Tag: news

Go Fish…

 

 

Source: Townhall.com

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The deterioration of the indicators highlighted below point to a downside break for the late-stage cyclical bull market from 2009, according to BofAML. Should 1,867 decisively give way, the 1820 (October 2014 low) provides additional support but the bigger risk is a top that projects down to 1,600-1,575; and derspite the last 2 days' bounce, volume and breadth suggest a market under distribution or selling pressure, not primed for new highs.

Many indicators have rolled over in advance of price

• New year-long+ lows for S&P 500 on-balance-volume
• S&P 500 VIGOR is breaking the October 2015/October 2014 lows
• The US Most Active advance-decline line has completed a top. Similar tops precede/coincided with S&P 500 breakdowns in late 2007 and 2000.
• Weekly global index-level advance-decline lines continue to hit new lows
• A Dow Theory Sell Signal in late August. However, the Industrials are still above their August low in early 2016 (as of Jan 19) and not confirming downside in Transports yet.
• Monthly MACD sell signal with the S&P 500 back below its 12-month MA near 2042. -The first weekly MACD sell signal below zero since 2008 in early January
• A rise off extreme lows for net free credit (free credit balances in cash and margin accounts net of the debit balance in margin accounts) could exacerbate an equity market sell-off.

S&P 500 at risk for breakdown below 1867 toward 1600-1575

We are monitoring three supports on the weekly S&P 500 chart: the uptrend line from 2009 near 1900, the neckline of a potential 1-year+ top near 1890, and the August low of 1867.

As of Jan 19, the S&P 500 has not yet decisively broken this 1900-1867 support zone, but 1867 remains at risk for a downside break given the deterioration of the indicators continue to point to a late-stage cyclical bull market from 2009. Should 1867 decisively give way, the 1820 (October 2014 low) provides additional support but the bigger risk is for a 1-year+ top that projects down to 1600-1575. Holding resistances at 1950 and 1994-2023 on oversold rallies keeps the risk to the downside.

Head & shoulders top breakdown for the broad-based Value Line Arithmetic

The Value Line Arithmetic Index (VALUA) is a broad-based, equal weighted US equity market index of approximately 1700 stocks.

The VALUA broke down from a 2-year head and shoulders top. Sustaining the break below 4100-4200 keeps this bearish pattern intact and favors a deeper decline to 3250-3150 or the breakout point from late 2012/early 2013. Additional resistance comes in at 4240-4440.

Mid caps show a head & shoulders top & big relative breakdown vs. large

The S&P Midcap 400 shows a fairly well-defined head and shoulders top, completed on the break below the uptrend line from October 2014.

Initial support comes in at the October 2014 low near 1269 but the top pattern counts down to 1150-1135 and remains firmly in place as long as the S&P 400 remains below 1372-1427. The late 2012 breakout point near 1000 provides additional support. Mid caps broke major support at the relative lows from October 2014, August 2012, and October 2011. This points to a longer-term loss of leadership from mid caps.

Small caps continue their absolute & relative losing ways

The Russell 2000 remains under pressure. The loss of multi-year relative support at the October 2014 and October 2011 lows could confirm a secular loss of leadership from small caps.

The Russell 2000 has also broken below its October 2014 low near 1040. There are some supports below this level, such as the 1010-1000 and 953-942 areas, but the most significant support comes in at the late 2012/early 2013 breakout point near 868-846. Given the major technical deterioration of small caps, we are not ruling out a test of that breakout point.
 
S&P 500 on-balance-volume continues to break down

The S&P 500 on-balance-volume (OBV), a measure of net accumulation, has lagged severely as volume did not confirm the May 2015 peak in the S&P 500. OBV has trended lower since late 2014 to suggest a lack of accumulation.

In fact, recent year-long+ new lows for S&P 500 OBV suggest a market under distribution or selling pressure. In our view, this increases the risk for the S&P 500 to follow the Value Line, S&P 400, and Russell 2000 and complete a year-long+ top on a break of the 2015 and late 2014 lows.

S&P 500 VIGOR: risk of top on break of Oct 2015 & Oct 2014 lows

S&P 500 VIGOR shows longer-term distribution (selling or down volume) dominating accumulation (buying or up volume) moving into early 2016.

This market has been under net distribution or selling. The break below the VIGOR lows from October 2015 and October 2014 confirms the weak readings for OBV as well as the risk for a deeper market correction below the S&P 500 lows from 2015 and late 2014.
 
Breadth Risk: A major breakdown for the US most active A-D line is bearish

The US 15 Most Active Advance-Decline (A-D) line is a daily cumulative A-D line of the top 15 most heavily traded stocks in the US by share volume.

When this A-D is rising, breadth for the most heavily traded stocks is bullish and reflects accumulation or buying. When this A-D line is falling, breadth for the most heavily traded stocks is bearish and reflects distribution or selling. The US most active A-D line topped out in advance of the S&P 500 with a peak in April and has since moved lower to complete a year-long top. This is a bearish signal for US equities in our view.

Similar Most active A-D line breakdown coincided with tops in 2000 & 2007

Big breakdowns in the most active A-D line preceded or coincided with big breakdowns for the S&P 500 in 2000 and 2007.

Moving into 2016, the Most Active A-D line has a big top breakdown in place and we view this as a risk to the cyclical bull market that began in 2009.

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Deflation Threatens to Swallow the World

Many high-powered people and institutions say that deflation is threatening much of the world’s economy …

China may export deflation to the rest of the world.

Japan is mired in deflation.

Economists are afraid that deflation will hit Hong Kong.

The Telegraph reported last week:

RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.

 

***

 

Andrew Roberts, the bank’s research chief for European economics and rates, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings.

The Independent notes:

Lower oil prices could push leading economies into deflation. Just look at the latest inflation rates – calculated before oil fell below $30 a barrel. In the UK and France, inflation is running at an almost invisible 0.2 per cent per annum; Germany is at 0.3 per cent and the US at 0.5 per cent.

 

Almost certainly these annual rates will soon fall below zero and so, at the very least, we shall be experiencing ‘technical’ deflation. Technical deflation is a short period of gently falling prices that does no harm. The real thing works like a doomsday machine and engenders a downward spiral that is difficult to stop and brings about a 1930s style slump.

 

Referring to the risk of deflation, two American central bankers indicated their worries last week. James Bullard, the head of the St Louis Federal Reserve, said falling inflation expectations were “worrisome”, while Charles Evans of the Chicago Fed, said the situation was “troubling”.

Deflation will likely nail Europe:

Research Team at TDS suggests that the euro area looks set to endure five consecutive months of deflation, starting in February.

 

***

 

“The further collapse in oil prices and what is likely spillover into core prices means the ECB’s 2016 inflation tracking is likely to be almost a full percentage point below their forecast of just six weeks ago.”

(Indeed, many say that Europe is stuck in a depression.)

The U.S. might seem better, but a top analyst said last year: “Core inflation in the US would be just as low as in the Eurozone if measured on the same basis”.

The National Center for Policy Analysis reported last week:

Medical prices grew 0.1 percent, versus a decrease of 0.1 percent for all other items, in December’s Consumer Price Index.

In addition:

Trucking freight in the U.S. is in steep decline, with freight companies pointing to a “glut in inventories” and a fall in demand as the culprit.

 

Morgan Stanley’s freight transportation update indicates a collapse in freight demand worse than that seen during 2009.

 

The Baltic Dry Index, a measure of global freight rates and thus a measure of global demand for shipping of raw materials, has collapsed to even more dismal historic lows. Hucksters in the mainstream continue to push the lie that the fall in the BDI is due to an “overabundance of new ships.” However, the CEO of A.P. Moeller-Maersk, the world’s largest shipping line, put that nonsense to rest when he admitted in November that “global growth is slowing down” and “[t]rade is currently significantly weaker than it normally would be under the growth forecasts we see.”

Indeed, shipping seems to have totally collapsed, and Bloomberg notes that “hiring a 1,100-foot merchant vessel would set you back less than the price of renting a Ferrari for a day.”

And the velocity of money has crashed far worse than during the Great Depression.

And see this.

Why Didn’t the Central Banks’ Pumping Trillions Into the Economy Prevent Deflation?

But how could deflation be threatening the globe when the central banks have pumped many trillions into the world economy?

Initially, quantitative easing (QE) – instituted by most central banks worldwide – actually causes DEFLATION.

In addition, governments on both sides of the Atlantic have encouraged bank manipulation and fraud to try to paper over their problems.

Why’s this a problem?

Because fraud was one of the main causes of the Great Depression and the Great Recession, but nothing has been done to rein in fraud today. And governments have virtually made it official policy not to prosecute fraud.

Fraud is an economy-killer, and trying to prevent deflation while allowing a breakdown in the rule of law is like pumping blood into a patient without suturing his gaping wounds.

The government also chose to artificially prop up asset prices … while letting the Main Street economy tank.

Governments also pretended that massive amounts of public and private debt are healthy and sustainable … but they are not.

And the trillions in central bank money never really made into the real economy, but were handed under the table to the fatcats. For example:

• The Fed threw money at “several billionaires and tens of multi-millionaires”, including billionaire businessman H. Wayne Huizenga, billionaire Michael Dell of Dell computer, billionaire hedge fund manager John Paulson, billionaire private equity honcho J. Christopher Flowers, and the wife of Morgan Stanley CEO John Mack

• The Fed also bailed out wealthy corporations, including hedge funds, McDonald’s and Harley-Davidson

• The Fed has been bailing out foreign banks … more than Main Street or the American people.  The foreign banks bailed out by the Fed include Gaddafi’s Libyan bank, the Arab Banking Corp. of Bahrain, and the Banks of Bavaria, Korea and Mexico

•  The Fed has intentionally discouraged banks from lending to Main Street, in a misguided attempt to curb inflation

By choosing the big banks over the little guy, the government has doomed BOTH.

In addition, bad government policy has created the worst inequality on record … and inequality is an economy-killer.

What Do the Economists Say?

We asked three outstanding economists why central banks pumping trillions into the world economy hasn’t worked to prevent deflation.

Professor Michael Hudson – Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and economic advisor to governments worldwide – told Washington’s Blog:

The debts were left in place in 2008 instead of being written down. So the economy is now in a classic debt deflation. QE seeks to inflate asset markets, not the real economy. The choice in 2008 was whether to bail out the banks or the economy — and the former were bailed out — the political Donor Class.

Economics professor Steve Keen – the  Head Of School Of Economics, History & Politics at Kingston University in London – has previously agreed, saying:  we’ll have “a never-ending depression unless we repudiate the debt, which never should have been extended in the first place”.

Professor Keen tells Washington’s Blog:

The simple reason is that, with the possible exception of the Bank of England, none of the Central Banks (and very few of the private banks themselves) understand how money is created. To create money, you have to put money into bank deposit accounts–thus increasing bank liabilities–at the same time as you expand the assets of the banks.

 

QE hasn’t done that.

 

In the USA, they’ve simply bought privately created bonds–normally MBSs–off the banks. This shuffles the asset side of the banks’s ledgers (by exchanging government-created money for overvalued private bonds) but doesn’t change the liability side directly–so no money is necessarily created.

 

In the UK, the CB buys those bonds off pension and insurance funds, which does create money–but it creates it in the deposit accounts of companies who are legally obliged to buy assets with that money (shares and other bonds) rather than goods and services produced by the real economy.

 

So QE as practised has been irrelevant to the real economy, leaving the deflationary forces created by the huge private debt bubble to rage on free.

And Professor Bill Black – Professor of Economics and Law at the University of Missouri,  America’s top expert on white collar fraud, and the senior S&L prosecutor who put more than 1,000 top executives in jail for fraud – tells Washington’s Blog:

Everything that criminology and economics teaches is that if financial elites are allowed to cheat with impunity they will make themselves rich at the people’s expense and corrupt democratic government.

Black previously explained that we’ve known for “hundreds of years” that failure to punish white collar criminals creates incentives for more economic crimes and further destruction of the economy in the future.

via Zero Hedge http://ift.tt/1Pt1fUP George Washington

When non-exceptional countries get “snowed in” by historical storms, they huddle around their wood burners with fingerless mittens keeping their hands warm while peeling potatoes and playing chess. In America, however, they skijore…

 

Because nothing says USA USA USA like snowboarding through New York City holding a Stars & Stripes being pulled by a Jeep Wrangler…

 

America – F##k Yeah!!

via Zero Hedge http://ift.tt/1Pt1eAn Tyler Durden

In a world in which every nation is now part of the race to debase their currency, or as the Brazilian finance minister first dubbed it in 2010, a “global currency war”, the first and foremost imperative on every central bank’s agenda is to devalue its currency faster than its net exporting peers. But not too fast: indeed, there is a problem, when the threat of devaluation becomes too great and the risk resulting from a flood of capital outflow surpasses than that from the economic contraction that would persist should the currency not devalue fast enough.

This is precisely what is happening in China, where as we reported two weeks ago, the nation has, over the past 18 months, seen $1 trillion in capital quietly exiting the otherwise closed system which has terrified the Politburo that even its $3.5 trillion in foreign reserves (of which about $1.5 trillion are said to be liquid) won’t be enough if the capital outflow accelerates.

This has in turn put the Chinese central bank in a very uncomfortable position: while the PBOC desperately needs to boost monetary stimulus to facilitate debt creation in a nation where company have to issue new debt just to pay their interest, or as Minsky called it, the endgame…

… any further stimulus will also lead to even greater currency debasement and devaluation, more capital outflows, more FX reserve spending, and ultimately the perception that Beijing is panicking and those $35 trillion in Chinese bank assets are about to the NPLed into oblivion as the rollover of bad debt becomes impossible.

This was confirmed earlier today when the South China Morning Post reported that according to a leaked document “the People’s Bank of China is reluctant to further reduce the required reserve ratio (or RRR) for fear of such a move resulting in the weakening of the yuan.”

The information, reportedly leaked from minutes of Tuesday’s meeting between the central bank and commercial lenders, was shared widely after it was published on major mainland online portals including Sina.com and Netease.com.

As a reminder, the RRR along with the core interest rate, are the two “shotgun” methods that China’s central bank has to easy (or tighten) monetary conditions. As such, every time Chinese economic indicators take another leg down, every one in the sellside screams for more PBOC stimulus, mostly in the form of a RRR cut.

However, that now appears won’t be happening.  SCMP explains why the PBOC is suddenly reluctant to ease aggressively over fears such a move can unleash another torrent of capital outflows:

The memo sheds light on the challenge the PBOC faces in trying to achieve two conflicting goals. It has to ease monetary supply to raise liquidity to boost the ailing economy. But it also has to stop the yuan from weakening too much, which could happen in the case of increased liquidity.

 

According to the memo, Zhang Xiaohui, an assistant central bank governor in charge of monetary policy, told commercial bankers that the PBOC had to be very careful in maintaining the renminbi’s exchange rate stability when managing liquidity.

 

A key lesson for the central bank was the aftermath of its move in late October to cut interest rates and the reserve ratio. The move greatly loosened liquidity conditions and “increased yuan depreciation expectations and added pressure on the yuan to weaken”, Zhang said.

 

The PBOC had to balance ensuring sufficient liquidity in the banking system and managing the stability of the yuan exchange rate, the official said.

 

“A too-loose liquidity situation may result in relatively big pressure on the yuan exchange rate,” Zhang was quoted as saying. “A cut in the required reserve ratio would be too strong a signal [to send to the market], and we can use other tools to provide the market with liquidity.”

Instead of the shotgun approach, the PBOC will therefore be expected to increase liquidity in the economy through open-market operations that were less drastic than cutting the reserve ratio, the memo said.

Indeed, we observed just that last week when the PBOC injected a whopping 400 billion yuan into the banking system – the most in three years – in an overnight operation using 7 and 28-day reverse repos, the same operations it was aggressively relying on in 2011 until 2013, when it resumed RRR and rate cuts once again, only to see a surge in capital outflows starting in mid-2014.

 

Furthermore, since the Lunar New Year period which falls in early February this year, is when cash demand peaks, it is likely that over the coming week the the PBOC will release an extra 1.6 trillion yuan, nearly a quarter trillion dollars, into the banking system to help banks cope with the increased cash demand.

However, and liquidity junkies expecting a flood of short-term funding may be disappointed: Zhang said banks had lent out money too rapidly in the first half of the month – over 1.7 trillion yuan – and that they had to slow down their lending process. The SCMP quotes Yi Gang, a vice-governor of the PBOC, who again warned banks not to repeat their mistake in the 2009 lending spree, during which many loans turned bad when they could not be collected back, according to the memo.

Of course, if China’s growth contracts any further, and if the central bank is indeed precluded from RRR and interest rate cuts, then a lending spree is precisely what banks will engage in.

Meanwhile, the biggest threat facing China remains its porous capital controls, which despite a max quote of $50,000 in annual outflows, has seen hundreds of billions in funding exit the “closed” capital account system, which in retrospect is not only not closed but very much open.

The central bank was determined to keep the yuan stable, Yi said. “The personal annual quota of $50,000 has not changed. Some individual bank clients are sending messages to their clients, encouraging dollar buying … If you spread false information to cause panic, relevant authorities will come after you,” he said.

As we said in September, when bitcoin was trading 40% lower than its current price, the big question is whether the Chinese population (which has over $20 trillion on deposit in the local banks) has realized that one of the best means of circumventing capital controls is with the digital currency, which however provides a window of opportunity which may not last too long, now that the PBOC is contemplating rolling out its own “digital currency.”

Of course, since the particular “currency” will be nothing like bitcoin, and every transaction will be logged, absolutely nobody will use it voluntarily unless China does what it does so well, and threatens with arrest, bodily harm or worse, anyone who keeps using bitcoin in lieu of the government-mandated currency. Based on history, such an escalation would only make the “forbidden” alternative even more attractive.

The PBOC’s news division did not respond to requests for confirmation of the leaked memo.

 

 

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After a brief hope-strewn bounce in September and October, world trade volumes have reverted to their recent stagnating growth trend, drooping 0.1% MoM in November as world industrial production swoons 0.4% MoM. On a smoothed year-over-year basis, world trade volume growth is decelerating at the fastest pace since Q4 2012 (right before QE3 was announced to save the world) and world industrial production growth is near its weakest since Q4 2008. It's not just China either as import volumes declined at the same rate in advanced economies and emerging economies.

The Baltic Dry Index hit a new all time low this week.

 

This is not new: we have been tracking the collapse of the Baltic Dry – aside for the occasional dead cat bounce – to all time lows, a proxy of global shipping and thus trade, for the past 7 years.

To be sure, for staunch goalseeking Keynesian the collapse in Baltic Dry rates had little to do with actual demand for this services, and everything to do with the alleged supply of drybulk shipping, which was the stated reason for the collapse in costs.

In other words, "trade was fine."

Except it's not!!

The last time world trade growth was decelerating this fast, The Fed stepped in with QE3…

 

And world industrial production growth is collapsing at nearly the fastest pace since Q4 2008…

Source: CPB

 

Seems like the perfect time to be hiking rates?

As we noted previously, given these trends, the crummy performance of our heavily internationalized revenue-challenged corporate heroes is starting to make sense: it’s tough out there.

And further, as the baltic dry index continues to plumb new record lows, how long until central banks realize that for all their omnipotence and all their attempts to restore growth, inflation and the "wealth effect" they never mastered the only thing worth printing in a globalized world: printing trade?

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Excerpted from Doug Noland's Credit Bubble Bulletin,

Global markets were too close to dislocating this week. Wednesday saw the S&P500 trade decisively below August lows. Japan’s Nikkei 225 Index sank to test November 2014 lows. Emerging stocks fell to six-year lows, with European equities at 13-month lows. Wednesday also saw WTI crude trade below $27 (sinking almost 7%), boosting y-t-d losses to 25%. Credit spreads were blowing out, and currency markets were increasingly disorderly. Early Thursday trading saw the Russian ruble down 5.3% (at a record low vs. dollar), with Brazil’s real also under intense pressure. The Hong Kong dollar peg was looking vulnerable. The VIX traded to the highest level since the August “flash crash,” while the Japanese yen traded to one-year highs (vs. $). De-risking/de-leveraging dynamics were quickly overwhelming global markets.

Something had to be done…

Bloomberg adjusted its original Friday morning headline, “Global Stocks Charmed by Draghi Effect as Oil Rallies With Ruble,” to “Global Stocks Charmed by Central Banks as Oil Jumps, Bonds Fall.” Draghi did have some help. The People’s Bank of China (PBOC) injected $61 billion of liquidity into the system, the “most in three years.” China’s Vice President assured the markets that Beijing will “look after” Chinese stock investors. There was also talk of added stimulus from the Bank of Japan (BOJ) and a much more dovish Fed. The markets interpreted a feistily dovish Draghi as evidence that global central bankers had assumed crisis-management mode.

The markets will now have six-weeks to ponder whether Draghi can deliver. Even assuming that he successful drags ECB hawks along, it’s not easy to envisage how an additional $10 billion or so of QE will have much impact on (bursting) global Bubble Dynamics. An emphatic Draghi was, however, certainly capable of reversing global risk markets that were increasingly positioned/hedged for bearish outcomes. Over the years we’ve witnessed powerful short squeezes take on lives of their own, repeatedly giving the global Bubble an extended lease on life. And while bear market rallies tend to be the most spectacular, at this point I expect nothing beyond fleeting effects on the unfolding global Bubble unwind. Draghi is a seasoned pro at punishing speculators betting against Europe.

The media fixates on “corrections,” “bottoms” and “bear markets.” Of late, there’s been some comparison of the current backdrop to previous periods, most notably 2008/09 and 2000. I have no desire to try to leapfrog other bearish commentary. My objective is always to present an analytical framework that assists in understanding the extraordinary world in which we live and operate.

Going back to 2009, I’ve referred to the “global government finance Bubble” as the “Granddaddy of All Bubbles.” I am these days more fearful than ever that this period has indeed been the terminal phase of decades of serial Bubbles. Bubble excess made it to the heart of contemporary “money” and Credit – central bank Credit and government debt. This period also saw a historic Bubble engulf the emerging markets, including China. It encompassed stocks, bonds, derivatives and financial assets generally – virtually everywhere. Central bankers “printed” Trillions out of thin air.

Today’s predicament is becoming increasingly apparent: as the current global Bubble deflates and risk aversion takes hold, there is both a lack of sources of reflationary Credit and insufficient economic growth potential necessary to inflate an even bigger reflationary global Bubble. With confidence in central banking waning and the monstrous Chinese Bubble faltering, there is confirmation in the thesis that a most prolonged period of inflationary financial Bubbles is drawing to a close.

The collapse of the Soviet Union coupled with the Greenspan Fed’s push into activist central banking ushered in what was almost universally accepted as an epic victory for free-market capitalism. Too much of this was a quite powerful illusion. U.S. finance was becoming increasingly state-directed. The Fed manipulated interest-rates and the shape of the yield curve. The Washington-based GSEs moved to completely dominate mortgage Credit. The massive U.S. “too big to fail” financial conglomerates came to dictate securities and derivatives-based finance – and market-based finance monopolized the real economy. And each faltering Bubble ensured more aggressive central bank “activism” – lower rates, greater market intervention and increasingly outlandish talk of “helicopter money” and the government printing press.

With the bursting of the mortgage finance Bubble, the Fed and global central banks resorted to desperate measures – reckless “money” printing, manipulation and market liquidity backstops. Along the way, virtually the entire world adopted U.S.-style market-based finance and policymaking. The process culminated with communist China adopting U.S.-style finance. So long as inflating financial markets were supportive of central planner objectives, everyone could pretend it was a move toward free markets.

What began with Greenspan’s early-nineties covert bank recapitalization evolved into Bernanke’s foolish policy to openly inflate risk markets with new central bank Credit. Amazingly, U.S. inflationism took the world by storm.

The issue today goes much beyond a stock market correction, a bear market or even global financial crisis. Contemporary central banking has failed. Theories have failed. Doctrine has failed. The inability to spur self-sustaining economic recovery has been a major issue. Yet, from my perspective, the critical failure has been the incapacity to generate general price inflation. The delusion has been that central bankers would always enjoy the capacity to inflate away excessive debt levels. Bubbles needn’t be feared, not with central banks “mopping” up with reflationary monetary stimulus. And for quite a while it seemed that “enlightened” contemporary inflationist doctrine had it all figured out.

Central bankers and market-based finance are a dangerous mix. Over the years, I have referred to market-based finance as the most powerful monetary policy transmission mechanism in the history of central banking. Greenspan could inflate the markets – and the entire system – with inklings of a 25 bps rate cut. Later it took Dr. Bernanke Trillions – the dawn of “whatever it takes,” and markets rejoiced.

Central banks around the world abused their newfound power and the power of financial markets. And for seven years egregious monetary inflation has been used specifically to inflate global securities markets. And “shock and awe,” “whatever it takes,” and “push back against a tightening of financial conditions” all worked to ensure the markets that central bankers would no longer tolerate crises, recessions or even a bear market.

For seven long years, risk misperceptions and market price distortions turned progressively more severe. Inflating securities markets around the globe became, as they do, self-reinforcing. “Money” flooded into the markets – especially through ETFs and derivatives. Trillions flowed into perceived safe equities index and corporate debt instruments. With central bankers providing a competitive advantage for leveraging and professional speculation, the hedge fund industry swelled to $3.0 TN (matching the $3 TN ETF complex). Wealth effects and the loosest financial conditions imaginable boosted spending, corporate profits, incomes, investment, tax receipts and GDP – not to mention M&A, stock repurchases and financial engineering.

But this historic wealth illusion has been built on a foundation of false premises – that central bank monetization can inflate price levels and spur system inflation necessary to grow out of debt problems; that securities markets should trade at higher multiples based upon contemporary central banker capacities to spur self-reinforcing economic recovery and liquid securities markets; that 2008 was “the hundred year flood.” In reality, central bankers inflated history’s greatest divergence between global securities prices and economic prospects.

Global markets have commenced what will be an extremely arduous adjustment process. Markets must now confront the harsh reality that central bankers don’t have things under control. Risk premiums must rise significantly – which means the destabilizing self-reinforcing dynamic of lower securities prices, faltering economic growth, uncertainty, fear and even higher risk premiums. This means major issues for global derivatives markets that have inflated to hundreds of Trillion on misperceptions and specious assumptions. I’ll assume Draghi, Kuroda, Yellen, the PBOC and others resort to more QE – and perhaps they prolong the adjustment period while holding severe global crisis at bay. But the global Bubble has burst. And if QE has been largely ineffective in the past, we’ll see how well it works as confidence in central banking withers. Perhaps this helps explain why global financial stocks now trade like death.

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

With the fourth quarter earnings season in progress, some 15% of S&P 500 companies have already reported resulted for the past quarter, and while 73% have beat EPS thanks to such pathetic gimmicks as Intel’s effective tax rate collapse, less than half of companies (or 49%) have beat on the top line.

What is worse, is that for Q4 2015, the blended forecast earnings decline is -6.0%, while revenues are expected to sink by 3.5%. This will mark the first time the index has seen three consecutive quarters of year-over-year declines in earnings since Q1 2009 through Q3 2009.

But an even bigger problem is not Q4 2015, which even the consensus which as recently as Sept 30 anticipated would post a Y/Y increase in earnings has admitted will be a -6% disaster, but the first quarter of 2016, where what until just three weeks ago was predicted to be a 1.0% EPS growth from a year ago, has just tumbled to a -1.7% decline, which would make Q1 2016 the first four consecutive quarters of year-over-year EPS declines since the global financial crisis (despite record amounts of stock buybacks).

It may be even worse than that, with the biggest wildcard again being the price of oil.

According to FactSet, “The estimated average price of crude oil for Q1 2016 is $42.29 (based on estimates from 51 contributors). This  estimate is above the average price of crude oil for Q4 2015 ($42.15). Going forward, the estimated average price for crude oil is expected to increase sequentially each quarter during the course of 2016. For Q2 2016, the estimated average price is $45.19. For Q3  2016, the estimated average price is $49.59. For Q4 2016, the estimated average price is $52.54.”

In other words, another hockeystick – one which is nowhere more visible than in what consensus expects to happen to energy EPS growth, which was just slashed once again relative to December 31, 2015 all the way from Q1 2016 to Q3 2016, but for some reason Q4 EPS is now expected to soar by 75%!?

Good luck.

Meanwhile, the risk is not Q4 but Q1, where as Factset notes, at this point in time, 11 companies in the index have issued EPS  guidance for Q1 2016. Of these 11 companies, 10 have issued negative EPS guidance and 1 has issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the first quarter is 91% (10 out of 11). This percentage is above the 5-year average of 72%.

It is when looking at this troubing development, and specifically Citi’s global earnings revisions dataset, that the iconic Matt King notes that “one of the most interesting and concerning developments we are keeping an eye on is the drop to a seven-year low in ‘global earnings revisions’, the index our equity strategists compile to measure shifts in consensus expectations.

This is what Matt King adds:

What is alarming is the way in which the downward revisions seem to have spread beyond just emerging markets and materials. They are most intense there, but almost every sector has suffered a deterioration, and many are recording near-record levels of downgrades. Why this should be so is slightly mysterious: GDP forecasts seem mostly to be lagging at this point, so it is unlikely analysts are responding to them; guidance from management is another potential factor, but with earnings season only just beginning, many managements have been in blackout periods.

 

Could equity analysts be getting cold feet in the same way as equity investors seem to be? After all, 2015 did feel like at least the third year running when equity pundits stated at the start of the year that “this is the year earnings really need to deliver, otherwise the market will sell off” – only to find that the market had again re-rated by the year-end. While we do think the leverage cycle revolves more around psychology than about specific levels, our equity strategists have helpfully pointed out that we have usually ticked into the bubble bursting phase at tighter spreads than these, and the only time we have had these spread levels and not had a recession was in 2011, when we were rescued by Draghi doing Whatever It Took.

Indeed, central banks rescued us in 2011 with the biggest “hail mary” can kicking in history. But as the chart of “global earnings revisions” shown below demonstrates, we are now below the 2011 level when Draghi suspended belief in fundamentals for another 3 years.

Who will be the central banker who pulls a Draghi this time around?

via Zero Hedge http://ift.tt/1PsOd9Q Tyler Durden