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Authored by Mike Shedlock via MishTalk,

Fresh on the heels of UC Berkeley saying they cannot trust kids to grade teachers, comes an even sillier Columbia idea.

According to a Columbia University PowerPoint presentation Trusting Students to Assess Themselves, inclusive grading starts by “trusting students to assess themselves.”

I picked that link up from Columbia University Seminar to Promote ‘Inclusive Grading’.

Rationale for Self-Grading

Teachers don’t know how to grade or don’t want to take the time.

Honor Code

Not to worry. Columbia university will ask students to sign a pledge card so they won’t cheat. That’s sure to fix everything.​

86% of Students Like It

“It was nice to know your grade right away and not torture yourself over a bad exam for a whole weekend.”

Start by Trusting Students

Yes, Let’s Trust Student Evaluations Except ….

Two days ago I noted The University of California, Berkeley is very unhappy with how students grade teachers.

Students Say They Prefer White Male Professors: We Cannot Allow That, Can We?

A Berkeley professor wants to nix student evaluations of teachers because students are biased.

“I Know the Students are Biased”

Over the next few weeks, students will get the chance to evaluate their professors and TAs. They’re going to get it wrong. They’ll be harder on women and people of color than on white men. Tenured white male faculty, in particular, should help their students understand this. 1/8

— Brian DeLay (@BrianDeLay) November 25, 2018

There you have it. Let’s not ask students to rank teachers because “I, Brian DeLay, know the students will get it wrong.“

It is the height of arrogance for DeLay to tell students that he knows they are biased and wrong.

Ironically, we are supposed to believe students will display bias when grading teachers but the students will have absolutely no bias when grading themselves.

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With global stocks suffering a bout of unprecedented volatility in the past two months, and the S&P routed by not one but two corrections in 2018, traders have been understandably shaken – and in many cases stunned – by a market in which nothing seemed to be working for the first 11 months of the year (although now that the US-China trade war has been put on hold for the next three months, we may yet see a burst of year-end euphoria as BTFDers come out in force).

However, not even the most jittery market since the financial crisis, one which saw virtually every major asset class generate barely any positive returns in 2018, and most were sharply lower…

… has managed to sap the sellside analyst crew of its traditional optimism.

According to Bloomberg calculations, of the 14 forecasts for 2019 from firms it tracks, the average prediction as of Nov 30 is for the S&P 500 to rise 11% to 3,056 by the end of next year. And while the steepness of the forecast path partly reflects the damage done to stocks since September, it’s the most optimistic call since the bull market began in 2009, according to Bloomberg’s Lu Wang.

This chronic sellside resilience contrasts with sullen investor mood, where as reported previously individuals are raising cash at the fastest pace since the financial crisiswhile hedge funds are rotation out of growth names and turning all-out “defensive.”

Countering the growing investor paranoia which has had the market rug pulled from under its feet on every occasion a consensus emerged to buy the dip, Wall Street analysts claim that despite the rout over the past two months, there is little evidence that a market crash is looming. Indeed, while overall economy growth is decelerating – in some cases sharply – corporate profits are still expanding. As a result, while the threat of a trade war and higher interest rates is real, the fear has probably gone too far, as reflected in a steep decline in valuations, according to Credit Suisse’s Jonathan Golub, who has the most optimistic target at 3,350.

Well, yes and no.

With the S&P P/E multiple shrinking to about 16.0x forward EPS forecasts, the S&P 500’s multiple is down 15% from a year ago, and while it is near the cheapest level since early 2016, it is still well above its long-term historical average. Also, while in 2018 profits jumped almost 25% – even as stocks are just 3% higher after last week’s furious rally – profit growth is expected to grind to a crawl in 2019 as Trump tax cuts are anniversaried and as the global economic slowdown and the fading of the Trump fiscal stimulus turns into a headwind.

“We have pretty strong valuation support for the market. I think investors are too bearish,” Palisade Capital Management CIO Dan Veru told Bloomberg; his view is one of the more extremely bullish heading into the new year: “They are taking these near-term headwinds, drawing a straight line, and given how long this expansion has been in place, saying this has to be the beginning of the end. My view is, we’re in the fifth inning of a nine-inning ball game.”

Not everyone agrees: Mike Wilson at Morgan Stanley has the least bullish forecast for 2019, and expected the market to be unchanged this year, with a year-end target at 2,750. Echoing what we noted above, Wilson expects the pace of profit expansions to slow to just 4.3 percent, an 80% drop from the 25% growth seen this year; he also sees the odds for a technical recession rising as global demand weakens. In fact, Wilson did not mince his words, and two weeks ago said that the S&P is now officially in a bear market, as buying the dip no longer works.

Elsewhere, Bank of America’s Savita Subramanian no longer sees the S&P rising next year. As we reported two weeks ago, the BofA strategist expects upside to equities through year-end and into next year and thus maintains her 2018 year-end target outlook for 3000 on the S&P 500 as a result of “still-supportive fundamentals, still-tepid equity sentiment and more reasonable valuations keep us positive.”

But in 2019, BofA now sees elevated likelihood of a peak in the S&P 500; not helping is BofA’s rates team calling for an inverted yield curve during the year (same as Goldman which expects the yield curve to invert in the second half), and with homebuilders peaking about one year ago and typically leading equities by about two years, the bank’s credit team is forecasting rising spreads in 2019.

“We suspect that we see a peak in equities next year, but bearish positioning and weak sentiment in stocks present upside, especially if trade risks subside, keeping us constructive for now,” Subramanian told clients in mid-November. As a result, Subramanian is urging investors to buy utility stocks as a hedge against market declines. She expects the S&P 500 to linger around 3,000 before retreating to end the next year at 2,900, down 100 points from its 2018 closing level.

BofA’s chief investment strategist, Michael Hartnett, is even more pessimistic expecting “big lows” in the market over the next few months as “the era of excess returns in bonds and equities has ended“…

… while the continued shrinkage in global central bank balance sheets will only add to the rising headwinds.

Meanwhile, in the aftermath of the biggest selloff in years, a sense of caution is creeping up even among the optimists. As Bloomberg notes, even the biggest bull is turning a bit defensive: Jonathan Golub at Credit Suisse this week downgraded cyclical stocks such as banks, industrials and materials producers while raising recommendations for companies seen offering stable income and dividends, like health-care and consumer staples. He expects the S&P to rise almost 600 points by December 31, 2019 from its Friday close, hitting 3,350.

What is more surprising, is that despite his headline optimism, reading between the lines of Credit Suisse forecasts one would be left with the impression that a recession is imminent: the bank shows that the market historically stops gaining about 6 months ahead of a recession…

… while on virtually all occasions since 1968, a bear market has been associated with a recession.

Still, with the exception of Morgan Stanley, all strategists remain optimistic and expect stocks to go up next year from where they are now. Yet underneath the buoyancy, a gap is widening. At 22 percent, the spread between the highest and lowest forecast is the widest since 2012.

Of course, anyone listening to the “strategist siren song” should be aware of their perpetual propensity to enter the new year bullish: after all clients will trade more if they are optimistic, not if they anticipate a crash. Since Bloomberg began tracking sellside reco data in 1999, professional forecasters have never once predicted a down year, with the average annual gain coming in at 9%.

But before we even get to 2019, there are still four weeks left for 2018; the average sellside forecast is for the S&P to hit 2,942. And even after the best week since 2011, the S&P 500 would need to jump roughly 7% to get there, although this weekend’s trade truce between the US and China may facilitate the release of animal spirits. Still, a 7% rally in the last month has only happened four times in the last 90 years.

Finally, for those who invest based on Wall Street recommendations, keep in mind that over the past two decades, chronically optimistic strategists’ track record is anything but perfect. While their bullishness looks prescient when shares are rising – as they have been for the past decade thanks to $15 trillion in central bank liquidity – the S&P 500 has exceeded strategists’ target by 4.4% points a year during this bull market.

That in mind, any investors who had listened to bullish sellside recommendations during the last two bear markets would have lost half of their investments. And with central bank liquidity now going into reverse, investors may

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Much has been said about the threat that some $3 trillion in BBB-rated bonds (out of a total investment grade universe of $6.4 trillion) present to the credit market, with growing fears that the next economic slowdown will see over $1 trillion in “fallen angel” credit swamp the junk bond market, sending yields and spreads sprinting higher. Less has been said about the risk of higher-rated A and AA bonds being downgraded to BBB on their way to junk (although we touched on this threat too last Friday in “A Record $90 Billion A-Rated Bonds Downgraded To BBB In Q4“).

But while the risk of a wholesale downgrade of the investment grade market is increasingly being priced in by the market – even if the timing remains suspect and might even be postponed if the Fed were to cut rates in 2019 as JPM observed overnight when noting the inversion in the front-end (2Y-1Y forwards spreads) of the US curve, a new big concern for the credit market is emerging, and here the timing of the imminent threat is all too urgent.

Because while some may be tempted to ignore the BBB downgrade “wall of worry”, corporate America is now facing a “maturity tsunami of worry” that is some 1.6 trillion dollars high.

As the following chart from BNP Paribas shows, a wall of maturing debt is about to slam head on into S&P 500 companies. Commenting on the chart, BNP understandable writes that it is “concerned by the maturity wall of bonds that need to be refinance over the next few years.” And, as Bloomberg’s Sebastian Boyd observes, said maturity wall is made even scarier by adding the amount available in untapped revolvers, which is money that in theory doesn’t need to be paid back and splits the counterparty risk with the company’s bank lenders (see GE).

More than a wall, the debt coming due is a wave that has been building for a decade. Or, as we called it above, a tsunami, which will hit both viable and “zombie” companies with billions in higher interest expense costs once the wave finally breaks, some time in 2019.

That said, nothing shown in the chart above should come as a surprise as the amount of newly issued debt (and also debt coming due) has been growing at an exponential rate over the past decade. Indeed, a historical chart looks truly impressive – or terrifying – considering that the amount of investment-grade bonds coming due in 1-3 years in June 2007 was only $360 million. Back then the spread on the overall index was in the mid-90s, roughly where it was in the first months of this year. However, as Boyd notes, the market cap of the Bloomberg Barclays 1-3 Year Credit index reached a record high of $1.4 trillion at the end of September, or roughly three times what it was before the crisis.

Finally, just as troubling is this chart from SRP which in addition to IG, also incorporates the amount of junk bond maturities in the coming decade.

Needless to say, as trillions in debt mature over the next several years and have to be rolled over into debt with far higher yields and cash coupons, corporations will be saddled with tens of billions in additional annual interest expense costs, money which CEOs and CFOs would have otherwise used to fund stock buybacks.

As for the other key question – whether this $1.6 trillion “debt maturity tsunami” results in a cascade of defaults – that will be answered by Fed Chair Powell: unless the Fed takes aggressive action to cut rates (and keep zombie companies alive), between the “falling angles” and the rotting “zombie companies” that are about to die for the last time, the next two years of mass defaults should prove to be quite exciting for those who still have dry powder to go angel and/or zombie hunting…

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Satellite images from Sunday obtained by Fox News confirms that Russia has deployed an S-400 surface-to-air missile battery at Dzhankoy airbase in Crimea, roughly 19 miles from the Russia-Ukraine border. The photos confirm Russia’s planned deployment which we reported on Wednesday.

The intelligence report by ImageSat International indicates that the infrastructure for the S-400 battery was prepared in recent months, a long time before last weekend’s naval encounters that sparked new tension between Russia and Ukraine.

The images showed a bare ground in April 2018, and construction by November 10 – two weeks before the recent escalation. –Fox News

The S-400’s eight launchers can be seen in four groups located in the southwest region of the airbase, while two radar systems are deployed in two nearby vehicles – one of which is suspected to be carrying S-400 missiles. 

Days after Russia captured several Ukrainian naval vessels along with 24 sailors, Moscow announced the deployment of the S-400 system, escalating the conflict in the region. Ukraine, which is now in a state of martial law over what President Petro Poroshenko calls the “threat of a full-scale war with Russia,” says that “the number of [Russian] units that have been deployed along our border has grown dramatically.” 

Though likely the plans were already in motion, the timing of the S-400 deployment announcement is designed to send a strong message to the West, which is also building up its forces as both the UK and US are reportedly injecting more military hardware and troops into Ukraine. 

The S-400 mobile missile system has an effective range of nearly 250 miles and is intended to bring down a variety of aerial threats – “from aircraft to cruise and ballistic missiles,” according to Fox. 

The system made its debut in 2007, succeeding the S-200 and S-300 batteries. According to CNBC, “the Russian-made S-400 is capable of engaging a wider array of targets, at longer ranges and against multiple threats simultaneously,” vs. US-made systems. 

In terms of capability, one source noted that while there is no perfect weapon, the S-400 eclipses even THAAD, America’s missile defense crown jewel.

When asked why nations seek to buy the S-400 instead of America’s Patriot or THAAD systems, one of the people with knowledge of the intelligence report explained that foreign militaries aren’t willing to stick with the cumbersome process of buying weapons from the U.S. government. –CNBC

During this weekend’s G20 meeting in Buenos Aires, Russian President Vladimir Putin said that it was “too early” to release the Ukrainian sailors, saying that it was necessary to hold the sailors captive while a legal case was constructed that would show that the three Ukrainian naval vessels were in violation of Russian territorial waters – and that the ship’s logs would reveal their attempt to cross the Kerch strait from the Black Sea into the Sea of Azov, which is enclosed by Russia, the Crimean peninsula and mainland Ukraine. 

When asked if the Kremlin might be willing to exchange the sailors for Russians detained by Ukraine, Putin replied: “We are not considering a swap and Ukraine did not raise this issue, and it’s too early to talk about that. They are still being investigated. We need to establish the fact that this was a provocation by the Ukrainian government and we need to put all these things on paper.” 

Putin also suggested that the incident was part of a wider pattern of provocation by Kiev. 

“The current Ukrainian leadership is not interested in resolving this at all,” said the Russian leader. “As long as they stay in power, war will continue. Why? Because when you have provocations, such hostilities like what just happened in the Black Sea … you can always use war to justify your economic failures.” 

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American drug overdose deaths surged above 70,000 in 2017, a 10% jump to a new record as life expectancy across the country plunged for the second time in three years, according to a government report out Thursday.

CDC Director Robert Redfield said the data was deeply “troubling.”

“Life expectancy gives us a snapshot of the Nation’s overall health and these sobering statistics are a wakeup call that we are losing too many Americans, too early and too often, to conditions that are preventable,” Redfield said in a statement Thursday, adding that the decline in overall life expectancy is linked to the accelerated rise in deaths from drug overdose and suicide.

Suicide rates moved higher, by about 3.7%. Together, these two causes of death decreased US life expectancy for the second year in a row, the CDC reported. As shown in the graphic below, most of the drug overdoses are occurring in deindustrialized regions of the country, including Rust Belt states and parts of the Mid Atlantic and North East.

Age-adjusted drug overdose death rates, by state: US, 2017

Overall life expectancy for Americans was 78.6 years in 2017, a reduction of 0.1 years. While the drop might not seem like much, life expectancy tends to rise, not reverse, which suggests the continuation of decay within the middle class.

The death rates are driven by a 9.6% jump in drug overdose deaths, from 63,632 in 2016, to 70,237 in 2017. Most of the overdoses involved opioids and or opioid analogs.

Age-adjusted drug overdose rates: US, 1999-2007

“West Virginia (with 57.8 overdose deaths per 100,000 people), Ohio (46.3 overdose deaths per 100,000), Pennsylvania (44.3), and the District of Columbia (44 ) had the highest observed age-adjusted drug overdose death rates in 2017,” the CDC report states.

NBC notes the increase was not as significant as the 21% jump in drug overdose death rate between 2015 and 2016. But warns since President Trump labeled the opioid crisis a “health emergency,” with increased federal, state and local efforts, the epidemic continues to spiral out of control.

Suicide rates are another concern. “The suicide rate in the United States has increased from 10.4 suicides per 100,000 in 1999 to 14 (per 100,000) in 2017,” a second CDC report reads.

“Suicide rates have increased since 1999 for both males and females ages 10-74. Rates in the most rural U.S. counties are nearly two times higher than rates in the most urban counties.”

“This increase in the suicide rate is extremely discouraging,” said Dr. Christine Moutier of the American Foundation for Suicide Prevention. “Until we scale up intervention efforts at the community, state and national levels, we will likely continue to see an increase in suicides in the United States.”

Age-adjusted death rates for the 10 leading cause of death: US, 2016 and 2017

The case can be made that, contrary to the administration’s claims of “the greatest economy ever,” the American economy is not quite that robust. The record levels of drug overdoses, elevated suicide rates, and life expectancy declines show that something is seriously wrong just below the surface of the otherwise strong economy. 

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For now, FX markets remain the only ‘liquid’ course of reflection on the Trump-Xi trade-truce ‘deal’ and China’s offshore yuan has spiked over 6 handles (back below 6.90/USD) implying a solid jump at the open for US equity futures…

A big jump for sure in offshore yuan but remains well below the early Nov spike highs…

On a side note, JPY has weakened, but remain unable to erase all of Powell’s dovish speech surge…

 

And extrapolating from last week’s moves, offshore yuan implies an open for S&P futures around 2800…

Which, as we noted earlier, is exactly in line with one “base case” which correctly predicted that a Truce – in which existing tariffs stay in place – is the most likely outcome (with a 70% chance), while also accurately predicting a 3 month ceasefire, the agreement will be enough to get the S&P to 2,800…

… so look for a burst of buying in the S&P over the next 24 hours which pushes the stock index higher, but not much higher as trader concerns will next revert back to the Fed which now that trade tensions have been temporarily removed, may promptly revert back to its hawkish bias and resume rising rates well into 2019 which in turn will be the next bearish event-risk to put a damper on any substantial Christmas rally.

And while spread-betting markets are signaling around a 250 point gain at the open for the Dow…

It is clear that there is little follow-through since the initial spike.

We await the algos open to see just what can be made of this so-called ‘truce’.

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Via Dana Lyons’ Tumblr,

Formerly lagging equal-weight indices are attempting a comeback — a development which would bolster the odds of a significant rally.

This past summer, we began detecting signs of a thinning out of the U.S. equity rally, a trend which would eventually contribute to the recent market correction. One manifestation of that internal weakening was seen in the various “equal-weight” indices that we track, as noted in a late July post.

As the name implies, the equal-weight average weighs each of an index’s components the same, in contrast to popular cap-weighted indices which place more weight on larger stocks. Cap-weighted averages can give one a distorted view of the health of the broad market at times if they are being unduly influenced by a relatively small number of stocks. On the other hand, an equally-weighted index can give us a better sense of the level of participation across the entire index.

The benefits of widespread participation (and vice versa) can be seen in a ratio of an equal-weight index to its cap-weighted counterpart. For example, see this chart of the performance of the Invesco S&P 500 Equal Weight ETF (ticker, RSP) vs. its cap-weighted counterpart, the S&P 500 SPDR ETF (SPY). As you can see, when the ratio was heading higher (i.e., the equal weight RSP was out-performing), stocks trended higher. However, when the RSP has declined on a relative basis, we have tended to see the stock market suffer — as it has over the past several months.

We can see the same general tendency in the ratio between the First Trust Equal Weight Nasdaq 100 ETF (QQEW) and the cap-weighted Invesco Nasdaq 100 ETF (QQQ). Though, given the overall dominance of the QQQ over the last dozen years, it is easier to see the benefits of the QQEW when the ratio is rising, e.g., coming off of the 2009 low and during the 2013 surge.

Unfortunately, as we mentioned, the equal-weight indices have struggled on a relative basis for most of the year, foreshadowing the recent rough patch in the market. However, they are presently attempting to stage some positive progress toward erasing at least the most recent deterioration suffered over the past several months. To wit…

In the July post, we mentioned that the RSP:SPY ratio was breaking down to new 5-year lows, below the former lows from 2016 and early 2018. That opened the way to a more accelerated decline in the ratio — and the swift recent selloff in the market as as whole.

At present, however, the RSP:SPY ratio is attempting to reclaim that breakdown area, a development which would likely be a sign of improving internals — and perhaps a tailwind for the market.

We are seeing a similar development in the QQEW:QQQ ratio. In this case, back in May, the ratio dropped below a trendline connecting (and supporting) a series of lower lows in the ratio going back to 2008. This too led to a swifter decline in the ratio, contributing to the recent sharp declines in the Nasdaq and technology sector.

However, as with the RSP, the QQEW:QQQ ratio has jumped in recent weeks and is challenging its former breakdown level.

Now, at times, these equal-weight ratios can see swift improvement during portions of a market correction when market participants begin to punish the largest caps to “catch up” to other stocks to the downside. However, in this case, the relative improvement in the equal-weight indices has occurred since the initial correction low in late October. That gives us some measure of optimism that this latest improvement in the broader market is legit.

The key, though, is what transpires at the breakdown levels of the respective ratios. Should they decisively reclaim the former breakdown levels, it should be a good sign for stocks in the short to intermediate-term. Should they fail here and resume their downtrends, it would be a sign that all is still not healthy in the broader market. We will continue to monitor these developments and provide updates in our AM Daily Strategy Sessions at The Lyons Share.

*  *  *

If you’re interested in the “all-access” version of our charts and research, please check out our premium site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Given what we believe will be a treacherous market climate going forward, there has never been a more important time to reap the benefits of our risk-managed approach. Thanks for reading!

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Last week, Americans learned depressed commodity prices and the escalating China-US trade war had sparked a farm bust across the Midwest region, sending farm bankruptcies to levels not seen since the great financial crisis.

Farmers fear China will never return to US soybean markets, as they have now explored new sources in South America.

According to Hellenic Shipping News, new evidence shows the US is “about to lose its leading position in global soybean exports to South American countries in 2019 as China seeks new import sources” because of President Trump’s trade disputes with China. 

Argentina, a significant global soybean producer, will dramatically boost its soy exports to China from an average of 7-8 million tons in the last several years, up to 10-15 million tons in 2019, Nicolas Pawlusiak, a spokesperson with the Rosario Board of Trade, which is based in Argentina, told the Global Times last week.

Pawlusiak said the growth in soybean exports from South American countries is directly due to the decline in US exports to China.

US-China trade war shifts soybeans destinations 

“China, normally the destination for 60% of all US soybean exports, slashed imports after raising tariffs on US shipments on July 06,” reported Reuters. 

“Total soybean production in Argentina in 2019 is expected to be more than 50 million tons, of which 15 million tons are for the export market, most of which will be sold to China. It’s twice the average of the past five years,” Pawlusiak said.

Zou Yesheng, deputy general manager of COFCO International Argentina, said that China’s soybean imports from Argentina would be around 10-12 million ton next year. The US exported about 30 million tons to China annually in past years, he added.

Brazil, another winner in the trade war, is expected to produce record amounts of soybean in the 2019 growing year and will increase its exports to China.

The difference between US exports prices for soybeans and Brazilian exports remains wide

The surge in production from South America will directly challenge the US’ leading roll in global supply. This would lead to larger US soybean inventories, as farmers would come under severe financial pressure, thus amplifying the farm bust in 2019.

Pawlusiak said if President Trump’s trade war with China continues to escalate, South American soybean exports would move much higher and have even more damaging effects on US farmers.

The US government had recently stepped in, trying to cushion angry farmers whose livelihoods have been blown up by Trump’s trade war, which by the way, could turn out to be a significant policy error as the US economy enters a slowdown. The USDA announced a $6 billion bailout that gives farmers relief aid, but the real concerns have yet to come, as it seems 2019 will be a turbulent year for the American farmers. 

Video: Nebraska Farmers Feeling Impact Of President Donald Trump’s Trade War 

 

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Authored by Peter Tchir via Academy Securities,

It’s Either Tied in Bottom of 9th or in Extra Innings

I guess we should continue with Friday’s T-Report theme of treating the President Trump and President Xi meeting as though it was a baseball game.

From Friday

We walk in a run.  The game goes on, possibly to extra innings.  The real-world equivalent is some promise by China to reduce the trade deficit, us putting on hold any new or increased tariffs and both sides agreeing that Intellectual Property rights are important and that both sides agree to focus on…

…This is my highest probability scenario. 

As far as I can tell from the press coverage I’ve seen

• China agreed to buy more agricultural and commodity goods (as we’ve been suggesting all along is part of the ‘easy’ deal)

• We agreed not to go ahead with the scheduled tariff increases (which were hurting us as well)

• Both sides have agreed to talk more with what seems like a 90 day target for progress (though a timeline that could easily be extended again)

Is this ‘Deal’ Good Enough for Markets?

It seems like this should be good enough for markets to continue with the rally that took S&P 500 and Nasdaq up 4.9% and 5.6% respectively on the week.

I think the outcome is marginally better than what people were pricing in and took some of the disaster scenarios off the table.

I would expect VIX to collapse now that the biggest wildcard is either off the table or at least postponed.  (Brexit and Italy while moving Europe around seem to have lost their ability to whip U.S. markets back and forth – for now).  We have Mueller and the change in the House in January to deal with on the domestic front – but that seems to be a few weeks away, which in this choppy market, can seem like a lifetime.

The biggest driver could be the market’s view, which we share, that Powell is trying to walk back a little on the dogmatically hawkish side (though part of this apparent change makes perfect sense for a data dependent Fed that is seeing the data weaken).

Corporate bonds were noticeably weak and an outlier on Friday.  Despite the S&P 500 and Nasdaq both gaining about 0.8%, the CDX IG index was a ½ bp wider on the day, high yield was down roughly a ¼% depending on whether you looked at CDX HY or the big HY ETFs.  The leveraged loan market bounced a little (at least BKLN did) but floating rate IG corporate bonds continued to trade poorly. 

The Bloomberg Corporate bond OAS moved out 2 on Friday to 137 (from 109 in the middle of October), and it probably understates the weakness as the bond indices tend to lag their traded Beta counterparts when tracking moves to the downside (for example, corp bond spreads widened according to the index on Wednesday while CDX IG gapped 5 bps tighter and even the often ignored LQDH rallied). 

If VIX can come down and the new issue calendar can show signs of slowing into year-end, credit should be able to turn around – but since its weakness on Friday was noteworthy, across the board, we will be watching that closely.

Bottom Line

Assuming the reporting we have seen so far is accurate, this deal, coupled with some oversold technicals and generally favorable seasonality, I’d expect a moderate risk-on move to begin.  

But, since I am already trying to think about what could derail this move, and when to start cutting back on risk again, I think the rally won’t be as big or long lasting as I’d like to see.

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