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While Wall Street investors may be clinging to hope that central bankers won’t screw up the tightening process, i.e., commit a “policy mistake”, which as we showed earlier is the biggest tail risk on Wall Street today… 

… and won’t blow up what is by now the biggest consensus position perhaps in history, namely everyone (including the Harvard Endowment) being long FAANG+BAT…

… Wall Street has now given up on the so-called “coordinated global recovery”, and as BofA’s Michael Hartnett reveals in his latest Fund Managers Survey polling 223 respondents with $643BN in AUM, expectations for faster global growth have collapsed, with only net 1% of investors indicating in May they think the global economy will strengthen over the next 12 months.  This is down 4% from April and the lowest level since February 2016 when the S&P hit an intraday low of 1810 and when global economy was just emerging from its China-deval/Quantitative Tightening led turmoil. The fact that this is happening now when both the economy and the markets have been firing on all cylinders is especially troubling.

Looking ahead, while only 18% expect a recession in the next 12 month, (and 2% expect it in 2018), a fully 84% are now confident the next recession will hit in the next two years, either in 2019 (41%) of 2020 (43%).

Meanwhile, looking at positioning, BofA notes that the market froth is now gone, expectations have reset, cash remains high explaining the May rally, but consensus still positioned for risk-on and expects: “good” rise in rates, no recession until 2020’Q1.

To this, BofA’s response is “Buy In May And Sell The Rip” as growth and credit weakness will be the likely triggers for the next move lower. Here is Hartnett:

“This month’s survey presents good and bad news,” said Michael Hartnett, BofA chief investment strategist. “Although cash levels remain high and growth optimism is at the lowest level in over two years, a majority of investors say there is room to grow in this equity bull market and don’t see signs of recession anytime soon. Fund managers think the May rally can extend in the near-term.”

Meanwhile, here are the other notable observations from the latest Fund Manage Survey:

Average cash balance ticks down to 4.9% in May, from 5.0% in April, but still above the 10-year average of 4.5%, continuing the FMS Cash Rule contrarian “buy” signal. This also means that the near-term BofAML Bull & Bear Indicator is more neutral now at 4.8 (close to the midpoint between the 2.0 “buy” and 8.0 “sell” thresholds). This is the good news, although it the June FMS cash falls < 4.6%, that would be a sell signal.

The not so good news is that while funds still have dry powder on the side, and are looking for a near-term bounce, Hartnett notes that the bank’s proprietary Global FMS Macro Indicator has fallen for the sixth straight month, sliding into negative territory for the first time since November 2016. This comes alongside the abovementioned expectations for slowing global growth with just net 1% of investors indicating they think the global economy will strengthen over the next 12 months; this is the lowest level since February 2016.

More bad news: corporate margin expectations have also peaked, and in May slumped to the lowest level since late 2016; falling 8% to net 19% thinking operating margins will fall in the next 12 months. This explains why despite the fantastic beats in much of Q1 earnings season, stocks have failed to find new highs.

Even more bad news: FMS profits expectations slump to post-Brexit lows of just 10% expecting faster growth over the next 12 months; the historical relationship implies defensives set to outperform cyclicals in coming months.

Meanwhile, suggesting stagflation is just around the corner, higher inflation remains the consensus view, with net 79% of investors surveyed expecting core CPI to rise over the next 12 months, slightly down from 82% last month.

In keeping with the reflationary theme, BofA finds that allocation to commodities stays at net 6% overweight, the highest since April 2012 when WTI was $105/bbl. To BofA this is indicative of “Commodity chasing” and even though the allocation to commodities is at a 8-year high, the energy/materials positions is still playing catch-up with #1 “pain trade” of 2018 YTD: long commodities.

Even more bad news: 76% say equities have yet to peak -the majority say not until 2019 or beyond; only 19% think January marked the top – suggesting fundamentally-driven selloffs will be met with BTFDing dragging the market even more from fair declining value…

… while a third of respondents say companies are now too levered, the highest since Dec’09.

Meanwhile, as confidence in the economy is crumbling, the buyside is hoping that growth stocks will preserve their beating ways, and as we showed earlier, the top “crowded trade” is  long FAANG+BAT (short Treasuries is #2).

What can shake the consensus view? According to BofA, a weak Q2 GDP in the US or a “bad” rise in rates (watch US bank stocks); coupled with credit contagion from EM (watch Brazil FX).

As for the best contrarian trade, BofA recommends shorting banks, and going long utilities, driven by lower bond yields.

To summarize: the growth narrative is now officially dead, Wall Street is starting to cash out, but most remain hopeful that they have time before the next recession hits some time in 2019 or 2020, and since the market has not peaked just yet, at least according to the vast majority, most investors are hoping for “one final hit” in the market – perhaps at the next all time high in the S&P – at which point the collective dumping will begin.

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Having thrown in the towel on his bond bear market call two weeks ago, Janus Henderson’s billionaire bond investor Bill Gross now believes that the most recent bearish bond price (rise in yields) will stop here as the economy cannot support higher yields.

As Gross said two weeks ago, yields won’t see a substantial move from here.

“Supply from the Treasury is a factor in addition to what the Fed might do in terms of a mild, bearish tone for U.S. Treasury bonds,” Gross told Bloomberg TV.

“I would expect the 10-year to basically meander around 2.80 to perhaps 3.10 or 3.15 for the balance of the year. It’s a hibernating bear market, which means the bear is awake but not really growling.”

Since then, yields have tested the upper-end of his channel and are breaking out today to their highest since 2011 (10Y)…

and back to their critical resistance levels (30Y)…

 

And now Gross is out with a pair of tweets (here and here) saying that the record bond shorts should not get too excited here…

 

Bill Gross thinks they won’t be right. He highlights the long-term downtrend over the past 30-years, which comes in a 3.22%.

“30yr Tsy long-term downward yield trendline for the past 3 decades now at  3.22%, only ~4bps higher than today’s yield.”

“Will 3.22% be broken to upside?” he asks.

“I don’t think so. The economy can’t support yields higher than 3.25% for 30s and 10s, nor 3% for 5s.

Continuing hibernating bond bear market is best forecast.”

Asa ForexLive also notes, if he’s right it doesn’t necessarily mean the US dollar will reverse right away but it would be a good sign for stocks and would limit how far the US dollar might run.

So, will Gross be right? Is this latest spike all rate-locks on upcoming IG issuance? And will this leave speculators with a record short position now wondering who will be the one holding the greatest fool bag by the end of the year…

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It’s a sea of red across Emerging Market FX today with the JPMorgan EM FX index suffering death cross as it tumbles to fresh 16-month lows…

And while all eyes recently have been on the Argentine Peso…it is being massively supported by BCRA today…

It is the Rand and the Lira that are getting crushed today…

The Lira is tumbling to new record lows as Erdogan threatens to take control of monetary policy…

 

And South Africa’s Rand is tumbling as it tries to market a new eurobond sale…

 

 

 

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Authored by John Coumarianos via RealInvestmentAdvice.com,

Is it possible that stocks aren’t overpriced? Financial adviser Josh Brown raises the possibility, arguing that earnings can grow into their prices. After all, Amazon, Netflix, Nvidia have seemed overpriced to investors for a long time, but their economic performance keeps improving.

As Brown puts it, with all of these stocks in the recent past, “[t]he fundamental stories grew up to justify the valuations investors had already been paying (Brown’s emphasis).”

And this can also happen to entire markets. Five years ago, the market’s cyclically adjusted P/E ratio (CAPE or Shiller PE) was higher than it had been in 87% of all readings up until that point. But the stock market has been up 90% since then. 

“No one could have known that the fundamentals would arrive to back up the elevated valuations for stocks eventually,” according to Brown.

This last statement is odd. In May of 2013, the S&P 500 carried a CAPE of 23. Now its CAPE is 31. It’s not clear from this simple valuation metric that stock earnings have grown into their new, elevated prices. Past ten-years’ worth of earnings ending in 2013 were $78, according to Robert Shiller’s data. For the most recent ten-year period, they are $84. Ironically, one could make the argument that earnings have grown into the 2013 price five years later, but not the 2018 price. It we apply the May 2013 price to the past decade’s worth of earnings ending today, we get a CAPE of around 21. That’s much more reasonable than the current one of 31.

In fact, if we agree that the long-term historical average CAPE of nearly 17 is outdated, and that the new average should be around 20 or 22, then the 2013 price of the market relative to the past decade’s worth of earnings ending today is roughly the correct valuation. That also means all the price advances the market has made since 2013 do not reflect underlying economic reality or earnings power value of the market. In other words, earnings have increased, but stock prices have increased much more so that the market should be trading at 2013 prices given the past decade’s worth of earnings.

Brown’s point, of course, is that the earnings growth of the past decade can repeat over the following decade. But that also means that for stocks to deliver robust returns, the current 31 CAPE valuation must reappear 10 years from now. That’s possible, but investors and advisers must contemplate how they would like to bet and what they must tell clients if they are behaving as fiduciaries.

It’s possible that we could wake up to a 31 CAPE in a decade, and that U.S. stocks will have delivered 7% or so nominal returns (2% dividend yield plus 4%-5% EPS growth). It’s also possible that earnings-per-share can increase at a greater clip than they have historically. Nobody should say those things are simply impossible. But if you are managing your own money, or advising others in a fiduciary capacity (which means you must treat their money with all the care you do your own), how reasonable is it to expect that as what forecasters might call a “base case?” At best, assuming we’ll all wake up to a 31 CAPE in a decade must be a very rosy, low-probability scenario.

There’s an irony to Brown warning against those who carry on about backward looking valuation metrics. One of the most well-known observations of behavioral finance is that human beings can be seduced by recent patterns, including recent securities price movements. We tend to assume, without any evidence other than the recent pattern, that price trends will continue. Everyone will have to decide for themselves whether deriving encouragement from a 90% stock price move without a commensurate earnings increase, as Brown does, reflects proper attention to simple arithmetic or our susceptibility to extrapolate recent stock price movements and returns into the future.

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In the aftermath of the recent Congressional Kangaroo Court in which Mark Zuckerberg had to explain to various House Reps and Senators why 85% of them were recipients of Facebook’s generous donations,  the company has been forced to inject some more transparency into its operations, and open the books, so to say, and this morning, for the first time, Facebook published its enforcement numbers for the first time, three weeks after the company published the internal guidelines its uses to enforce its Community Standards.

The first report of its kind, covers Facebook’s enforcement efforts between October 2017 to March 2018, and covers six areas:

• graphic violence,
• adult nudity and sexual activity,
• terrorist propaganda,
• hate speech,
• spam,
• fake accounts.

As part of today’s disclosure, Facebook’s numbers show i) How much content people saw that violates FB standards; ii) How much content was removed; and iii) How much content was detected proactively using technology — before people who use Facebook reported it.

Facebook also reported that 85% of U.S. law enforcement data requests from July to December 2017 produced some data, when the company received 32,742 total requests on 53,625 users/accounts in 2H 2017.

So, as part of its effort in showing the public “how much bad stuff is out there” here is what Facebook reported:

• We took down 837 million pieces of spam in Q1 2018 — nearly 100% of which we found and flagged before anyone reported it; and
• The key to fighting spam is taking down the fake accounts that spread it. In Q1, we disabled about 583 million fake accounts — most of which were disabled within minutes of registration. This is in addition to the millions of fake account attempts we prevent daily from ever registering with Facebook. Overall, we estimate that around 3 to 4% of the active Facebook accounts on the site during this time period were still fake.
• We took down 21 million pieces of adult nudity and sexual activity in Q1 2018 — 96% of which was found and flagged by our technology before it was reported. Overall, we estimate that out of every 10,000 pieces of content viewed on Facebook, 7 to 9 views were of content that violated our adult nudity and pornography standards.
• For graphic violence, we took down or applied warning labels to about 3.5 million pieces of violent content in Q1 2018 — 86% of which was identified by our technology before it was reported to Facebook.

But the most problematic category for Facebook remains hate speech, where the company admits that “our technology still doesn’t work that well and so it needs to be checked by our review teams.”

And since “hate speech” means whatever one decide it should mean, it is here that wholesale censorship will take place, in the form of blanket muting or the more subtle “shadow banning” which Facebook has repeatedly used in the past to ban conservatives.

Here Facebook reveals that “We removed 2.5 million pieces of hate speech in Q1 2018 — 38% of which was flagged by our technology.“

This means that 62% of the “hate speech” that Facebook took down was the result of complaints by outside readers who found the content of said “hate speech” unpleasant or disagreeable and demanded it be taken down. One wonders, as we proceed down this road, how long until every new piece of content is flagged as “hate speech” and is eventually taken down leading to a feed that is totally devoid of any intellectual opposition; one also wonders how much it will cost Facebook to hire the thousands of arbiters who decide subjectively just what is “hate speech.”

Finally, in the spirit of openness, we hope Facebook will reveal examples of what it classified as “hate speech” which it then removed, especially in light of growing complaints that Facebook has become nothing more than a 1st Amendment filter of non-liberal opinions. That said, we won’t be holding our breath.

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Authored by Audrey Conklin, originally posted at The Daily Caller,

For the year I worked at Starbucks, my manager made it very clear to all the partners at our location that the store’s two bathrooms were for paying customers only. (Starbucks calls its employees “partners” because they get an annual share in the company stock, among other reasons).

Like many other Starbucks stores, we set a four-digit code on the bathroom locks so they couldn’t be accessed by just anybody. Paying customers had to ask for the code. And it changed every couple of weeks, so even regular customers had to ask. But there were good reasons behind this mandatory system that has recently been changed to allow non-paying customers to use Starbucks bathrooms, too.

First, the store I worked at was the third busiest in the entire city of Boston, located next door to Mass General Hospital, two large hotels, a train station and a residential neighborhood. The street was also home to many homeless people who slept beneath store awnings and private doorways in early hours of the morning when we opened.

In Boston, it’s illegal to offer shelter to people abusing substances. The Department of Housing and Community Development (DHCD) and Emergency Assistance (EA) are legally allowed to perform drug tests on those they believe to be under the influence of drugs or alcohol at shelters. Therefore, those who do have alcoholism problems or drug addictions often make the conscious choice to pitch up outside in public areas.

There were regular vagabonds who walked into our store wanting a cup of water, a warmer (or cooler) climate and to use the bathroom. Of course, bathrooms were off limits to everyone but paying customers. And when the homeless loitered in our store and refused to leave, our friends at the fire department or police station down the road would help us escort them out.

The issue was more than just cleanliness or comfort for paying customers; the main reason we weren’t allowed to let the homeless use our bathrooms was because my manager had seen multiple instances in which homeless people had gone into the bathrooms before the codes were put into place, or when they waited outside long enough for a customer to walk out and catch the door before it closed, and then locked themselves inside for so long that we had to call the fire department.

Substance abusers – often homeless – have ruined bathroom opportunities for everyone; businesses cannot take the chance. Those homeless people who take advantage of bathrooms in busy coffee shops and the like use the facilities to do drugs, drink, sleep and sometimes worse.

There were times when I had to give desperate-looking strangers the awkward line, “Our bathroom is for paying customers only.” There were also times, however, when a woman would rush into the store in tourist gear and ask if her child could use the bathroom in broken English and I would break the rules and give her the code. But I wouldn’t give the code to a suspicious-looking person, and by suspicious-looking I mean lacking general manners, the ability to walk in a straight line and cleanliness.

When it comes to making a decision of trust, it should go without saying that some people look more trustworthy than others. The old rules encouraged partners to deny non-paying customers access to the bathroom, regardless of race or ethnicity.

The bathroom policy changed as a continuation of attempts by Starbucks to save its reputation when, last month, a store manager at a Philadelphia branch denied two black men access to the bathroom because they hadn’t purchased anything. When the men waited around afterward for their friend, the manager made a rather impulsive decision — that many blame on her unconscious racial bias — to call the police. When the police arrived at the scene, a bystander recorded the civil encounter in which the police arrest the two men for loitering.

The video went viral quickly. On the surface, it seems to have reached millions of viewers because so many people relate to the issue of micro- and macro-aggressions like this one, but if you look closely, the video went viral because it’s actually ridiculous. Blame it on the manager’s racial bias if you want — I don’t know the reason why she decided to call the police — but I believe the video went viral because things like this actually don’t happen that often and people become fascinated and angry in the rare event that such events do happen.

When the news reached Starbucks CEO Kevin Johnson, he came out with this public statement: “The video shot by customers is very hard to watch and the actions in it are not representative of our Starbucks Mission and Values. Creating an environment that is both safe and welcoming for everyone is paramount for every store.”

The statement continues: “Regretfully, our practices and training led to a bad outcome — the basis for the call to the Philadelphia police department was wrong. Our store manager never intended for these men to be arrested and this should never have escalated as it did.”

And yet the situation did escalate and continues to escalate further, largely due to public outcry, which leads us to my second point.

After the incident, Starbucks announced that it would close over 8,000 of its stores on May 28, 2018, so its partners could participate in implicit bias training, which most agree isn’t a real solution to the issue at stake. Rather, it was a public display of Starbucks making active plans to address a problem instead of just issuing an apology.

Weeks after the bias training announcement, Starbucks chairman Howard Schultz announced on May 11 that Starbucks changed its bathroom policy so that store restroom facilities are now open to “all.” But Schultz made it clear that Starbucks does not “want to become a public bathroom.” Instead, the company is “going to make the right decision 100 percent of the time and give people the key, because we don’t want anyone at Starbucks to feel as if we are not giving access to you to the bathroom because you are less than.”

In this case, Schultz is using “100 percent of the time” as a euphemism for “public bathroom,” because, of course, Starbucks does not want to become known as the public restroom place — not among its $7 lattés, prepackaged protein bistro boxes and ceramic thermoses.

It’s not about compassion for people who need to use a bathroom. Starbucks will always apologize profusely in response to events like this one to avoid lawsuits and an overall unpopular reputation among the millennial masses who invest so much in their business. Unfortunately, this heavy complacency can only make the occasional social issues that arise next to its name more difficult from here on. The next time Starbucks goes under fire, it will be because someone was denied access to a bathroom.

And with that, we come to my third and final point that bathrooms should be something of a luxury at places like Starbucks for paying customers and employees only. Water, plumbing, electricity and general maintenance do not come at a small price. And Starbucks isn’t paying that price. Its customers are.

Customers are not only paying for the coffee; they are paying for the heat and air conditioning, tables, accessible WiFi and bathrooms. Partners are paid to keep the place clean and comfortable for customers who spend literal hours studying, working, and holding meetings in the store. It seems like a fair trade to me.

It doesn’t seem like a fair trade to me, however, if I pay $5 for my drink and then have to wait in line with a bunch of random tourists who just walked in wanting to use the single-family bathroom without buying anything. It also doesn’t seem like a fair trade if I’m paid to clean a bathroom that has been used for the wrong reasons by people who don’t care about the fact that it’s my job to clean up after them.

I would say that I hope store managers will continue to use their best judgment with their backs turned to Starbucks’ new bathroom policy to decide who should and should not have access to their bathrooms, but that would probably result in another viral video, national outrage, and more policy changes.

So I’ll just leave it at this: The bathroom policy should have never been altered.

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