Tag: news

Submitted by Lance Roberts of STA Wealth Management,

This past week I wrote two articles discussing Shiller's CAPE ratio (see here and here) and why valuations are still an important metric when it comes to making long term investments.  However, during the research process of writing that article I could not help but notice the extreme amount of optimism about the financial markets. Despite weak economic data and geopolitical intrigue the complacency and "bullishness" are at extreme levels. 

My Californian money manager friend sent me the following note yesterday from Wolf Richter:

"And so we have a series of geniuses: Greenspan who said that the very concept of a national housing bubble in the US was impossible just as the national housing bubble was inflating to monstrous proportions; Bernanke who said that the consequences of sub-prime lending were 'contained' just as the consequences of subprime lending were eating up the banks from the inside out; and Yellen who now told us that complacency is nothing to worry about.

 

So we sally deeper into the Yellen era, which is the same as the Bernanke era, in that the Fed – and other central banks, for that matter – is the only thing worth looking at. Central banks rule. Practically nothing else matters. Metrics and ratios are just for decoration. Markets as a means of price discovery no longer exist."

Wolf is correct, the markets have now come to believe that the Federal Reserve is the omnipotent controller of the financial markets.  Such beliefs have always ended badly. This is why I discussed one of the biggest traps that investors fall into during times like these, "Confirmation Bias:"

"As human beings, we hate being told that we are wrong, so we tend to seek out sources that tell us we are 'right.'"

 This week's "Things To Ponder" is dedicated to things that "market bulls" should consider to keep from falling prey to the psychological biases that lead to poor investment returns over time.

1) Who Is Selling Stocks? by Sigmund via SigmundHolmes.com

"According to Reuters, 1st quarter share weighted earnings amounted to $258.8 billion. So companies in the S&P 500 spent 93% of their earnings on buybacks and dividends. It’s been all the rage in this cycle to look at “shareholder yield” which is a combination of buybacks and dividends, something I find too clever by half considering the past track record of management led buybacks. But if you think that is a useful metric, you have to ask yourself, is a 93% payout ratio sustainable? I guess we do have the answer to one question though. We know why capital spending has been so punk."

2) BuyBacks Grow 50% YoY – Near Pre-Recession Highs via FactSet

"Aggregate share buybacks for the S&P 500 grew 50% in Q1 to $154.2 billion, and amounted to the third largest quarterly total since 2005. The biggest contributor to the Q1 total was Apple’s record $18.6 billion in repurchases, but IBM also had an uncharacteristically active quarter with $8.3 billion in buybacks. In addition, five of the top ten companies by dollar-value buybacks in Q1 are traditionally not big spenders, and each spent more money on buybacks in Q1 than in any quarter in at least ten years."

"But the increase in buybacks has outpaced cash inflows for the highest growth sectors. The Materials sector spent 195.5% of adjusted free cash flows on share repurchases in the trailing twelve months ending Q1. This compares to a median of 82.9%. In addition, the Information Technology and Industrials sectors are also significantly above their median (83.7% versus 68.7%, and 104.6% versus 79.4%)."

3) Volatility Is Disconnected From Fundamentals by JP Morgan via ZeroHedge

To further understand the current low volatility levels and compare it to the 2004-2007 time period, we looked at levels of market activity and structural drivers of volatility. Firstly, there is much less trading activity now as compared to the 2004-2007 time period. [The data] shows a nearly 50% decline of equity share volumes since 2007. Volume and volatility are highly correlated. Volatility and volumes are linked by a positive feedback loop (lower volumes lead to lower volatility and vice versa).

In summary, we see the current market environment as different from 2004-2007. Volatility appears to be too low and disconnected from fundamentals. However, the low yield environment and support from central banks is currently keeping volatility low not just in equities but across asset classes.

 

Additionally, equity volatility has been held down by low trading activity and option hedging pressure. As we will discuss below, some of the option-related pressure on volatility will abate after the June expiry, which could result in higher realized volatility.

READ ALSO:  It's Not The VIX That's Vexing The Market by Michael Kahn via Barron's

"I won't debate whether indicators measuring investor sentiment are different from those measuring professional sentiment. But from what I see in many sentiment gauges, the weight of the evidence leans toward the market being too sanguine for its own good right now.

 

Jason Goepfert, who runs the SentimenTrader.com Website, offered a third view, saying that the low levels of volatility expectations across asset classes have forced traders to make bolder bets.

 

It is the same concept. Traders and investors are taking risks without worrying about the consequences. That should be a warning for everyone."

4) Food Stamp Usage Is Cratering by Cullen Roche via Pragmatic Capitalist

The rate of participation in the food stamps program has now declined on a year over year basis for six straight months. And the cost of benefits has declined at a near double-digit pace for each of the last 5 months.  After reaching peak participation of 47.6 million last August the number of participants has declined to 46.1 million.

 

This might seem like good news, but it’s more likely a sign of a late cycle recovery trend.  You see, food stamps are a countercyclical event.  They’re part of what economists refer to as 'automatic stabilizers'.  That is, when corporations fire employees they often sign up for government benefits so they can try to make ends meet while they look for work.  And those benefits are most in demand when the economy is at its worst.  So programs like food stamps 'automatically' kick into high gear when the economy goes into recession.  You can see this clearly in the following chart:"

"The fact that this trend is now sharply improving means that the economy is on the mend.  But it also means that the economy is late in the cycle of expansion.  And so what looks like a positive trend could actually be a sign of something negative developing."

5) Does The Fed Really Know What Time It Is? by Vince Foster via MinyanVille

"Fed officials keep talking about when they will raise rates, and media focus is on whether it will be sooner than the market expects. More significant questions are not being discussed.

 

JPMorgan CFO Marianne Lake outlined the exit process the bank was preparing for, raising some risk management hurdles…

 

'In terms of sequencing, what we expect is that the Fed will seize asset purchases by the end of this year. The likely next step would be to drain liquidity from the systems, potentially as much as $1 trillion or so using the reverse repo facility with non-banks. This is likely to happen over a short period of time, maybe a quarter or two and probably in the second or maybe in the second-half of 2015. After which the Fed funds rate will start to raise and lastly reinvestment in order to shrink the remaining balance sheet, but over time.

 

The second important assumption we're making is that as rates continue to normalize over time, we're all likely to also see a migration of stickier high quality retail deposits in favor of more attractive rates in money funds. We think ultimately those deposits will likely find their way back to bank balance sheet in the form of wholesale deposits, which of course is very important particularly in light of regulatory liquidity standards, when notably, if you take a retail deposit that has a low outflow assumptions and ultimately replaced with a wholesale deposit that has a high outflow assumption, it could substantially reduce your liquidity…"

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Think about that last bit for a minute.  The Federal Reserve will drain liquidity from the system at the same time they begin to raise the overnight lending rates while looking for rates "normalize" at higher levels.  Considering that the markets have been primarily advancing on the back of continued flows of liquidity from the Federal Reserve combined with artificially suppressed interest rates; what do you think the impact on the financial markets will be?  The chart below shows the history of the Fed's ability to control the economy.

 

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 “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”  –  Andy Grove

Have a great weekend.

via Zero Hedge http://ift.tt/UVRbJG Tyler Durden

It’s Friday… which can mean only one thing., The entirely unrigged (but ridiculously ubiquitous) meltdown in VIX starting at 330ET to ensure whatever momentum ignition is left will get flushed higher and ensure higher highs in stocks… These are your “markets”… (just as we predicted this morning)

 

 

The only thing we note is – it appears the beta is running lower on the ignition.

Whocouldanode?

In other news, there have been no material geopolitical updates, which added with the fact that it is Friday, means there will be a now traditional VIX slam into the last minutes of trading to close stocks out at the day’s, and a new record, highs.

via Zero Hedge http://ift.tt/1pmP8Y1 Tyler Durden

Fear – or no fear. VIX was monkey-hammered to fresh cycle lows at 10.34 today (still double-digits for now) and OPEX lifted US equity markets (Dow Industrials, Transports, and S&P) to new record highs. Notably European peripheral bond spreads jumped higher (worsened) by their most in 15 months this week. "Most shorted" stocks rose a massive 4.6% this week (surging this afternoon) – the biggest squeeze in 14 months. The USD lost ground (-0.4% on the week) led by EUR strength as JPY closed unch (hardly supportive of the 2% gain in the high-beta honeys this week). Treasuries were nothing like as exuberant as stocks this week (30Y +3bps, 5Y unch) having traded in a 10-11bps range all week. The ubiquitous late-day VIX slam forced stocks to all-time highs. Precious metals had their best week in 4 months closing above $1300 (gold) and $20 (silver) back at 2 and 3 month highs respectively and pushing gold above the S&P year-to-date.

 

Gold +9% YTD,Silver +7.1% YTD, S&P +6.9% YTD, 30Y Futs +5.55% YTD

 

Trannies were trumped by the Russell 2000 as the small-cap momo all-clear takes hold…

 

As the squeeze continues…

 

with the biggest week for a short squeeze in 14 months…

 

Today's OPEX makes comparisons hard but the trend in VIX today was towards 'hedges' as opposed to risk-addition…

 

Gold and silver had quite a week… (their best in 4 months)

 

Treasuries traded in a 10-11bps range this week but closed nearly unch…

 

FX markets saw EUR strength (USD weakness but JPY close unch…)

 

But as @Not_Jim_Cramer noted – JPY is on borrowed time…

 

Charts: Bloomberg

Bonus Chart: When the S&P 500 has been this rich to the fed balance sheet in the past, its has corrected…

via Zero Hedge http://ift.tt/1nT9rNk Tyler Durden

Via Omid Malekan of Visual Stories blog,

In a video leaked by someone who happened to be working out at the same hotel gym as President Obama, the world got a peak into the exercise routine of the most powerful man on earth. The President is sorrounded by some of the best and smartest advisors in the country, but apparently none of them is a personal trainer, as his approach and technique leave a lot to be desired. But he is in luck, because my colleagues and I at Precision Physical Therapy & Fitness are here to help.

To start with, lets look at the President’s seated shoulder press:

 

The first problem here is the limited range. By not bringing the weights all the way down, the President is not getting the full benefit of the exercise, nor is he working on improving his range of motion. This leads to a lack of flexibility, which much like the Republican Party Platform, is not an effective strategy.

Second, take a look at how the President’s lower back sits against the seat, and how there is a gap there bigger than in last year’s federal budget. This is a common problem that develops when we try to lift weights that are too heavy, and can lead to back injuries and other problems. The smart way to go is to lower the weight and make sure your back sits flush against the seat, or better yet, to do the exercise seated on a ball while using you core to sit upright.

Next, lets look at the President’s walking lunge, curl & press:

 

This is an excellent exercise, as it hits everything from the hamstrings and glutes to the biceps and deltoids. It also develops balance and stability. Our only advice here is to slow down (especially during the eccentric or negative movement) and to try to make like the current Congress’ approval ratings, and get really low.

Next, the basic arm raise:

 

The President is going way too fast, and like passage of his Affordable Care Act, seemingly more concerned with getting the exercise over with than doing it right. The right way to do this exercise is in a slow and controlled manner, pausing at the top and always turning your hands so you look like Bill Clinton giving a stump speech. In other words, with your thumbs up!

Next is a step-up combined with a knee-raise.

 

This is another excellent exercise, but the execution can be better. For starters the height of the bench, much like the UV setting on John Boehner tanning bed, is too high.  Once again the President should slow down, and pause at the top with his lifted leg parallel to the ground. Whenever doing an exercise that involves taking a foot off the ground and then putting it back down, its important to make like you are managing a political crisis and focus on a soft landing.

Proper exercise is not just a series of movements you try to get over with as soon as possible, but rather a state of mind. To that end, what you do in between sets and when resting is just as important as the lifts themselves. Take for example how the President puts down his dumbbells:

 

Like America’s recent policies in the Mid East, his posture here is weak and dangerous. You should never bend your spine like that, and always pick up and put down objects by bending at the knees.

And remember, exercise is supposed to be fun. If you are working out because you feel like you should, you are not going to last too long, and might start to look like this guy:

 

via Zero Hedge http://ift.tt/1ytBJ6L Tyler Durden

As oil prices have risen on geopolitical concerns (that have been printed away by central banks in stocks), so gas prices at the pump in the US have risen to their highest for this time of year since 2008 (and that did not end well). We are not alone in our concern as Morgan Stanley’s (and esx Fed) Vince Reinhart warns that a more extreme jump in oil prices would be enough to stall the recovery (lowering real GDP growth by 1.7 percentage points one year out; and perhaps more worryingly, raise CPI growth by about 3.6pp, lowering real consumer spending growth by a full two percentage points).

 

Gas prices were last this high in the Summer in 2008…

 

And that did not end well… (especially with wages continuing to drop)

As Morgan Stanley warns,

Whether price increases are temporary or sustained matters most when modeling the contemporaneous effects on the economy of a rise in oil prices. Simulations of a permanent, upward shift in the price of Brent crude of $10/barrel indicate that real GDP growth four quarters out would be reduced by roughly 0.4 percentage points (pp) and that CPI would be higher by about 0.9pp – compared with our baseline. Growth in real consumer spending would be reduced by 0.5pp.

 

If, however, we model a transitory $10/bbl rise in Brent crude prices (occurring in the current quarter and dropping back to previous levels in the subsequent quarter), the impact results in no net change in the growth rate of real GDP, nearly no net impact on CPI, and no net change in the growth rate of real consumer spending – one year out.

 

A stress test of our model indicates that a more extreme, sustained $50/barrel jump in oil prices would be enough to stall the US recovery, precipitating a single quarter of sub-1% growth and lowering real GDP growth by 1.7 percentage points one year out. A price surge of that severity would also raise CPI growth by about 3.6pp and lower real consumer spending growth by a full two percentage points.

 

 

Not exactly encouraging (but then stocks don’t care; growth will come roaring back after the Polar Vortex, the war, and El Nino)

via Zero Hedge http://ift.tt/1psOSJ9 Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Timing matters, as fundamentals have no impact in a euphoric blow-off top or in a panic-driven, bidless crash.

I recently received an email from a reader suggesting I back up my opinions by publishing my own trading positions. The reader suggested that failure to put my money where my mouth is diminished the gravitas of the opinions published here.

He suggested that if I really believed in The Generational Short: Banks, Wall Street, Housing and Luxury Retail Are Doomed, I should bet against these for however long it took the trend to manifest–decades if necessary.

I understand the credibility value of putting my money where my mouth is: without some evidence that the writer is walking the walk, then we assume he/she is merely talking the talk or talking his book, i.e. supporting his positions publicly while he unloads the position in private.

There are fundamental problems with publishing one's trading positions as a gambit for credibility, and it's worth delineating them because they reflect the inherent uncertainties of trading and prognostication.

1. Markets do not trade on fundamentals. Though pundits and punters may refer to various fundamentals (price-earnings ratios, etc.) to justify their expectations of future stock prices, markets trade on emotions and the zeitgeist generated by Central Planning intervention, both publicly announced and secretly executed.

As a result, any analysis of fundamentals is for historical context only. Misguided attempts to predict what the market should do if fundamentals mattered rarely succeed, for the simple reason that fundamentals don't matter. They are invoked after the fact to justify one trend or another.

Here is a chart of the Dow Jones Industrial Average (DJIA). Did the fundamentals of the corporations that make up the DJIA fluctuate as wildly between 2000 and 2014 as the DJIA itself? The answer is no: what fluctuated wildly was the emotions of punters and the risk appetite set by Central Planning interventions.

2. Timing matters. Deteriorating fundamentals have no impact in a euphoric blow-off top, just as improving fundamentals have no impact in a panic-driven, bidless crash.

I'll use coffee to illustrate the point. As a hobby, I watch a lot of markets, and last year coffee started to look constructive after a multi-year decline from over $2.60 to $1.20.

I tend to be early on these kinds of trend reversals, and indeed I was early, as one more low lay ahead in November 2013. The classic "buy" signal occurred in January, when price popped above the 20-week moving average and that resistance became support.

If I'd announced opening a long position in coffee in late July, 2013, anyone following me into the trade would have experienced a 15% decline by November. Had they sold or been stopped out, it was a losing trade.

If they'd held their position for a mere 7 months, they would have gained about 75%– on an annualized basis, around 120%.

If they'd built a position over time (as many experienced traders do), the rise off the bottom would have afforded a relatively low-risk opportunity to add to the position. The inverse head-and-shoulders (the right shoulder was traced out in late January/early February) offered another relatively low-risk chance to add to the position.

The use of options to add to gains and/or hedge losses would have offered some basic risk management to the trade.

An imperfect entry trade was a loser if sold in November and never re-entered, and a highly profitable winner if held and/or added to. The larger point is that trading requires far more than a commentary establishing the fundamentals. It requires the discipline and experience to construct a trading plan for the position and the discipline to execute the plan. It requires an awareness of risk and the zeitgeist of Central Planning interventions, which work until they don't.

A position sold inopportunely generated a loss while the exact same position generated outsized gains if held or added to according to a trading plan that accounted for the possibility of being early to the trend change.

In my opinion, markets reflect a dynamic somewhat akin to the Heisenburg uncertainty principle of quantum mechanics, which holds that precision is fundamentally limited by Nature: the more precisely the position of a particle is determined, the less precisely its momentum can be known, and vice versa.

In an analogous fashion, the more precisely we can determine the likelihood of a trend change, the less precisely we can determine the timing of the trend change–and vice versa. (I'll call this the Smith Market Uncertainty Principle until someone informs me that others have published the principle under a different name.)

Posting anything less than a full trading plan is intrinsically misleading, and the likelihood of an inexperienced trader following the plan is low. (I know, having been that inexperienced trader many, many times.)

It's possible to be right about the fundamentals and lose money trying to trade those fundamentals. It's also possible to be wrong about the fundamentals and make a boatload of money trading Central Planning interventions.

My own advice that I try to live is: invest in yourself, not Wall Street.

via Zero Hedge http://ift.tt/1rgFVSn Tyler Durden