The Bloomberg news crawler this morning is heralding the heart of our thesis: Namely, that “flush with cash from the tax cut”, US companies are heading for a “stock buyback binge of historic proportions”.
This isn’t a “told you so” point. It’s dramatic proof that corporate America has been absolutely corrupted by the Fed’s long-running regime of Bubble Finance. Undoubtedly, the C-suites view the asinine Trump/GOP tax cut not as a green light to invest and build for the long haul, but as manna from heaven to pump their faltering share prices in the here and now.
And we do mean a gift just in the nick of time. The giant Bernanke/Yellen financial bubble is finally springing cracks everywhere, putting corporate share prices and executive stock option packages squarely in harms’ way.
So what could be more timely and efficacious than an enhanced, government debt-financed wave of stock buybacks to rejuvenate the speculative juices on Wall Street and embolden the robo-machines and punters for another round of buy-the-dip?
A few weeks ago I wrote an article called “The Return of Volatility” in the midst of the February stock market correction. I highlighted the prospects of a change in market regime from one of ultra low volatility to a period of higher volatility. My view remains that we will likely see a sustained period of higher volatility for stocks, but due to a number of positive dynamics it may well be more similar to the late 1990’s than the pre-financial crisis period. In other words, rising volatility with rising stocks.
Now that’s just looking at one asset class – stocks, or specifically the S&P500. But what about other asset classes? Curiously, this period of ultra low volatility for equities has been mirrored across the major asset classes. The second chart in this report shows how realized volatility for the US dollar (the DXY), Commodities (GSCI Commodities Index), and the US 10-Year Government Bond Yield has dropped to very low levels. In fact there seems to have been a synchronization in volatility across asset classes.
But as I outlined in the presentation “Monetary Policy and Asset Allocation” as the global economic cycle matures, the tides are turning for global monetary policy. This is going to be a key driver of higher volatility across asset classes in the months and years to come. Monetary policy (traditional and extraordinary policy tools) was a force for volatility suppression over the past 10 years, and now that is changing.
The key points on the transition to a higher volatility regime are:
We were having a perfectly nice low-volatility uptrend until Jan. 26, and everyone was happy. Since then, the inverse VIX ETN known as XIV has blown up (a great case of a “burning LOH” marker), and traders are starting to remember that stock prices actually can go down. So why now?
As with most bear markets and recessions, the blame goes to the Federal Reserve, which decided last year that it would start unwinding all of the QE buying of T-Bonds and Mortgage Backed Securities (MBS) that it had bought up from 2009-14. Last year, the Federal Reserve under Janet Yellen announced plans to start liquidating those bond and MBS holdings, starting at a rate of $10 billion per month in Q4 of 2017, and ramping up that rate by an additional $10 billion in every quarter to follow. So the target rate of sales for Q1 2018 is $20 billion per month, and it is supposed to ramp up to $30 billion per month in Q2, then $40 billion per month in Q3, eventually peaking at a $50 billion per month rate in Q4 and beyond.
The heart of the Fed’s monetary central planning regime is the falsificationof financial asset prices. At the end of the day, however, that extracts a huge price in terms of diminished main street prosperity and dangerous financial system instability.
Of course, they are pleased to describe this in more antiseptic terms such as financial accommodation or shifting risk and term premia. For example, when they employ QE to suppress the yield on the 10-year UST (i.e. reduce the term premium), the aim is to lower mortgage rates and thereby stimulate higher levels of housing construction.
Likewise, the Fed heads also claim that another reason for suppressing the risk free rate on US Treasuries via QE was to induce investors to move further out the risk curve into corporates and even junk, thereby purportedly boosting availability and reducing the carry cost of debt financed corporate investments in plant, equipment and technology.
The Donald seems to think that the 37% gain in the stock market between election day and the January 26th high was all about him, and in one sense that’s true.
Donald Trump is all about delusional and so are the casino punters. They keep buying what the robo-machines are buying, which, in turn, persist in feasting on the dip because it’s there and because it’s worked like a charm for nine years running.
So doing, the punters have become downright reckless. After all, the market was already sky high last January—-trading at 23Xearnings on the S&P 500 and resting precariously on a record $554 billionof margin debt . Yet in order to load up on even more of these ultra risky shares, punters have since added $112 billion to their already staggeringmargin accounts, thereby helping to propel the S&P index to a truly ludicrous 27Xby the end of January 2o18.
A July 2013 See-It-Market post outlined the three steps required for a trend change. The S&P 500 recently broke the downward-sloping trendline below (step 1), made a higher low relative to the previous low (step 2), and went on to print a higher high (step 3). The completion of these three steps tells us the odds of the correction low being in place have improved.
Divergent: It’s Dalio (And Asness) Versus Everyone Else as Money Flows to Europe Stocks (Fed Tightening As ECB Maintains Accommodating?)
Money is following to European stocks as jitters struck the US stock markets and The Federal Reserve continues to slowly normalize its monetary policy.
(Bloomberg) — Billionaire Ray Dalio has $18.45 billion in bets against Europe’s biggest stocks. Most of the rest of the investing world is headed in the other direction.
U.S. stocks lost $9.7 billion in investment so far this month while Eurozone shares have gained $3.2 billion, according to data compiled by Bloomberg. Peers of Dalio’s firm, Bridgewater Associates, are mostly wagering that Eurozone equities will rise.
“I’m surprised. That’s a big bet. Dalio and his team are very confident,” said Rick Herman, managing director of asset allocation who helps oversee about $30 billion at BB&T Institutional Investment Advisors Inc. “That’s definitely out of consensus. European stocks are cheaper, and they also have stronger earnings growth.”
Dalio has always marched to the beat of his own drummer, so his big short position, especially when other hedge funds are betting in the opposite direction, could be seen in that context.
For a market analyst there is an irresistible temptation to seek out one or more historical parallels to the current situation. The idea is that clues about what’s going to happen in the future can be found by looking at what happened following similar price action in the past. Sometimes this method works, sometimes it doesn’t.
Assuming that the decline from the January-2018 peak is a short-term correction that will run its course before the end March (my assumption since the correction’s beginning in late-January), the recent price action probably is akin to what happened in February-March of 2007. In late-February of 2007 the SPX had been grinding its way upward in relentless fashion for many months. The VIX was near an all-time low and there was no sign in the price action that anything untoward was about to happen, even though some cracks had begun to appear in the mortgage-financing and real-estate bubbles. Then, out of the blue, there was a 5% plunge in the SPX. On the following daily chart this plunge is labeled “Warning shot 1″.
If you had asked me a week ago what I thought the probability was that we’d resume the downtrend and take out the lows of early February, I would have probably said 80%. Last week’s action (augmented by this morning’s) takes that down to more like 20%. It seems that, once again, the BTFD crowd was right. It sucks.
Oddly, the big tumble early in this month took place on pretty much no distinguishable news, and the same can be said for the recent lift. Let’s face it, the Dow has gone up thousands of points in just a couple of weeks, and no one can point to any real reason why. It’s pretty much like the “V-dip” didn’t need to take place at all (except to wipe out the unfortunates who owned XIV).
Anyway, we seem to be back in the godawful up-half-a-percent-every-single-day mode that we had been in before all the excitement began, and if we cross above the blue horizontal below, then we’ll just grind out way into the “DMZ” (tinted green) leading up to all the overhead supply. Simply stated, for me, the market has become boring and nauseating once again.
I mentioned in a Tweet on Friday that the low volume on Friday’s rally was a bit concerning. The study below is one I featured in the subscriber letter this weekend. It examined other times substantial rallies occurred during uptrends on very light volume.
Stats here suggest a downside edge. Perhaps not a huge edge, but in my view one that appears strong enough to warrant some consideration when establishing my short-term bias. So traders may want to keep this in mind as we begin a new week. I will also note that I ran the same test, but switched the volume requirement to “NOT the lightest in 20 days”. Of course there were many more instances. With volume not coming in extremely low, the average trade flipped to moderately positive across the board. This suggests the low volume is a factor.
Strengthening bond prices. Surging oil. Strong equities. Grumble. Today is one of those “days to endure” for me. Ah, well. Here’s one idea to share: fallen angel Chipotle, which even with the recent bounce is still 60% off its peak. What we have here is a consistent series of lower lows and lower highs: the very definition of a downtrend.