s autos sniffle, these economies will be in extremis.

But, it doesn’t have to be that way: rather than being straightjacketed into servitor nation status, they could follow more lucrative value-added paths based not just on innovation and entrepreneurship, but on stronger national platforms where corporate governance, politics, judiciary, and trade are reinforced across these economies. However, that would require investment in education, law and order – which is impossible while austerity is the EU enforced rule, and austerity results in populist national governments.   

I should imagine a few emails on that comment – that EU austerity has caused populist politics. Its certainly contributed to the political phenomena that’s occurred across Occidental economies.. Worth bearing in mind..

via RSS http://bit.ly/2FweqEo Tyler Durden

The torrid post-Christmas rally, which fizzled last Friday, appears to be officially dead just as earnings season begins, with futures sliding early in the session only seeing the drop accelerated after dismal trade data out of China reignited concerns about global growth and ahead of a key Brexit vote on Tuesday, leading to a sea of red in global markets with S&P futures down 1% to session lows around 6am ET, alongside sliding stocks in Europe and Asia. Treasury yields fell to 2.66% while the dollar held steady.

Tech stocks were the biggest losers in the Stoxx Europe 600 Index on renewed fears about a China hard-landing; in Asia, losses were most pronounced in Hong Kong after China posted the worst import and export figures since 2016. The index of Europe’s leading 300 shares slipped 0.7 percent in early trade to 1,365 points. Germany’s DAX and France’s CAC fell around 0.6 percent, with shares in European tech and luxury goods companies and the automotive sector suffering some of the biggest declines.

“We believe trade growth next year will slow significantly on huge uncertainty and high base,” Citi analysts wrote in a note, predicting China’s exports and imports to fall 5.1 percent and 6.8 percent respectively this year. “Significant uncertainty remains as to whether there could be a ‘deal’ after March 1,” they added.

The falls in Europe followed hefty declines in Asia where MSCI’s broadest index of Asia-Pacific ex-Japan shares lost around 1 percent from Friday’s 1-1/2 month high – its biggest single-day percentage drop since Jan. 2. Chinese and Hong Kong shares suffered the worst hits.

Early on Monday, China reported dismal trade data with exports unexpectedly falling the most since 2016 in December, while imports also contracted, pointing to further weakness in the world’s second-largest economy in 2019 and deteriorating global demand. Specifically, China December exports tumbled Fall -4.4% Y/y in Dollar Terms, the weakest year-on-year reading since January 2017, and down from +3.9% in November; far below the 2.0% consensus increase, while imports plunged -7.6% from +2.9% in Nov, badly missing the 4.5% expected increase, ironically resulting in the biggest trade surplus on record of $57.1BN. In month-on-month terms, the contraction of exports and imports accelerated further in December. In sequential terms, exports contracted 6.2% mom sa non-annualized, down further from a decrease of 3.4% in November

“Today’s data reflect an end to export front-loading and the start of payback effects, while the global slowdown could also weigh on China’s exports,” Nomura economists wrote in a note, referring to a surge in shipments to the U.S. over much of last year as companies rushed to beat further tariffs.

The large contraction in Chinese imports was broadly consistent with a significant decrease of exports in December from Korea and Taiwan to China. Exports growth has been weaker than expected over the past two months, and sequential momentum has slowed significantly to a contraction since November from a strong rebound in September, which has been probably due to the fading impact from front-loading ahead of 10% tariffs levied on $200bn Chinese goods starting in late September (and ahead of the potential—and so far delayed—increase of tariffs on these goods to 25%). According to Goldman, exports growth is likely to remain soft in the near future, given moderation in global growth momentum suggested by GS Leading Current Activity Indicator, even though a faster-than-expected waning of impact from front-loading could potentially pose less downward pressure for exports in the coming months. Adding to policymakers’ worries, data on Monday also showed China posted its biggest trade surplus with the United States on record in 2018, which could prompt President Donald Trump to turn up the heat on Beijing in their bitter trade dispute.

The dismal December trade readings suggest China’s economy may have cooled faster than expected late in the year, despite a slew of growth-boosting measures in recent months ranging from higher infrastructure spending to tax cuts. Some analysts had already speculated that Beijing may have to speed up and intensify its policy easing and stimulus measures this year after factory activity shrank in December.

Elsewhere, ahead of a critical Brexit vote on Tuesday, UK PM May warned that failure to back her Brexit deal risks a no-deal Brexit and is to say she believes parliament will more likely block Brexit than the UK leave without a deal, according to the PM’s office. In separate reports, the UK government commented that any defeat by less than 100 votes on Tuesday would be counted as a good result. Furthermore, reports in The Times noted that Brussels expects the UK to ask for an extension to Article 50 to allow Brexit to be delayed if the House of Commons rejects Theresa May’s deal tomorrow, while there were separate reports that Pro-EU MPs are said to publish draft legislation on Monday for a 2nd referendum.

All this adds to tensions as traders watch the record rally of the last two weeks finally collapse and as the banks are set to report earnings. As Bloomberg notes, this month’s buoyancy in global equities, triggered by signs of progress in U.S.-China trade talks and dovish commentary from Federal Reserve officials, faces a test with the Chinese data underscoring the impact of the trade spat. The next hurdles to clear will be a slew of U.S. bank profit reports and earnings season, amid worries global growth is slowing. Also weighing on sentiment is the partial U.S government shutdown that’s entered its fourth week.

In FX, the Bloomberg Dollar Spot Index was little changed while the yen climbed as Chinese trade data and caution ahead of key earnings curbed risk appetite. The euro hit a session low after data showed euro-zone industrial production contracted 3.3% y/y in November, compared to an estimate of a 2.1% decline; Bunds gained, lagging Treasuries, while Italian bonds fell ahead of possible supply. Sweden’s krona recovered from an earlier decline after inflation data beat analyst estimates, while matching the central bank’s forecast. Finally, the Turkish lira slumped after Trump warned Turkey not to attack Kurdish forces in Syria after a planned U.S. pullout, saying it would be economically devastated if it did so.

The prospect of slowing global growth also roiled commodity markets, with oil prices slipping 1% after initially rising, and industrial metals copper and aluminum losing ground in both London and Shanghai.  Meanwhile safe havens trades benefited from the equity pullback with U.S. 10-year Treasury yields falling to as low as 2.6690 percent – their lowest level in a week – while gold prices gained as Newmont announced it would buy Goldcorp to create the world’s largest gold miner.

In geopol news, President Trump tweeted that US is starting long overdue pullout from Syria, while he also threatened to devastate Turkey economically if Turkey hits the Kurds and likewise doesn’t want the Kurds to provoke Turkey. Iran suggested it could restart its nuclear program as its nuclear program chief stated that they have started preliminary activities for designing a modern process for 20% uranium enrichment for its reactor in Tehran. In separate news, US President Trump’s reportedly instructed the Pentagon last year to provide military options to strike Iran.

In other news, PG&E (PCG) said to be in discussions with banks about multi-billion dollar bankruptcy financing and may inform employees on Monday it is preparing a bankruptcy filing for January 29th.; the Co’s CEO Williams is leaving with general council John Simon to takeover in the interim. Company shares are down 50% pre-market.

For the U.S. trading day ahead, banks will be in sharp focus as they kick off the earnings season. Quarterly results from Citigroup are due on Monday followed by JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley later in the week. Expectations are dour with profits for U.S. companies forecast to rise 6.4 percent, down from an Oct. 1 estimate of 10.2 percent and a big drop from 2018’s tax cut-fueled gain of more than 20 percent. Investor attention was also on the U.S. government shutdown, now in its 24th day, and with no resolution in sight.

Market Snapshot

• S&P 500 futures down 1% to 2,569.00
• STOXX Europe 600 down 0.5% to 347.32
• MXAP down 0.4% to 150.88
• MXAPJ down 0.9% to 486.56
• Nikkei up 1% to 20,359.70
• Topix up 0.5% to 1,529.73
• Hang Seng Index down 1.4% to 26,298.33
• Shanghai Composite down 0.7% to 2,535.77
• Sensex down 0.4% to 35,862.08
• Australia S&P/ASX 200 down 0.02% to 5,773.37
• Kospi down 0.5% to 2,064.52
• German 10Y yield fell 1.9 bps to 0.22%
• Euro up 0.02% to $1.1471
• Italian 10Y yield fell 3.5 bps to 2.493%
• Spanish 10Y yield fell 1.2 bps to 1.433%
• Brent futures down 1.8% to $59.40/bbl
• Gold spot up 0.3% to $1,294.05
• U.S. Dollar Index little changed at 95.67

Top Overnight News from Bloomberg

• Trump’s refusal to reopen the U.S. government reflects the growing influence of his acting Chief of Staff Mick Mulvaney and senior adviser Stephen Miller, hard-right conservatives who are closer to the president thanks to turnover within the White House
• With Washington mired in gridlock and markets flashing all sorts of warning signs, the majority of Americans expects 2019 to be a grim one for their finances, according to a new study
• Industrial output in the euro area fell the most in almost three years in November, raising questions over the economy’s ability to regain momentum after a broad-based slowdown
• Greek Prime Minister Alexis Tsipras’s political future is on the line this week after a coalition breakdown prompted him to call a confidence vote in parliament set for Wednesday, raising the risk of an early election
• Italy’s economy is probably in a phase of stagnation not recession, Finance Minister Giovanni Tria said in a newspaper interview, adding that the country’s deficit will be kept under control
• Germany should try to head off an economic slowdown by easing the tax burden on companies, according to the new chairwoman of Chancellor Angela Merkel’s Christian Democrats

Asian equity markets began the week subdued following the indecisive close on Wall St last Friday as the US government shutdown extended to its longest in history, while disappointing Chinese trade data and the absence of Japanese participants for Coming of Age Day also contributed to the downbeat sentiment. ASX 200 (Unch.) failed to hold on to early gains as strength in Telecoms and its largest weighted Financials sector was eventually overwhelmed by losses in the broader market, while KOSPI (-0.5%) was lacklustre amid softness in the index heavyweights including Samsung Electronics and Hyundai Motor. Hang Seng (-1.4%) and Shanghai Comp. (-0.7%) were also pressured as Chinese Exports and Imports figures took a further hit from the US-China trade dispute, although losses in the mainland were capped after the PBoC injected liquidity to the interbank market in which it utilized 28-day reverse repos for the first time since June last year. PBoC injected CNY 80bln via 7-day and CNY 20bln in 28-day reverse repos for a net daily injection of CNY 20bln. PBoC set CNY mid-point at 6.7560 (Prev. 6.7909).

Top Asian News

• China Doubles Foreign Investment Limit in Further Opening
• CapitaLand CEO Puts Stamp on Developer With $4.4 Billion Deal
• Etihad Agrees to Raise Stake in India’s Jet to 49%, Report Says
• Jet Airways Jumps on Report Founder Goyal Is Giving Up Control
• China Is Said to Extend Foreign Bond Quota for 28 More Firms

Major European Indices are in the red [Euro Stoxx 50 -1.0%], with some underperformance seen in the SMI (-1.1%) weighed on by poor performance in luxury names such as Richemont (-2.1%) and Swatch (-1.0%) following poor Chinese trade data. Other luxury names including Pandora (-6.5%), and LVMH (-3.5%) are in the red on the back of this as well; Burberry (+0.3%) is bucking the luxury trend after being upgraded at Bank of America Merrill Lynch. Sectors are similarly in the red with some slight outperformance seen in healthcare. Other notable movers include Next (-2.9%) in the red after being downgraded at Credit Suisse, and Dialog Semiconductor (+4.3%) after reporting a 7% Y/Y increase in full year revenue.

Top European News

• Orsted Shares Slump Most Since July as Asset Sale Scuppered
• Telecom Italia Is Said to Bid for BT’s Scandal-Plagued Business
• Monte Paschi Drops After ECB Says It Has Capital, Profit Issues
• Euro-Area Production Slump Adds to Gloom for Economic Outlook
• Continental AG Issues Gloomy Auto Market Forecast for First Half

In FX, it has been a relatively docile session for the USD thus far as the index sits around the middle of tight 95.527-726 range as the US government shutdown extends to the longest in history. Subsequently, the US data originally scheduled for release today (building permits, advanced goods trade balance and durable goods) have been cancelled.

• AUD/NZD/CNY/JPY – The major G10 movers, all in the aftermath of below-forecast Chinese trade data as exports and imports both declined to a 6-month low in USD terms vs. expected rises. As such trade-proxy AUD/USD fell around 0.4% to test its 100 DMA at around 0.7180 while NZD/USD declined 0.3% to test its 200 DMA at around 0.6797, ahead of its 50 DMA at 0.6789 as the technicals are still poised to form a golden cross. Meanwhile, global-growth fears sparked safe-haven demand into the Yen as USD/JPY tested 108.00 to the downside ahead of a Fib level at 107.91, of note 1.1bln in option expiries sit between 108.00-15. Finally, the Yuan snapped a three-day winning streak but remains sub-6.80 vs. the greenback, though the currency is of course dampened by the disappointing trade figures, USD/CNY is capped by a firmer PBoC CNY fix of 6.7560 (Prev. 6.7909). In terms of techincals, USD/CNH breached its 50 HMA to the upside at 6.7692 with the 100 HMA above the 6.8000 level. It is also worth noting that Goldman Sachs raised their 3, 6, 12 month USD/CNH forecast to 6.80 (Prev. 6.95), 6.80 (Prev. 7.10) and 6.70 (Prev. 6.90) respectively citing an improvement in sentiment around US-Sino trade talks.
• GBP, EUR – Both little changed on the day, while the latter is largely fluctuating with the dollar and the Pound awaits tomorrows meaningful vote, which was originally scheduled for December 11th last year. The deal is widely expected to be voted down and BBC reports that around 100 Tory and the 10 DUP MPs are expected to join the Labour and the opposition parties in voting against the deal. In terms of where we stand with Brexit, PM May is to deliver a speech at 15:30 GMT where she will warn that Parliament is more likely to block Brexit rather than let Britain leave without a deal. Furthermore, the assurances provided by Brussels are also understood to not be enough to sway MPs towards PM May’s deal scheduled for 19:00GMT tomorrow. Cable was largely unfazed by the release of the EU assurances which offered little in the way of legally-binding material MPs sough for. From a technical standpoint, Cable recently saw a pop higher and rests just below its 100 DMA at 1.2893 with no notable option expiries for the day. Going back to the EUR, the currency was relatively unmoved by below-forecast industrial production figures following Germany’s dismal IP release last week. EUR/USD is currently below its 100 DMA at 1.1476 and in close proximity to the psychological (and 200 HMA) at 1.1450, while there is nothing notable to report regarding option expiries.
• TRY – The stand-out EM underperformer as USD/TRY reclaimed 5.50 to the upside amid a tweet by US President Trump over the weekend where he threatened to devastate Turkey if Turkey hits the Kurds, subsequently pouring cold water over what seemed like a fruitful relationship between the countries.

In commodities, Brent (-1.4%) and WTI (-1.6%) prices are in the red, just below USD 60.00/bbl and USD 51.00/bbl respectively, as the risk tone stemming from the ongoing US government shutdown and disappointing Chinese trade data weighs on markets. Regarding China, December oil imports of 10.35mln BPD, down from November’s figure but up from the 7.97mln BPD for December 2017. Separately, Saudi Energy Minister Al Falih stated that in his opinion OPEC+ has taken enough action to balance the oil market this year, and that there is no need for an extraordinary OPEC meeting before April. Gold (+0.4%) is in the green, towards the sessions high of USD 1294.57/oz as the aforementioned risk tone weighs on markets. Elsewhere, China’s 2018 iron ore imports fell -1% Y/Y, the first yearly decline since 2010. In contrast China’s 2018 copper imports increased 12.9% to a record high of 5.3mln tonnes.

US Event Calendar

• Nothing major scheduled

DB’s Jim Reid concludes the overnight wrap

For those disappointed with the news on Friday that Mr Trump has cancelled his trip to the World Economic Forum in Davos next week, then fear not. I’ll be making my debut at the event and will be presenting at two Deutsche Bank hosted events. If you or anyone you work with are attending and would like to come along please let me know and I’ll let you know how to register. I’m hoping Bono finds time away from fixing the world’s problems to attend one of my sessions. Failing that I’d be happy to discuss my views on the yield curve with Angelina Jolie.

That’s for next week. For this it’s all about the Brexit vote, what happens next, and the start of US earnings season. Before we preview this, today marks the 24th day of the US government shutdown eclipsing the previous longest ever (21 days) seen in 1995-96. For markets the main inconvenience so far is the delay in some data releases. This Wednesday’s US retail sales release is the highest profile casualty to date data wise. Our economists highlighted that the 2013 shutdown was calculated to have cost about 0.1% of GDP per week lost. However at 850k furloughed workers, the shutdown over 5 years ago led to double the temporary losses of jobs than the current impasse has created. So the overall economic impact should be minimal for now even if it is distressing for those directly impacted. However the longer it goes on the more the lack of visibility on data will be a problem and the more it will start to make a meaningful impact on the immediate economic outlook. We’re not there yet but we’re also not seemingly near a solution.

Outside of US politics the main story this week will be Brexit. The Withdrawal Agreement vote takes place tomorrow evening but The Times on Saturday suggested that if an earlier amendment (the amendments get voted on first) is passed that rejects the deal but also rejects a no-deal then it’s still possible the vote won’t take place and the government will admit defeat but avoid the actual process. Regardless of what happens it seems possible that the deal won’t pass and we could get a constitutional head scratcher of a week. The opposition Labour Party will likely call a no-confidence motion that they have very little chance of winning but more importantly the weekend press (Bloomberg) is increasingly suggesting that Parliament will try to wrestle control of Brexit from Mrs May after Tuesday. Meanwhile, in a last ditch effort PM May is going to make a speech today appealing to members of Parliament to vote for her deal and at the same time warning them that there’s now more chance of them blocking Brexit than of Britain leaving the European Union without a deal.

Overnight the Guardian has reported that the EU27 is considering extending the Article 50 deadline until July should the UK request it assuming Mrs May loses tomorrow. To extend beyond the Euro Parliamentary elections would show the EU are keen to avoid a no-deal. If true one could argue that we’ll now increasingly likely to get a rolling extension until we get a deal, the U.K. decides to stay in, or there is a Parliamentary majority for a no-deal exit (highly unlikely). This news if verified would ultimately reduce the pathways to a hard, cliff edge Brexit.

As it stands Mrs May needs to come back by next Monday with a plan B if she loses tomorrow (thanks to a constitutionally questionable amendment last week that shortened the required response time from 21 to 3 days). However it appears that procedure in the U.K. Parliament is highly unpredictable at the moment and it wouldn’t be a surprise to see more constitutional deviations to standard procedure. . Anyone who says they know exactly how this all ends is either lying or a time traveller. If they are the latter can you ask them whether Liverpool win the league as I wouldn’t mind knowing so as to cut down the tension and stress I’m feeling at the moment. However if the answer is that after waiting 29 years there’s another 29 years further to wait then maybe I’ll be better off blissfully unaware.

On a serious note the direction of travel seems likely to be a pivot towards a softer Brexit or a delay to Brexit if the main motion is defeated tomorrow night. However many bumps are likely on the way.

Meanwhile, earnings season is back in the US with 35 S&P 500 companies set to report this week. The highlights will likely be the banks with Citigroup reporting today, Wells Fargo and JP Morgan tomorrow, Goldman Sachs and Bank of America on Wednesday, and Morgan Stanley on Thursday. UnitedHealth and Delta Airlines are also due to report on Tuesday, Netflix on Wednesday, and Schlumberger and American Express on Thursday. For Q4, earnings growth for the S&P 500 is expected to be 11.4% which compares to around 25% growth reported in each of the previous three quarters. Still, if Q4 comes in in-line this would be the fifth straight quarter of double digits earnings growth. It’s worth noting also that over the past five years on average, actual earnings have exceeded estimated earnings by nearly 5% according to Factset. In terms of data we show the full week ahead at the end.

This morning in Asia markets are heading lower with the Hang Seng (-1.43%), Shanghai Comp (-0.56%) and Kospi (-0.66%) all down weighed by the disappointing December trade data from China with both exports (at -4.4% yoy vs. +2.0% yoy expected) and imports (at -7.6% yoy vs. +4.5% yoy expected) declining at a faster pace and at the worst levels since 2016, thereby raising concerns of a slowdown in global growth. The Australian dollar (-0.44%) also came under pressure following China’s disappointing trade data even as China’s onshore yuan is eking out a small gain (+0.06%). Japan’s markets are closed for a holiday. Elsewhere, futures on the S&P 500 are also down -0.73%.

Turning to a recap of last week, Friday turned out to be quite a calm trading session, especially relative to the rest of the week. The highlight was the US’s December CPI data, which printed exactly in-line with consensus expectations. Core prices rose +0.2% mom and +2.2% yoy. Headline inflation moderated a touch, to -0.1% mom and +1.9% yoy, though it was driven by transitory energy dynamics.

On the week, the S&P 500 ended +2.54% higher (-0.01% on Friday), while small caps outperformed with the Russell 2000 up +4.83% (+0.14% Friday). Other major indexes also advanced, with the DOW and NASDAQ gaining +2.40% and +2.78%, respectively (-0.02% and -0.30% Friday). In Europe, the STOXX 600 rose +1.69% on the week (+0.09% Friday) while Italy’s FTSEMIB outperformed, up +2.43% (-0.06% Friday). Asian equities advanced as well, with the Nikkei and Hang Seng indexes up +4.08% and +4.06% (+0.97% and +0.55% Friday) respectively. The main drivers of this broad risk-on sentiment were: positive progress on US-China trade talks, Fed Chair Powell and other Fed officials signaling a pause in the rate hike cycle, and low valuations after December’s steep selloff.

In fixed income, US HY credit stole the show with a -44.5bps rally on the week, its strongest week since March 2016 (+2bps Friday) and 84bps tighter than its recent wides on January 3rd. European HY also gained -28bps (-4bps Friday). Sovereign bond yields rose slightly, with Treasuries and Bunds ending the week +3.0 and +3.1 bps higher at 2.70% and 0.24% (-4.5bps and -1.6bps on Friday). The dollar retreated -0.53% while EM currencies gained +0.36%, though the moves moderated on Friday (dollar +0.14% and EMs -0.14%). The euro ended the week +0.59% stronger at 1.146 (-0.33% Friday). Finally, oil continued its strong rally as well, gaining +6.15% on the week (-1.80% Friday) to close above $60. The two week gain for Brent was 16.05%, the best performance in over two years.

It should be a quiet start to the week on Monday with the only data due out being the Euro Area November industrial production report and China’s December trade balance. Meanwhile earnings season gets underway with Citigroup reporting.

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Shares of the troubled California utility PG&E tumbled more than 30% on Monday after its CEO Geisha Williams quit, followed by the revelation made in an 8-k filing on Monday morning that the utility – which is facing potentially billions of dollars in fines related to the California wildfires – is planning to file for bankruptcy on Jan. 29.

PG&E has seen its shares plunge by more than half since November after the state opened an investigation into the utility’s role in the wildfires. The utility had already participated in one of the largest bankruptcies in US history back in 2000 during California’s energy crisis. Following a collateral-call-triggering downgrade to junk last week, rumors circulated that PG&E could inform its employees about bankruptcy plans as soon as Monday.

Williams, who was one of the first Hispanic CEOs in the Fortune 500, will be succeeded by the company’s general counsel on an interim basis. Her departure follows the exits of three PG&E CEOs earlier this month, according to Bloomberg.

“I will be leaving PG&E,” Williams said in a separate email, without providing a reason for her departure. “I value the opportunity I’ve had to lead PG&E and wish all of my colleagues well.”

Meanwhile, the possibility of a state takeover and/or state-organized breakup have also loomed over the company. Newly appointed California Governor Gavin Newsom said during a press conference Thursday that his office would be making an announcement related to PG&E within the next few days and that the issue was at the top of his agenda. He said in a later interview that the announcement would involve appointments to the California Public Utilities Commission, the state’s grid operator and to a commission established by legislature to explore wildfire issues.

 

Wall Street analysts are scrambling to discern the possible fallout from such a large bankruptcy filing, and its possible implications on the junk bond market, and whether a PG&E bankruptcy could create an “AIG” moment. Citigroup Inc. called it a “a crisis of confidence.” Guggenheim Securities analysts likened the dilemma PG&E poses to investors and lawmakers as “a falling knife.”

After taking the helm at PG&E, Williams pushed for changes to California laws to free utilities from responsibility if their equipment malfunctions and causes a natural disaster – something she decried as “bad public policy.” However, while lawmakers have rejected PG&E’s calls to change wildfire liability laws, they did pass a law in August to help the utility to pay for the 2017 wine country fires. California lawmakers are now weighing whether to pass another law to help PG&E limit its liability.

Then again, PG&E’s planned bankruptcy filing could be a bluff to force California lawmakers to act. After all, if PG&E goes down, it would be shielded from bankruptcy-related lawsuits – while Californians might be faced with higher utility rates.

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In the latest deal in what’s becoming a wave of consolidation among gold miners, Newmont Mining announced on Monday that it would buy smaller miner Gold Corp in a deal valued at $10 billion.

The deal could create the largest gold miner in the world, with operations stretching from the Americas, to Australia and Ghana, the companies said. Newmont will offer 0.3280 of its share and two cents for each share of its Canadian rival, according to  CNBC. The deal is the largest in the space since Randgold and Barrick announced their plans to merge back in September.

As the Wall Street Journal pointed out, the depletion of global gold mines and the resulting increase in extraction costs has pushed gold miners to seek cost efficiencies and smaller-scale combinations.

“The strategic rationale for combining Goldcorp with Newmont is powerfully compelling on many levels.” Goldcorp Chief Executive Officer David Garofalo said in a statement. Goldcorp shares climbed 1.3% in premarket trading on the news. The GDX, an ETF of gold miners, also climbed on the news.

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Authored by Tom Luongo,

“What are you reading my lord?” — Polonius

“Words.” — Hamlet

Something has changed in U.S. politics. And it may finally signal something changing for the better. Since the announcement (but no real follow through) to end our military involvement in Syria what passes for our statesmen – John Bolton and Secretary of State Mike Pompeo – have been ignored, mocked or both.

Bolton attempted to box Trump in on not leaving Syria while Israel chest-thumped about how they will not yield an inch to Iran. Turkish President Erdogan publicly lambasted him with no response from President Trump.

Or anyone else for that matter.

When was the last time you heard of a major U.S. political figure go overseas and be refused a meeting with a foreign head of state, publicly upbraided and sent home like an irrelevant flunkie?

I can’t think of one.

Bolton came into the Middle East and made demands like he was the President which Bolton knew were clearly red lines for Erdogan — guaranteeing the safety of the Syrian Kurds.

And he did this from Jerusalem.

The insult couldn’t be plainer. The lack of Bolton’s self-awareness and understanding of the situation was embarrassing. And it left Erdogan the perfect opportunity to call out the Trump Administration’s policies as beholden to a foreign power, Israel.

Pompeo’s Pomp

Next up we have His Rotundity, Mike Pompeo. He goes into Cairo and gives a speech which again shows a stunning lack of specific knowledge of history. Pompeo spent most of the speech doing what he does best.

Misrepresenting history of U.S. involvement in the Middle East so ardently one really thought he should have done it in his private man place.

The other thing he did however, is what got my attention. And I have Moon of Alabamaagain to thank for this. Pompeo outlined Trump’s vision for the future of U.S. intervention in the Middle East.

And that intervention involves something Trump is good at and Pompeo isn’t.

Words.

From Pompeo’s speech (H/T MoA):

In Syria, the United States will use diplomacy and work with our partners to expel every last Iranian boot, and work through the UN-led process to bring peace and stability to the long-suffering Syrian people. There will be no U.S. reconstruction assistance for areas of Syria held by Assad until Iran and its proxy forces withdraw and until we see irreversible progress towards a political resolution.

— MIKE POMPEO, SECRERTARY OF STATE

To be honest, the Trump administration actually engaging in something approximating diplomacy would be a welcome start. Because, to this point, there has been precious little diplomacy in the way the administration as comported itself.

Whether this was by design or a consequence of the paralysis imposed on it by a rebellious Deep State and political opposition is, frankly, as irrelevant as most of the words that come out of Pompeo’s mouth on most days.

But, grudgingly, I’ll concede this is a good sign. As always with Trump, the follow-through is what’s important. He should know that from his golf game.

Back in the Iraq-SSR

To whit, the Asia Times just ran an article wondering what is Trump up to in Iraq? Pulling the troops out of Syria only to relocate them to Iraq to retrench there after another embarrassment — recent electoral loss of our guy Abadi — seems at odds with Pompeo’s words.

Baghdad played host to a kick-off conference of the new NATO Mission in Iraq or (NMI).

According to the press release issued by NATO’s Allied Joint Force Command in Naples, the conference was attended by “key leaders from across the Iraqi Security and Defence sector. They included the Iraqi Chief of Staff, General Othman Al-Ghanimi” and representatives from various international partner missions, organizations and entities such as the Combined Joint Task Force Operation Inherent Resolve, the European Union Advise Mission in Iraq, the United Nations Assistance Mission Iraq, and the Office of Security Cooperation-Iraq and Diplomatic Missions.

The NMI Commander, Canadian general Dany Fortin, introduced the mission’s mandate, vision and aim as a “new iteration of a long-standing relationship” between NATO and Iraq, one that will bring together “expertise and best practice in security/defence sector reform, institution building and training and education from the entire Alliance and its partners.”

We’re cozying up to the Iraqi military as NMI has the backing of prominent Iraqi generals, while the Iraqi political leadership, no longer ‘our guys,’ refused to meet with Trump when he landed in what Trump called ‘our base.’ But we have no bases in Iraq. We are there at the pleasure of the Iraqi government, a government that now no longer necessarily wants us there.

Again, a U.S. official, this time Trump himself, using the wrong words and the wrong diplomatic protocol now wants to engage in dialogue with people who we’ve invaded, abused, spat on and murdered.

So, is this a change in direction in U.S. foreign policy or a response to the ‘wrong people’ coming to power politically and the U.S. looking to shore up support with the military?

In other words, has anything really changed?

Face the Face

For another example I turn to U.S. Ambassador to Germany, Richard Grenell, who just sent a letter to both Uniper and BASF to stop work on the Nordstream 2 pipeline or else face further U.S. sanctions.

The Bild report raised the ire of some German politicians in Berlin. Fabio De Masi, a top Left Party MP, demanded that the government reprimand Grenell, saying: “The US Ambassador seems to make an impression that he is a viceroy of the Washington emperor.

This is the real face of Trumpian diplomacy. Stop acting in your own best interest or we’ll bankrupt you.

The situation at this point is pretty clear. While our military strength is formidable it is not, however, a blank check to enforce political edicts anymore.

In a world where U.S. prosperity is dependent on the prosperity of the entire world, threatening financial ruin is just as much of a bluff as threatening physical ruin.

And we’re seeing that bluff being called a lot. Country after country are now simply showing U.S. strongmen like Pompeo, Bolton, Mattis and even Trump himself, the door and there is little to no real response from them.

• Trump tried to scare Erdogan into submission with sanctions and a collapse of the lira last year. When it didn’t work, Erdogan knew where his allies were. He acted accordingly, siding with Putin’s energy security for Turkey rather than a mercurial U.S.

• India did the same thing over the purchase of Russian S-400 missile defense systems. They said some nice things, invited us to talks and then sent us packing without a deal.

• Germany refuses to yield on Nordstream 2.

• Qatar was the first to pull out of the Syrian conflict and then turned around and negotiated a major exploration and development deal with Iran in the North Pars gas field.

• Even Japan is in constant talks with Russia about working out their differences officially (again, against U.S. wishes) and sign a peace treaty. Japan needs Russian energy badly and Putin is patient enough to wait Prime Minister Shinzo Abe out while calling out his hypocrisy.

War of Words

All of these words and ineffectual bloviations point to the same thing, despite Trump’s bluster. The U.S. isn’t respected the same way it once was. And the countries caught between the growing stature of China and Russia and the fading glory of the U.S. sense this shift and are placing their bets accordingly.

Trump senses this and, in many ways, doesn’t care about them. He’s focused on what he sees as old debts, not future liabilities. He’s worried about getting everyone to pay up and pay us back rather than excising the sunk costs and shoring up the finances at home.

He’s coming around to the view that these commitments — Iraq, Syria, Afghanistan, Pakistan, etc. — can never recoup the losses. So, while Putin, Xi, Erdogan and Modi wait him out on when we’re leaving Asia, he’s trying to wait out the Deep State’s and his staff’s obsession with staying here.

In the meantime all we’re left with is a lot of words, full of sound and fury, signifying the end of the geopolitics as we’ve known it.

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