Pulling the Punchbowl When the Espresso Is Hot and the Economy Is Cooling

By Heisenberg

You can count me skeptical when it comes to whether € credit is going to be able to accept the wind down of CSPP with relative alacrity.

I know some of my more sophisticated readers would tell me I’m preaching to the choir when I say that, but there’s still a sizable contingent out there that seems to think it’s somehow going to be possible to remove that ongoing bullish technical from a market that, broadly speaking, is priced to perfection without everyone suddenly deciding to take a closer look at whether they’re being compensated adequately for bearing credit risk.

I’ve obviously talked about this a ton in these pages, but I was thinking about it over the weekend in the context of Italy and I think one thing that’s worth considering is whether the potential exists for a kind of “double whammy” scenario where the relative weighting of Italian credits at the index level ends up causing problems at a time when spreads are set to lose the technical tailwind from CSPP.

I’m just going to excerpt the post in which I laid this out because I don’t want anyone to miss it in case it turns out to be some semblance of important later on down the road:

Continue reading Pulling the Punchbowl When the Espresso Is Hot and the Economy Is Cooling

Bi-Weekly Economic Review: Growth Expectations Break Out?

By Joseph Calhoun

There are a lot of reasons why interest rates may have risen recently. The federal government is expected to post a larger deficit this year – and in future years – due to the tax cuts. Further exacerbating those concerns is the ongoing shrinkage of the Fed’s balance sheet. Increased supply and potentially decreased demand is not a recipe for higher prices. In addition, there is some fear that the ongoing trade disputes may impact foreign demand for Treasuries. There are also, as our Jeff Snider has reported, some stresses in the Eurodollar market that are impacting Treasuries.

An unappreciated source of volatility is the mortgage market. Holders of mortgage securities, such as mortgage REITs, hedge with Treasuries to maintain their desired duration (or interest rate swaps but the result is the same). As interest rates rise, mortgage securities’ duration lengthens as prepayments slow. To maintain a constant duration, holders of these securities will sell Treasuries. If that weren’t complicated enough, the Fed is a large holder of mortgages and is shrinking its balance sheet. The reduction in mortgage securities so far is minimal but it is expected to accelerate in coming months. But again, we see a situation where a large source of demand in the mortgage market is being removed. If mortgage rates continue to rise, Treasuries will be impacted.

Some of these concerns may be overblown. Tax receipts in April set a record and the surplus for that month was a record too. I think it is way too early to be patting Art Laffer on the back since that is mostly about what happened last year but it is a positive at least for now. As for the trade disputes, I don’t expect the US or the Chinese to do anything really stupid although when talking about politicians in any country one shouldn’t discount that possibility too much. As for the mortgage market, demand may indeed fall but so may supply. Higher interest rates are not going to make houses any more affordable.

Continue reading Bi-Weekly Economic Review: Growth Expectations Break Out?

Crisis Watch

By Doug Noland

Where to begin? Contagion… The Argentine peso dropped another 5.0% this week, bringing y-t-d losses to 23.7%. The Turkish lira fell 3.9%, boosting 2018 losses to 15.4%. As notable, the Brazilian real dropped 3.7% (down 11.5% y-t-d), and the South African rand sank 4.0% (down 3.0% y-t-d). The Colombian peso fell 3.0%, the Chilean peso 2.7%, the Mexican peso 2.7%, the Hungarian forint 2.3%, the Polish zloty 2.1% and the Czech koruna 2.0%.

EM losses were not limited to the currencies. Yields continued surging throughout EM. Notable rises this week in local EM bonds include 54 bps in Brazil, 27 bps in South Africa, 34 bps in Hungary, 36 bps in Lebanon, 25 bps in Indonesia, 28 bps in Peru, 14 bps in Turkey, 20 bps in Mexico and 11 bps in Poland.

Dollar-denominated EM debt was anything but immune. Turkey’s 10-year dollar bond yields spiked 41 bps to 7.16%, the high going back to May 2009. Brazil’s dollar bond yields surged 29 bps to 5.58%, the highest level since December 2016. Mexico’s dollar yields jumped 18 bps to 4.64%, the high going all the way back to February 2011. Dollar yields rose 19 bps in Chile, 28 bps in Colombia, 19 bps in Indonesia, 14 bps in Russia, 14 bps in Ukraine and 167 bps in Venezuela (to 32.80%). Losses are mounting quickly for those speculating in EM debt.

Developed bonds were under pressure as well. We’ll begin with Italy:

Continue reading Crisis Watch

Semiconductor Canaries: Chirp, Warble… Soon a Croak and Silence?


In light of earnings reactions in the Semiconductor Equipment sector, it’s time for an update of a theme we have had in play since November, 2017

The canary is no longer chirping in a healthy manner and the economy’s coal mine has a toxic gas leak. While the recent Lam Research (LRCX) earnings report was pretty good and there were positive aspects to that of Applied Materials (AMAT), these highly cyclical companies that have been at the front end of the entire economic cycle that had its beginnings in 2013 are showing signs of wear.

Business is still good but when you are talking about cyclical leaders, it is growth rate that matters. I have read article after article touting strong current business and future drivers that will change the typical Semiconductor cycle as next generation Fabs are needed for ever more dynamic specialty chips for higher-end devices.

Applied Materials Slides After Softer Q3 Forecasts on Weaker Smartphone Demand

“Smartphone sales have been below expectations, particularly for high-end models, and in response, both semiconductor and display suppliers have made adjustments to their capacity planning,” CEO Gary Dickerson told investors on a conference call. “With inventory rebalance that we’re seeing from smartphones, we’re going to see a sequential dip in the Q3. But from our guidance into Q4, you can see that it recovers nicely into Q4.”

Taking the pulse of the analyst community, from the large houses to the boutiques to the chattering blogosphere, the theme seems to be that a buying opportunity is developing for the likes of AMAT and LRCX, two excellent companies. If you take Applied CEO Gary Dickerson’s view at face value, a decline in these stocks would be exactly that, an opportunity.

But as someone from the real world (as opposed to the Armani wearing analyst community) I can tell you that these companies have no better visibility than you or I. How can they? The global macro economy is subject to many inputs and if future outcomes were that easy to read, we’d all be rich beyond our wildest dreams because we’d have already seen around every corner. The global economy, while healthy now is not immune to the business cycle.

So here is a corner to look around. In NFTRH we began using this chart in Q4 2017 after a major financial media outlet published an article touting these two companies as great values for great investment returns in 2018. Leadership by the Semi Equipment companies has flattened out.

Continue reading Semiconductor Canaries: Chirp, Warble… Soon a Croak and Silence?

The Charts to Watch in 2018 [Updated]

By Callum Thomas

At the start of the year I posted an article on The Charts to Watch in 2018. It covered some of the key charts and indicators from my 2017 End of Year Special Edition and at the time attracted a lot of interest.  So I thought it would be a good idea to do an almost halfway point update as an eventful 2018 has so far seemingly rushed by.

The format of this article is the same as the original, but I will leave in the exact comments on the charts (in italics and quote marks) for the sake of transparency.  Aside from updating the charts, I have added my updated views and what has changed or become more apparent since then.

But before we get into the charts, here’s a quote from the introduction of original post:

“I’ve said it before and I’ll say it again: 2018 is going to be harder and more complex for investors than 2017.  The cross currents of rising valuations across asset classes, maturing of the business cycle at a global level, and the turning of the tides in monetary policy could make 2018 a watershed year.”

Yep. Sure looks that way!

1. “No more spare capacity in DM. (Next step = Inflation)”
Nothing to add to this.  If anything investors should be paying even more attention to this chart.

Continue reading The Charts to Watch in 2018 [Updated]

Globally Synchronized Asynchronous Growth

By Jeffrey Snider

Industrial Production in the United States rose 3.5% year-over-year in April 2018, down slightly from a revised 3.7% rise in March. Since accelerating to 3.4% growth back in November 2017, US industry has failed to experience much beyond that clear hurricane-related boost. IP for prior months, particularly February and March 2018, were revised significantly lower.

Continue reading Globally Synchronized Asynchronous Growth

An India Canary?

By Jeffrey Snider

The sweeping tide of populist election victories has not been limited to just the US and Europe. There have been torrents in Asia, too. Though there is some disagreement whether he counts among them or not, India’s Narendra Modi swept to a historic electoral triumph in May 2014 sure sounding a lot like one, maybe even one of the first.

In it, Modi’s Bharatiya Janata party (BJP) totally unseated the Congress party that had held the government since 2004, and for 49 of the 67 years before then. As UK’s Guardian put it, “Experts say the political landscape of India has been transformed. The vote is the most decisive mandate for any Indian leader since the 1984 assassination of prime minister Indira Gandhi propelled her son Rajiv to office.”

Like European and American populists, this wasn’t supposed to happen. Modi’s campaign prior to the election was widely mocked (by all the “right” people, too). He appealed largely to a growing sense of unease, one that wasn’t shared by people doing well nor much acknowledged in official communications.

One of his more popular slogans, particularly toward the end of the campaign, was Bahut Hui Mehngai Ki Maar, Abki Baar Modi Sarkar. Critics panned the simple mindedness, often posting derogatory memes with Modi as the punchline (in one, the Joker asks Batman, “do you know where I got my scars?” to which the superhero replies, “Ab Ki Baar Modi Sarkar.”)

Roughly translated, the catchphrase was, “enough of inflation, it’s now time for Modi’s government.”

For much of the Great “Moderation” India’s currency was pretty stable. During the 2000’s up until the Great Financial (Dollar) Crisis, there was practically no volatility in it at all. During the panic, the rupee fell like so many others – ending the “devaluation” exactly on March 9, 2009.

Continue reading An India Canary?

Jolted! Job Openings Leap By 472,000 To All-Time High 6.55 Million

By Anthony B. Sanders

The monthly JOLTS report for March revealed an additional 472k job openings in the US economy. That brings that grand total of US job openings to 6.55 million.


The JOLTs measures the number of specific job  openings in an economy. Job vacancies generally include either newly created or unoccupied positions  (or those that are about to become vacant) where an employer is taking specific actions to fill these positions.

Continue reading Jolted! Job Openings Leap By 472,000 To All-Time High 6.55 Million

Problems Are Emerging

By Heisenberg

Well, first thing’s first.

Donald Trump sent 11 tweets by 3:00 p.m. ET, a truly impressive “covfefe” tally, that included this batshit ramble about Lisa Page and Peter Strzok:

Yes, “what a total mess.” And for Christ sake, will someone please teach him what a proper noun is or, more to the point, what a proper noun isn’t?

But this was the one that mattered:

Continue reading Problems Are Emerging

Bi-Weekly Economic Review: Oil, Interest Rates & Economic Growth

By Joseph Calhoun

The yield on the 10 year Treasury note briefly surpassed the supposedly important 3% barrier and then….nothing. So, maybe, contrary to all the commentary that placed such importance on that level, it was just another line on a chart and the bond bear market fear mongering told us a lot about the commentators and not a lot about the market or the economy. As I said last month, despite the recent run up in rates, the economic landscape hasn’t changed that much. Since the beginning of the year, nominal growth expectations have risen, with both inflation and real growth expectations up slightly. But taking a little longer view, those expectations are no different today than they were at the end of 2015 or the fall of 2013. Call it what you will – secular stagnation or the new normal – but it is still with us. And I see no evidence that the US economy is about to break out of the 1.5% to 2.5% growth range we’ve been in for most of that period since 2013.

The economic data since the last update was a little weaker and the markets reflect that with both nominal and real interest rates down ever so slightly. From the bigger picture perspective, if we are to break out to a new higher growth range, we’ll have to raise productivity and so far, as the most recent report showed, we aren’t. There is some anecdotal evidence that investment may rise – if you believe the companies talking about capex on their conference calls – but like Godot, the hard evidence continues to be a no show. If companies do indeed start investing more then maybe productivity will rise and we can break out of these doldrums for good. But right now it just isn’t happening.

Continue reading Bi-Weekly Economic Review: Oil, Interest Rates & Economic Growth

Pushing Against the Big Wave

By Kevin Muir

One of the greatest traders of all time, yet probably one of the least well known, once said, “win or lose, everybody gets what they want out of the market.” Easy for Ed Seykota to say as he sits on his deck overlooking Lake Tahoe sipping a nice California cab. Yet as I struggle to make sense of this great game we all love to play, I wonder if maybe Ed is correct. I know his comment might seem a little preachy, but the older I get, the more I realize that a trader’s biggest obstacles lie in the dark recesses of their thoughts, not in the day-to-day zigs and zags of the markets.

So I wonder. Not only do we all get what we want, but do we only see what we want to see?

The other day, one of the biggest bond bulls out there posted the following chart:

Continue reading Pushing Against the Big Wave