Its been a long time, we shouldn't of left you
While its been a while since I posted here, not much has really changed in financial markets this year. People still worried about China, US FAANG stocks still going up, Europe is always a mess.
While there have been moves in sectors and markets this year for sure (EM and Frontier managers have been busy) the real big change in markets, which perhaps still needs many more months of digestion is the rise in US Long rates (ie 10 and 30 years). Since breaking the psychological levels Gundlach and others have mentioned as 'lines in the sand' price action has been pretty boring. But I do tend to agree with them that rates have entered into a new regime.
Of course the first asset class to react to higher rates was the Dollar and EM. They seem to have quite a bit priced in already and add in a pinch of China slowdown concerns its easy to see why they have under performed. I dont have much to add. Perhaps they are oversold. You can add in US homebuilders and Capital Goods to that list as well.
The next to go IMO has been parts of the duration trade. Muni's, preferreds. They have moved a little but they can still move a lot more if rates go much higher.
The last to go, and we all knew it was going to take more time than markets, was the US stock market. Its been the best place to be for the past several years and its more of a growth vs value play which means rates matter even less.
If you only follow the price chart, you could be forgiven for assuming the current bull is intact. I'd have to agree as there has yet to be a flashing 'dow sell signal' yet. Though I could easily see a topping pattern set up from here.
But lets turn to a few charts of the market P/E and EPS, which combined give you the price.
You can see that for most of 2017, 17.5x PE was a nice level the market was supporting. Then in January, when analyst estimates really got revised higher for the tax reductions we dropped down to 16x. Its been hanging around 16-17 for most of the year and on the recent dip, dropped below 16. Some, like Morgan's equity strategist now see 16 as the ceiling for the market, not the floor. His reasoning is that higher interest rates impact investors risk premium. Something to think about. Russell seems to have go the message loud and clear
While companies in the US may still be beating earning and buying back shares, its possible that investors re-rate regardless.
Now what happens is EPS estimates start to turn down, like they are in Europe. Well then that would be cause for real concern. But we're not there yet.
527 comments
Click here for comments «Oldest ‹Older 1 – 200 of 527 Newer› Newest»Cracker, Abee. Welcome back.
ReplyA few additional thoughts from LB. Themes for the next few weeks:
lower vol, lower dollar, lower US growth forecasts, lower yields, lower break-evens, lower 2019 Fed hike forecast
the answer to River's question on oil (not that I am an expert): stable now and into US midterms, medium term drifting higher (lower dollar and seasonal), next spring to summer, falling on slower global demand and rising US stockpiles.
rebound in emerging market bonds, stocks, FX; rotation from US growth to value
lower "highs" in the cannabis complex (currently trading at sky high multiples) - Canopy and Cronos report mid November, Tilray late November. it's likely that they will be sold off well ahead of the releases, but if not there will surely be ritual slaughter in these names after earnings. It's always fun to wake up and see 30-50% off a single name (see Bank of the Ozarks today, WTF were THEY smoking?) and I think that's a possibility with all the marijuana stocks if they don't correct earlier.
I would think that a lot are dependent on this midterm election. If Dem takes the house, then you can expect a frozen front on the fiscal policy. If GOP keeps the house, then there will be another fiscal stimulus coming in 2020.
ReplyThe labor market is indeed really tight based on my limited knowledge on private businesses, and businesses are stocking inventory as much as possible to avoid tariff coming at the end of the year. The consumer spending/retail sales seemed to be just slightly better than flat. IMO all these point to a huge inventory early next year, coinciding with a seasonal retail slump next spring. With one or two rate raises into next spring, there is a strong possibility that an inventory recession occurs in the first half next year.
Maybe the recent market drop, especially IWM, really began to price in such future.
Anon, I think that's an exceptionally good read of what has occurred during Q3 and what is to come. Tariffs will end up being mildly deflationary via the mechanism you outline above. Retail stocks have largely priced this in, interestingly.
ReplyIn respect of such a prognostication, it seems that emerging markets have already priced in most of a mild US recession. EM bonds and some equities have already picked up. Gold and silver seem recently to be smelling a weaker dollar ahead, as they sometimes do. The next pieces to play catch-up would be FX (way too many FOMC rate hikes priced in for 2019 at present), US Treasuries (growth/inflation fear/optimism is completely over-blown) and US growth stocks (laughably over-valued for years). A series of saw-tooth re-pricing events are ahead of us during Q1, even though Spoos may rally into EoY (looks like that process is getting started, although along a bumpy pathway). One or more monster squeezes await the increasingly rabid and almost psychically unhinged bond bears, as slower US data begins to emerge, perhaps after the Dec rate hike.
Having said that, there will be some gems among the rubble for US stock pickers. Rate-sensitive issues have already taken a beating and will benefit from the rotation from growth to value. Some kinds of "growth" sectors (Cannabis saliva, for example) will prove to be especially over-valued.
ReplyReally got a useful blog to read today. Its very informative, keep posting more like this.
Sebi registered advisory company
LB,
ReplyYour comments on here are awesome. I have followed them since before the financial crisis. In light of current conditions at the MM blog, I wondered if you would consider starting one of your own? I will organize it for you. All you have to do is post your short commentary as it occurs to you.
Regardless, thanks for many years of insightful comments. Listening to you has been a postive NPV exercise.
Cheers.
Thanks for the above, @PPM, will give that some thought.
Reply@River, Note that I have already been spectacularly wrong on oil. Never was much good at picking that one, so I stay away. A bit more accurate on the cannabis complex, though.
So, no time for a prolonged post, but does anyone remember when we had a market? You know, where people would look and say hey, F, Ford, that's a real car company that makes cars and people buy them and the company pays its workers and they have shareholders and they get a dividend, cool, huh? RIght now the shares in total are worth less than the book value of the company. Kind of makes you feel like investing, no? Now TSLA, that's Elon Musk, who is a crazy guy who does coke and then tweets, with a few warehouses in Cali and they lose money but the shares are priced to the moon. Not investable, right? Now do that with T (AT&T), or TKC, Turkcell (loads of Turkish people paying to having a natter on the phone) v. Twitter (loads of people posting garbage that most of us aren't interested in). Hmm, you can buy shares in Gazprom or Lukoil (sells something that people need every day and pays a healthy dividend, but oooooh it's in a naughty country) or you can own a shale oil wildcatter in North Dakota somewhere. Easy choice, actually, when you look at the details.
Pretty obvious which ones you'd like to own? You can go on and on like this comparing "real economy" stocks to invest in with "unicorns". It's possible we are just beginning to see that process happen now, and in truth it's not uncommon for this to happen very late in the economic cycle. But you have to ask, like in 1999, or 2007, WTF were people thinking?
Imagine if we had a market? Maybe that's what recessions and bear markets do for us. Somewhere near the bottom, like 3/6/09, all the b.s. has been stripped away, the valuations have corrected and just for a few moments, before another round of central bank intervention begins to blow the next bubble, a miracle occurs, and there it is - we have a market again.
Leftback, your back in London by sounds of it. Back trading within the big boys club. How can I tell?....no...it wasn't your London Snow reference. It was your John Maynard impersonation.
ReplyHave it old boy!
The local bar reveals all....after too many.
And seriously , if I can't kick a goal on a S.E.A beach resort left alone at my own pace..what hope I have got making money for those ".........." anyway. Who cares.
@LB, thanks for the reply
ReplyThe gang is back in the house. Good to see. Great post. Higher oil/yield probably have dented multiples, and now with EPS growth rolling over. Yikes! Two questions now seem all encompassing.
Reply1) Will the Fed blink? A dovish hike in December?
2) How do you feel about the long bond above 3% here LB? I have been buying both long and front-end this year, and now I feel like I should buy more.
As for equities; it is grim.+7% on AT&T seems way overdone to me, but hey ... when sellers take over. I reckon some of the turds in EM and Europe will rebound first out of this, but I can't be sure. Overall, it seems to me that a big part of this market would rip higher on even a marginal shift in the Fed's message.
@CV!
ReplyYes, in fact Mr Market may do the hard work as usual and move the needle on hikes before the FOMC follow - as usual. Hike in December with downward Dot Plot sounds about right.
Loving the Long Bond, and munis, have been buying every yield surge since the spring. This week have been getting into the REITs (look at NLY and AGNC green today). Just added some T today among the carnage, prepared to see it under $30 tomorrow morning when Johnny Retail gets involved (or his stops get hit). Like F after the recent trip to the woodshed; TKC looks strong after earnings, [and as USDTRY eventually corrects]. You'd have to be bonkers not to grab some 6, 7, 12% yields here by dipping into the "value" and EM bags, and hold 'em into the New Year fund flows. The Dogs of the Dow strategy again. Other than that, all I see are overvalued momos and hedge fund hotels. The average millennial portfolio must be looking ugly.
Shorting TLRY has been the Gift that Keeps on Giving this month. Toke on, bros, keep bidding that dog up at the open every day and I will keep selling it until the RSI is in the teens and even Mr. Margin Clerk doesn't call you any more.
F reported decent earnings, btw. We were buying calls all week and Mr Shorty is going to wake up with a surprise in his rear end in the morning. A week of selling is going to get erased and maybe more.
ReplyHey, come on, kids, Look and Learn, I mean you could buy some Silicon Valley unicorn or probably fraudulent biotech instead - on the promise of imaginary profits at some future date and piss all your money away - but why would you?
Back to basics this week. Utilities, REITs, munis and real profitable companies are all going to get a lot of love in Q4.
Awise from the gwave.
ReplyGood to see some action on the blog ; thanks for putting some thoughts together Abee.
For me, regardless of the recent vol, I'm actually surprised by the resilience of the markets thus far. Until I see some commodities really puke I'm probably in the (dare I say it) JBTFD camp re: the US.
Don't get me wrong, I still think odds are on a "correction" in the medium term in the US.
Good man LB! That's what I like to hear. F is an interesting one ... everything automotive just seems to be going down the drain, but I would love to see a turnaround story in Ford! That would be a stunner of a trade. All the European core brands look absolutely horrible too. They're trading below book value!
ReplyTKC is interesting too; I wasn't aware that this play on TRY/Turkey was available.
"For me, regardless of the recent vol, I'm actually surprised by the resilience of the markets thus far. Until I see some commodities really puke I'm probably in the (dare I say it) JBTFD camp re: the US."
Fair enough ... what's really interesting to me is that bond yields haven't cracked yet. NDX was down over 4% today and you got six basis points and change on the 2y; that's really poor. Suggests more pain is possible, but as LB suggests the re the yielders, EM etc. If the Fed steps back, even slightly, we're off to the races.
Another bounce is forming this morning. Other than very specific stock/sector picking we feel absolutely no desire to get involved. Although we may be wrong, we believe the Top Is In, that 2018 is playing out like 2007 here, and there is an overwhelming consensus beginning to form around that conclusion. If you want great charts, take a look at Northman Trader's stuff on the negative divergences and the technical damage to many broad market charts. It's very convincing.
ReplyGiven this initial assumption, we have probably moved from an environment of "JBTFD" to "JSTFR". A few stocks may have just seen cycle lows, F for example, but one never knows. Looking at RSIs it is reasonable to predict that you might also get a tradable bounce in homebuilders here, and we love the REITs. Stay away from FAANGs and banks. More pain ahead in those sectors, although there are going to be some ripping squeezes (usually the confirmation that a bear market is in force).
What we do expect to see, at some point is a lower dollar, esp. USDJPY, where we cannot understand the current yen weakness after all the US equity carnage, surely this heads lower [as Jordan Rochester of Nomura discussed on BBG TV earlier today]. Some of what we have been seeing is hard to explain, as noted above, we are not seeing many "flight to safety" dynamics in credit, so this is presumably an unwind of the leveraged "Buy FAANG, Sell JPY and Vol" trade that was prevalent in 2017-18 among 12 yo hedgies. Does it make you sad to think of so many 12yo HFMs losing a year's worth of P/L in three weeks? We are deeply moved.
Along with the lower dollar, we also expect to see the following predictable results: EM FX and equity recovery, a return of the US curve flattener and the growth-to-value rotation in the US (also mentioned this morning as a late cycle phenomenon). Larger US exporters should also see some relief at some point. The next group of sheep to be slaughtered are presumably going to be Treasury Bears. Watch out for credit spreads to widen gradually - the TIP/TLT ratio has already cracked lower.
Btw, TKC bottomed below $4 a while ago, when the TRY bashing peaked, we started fishing then and still like this as an under the radar "value" play with "growth" potential. We do a screen of RSI<30 from time to time that throws up these things, but the FX dump meant that Turkey was on the screens constantly. Argentina may be a similar opportunity but USDARS hasn't budged which means TEO, CRESY etc. have languished in the vicinity of the woodshed. These are good lower dollar plays along with other stuff like Brazilian utilities that can also offer divis and a leveraged FX play. Even Russia offers value. Anyone out there remember BRICs? It might be time for that idea to make a comeback, but we'll lose the C this time. China looks like a no-go zone for the time being. There will be great value there one day, after the mother of all credit crashes plays out.
Lefty, you know what amusing me the greatest about this market. The Paris stock exchange market. If the Challenger company public issue of shares was conducted today, I'm sure the CEO would agree with me ...just like he did many years ago....that a "...." is always a "...."!
ReplyI'm waiting for your next phone call "...."!
Reply@LB: If you see a US curve flattener coming up, wouldn't you want to get away from REITs instead, especially mREITs that benefit from a steep curve?
ReplyAbee(nod),Gents - a simplistic view from the hammock... why get involved if you don't have too? (because some have too).
ReplyNot one for loquacious,it comes down the markets v FED/ECB.
Thanks for the perspective LB. I tend to agree. Cash and bonds look good here. The trick is not to get lured in value traps, but T sub 30 ... I mean, that's a low bar ;). The big question for is really unchanged. Can this market rotate away from growth/momentum *without* everything getting destroyed? If it can, I think we're in business on a number of big themes. If not, well ... we're in a for a ride.
ReplyOne thing I note for example is that when the FANGs take a beating, many of the downtrodden names rally, presumably because of short-covering. Of course, that hasn't been the case recently. The Q3 earnings season is a classic case of "you better beat your low bar, or else ...!"
SPX bullish % down to 32. Can go lower and has in the past, but if so then clearly you're firmly entering oversold and short covering territory even if you do want to JSTFR thereafter.
ReplyI hear you Checkmate, if this price action holds today, I reckon the MSCI World will be down nearly 10% month-to-date starting next week ... that's Lehman Brothers territory! It will bounce, eventually, even if it is a dead cat
ReplySince the wildlings have taken over this blog since Macro-man 1 and 2 and 3 have sailed off into the sunset, allow me to just get this out of the way before Macro-man 4!...takes over.
ReplyThe Cox plate $6million horse race has been run and won, and won by a horse for the fourth time in a row. Yep, I watched the race , and now I have seen it all in racing. Thank you racing , its been good, but , you just don't do it for me anymore.
Special thanks to aussie battler , he has reminded me how conflicted and spiteful the racing industry underbelly is. I didn't need reminding since I think I was about 6 years old when my grandfather used to come a pick me up and take me over to his place to sleep with his greyhounds in the kennel's to shoo away the fence jumpers'. But , you old boy...your worse than fence jumper ( the lowest of the lowest on a track mind you...).
You've restored exactly the reason why I left the track ..apart from injuries. No trainer , and no jockey can ever instill good faith in books ever again. So don't waste your time , leave old amps alone to his own. And the lads over at the other blog, you can email me anytime want for a tip, or a beer , or both..not a problem.
S.E.A here I come!
Just one more thing...
ReplyArki...do the world a favor. Just marry the thing. Stop being a gaylord and hiding behind your mates uber sharing network and put a ring on it. You've put all your mates reputations on the block and plenty plebs on your mission to put one solitary person in jail for it.
I'm dying see it swing off your arm.
Replyarki = gaylord
Replyarki the gaylord...here is my IPv4 Address: 192.168.0.57.
Pass it around your uber sharing network and do your best.
Replyarki the gaylord...here is my bitcoin address BTC: 3HcEB6bi4TFPdvk31Pwz77DwAzfAZz2fMn
Pass it around your uber sharing network and do your best.
Replyarki the gaylord...here is my home address
https://www.google.com/maps/dir/86+Hardgrave+Road,+West+End+QLD/Lower+Hardgrave+Rd,+West+End+QLD+4101/@-27.4853643,153.0042032,17z/data=!4m14!4m13!1m5!1m1!1s0x6b91509894937117:0x52646447e0dcbbf1!2m2!1d153.0071144!2d-27.4828977!1m5!1m1!1s0x6b91509a34d8800b:0x483bde96ebe739a1!2m2!1d153.005908!2d-27.48808!3e0
Pass it around your uber sharing network and do your best.
Replyarki the gaylord...sorry to have disappointed you and the uber sharing network for running into a dead end upon those valid personal credentials. But cheer up old boy! Someone's looking after you ...that's for sure.
@LB, not often I find myself on the other side of your trade. REITs? You better be out soon, and I really hope this is just a short-term punt for you. When I say short term I mean a week or two. This is a train wreck in making. You don't need to believe me, just look at charts. Specifically, the two you have been mentioning here, NLY and AGNC are heading for their respective lows, imho. Head and shoulders and a major downtrend to continue. I am more inclined to short the group on any rally, specifically, IYR to sell right here and then slightly above (on retest of $80, if it ever gets there) with the following scaleout targets: 73, 70, 67, 63.
Reply@IPA: Interesting and thanks for the input. I was thinking that we have already seen a short term bottom in all the rate-sensitive stuff, as Mr Market starts to adjust to slower US growth rate expectations, and so we are predicting a rotation from growth to income/value that may last into the New Year. Eventually we might have another housing/MBS crash, but for the time being we don't see that happening until credit cracks for real and employment starts to go with it.
ReplyLots of talking heads would tell you to run from REITs here, b/c "interest rates are going higher", but what if they are wrong, the Fed may signal a pause or a slower pace of hikes in 2019 and then there will be a wicked short covering event in Treasuries, which will be good for REITs, utilities and so on. We also like the idea of an EM bounce for the same reason.
The march down for REITs has certainly been a long one, and RSIs were fairly low when we started to nibble a week or so ago. Notably AGNC was bid after Q3 earnings report, unlike most of the market. Anyway, the next week or two will tell the tale. We are probably one weakish jobs or inflation number away from the monster short squeeze in bonds.
@LB, not to start a lengthy in-depth discussion on a mundane subject, but REITs are not exactly immune to economic growth slowdown. If anything, it is not uncommon to see them cut dividends (in some cases quite heftily) during a recession. They don't operate in a vacuum and I'd be surprised to see them outperform, let alone be immune to a slowdown you are thinking is about to ensue. Look at what happened to them during the last recession - it was a carnage of gargantuan proportions. And while many of them recovered, it took them a lot longer than growth stocks for sure. I am not sure what saves the group from another leg lower especially if you consider that commercial real estate may be about to take the same cliff dive as residential did during the GFC. So whether it's higher rates or slower growth, I think REITs can't get out of their own way fast enough to reverse the enormous fund outflows that they have experienced in the last few months.
Reply@LB I like AGNC and NLY here as well. Nice hedge in case rates ever go lower. RE:IPA fears, the mREITs are mostly a spread game, credit risk is minimal (though not in 2008 with GSE fear etc). For other REITs I am with you. Rates are going higher, maybe not in the immediate future but in the next few years. 3% cap rates are just stupid. It was dumb money, lets be clear. The same money that was chasing AMZN at $1800.
Replyon AMZN and tech in general. Look there is a huge transformation coming with AI, connected devices etc. The value of AMZN is mostly in AWS. They own the cloud and the only reason MSFT or anyone else has a footprint is bc companies are worried about over reliance on AWS so they are splitting workloads. Problem is AMZN financials are purposely misleading. You have no idea what is really going on. But to think a $1Trillion dollar company is going to have the same 5 or 10 year returns it had in the past is foolish. Law of large numbers will hit eventually (AAPL after it buys back all the stock).
Seems to me a lot of ppl moved from Bitcoin to AMZN/ BAT/ cloud stocks. Same movie. But economoy isnt falling apart. Just expectations bieng re-set. And market wants Fed or Trump Tarriffs to blink. I think it might be a while before that happens.
Also RMB is going to break 7.0. Hopefully its not the end of the world
Regarding currency, why is JPY not acting like a risk averse vehicle lately? USD looks like that it is going to test previous peak in 16/17. I think LB is early on shorting USD trade.
ReplyGood to see some life in here.
Reply@IPA, you've been calling for REIT's to get taken out for a long time. Yes, the chart may look a little bit negative, but to me, it's somewhat a mirror of REIT's in 2014. They had a failed head and shoulders back then, and rallied into the slower growth period and deflationary period of 2015-2016. Yeah, they're economically sensitive, but I think that's where you pick and choose your sectors within REIT's at least. Regardless, I've been saying since the late spring that commodities are telling us what is going to happen in terms of rates. With commodities not faring well, we shouldn't need more hikes. Most recent GDP report even confirmed this to an extent with subdued inflation measured. This is bullish bond proxies to varying degrees.
@LB, I don't think Ford or any automaker is a good place to be right now outside of a short term trade or two. Relative to Tesla? Sure, but that's not saying much. Autos have so many headwinds right now it's not even funny, and we all saw how they performed during last recession where half of them had to be bailed out, and we still needed a stimulus program (cash for clunkers) for them to survive. Even if we don't see a recession, I just don't see the upside here. Higher rates, cars are lasting longer, increasing wage costs and a tighter labor market, tariff issues, high debt levels, and potentially peaking growth here. We are definitively late cycle, and Autos have pretty much never done well during a late cycle environment. The best case scenario here is that you get a nice little dividend with a ton of risk. Their valuation isn't high right now, but that's because their revenue is not performing well and does not have any positive catalysts on the horizon any time soon.
Domestically I think we get a lower high rally that starts around election time after FANG earnings have been fully digested. We could be at lows, but if Apple fails, that'll hurt more. Overall, I'm pretty heavy short Brazil right now.We'll see how that turns out of course, but with Dollar looking higher (it's touching on a neckline of an inverse H&S with lots of positive catalysts to push it higher), I think the political froth is going to wear off and they'll realize they have just as many problems as they had before and then some. For EM's, it was the only EM to not be rising recently, and there isn't any fundamental reason aside from political items, which aren't actually as related to the bigger macro problems there as many think.
Bigger picture, I've been realizing that we've been in a huge wordwide bubble that started building around 2001, and has been trying not to completely deflate since around 2013. That being the worldwide short-dollar bubble. People like to say we had a commodity bubble, but that was just a component of things. The more you look at how the global offshore dollar system is set-up, the more you realize that the dollar had been artificially bludgeoned as lending in dollars around the globe caused the dollar sink, and propped up commodities, emerging markets (china), and other areas. This was exacerbated by low rates and QE of course. But regardless, those dollars need to be paid back still, and without the lending growing, the dollar can't head south for a consistent amount of time any more, and we're starting to see this unravel. I think the end game here is potentially quite ugly, but we'll see if we can continue on for longer.
@Cbus20122,that's Quality.in fact - if the posters names were removed,it deserves a stand alone Macro Man post.
ReplyOf course the first Question people would be asking themselves is - how should one position in a high Dollar environment?
Do the opposite, if one thinks there will be an extended low Dollar environment.
@Commodities, Agree. Where is the love?
Great stuff, people. This business is about getting tow things right: timing and direction. As a frequent options punter it's the timing that's especially important to me, and yes I am known for being early, although trading has cured me of that lately.
ReplyI have definitely been early on the USD turning lower, but I still think it's coming. Tariffs, higher rates, Fed balance sheet and the payback for all the activity that was pulled forward by the tax cuts - these are all going to conspire to slow down the US economy and USD will follow. If you want a contrarian indicator, how about this one? We have been hearing a lot of this lately:
https://www.zerohedge.com/news/2018-10-30/peter-schiff-rising-interest-rates-will-collapse-stock-market
Peter is a broken record and a bit of a rear view mirror navigator. He isn't good at short-term market timing. SO… here we go, you're going to hate this. I am going to suggest the following unpopular ideas, specifically THAT:
1) The US economy slows somewhat over the winter, to a 1-2% pace. [NO RECESSION] REITs do fine.
2) The pace of Fed rate hikes for 2019 - as interpreted by the market - decelerates. Long end rates fall.
3) The housing market picks up a bit - although a dead cat bounce. Homebuilders do well for 6-9 months.
4) Conditions ease for automakers, again for 6-12 months. Ford will do fine.
5) Emerging markets finally have a recovery - EM bonds do especially well, as do rate-sensitive EM equities.
6) The dollar falls, but slowly enough that hardly anyone notices for a while.
7) Commodities are a bit firmer, but not enough for inflation fears to bite. Gold bugs are frustrated.
8) Oil is steady or rising slowly at least until late Spring or mid-summer.
9) Break-evens continue to move lower. Utilities and telecoms do fine.
10) We may have an echo of this "earnings recession" sell-off in Jan/Feb, but nothing larger than this.
In other words, I think that we are going to have 6 months of bloody Goldilocks - and the market will love it, and we will see the mother of all squeezes, and it will frustrate the crap out of natural bears like me. This is why I think you can buy XHB, F, T, NLY, AGNC here, and a few other washed out US equities and sit on 'em for at least two quarters before the environment changes radically again, because the consensus model for 2019 that is based on rapidly rising rates is WRONG. You can also shop for beaten down EM yield in whatever locations you happen to like. I like Turkey (TKC) and even Argentina (TEO) as they have already experienced the FX beat-down of the decade. Brazil is dodgy for sure, but it wouldn't surprise me if the new fascist got some love of a year and EWZ rallied hard. After all, Trump got a rally.
ONE BIG GIGANTIC CAVEAT: The above assumes that China or Italy don't precipitate a global recession by starting a banking and credit crisis that would obviously create worldwide contagion. Let's assume that this doesn't happen just yet.
OK, buybacks are back in play - sooner or later someone will try to make money by selling vol - and succeed. I will not be the first, but I would be gradually reducing shorts and lifting hedges over the next week or two. A slow painful grinding squeeze is coming, so why waste all the money you made in October by fighting it? Grab some longs you like and a few beers and sit back and enjoy the ride into EoY knowing that you are way ahead of your benchmarks, your neighbors and 12yo HFMs not to mention the "passive investors" among the millennials, who are getting their first real taste of a correction. It tastes like ass.
Excellent LB, damn excellent. Mainly because I want to believe it ... badly ;). The key parts of that story is a crack in the vice which is currently the 3-to-4 hikes next year. I agree that this probably takes the dollar lower.
ReplyOne thing though, and this is very clear from speaking to clients. No one believes Trump will do the 25% + $267B. That is NOT priced -in. For the record, I think the consensus is right, but it worries me.
Another quiet green day looming as we continue to see month-end rebalancing. If we had to guess, we would suggest that there are probably two or three more ugly down days ahead of us before it becomes clear that this Hunt for Red October event is over and the vol sellers re-emerge as markets drift higher, perhaps all the way into the end of the year. Like many here we see December's rate hike as nailed on, but with the 2019 (and beyond) dots coming under debate going forward. If you don't believe me, you don't have to, just look at Eurodollars and break-evens, as collated here by Prof. Sanders:
Replyhttps://confoundedinterest.net/2018/10/29/bond-market-losing-confidence-in-federal-reserve-sp-valuation-near-cheapest-since-2016-inflation-expectations-cooling/
With the US ADP number due tomorrow, our playbook suggests that we take advantage of any exuberance in US economic data to buy weakness in Treasuries, maybe JPY or gold if that's your thing. We would use further weakness in equities during early November (which seems likely) to add to things we like, real economy stocks, some EMs and REITs.
CV, there is substantial pushback against the 25% tariffs from the C-suites of major corporations. These policies are the brain child of Navarro, who is frankly a loon. If he is pushed out of the WH it will be a sign that corporate America is in charge. China's economy is teetering on the brink at the moment, and students of Niall Ferguson's "Chimerica" will understand that the connections between the economies are intricate and not easily unwound. That's the message Trump will be hearing.
Happy Halloween, punters.
Interesting technical level spotted in QQQ. The closing price of May 14, 25, June 27, Oct 11 are almost identical, range 169.50-169.75. One might propose that a rally into 169 would produce some selling pressure, shorts might enter there with 170 as a stop. Possibly getting ahead of myself here, but it's possible we could enter that zone today. The SPY chart isn't identical but the same level exists there around 272-273, which is also close overhead from here.
Reply@LB, I agree with your idea on US weakness in the next few quarters. But I'm not buying the deficit and spending causing a big break in the dollar's rally. First off, everywhere else in the world is doing similar things or worse. If we stop hiking, we'll still see big gaps in rates between the US and other areas in the world.
ReplyRegardless, the dollar's primary issue isn't that of carry or other more traditional items. It's all about liquidity and the massive amount of US dollar denominated debt coming due in the next few years after over a decade of gorging on dollar-based debt to fund the massive EM expansion (China's bubble). I realize there are now a lot of USD bulls which is skewing the COT towards over-exuberance, but I'm not sure that's going to matter when the primary driver is China's black hole of dollar funding sucking all the USD liquidity away from markets. This will only get worse as the primary dealers in issuing eurodollar funding are likely getting more scared, and with China not seeing their dollars coming in via export trade as much due to increasing political pressure.
I want to believe emerging markets will get better, but I tend to be on the side that any rally right now in EM will just be the bull trap that catches a lot of people way off guard for what is really happening.
Perhaps the "short dollar" bubble can tread water for a little while longer, but this is going to come crashing down at some point or another and tensions and shifting sentiment toward China make me believe it's becoming much more likely that we'll see a hard landing in China and a massive liquidity crisis.
And another thing with that idea I just mentioned is that most of the technicals back it up pretty well. We have Gold, Silver, Copper, and a lot of other commodities either sitting on or just breaking a decade + head and shoulders pattern that are all highly correlated with the dollar. If these are true H&S patterns, we would see gold fall back to around 400. We have USDCNY threatening to break 7. The DXY index is coming up on breaking an inverse head and shoulders that would target 110+ on an implied move. This is all of course in alignment with what's been happening around the world over the past year. Can this stuff stop? Sure, but I wouldn't bet against this trade on a long term or even medium term basis.
ReplyAnd I'm a little worried about treasury's. I've become more and more of the belief that a lot of the recent weakness in treasurys is a result of foreign selling along with lack of foreign buying. This coincides with foreign slowing of easing programs, but it's also noteworth that Chinese holdings of UST have dropped. And no, I do not think China wants to sell US treasuries, nor do I think they would do so as a retaliation against the trade dispute. BUT, I do think China will sell US treasuries, Gold, and US dollar denominated assets to stabilize the Yuan, especially as it approaches 7 or breaks past that #. Therefore, I think a dollar bear has to also be of the belief that China will be able to maintain their currency from breaking past 7.
I think the price action on Oct-29 responding the news of 25% on 267b did show that the market had not totally priced in the last leg of tariff.
ReplyHowever, I happen to believe that it had priced in that Yuan to USD will break 7. PBOC maybe be waiting for the leadership meeting to decide whether it wants to protect that level. Also, if China indeed does a hard landing, Yuan will drop at least 30% from its peak, given that USD dropped more than 20% between 2008 and 2012. We should know where it goes around next spring festival.
With lower USD liquidity in the international markets, rising Treasury issuance, and unwinding of fed's bond buying program, even if fed slows the rate raising process in 2019, the long-term trend of Treasury is still going downward.
The QQQ 170 level didn't last long! Today's market is like a rising knife.... don't touch it until it has stopped just below your bollocks. We are probably going to see gaps filled one by one on the way back up. Thursday's close ~171 is next on the list.
Reply@LB, "homebuiders do well for 6-9 months"?? Man, they could not rally for more than two consecutive weeks this whole year. Any time you have a >30% decline in the most cyclical sector of the market when economic growth actually picks up you have to back off and think about the reasons. This is not your typical supply and demand equation any more. There are serious structural faults (no pun intended) in the sector - lack of available and reasonably priced vacant land, building supply constraints and rising prices due to tariffs, demographic shifts in the market, and yes, rapidly rising new home prices (on top of rising rates) are finally stifling the demand. You tell me how you are not worried about the blow-off tops on the homebuilders' charts? That spells DEATH. You did say dead cat bounce, but this is not bottom fishing, it's like fishing in a pond full of dead fish. XHB sold to you on a two-week rally, if it can muster one.
ReplyLOL. I have really missed these fireside chats about investing. First of all, this week's bounce may reverse as soon as Friday if not tomorrow. FOMC is going to be launching more bonds into the void, and we are going to see more sickening dumps. With this in mind we do have a small short in QQQ overnight to go with our short of TLRY, still trading at 100 x book.
ReplyNow, looking ahead, THIS IS NOT THE GFC. The World Is Not Ending. Yes, this market will eventually end up going down in flames, but not yet. This isn't 2008, more like 2007, or perhaps 1999 is a better analogy. Tech garbage, cannabis growers, money-pit biotechs, all that shit is going to burn to the ground, but not the real economy stuff. That's why we are long a few decent beaten down value/income stocks like T, F, NLY, as well as some beaten down EM stocks like, TKC, TEO.
Btw, GE is not on our list, wake me up when it trades below $5 and they start selling assets. What a disgusting pile of excrement that stock became once Welch and Immelt had finished hollowing it out, and what a crime against its workers and those who built it up. In a just society, Jack and Jeff would be doing time breaking rocks instead of on TV or the motivational speaking circuit. Perhaps the SEC will finally send in some forensic accountants to find out where the money went? Criminals.
I think I poked the hornets nest by mentioning XHB. Now I am not in fact long XHB and nor am I proposing anyone get long. Is the top in? Abso-fucking-lutely, as it is for the broad market, agreed? Just pointing out this - that whenever sentiment is very very extreme, and it is or has been clearly extreme recently in TLT, XHB, REITs and munis, well we all know that monster rallies/squeezes get started that way. XHB is quite capable of rallying over several months to a 50%, 61.8% or even 72.4% fib retracement. We have seen them happen.
Look, @IPA, you are a very smart punter, and everything you say is true. But the weakness in XHB has largely been on the back of the overwhelming rising rates consensus, and NOT (as yet) weakness in the overall economy. Remember people nowadays buy payments not homes, so it's the 5% mortgage rate that has hurt XHB and the REITs in tandem. They are the poster children for rate-sensitive assets, even more than munis, preferreds and utilities.
ReplyNow let's say, just for argument's sake, that we get a weak(er) Q4, say 1.5% and a weak (seasonal) Q1, 0.5%. Unemployment might even tick up slightly. I am going to argue for now that 5y5y forwards are already predicting such an outcome. Nothing drastic, no recession, but a seasonal slowdown. This will happen b/c this economy simply cannot take present interest rates.
What do we think is likely to happen? Remember that we have half the population of the punting universe massively short Treasuries with leverage. This reminds me a bit of 2010, where EVERYONE and their uncle was short the long bond and the 10y. The US slowdown that followed was painful for almost everyone except Treasury longs and holders of a bag of rate-sensitive goodies such as REITs and munis, and precipitated looser monetary policy (QE2).
I am not going long XHB, but I would warn against shorting this group, or the REITs, as I think the conditions are in place for a very naughty squeeze that will give Mr Shorty a very sore bottom indeed. It was, after all, just this time last year that the homebuilders went on a tear, carving out a 15% three month long rally into that blow-off top you so eloquently described. One last note: the RSI for XHB bottomed out two weeks ago in the teens, for heaven's sake, and is now in the 40s. Don't believe me? Just look at the charts. This sucker will bounce. Let's reconvene in March/April and see how it turned out? I also want to look at REITs and extreme oversold EMs like Turkey and Argentina at the same time.
None of us should be surprised if a basket full of tech turds, Silicon Valley unicorns and other momo garbage turns around here and puts in a stirring rally into EoY, simply b/c it is all so oversold, people have year end targets to make, and then there are the January fund flows to front run. There are quite a few worthwhile assets that may even outperform at the same time! Once vol sellers get involved again this could be an absolute rip-snorter, so watch out.
Man, it is so weird when I am the most bullish commentator here. I assure you it's just because I am immune to the madness of crowds. Bullishness is probably temporary…
Fair enough @LB, let's put the issue to rest and reconvene in March/April (which some on this board will call a "long time") and see how it turned out indeed. I actually have a buck or two on this trade to make this valid. I appreciate your compliment!
Reply@theclub, I'll throw my dart in the ring with some technicals. The Nasdaq is woeful...and for repairment to the upside...it won't be constructive for a while. The Spooz 2278 level is first major resistance. Anything that sits above that will be fragile until the Nazzy catched up. cheerio ...ahh, that beach in Thailand, can you all see be spread eagled on the beach with passengers trying to wake up at 7am with my face bitten overnight by beach worms.
ReplyAnyone else playing that big gap closing somewhat soon like me? I've got a few short term options plays on that closing shut... holding my breath here...
Reply@IPA: Honking rally in XHB today. Just sayin'... wonder if XHB smells US weakness and sees the lower inflation expectations?
Reply@Cbus: QQQ looking at overhead resistance at the 200DMA just above 172, at 172.21, that's the next stop. Yes, that gap will get filled to 179 in QQQ, 287 in SPY. Gaps get filled, but maybe not yet.
@amps: AAPL is critical for Nas. AAPL trading weak today into earnings and throwing up a doji. Weakness in AAPL would drag the index lower from this critical resistance and stall the bounce, for a while at least.
I am guessing that there will be a face-ripper soon, but it may not happen this week. One more day of red screens ahead of us?
@Cbus, did you perhaps mean the gap below - SPY to 268 and QQQ to 166? Yeah, I like that, in fact I think that one maybe closes before the real ripper begins.
ReplyBear markets and deep corrections often have nasty Friday sell-offs as punters become increasingly reluctant to take too much risk home for the weekend, and big down Fridays often bleed over to the Monday.
ReplyThere are a lot of catalysts available this week. If the market dumps, the headline writers will be able to choose their culprit from: "short-term overbought", "AAPL missed on top/bottom/guidance", "overheating jobs market" or "cooling employment data".
@LB, yes, I'm referring to the gap below to 268 on SPY and 166 on QQQ.
Reply@LB, I thought we were going to wait until March to claim a victory. You realize how small this daily advance looks like on the monthly chart. I had to switch to a 15-min chart to see it.
Reply@IPA, you sound like Real Money. Monthly charts, indeed. IPA we salute you, we was just messing with you, because you're a mate, innit. Yes, yes, the finish line is March op ex, OK?
Reply@Cbus: AAPL guided lower, LOL, and looks like it will fill the gap from today's open. Great chart read there Cbus, and I think you're going to get that lower gap filled, excellent marksmanship, sir, and we are right there with you, my friend, punting QQQ from the short side along with some weed stocks. Looks like we will both be smiling tomorrow whatever random number is on the ball that the BLS lotto spews out.
@12yoHFM: if you're out there, a few of you chaps are going to get a lesson in market structure again tomorrow. Punters sell AAPL, and because it is such a large constituent of the indexes the ETF houses have to sell SPY and QQQ, which drags AAPL lower, which means ETFs have to sell SPY and QQQ. Rinse and repeat. It means that the consequences are greater than the event merits.
Hmm… AAPL down 6%, the Spoos are off 11 handles, Qs are down 80. Nothing biblical as yet, but we are slightly worried about our limited longs in case of a waterfall event, although they might end up as safe havens, if Treasuries rally, rates fall then REITs look good at last. It's all relative. Anyway, to offset the longs, we are short QQQ, and a cannabis stock that could go to $10 in a selling panic. Now why exactly am I sounding so concerned?
ReplyTomorrow [and Monday] we suggest, have the potential to get a bit larger than most people think - for several reasons.
One, POSITIONING - far too many punters were climbing aboard the recovery train today - this on the back of a small month-end rebalancing bounce (Tuesday) and a wicked hard squeeze of most shorted stocks, mostly the trash. Far too many weak hands are offside now, and are going to wake up to a Gap 'n' Crap in the morning. Johnny Retail isn't the sharpest knife in the drawer so he isn't going to find out what's up until lunchtime Friday and then he isn't going to sell his stocks until Monday morning, which will make a large decline somewhat worse. VIX just declined sharply today, which means there aren't a vast number of shorts ready to cover, and there may be some new vol sellers exposed tomorrow morning.
Two, TECHNICALS - we were looking at the 171 level in QQQ, but the 172.21 level (200 day moving average) came into play today and was observed almost to the penny (HoD 172.24) before holding into the close. That is going to form a very very firm overhead resistance from now on, which will limit the potential for the next bounce. It wasn't the easiest trade to enter but it did observe the technicals very well in the end, for those who were alive to it. The next rally is going to be fighting $60B of monetary tightening during the month of November.
Three, GLOBAL PARTICIPANTS. AAPL has institutional holders all over the world, including the Swiss National Bank and other SWFs. These fine punters have never had to deal with a really stomach-churning plunge in the fruit. Well, this may be it. Are Sven, Horst and Mohammad going to dump their AAPL and other USD holdings, if it all goes pear-shaped? If so, then we are eventually going to see one of those things where USDJPY loses 1 or 2 handles overnight, and then this will be ugly indeed.
Fourth, MARKET STRUCTURE - when you think about the reflexivity implicit in the relationship between AAPL and SPY/QQQ, and the rather dim-witted nature of many of the passive investing and younger margin-dependent punting proletariat when it comes to market structure, it makes one wonder whether a really big feedback loop might come into play. Perhaps if the dump goes really large they will bring Taleb on to explain to the spokesmodels exactly why it is happening.
Fifth, SENTIMENT has yet to see extremes during this correction. No-one has yet seen a Canadian crying into his medicinal cannabis chest, or talked to a millennial who lost his parent's house because of a margin call. That kind of stuff only happens when liquidity dries up, and then markets will finally reach sentiment extremes, and when that happens there is always towel-chucking and lumpy trading of illiquid assets because punters have no alternative.
"Crashes happen from oversold conditions" as the great Ritholtz once lectured us, "not overbought conditions". We do not expect a crash this year but we accept that tomorrow has at least some potential to set up the conditions for one to occur. The wild cards in the wings are Trump, and more importantly the Fed, which could end any carnage with a dovish signal.
ReplyIf this does get nasty, there are going to be some flash crashes, so we'd suggest that tight stops are going to be useless, this isn't going to be a time for catching falling knives, and we should try to avoid having to trade anything illiquid until the dust settles. Price discovery under duress can be an ugly business. Of course this may end up being a pothole and not a massive volcanic caldera. We give this just a 10% chance of evolving into a 1987-style crash, and a 20% chance of generating a 2008-sized 7-8% dumper. Keep an eye on the term structure of the VIX, as it will indicate the likelihood that November op ex makes things worse, not better.
There, that was almost a post… succinct and to the point. Now let's sit back and see what happens. One thing is for sure, loads of people are going to dismiss this as alarmist nonsense and they may well be correct. I am interested to hear what some of the chartists have to say like Northman Trader and a few others.
@leftback,... "Man, it is so weird when I am the most bullish commentator"
ReplyYou are frightening the crap out of me, you are now the most bullish and bearish commentator. Chill man, let it play out, wait till next weekend to look at the charts,with a clear head.
@LB, do you subscribe to Sven's calls? I heard a few guys say he was good but most said not worth it. I guess like with all other chart gurus it is a hit or miss. But I am not sure we need someone like NT to tell us what is going on in TNX and TYX. Those two are up to making some serious damage above here all the way to their next respective resistance levels. So let's just say not tomorrow and not in a few weeks, but by the end of Q1 we will be talking about TNX in 3.4-3.5 and TYX in 3.7-3.8 area. I know you are going to call me delusional on this and say that stock market will roll over and die before those levels are hit. I am going to take that criticism in stride. :)
ReplyBy the way, does anybody else get a feel that markets are acting very... odd right now? I get that after a correction, we're conditioned to feeling a bit more scared, wary, etc. But that's not really what I'm talking about here.
Reply1. Oil is breaking trend. It also has gone into contango. I'm not a futures or oil expert, so I'm not super nuanced in this, but I know enough to know that the trend break here at this time is significant and interesting.
2. Libor-OIS is once again skyrocketing. This lends more credence to my dollar bullish thoughts, despite today's "pullback" in the dollar. And by skyrocketing, it's literally going to the heavens. This is the biggest move by velocity in Libor/OIS since December 2008 when liquidity was nonexistant. Of course, this move seems to have just started, but I think this is extremely telling. Liquidity in the coming months is looking to be potentially problematic.
3. Note the interesting USDCNY move yesterday at the same time that USD went down. Very obvious defending the 7.0 threshold, but with what? My best guess is something commodity related, possibly with Gold (note the gold move upward that is concurrent with the USDCNY move). Buying gold helps to prop up CNY I believe, whereas CNY devaluing means gold will probably drop. Just an interesting note on positioning, and where you should have your views if you think that a Chinese currency deval may occur.
4. As mentioned, most of the rally recently has been a traditional bounce via shorts covering into an oversold position. For the last 10 years, buying the dip has worked quite well, but I do worry that at some point, people will get far too complacent. The speed at which the market is shifting to bullish after recent weakness in my opinion seems to be a bit of pavlovian conditioning. But they will 100% get set on fire by this at some point or another. IS that time now? Could be, but who knows, hard to say.
5. There are some other items I've read about in the monetary / dollar sphere that make me wonder what it is that's about to blow up. Very specifically - this blog post highlights a lot of it. https://www.alhambrapartners.com/2018/10/17/the-very-very-very-big-things/ . May not be anything yet, but with the way Libor/OIS is surging right now, I wonder if there is something going on here more specifically.
@Skr. LOL. True. Will get back to you next week on that one. I looked at the long-term chart for INTC, and thought about how pre-eminent that stock was in 2000, and how no-one thought it could fall. Then I thought about AAPL (or AMZN) and the parallels are obvious - and I began worrying. In fact, it was a bit frightening, and then AAPL guided lower for Q4.
ReplyThe apparent schizophrenia at the moment results from being long real things that make sense and being short things that are (marijuana) smoke-and-mirrors. I imagine the 2000-2001 period was a bit like this. Back then there was a mild slowdown in the real economy and what was initially a slow-motion crash in start ups with imaginary profits. Spoos ended up outperforming Qs by a wide margin. In fact I think that this may end up being a re-run, and maybe this is why many of us who didn't experience 2000 are struggling a bit to make sense of things. Take a look at the 2000 chart for INTC, and then imagine even an echo, let alone a repeat of that today, but with AAPL. I think the US election is creating a lot of noise and that's making it hard to step back and see the big picture. AAPL is down 6% in pre-market trading, and to me that's more important than Trump and the BLS, once we get past today's data and the mid-term elections.
This is going to be an interesting day. The Trump/Xi two-day love fest continues and the overnight move in USDCNY drove futures higher. We still haven't seen how the market parses the overnight action, the employment data and all the political noise of the day. While we are generally constructive on what you might call Real Economy stocks for the time being, we just wonder how is the NASDAQ going to move higher (next week, not today) with AAPL falling? - it is 12% of the index. Imagine a 150 lb marathon runner being given an 18 lb weight to carry and that's what it's going to be like being long the NASDAQ for the time being.
@IPA: TNX and TYX. Yes, rates are going higher. We all know this to be true :-) except 5y5y break-evens.
There are some problems with this consensus of inevitability thinking, which is just a sort of recency bias, no?Markets are supposed to "know" about things like wage inflation in real time, so that should be "priced in", no? If everyone knows TNX is going to 3.5%, shouldn't it be there already? It isn't there for a reason - b/c a number of market participants don't believe the inflation hype, and think that (to borrow a phrase from Dame Janet Yellen) it is "transitory". There are signs of softness out there already, and sooner or later the Treasury shorts are going to get clubbed over the head with one soft US data point. The results of extreme positioning are unpredictable.
Anyway here comes the number! BLS Bingo may now commence. +190k here - but sell the news on wage growth?
@LB, I experienced 2000 and can tell you that while charts look somewhat similar the thesis was a bit different in tech. There was an artificial tech demand going into Y2K, a genius way for tech giants to juice the corporations into upgrading. Once the clock turned 12:00 and the world didn't end it was obvious, the page was turned and all related players got smacked, with INTC and MSFT being essential components of the upgrade. I am oversimplifying of course, as you correctly pointed out, at that time dotcom was also crashing and the whole notion that we were going to lock ourselves in a dark room in the middle of nowhere with nothing but a computer and a mouse and click our way to prosperity was dispelled. Fast forward to today, that notion is actually a reality and that's why AMZN and AAPL went to $1T (albeit Mr. Market is doing a rethink on that large number). You can't call them garbage now and I would argue that they are a big part of the real economy of today that you are so keen on. So I doubt we will see crash and burn of big tech here like in 2K but a selloff to reset things a bit was needed indeed, hence we are seeing one. This ain't 2000 moment in tech, imho.
ReplyNow, with that being said, the cliff diving that 2000 brought in tech is nothing new to this country or the stock market. We go through these bubble phases and it's something different each time. Tech in 2K, real estate in 08, and will it be the Treasuries this time? You see, why it takes a while to get to 3.4-3.5 on TNX is because Treasuries are presumed to be non-fast-moving vehicles and there was (and still is) too much Fed intervention to undo. Once it's out of the way Mr. Li and Mr. Watanabe will do their part and that will leave an enormous void to fill and lead to the "inevitable" - 12yoHFMs reacting the same way they did in 2K and 08. I think the day may come when we will wake up to a limit down on Treasury futures. Do "we all know this"? Hardly!
I think it's pretty clear that we aren't in a 2000 style tech bubble. But that doesn't mean we aren't extremely pricey. The nifty 50 stocks of the late 60's were a bubble, but that wasn't anything like the tech bubble.
ReplyHonestly, I think there are some isolated sectors that are extremely pricey, but it's more of a very broad load of expensiveness right now that is the bigger issue. I somewhat blame the bubble in bonds pushing people out the risk ladder. As bonds got more expensive, that pushed more investors into value stocks. Those value stocks no longer have great yield, and aren't growing much either. As a result, normal value investors have gotten killed, which has pushed people into growth stocks more than other times. It's all about the push down the risk ladder due to QE distorting the normal mechanics of the market. Too much money and too few places to put it.
Also, side note, but on the talk of bond bubbles and such. I think that any bubble in bonds bursting won't really be catastrophic as a bond owner. If a bond bubble "bursts", people will step in to purchase bonds at higher yields, at least assuming the bond itself is safe. I think this is more about the knock-on effects of what happens if bonds don't keep rising. We can look at Japan as an easy example of how a bond bubble can just stay lower for longer, even after breaking multiple trendlines. The big issue as I see it is the massive amount of systematic strategies such as risk parity that are built with leverage on bonds, and will have to re-lever as the stock-bond allocation doesn't perform the same way it did during 35 years of falling rates. I see this similar to the housing market bust in 2005-2008. Home prices didn't need to drop 50% to cause problems, they just needed to drop enough to cause issues through the collateral system. If we do have a bond bubble, this will really cause pensions a major headache.
:o] @IPA is promoting his new Death of Bond movie. Let's get back to that one later, shall we? I think you would have to cast Mnuchin and Trump as the villains in that one, as they are issuance fiends and Trump isn't known for paying his debts.
ReplyLB loves AAPL products but if you close your eyes and touch the elephant, you will find that this is an over-priced slowly growing growth company with a small dividend. Let's get chartist for a while here, friends: AAPL has a gap down to 194ish. Not going to see that fill today, but next week? Another 5-6% move down from here is hardly out of the question, especially when there is simply no reason to buy the stock. Likewise the gap to 166ish in QQQ pointed out by @Cbus is definitely in play. New intra-day resistance is being built as we speak at 171, 170.50 maybe? The 200day MA now looks like a trap door overhead that has been slammed shut. In AAPL, today's opening price of 209.50 may prove very sticky, or we may never see it again.
Credit where it is due? Nice call, congrats to one or two punters here who called the AAPL/QQQ downturn. Let's see if this turns into one of those late cycle Fridays where the market closes at the lows of the day. It's not like it hasn't happened lately...
Strange but true department: Democrats doing well in the midterms may actually be good for Treasury bonds… !!!
ReplyWe did mention, did we not, this wasn't going to be a day for the Kevlar Gloves™? Knife catchers have already lost a few fingers and other appendages in AAPL and QQQ today and we haven't had the 2pm margin call witching hour yet.
ReplyBtw, I thought this was a good read, not much bloviation and fits in with our "Japanification" world view.
https://www.dlacalle.com/en/the-next-financial-crisis/
@IPA, we can't have the "Death of Bond" and "Turning Japanese". Incompatible. Which means … ONE OF US IS WRONG. One outcome is stagflationary, the other deflationary, and Western demographics seem to support the latter unless there is massive money printing. Oh wait, BoJ did that and it didn't work. My position is that there are masses of punters out there who are going to be only too eager and ready to learn about the joys of Treasuries once their beloved "aggressive growth" equity and high yield bond funds start hemorrhaging.
"Same as it ever was…"
well, it could be different time frame. Bond is dead in short term (1-2 years) and we all become japanese (after 3 years) in the long term.
ReplyLol @LB, you completely coerced my reference to Mr. Watanabe (wouldn't be the first time). I meant China and Japan selling down their US Treasury holdings after Fed support waned. Regardless, you really need to chill and stop the minute-by-minute bond commentary if we are going to have an adult conversation here. One of us is already wrong. Care to look at monthly chart of TLT? Let's just say I'm not telling you what to do, but man, you gotta zoom out. Once 116-117 support broke the movie has already ended. You are staring at a gigantic H&S. I wrote the scenario many moons ago right here in black on white. I believe we have already had this conversation before. You are too preoccupied with myopic observations vs the big trend. Next solid support on monthly chart comes in the 101-102 area with a brief stop at 106-108 with the "face-ripping" daily rallies a few times in between notwithstanding. I'll give you a big credit as you do cartwheels on those days. You can do the math on what TNX may be trading at when TLT hits 102. This has nothing to do with a default, Trump or Democrats.
ReplyHey, Lefty...I wonder if this hedgefund trader is going to get a margin call one day. World's best hedger...till not.
Replyhttps://www.instagram.com/catmcneil/
That's right sweety...your in there for life. Not even the new york savant masochistic club would dare go in there.
Reply@IPA. We sincerely apologize if our stream of short-term chart consciousness has become irritating and maybe not very appropriate for the blog. 5 minute macro as MM himself used to say. We are who we are, and you're right, swing traders and options punters don't spend a lot of time looking at longer term charts. Guilty as charged.
ReplyLook, first of all, we are not disputing the fact that you got it right on higher rates this year. OK? So, yeah, no question that you have been correct with some great (long-term) chart reads and calls on bonds. We stand corrected, but as always we are still trying to focus on what may or may not be ahead of us. The level of sentiment extreme in bonds at the moment is reminding us of 2010, though. I would add that we found 2006 a difficult year to negotiate, probably for similar reasons.
Btw, we would argue that the last few months action in Treasurys have not really been due to China, Japan, Russia or other foreign entities selling. More to do with the fact that non-traditional leveraged players (US hedge funds) know that the Fed is selling, and are leaning short with leverage. This is the same game that is usually played with crude oil from the long side. It works fine, until it doesn't, and then everyone is caught on the wrong side of the boat.
Mrs Watanabe is usually part of the FX conversation, is she not, as a Japanese punter eager to chase yield outside of yen-denominated assets? We are always eager to insert Japan into the debate, as a living laboratory of what madness central bankers can achieve.
OK, back to something we seem to know about, today's dump. Will it accelerate after 2pm?
There is a great chart in here that illustrates the analogy between today and 2000 in terms of asymmetric valuations, this is something that you feel every day (how can Ford trade below book and other stocks trade at absurd multiples?):
Replyhttps://www.zerohedge.com/news/2018-10-30/reuters-calls-it-growth-stock-days-are-gone-value-back-play
Somewhat astonishing to see US HY ETFs untouched today with Treasury yields screaming higher. There are some unusual dynamics in US credit markets that are indicative of "unnatural market participants". In equities we expect more weakness ahead of the midterms; after all it's hard to see how markets can rally without AAPL which didn't muster even a dead cat bounce.
This was a tough but interesting week. Next week, midterms, Fed, promises to be just as challenging.
Just to follow up on a previous post about the "markets v FED/ECB", the first signs came from the ECB today that the markets are going to win, more TLRO's anybody? I think it is consensus that the FED has won their bout with the markets .
ReplyWhich leads back to Abee's post on P/E's (didn't want to inturpt peeps in full flow, seriously good stuff by the way!), European P/E's on the floor with US on the relatively high side.
P/E re-rate you ask? P/E rotation one answers.
I'd say there is probably a few more trade idea's in there - but I'll leave that to more qualified.
Surely the moment Trump pushed the fiscal, spend/tax cut buttons, it was time to rethink what we expected from US Bonds ? I know I certainly thought again whether I was still comfortable with inflationary risk and decided to step aside. You might take the view that with employment being tight (relevant skills tight), some evidence that the trend on wages is now up, and Trump tax cuts offering another real increase in disposable income, that the Fed have all the reason they need to keep going until the evidence changes. They've been gifted a chance to 'normalise' rates (whatever that really means) and as such they may have a view it's in their interests to build some dry powder for when ever they need to use rate management in the future. I think it's impossible to know with foresight where rates will finally top ,but do we need to know that?
ReplyPersonally, when the yield on US bonds started showing fresh air over and above the yield on the SP500 that looked a great reason at least to be risk cautious. That's at least part of the reason for the divergence between growth and value stocks isn't it? The problem as we have seen though is when growth leaders start not delivering the growth numbers expected they go south in a major way.
At the moment the bullish % on the SP500 is very low, because both value and growth don't look worth the risk, but it doesn't surprise me that we can see short covering and some value buyers out there simply because how fast and how far markets travel matters, but with that rate question unresolved I think the news isn't good for growth or value buyers other than for relatively quick trades. For longer term people like me the cash to sell any rally plus some uncorrelated holdings is the way to go. I don't want to be short US bonds even though I still tend to think they have some way still to go. Indeed if I want that type of play I'd rather be short UK bonds right now, because as resistance to a Brexit deal crumbles away the BOE will play some catch up and we know what that would mean for bonds, or maybe I should say that will be what the market will tend to perceive even if Carney refuses to deliver because the 'smell of his bacon frying' tells him not to raise rates.
As usual time frame matters and it's very easy for people who have different time frames to disagree because all too often they are talking about different ways of playing the market.
This piece might qualify as a bit of a contrarian indicator. Gundlach correctly points out that the concerns about MBS are a bit overblown at present, although there is no doubt that the housing market is slowing to a crawl in places.
Replyhttps://www.zerohedge.com/news/2018-11-02/mortgage-bonds-suffer-worst-month-2-years-marginal-buyer-fed-pulls-out
Many of us have pointed out that in some respects the balance sheet reduction by the Fed is a more serous issue in terms of tightening financial conditions than the gradual and well telegraphed procession of 1/4 point rate hikes. It is unquestionably true that the combination is unprecedented, and therefore no-one has traded through this type of Fed program before.
We suggest that the logical conclusion of what we are experiencing currently is that as equities weaken and the bull market is finally declared terminal, if not dead, then US hedge funds, Real Money and overseas investors all emerge as buyers for MBS, munis and Treasuries, all of which have seen prices fall, and the market carves out a path to lower rates before the Fed, in its usual fashion, adjusts policy after the fact, to reflect the slowing economy.
Now to return to equities. We are bullish and bearish, as we mentioned last week.
ReplyWe are bearish as hell QQQ for tomorrow and Tuesday, will be looking around for value at the same time as we expect another wave of selling in "tech", "FAANG", or whatever you want to call the over-priced growth sectors, now that last week's dead cat bounce is behind us. There will be more bounces but the charts seem to be pointing to new lows for FAANGs.
It might be a good idea to be flat by Tuesday evening, Wednesday morning rather than to try to game the midterm elections. Another relief rally is probably not far away unless there is some outlandish result. There is also the argument that a less powerful Trump and a reined in Mnuchin would lead to less issuance and be positive for Treasurys.
We are bullish rate-sensitive sectors, as we anticipate some kind of hand signals from the Fed later in the week. Even a reminder that they remain "data-dependent" might suffice to trigger a short covering rally - in bonds and stocks.
A good week to be extra nimble and not too dogmatic?
The last three years I have been studying the underlying fundamentals that make a market. I haven't put to much effort in trading the dummy account. But that is well over , and its time to trade.
ReplyThis link is very agreeable , I have found , since you really have to know your own time frame...are you are 1% stop losers? ...or a 3% percenta.
https://www.zerohedge.com/news/2018-11-04/morgan-stanley-pain-was-greater-many-investors-could-have-imagined
If I had been trading as 1% percenta with cash in hand , I doubt I would be in this situation...agree, lefty.
But, that didn't happen. I made some calls, and within a respectable degree of percentage leeway , I think I have got this right.
Be that as it may, this is going to leave me with my new wealth of information of markets to find a secluded place to do what I do best , eat , train , research and punt...and you know what...and be left alone to work from here. This link is a good starting place.
http://www.vietnam-guide.com/da-nang/top10/best-da-nang-beach.htm
https://www.project-syndicate.org/commentary/china-opaque-foreign-development-loans-by-carmen-reinhart-2018-10
ReplyThis article is a great window into how the "short-dollar" bubble is coming frayed apart.
Time to get flat.
ReplyQQQ didn't fill the @Cbus gap to 166 but we closed that trade out this morning for a profit. Have a few smaller things on for now. If we had to guess, we'd say that some kind of relief rally would ensue by virtue of eliminating uncertainty of outcome.
But really, it's time to sit and watch, and then perhaps find something extreme in the reaction to fade. Certainly we would fade a dollar rally. Looking at this from another perspective there is something more important ahead than the midterms - the FED!
ReplyBeen flat for a while. That Spooz levels I have put on display...can you see the whole thing now. Not much to it...daddies money.
I'm starting to wonder if we get a sell the news type signal here post election. I think I've lost count how many times I've heard that statistic about how markets always rally after midterm elections. Stats like this are great for getting a bunch of people stuck on the wrong side of things in my opinion.
Reply
ReplyCbuss20122, you know what side you had to be on if you like your freedom?
When this song played at the half-time superbowl , and that troll-lette piped up over at her instagram straight afterwards many years ago...the cat was out of the bag for public viewing.
https://www.youtube.com/watch?v=mlQazNBH5fY
Well, there's your post-election relief rally as one layer of uncertainty is lifted. The biggest reaction to the shift in the HoR is probably going to be in EMs, especially China, where any weakening of Trumpian power will be viewed as a good thing. We have avoided for now the broad market consequences of AAPL's lower guidance.
ReplyInteresting to see that value stocks are NOT doing well today in general and that all kinds of garbage is up big. So this is a squeeze. Certainly we would add there is definitely the beginnings of a squeeze in Treasurys, presumably b/c there isn't going to be another Tax Relief for the Rich "fiscal stimulus" reverse Robin Hood ahead of us now and the details of yesterday's 10y auction were generally positive. Perhaps indirect and direct bidders were also awaiting the election.
Now we can forget politics and focus on the FED. They are in a tight spot, wanting to take some more froth out of the market without driving another nail into the coffin of the US housing market. A dovish hike is in the cards for December, perhaps the best that they can do here is to say they are staying on course but remain data-dependent. Any shift lower in the dots might well be read by the market as a move towards a more dovish Fed in 2019.
Trading wise, there are clearly going to be some technical levels that present tactical trading opportunities over the next few weeks, but it's hard to shake the feeling that a long and painful grind upwards into EoY is clearly the Pain Trade, for the shorts at least. Buybacks are back, and it's tough to fight the flow. For now this market is going higher, retracing its steps and filling gaps, although FOMC OMO activity mid-month might elicit a wobble along the way.
Trade what you see, not what you think?
A look at the latest US housing market data suggests that some kind of slowdown in the Fed's tightening program may well be forthcoming. Remember they still own a shedload of MBS and the world's biggest hedge fund likes to make money, not lose it. Also it's not just the Fed itself who are going to suffer, but their masters, the money center banks like Wells Fargo. Here are the gory details on mortgage apps from Prof. Sanders and ZH:
Replyhttps://confoundedinterest.net/2018/11/07/winter-is-coming-residential-mortgage-applications-decline-with-interest-rate-increases-and-seasonal-effects/
https://www.zerohedge.com/news/2018-11-07/mortgage-applications-plummet-18-year-lows-rates-hit-2010-highs
Expect to see a lot more curve flattening posts now that winter is here. I know that I have been a broken record and early - and that IPA has duly and appropriately excoriated me for this, but I still think US long bond yields have peaked and are heading lower for most of Q4 and probably well into Q1.
Anyone got any thoughts on the incredible Teflon US HY and IG credit market? Clearly stunningly overvalued and yet almost untouched by the higher rates narrative. Are markets smarter than we are, or is a substantial spread widening in the works? Maybe this is another of those things that will happen, "later" than everyone imagines, and then "all at once".
Lefty...overheard at the local post-election watering hole in Brooklyn.
ReplyHer: what's this election about bro?
Him: not much, it's only mid terms.
Her: well, bro...its not only mid terms, little bro...
Him: pipe down , sweety...and continue to finish that...
Her: listen, little bro...this town is ours...
Him: i get that, i'm a foreigner, and your the local...
Her: listen, little bro...that newly elected sweet ass back home is our ass , too...
Him: did you say , our ass?
Her: Yeah...
Him: okay...our ass , is your ass here too?
Her: Yeah...
Him: so I shouldn't bother voting anywhere then?
Her: Yeah...no vote for you...our ass, and our little bro!
Lefty,...overheard in the post-election dayclub session.
ReplyHer: see that hoe over there...
Him: yeah.
Her: that's one of my hoe's.
Him: is your hoe... mean our ass?
Her: yeah.
Him: i wouldn't speak like that about your friends.
Her: f##k off...you need a gun.
Him: sweety, pipe down...where at a dayclub...enjoy the chemicals.
Her: yeah...look where we are...that would be right. you need a gun.
Him: ...um, tell me, sweety...you'll think little bro over there has gotten this far without one?
Her: shut your face c##t.
Him: okay...I'm getting out of here now. your mentally challenging me to much for a dayclub session.
So the midterms and FED are out of the way that just leaves tariffs, right? Or as Meatloaf famously phrased it "Two out of Three ain't bad".
ReplyA very quick run through as we head into week close[as I suspect ya'll are itching to get back in here:)]
Dollar - Up
Commodities - Down
Equities - Upish (relief rally?)
Bonds - Neutral /slightly Upish
@leftback we could do with them chart views as well as those Macro fundies.
@Skr, you got some of that right… 3 out of 4 ain't bad. Equities were a bit overbought so that is being worked off.
ReplyHmm, today's big story? What do you think is more important for bonds? Yesterday's Fed? The crappy 30y auction that preceded it? This morning's super hot PPI number? Or the price of WTI and Brent?
The oil price, without a doubt. How do we know this? Look at the Treasury market. Hottest PPI print since 2012, and what did rates do? It was Sell The News in rates this morning. OK let's explain this: the PPI is a (somewhat) backward-looking indicator, whereas today's oil price move is essentially baking in and forecasting a move lower ahead in PPI and CPI.
LB doesn't have the time available just at the moment to dig out and post charts, but perhaps we'll get there during the quiet week around Turkey Time. Not sure we will see much happen in November except a bunch of highly profitable range trading! Bulls should beware - all we see in the charts today is the gap lower in SPY and QQQ to Tuesday's closing level.
Looking ahead to next week, would not be surprised to see the aforementioned gap filled early in the week, before the relief rally resumes into op ex on Friday. Makes sense, no?
Munis and REITs are out-performing today as rates slide lower, and generally there is a bid for value over growth in equities. We expect to see a bit more than that going forward. Reports of the death of NLY and AGNC were perhaps greatly exaggerated.
ReplyCannabis companies report earnings next week, we can confidently expect that the trade in those names will be more fun than a barrel full of monkeys. This week's action was especially manic. The lock-up period for one of these names ends in January. There is only one earnings report ahead of the deadline and then one after… it will be interesting to see how long investors wait before trying to get out of a burning theatre through a very small door. Mondays have often been … difficult for cannabis longs.
In other news there is a possibility that the fire in Malibu will burn all the way to the ocean. Insurers must be on edge again. Let's hope everyone can get out early and safely. Don't mess with the Santa Ana winds.
https://losangeles.cbslocal.com/2018/11/09/woolsey-fire-75k-homes-evacuated/
https://www.bloomberg.com/opinion/articles/2018-11-09/china-s-scandal-hit-bad-banks-are-being-forced-to-shrink?srnd=markets-vp
ReplyAnd yet another window into the enormous bubble in US dollar borrowing, aka the "short dollar" bubble as I call it. This has been unraveling since 2012 somewhat slowly, being held together only by money printing. But this is starting to unravel more quickly recently.
This is the steamroller in my opinion, everything else is just picking up pennies right now. Given, it's one and the same with China's credit bubble, but still worth paying attention to. Watch Chinese real estate and banking health (as much as possible given the lack of data) for signs this is coming undone.
@Cbus: We just don't know how many resources PBoC can devote to holding it all together. Given the societal consequences of a deep recession in China, one imagines they will fight hard. USDCNY 7 seems to be the line in the sand for now as they try to avoid another episode of capital flight.
ReplyFor now, we think it holds, the dollar retreats a little and EMs and China catch a bid into EoY.
The gaps we alluded to may be filled on Monday or as early as today. Then we find out whether some of the oversold bounces we saw (XHB, for example) are real or of the dead cat variety. If the latter, we break to new lows, if the former then next week we will see a return of dip-buying action. On balance we think that lower rates will begin to help and the dip buyers will return.
Marijuana stocks are down, with earnings looming next week. No worries though, a few extra BONG HITS and STONER, I mean, punt, I mean a new generation of marijuana INVESTORS will be, like, TOTALLY STOKED, and unconcerned with enterprise values for individual names that are 5-10x the projected size of the entire global market for medical marijuana. Going to the MOON, dude, gonna TOKE our way to wealth as marijuana millionaires, stocks targeting $420 - like that dude, MUSK, hey, man, that was so cool, although those down days are GNARLY.
@LB, obviously a Chinese hard landing is something everyone is watching, and a CNY break of 7 would be significant, especially since they outright stated they do not want to pass this. If it goes past, that likely indicates things are getting away from them. At the very minimum, the market as a whole will have this general belief. It probably will hold for the short time being, but for how long? They're already selling their reserves. They last did this in 2015-2016, where they sold over 1 trillion of US reserves, yet this did nothing to stop the bleeding... in large part because it causes a feedback loop in the US dollar as well as US treasuries, making their dollar-denominated debt more expensive as they sell their reserves (which almost entirely negates things in the first place).
ReplyThe main problem is they've hit a wall in expanding US dollar denominated credit. When in expansion mode, China's dollar problems aren't so problematic, but that requires lenders to lend to them in dollars. It also requires chinese export of goods to return lots of US dollars. Well, right now, USD lending is starting to pull back, and China's current account has flipped negative for the first time in 17 years this year (not coincidentally around the same time a lot of this stuff started to blow up). All this means that we have huge black hole worth of dollar needs coming from China, and they're not able to get their dollars as liquidity has dried up quite a bit.
This thing has legs, that's all I can say. This has been souring since roughly 2014, but we got a reprieve in 2016-2017 as China unleashed the largest wave of stimulus in their history and was able to restart some of their dollar borrowing. With that said, the 2016-2017 period of stimulus and dollar borrowing was more of a last gasp than a recovery, and it likely sealed the deal by expanding their overall dollar liabilities and financial instability issues past the point of return.
This is going to crash at some point, and it is going to cause a global financial crisis, one that will likely rival or surpass the GFC. I know that's an extreme statement, but it's basic math, economics, and understanding the scale of all of this. Are you confident that the duct tape is going to hold this together much longer? It's possible, but everything is fundamentally pointing against that right now at the same time that a lot of the technicals and market action is also confirming those items.
Like the GFC, this is not some black swan that "nobody could have seen coming". It's more of an issue that people have stuck their head in the ground on and pretended it couldn't come unglued since it continued on for such a long time they felt it could never come down.
@CBUS, Based on an old wsj article (https://www.wsj.com/articles/chinese-investors-are-getting-fed-up-with-their-countrys-dollar-debt-1524475803), between 2013 and 2018, there would be under $400 billion bonds denominated in USD issued by Chinese companies. I assumed that before 2013 the USD bonds issuance might be really insignificant. I could be wrong though, as I do not have any data. And the government itself has little USD debt.
ReplyThose bonds are not going to mature at the same time, probably spread out in the next 3 to 5 years. Those are mostly corporate bonds, not all of them are SMEs, so they could actually default on the bonds without creating any systemic risk.
Therefore, I am not sure if your theme of the big China USD bonds bubble bursting has such a huge impact. I am not saying that China does not face great difficult time ahead. Just I see its problem has more to do with plateau labor productivity and inefficient financial system. Yes, USD appreciation is a serious issue. The EM markets in general are in for a rougher ride.
But one lesson everyone learned from the GFC is that you could monetized your debt and ride out of the crisis, especially when China's main debt burden is still RMB denominated. And as far as I can see, a large part of China's local government debt had already been monetized. And with the recent fiscal stimulus, monetary loosening, and deregulation actions in China, they probably can muddle through, though not pretty.
Also, a large, unknown portion of USD-based bonds issued by Chinese companies were bought by Chinese investors based on the WSJ article, presumably with borrowed USD from China's foreign reserve. So when a default event comes, it could be interesting to know how the repayment would affect the whole foreign reserve.
ReplyIn addition, the current deficit could be a symptom of capital flight, given it is really difficult for many folks to move money out of China.
@Anon
Reply" And as far as I can see, a large part of China's local government debt had already been monetized."
And guess what Chinese monetization is backed by? USD based assets. Without access to the dollar their currency starts to destabilize, and then that poses risks to their internal debt bubbles. It's far from being limited to just dollar bonds, and while China is part of the epicenter, they're not the only player here. See the chart below. For whate it's worth, their dollar bonds outstanding are almost 1 trillion right now.
https://amp.businessinsider.com/images/59dfb421d4e9201f008b45a9-480-598.png
There is a lot more out there than just publicly listed dollar bonds. Almost every major commodity, to which China is a bigtime importer of is traded with via dollars. A rising dollar makes everything more expensive for them.
The truly silly thing is thinking that China can just print away all their debts without ever facing any consequences for this. The recoveries after their waves of stimulus have in fact have been a series of lower and lower high points despite larger and larger stimulus going into effect. If stimulus was effective there (aka, inflating away the debt) then this wouldn't be a problem. But as their debts mount and they have struggled to keep their currency above water (which requires more USD backing). Now, all we see is slowing GDP, mounting debt, and increasing currency problems. They've been riding out the problems for the past 2-3 years, but the issue is that it's not working. That's what many are failing to see as there has been no recovery in inflation, gdp, or anything truly positive, and their problems have only gotten worse. All this will do is make it harder and harder to keep their currency stabilized and the other problems will continue to snowball as they have.
Here is a very good big picture view of chinese money printing: https://twitter.com/Jkylebass/status/1051256440353169408
So if they're printing so much money, why haven't we gotten a major devaluation? Well, it's largely due to immense capital controls so far and other gimmicks that aren't really sustainable on a long-term basis.
The main point is, we've been in the stage of China trying to monetize their debt and muddle through things, but it's not enough. You can keep a dam plugged by putting your thumb in the hole, but eventually new holes start to open up. Plugging it will delay things, but it can't stop the inevitable.
@cbus
ReplyYes, China has a RMB debt problem, we can all agree on that. But does China have a USD-based debt problem?
"For whate it's worth, their dollar bonds outstanding are almost 1 trillion right now. "
What is the source of the above statement? Based on the WSJ article, its USD-based debt should be around $400 billion, including rollover so the total inventory now would be lower. The difference between WSJ number and your number is $600 billion. That is not pocket change and could change the situation dramatically.
"Almost every major commodity, to which China is a bigtime importer of is traded with via dollars. A rising dollar makes everything more expensive for them."
Right, but then the rising dollar also tends to make every commodity cheaper.
I also want to emphasize that during the past 2-3 years, China was spiking the leverage in the economy. The monetizing part had not begun in full scale yet. Look at the Shanghai interbank rate, until May 2018, China is in the monetary tightening mood, then the rate drop, coinciding with the trade war. The tax cut, the deregulation, and some more fiscal spending, offsetting some impacts of trade war, means China would muddle through with a bleeding fx reserve in 2019.
The future growth rate will be low, as I said, it is labor productivity problem. The vast number of unskilled labor, basically they have reached their peak earnings and there is few policy tool that could help them grow their income at the fast speed as before. Credit cycle does not help, but this China's problem is more fundamental than debt bubble.
AUD and NZD already in some extent reflected loosening China monetary conditions. Before the Trump-Xi meeting, RMB would not break 7. After that it is anybody guess. 7 is a psychological level. Is breaking 7 a big deal? Again we come back to the USD-based debt level. If it is about $400b, then there will be short term panic. If it is indeed $1 trillion, then there will be much bigger shock.
Regarding the trade talk, it looks like China would make some concessions in the leaders meeting, but also it prepares to intervene the offshore RMB market just in case. So the unpredictable part is the US response IMO. I am a little pessimistic as the trade hawk really seems to have an upper hand. Buying some cheap protection in the next two weeks could be a good idea. Next January and February would be the real test.
@LB, am I hearing you hedge your XHB bet a bit? Lol, just teasing you, pal... In any case, check out DHI's fresh 2019 guidance, err...lack thereof. The best builder out there has no freaking idea what the market is doing now after raising their guidance just last qtr. I bet they are scaring the crap out of everyone, therefore the dead cat bounce you referred to is going to be short-lived indeed. I know, I know, until March OpEx we wait. Perhaps it won't take that long :)
Reply@IPA, you what gave the bears and bulls the audacity to think they could take control of everything?...
ReplyThe premier league guy. Lot's of laugh asshole.
ReplyI'll give a tip on where oil will be next century. ummm...$1.00.
You can trust me to give you my utter most best market valuations from here on out. Sir.
ReplySeriously, macro-man team..can you imagine me being let loose amongst the oil oligarchs trading books for a week? or even one wall streets big houses.
Please please please ...give me a job...pretty please.
China is going 'western' economically albeit very slowly. Moreover, I can see a lot of people losing consistently over a long time period by essentially betting against the Chinese govt and their ability to 'slowbleed' their adjustment problems. In effect betting on the 'big one' , a currency crash or debt crunch whilst the govt just keeps grinding the losses slowly away. If I had to find an analogy it would be those traders betting against the Japanese Bond markets all those years to the degree it coined the term 'widowmaker'. Clearly you can win big betting against govts like Venezuela etc, but it didn't work in Japan and I suspect it isn't going to work in China either.
Reply
ReplyYou say China 'slowbleed'...nah,... the oligarchs and the street houses books would go through this before they noticed anything...
https://www.youtube.com/watch?v=Pk2ZX8UqHaQ
ReplyThis one's a better ((version))
https://www.youtube.com/watch?v=EoODcUKNLRg
ReplyThe mid-term...not the short-term, votes are in, and macro man has been delegated by trumpy to supervise the congressional funding and building of the wall in...Israel.
Well....... I agree with @Cbus that China's debt is a massive scary problem and with @Anon that it isn't going to burst before New Years, which is the time frame in which we are currently focused.
Reply@IPA - chart watchers can read the XHB chart in a number of ways, one of which is that a meaningful bottom has been made for the time being after a RSI down in the teens (we are not long btw, just pointing this out). Like the REITs, XHB trades stronger than the broad market today, and this will persist as long as we see a drift to lower yields. As always, getting the dollar and rates correct predicts many other things. We didn't expect to see King Dollar spike to new 2018 highs this morning but there it is.
Most of the things we like (F, T, NLY) are trading strongly today, whereas things we don't (AAPL, QQQ, IBB) trade weak, and we think that's a theme for Q1 2019 at least. Of course there is probably going to be another massive bounce in over-priced garbage at some point.
...and today saw the @Cbus gap to QQQ 166 more or less filled. A similar gap in AAPL is also almost filled. Good eye!!!
ReplyThe jewel of the cannabis complex reports on Wednesday, Canopy Growth, after Aurora reported this morning. Note that Aurora beat, but was dropped for a 4.5% loss anyway. Tilray reports after the close tomorrow. Veteran cannabis watchers will know that the pumpers will be out early, pushing TLRY and CGC up at the open, and perhaps into the close as well; then the real fun and games begin. No new catalysts for this sector after this week, now that legislation, elections and earnings will be behind us. It wouldn't be a big shock to see this small segment of the market retreat from its "highs"; many of these stocks have price/book ratios > 100.
@LB, yes, on short-term basis RSI is used as a reset of sorts and only another reason for bears who scaled out earlier to re-enter on rallies. Let's see what HD has in store for us tomorrow (pun totally intended). I suspect there will be very little holiday cheer for them this year. It's a barometer of the sector, and if they get taken to the wood shed then XHB will follow in a short order.
Reply@amps, I am used to your gibberish and simply skip over your nonsense here. But pal, you wouldn't expect me to stand next to you at the pub and not send you to the dentist after your "kind" remarks about me, would you? Let's just say you should be glad we are thousands of miles apart and you are in a need of a stronger medication I simply can't prescribe.
@IPA, ah well. Wouldn't be the first time. But , you know what. You cannot frustrate me out of it...and you cannot frustrate me into simple mistakes. Punting is what do...win or lose. Be gone!
ReplyThere are still two naughty little gaps in the chart of AAPL to be filled, the lower one to 187.88. For those of a bearish hue, that suggests there might be further weakness ahead. On the other hand, we are flirting with the 200 day MA, so the daily and weekly closes will be very important, and there will be many with an interest in keeping the stock afloat as we head to op ex., so maybe that lower gap goes unfilled for now.
ReplyDollar and rates a little lower, defensive (rate-sensitive) names seem to have anticipated that yesterday, although Treasury futures have retreated a little from yesterday. REITs persist in rallying and so do the homebuilders. Sometimes the market has x-ray spectacles on and sees something coming before the talking heads and market pundits, even the commentariat at MM.
Peanut gallery has been divided here between "winter slowdown / dollar and rates reversing / end of year risk on rally" (LB) and "dollar and rates screaming higher/ stagflation / run for the hills" (IPA). Every day you can see the push and pull in the market between these groups. If you are on TeeVee of course, you just look at the direction of the day's arrow and spout off accordingly, b/c that's the way the game is played, my friends.
Dax futures are holding up well against its US counterparts - maybe the first visual of the rotation I mentioned.
ReplyOthers here see markets slowing down, with treasuries outperforming and dollar rising (and commodities falling). Standard deflationary / liquidity crunch playbook.
ReplyFWIW, will be interesting to see if bonds can continue falling in the face of Oil getting crushed here. History says Bonds will outperform, especially if Oil continues to come down. And oil is looking like it has more room to fall (may have some very short term rallies, but this is an oil bear taking hold). Oh and guess what also happens when oil falls? The dollar tends to rally... imagine that :)
Oil was the last holdout in the "we're facing inflation risk" narrative that comes at literally every market top, and somehow still catches everyone off guard thinking we're facing more risks of inflation than deflation. Given, the two are closely related (inflation LEADS to deflation typically). From here on, we get CPI coming down, ISM Dropping, dotplots coming down, fed halting hikes, etc. This could potentially be bearish on the dollar, although how that actually plays out is all strongly relative to what other countries around the world are doing, which will possibly be even more dovish than anything in the USA, meaning a potentially continuing strong dollar. We will see.
On another note - I came across a perfect visual for a lot of my thinking. Please view the graphic below (copy paste address)
Replyhttps://pbs.twimg.com/media/Dr6jViLUUAAunRD.jpg:large
I post this not because of the current debt to gdp ratio of corporates being worrying (everyone already knows that). I think the far more interesting item is if you look back to the earlier portions of this chart where debt to gdp for corporates was extremely low... notably during periods of high inflation.
I mention this because people get super caught up in looking at deficits and such when trying to predict a big inflationary bust (as people called for in 2007, and more recently with the bond bear calls) vs. our more common deflationary busts, and completely ignore the reason why we likely can't / won't have any real type of long term stagflation like we did in the early 80's.... US corporate and consumer debt prevent any real long term stagflation from ever taking hold.
The main issue is that if rates and inflation become too high, it becomes very hard to see a sustained level of inflation in a slowing growth environment because you then start to see defaults pile up. It's the basic story of the fed raising rates too fast - they raise rates due to inflationary issues (as they have to) until the point where they hit the ceiling and those rates start to cause cracks in the credit market. From there, we flip a switch from inflation to very rapid deflation as the market can't handle the higher commodity costs, higher borrowing costs, higher employment costs, etc and then has to delever and reduce expenditures in a hurry.
We can however see a real stagflationary event when our debt levels are relatively low since rising costs and rising rates won't cause the same squeezes they do when an economy is highly levered in corporate and consumer debt.
@LB, I said nothing about the dollar, stock market, end of year risk on/off or stagflation in general, did I? I did make three clear and precise calls though: XHB to 28, IYR to 73, 70, 67, 63, and TLT to 108, 106, 102 - all by the end of Q1'19. Now, you may interpret those calls as stagflation for the sector I think gets beaten senseless - real estate, both commercial and residential, due to higher interest rates. But there is a whole a lot more sector specific to my call than just rates, which, not to be redundant, HD conference call pretty much confirmed today. I made no FX or any other market calls, so let's get that clear, please.
ReplyGuys - I'm gonna flip this one!
ReplySo, what I'm getting here is - peeps are looking back on historical /empirical (and dare I say curve fitting) /talking for the sake of it (yes you ,33% and your buddy brings in at 50%), but hey, we all have different ways of working.
The confusion (yes you again Dr. Hyde) is hilarious.
Get comfortable in that old arm chair and regale to the grandkids what happened when ya lost ya balls!
@Skr??? Not sure what that means or at whom it is aimed… funny though. LOL.
Reply@IPA. Sometimes LB reads, thinks and writes faster b/c of shortage of time than is merited, and simply makes errors. Apologies. Mind-altering substances played no role in these mis-statements, however.
OK, where are we this morning? Flat futures, awaiting CPI, which - if it is screamingly hot - must surely be the last in a screamingly hot series, b/c as @Cbus outlines, lower oil will drag US yields down with it, b/c it is the major US inflation driver. Skate to where the puck is going to be, not where it is as The Great One once stated from the Great White North.
Speaking of Canada, sector leader Canopy Growth missed, Tilray beat but still lost a fabulous amount of money on $10M annual revenue, and the entire cannabis sector looks like it will take a trip to the woodshed today for a whupping that may last into expiration and perhaps become prolonged in the absence of upcoming catalysts. Profits up in smoke….
We continue to be long "real economy" things on the grounds that recession isn't yet imminent (although winter is coming). Not touching any kind of "tech" although AAPL looks due for a bounce, interesting to see the world's most important stock getting oversold. Maybe the Swiss National Bank are smarter than we thought, apparently they unloaded some in Q3.
AAPL still trading heavy. That gap down to 189ish more or less filled now, so it's ripe for a bounce. Certainly the major averages are not going to get far without, so it's critical.
ReplyWe could be wrong but the chart of EEM seems to be constructing the framework for a stealth end of year rally. REITs also, for example the chart for the MORT ETF has a double bottom.
Chairman Powell's utterances may be of interest tonight. With crude oil prices cratering this week, perhaps this might not be the time to broadcast a hawkish view.
Just a technical thought - that gap I mentioned a while back... we're sitting on top of it with the spoos right now, but haven't broken. Some may construe that as being good given that we haven't broken it yet. But if we bounce from here, I would be even more worried about at potential head and shoulders if that were to occur. If we broke that head and shoulders neckline, based on traditional h&s stuff, we would likely see a measured move to new lows.
ReplyWith that said, this hasn't happened yet, just saying it *could* be forming.
Okay, so nvmd, closed the gap right away. But I still think a potential H&S is in play. My guess it that we will likely get a small rally into OPEX as LB brings up, but if stuff weakens afterward, then we'll be right on the neckline in a hurry. But once again, who knows. I'm not counting on that, but just preparing for the possibility of this scenario happening.
ReplySo…. one of the more interesting things about this business is how many moving parts there are and some days they all seem to be in motion at once. Now, another edition of what the hell just happened, part three for the week. Let's review a few issues, and then the peanut gallery can throw things at each other as usual:
Reply1) @Cbus gaps closed in spoos, Qs and AAPL, which sets up the market for a bounce, according to one interpretation.
2) Op EX Is fast approaching which tends to support the thesis in 1)
3) Chairman Powell made utterances last night, which were at first interpreted as hawkish. It's not clear he intended this.
4) While 3) is going on, we have a crisis in the UK government once more related to May (or May Not) and Brexit.
5) Because of 4) cable is down a big chunk, and gilts are bid, with UK10y down ~10bps.
6) Oil is steady this morning for the time being at $56 - but has fallen 20% very quickly.
7) Perhaps because of 4), 5) and 6), and not 3), US yields are drifting slightly lower this morning, 3.10% on US10y.
8) 3.10% is an important support level for TNX, (and there is a huge short position).
9) Some people's favorite FX risk barometer, AUDJPY, is flashing green, USDCNY < 7, and China was green last night.
10) VIX is slightly lower, perhaps because of 2).
In the old days, world events in other large economies used to matter for FED policy. It's not clear if that's true any more, but one could certainly make an argument that some members of the Fed might see fit to send out a slightly less hawkish message, in view of what is fast developing into an absolute dog's breakfast in Westminster. Future BoE hikes are being taken off the table by the market even as we type.
OK, you can throw stuff now.
The empire is dead, long live the empire.
ReplyNo one is throwing anything. We are all chums here on the soapbox at speakers corner.
"9) Some people's favorite FX risk barometer, AUDJPY, is flashing green, USDCNY < 7, and China was green last night."
ReplyThis is definitely somewhat bullish EM in the short term in my opinion, and the charts are looking reasonably favorable to EM. Tencent finally had decent earnings, and some of the economic data from China wasn't quite as bad as it had been the previous month. So I'm kind of with you in the thinking that China could see a short term rally, but I don't see the risk/reward being favorable to try to trade this.
I think the big thing to keep in mind is that China is selling forex reserves. This is a very desperatate move to keep USDCNY from devaluing too far. We literally saw this playbook back in 2015-2016. Everything going on in the markets is very similar to that time, except we have higher rates, higher commodity costs, increased debt service costs globally, and bigger geopolitical risks. I truly think 2015-2016 gave us a playbook of how to play the current markets. So basically, we're in a groundhogs day version of 2015-2016, except we have less tools to fight against gravity compared to back then. Obviously, watch for the QE's to come roaring back here, but I'm not convinced they can save markets indefinitely as there have been greatly diminishing returns and more political pressures.
US rates are lower, quite sharply so at the short end, which is in theory the end of the curve most directly influenced by the Fed. Hmm. US 10y yield support level at 3.10% has been breached, and 3.06 and then 3.00% are the next levels to watch. For those who watch this and consider it important (and we do) AAPL is up on the day. With op ex ahead, I am finding it hard to conjure a horribly bearish scenario out of that lot, especially after the @Cbus gaps™ have been filled yesterday.
ReplyIt's probably not going to be the most fun day ever for longs, but it may end up OK. Look around today and you will see that here and there some long-only equity guys with cash on hand are going to be filling their boots a little bit into the end of the year. Why? Because they have to - it's their job. Whether that can constitute the foundations for a face-ripper is hard to say, but it's likely that watching AAPL will pay off as the market's most important stock should provide some useful direction.
so that's it, it comes down to Apple saving the entire world market, a day before expiry? that is an insult to the short gamma exposure out there..
Replylong term the $181bn of AT&T debt, soon to follow GE glorious future, and the whole credit ETF house of cards are some of the issues for US markets. QT and trade tariffs were announced before Trump got elected. Markets for two years, decided that only tax cut mattered. They need to go back to pricing QT and tariffs en vitesse. It will hurt.
long-only equity guys investing here will have 1/10 of the shelf life of corporate buybacks (the theft of the century, don't they look smart right now) - those short term considerations are good for a pre-Santaish push over (spoo) 2800 something where everyone should plan to trim equities holding to zero, nothing more
long term there is only air until January 2016 lows. It will still look mega bullish on a 20 year chart, and offer close to 40% discount to 2018 market top, but a lot of pain until then for anyone who can't break their 2009-2018 POMOQEFOMOBTFDTINA wanton brainwashing
@LB, peanut gallery is divided indeed. But perhaps in your own words, we are looking at different timeframes and really starting to pull apart here. Some of us are simply picking up pennies in front of a steamroller. I am pretty sure you are checking out new 52 week low on AGNC this morning. Also, while you are at it, look at the absolute carnage in homebuilders, new 52 week lows on many, KBH is down 17% as I type. Powell didn't mean anything other than what he said last night and really, so many times before - it's the Treasury and not the Fed who has gone crazy. "Unsustainable fiscal path", and he is not about to change his mind because FAANG is in a bear market. Don't fight the Fed!
Reply@leftback- "US rates are lower, quite sharply"
ReplyForgive my ignorance - but does that mean some are buying bonds and if so whom?
Exactly.
ReplyIf we have learned anything around here among us trading postulater's, it is that we all have bigger concerns on our own individual trading techniques and analyses to be worried about the neighboring trader in the pod next door taking advantage of our generosity with the after hour ladies and the reserved tables on weekends after the races. Punters have been brainwashed from the very beginning all because lady luck wouldn't accept that one solitary punter was willing to lay against her. All day.
Uk got it's first warning yesterday as to what capital flight looks like if even the possibility of an election and Corbyn govt become a concern. Currency, Banks, Builders, Insurers, Utilities , even domestically focussed retailers. All got sent to the toilet. Pretty clear signal of intent I think. So, as it stands either we get more of the same OR we see the PM gone fairly quickly accompanied by a policy change that might have some chance of success. Lord knows what that would look like. Turbulent times over here.
ReplyNico, welcome back! I recall you describing market tops as a brief period up to the top tick followed by a quick cascade down. Does that fit the description of what we are seeing of Spooz since october 4? Or do you think it will be a protracted decline of sideways action and lower lows? All the ingredients of further declines are there - ugly technicals, credit issues emerging to the public, FAANG looking ugly, bond supply rising, PMs holding firm, etc...
ReplyPowell 'beyond' neutral comment triggered the top. Everyone already wishes the Fed would change its mind. We tripled on the way up, but 6 or 8% down and you find the pomoqefomobtfdtina junkies asking the Fed to reconsider. Come on. Fed knows this is the best way to deflate the economy. By deflating risky assets, by a long shot.
ReplyPowell top has put everything in motion. Read somewhere it ain't frequent to reverse so fast from an all time high so you can argue everyone and their end of year 3100 target got taken by surprise. What to expect? ginormous credit/margin deleveraging in line and en route towards the EM and Europe abysmal performance that US decoupled from.
The biggest bubble this time is 'passive investing'. Everyone has done the same pomoqefomobtfdtina waterskiiing behind the Fed.. Doesn't matter that US financial system is 'better' now than in 2008, NYSE margin, corporate and consumer debt is at record level. The whole system fed on more debt, more credit-based consumption and more leverage chasing stocks reporting credit-steroids earnings when they were not purely fake from floating reduction (buy backs)
It was like this in 2016. But the animal spirits of Trumpism - some sincere, some jejune - have stretched that new normal to the limits so I see the situation much worse than 2008. Passive investing, ETFs everywhere, all threaten liquidity. The car industry is broken. What is the notional of auto subprime again? What is fair value to Amazon business again, when real rates reach 5%?
My Chinese friends tell me of domestic fraud of EPIC proportions. Nothing in the news of course, but how long until Chinese shadow banking implodes? It ain't about the tariff. They don't help, but Chinese house of cards will die on worldwide consumption gloom. That is an awful lot to reprice.
Everytime i go long counterrallies (like now) i feel totally bipolar and oblivious to the bigger trend at work today. Trade safe. The bigger trend is down.
@Nico G said: "Everytime i go long counterrallies (like now) i feel totally bipolar and oblivious to the bigger trend at work today. Trade safe. The bigger trend is down."
ReplyYes, those are my thoughts ad feelings exactly. It has played out as many of us had outlined. However, we are a bit bipolar b/c we think that a rip-snorting face-ripper is on the way. Why? Because short end rates have dipped (that means there is a bid in US2y - in other words people are buying bonds, Skr), and now the Fed has begun to blink…. their main concern will be, not equities, but to avoid prematurely precipitating a major crack in corporate credits before it arrives of its own accord.
I thought that Powell's comments were even-handed, more or less, which is appropriate for a Chair not named Janet, but Richard Clarida's interview this morning shows that he clearly leans one way, with a dovish tilt. The market has already begun to move to price in 1-2 hikes in 2019 and then a pause or full stop, or in other words a maximum of 2-3 more hikes. The dollar fell quite sharply after Clarida's comments.
Clarida may already represent one of the lower dots, and we are likely to see others come out and reveal lower dots in the days to come. Macro Man has called for the demise of the dots, but it may not be dispensed with until the Fed pauses. Very very good discussion of all this on BBG this morning with Luke Kawa, George from Nomura and Krishna from Oppenheimer. I thought they were all very lucid as one would expect from some of the very best of the rates and bonds guys.
Lower levels are ahead, especially for Qs in the New Year, but for now there will be vol selling - bears should beware the rip-snorter! You can hear the hooves in the distance.
Already getting some pushback on the above. Some sages clearly think that the FED continues to grind onwards until the dollar gets so strong that something breaks. [Given the current situation in China, UK and other places, that would be pretty stupid.] Markets agreed with the FED for a while but are maybe beginning to dissent. Let's see if the Fed will eventually follow the Eurodollar market? They can, after all, continue to tighten financial conditions to some extent via QT, without hiking rates.
ReplyThe problem with the FED (and the reason they are so often late and sometimes disastrously wrong) is that they tend to look at so many lagging indicators. Unemployment is a notorious lagging indicator, CPI also has quite a slow reaction function to input costs. Lumber, oil, pending home sales, gasoline, PPI, retail sales are probably more useful real-time indicators.
There is probably room for one more plunge before the bounce, but don't count on it when too many people are calling for it. There is already a decent stealth rally in emerging markets.
ReplyOn one hand, Fed may be softening and markets could rush to safety. On the other hand, the US fiscal deficit would only increase. From now to the first quarter next year, my view is that the economic difficulty in China and economic slowing in the US would very likely force capital to rush into T-bonds for safety. Once Fed indeed pauses hiking the rate. The increasing US fiscal deficit would again become the dominant factor.
The above assumption is based on no trade ceasefire by the end of this month. If there is a surprising trade ceasefire, then there should be a short term relief, before the market returns to panicking about 2019.
I have to think the long end of T-bonds are the next squeeze to happen. We got oil / nat gas squeezed just recently, and what follows those is almost always bonds.
ReplyI'm with IPA in thinking that buying homebuilders here just ends up catching a falling knife, but the sentiment is finally shifting towards people thinking the economy is not overheating, and is actually doing the opposite. Go figure it's right after oil falls back to earth.
@Cbus, yes, with you on the squeeze at the long end. It has probably already started. CFTC positioning data shows a reduction in the massive short speculator position.
Reply@IPA: To be clear, I am not Long XHB, but I do think there is a good chance that this has bottomed out for now and surprises a lot of people with an annoying Fibonacci retracement that may last several months and exceed most people's expectations. Look at the charts. XHB can easily rally 10-12% from here without changing the fundamentally bearish picture at all.
Now, I wish we wouldn't yell at each other here. The fact is we are probably all in agreement but looking at things through slightly different lenses and with different timeframes. Let's cut through the noise and see what the disagreements are.
What can we ALL agree on, you ask?
Spoos and Qs have peaked. The Top is already behind us. Severe technical damage has been done. In the next year or so we will see lows that are lower, substantially so for many sectors. A recession is coming, in 2019 or 2020. Only Jeremy Siegel, 12 yo HFMs and other Permabulls may disagree.
What do we NOT agree on? A lot.
ReplySPOOS and Qs
Some here think the market is going to take a deep dive here, grind lower for months, etc. Even 12yo HFMs now think this.
Others think, like LB, that these movements are never monotonic, and that there will be rallies, perhaps substantial ones.
PUMP or DUMP from here?
Some here think there has to be a massive dump with capitulation before any meaningful rally can occur.
Others think that when everyone expects something to happen, it usually doesn't, and Wall Street will pump stocks into EoY.
FX
Some here think that the dollar will continue to grind substantially higher - driven by what? The strength of the US economy as revealed by lagging indicators, the hawkishness of Fed policy, general malaise in Europe, UK etc..
Others think the dollar is peaking here, and that the chart for EEM is telling us this. The US economy is weakening, which will eventually be revealed in softer data, lower US rates and eventually this will be reflected in Fed commentary. This may or may not prove to be a short-lived blip slowing (one quarter). We will see surprising rallies in things like AUDUSD.
RATES
In line with the above, some here think that long end rates have not peaked, and will continue to grind higher, doing further damage to the US housing market and other rate-sensitive sectors, driven by continued and strident Fed hawkishness.
Others think that long end rates have peaked for now, and that the chart for XHB (for example) or MORT is telling us this. Just FYI, XHB at one point had an RSI in the teens, which is an exceptional event. A relief rally of substantial proportions is in the works for the rate-sensitive sectors.
BATSHIT INSANE VALUATION UNICORN POOP SECTOR
Not sure what the consensus is on this here. I think we all know that it exists. Insane valuation is an invariant feature of late cycle bubble economies and markets. The end game is clear. In a true liquidity squeeze, bitcoin, unicorn poop, money-losing start-ups and fraudulent biotechs all find their fundamental value, which is zero or close to it. Larger companies with a huge raft of debt may go BK.
Some here think this is imminent and that things will go 2008 again.
Others believe that the Fed will blink before a true liquidity squeeze arrives, having learned from Lehman.
The fact is there is no liquidity squeeze whatsoever here. We watch the batshit insane cannabis sector every day, and P/Es there remain at batshit insane levels. People are still trading imaginary monetary tokens, bitcoins etc.. with little fear of the zero.
BOND MARKET MELTDOWN: BONFIRE OF THE VANITIES.
Some think that US10s can go to 5%, 6% etc.. and that this would cause some significant dislocations, but not TEOTWAWKI.
Others here demur, and think that b/c of the levels of global and US corporate debt, a 5% 10y would see most of us living in caves again, and that this extreme bond bearishness is a type of thinking that is unduly influenced by exposure to the 1970s. This is not the 1970s, and the market to look at is JGBs. Yes, the Widowmaker lives.
2008 "BIG ONE" REDUX or 2000 ALL OVER AGAIN?
Almost all of us lived and traded through 2008, so that's the model for many of us but we may not see that ever again.
Some think that the FED tightens until something systemic breaks and then it's Katie, bar the door, Lehman redux. Shitshow.
Others think that it doesn't go like that, this will be a slower re-rating with rotation - more akin to 2000 - in which unicorn poop is revalued to zero while asset classes related to the real economy experience a bumpy ride but a cushioned landing into a mild US recession that is inevitably met with lower rates and the Fed adjusts policy. The Fed then proceeds in, dare I say it, a Japanese way because at some point there is nothing else to do other than to repeat BoJ policy.
LB - In a nutshell ~ Indecision.
ReplyTo quote three of your agreeable comments that are all interlinked:
1)Trade what you see, not what you think
2)Highly profitable range bound trading
3)Because some have too
Now we only have a small sample size of the markets commenting on here, but let's take it for arguments sake that we have the same ongoings in the broader market. So working backwards from 3)We have some groups that simply can't(or as you suggest, unwilling to) change their models, some whom are adapting but it takes time to move that sheet volume off the books. Which in theory should lead onto 2) As we see the difference of opinions expressed in price action. Oversimplified somewhat, it brings us back to 1) Tade what you see, not what you think.
The fight continues it seems with the central banks as I mentioned in my first post.
@LB, I agree with most of what you wrote, but I think it's important to note that you can't look at the dollar in isolation. Yes, the USA will be slowing, but if the USA slows in 2019, do you think we'll be in a worse position than emerging markets or europe? The economics of those markets is absolute dog poop right now, and it's only getting started in all likelihood unless they do more qe's. It's a relative game, and while the DXY may not be pretty, it's the prettiest ugly duckling out there.
ReplyAlso, liquidity is starting to become a problem. This is more of a global phenomenon than a domestic issue by and large, but this not something noticable by looking at stuff like biotechs, bitcoin, and weed stocks. 2007-2008 shows us a lot about liquidity, and we know that it can evaporate in a hurry. Despite waning liquidity even in 2008, there were still things that were rocketing and bubbling higher all the way into October (notably commodities back then). Thats more of my thinking of how this could potentially play out.
optionseller ( dot ).com appears to have lost all client money on short options strategies on energy markets
Replyhttps://twitter.com/jmanfreddi/status/1064152252405989376
More from WSJ reporter Gunjan Banerji on her twitter feed
@GunjanJS
https://www.scmp.com/economy/china-economy/article/2173461/china-underestimating-its-us3-trillion-dollar-debt-and-could
ReplyThis came up in an earlier discussion higher up here. This article estimates China's dollar debts to be up to 3 trillion dollars. That's extremely significant to say the least.
@Jill: LOL. Although one feels bad for the investors, you have to laugh at the "strategy" of selling naked and unhedged.
ReplyApparently, they sold far OTM calls on Natty, b/c, like, it hasn't gone up in price in living memory {actually there have been several events like this in history}. Of course the minute someone establishes a position like that with leverage, the more likely it becomes that when the conditions are right for a squeeze, then an exaggerated price surge can develop. That might explain that monster spike and reversal candle in NG last week, which developed so fast that only dedicated commodity punters probably noticed it. Our attention was elsewhere, for sure.
I wish my counter-parties would screw up that badly. Maybe one day someone will insist on selling deep OTM puts on one of those small unicorns with leverage, and when the trade goes pear shaped it will cause a flash crash with illiquid trading and bid-ask spreads of $10…. like the last day of XIV.
Northman Trader has a lot of good charts this week. I like his blog, I should point out, not for his market calls, but b/c he has really nice looking charts and I like looking at them. Most charts obviously have multiple (often opposite) interpretations, LB's for example, and the interpretations of other members of the peanut gallery who are armed with rotten tomatoes. As an example, the recent discussion of the XHB chart, which can be read in at least two different ways.
FWIW, NT sees potential for a bullish interlude here based on a few inverted H&S formations, and the recent gap filling by SPY and QQQ. One of his models is an absolute screamer that would take the SPX to new highs above 3000. Around here we refer to that as an incipient face-ripper. We take a more guarded view here, and point to the potential for a substantial Fib retracement with SPX gaps filled to 2880 (144 points or 5-6% from here). If such a thing gets started and there is progress on trade talks, seasonal factors, technicals and vol selling might combine with improved sentiment to cause a significant amount of pain to bears. Note that this analysis excludes any changes in Fedspeak; in fact, I am sure the Fed would prefer that markets react to things other than the Dot Plot.
Two views on this upcoming week's trading. On the one hand, LB sees AAPL trading more constructively and his mind cannot possibly develop an overtly bearish scenario while that stock trades higher. Others see dead cat bounces everywhere and will try to sell every rip. It's all about timeframes, as @IPA pointed out above. We think there is a very good chance that the next bounce lasts 6-8 weeks, straddling end of year and new year as performance chasing segues into front running Q1 fund flows. That kind of rally would present the chance to pick up more than a few pennies in front of the steamroller. Emerging markets are poised to do exceptionally well in the near term.
Not sure if this is what Nico has in mind? We would expect the rally to stall early in 2019 and additional declines to begin mid-January into the heart of the Q4 earnings reports. Of course, changes in Fedspeak or Trump tariffs might create a new reality for traders in the interim. Longer term, any number of triggers are out there that could set off market contagion that might lead to a waterfall decline in US equities. Banking crises in China, Italy or a meltdown in US investment grade are on the list, but we don't see any of them as imminent, although they are on the radar as @Cbus points out.
@LB, honestly, are you getting chopped? The only reason I ask is that just on Nov 14th you were still looking at "no recession" scenario, "homebuilders do well for 6-9 mo" on October 30th, and now you think "mild US recession" and a "stall early in 2019"? What changed your mind so quickly? I am not trying to pick on you pal, but one can't be trading macro from a 15-min chart. Like @Skr said: dual personality disorder kicks in quickly, hence you get chopped a lot. Nobody is yelling at you here but we now drastically differ in our opinions regardless of timeframes. There is no way on earth homebuilders, automakers or many "real economy stocks" do well in a recession scenario. Consumer staples and utilities maybe, but not much else, let alone cyclicals like F. You surely know this (you are a very smart punter, and I respect you a bunch) - most stocks will get sold hard. And to be exact, I didn't say recession, you did.
ReplyLOL. This is the risk of commenting too frequently… and writing from the top of one's head. Now I have to dig my way out.
ReplyLook, the dual personalities come from investing/trading with two timeframes. Longer term, yes, bearish as hell, recession is coming, deflation lurks around the corner, central banks have decreased firepower to respond (but you can bet they will). Shorter term, it's not all going to go to hell just yet, and certainly not this week. The uncertainty is, as always, in the timing, and in predicting the insanity that is the administration's trade policy, then of course there is the issue of the Fed's monetary policy based on the rear-view mirror indicators of which they are so enamored.
Recession? I think it depends on what the definition of "recession" is. We know the official definition. Two consecutive quarters of -0.1% growth fits the definition, but I am not sure that it would "feel" the same as four quarters of -5.0%, and nor would we feel the same effect in the real economy. From my perspective, a lot of real economy stocks are already beaten down and are pricing in a mild slowdown ahead. IT HAS ALREADY BEEN PRICED IN. This is what markets do, no? Equities don't follow GDP, PCE or BLS data, they lead by 6-12 months typically. In our obsession with the Fed many have forgotten this.
Right now I am expecting a very slow Q1 in the US, that's a "stall", and we have had quarters like that many times during the "recovery". After that, trend growth (I am expecting a less hawkish Fed by this time) and then perhaps a mild recession later in the year. Basically something more like 2001 and less like 2009 is what we are looking at, unless the Fed completely lose their minds and there is a policy error of Trichet-like magnitude, or worse. Frankly I think that after the December rate hike the Fed will have already tightened enough to precipitate a mild recession, and I suspect that several voting members agree with me. The three months interval between Dec and Mar meetings should allow them to gather enough data to signal a pause, and if this is correct we will probably see the markets begin to price this in soon (if it isn't already happening).
The big uncertainty for me ahead is how much of an effect in the real economy would happen outside of the Bay Area in the event of a 2000 style unicorn crash? In other words, can Unicornia (just coined that) have a recession and a stock market sector crash without that event dragging the entire global economy into a deep recession? My bet is that a deep (and very necessary) correction in Silicon Valley doesn't drag down the rest of the world unless the central banks do something idiotic. Tightening via the balance sheet alone will pop the unicorn bubbles. Rate hikes in 2019 would only exacerbate the situation, and would be pointless (mortgage market is already dead in the water, corporate credit already stressed). The Fed needs to stop after December, and signal soon that they will pause and remain "data dependent", then sit back while it all plays out.
Now, back to this week. Looking at AAPL pre-market, there is no chance that the bounce gets anywhere today. That's just mathematics. Let's keep an eye on what sectors do well, you already know the semis are going to have a bad day. I will be watching the cannabis stocks, more exciting than watching paint dry, or "grass" grow.
OK, that is definitely enough from me. I am going to shut up until after Turkey Day.
"Oh no, I've said too much. I haven't said enough". "That's me in the corner. Losing my religion…"
LB - please keep posting any time you please. We're all trying to learn here, especially from the veterans.
Reply@LB, In 2019 they are going to have press conference after every FOMC meeting. So they may use it in Jan if the trade war hits a pause somehow.
ReplyTis the problem with parabolic stocks - once they top you can't pick a bottom next month. On Apple chart there is nothing until 2015 top - 100 dollars below last month top. Btfd where uh? Try to price consumer fatigue on those growth stories. I lost two iphones X this year (one stolen, one in water) and came back to my old iphone 6 which works much better and does not heat up at all and i don't look cool and that's that. It is just a single example but...
ReplyNasdaq has gone near 2000 style parabolic with parabolic leaders so to find a bottom there you need to keep 2000-2002 kinda drawdown in mind.. which is too scary to write.
So we will sum up the American dream again: everybody maxes out on their credit card to buy latest Apple product. Parabolic shares make the 1% rich + the Swiss National Bank. Those 1% guys sell now, rich. The 99% cope with credit woes next two years. Why do they allow that again? The whole world on debt to make the 1% very rich. They have killed capitalism and like Ray Dalio i expect major social turmoil when the plebs realise the supercherie.
@LB, you've mentioned that you think the US will see more of a 2000 style recession coming here. But what are your thoughts abroad? Everything I see in Europe looks absolutely awful, and I'm not really sure of what the way out is there. QE only served to prop up the zombies there over the past few years while also supporting inequality and political problems. Do we get more QE's? That's tough to figure out and even then, they'll likely just placate the markets for a short time before things get even worse.
ReplyI think overall, something that I'm noticing right now is that almost all of the post GFC issues that have occurred intermittently since 2008 seem to be coming back all at the same time, which is worrying given the timing.
For example: we thought the euro crisis was solved in 2012, but more savvy investors probably realized we just kicked the can down the road there hoping that QE would allow for recovery. I think we can conclude that QE did not provide recovery, it just delayed austerity from being needed and further exasperated the zombies and political divide there. Now we're faced with potentially bigger problems than Greece as Italy looks just as bad, economic data is already negative in the most important Euro economy (germany) and Brexit is not looking like a positive catalyst either. So this is yet another ghost from the past coming back to haunt us.
Then we get the 2015 problems from emerging markets and China also coming back with a vengeance. We kicked the can down the road in 2016-2017 with a massive wave of easing, which only caused huge bubbles in real estate to pop up as Chinese capital flight hit a fever pitch amidst their currency weakening. We got a nice bull run, but it was not proportional to the amount of liquidity injected, and now we're starting to face the inverse as China is once again struggling to keep their currency propped up. In short, we're looking at a repeat of 2015-2016 here, yet with more debt, higher costs, etc.
Then there are other issues as well such as Oil now threatening another 2014 style crash here, etc.
And no, I don't think we're going to "crash" right now, these things take time and we haven't hit a systemic moment yet with a bank failing or major corporation shocking the world with a surprise bankruptcy (although GE partially fills this role). But in terms of what we may be facing down regarding a 2019-2020 recession, I'm pretty concerned with the manner in which our old problems are coming back in even worse ways than they were originally presented. This is simply how these things work when austerity is ignored (largely due to politicians favoring easing since it props up markets during the short-term).
I'm not some uber negative permabear, but some of the sociological trends in the world, the political trends, and then of course the broader market trends tell me that the worst case scenario we're facing could be worse than 2008 if things get properly systemic. Given, a lot of that will be coming from outside the USA borders, but it'll be a global problem regardless. I try to weigh the bull case and the bear case, and I just don't see a ton of long-term hope in any bull scenario for the global economy. All the biggest bullish cases all are reliant on further expansion of liquidity essentially via money printing, which is inherently unpredictable since it's political. These scenarios also would only provide a short term boost while further hurting the long-term view.
So, first time caller, long time listener. Ex-sellside equity sales trader (yes, equities in dallas=morons).
ReplyAt the risk of getting scorched, a long-term question:
Could Trump be using trade policy, not economically but politically? To wit, pushing our competitors (EU, China) into turmoil in order to extend the viability of USTs. Knowing we are the cleanest dirty shirt and seeing the $2T+ annual hole on the horizon he is cutting off our nose in order to cut off their heads. If you're first it's not panic.
A corollary: do rates rise in the next recession?
Back under my rock I go....
This is our last comment. Ever, or until next week. ;-)
Reply@Nico: I don't disagree with you and wouldn't touch AAPL with a ten foot pole, on fundamentals.
Now, from a purely technical standpoint... AAPL pierced the lower Bolly band twice and is approaching oversold. There is quite strong chart support below this level, around 183-185, get the ruler and draw a line from the March high, through the May surge to the June low. It's rough but I have seen worse. Someone will buy it, b/c it's their job.
@Cbus: " I don't think we're going to "crash" right now, these things take time and we haven't hit a systemic moment yet "
Agree. The vast majority of punters and the general public are completely oblivious. Crashes only occur when everyone wakes up at once and hits the sell button.
GE, like AIG, was once systemically important, but has been largely defused and is now no longer a designated SIFI. It is a sadly fraudulent sack of shit at the corporate level but it is NOT systemic. I feel bad for the production workers who made things for GE. You know they are going to lose their pensions while the reptiles in the C suite are going to skate away with their bonus.
Not sure about Europe. Tiny slowdowns and recessions are the New Normal in the EZ. I think trend growth is a lot lower there, in part because they probably don't fudge the numbers quite as much as they do here, or in China, where GDP can be calculated from a time-dependent formula with little error, because it isn't actually measured.
Economics is easier in China. Recessions do not occur in China. They are illegal, and any recession that occurred would be quickly detained for questioning, then disappear without trace, before re-appearing on TV after re-education to confess that it was merely a mild slowdown and never truly a contraction, but had been bribed by agents of the West to insert a minus sign. Capitalism has been reinvented: "Four legs good, two legs better!".
excellent LB!
Replyi am worried about this reverse HSH even my toddlers are watching.. if spoos fail the 2690 of last resort, the Santa wally is gone - essential session today, and a strong reversal Tuesday to keep in mind. This is the first time in 10 years that i play the Santa rally so you know what will happen.
LB, quoth the village constable, thou art naught but a Fool and a Knave. All shall ignore his drivel, forsooth. Much bollocks he hath talked here. Consign him to the stocks forthwith, the better for the citizenry to pelt him with over-ripe fruit.
ReplyBut Hark! Who comes here? Elders far more learned hath come amongst us to speak! All of the heresy the Knave LB hath been promulgating have now been brought forth by Charlie of Nomura (you read it here first, though):
https://www.zerohedge.com/news/2018-11-19/fed-blinking-front-our-very-eyes-nomura-calls-end-normalization
Fed blinking? Check.
Lower dollar? Check.
EM relief rally? Check.
Eurodollar curve pricing in a pause? Check.
Treasury rally across the curve? Check.
and.... (drum roll) the big one we have been banging on about here:
Death of momo and growth-to-value rotation. Check.
OK. Enough. Once Mr Market has fully priced in the pause, the Fed will pause. It's what they do.
A ripsnorting squeeze of gargantuan proportions is coming after the signal has been given.
Nico shall have his Santa rally, of up to 90 spoos points, but the sleigh will hit some turbulence, so buckle up.
Meanwhile most of that oversold "value sh*t" we liked is up on the day, T, F, TKC, while unicorn futures are down. Even the effing XHB is OK today, what is that telling you about the rates trajectory, friends in the peanut gallery?
[LB exits, stage left, wearing a fool cap and clutching a turkey leg.]
Hey @LB, don't feel bad. We are not armed with rotten tomatoes, we actually trade this stuff too and happened to be on the other side. Difference of opinions is what makes the market. I would not want all "yes" men around me when I take the trade. You should take the criticism in stride and do your own thing. If you wanna do a daily, hourly, minute-by-minute update on XHB that's fine, but put some dough on it so we can size up at the end of Q1. It's down on the day now, so does that make me a winner?
ReplyBy the way, a purer way of playing homebuilders would be ITB. Check out how cheery the chart looks for the holidays. Homebuilders are crapping in their pants and this morning's NAHB Index report should tell you what's ahead. Builder sentiment is the lowest since 8/2015.
Happy Thanksgiving!
@IPA, Just talk about next 1-2 weeks. Builder sentiment is the lowest since 8/2015 and index dropped close to 2%, but ITB hardly changed for now. I am willing to bet that it likely means something.
Reply@Anon, if I bet on 1-2 weeks move I'm screwed. Would not even try. Have no idea where to begin. I would get lost in the noise. But I do wish you luck.
ReplyJust a quick thought for the bond bears out there.
ReplyIf you take all those popular bond charts going around that are causing people to signal the definitive end of the bond bubble, just note that most of those are not using log scales.
I get that it's stupid to use log scales on bond yield chart, but I tend to believe this more closely aligns with how bonds have been trading over the past 2 decades. So if you're gung ho on shorting bonds at this point based on your charting, I would review your charts in log scale and see how well your thoughts align with everything else. I noticed log scale for bond yield charts aligns much better with shifts and turning points on both a short and long term time span. This is true across multiple durations.
And for whatever it's worth, on a very long time scale, I'm a bond bear, but we're not there yet, and a true bond bear market can only truly happen after we see a lot of austerity in my personal opinion.
See chart examples here: https://www.tradingview.com/chart/US10Y/iGBQwGmL-The-bond-bear-is-not-here-yet-use-a-log-scale/
@Anons-can we please put a name on it, e.g. ABC, it's as easy as 1-2-3 :-)
Reply
ReplyYeah, timeframes need to be disclosed occasionally here to avoid confusion. Though, your timeframe is going to change in dumping periods. My 3 to 9 month timeframe for equities is chop with occasional dumps. Don't expect to see that consistent grind up anymore that we have seen when monetary or fiscal taps are forecasted by officials. Time for a break. I will leave you with this short debriefing.
When amps came onto this blog, and thereby promoting himself, the haters and spiters (not to mention spiders) laced up their boots in preparation of losing their tipping machine. This was made worse when the commodity desk offered amps a promotion. You can only imagined the labyrinth paradigm of group pumping calls and pillow talking sessions to how to throw amps on the street once again. Sucko!
The chart support zone we highlighted for AAPL is just now coming into play around 181. If we were long AAPL, SPY or QQQ, (which we are not), this would be a very important juncture.
ReplyLooking at recent price action there must have been even more leveraged FAANG longs that need to be unwound than we suspected. It never pays to underestimate human (or hedge fund) stupidity, apparently. Presumably the ETF structure and passive investing are contributing to the unwind. The reflexivity inherent in the inter-dependence of AAPL, SPY and QQQ is what prompted our very bearish comment a week or two ago. So that means half of our brain was working at the time.
Q: Does the peanut gallery give credit for partially correct forecasts?
A: (LB ducks as he is pelted with rotten tomatoes).
Shorting the cannabis sector and being long some "value" stocks (that's the other half of our brain) and a massive pile of TLT is working here, for the time being, in a modest way. This is not an easy market, but it must be a lot worse for long-only growth fund managers.
Presumably the recent move lower in rates is beginning to hurt the bond bears, you know that one morning yields will scream lower and this will surely become the next pain trade for someone out there, maybe another fund will blow up. [Short Treasurys is not the easiest trade to hedge, hence someone out there might meet the usual fate of those who make highly leveraged directional bets].
The regularly scheduled Thanksgiving face-ripper has been delayed. Will it be cancelled this year?
One thing that is a bit of a concern is that cryptos seem to be entering the liquidation phase. You knew this was coming, right, kids? It is more than vaguely possible that some tools, I mean punters, out there will have to liquidate their FAANG holdings now in order to cover margin calls on their BTC in their "balanced modern portfolio". I am sure regular readers get the point.
ReplyLB almost* feels sorry for the 12yo HFMs with their cryptos, weed stocks and FAANG. They don't even show up to hurl abuse any more. Never mind, they will learn from this.
*Almost, but not quite. We did warn you, repeatedly.
AAPL broke through that support like butter. AAPL has a gap to 169.
ReplyThis isn't going to be pretty. Just sayin'..
" there must have been even more leveraged FAANG longs that need to be unwound than we suspected"
Replyare you on drugs LB?
check the real cash balance on https://realinvestmentadvice.com
there has never been more leverage in history, many times over 2007 level. Look at cryptos liquidation because the equity glories of 'passive indexing' are next
Interesting day, time for some new lows. Glad I'm positioned long treasuries, short europe/australia/china, long utilities, defensive healthcare, and some consumer staples.
ReplyI think bigger picture, there is a very relevant item here that isn't being covered as much as it should: The Chinese 1yr gov bond is now trading at 2.57% yield vs US 1 year bond at 2.65%. That has some very very very important implications for capital flight, carry trades, currency, defensive positioning, etc. I don't even know the full extent of what this will impact, but I do know this is a bigger structural challenge for China amidst all their other problems, and this will only put more pressure on the Yuan to depreciate.
On another note, so many people were talking about the inverse head and shoulders pattern forming on many indexes that they ignored the slightly smaller non-inverse head and shoulders pattern that I mentioned on here a few days back. That just broke :) . I'm not a technician, but I've been on a good role recently with some of my more technical plays.
ReplySanta better hurry and bring some cheer to retail. What a train wreck! Look at them mall REITs getting pummeled too. Today was simply unbearable and the dam broke, as the SSS misses galore accompanied by weak guidance this AM came from all facets of retail biz. Look at these names: KSS, LB (not you, pal), LOW, ROST, TGT, TJX. This ain't just the weak holiday shopping anticipation, this is much bigger picture of store saturation, brick-and-mortar lackluster performance as a whole, absolute apathy on consumers' part, and yes, good point @Nico and @Cbus - consumer debt that has now surpassed pre-GFC level. Never mind housing, the new worry is here - retail recession may be the biggest story ahead. And this is just as everyone is looking for all troubles to come from outside of US. Some folks can't see what's right under their noses. I drive around and see all these new malls and shopping centers popping up and I ask who the hell is going in there? We will see some of these malls never get filled as others disappear in smoke. You wanna buy some REITs? You go right ahead, sold to you.
Reply"Look at them mall REITs getting pummeled too."
Reply@IPA, we are in complete agreement on this one, wouldn't touch that or any retail with a ten foot pole, but looking at the chart for IYR is surprising, the mREITs and rREITs have been resilient. They smell lower rates.
"The Chinese 1yr gov bond is now trading at 2.57% yield vs US 1 year bond at 2.65%."
Interesting, and I suspect this is "transitory" - the latter yield may fall quite soon. Expecting to see a 3.00% 10y quite soon now that oil has broken down, and then another move lower before the end of the year.
"Interesting day, time for some new lows"
Today finally smelling like capitulation, AAPL and QQQ piercing the lower Bolly band yet again; RSI for AAPL finally <30. Some of those popular defensives like VZ and WBA had got a little overpriced. Still lots of interesting yield out there to be had in equities, but it's babies and bathwater time today. The energy complex is looking a bit more interesting at last. BP has been hit by Brexit as well as oil prices, during what should be a period of seasonal strength.
The "nailed on" December rate hike is no longer a 100% sure thing. I still think they go through with it because their inflation and employment data points are all stale.
LeftbackNovember 9, 2018 at 4:18 Pm...
Reply"@Skr, you got some of that right… 3 out of 4 ain't bad. Equities were a bit overbought so that is being worked off."
4 out of 4? Check (% or points, take your pick).
It was you sir, not I that threw rotten tomatoes. My shoes need new laces go buy me some tomorrow, oh - and get something nice for yourself.
@Skr: It is all about time frames, isn't it? LOL. That comment was intended as praise, in this business 75% is an A+, sir.
ReplyNo tomatoes, it's all mutual admiration on this blog, innit, and let's face it - we are all beating long FANG the last two months, so why not let us share in some of that happiness and be slightly less self-critical. Team "growth stock bear" has trounced the opposition of late.
I thought this article was a good read. This is something that many of us "knew" in our bones was happening, but we couldn't provide a technically correct explanation for it. The balance sheet expansion was a massive easing of financial conditions, so why should anyone be surprised that balance sheet reduction is equivalent to the Fed raising rates and tightening conditions?
https://www.cfr.org/blog/fed-tightening-more-it-realizes?sp_mid=57825878&sp_rid=
One or two of us (and more than a few commentators out there) think the Fed have already overdone it, and may have tightened into a brief and mild slowdown (not so mild in emerging markets). In fact that is what Dr Copper, Larry Lumber and the crude oil market would appear to be saying. Even Jim Cramer has been saying it, and he's not wrong.
Of course the slowdown will be mild only if they come to their senses and stop the rate hikes now. The slowing of the US economy is palpable if you are in real places talking to middle class Americans. Of course if you are sitting in Silicon Valley or in the Nation's Capital, too many distractions might prevent you from seeing all the closed stores and empty malls. Even in Manhattan you just cannot miss the empty store-fronts. The CRE sector has badly miscalculated, once again.
DB,CS,RBS,GS look like the four horseman of the apocalypse today.
ReplyIf this sector starts/is deleveraging the fed will want to take their foot off the brake tout de suite.
I ain't no technician but sure looks like each drew out a "flaming pile of dung" doji.
Thanksgiving squeeze coming to a mall near you now?
ReplyIn the UK we've seen a lot of this retail/mall destruction and then made assumptions about consumption from it. So far, pretty much a mistake. The consumption is still broadly still there ,but has moved online which has made picking the retail sector a lot more tricky.
Looking at the Bullish% we have had short covering/ value picking phase 1 followed by shorting the rally phase 1 ,but right now if history holds good we should see shorts squeezed by holiday bahaviour bringing us into the month end squaring portfolios period. Santas gift bag might look consolidated this year and it looks like being difficult to work out which toys are not going to blow up in your face.
This feels to me like the final throes of a fairly standard correction. As is often the case, the strengthening USD has killed off assets one by one - a slow death for EM this year, leading some to proclaim US equities as a safe haven, then an accelerated breakdown as all risk assets get taken to the woodshed, notably US tech (not such a safe haven). It's been interesting to see EM bottoming (so far) in late October. I'm not sure what to make of this week's credit weakness - usually a worrying development, but I can't help thinking it's just the latest (maybe last) risk asset to be hit rather than something more significant.
ReplyThere are plenty of reasons to be bearish but for now I am unconvinced. I see this more akin to 2015/16 - a very challenging few months for EM and then an acceleration in Jan/Feb 16 when developed market equities and HY joined in.
As usual the Fed holds the key. If this moderation of the dollar continues, there looks to be strong potential for that Santa rally into Q1 next year. In Feb 16 they were very supportive, and that is certainly less likely now.
"I'm not sure what to make of this week's credit weakness - usually a worrying development, but I can't help thinking it's just the latest (maybe last) risk asset to be hit rather than something more significant. "
ReplyIt's oil. Oil sector is a huge portion of high yield, hence why spreads only started to look bad once oil started to tank.
"There are plenty of reasons to be bearish but for now I am unconvinced. I see this more akin to 2015/16 - a very challenging few months for EM and then an acceleration in Jan/Feb 16 when developed market equities and HY joined in."
I think this is a definite possibility, but we still have a ways until this is over. Using the 2015-2016 playbook, we'll have more pain in q1 2019, and then you would want to reassess. With that said, I think it's extremely important to understand WHY 2015-2016 did not turn into a recession. It was a largely a product of "globally synchronized record stimulus", much of which was more of an adrenaline shot that helped prop up poorly performing assets.
Not saying we can't see a recovery again, but I'll be constant in beating the drum that we're far less likely to see a similar stimulus to that time (due to structural / political reasons), and even if we do, it's likely any stimulus won't be as effective as it was back then. Each CB liquidity injection has resulted in diminishing returns, and the global central banks surely know this.
Good to see proper discussion here...
ReplyNews reaches me that HF concentration and performance is EVEN worse in European funds than the widely discussed US debacle. Apparently the AVERAGE European long/short fund was -8% in January. Surely fund/career threatening news for many of London's remaining french hedgies...
With apologies to those before who've done this better, I present "The Final Drawdown"
https://youtu.be/9jK-NcRmVcw
We're leaving from Chiswick,
But still it's farewell
And maybe we'll go back
To France, who can tell?
I guess there is no one to blame
We're leaving town (leaving town)
Will things ever be the same again?
It's the final drawdown
The final drawdown
Oh
We're heading for Paris (Paris)
And still we stand tall
'Cause maybe they've seen us (seen us)
And welcome us all, yeah
With so little money to run
And cash calls to fund (calls to fund)
I'm sure that we'll all miss you so
It's the final drawdown
The final drawdown
The final drawdown
The final drawdown
Oh
The final drawdown, oh
It's the final drawdown
The final drawdown
The final drawdown
The final drawdown
Oh
It's the final drawdown
We're leaving together
The final drawdown
We'll all miss London so
It's the final drawdown
It's the final drawdown
Oh
It's the final drawdown, yeah
@checkmate, very good point about online sales, yet another reason why shopping malls are disappearing. It's estimated that by 2023 50% of all malls in US will be empty. What a mess! Someone is probably going to make a killing scooping some of that vacant CRE up selectively at extremely depressed prices. Question is what to do with the rest of that (mostly a teardown) space. The demand for mixed-use development may be waning as it gets overbuilt and it's only appropriate in urban settings anyway. I think that large amount of suburban mall REITs defaults will send a shockwave through the market which will affect all REITs in general.
ReplyThis being said, we still have to put things in perspective. E-commerce represented only 9.8% of all retail sales in Q3. While I agree with you on brick-and-mortar losing some traffic to e-tail, there are still some serious expansion ambitions at hand. It's estimated that even with the bankrupt 8K stores closings, net 4K new stores will be opened across US in 2018, as around 12K of new retail locations are added. I think that creates the saturation that eats into the available foot traffic and could possibly be the tipping point.
Also, retail bankruptcies are supposed to result in a huge legacy business left to divide, an estimated $100B this year alone. One would expect Target, Kohl's and Lowe's to pick up the slack created by Sears/Kmart debacle, but it doesn't seem to be the case. I think that specific customer base is different and most folks who shopped there are heading straight to Walmart. Not even TJX and ROST are getting them and their stocks were down again today. And one can't say it's still early in the game, Sears/Kmart has pretty much been dead for a year.
I think the biggest thing for me that screams retail is in trouble - the big names are missing earnings at the time when consumer confidence is at 18-yr high. XRT has a very pronounced l/t h&s with a s/t h&s inside of it, and I'm thinking unless holiday sales broadly blow past expectation that it will complete the first projected distance at $40 with a longer timeframe target at $32. The latter would probably only be in play as the result of a recession.
The time-honored pattern for Thanksgiving week has always been:
ReplyM, Tu, up on low volume, W down on vanishing volume as everyone takes profits and goes home. F, up on very low volume, only retail punters playing. The M after is one of the big tax selling days, so the market is usually down, after that the focus is EoY.
Wondering if M 11/26 will mark the low or at least the end of this correction phase? Margin debt has apparently declined a lot, VIX is sliding lower, makes me wonder if we are finally running out of forced sellers/weak hands?
Happy Thanksgiving to all Friends of this blog since 2008
ReplySpecial thanks to LB who called the bottom...666
Funny to hear Trump say he's not going to punish Saudis for Khashogi butchering because they keep oil prices down...LOL. A big FAT lie
ReplySo Trump don't know about the FED
ReplyTrump and Twitter...is there ever going to be a bigger diminishing return for a sponsor on twitter leading into 2020.
ReplyAlright lads...its time to load up on Mexican retail. Taco Bell's and Corona beverage shares. You have till 11am to fill 80% of your package before we get shut out at fair valuations...anyone that can that cannot managed getting sloshed by midday will have to skip through the local cartels to get a restock of their favorite beverage at the local 7/11.
https://www.smh.com.au/entertainment/celebrity/james-packer-by-karl-stefanovic-s-side-at-big-fat-mexican-wedding-20181122-p50hpw.html
ReplyLefty, its no joke. They want me to analyze the market ratings...than there it is...right in your own backyard. Just do it!
ReplyI'll let you know , you fat poz. You really think I don't know how your survived this long...overlap down the casino food chain.
ReplyBut that's alright , you fat poz. Because if the day ever comes that I'm in a position to give them something...they won't get it. I know who they are , and where they are on the casino food chain.
Italy is leading the squeeze higher, Salvini bought futures and switched to nice guy mode
ReplyThe usual Thanksgiving week trading patterns have been completely inverted for 2018.
ReplyYes, Italy is fixed for a week or two. That's the first of a series of events that could drive markets higher, the others being the resolution of the Brexit deal, temporary stability in the crude oil market and some kind of US-China trade deal at the weekend. Don't count it out. Trump would also love to be Santa - just like Salvini. Perhaps he will hand out toys at the border?
We have been pointing out a few technical indications of an incipient face-ripper, here is a presentation from Northman Trader that reviews the evidence and the triggers for such an event:
https://www.zerohedge.com/news/2018-11-25/bear-trap
I'll add that the things that lead the markets down are now outperforming the rest of the market on a relative basis. I have my own macro model that shows this is often indicative of a good sign of short-term bottoming. Long term, the bear has started, but I think we'll start to rally here for a good while. New highs? Who knows, I wouldn't count on it, but also wouldn't rule out a vicious rally if we see anything such as a trade deal (unlikely) or other positive news on Brexit / Italy. The interesting thing with these items is that if they do materialize, we'll later start to see that there are bigger problems away from the headline news-grabbing items. Even if Italy figures out it's budget, it's still heading into a recession. Even if we get a Chinese soft agreement on tariffs (unlikely), we will then realize that China hasn't been crashing due to trade warz.
ReplyWe hold firm that we have now entered the buy till it fails stage. We also concer that the "forced sellers turned the dail up to - pms bitch mode over the past week. Therefore we are going to strike number 3 off our list (if that's OK with the rest of the team?) and focus on the range bound till we get to the upper levels and then review.
Reply~Indecision still prevalent amongst lesser analysts which we find funny. what ever happened to - support your local sheriff?
@Barton-options on Twitter covers fed induced liquidity and how it affects the markets
Reply42 billion of liquidity withdrawal this week
https://twitter.com/Barton_options/status/1066845691505459201
@barton-options November 25 comments
https://twitter.com/Barton_options/status/1066850566066880512
Barton:
"Calculated via tracking and projecting various accounts NY Fed manages (Treasury, Fannie Mae, etc). "
"Money flowing into NYFed-managed accounts temporarily reduces reserve balance of commercial banks, causing a liquidity squeeze on risk assets."
The market is starting to go up on bad news. AAPL is making higher lows. Even GE, the Dog of Dogs, is making higher lows. You know what this means? That's right, my friends. The face-ripper cometh… now, will we also get a sharp retracement in WTI? Or another lurch lower? $50 is the line in the (tar) sands.
ReplyInteresting to see a strong series of Treasury auctions. The last set were very poor but were pushed right up against a FOMC meeting which may explain why a lot of buyers decided to pass.
TLT is starting to make higher lows. We are likely to see rate-sensitive sectors continue to (out-)perform, until the bears throw in the towel for the season, the vol sellers emerge from hiding, and then everyone favorites "MTUM" and "MostShorted" lead the official kick-off of the Santa rally.
Following up on your comment - note that TLT and SPX both are closing sitting right on top of resistance lines, which is indicative of the market's indecision and desire to hear the headlines and data releases tomorrow and into the rest of the week before making their mind on whether to close their bond short positions or to go re-long on equities.
ReplySharp - meh, not really in the script, consider an initial few cheerleading days followed by a slow blunt that does the same trick but takes that little bit longer.
ReplyCb, maybe we are a bit too aggressive but we certainly don't swim in the nude. Yes there is the liquidity in both markets that you mention - if you want to take on that play. Obviously the question arises, which is going to outperform over the next three - six months(we have already answered this for ourselves),data is irrelevant in that sense.
Mnuchin Asked About Fed Option That Could Avoid Rate Hikes
ReplyTreasury chief raises possibility of faster balance-sheet cut
https://www.bloomberg.com/news/articles/2018-11-28/mnuchin-said-to-ask-about-fed-option-that-could-avoid-rate-hikes
Barton
Reply
@Barton_options
@Barton_options
Dec outlook (major update, 11/26)
T=US Treasury
12/3-4: highest market liquidity days of the month
12/5-11: 40-45Bn withdrawal from T.
12/12-18: T. removes 52Bn, GSE removes ~37Bn.
12/19 FOMC
12/20-27: T. releases 30Bn, GSE releases 17Bn
12/28-31: T takes 15Bn, Fed takes 18Bn
In other words,
we go from high liquidity days (12/3-4, 5-6Bn better than today)
to awful liquidity on 12/18 (125Bn worse than today)
to a slightly better 12/31 (97Bn worse than today)
Fed contributes to 35Bn. Treasury needs to take 60Bn away from the market to replenish cash reserves and get ready for government shutdown/debt-ceiling.
Treasury's balance will go up from 190Bn on 1/2/2018 to 410Bn on 12/31/2018.
TMM4,just a little something for all the hard work over the last few weeks.
Replyhttps://youtu.be/e7wBGekB2-w
Are we doing it right? LoL
@Jill,
ReplyWhat are the sources of these data?
Anon &:43pm
ReplyBarton posts on twitter .
@Barton_options
With Powell out announcing only 2 more rate hikes, we now get to witness more of a "moment of truth" with the dollar. The dollar hit resistance yesterday and is now falling back after Powell's commentary of going dovish. The market is of course seeing this as bearish for the dollar since they believe the rising rates fueling the dollar's rise narrative as having a finish line of sorts.
ReplyI'm not downplaying the idea that interest rates play a role here, but the far more important issue in my opinion is liquidity and demand for dollars for the purpose of debt service payments. Also, the bigger idea here that wall street always seems to miss is that the dollar is priced RELATIVE to other currencies. So even if we are being dovish in the USA, if every other country in the world is also dovish and has lower rates, the dollar will still keep rising.
We saw this in 2015-2016. The USA went dovish (via the dotplot), yet what happened to the dollar during that time? It rose all the way to 103 in the DXY index. We saw what happened to emerging markets during that time period.
So here we are again, with most of the big banks calling for a return of dollar bearishness at a time when liquidity is rapidly drying up (just take a look at Libor), when China is accelerating their rate of selling reserves to keep the CNY propped up, and when the fed is pivoting dovish. If the dollar keeps up it's rise, the moment of truth will be in the realization that the dollar hasn't been rising because of interest rates, but due to liquidity risk and demand.
The face-ripper is finally upon us. It took a while but here it is… we did call that one a while ago, we were early as usual and were therefore deserving of the tomatoes at the time. Certainly the mood of Mr Market has changed, the out-performance of AAPL and GE being a notable feature of the day. Now we can all play our favorite game of drawing lines on charts!
ReplyI would give this maybe 3 or 4 trading days, 5 tops before we get some more chop. Hate to return to this again, but what crude does from here is important as it is now the key to US high yield - until Fed hawkishness resumes or the economy craters, neither of which seem imminent right here.
Interesting thoughts about the dollar, @Cbus, but if too many punters are caught out of position here we might get a deeper pullback and then have to wait a while to see renewed dollar strength.
Look at when the high of the day for TLT was reached, right after the speech headlines were realeased, and it closed on its ass too. Oh, and the more stocks get cheered, the lower TLT will go. Powell's bowing down to Trump is going to backfire, imho. Is this perhaps the beginning of the real worries about the resulting inflation? Those who have a massive pile of TLT have to be worried a bit here.
Reply"Is this perhaps the beginning of the real worries about the resulting inflation?"
ReplyI'm amazed people are still holding on to this narrative.... Please tell me, what signs of inflation are you seeing rising aside from late-cycle job tightness?
- Oil is down almost 20% YTD (and 30% from peak)
- Gold is down around 7% YTD
- The CRB Commodities index is down over 8% YTD
- The dollar, which is deflationary when rising is about 5% higher (and much higher off lows)
With all due respect IPA, the entire bond bear idea is likely true... but only on a much longer term time scale. We will see one last bond hurrah before the bond bear market comes, and by bond bear market, I mean it will likely be a very slow plod upward in yields for 30 or so years if that.
And since I like to cross some of the fundamentals with the technicals, the 10 year yield is dropping out of a 3 year wedge as of today. Not sure how this looks negative for bond longs.
https://www.tradingview.com/chart/US10Y/mIHeQY0e-Treasuries-are-about-to-see-a-great-rally-here/
@IPA: I hate to argue with you b/c you are intelligent and tenacious. But you are trading the 70s for some reason, this situation here is more like Japan's deflationary decades and with a bucket of QE that the Fed will not be able to unwind in full this time around, which makes Treasuries the new Widowmaker.
ReplyYou simply cannot have all of these together at the same time:
1) A US slowdown/recession
2) Equity/commodity bear market or deep correction
3) Bond bear
2) is deflationary and just not compatible with 3)
Trust me, even if foreign buyers desert Treasuries (they won't), those punters will be replaced by domestic buyers once 1) and 2) set in seriously. If you don't believe me look what happened in Japan. Beware the Widowmaker my friend !!!
Now can we get back to the swing trade du jour, the face ripper, in which we have partaken so recently? Let's just get this one out of the way before we address 2019 Macro themes? Apologies again for short time frames, it's who we are.
got out of 500 Europeans long during Spooz liquidation squeeze time last night - am gonna buy my mother in law the new X5 and will go art hunting in Budapest. Great American rally but the incredible weakness of Europe (Dax foremost) is telling the same story: more pain ahead
Replyi wonder if Dax is preparing our made in Europe Lehman moment: DB bankrupcy. Dax is headed to 9000. If Monday trades rich courtesy of G20 i will reenter Stoxx short. I hated being long (vs. Spoos short of course), i hated every minute of it it's bad for my bear health
i'd say, all eyes on US corporate credit from now on, the yield compression starting to crack. AT&T should follow GE soon. Good luck