Tag: news

Authored by Lance Roberts via RealInvestmentAdvice.com,

Yesterday, as I was researching the data on the Fed’s balance sheet as it relates to the future direction of interest rates, I stumbled across an interesting piece of analysis.

The chart below shows the deviation of the market from the underlying liquidity provided by the Fed’s balance sheet.

Not surprisingly, in 2006-2007 as the deviation reached extremes, market liquidity became problematic. While we only recognized this in hindsight, the correlation is important to consider.

Currently, this “Brawny Market” has become the “quicker picker-upper” of market liquidity. The issue becomes, as discussed yesterday, with the Federal Reserve beginning to extract liquidity from the markets, along with the ECB tapering their QE program simultaneously, at what point does liquidity once again become a problem? 

For now, however, market exuberance has completely overtaken investor mentalities. Such is not surprising as we head into the 9th-year of the current bull market advance. As shown in the chart below, the current market conditions, while bullish and positive which keeps portfolios allocated toward risk, are at levels seen only three-times previously.

Such does not mean a “crash” is coming tomorrow, but it does suggest that this “Brawny Market” has much more limited upside than what most investors currently believe.

Remain long equities for now. But don’t forget that what goes up, will eventually come down. So it is worth paying attention to the risk and having a plan of action in place to do with the eventual reversion when it comes.

Just something to think about as you catch up on your weekend reading list.

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What a week…

 

Quick summary of this week’s records:

• Record highs for S&P, Dow, and Nasdaq.
• Lowest VIX close ever.
• First time VIX has ever traded at or below 9.00 for 3 straight days ever.
• Nasdaq’s best start to a year since 2004.
• Near record streak for stocks to remain within 5% of all-time high ever.
• Individual investors highest stock exposure since 2000.
• Fastest yield curve flattening since 2007.
• Longest streak of complacency for risk ever.
• Longest winning streak for gold ever.
• Longest winning streak for global commodities ever.

So stocks opened gap up on Tuesday and never looked back…Nasdaq was the week’s big winner…

 

 

As SentimentTrader.com notes, individual investors have the most stock exposure since 2000, and their short-term optimism is now rising. It has done an about-face during the past two months, going from pessimism to the 2nd-highest optimism since the 2009 low.

 

Additionally, Citi’s Macro Risk Index has now been below its neutral level (meaning relatively low risk aversion) for the longest period in its history starting in 1997. The last time it measured higher than average risk aversion was November 2016.

 

VIX closed at record lows this week and traded at 9.00 or lower for 3 straight days – something it has never done before…

 

 

Gold was the day’s big winner post-Payrolls… until the late-day meltup in stocks…

 

 

Investors were buying anything with risk… High Yield bonds had the best week in 5 months, smashing back above the 200DMA…

 

 

Despite all the equity exuberance, the Treasury yield curve hit new cycle lows and ended flatter on the week…

 

 

Treasury yields did rise on the week, snapping higher today after the dismal jobs data…

 

 

The Dollar Index fell for the 4th straight week, closing at its lowest since September…

 

 

Gold and Bitcoin had a big week….

 

 

Copper’s first weekly drop in a month as the rest of the commodity space surged to the longest daily win streak in history…

 

 

And in crypto-land, Ripple unraveled today – crashing 35% – before ramping back higher on headlines about Western Union adopting the protocol… ETH (topped $1000) just outperformed XRP on the week…

and Bitcoin topped $16,500…

 

 

 

And don’t forget – Tepper and Cohn have now told you that stocks are not expensive…

Nope…

Nope…

 

 

 

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For years, equity market investors have been cajoled into stocks by their commission-rakers with four simple words – “there is no alternative” – often shortened to the acronym ‘TINA’.

The argument went that since bonds had such low yields, you were a mug not to buy stocks with every penny of your retirement funds.

But as of this week, that argument is no more. TINA is dead…

For the first time since 2008, 2Y US Treasury bond yields are greater than the dividend yield of the S&P 500…

 

 

Of course, just as the TINA analogy triggered stocks fund managers to pitch their assets, so this latest swing in yields has brought back the bond managers with the same extremes…

“It’s the right strategy if you’re looking for income,” said Andrew Brenner, head of international fixed income at Natalliance Securities in New York.

“You should be moving all your assets and risk into shorter fixed-income because you’re getting paid for it.”

Perhaps the ‘all-in’ approach should be tempered a little.

As Bloomberg reports, Leuthold Weeden Capital Management’s Jim Paulsen said,

“Right now, people are frozen at the stick with this one-way market. It’s hard to make a decision because every day you wait, equities go up again…

What would change that is if there’s an event that alters the risk profile of the credit or stock market. Then you’d see real flows as people make adjustments.”

Of course, there is something to be said for holding bonds, as PIMCO notes, bonds are different… and a lot less risky (but then again, with the constant propaganda being spewed by mainstream business media and White House alike, who can even remember when stocks were risky?)

 

But as Bloomberg notes, any reallocation may only come after substantial pain in U.S. markets. But once it does, the shift in yield seeking behavior could exacerbate damage to equities or credit as demand for bond proxies evaporates, Paulsen said.

“It’s been reinforced for a pretty long that it’s a working strategy,” he said.

“It’s like anything — if it’s outperformed for that long, there are most certainly too many people riding the train.”

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Something odd is going on in China. On one hand, the PBOC has been soaking up excess liquidity from the market like a drunken sailor, and after not conducting reverse repos for 10 consecutive days, it has reduced the excess liquidity level by 510bn yuan in the latest week as existing open market operations matured, and roughly half that in the week prior.

On the surface, this would suggest a sharp tightening in monetary conditions, and yet precisely the opposite is taking place: over the past week, instead of rising short-term rates – the traditional indicator of tighter conditions in China – yields on Chinese short-dated instruments have tumbled. Putting the move in context, 1Y yields have plunged nearly 20bps in the first week of 2018, the biggest weekly slide since June 2015.

In parallel, on Thursday the 7-Day repurchase rate slid to the lowest since April.

While some have provided theoretical explanations, nobody really knows what is going on. In fact, some such as Citi have put on the tinfoil hat and speculate that the PBOC is covertly adding tons of liquidity on the short-end of the curve, to wit:

It looks like the PBoC has been adding quite a lot of liquidity in the shorter end of the curve in recent days -with a variety of interbank rates softer, and the 1y CGB yield notably lower by 21bps YTD whereas 5s and 10s yields have stayed broadly flat. 

Assuming that Citi is correct, it would explain many things, not least of all the stunning surge higher in Chinese, global and even US stocks. This is how Citi puts it:

Against that background, it is no surprise that equity markets have been so well supported and the SHPROP has exploded upward.

Finally, the bank puts the move in the context of declining Chinese producer price inflation, as well as the surging Yuan:

While it is always possible that early-year developments can be attributed to year-end positioning being adjusted, easier liquidity definitely provides some cushion for the PBoC against rising real rates if the PPI continues to fall, and the exchange rate continuing to show some modest appreciation.

Meanwhile, Bloomberg was quick to rain on China’s parade, first highlighting some other possible reasons for the plunge in short-end rates:

Relief was palpable in the market this week after typical year-end liquidity tightness passed and the central bank said it will let banks use reserves to meet funding needs during February’s week-long Lunar New Year holidays. The one-year government bond yield has plunged 17 basis points since markets re-opened in the new year, set for the biggest weekly slide since June 2015, when China slashed rates.

… then quickly nothing that despite the drop in short-end yield, the 10-year yield has kept climbing, causing the yield curve to steepen sharply.

That is not good, because as Bloomberg then explains, the failure of the 10-year yield to follow the short-end lower suggests traders are still bearish on the factors that made China one of the world’s worst-performing bond markets in 2017. Commodity prices are rising, the U.S. is still on a tightening path, and the People’s Bank of China has skipped cash injections for ten straight days, a sign it’s reluctant to ease funding conditions significantly.

“The PBOC’s maneuver shows on the short end, it’s guaranteeing that you won’t have any problems,” said James Yip, a Hong Kong-based money manager at Shenwan Hongyuan Asset Management. “If people are more upbeat cyclically, it means their expectations are more optimistic about the economy and inflation, which is a worry for the long end. Plus you still can’t see any loosening or resolution in the whole regulatory framework.”

True, the sharp steepening may be bad for bond market, but for now at least it is welcome news for stocks, and if Citi is right, the PBOC now has an explicit – and covert – mandate

But the bigger picture remains the same: China’s economic data have been mostly stead, if on a slowing glidepath, even as the BBG commodities index jumped to a 10-month high, increasing the risk of faster inflation. At the same time, the latest set of Federal Reserve minutes show gradual U.S. tightening is still on track, giving China some pressure to follow suit.

And in a sign curbing financial risks remains an official goal, policy makers tightened supervision of entrusted bond holdings to curtail leverage, Bloomberg News reported on Thursday.

Investors “are still very much worried about funding conditions before the Spring Festival and regulations, so they’ve concentrated their holdings in short-end ‘haven’ types,” Qin Han, a fixed-income analyst at Guotai Junan Securities Co., wrote in a note. “Although funding conditions are extremely loose, investors have been scared stiff.”

Of course, one wouldn’t know it from looking at stocks, either in China or the US, where daily records are now the norm. On the other hand, if this is nothing but more PBOC liquidity injections, then the party is about to end as soon as the Chinese central bank is forced to reverse its covert monetary policy, and soaks up liquidity from the short end, and risk assets, and reverts to more conventional monetary instruments, even as financial conditions around the globe continue to tighten…

 

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Authored by Zainab Calcuttawala via OilPrice.com,

A new investigation by the Government Accountability Office (GAO) says the Obama administration took an inconsistent amount of time to approve applications for seismic testing for offshore oil and gas drilling, a report by The Hill says.

 

Depending on the regional office, some applications were approved within a day and others would take almost a year to go through the process.

The National Marine Fisheries Service (NMFS) and the Fish and Wildlife Service (FWS) did not record application turnaround times consistently either.

“Until NMFS and FWS develop guidance that clarifies how and when staff should record the date the agency determines the ‘adequacy and completeness’ of an application, the agencies and applicants will continue to have uncertainty around review time frames for incidental take authorizations,” GAO said.

“Moreover, NMFS and FWS officials we interviewed said that they do not analyze their review time frames, a practice that is inconsistent with federal standards for internal control.”

Seismic analysis, which allows oil and gas companies to determine potential reserves in the underwater areas they would bid on to lease, is a controversial practice for environmentalists. They claim it unduly disturbs the wildlife.

An unpredictable bureaucracy generally makes it difficult for high cost, high risk businesses, like the oil and gas industry, to run on a set schedule. The report makes Obama’s executive branch seem unfriendly to the industry, though the previous White House did reverse forty years of restrictions on American fossil fuel exports.

“Seismic research is vital to unlocking energy potential off our coasts, and federal red tape is standing in the way,” Utah Rep. Rob Bishop, who requested the report, said. “GAO’s report highlights the bureaucratic dysfunction, lack of transparency and blatant abuses of discretion that has stalled greater exploration and development.”

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Yesterday the Dow Jones crossed above 25,000 for the first time ever, making the trek from the previous millennial level of 24,000 in  just 23 day: a record short interval of time. There was just one problem: retail investors refuse to get onboard for the voyage.

Ah yes, retail investors: long beloved on Wall Street because they miss every equity bull market then inevitably join the party too late and serve as the buyers of last resort that soak up the supply of overvalued garbage being dumped by hedge funds, banks and other institutions at end of every bubble. Showing up to the party too late and then riding the crash is just kinda their thing.

As the Wall Street Journal points out this morning, that cycle appears to be repeating itself with the current equity bubble. Well, only the first part, because no matter how high the market rises, retail investors just can’t stop selling. In fact, since 2012 retail investors have pulled nearly $1 trillion in capital from U.S.-focused mutual funds.

… even as the S&P has nearly tripled…

Incidentally, this is what we noted at the end of 2017 as the biggest mystery and lingering question on traders’ minds: how is it possible that while the cumulative return of the S&P since 2015 been an impressive 34%, equity flows over the same period have been consistently negative?

Aside from corporate buybacks accounting for the bulk of purchases (and central bank purchases of course), we have yet to hear a plausible explanation for how any of this makes sense. Speaking of buybacks, here is the WSJ:

The most dedicated buyer of U.S. shares has been the companies themselves. Corporate stock buybacks started ramping in 2009, hitting a record of $572 billion in 2015, before leveling off, according to data from S&P Dow Jones Indices. With the new tax law cutting the corporate rate to 21% from 35%, many analysts expect companies will use at least some of that cash to buy back more of their own shares.

Meanwhile, no matter what happens, the retail euphoria just isn’t there, and as John Fox, chief investment officer at Fenimore Asset Management, notes, Yellen’s equity bubble “is the most disliked bull market of my career…No one is excited. This is not like 1999 and 2000, where you went to a bar and CNBC was on TV.”

Well, there’s a reason why it is “disliked”: it is also the most artificial, inorganic “bull market” ever, made possible only thanks to some $20 trillion in central bank liquidity, something which retail investors appears to have grasped.

To be sure, some portion of the mutual fund withdrawals noted above are undoubtedly finding their way back into equities via ETF and direct stock purchases.  But no matter how it is spun, recent surveys confirm that American stock ownership is retreating.  62% of Americans reported owning equities, on average, between the fall of the dot-com bubble and the onset of the global financial crisis, between 2001 and 2008, according to a Gallup survey from early 2017. That number shrunk to 54% during the current bull market, from 2009 to 2017.

Not surprisingly, stock ownership is down most among middle-aged investors who got burned by two massive stock market bubbles in 2000 and 2008.

“So when the markets rebounded…there was a segment of the population that was very hesitant to get back in,” said Steven Wagner, chief executive and co-founder of advisory firm Omnia Family Wealth in Aventura, Fla. “People are always shaped by their recent experiences, and much more so by the negative ones.”

Making matters worse, not only is retail not rushing to buy stocks, many aging investors are now actively liquidating and rotating into “safer” assets.

As baby boomers near retirement age, many are paring back positions in riskier equity funds in favor of more stable holdings such as bonds, following the advice of most financial planners.

“I’m 10 years from retirement, so I’m being more cautious,” said Jeffrey Lee Schantz, a 58-year-old architect in Boston, who has put what he considers to be his nest egg into “very conservative investments,” including fixed-income funds.

Meanwhile, younger Americans, who started accumulating income only after the housing bust and financial crisis, never developed an affinity for stocks.

“I’ve always been wary of losing my money on a badly timed purchase or sale of a stock, but now I’d rather not risk losing what little money I have on a misreading of the market,” said Michelle Morley, a 26-year-old model, was a college student during the recession.

Many in the younger generation also appears to have bypassed stocks entirely in lieu of the current “get rich scheme” – cryptos:

College students and other millennials, meanwhile, have found other ways to speculate than buying the latest tech stock. Nate Reutiman, a 20-year-old Boston College student studying marketing and analytics, said he is more interested in cryptocurrencies. Last year, Mr. Reutiman and his roommates discussed contributing $1,000 each to install a mining rig, a system of computers built to find bitcoins, in their dormitory room.

For the best explanation(s) why retail refuses to buy at the top, we go straight to the horse’s mouth: their own testimonials.

There’s your generic millennial…

… then there is the PTSD sufferer who will likely never get in, no matter what.

… then there are those who find stocks simply too expensive.

… others simply don’t want to get burned.

… and finally those who just – correctly – know that the party is about to end and have no desire to be the greatest fools.

* * *

Will this time be any different and will retail hold out until the bitter end? Probably not, in fact, hoarding cash now simply means that retail investors are ‘perfectly positioned’ to provide that last bit of incremental capital that pushes equities to their absolute peak during the “blow off top” melt up the S&P finds itself in, at some point later this year or next year, just before they crash 50% – according to Jeremy Grantham – and wipe out another generation of savings.

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