Thursday, December 29, 2016

Finally Some Selling

It seems like we haven't seen selling like yesterday for months.  The market was overbought, and it has chopped since the FOMC meeting to consolidate the gains.

 Bonds finally caught a strong bid.  That is a good sign if you are a bull not only in bonds, but also in stocks.  I see very little upside in yields, perhaps up to 2.80% 10 year, which means this equities rally probably has more to go.  The biggest bear case was a bond market continuing to selloff, infecting its weakness onto equities.

Yesterday, it looks like we had those looking to sell stocks ahead of the newly feared January. Market professionals are much simpler than you think.  They remember what happened in the past 3 Januarys, when we had chunky pullbacks, and are projecting January 2017 to also present a pullback.  The contrarian in me thinks that this market will receive a bunch of inflows in the start of the year, as the trend of big inflows continues, propelling the market to all time highs.

Despite the big inflows, I see no euphoria in the financial media or on Twitter.  Sure, there is no more outright bearishness that you saw for much of the year, when people like CNBC's Brian Kelly screamed sell at every opportunity.  But there is also a reluctance to fully buy in to the rally because of the uncertainty of what Trump will do when he enters office.  And whenever there is uncertainty, there is untapped potential for the market to go higher.

The markets usually top out when there is the most certainty and it seems like there is nothing to fear.  A lot of investors are still worried about what policies Trump will enact, especially his trade policies, or even his abrasive tweets.  I think the uncertainty is overblown because the Republican playbook is right out in the open.  Cut taxes, cut some more taxes, spend on defense, and then cut some regulations.   Those are short term bullish for the stock market, and that carrot of those new tax bills being passed will keep this market afloat.

As for Trump's various rants and tweets, they are irrelevant and the market ignores them.  You have to consider the source.  Trump spews out a lot of abrasive and unpresidential tweets, but at the end of the day, they don't mean anything when it comes to his policies or to the economy.

There is some complacency in this market, but given how strong this market has been, with breadth very strong, it shouldn't lead to more than a couple percent pullback before you test the highs again.  Due to the complacency, I am not bullish, but because of the strong uptrend and expectations for strong equity inflows in January, I cannot be bearish.  There are no high probability trades here, but if I had to choose, I would rather buy S&P 2250 then sell it.

Tuesday, December 27, 2016

Anything But Yuan

With Chinese FX reserves getting to levels where they have to slow down their support for the yuan, they have opted to put in stringent capital controls to stem the flood of outflows.  There are obvious repercussions to this in the financial markets.  The most obvious is a reduction in Chinese capital flowing to foreign markets.

The Chinese have been almost solely focused on buying up real estate, as it is their preferred store of value.  In particular, they helped to boost the luxury real estate markets in big cities like New York, Los Angeles, London, Vancouver, Toronto, etc.  They added more fuel to the fire to high end real estate, which was already getting a boost from increasing financial asset prices over the past 5 years.  I would argue that compared to stocks, there is a bigger wealth effect from increasing home prices because they are viewed as more permanent, and is usually a bigger part of a middle to upper middle class person's net worth.  Luxury housing supply is increasing at time when demand will be decreasing.  A bad situation for that sector.

The financial media is right to be worried about China.  It is in a very difficult situation where their crazy money printing and debt build up over the past 8 years has created an excess of cheap yuan looking for a home.  And it doesn't want to stay in China, with real estate already overinflated and equities overvalued considering all the nonperforming loans on the banks' books.  The wealthy Chinese realize that the yuan is way overvalued and should be trading more like 10-12 yuan/dollar than 7/dollar.  That is why Chinese corporations are finding clever ways to invoice to keep more dollars and not have to exchange back to yuan.  Or using their yuan to buy up dollar based assets, like real estate, or do foreign company acquisitions.  Anything but yuan.

This weakening yuan is a headache for the PBOC because it can't cut rates and pump as much credit into the system as it needs to in order to pump up the economy.  If they do, the pressure on the currency increases and more FX reserves need to be used to keep the yuan stable against the dollar.  It is becoming increasingly clear that the best of two bad options to get out of this dilemma is to keep pumping credit into the system, devalue the yuan, and make the big debt pile more palatable via inflation.  Of course, that will make imports into China much more expensive, and reduce confidence in the yuan, but it will help to increase Chinese exports, a way to rebuild their FX reserves.  This also reduces the pressure to keep building more worthless buildings, roads, and bridges to nowhere, to keep up their GDP numbers.  The overcapacity everywhere is a whole another nightmare hanging over China's head.

With China increasing exports through a weaker currency, that will give a deflationary push on manufactured goods, and also crowd out some of their competitors, a net negative for global growth ex China.  All in all, this China situation is a time bomb waiting to explode, and it can do some real damage now that equity prices are so high.  Something to look for in 2017.

Thursday, December 22, 2016

Save Your Ammo

There will be better setups to play counter trend.  With the down Januarys the past 3 years, investors' short term memories create trading biases which are usually not profitable.  When you have strong inflows like you did at the end of the year, it is a clear shift in investor sentiment which doesn't change on a dime.  Although my forecast is as an S&P blowoff top that will peak in the spring of 2017, there is still a lot of time between now and then.

When I see Stocktwits SPX and SPY sentiment at bearish levels, I know that retail is wary of this rally and thinks it is going to go right back down like we did in July.  On some level, retail traders can't believe that the market is going up on anticipation of Trump goodies.  They still view that as an uncertainty, when it is a near certainty that Trump will do massive tax cuts.  Republicans never met a tax cut they didn't like, and they control both houses of Congress.

Wait for a better opportunity when retail is on board the bull train.  They are still too cautious considering the strong rally for me to want to play a counter trend trade short in S&P.

Tuesday, December 20, 2016

Bad News for Contrarians

CNBC's Brian Kelly is short-term bearish stocks and short-term bullish bonds.  He is one of my best tells on fast money.  Neck and neck with Dennis Gartman for the title of Most Valuable Teller.  They tell it like how they feel.  And what they feel is what a lot of weak handed fast money feels.  If this type of fast money has bought, it means that they have to sell, and sell quickly.  It is most valuable when they are doing this counter trend, but it also has decent value when they are running with pack.

This year, Brian Kelly has been continuously bearish stocks and bullish gold and TLT (long term Treasury ETF).  He has screamed to get long TLT and gold throughout the year.  Those that followed his advice has lost chunks.  Those who faded him have made a lot.

This gives me pause when it comes to shorting the market, and I covered S&P after I found out that Brian Kelly was bearish stocks.  We will be going higher, bullish sentiment or not, because the money is flowing in and will keep flowing in anticipating Trump goodies.  The market is always strongest when anticipating good news, not after the good news has come out.

It seems like the market will be dead for the next several days, so mostly staying on the sidelines and reset for what should be an interesting 2017.

Monday, December 19, 2016

Not a Long Lasting Trend

The market is now in a trending phase, with stocks and dollar uptrends, and a bond downtrend.  Based on what I have mentioned about the Trump tax cuts, and overvaluation and aging population, the fundamentals do not support this trend to continue for much longer.  Sure, the market can remain irrational for a long time, but you need the investing public to have something more concrete than Trump magic and hope to keep this rally going.  All the measures that Trump will take to boost the economy are short term, and are long term unsustainable because the budget deficit would balloon to a point where the stimulus becomes a net negative, keeping interest rates artificially high.

Soros has stated that the participants in the market are fallible, and oversimplify complex systems.  He also mentions that in his theory of reflexivity, two functions determine prices:  1) the perception of reality, and 2) the behavior based on that perception by market participants.  I agree with his definition of what moves markets, but his writings make his theories more complex than they really are.  He could have explained his theory concisely in a couple of pages, rather than over a half a book.

The current perception of a stronger US economy and higher inflation in the next few years due to Trumponomics is gaining popularity and the prices reinforce the perception, in a feedback loop that keeps the S&P and dollar going higher, and Treasuries lower.  But the perception will be tested in 2017 and 2018, because that is when the actual results have to start coming in.

The perception will be invalidated sooner than many people think, as it is based on oversimplistic and overoptimistic logic.  It overestimates the ability of fiscal spending and tax cuts to boost the economy when it is already running near full capacity.  Fiscal stimulus has always been less effective in boosting the stock market than monetary stimulus.  After all, the markets are based on supply and demand, and fiscal stimulus that is tax cut heavy is a mere reallocation of assets from the bond market to a mix of cash, stocks, bonds, and real estate.  By making bonds cheaper, they have taken money away from the bond holders' hands and given it to those who get the tax cuts.  Theoretically, there is no net addition to the supply of dollars like you would get with monetary stimulus.  Monetary stimulus is always the easiest way to boost the stock market, as we have seen since 2008.

If this strong US economy perception gets proven false, it will lead to a spectacular reversal in the stock, dollar, and bond trades.  Watch for that sometime in 2017.

I have always traded better around market turns than when the market is strongly trending.  It has not been easy to trade as a fader for the last few weeks.  But 2017 should provide much better opportunities for those trading based on fundamentals and not short term momentum.  Timing is the tricky part, but the tax cut bill being introduced and passed in Congress will probably be close to the climax of this up move.   That is likely to happen in the spring of 2017.  In the meantime, I will not be taking any long term positions either short stocks or long Treasuries.  But after the bill gets passed, it will be time to look to take a long term short (12-18 months) in S&P and long in Treasuries.

Friday, December 16, 2016

Due for a Pullback

With the Fed turning more hawkish, we have laid the foundation for the market to consolidate its gains and have a pullback.  Yellen has decided that the stock market is a little overheated.  Trust me, the Fed knew how the market would perceive 3 rate hikes forward guidance.  It wanted to cool this freight train down, and I think she will get what she wants, at least for the next several days.

It also coincides with the high optimism and heavy inflows into equity ETFs since the election.  It has been over 5 weeks since the election, and that has given most institutional investors plenty of time to add positions and after this Fed announcement, I don't see them adding to positions with just 2 weeks left in the year and with the newly feared January ahead.  It used to be that Januarys was a bullish month where investors put risk money to work in the new year.  That hasn't been the case since 2014.

I will be shorting the S&P for a trade today and will ride probably hold it into next week.  This will be one of my first S&P trades since the election, as the market isn't that good for trading at the moment.  I am playing for a post opex pullback as Yellen tries to be the party pooper.  Not looking for much, perhaps 20 points down.

Thursday, December 15, 2016

Fed are Stock Jockeys

Let's not pretend like the Fed really looks that closely at jobs numbers or inflation, which is their dual mandate.  I think they have a single mandate now.  It is to control the S&P 500 in a slow and steady ascent.  They must have felt like the S&P 500 was getting short term overheated so they threw out another one of their empty forward guidances in the form of 3 rate hikes in 2017.  This time, they surprised the market which was expecting the status quo of 2 rate hikes for 2017 and neutral to dovish language.  Yellen didn't oblige.  Even though these forward guidances are mostly empty promises, this time the bond market is paying attention, so it means these promises aren't as empty as they've been over the past 8 years.  The difference between bond market expectations and Fed expectations is as small as I've seen since 2008.

Yellen is without a doubt a lot more hawkish than Bernanke.  She will occasionally say things which she knows the market will not like, and she doesn't really seem to care.  Bernanke was explicitly trying to pump up the S&P to as high a level as he could get it without losing all credibility.  Thankfully he decided to excuse himself from the position so he could cash out from his notoriety.

So with a newly hawkish Fed, what are we to make of the stock market?  I think little if anything at all, for now.  The equity fund inflows are through the roof, and will help perpetuate this market higher for the next couple of months.  The magical thing about this equity rally is that it is based on perception of tax cuts and infrastructure/defense spending, and it can't be disproven until Trump actually has the plan actually enacted, which will be in 2018.  So you can live in this fantasy world of how good things will be after Trump's fiscal stimulus gets put to work, and it won't be tested until 2018.  That is a long time to anticipate goodies, but it also keeps the hope alive even if the economic data comes in weak in 2017.

That fiscal stimulus hope is the tailwind for the stock market, and a headwind for the bond market.  So even though Yellen slowly tries to take away the alcohol from the party, the market is ignoring it because Trump is the one who is providing the punch from the other side.

I continue to stay away from the S&P 500 and will stay away until I see more volatility and/or signs of topping in the market.  The odds still favor trading from the long side in SPX but I don't feel comfortable doing that at these lofty levels.  The Treasuries look panicky today, and I wouldn't be surprised if we made short term bottom in bonds today or tomorrow.  Short-term, we should be locked in a 2.45-2.65% 10 year range.  In the intermediate term, there is more bond weakness in early 2017 as the Trump plan becomes clearer and more concrete.

Tuesday, December 13, 2016

Hawkish Fed

If there ever was a time for one to bet on the Fed coming out more hawkish than market expectations, it is this one.  I don't remember seeing the investment community this complacent going into an expected rate hike last year at this time.  Of course, the market was weaker back then.

Over the past 3 months, the economic data has been beating expectations.  The S&P is at an all-time high, which is probably the most important factor.  And there is the Trump factor, which will not be mentioned, but is in the back of the mind of Fed officials when they try to forecast growth and inflation.
CESI/USD Index is Over 60
It is interesting to see that the financial pundits believed the Fed and was expecting 4 rate hikes in 2016 after that December 2015 hike, but they were completely wrong, and the Fed surprised on the dovish side at the March, June, and September meetings this year.  I will not mention the other meetings because they seem to be like mini-meetings, where nothing big is decided on.  Now with rates higher than in December 2015, the financial pundits are saying 1 or 2 rate hikes for 2017.  They have finally figured out the Fed's game, which is to overpromise on rate hikes, and underdeliver.  But with those more dovish expectations of the Fed, they are setting themselves up for a disappointment when Yellen starts talking up the economy and inflation expectations.

While I don't think stocks will selloff that much on this news, Treasuries, especially the short end of the yield curve, will probably not like it.  If I had to take a position ahead of the FOMC meeting, I would be shorting T-notes.

Monday, December 12, 2016

Watch VIX as S&P Rises

I am not getting any imminent signs that the market is topping out.  One of my favorite indicators of a market top is when volatility rises with the S&P 500.  It is not that common, but it was deadly accurate in forecasting the top in the summer of 2007 and the market weakness in January 2015.  I vividly remember when the VIX was stubbornly high in the December 2014 holiday period even though the market had just made a short term bottom and was rallying strongly.  If you look at the VIX chart from 2014-2015 below, you will see the VIX stayed above 14, making a higher high as the S&P was making higher highs.

The connection is much more obvious in 2007 when the VIX bottomed out below 10 in February 2007 and preceded to rally with the S&P into the summer, as the S&P was making new highs week after week.  Right now, the VIX is making lower lows as the S&P is hitting new highs.  So there is no inverse VIX divergence signal with the S&P.  You need to be patient here with shorts, as it looks like we will be making higher highs in early 2017.  It is too early to try to call a top.  Give the rally time till at least February 2017, or whenever the Trump tax cuts get passed, probably sometime in spring 2017.

SPX 2007
VIX 2007
SPX 2014-2015
VIX 2014-2015
SPX 2016
VIX 2016

Friday, December 9, 2016

Harry Dent on CNBC

Yesterday, Harry Dent showed up on CNBC Futures Now program and unbelievably, I agreed with his views.  He sees this up move in stocks as a blowoff move that will form a top in 2017 and believes that Treasuries are the place to put your money when it tops.

He has been bearish for quite some time, and I don't think he's a good market forecaster, but he's got the facts right.  Trump's economic plan will be a bust, Europe is a mess, with Italy in trouble, China's real estate bubble is about to blow up, and aging demographics will keep growth low.  I also believe his timing is finally right this time, he was bearish way too early, and CNBC called him out on that, and his views were met with a lot of skepticism.  And they didn't refute his facts, but just stated that he's been wrong by being bearish, so he can't be believed.  But at least he hasn't gone from bearish to bullish near the top, which would be MUCH worse.

In any case, the upside in the S&P is limited, unless we enter a bubble.  I put the odds of a bubble forming at around 10%.  I would consider a move above S&P 2400 in 2017 as a bubble.  I don't believe the market is a bubble now, but it is very overvalued.  A bubble has to have two essential things:  1) very overvalued 2) going up quickly.  We have the overvalued part, but not the going up quickly part.

I am thinking more and more that the good news top will happen when Trump gets all his tax cut and infrastructure spending plans passed through Congress.  Hard to guess what level the S&P will be at that point, but the higher it goes, the harder it will fall in the second half of 2017.
Dow to rally another 10-20%, then plunge to 6,000: Economist Harry Dent

Wednesday, December 7, 2016

Short Term Thinking

One of the reasons opportunities arise on Wall Street is because of the prevalence of short term thinking.  Short term results are emphasized, even though these asset managers talk about the long term while trading in and out of positions on a daily and weekly basis.

You don't see investors stick around with a fund manager if they have a couple of bad years.  A few bad months is tolerated, a couple of bad years is not.  That kind of investor behavior keeps the fund managers on their toes, always worried about short term performance.  This leads to herd like behavior, because one is forgiven for going down with a crowded ship, but going down in a ship as the only passenger leads to pink slips and redemptions.

Right now,  the Trump trade of buying the dollar, buying US equities, and selling bonds is pervasive on Wall Street.  Even though we are in the late stages of a bull market in both the dollar and stocks.  To enter now and buy the dollar and S&P, you are taking a big risk for a small reward.  On a PPP basis, the dollar is already overvalued, and speculative positioning is already loaded up on long dollars.  For the S&P, at over 2200, you are trading at over 20 times earnings which are growing in the low single digits with rates rising.  It is one of the worst times in stock market history to enter a long term investment in the S&P.  

These are not big secrets.  And although valuations/earnings were mentioned as being a concern in 2015, and earlier this year, almost no mention of it now.  It is known, but not mentioned.  Because it goes counter to the prevailing theme of having to play the Trump trade, of buying stocks on hopes of big tax cuts, some infrastructure spending, and deregulation.  Those are hits of crack, as I mentioned before, which the market will eventually see for what it is:  a short term earnings boost that doesn't affect the long term value of US corporations.  

Yet the short term thinking of Wall Street buys stocks at what are bad prices for long term investment because that is the safest way to keep their jobs.  If they lag the averages and the market keeps going higher without them, they will be fired.  

For individual investors, this presents an opportunity to play the other side.  Fade the extremes of short term investment flows and build positions for the ride down.  The tricky part is the timing, because tops are always harder to time than bottoms.  But with the amount of exuberance we are getting off this Trump victory, my gut tells me the top is not far away.  I give this bull market 6 months at most.  

I have been doing a lot less short term trading and more long term fundamental research.  The long term picture looks bad.  Overvalued, lots of debt, with no growth, and now with a lot of optimism.  But I have refrained from shorting because we are not that far removed from the tumult of earlier this year when the S&P went down to 1812.  It usually takes the stock market at least a year to top out after forming such a powerful bottom.  But as that scary period gets further and further away from the rear view mirror, the risk of a big move lower gets higher and higher.  Hopefully in 2017, the short term behavior of the funds and institutions will provide the exquisite selling opportunity that I am waiting for.  

Monday, December 5, 2016

Another Hyped Up Nonevent

The Italian referendum has come and gone, and another midget hurdle has been cleared, although this was supposed to be bad news, with a No vote winning.  But it was expected, and honestly, no one outside of Italy really cares.  With Brexit, the US election, and now the Italian referendum, the knee jerk selling is lasting less and less.  With Brexit, the knee jerk dumb money selling lasted 2 trading days.  With the election, it lasted 6 hours.  This one, the selling was hardly noticeable, and we went straight back up and above the Friday close with ease.

The crowd is catching on.  Or maybe the dumb money is running out of ammo, after selling in the hole after Brexit and the US election.  Most of these events are meaningless, at least when they are considered scary events.  They are meaningful only in that market participants act surprised that the market did what it did.  Like go up on Brexit.  Or on Trump winning.  Or now this.

The Italians are not leaving the EU unless they are forced out.  They are free riding off the credit market benefits of Mario's QE and the frictionless access to other EU markets.  There is no way they give that up so they can ignore Brussels, spend like mad, and devalue their currency.

After overnight sessions like today, you can see why volatility is so low.  Even these supposedly scary talked up vol events end up being more hype than reality.  Eventually the crowd catches on and ignores these events and moves on to the next "scary" thing.  You do that for long enough and a lot of complacency builds up for actual meaningful events in the future, things that will actually affect markets for more than a few hours or days.

This S&P market has been quite the bore, and it has lived up to what I expected.  A no-touch market. It is only worth touching when volatility is elevated.  Now is definitely not one of those times.

Friday, December 2, 2016

The Five Year

This Treasury maturity is often ignored in favor of either the 10 year or the 30 year, but it is the portion of the curve that has been an enigma.  The 5 year is most closely tied to the intermediate term expectations for the Fed funds rate.  But the problem is that those intermediate expectations have been wrong.  For 8 years. They have been too optimistic about the path and timing of interest rate hikes.  And yet the 5 year note still hasn't performed well despite that reality.

Usually you don't get a five year yield that is too far from the current Fed funds rate, unless the current rate is viewed as long term unsustainable.  Thus, with the 5 year at 1.8%, the market is viewing rates below 1% as long term unsustainable.  But to me, interest rates below 1% seem much more long term sustainable than interest rates at 2% or higher.  The growth in government debt supply over the past 10 years makes it unlikely that you can have a big rate rise without hurting a lot of investors.  Add in higher duration on that debt compared to 10 years ago and it amplifies the leverage.  And when you hurt a lot of investors, what does the Fed do?  They start easing.   Which is what happened in Japan.  They tried to get off the zero bound and they failed miserably.

Japan is an extreme case in being stuck at zero when there is little growth and so much government debt.  That is the only way that economy can survive.

There is a lot of Treasury supply.  It is not like the German Bund, or other European government bonds.  The US government debt to GDP ratio is over 100%, and likely going to rise even faster with Trump and his massive tax cuts.  While you would think a lot of supply would cause bond prices to go down, and stay down, but bonds aren't completely priced off of natural supply and demand.  There is a little institution called the Fed that intervenes when it thinks there is too much supply.

Along the yield curve, probably the best risk/reward would be the 5 year.  It is closely tied to intermediate term Fed rate expectations so with the Fed unlikely to raise too many times before the economy goes sour, there isn't as much downside as the 10 or 30 year, but with enough duration to benefit from a move back into risk free assets when equities get weak.

I believe this bond market selloff cannot continue for the long term.  The US is just not growing fast enough, and with worsening demographics, no new revolutionary tech innovation, and a lot of debt, you cannot compared this time period with anything like the last 100 years.  As I mentioned yesterday about tax cuts, they act like a hit of crack.  Fast acting, but short lived with lots of side effects.  Yet, you hear random financial "experts" talk about a possible 6% Fed funds rate like we are back in 1999.

What you are seeing is a slow liquidation and repricing of fiscal policy uncertainty risks associated with big tax cuts and a concurrent big increase in Treasury issuance.  Once all the blood is shed in the bond market, there will be an opportunity waiting on the other side.  The question is how much more blood needs to be shed.

I am guessing we reach a top in yields sometime in early 2017, when the optimism about Trump's economic plan reaches its peak.  Until then, I would be careful buying bonds.  I initially thought 2.35% would hold and the market would consolidate between 2.15% and 2.35%.  I was wrong.  I underestimated the amount of money and long speculative positioning built up this year.  The liquidation is still ongoing, although it looks like we hit a climax of selling yesterday.  I expect another wave of selling as we get closer to the FOMC meeting in two weeks.  I think we go higher in yields into January.  Under a worst case scenario, we could have 10 yr yields go up to 2.80-2.90%.  But under my base case scenario, I expect yields to top out at 2.60-2.70%.

Thursday, December 1, 2016

Tax Cuts Have a Price

Bonds are the main show.  Despite what you hear about all the Trump theme plays, like financials and industrials, the big move is happening in bonds.  The carnage is extreme and will have lasting implications for the sustainability of this bull market.  The stock market is not strong enough or cheap enough to sustain an uptrend with this kind of relentless rise in yields.  At a certain point, the high dividend plays become roach motels and bonds become more attractive on a relative value basis.

The Trump experiment of having big tax cuts and big deficits is taking from one hand and giving it to another.  They are taking money away from bond holders and giving them to the high income earners, corporations, and to equity holders.  Lighting a flaming torch to all those bonds outstanding is a bold experiment in testing how deeply dependent financial markets are on low interest rates.  The global economy will collapse under a huge weight of debt if Trump gets 100% of what he wants.

QE is free money.  Tax cuts are not free money.  There is no price to pay in the financial markets with QE.  But there is one to pay with tax cuts.  When there is no QE, the price to be paid for running up huge budget deficits is higher interest rates.  An economy growing like it did in the 1980s and 1990s can handle a 10 yr yield above 5%.  An economy this weak would go into a deep recession if the yields got even a sniff of that level.

I am not saying we will keep selling off in bonds and enter a bond bear market.  But too many equity investors are sanguine about rising interest rates.  They are what cash flows are discounted off of.  I have serious doubts that these tax cuts will boost growth as many think.  The Bush tax cuts did very little for the economy from 2001 to 2012.  Most tax cuts are saved, not spent as many people think.  And since most of the Trump tax cuts will go to the rich, most of the extra money will be saved.  You are mostly shifting savings from the bond market to a mix of stocks, bonds, real estate, and cash.

While Trump has succeeded in killing the bond market, I don't think he will succeed in keeping the equity bull market going.  The best way to support the financial markets as we have seen over the past 7 years is through monetary policy, not fiscal policy.  As I figured, the end game for this bull market would come on hopes for a stronger economy, which would take away the monetary policy stimulus this bull market has thrived off of.  If I am long stocks, a Fed feeling confident about the economy and higher inflation is the last thing I would want to see.

Tuesday, November 29, 2016

Bonds Taper Tantrum Part 2

This is getting really bad in the bond market.  It is a bit shocking to see such carnage in fixed income when the economy is this mediocre.  In 2013, during the taper tantrum, you had 10 yr yields go from 1.6% to 2.9% over a span of 4 months, on fears of the Fed reducing QE.  But $85B of monthly QE was still ongoing throughout the year and was only tapering $10B every meeting, starting in 2014.  So you had buying power supporting the Treasuries as the carnage was happening.  But there is no QE now.  And unlike 2013, you didn't have a potential bullish catalyst for Treasuries like you did with ECB going negative and starting QE.  The ECB is already doing their QE and will likely have to taper because of a lack of supply.

With Bunds already near 0%, there is very little lift that it can provide to Treasuries.  The only thing that will help Treasuries now is the economy slowing more than expectations.  That is a higher hurdle than merely riding on the coattails of a big bull move higher in European government bonds.

I underestimated this bond selloff.  It will not be contained at 10 yr 2.40%.  I see at least a move towards 2.5% and probably closer to 2.6% before you can feel safer buying the weakness.  So no, this isn't as great a buying opportunity for bonds like you had in the end of 2013, or even end of 2015.  This selloff will need more time to mature and build, because the equities are not as vulnerable as they were at this time in 2015, and you won't have the boost from European sovereign yields going lower and lower like in 2014.

And the problem is that the Fed hasn't even said anything yet to fan the flames.  And in all likelihood, you will see a hawkish Fed in December, now that the election is over and Yellen fights back against Trump and his hopes for a low Fed funds rate.   Even though Yellen is a dove, the pressure is building for the Fed to start raising rates as equities keep going higher and CPI inflation stays above 2%.  They mentioned in their minutes that they are worried about their credibility.  If they maintain a dovish tone, they will lose their credibility even faster.

That is probably why you are seeing a flattening of the 5-30 yield spread, as money is betting that the Fed will talk tough about rate hikes for 2017.  And this time, I don't think you will get the big equity swoon to hold them off from their plans so easily.  At least not for the next few months.

This feels like the blowoff stage for equities, and the give up stage for bonds.  Looking out over 2 to 3 months, I am a bond bear, equity bull.  But looking out over 2 to 3 years, I am a bond bull, equity bear.   The fund flows in November are finally making distinct big moves.  Lots of money is going into equity mutual funds and ETFs, finally.  It was a long time coming.  It took optimism about Trump of all people to get those skittish investors to jump into the pool.  All the signs for the final top are there.  We just need to let it play out for the next few months and take the other side.  In the meantime, don't waste your bullets playing for singles.  There will be much bigger opportunities in 2017, as the crowd finally embraces this overvalued, aging bull market.

Monday, November 28, 2016

USDCNY 6.91 and climbing

The higher they go, the hard they fall.  There hasn't been such heavy inflows over a two week period since late 2014.  That led to choppy and toppy markets in 2015 which led to moments like lock limit down in S&P 500 futures on Monday, August 24, going from 2100 to 1840 over a span of just one week.  How soon we forget that the reason for that big drop was because of fears of the deflationary effects of a Chinese yuan devaluation and Chinese financial stability.  The USD-CNY exchange rate rose to 6.38 that day.  Today we are at 6.91.   And yet not a peep.  The situation in China has gotten worse, and the Chinese are selling Treasuries to defend the yuan to prevent it from falling even more.  When the yuan is in a controlled descent, it makes it obvious for those with yuan to get the hell out of that currency and convert it into dollars, euros, yen, whatever.  But now there is news of the Chinese government trying to crack down on capital outflows by making it difficult or illegal for Chinese companies to do foreign mergers and acquisitions.  Many of these acquisitions are a way for the Chinese to convert their yuan into dollars.

If the CNY was a free floating currency, it would be at 10 right now.  There has been so much money printing by the PBOC to keep their debt pyramid from collapsing that you now have more M2 money supply in CNY (dollar converted) than in USD.  How can the US with a GDP almost twice that of China and with the world's reserve currency have a smaller M2 than China?  It makes no sense, and it points to a massively overvalued yuan which has kept its value because of capital controls.

The most interesting thing to watch in 2017 is not what Trump will do, but what happens in China.  We are getting really close to that Minsky moment where faith in the Chinese government and the PBOC causes a panic out of the yuan and into foreign currency based assets.  In China, there are very few choices.  The only thing I can think of that the Chinese investor can buy to protect against a yuan devaluation is gold or other hard assets denominated in dollars.  Perhaps they will go back to hoarding copper or oil.  A yuan devaluation would export some deflation into the global economy but I don't see it as trigger for a global financial panic.  But I do see it as a trigger for a panic out of yuan based assets, mainly the one that the Chinese have been hiding out in the most:  Chinese real estate.

The smart ones in China already have transferred most of their yuan assets into USD or other foreign assets to convert their vastly overvalued currency into something more accurately valued.  Even if that means overpaying for luxury condos in Manhattan or London.

This bull market in the S&P is getting very old, and I will be actively looking for signs of a major top in 2017.  The optimism over Trump's tax cuts and infrastructure spending is way overdone, and a disappointment over its economic effects could trigger the downside of the slope.  We are getting close to the peak of the mountain.

I don't see any good trades in the near term, the S&P should continue to grind higher, and I won't actively look to short until we get into 2017 and closer to 2300 level.

Wednesday, November 16, 2016

Blog Break

Market has gotten back to the previous highs.  But the current run looks worse than the post-Brexit run, due to the much higher interest rates and poorer breadth figures.  There aren't as many stocks participating in this rally as we had in July.  If I was a paper napkin chartist, I would say that we just might have a double top on our hands.  I won't go that far and be bearish, but definitely not bullish here.

And the bond market looks like it will have to consolidate this higher range from 2.15-2.35% 10 yr yields.  Lot of unwinding going on.  I disagree with many of the pundits that are calling the end of this bond bull market.  The structural weakness in the economy will not be eliminated with some tax cuts, deregulation, and infrastructure spending.  The financial market needs QE to maintain high valuations.  QE >>>>> Fiscal stimulus.

Will be back after Thanksgiving.

Monday, November 14, 2016

Overreactions to Trump

There is a consensus forming among investors that is more perception than reality.  The perception of deficit spending with tax cuts being inflationary and adding to growth and thus bad for bonds and good for stocks.  But with the assumption that the Fed will be raising rates regularly in 2017 (that is what the bond market is predicting), that is a negative for growth.  When you raise the cost of mortgages, the cost of corporations to issue bonds, and cause a reverse wealth effect on bond holders, those are all negative for the economy.  Real estate will slow down.  So will debt fueled buybacks.  Sure tax cuts will provide stimulus, but without QE, those dollars are immediately sucked out of the economy from bond buyers.  And there will have to be a lot of money set aside to buy bonds because there are huge projected increases in the budget deficit with these unfunded tax cuts and infrastructure spending.

And the bond market is global.  The jump up in Treasury yields is also pushing up yields globally, providing a monetary drag to the economies globally that will not be getting that tax cut or deficit spending.  I believe the net effect is a negative for global financial asset prices which weigh heavily towards fixed income and real estate.

So if the growth expectations aren't met, as I suspect, that could set up a strong counter move in bonds in 2017.

Another perception is that the dollar will be stronger because of higher interest rates.  A lot of that move already happened in 2014/2015 when the euro and the yen were getting crushed on expectations that the Fed would raise and the ECB and BOJ would cut and do QE.  The euro and yen are undervalued already versus the dollar on a PPP basis.  Also, don't forget the dollar was extremely weak under George W. Bush's reign when he had a similar tax cut plan while the Fed raised rates continuously from 2004 to 2006.

With this weakness in the bond market, the stock market should have a difficult time going higher.  But the money flows to the stock market should keep the downside limited.  The 10 year yield is coming towards some major resistance in the 2.30-2.35% zone, which is the top of the zone in yields last winter.

Friday, November 11, 2016

Fast Money

Listened to CNBC Fast Money yesterday.  It is a good indicator of what Wall Street fast money is thinking.  Trump is good for banks, industrials, and defense sector.  Bad for utilities, telecoms, and bond proxies.  The paper napkin 5 minute analysts are having a field day with the potential scenarios of a Trump presidency.  It was clear that there was still some apprehension, because after all, many of them were scared to death last week, so it is impossible for them to turn on a dime and go max bearish to max bullish.  But let's just borrow renowned commodity king Dennis Gartman's phrase: they are pleasantly long.

As long as they are not maximum bullish, there is still fuel for the market to go higher.  But the change in market opinion was much more rapid than I anticipated.  Perhaps it is the proliferation of hedge funds and their herding behavior that leads to such quick moves, and then total stagnation and flat markets once we reach the pre-destined level.  It is unlike what you saw in the 1990s and 2000s.  Since 2009, there have been very few pullbacks when the market is in an uptrend.  Only after you reach a point of stagnation does the market finally pullback.  That also is usually when the intermediate term trend is over.  

I do believe equities will go higher in the coming months, but I will probably play it small or just sit out the rally.  I don't have a lot of conviction when betting on a blowoff move, even if I do think it is likely to happen.

By the way, with the way bonds are trading, I don't think you will get much reward for the risk that you take going long bonds for the rest of the year.  With the huge jump in yields over the last 2 days, it is clear there is a lot of money stuck in a painful spot holding long duration bonds.  The uncertainty of a Trump stimulus package is a huge cloud hanging over the bond market.  The prudent choice is to wait for the liquidators to sell to stronger hands.  After you get a bit more fear in bond investors and higher yields, maybe 2.40% 10 year yields, then it may be time to do some buying for the long term.

Thursday, November 10, 2016

They Love Trump Now

Everyone remembers what happened post-Brexit.  Lots of anxiety over a nothing-burger and those memories are still fresh in the minds of fund managers.  They don't want to be left standing at the bus station.  They are jumping on this post-election bounce with a renewed view of Trump and his policies, forgetting about his tough trade talk, and his wild and unpredictable rants, and awaiting fresh fiscal stimulus in the form of massive tax cuts and infrastructure spending.

The mood has changed from that of apprehension about a post-election selloff and Trump fears to embracing Trump and his economic policies and even praising his victory speech.  That is what happens when everyone waits for the event to be over to deploy their cash.  And yes, that cash is all on the long side.  You have to think about asset managers from a long only perspective.  There are few if any "real" hedge funds anymore, most are masquerading as expensive, lower beta equity index funds.

So when they go to cash, and then deploy their cash, it means they are buying stock.  Not bonds, but stocks.  Bonds are things you hold when you are uncertain, not when you are certain.  And investors are certain that things will be rosy when Trump puts out his economic plan.

Ignored in this rally to the moon is the sharp rise in bond yields, a killer for those low growth high dividend paying stocks.  How soon we forget that corporate America benefited BIGLY from being able to issue loads of bonds at low interest rates, much of them used for stock buybacks.  That game has gotten a bit more expensive now.  Sure you will get some bridges to nowhere built and have some tax cuts, but it is taking from one hand (bondholders) and giving it to another (receivers of tax cuts).  You see, it is no longer a gravy train now because QE is not monetizing deficit spending like it did from 2009 to 2014.  And thus, deficit spending has a price now:  more Treasury supply = higher yields.  When QE was in full force, deficit spending didn't have a price.  The Fed effectively put a ceiling on yields with their POMO.

This is getting closer to how envisioned the final stage of this bull market to be.  A Fed that has stopped QE, felt pressure to raise interest rates as markets go higher under a deficit spending boom, with investors excited about overvalued equities as the potential for higher GDP growth under Trump's fiscal stimulus gets everyone excited.   Trump will try to do what Reagan did in the 80s.  But the big difference is that global demographics are much worse now and the debt ratios much higher.

There are no good short term opportunities in stocks, but I do see an opportunity brewing in the not so distant future in bonds.  But let's wait for these moves to mature, over the coming weeks and months.  A lot of money has still not been deployed and the latecomers will always be there to keep the market on trend until they are satiated with supply.

The next 6 months are going to show you what a top looks like after a long bull market.  I can already envision a blowoff top in the S&P as it heads towards 2300 as the latecomers pile in.  It will be a sight to see.

Wednesday, November 9, 2016

Bond Blood

They are looking for blood in the bond market.  Haven't see a move down like this since the taper tantrum in 2013.  I do NOT think that it will be that bad of a bond rout, because monetary policy is not what is involved here.  The Fed isn't going to change their policy.  I see more of a spring of 2015, where yields went from 1.65% to 2.48%.

It is a new bond market now, it has a HUGE monkey on its back in the form of Donald Trump.  He has a blank check because Congress is Republican controlled, and he will be able to get away with massive corporate tax cuts and infrastructure spending.  A double whammy to the bond market.  Not only will Treasury supply balloon higher as the budget deficit soars, but you will get a marginal boost in economic activity from the infrastructure build and corporations making more post-tax income.

Despite all those things, these fiscal stimulus packages are usually more hype than substance.  But the hype will be in full force for the next few months.  It does not take away from my very long term view that bonds are in a structural bull market due to aging demographics and overleveraged global economies.  However, everyone trades in the short to intermediate term, so it is probably sell first, ask questions later.

Looking to buy bonds soon.  2.10% 10 year is my buy level.  There should be a short term rebound after the 30 year auction tomorrow is out of the way.

Why Trump Won

Very low voter turnout.  Trump's voter base was far more passionate and likely to vote than Clinton's.  I don't think the polls were that wrong, it was that they didn't measure how likely a Trump voter or Clinton voter would go out to vote.  Since both candidates were unpopular, I totally underestimated the low voter turnout factor, which favored Trump.  These polls have a margin of error of 3-4 percent and that margin for error is needed to account for things such as low voter turnout and the "silent majority".  There indeed was a shy Trump supporter thing going on.  The urge for change was too great for Clinton to overcome.

As I stated before Trump would be considered stock negative and bond negative, and that is what we have.  More bond negative than anything else, especially the long bond.  It seems like Trump is scaring bond investors much more than stock investors.  His infrastructure spending talk and his well known desire to cut corporate taxes have a good chance of passing through a Republican controlled Congress.  I wouldn't say that kind of fiscal stimulus is wildly stock positive because it is accompanied by higher interest rates.

Judging by the open, the S&P has only given back part of the Monday-Tuesday rally.  It is clear that there are a lot of people in cash who need to deploy it regardless.  And some of that bond money will go to stocks, because cash these days always burns a hole in an investor's pocket.

I will be selling most of my long today and go back to just observing what goes on.  At these levels, I am slightly bullish so not enough to hold a full position.  I will be waiting for an opportunity to get long bonds if we see a further selloff later this year, perhaps to 2.10% area on 10 year yields.

Tuesday, November 8, 2016

Overestimating Trump's Odds

It is easy to root for one side or the other.  If you are a Democrat, it is easy to be rooting for Clinton and be biased to the long side, expecting a Clinton win.  If you are a Republican, you will probably be rooting for Trump and be biased to the short side hoping for a big immediate payoff, like Brexit.

You have to trade the market as it is, without an irrational bias.  You cannot trade the market that you want and be successful.  If you want a bear market, or are hoping for a big drop, you can't just go in there and buy puts or short stocks in the hole hoping for a big payoff.   Hope is not an investment strategy.  I have been there before, long puts, thinking that the market is due for a correction, and then waiting and waiting, eventually giving up and covering for big losses.

 Objectively, if I didn't have any position on, I would hope for Trump to win.  Not because I like his views, but because he would bring more volatility to the market.  But I am long, and obviously hoping for Clinton to win.  Everything tells me that Trump's odds are inflated even at 20% chance of winning because of the polling data, how much media bashing he has taken, the fact that he is so disliked, the big mistakes that he has made over the course of the campaign.  He has gotten more disciplined lately but the damage was done with the hot mics and sexual harrassment accusations from all over, and rigged election talk, etc.  Trump was never popular to begin with, but he has offended too many people, showed his lack of political skills by going off on various targets, to his detriment.

The biggest, most underrated factor in this election is the extremely anti Trump media bias, which I don't think anyone could overcome.  Even the conservatives don't like him much, as he struggled to get endorsements.  It seems like at least 90% of the articles that I read in various online news sites is an article critical of Trump.  Although I am not a Trump fan, some of those articles seem to nitpick everything, and blow them out of proportion, making him look worse than he really is.  And he already looks pretty bad just by watching his speeches and debate performances.  This election has clearly become a Trump vs. non Trump race.  It is a referendum on Trump, not a race between candidates of two parties.  The media has clearly done their best to make Trump look as toxic as possible.  You cannot underestimate the power of the media to shape the minds of people and create a new subjective reality that affects their actions and opinions.

Anything can happen, but the odds of a Trump win are probably closer to 5% than 20%.  And the market seemed to be pricing in a 50/50 shot for Trump last week when the fear was at its highest and the FBI investigation on Clinton was still going.

I've seen many mentions of Brexit when traders talk about this election, but those Brexit odds were always much closer than Clinton-Trump odds.  In fact, it seemed liked traders were ignoring the polls that did show Brexit leading for a period of time, as if it was a temporary fluke.  That hasn't happened with Trump even when he got that last minute gift from the FBI.

Throw out the Brexit playbook, the trading ahead of the election has clearly brought in more fear than pre-Brexit, just by looking at CNBC and the put/call ratios.  That gives it a much higher likelihood that the market is well hedged for the event and holding too much cash, which they will probably deploy if Clinton wins.

Monday, November 7, 2016

Presidential Election Scenarios

It looks like last week was fear week.  The week to get scared, buy puts at inflated prices, and hedge against a Trump presidency or Clinton getting arrested.  The chicken littles had a field day, but like the last 8 years, their time in the sun looks brief.

You can hate the game, say the rallies are fake, the fundamentals suck, but you have to trade what you know.  And when there is a lot of fear over something that isn't that scary, that presents a buying opportunity.  These dips happen over and over again, and you would think traders would eventually catch on to the fact that they are usually buying opportunities and not a start of some big correction, but 2008 is still seared into the minds of so many investors.  Eventually these dips will keep going down and be the start of a bear market but probably only after we get some real economic weakness.

The market overreacted on the Clinton emails and Trump gaining in the polls.  You are taking a lot of that back today.  Based on what happened in Brexit, I am pretty sure you aren't going to rip too much higher than these levels ahead of the election results.  At the same time, odds are very high that we have reached the apex in fear (as measured by VIX and put/call ratios) for the next few weeks (barring a Trump win, which objectively by most pollsters is about 15% probability).  That is not tiny, but it is small enough to make the risk/reward from buying equities ahead of election results a positive EV bet.

I would roughly guess that a Trump win would drop the S&P about 80 points the next day.  A Clinton win would probably raise the S&P up about 30 points.  Given what I think odds of Trump winning are(about 15%), it is probably a good bet to go long.  However, unlike Brexit, if Trump wins, I don't see a quick dip and then rip because of international money that is scared to death of Trump and will flee US stocks as a result.  That would take several weeks to play out.

I eventually think that would set up a monster long buying opportunity into the trough of that selling, but I don't see such a short correction like Brexit.  A Trump win would be much more of a shock to the system than a Brexit.  Easily by a factor of 100.  It would be more of a dip, dip some more, spend some time lower, scare the foreigners out of US stocks, and then rip for months on end.

Under a Clinton win scenario, you will get a big gap up that can eventually take the market up to 2160-2170 resistance zone over several days, and then we probably fade ahead of ECB and FOMC in December.

As for the Congressional races, I don't think those will matter much, because frankly, the Republicans and Democrats probably can't do anything substantial enough to affect the economy.

The odds favor the bulls.  I remain long S&P.

Friday, November 4, 2016

8 Straight Down

The pundits like to bring out random statistics to state the seriousness or peril that the market is in.  We have been down 8 straight days, the last time since October 2008.  But they don't like to mention that the down days in this streak are microscopic compared to the down days in October 2008.  It is like comparing 8 straight paper cuts to getting hit with eight bullets from an elephant gun.

What has been noticeable is that the VIX has been vastly outperforming the inverse of the S&P.  In other words, option premium has been rising rapidly, more than one would expect from a couple percent down move.  Usually that is bearish short term, but more bullish intermediate term, especially when the rise in that volatility is due to a big event (like a presidential election).

Also, you have seen several days of high equity put/call ratios despite the relatively small down days.  That tells me many of the nervous investors are hedging with puts ahead of the election, which is a positive.

The base case is for the market to bottom before Tuesday's election, and then rally on the results in the intermediate term, whether it be Trump or Clinton.  If Clinton wins, you get rid of the uncertainty and have a predictable cookie cutter politician.   If Trump gets elected, you will have a short term reflexive selloff like after Brexit, but then you will have an equally violent rally when investors realize that Trump is actually more likely than Clinton to enact pro-growth fiscal policies and cut corporate taxes.

I did some buying near the close yesterday in S&P, and will look to add a bit more if we dip today.  Running with the bulls, at least for the next week or two.

Wednesday, November 2, 2016

Election Fears

They tried to hold 2120 and when it broke, we got a little panic yesterday.  You can play the percentages, and have the odds in your favor, and still lose.  I dipped a toe on the long side around 2120 and took some heat.  But the statistics are favorable after yesterday's trade.  We finally got some fear into this market, with the uncertainty over the election finally coming to a boil.

There are going to be less willing buyers ahead of the election, so the only way to get them enticed is to lower the prices.  And that's what happened.  We finally got some higher volume and got rid of a lot of complacency in a hurry.  There is a tendency to dip a week or two ahead of these big events like Brexit and the US election but then rally only a few days ahead of it.  It is as if the market trades on what will happen a week later, not a day later.  So we are getting rid of the nervous short term buyers afraid of a possible Trump presidency, however small the odds are.  They don't want to risk jumping in ahead of a possible plunge.  There is opportunity when others have irrational fears.

I actually think Trump is equity positive and bond negative, while Clinton is more equity negative, bond positive.  But people are thinking Trump equity negative, bond negative, and Clinton equity positive, bond positive.   So you are not seeing much of a bid in bonds despite the S&P weakness.  Trump's economic policy will be to lower taxes and spend more, similar to Reagan.  All else being equal, that is equity positive.  His trade policies scare some people, but it will be impossible to push through any kind of big trade barriers with the Congress bought and paid for by the multinationals.

Thinking an intermediate term S&P bounce from here to the end of next week towards 2160 after the uncertainty of the US election dissipates.

Monday, October 31, 2016

Buy Any Dip Today

We are likely going higher into the election.  The last minute jitters came in on Friday with the Hillary Clinton email news.  And of course, the media is apt to do, it overreacted, making a mountain out of a molehill.  This is old news, it doesn't change anyone's mind about either candidate.  The polls are pretty much telling us that it is Hillary Clinton who will win, and that hasn't changed.  Also, the FOMC meeting is coming up November 2, and the usual grind higher ahead of the FOMC is to be expected, especially since it is very likely to be a nothing burger.

Bonds look like we want 2.00% 10 year yields.  We are in the re-positioning phase for bonds, as there have been a lot of inflows into bond funds and ETFs this year, with the move down in oil and with all the deflation talk and Brexit fears, etc.  Now we have a lot of revival of inflation talk and expectations for ECB tapering and Fed rate hikes.  The tide has turned on the money flows, and it should last for a few months.  I don't want to get in the way of that wave.  Even though I am a long term bull on bonds, I do see an intermediate term move higher in yields from now till early 2017.

The volatility is really dying out there, hoping for one more little dip lower to scoop up some S&P today.  Any prices around Friday's lows of S&P 2120 area is a buy.

Thursday, October 27, 2016

Stock/Bond Correlation

There is little opportunity out there.  If you lose a lot of money in this market, you will be stuck in a hole for quite a while.  This is a not a market to try to make comebacks.  This is a market to either avoid or trade lightly.  I am speaking from a longer term trader's perspective.  I am sure the daytraders still have some mean reversion setups that they can rely on in this kind of chop.  But from those looking to catch moves that last more than a couple of days, this is horrible.

The stock market usually rallies the week before the election, so it is probably about time for the seasonal players to come in to try to catch an up move.  But there is very little upside from here.  Not with central banks unwilling to stay aggressive if the market goes higher.  Rallies are now just traps set up to bring out hawkish Fed/ECB talk.  And this market is just not strong enough to withstand that talk.

We may soon be entering a rare period when stocks and bonds go down together.  There has been a notable change in the market tone in the bond market, with rallies quickly dying out and with dips lasting longer and longer.  That is despite a flat stock market.  Without QE in Europe, these bond prices are not sustainable.  That is what this price action is telling you, as the fears of ECB tapering will not go away despite whatever Draghi says.  Unlike 2013, the economy is too weak and stocks too overvalued to withstand such a rise in bond yields without it affecting stocks.  If we get a taper tantrum, it will affect stocks, and not for just a few days like 2013.  The correlation between stocks and bonds will get close to 1.

Bonds continue to get crushed and we have a healthy gap up in the S&P today.  I don't believe this rally lasts.

Monday, October 24, 2016

Yuan Stealth Devaluation

The Chinese have decided to support their economy by devaluing their currency.  It is the simplest thing for them to do.  They surprised the market in August 2015 when they started in earnest, but now it is expected and it doesn't worry the market.  Theoretically, Chinese devaluation would lead to lower costs for Chinese goods and thus deflation.  But that is only if the yuan prices of those Chinese goods stay the same.  I am sure they will rise in yuan, to neutralize any effect on dollar weighted prices.

It is a classic money printing exit to a massive debt bubble, and should help to prolong the collapse of the bubble by several months.  That gives the global equity markets enough runway to keep rising higher before the eventual drop.

I am surprised to see such a strong Monday but this market doesn't trade with much rhyme or reason these days.  It is just pinging back and forth between 2130 to 2160.

Bonds continue to trade heavy, and you have seen very little value buying up here around 1.75% 10 year.  I am seeing more and more investors move over to the bond bear camp, and it is something I expect to continue in the coming months.  This migration from bond bullishness to bond bearishness still has a ways to go.  The cloud of ECB taper and potential fiscal stimulus with Clinton weighs heavily on this bond market.

Friday, October 21, 2016

Most Uninteresting Market

Even the selloffs are boring.  The volume is light for a reason.  The market is not going anywhere, the volatility is low, and really presents very few worthwhile opportunities.  Everyone is cool, calm, and collected.  That is not a situation where you will find big edges.  You need the majority to be feeling uncomfortable in order to get more opportunities.  When the investors and traders are acting rationally, there are very few openings available.

You would figure that the election would get some traders and investors more nervous than this but it is a foregone conclusion that Clinton will win and the only question is who controls the Senate and House.  I really doubt that Trump's implosion will affect other Republicans.  It is clear that Trump is in his own little world and category, pushed off to the side.  A sideshow.  A clown act.  Someone who looks worse as the days go by.

What's worse than the sexual harassment cases, he is whining about the election being rigged.  And he's not just talking about media coverage, but the actual voting mechanism and polls.  That is before the election even happens!

I was actually kind of hoping for Trump to do well and even win, just to shake up US politics.  But he just couldn't control himself and went overboard with the conspiracy theories and talk of a rigged election.  That was the final nail in the coffin.

And there is a very large portion (about 40%) of the US population who actually believe him when he says the election is rigged.  That is a sad state of affairs.  There is no reason to rig the election because BOTH Democrats and Republicans are bought and paid for by corporations, lobbyists, and special interest groups.  Those in power could really care less who wins, they have it made either way.

I almost never talk about politics unless it affects the market but these days are so uninteresting that I can't help myself.

Back to the market.  I think the market is set for a pre-election rally in the first week of November.  We should have a few remaining days of nervousness and position squaring ahead of the election and then it will pass.  We should be back over 2160 by first week of November.

Wednesday, October 19, 2016

Chop Chop

They say that the market spends 80% of the time going sideways.  They must be talking about this market.  There is no defined trend over the past several weeks.  It has been a short term fader's paradise.  Except I haven't been playing that game for a while now, so I have been missing out on the fading opportunities.  It is not something that I have any regrets about, just because the reward isn't that great, even if the risk isn't either.  Of course, these choppy markets can go sideways until they dull your senses and make you complacent, and then wham!  August 2015 happens.

I haven't bent down to pickup the dimes all over the place in front of the really slow bulldozer, I don't want to be the one picking up dimes when the bulldozer driver hits the gas.

I do believe we will resolve this chop by going higher, much like you had a slight uptrend in the first half of 2015, but that goes against my longer term view that this market is overvalued and set up for a 20% correction within the next couple of years.

The trend of fewer buybacks and lack of new money coming into the equity market makes the upside limited, much like 2015.  At the same time, I don't see any kind of topping action or overbullishness among the investment community.  There are a lot of reluctant bulls out there.

As for other markets, the crude oil downtrend is probably over and we are in for a period of sideways action there, and bonds look bad over the next 6 months, with central banks hinting less accommodative policy over and over again.  And I am usually a bond bull.  So not a great time for any long term bulls out there in any financial asset classes at the moment.

Monday, October 17, 2016

Weak Bounces

That bounce on Friday just didn't have much firepower.  It is almost as if the trend faders are taking control and not letting these moves go too far down or up.  On Thursday, you had a morning dip down to 2115 and it was bought ravenously by the dip buyers.  Then the day after, with a lot of paper napkin chartists raving about the intraday reversal, you get a gap and crap.  Which brings us to today.

The market feels heavy, with the weight of the election, and uncertainty about a possible Democratic win in both houses of Congress worrying about possible negative ramifications.  It is now beyond Trump.  Even though he gets all the headlines, the real worry now is that of a Democratic sweep which gives them a mandate to push through higher taxes and more regulations.

Also, the market breadth has been weakening over the past several weeks, as market leaders have kept the indices afloat while secondary names have been declining.  It all makes for a market that is looking to make another leg lower, one that will probably be just enough to scare the short term equity traders, but not low enough to let the value buyers and the extra patient get entries before we move higher.  And yes, I do think this is just a dip that refreshes and takes us back to new all time highs.  But this dip should last for the rest of October, and then we'll have to see from there.

I have a feeling that we will be getting a Santa Claus rally and a beginning of 2017 boost higher as the final skeptics throw in the towel and create a mini blowoff top.

Thursday, October 13, 2016

Pricing in Less Aggressive CBs

So what has changed from this summer to this fall?  Other than a 50 point drop in the ES, not much right?  The rhetoric has changed.  The central banks are no longer talking dovish and placating the markets like they have been for the last several years.  They don't want the market to go down, but they also don't want to build up an asset bubble in stocks, bonds, and real estate.

You are actually seeing tough talk now (still no tough action) even though the economic data is only mediocre, at best.  It just reinforces their focus on the stock market, specifically the S&P 500.  They don't seem to care too much about the global equities, just US equities which is their proxy for the health of the US and global economy.

Remember this:  Central banks act immediately when there is economic and market weakness.  There is almost no lag to their actions when the economy is tanking.  But, and this is important to remember:  central banks act with about a 2 to 3 months lag when there is market strength.  The strength in July post Brexit made the Fed more hawkish in September.  It didn't make them more hawkish in July or August.

Now if we continue to get market weakness this month, and crack 2100, and go down to test 2060, the Fed tough talk will disappear like a fart in the wind.  They are only tough guys when the S&P is flat to up.  When the S&P starts dropping, the tough talk suddenly turns to doves chirping.

I found it interesting that the Fed in their minutes yesterday talked about their credibility and why it was important for them to hike rates soon.  They talk about data dependency and yet in their minutes, they are talking about losing credibility with what they promised the market with all these rate hikes which they totally failed to deliver.  They have lost their credibility a long time ago, yet their words still move markets because while their statements end up about 80% wrong, there is still the 20% where their promises are actually kept and that keeps the market on its toes and still believing.

So this is one of those times that the market is believing that the ECB, BOJ, and Fed will refrain from expanding their monetary stimulus unless things get worse.  There stimulus is now conditional upon things getting worse economically.  Let's see if that remains the case if the market goes down despite the economy remaining stable. Sometime in 2017, the market will go down hard and test the central banks to see if they really are going to stick with their game plan of less stimulus (BOJ, ECB) and more rate hikes (Fed).   A little birdie tells me that they flinch and bring out the big guns at the first sign of trouble, like they always do.

Getting one of those rare continuations to the downside this morning (after one day Fed minutes pause) after Tuesday's sudden drop.  Market still feels lower from here, but not worth playing the short side from a risk/reward perspective.  Not really interested in buying dips till I see more panicky downside action also.  So mostly waiting, like most of this year.

Tuesday, October 11, 2016

Dump Out of the Blue

Hard dump on no news.  That is what happens when you have an overvalued market that is losing buying interest from corporations.  Stock buybacks and lower interest rates were the main driver for higher prices.  Both of those supports for the market are slowly dissipating.  We have a substantial reduction in buybacks from last year and interest rates are creeping higher.

On Monday, you had a bank holiday which was the perfect time for the junior traders to overreact to Trump's troubles and bid up the market on a likely Clinton win.

Interest rates are stubbornly sticking to higher levels despite a flat S&P, and the recent rhetoric from central banks is noticeably different than what it was earlier in the year.  Since we all know that the main driver for the rally since 2009 has been central bank action, it should come as no surprise that the market will get weaker when the central banks show their reluctance to continue with their insane policies.

I am looking for more weakness in the coming days, although it should be contained above 2100.  No position in the S&P at the moment.

Friday, October 7, 2016

Bond Market Transition

The bond market doesn't act like it did earlier in the year.  It is not giving sellers a long time to sell at good prices.  The rallies have less staying power.  There is less lingering at the highs.  With the Bund and JGB intermediate to long end yields having very little upside now that they are near zero, non-economic factors such as central bank talk and rumors are causing big moves lower that stick.  In the past, you would get an occasional bit of hawkish talk and it would take the market down but then it would bounce right back up.  Not anymore these days.

For the first time since 2013, we have the 3 major central banks, Fed, ECB, and BOJ all going for less easing.  And that is despite growth and inflation being tame.  The central banks are saving their bullets for when things get worse.  In the case of the ECB and BOJ, they are at a point where QE is no longer going to provide any stimulus, and instead will just make bond markets more distorted and illiquid.

The bond market is starting to catch up to this reality, while positioning is still rather bullish among the fixed income community.  This sets up a potential bond market selloff over the next 3-4 months which could take 10 year yields over 2%, something that would surprise quite a few fixed income analysts.  Plus, you will be getting talk about fiscal stimulus after the election, no matter who is president.  There is a growing group of those in power wanting some kind of fiscal stimulus being passed as monetary policy has gone about as far as it can.

Under these conditions, I can no longer be a longer term bull in bonds.  Sure, there will be short term trades to catch a rally in bonds when they get oversold, but you can no longer just sit back and think of bonds as a long term bet.  They are vulnerable to a mini 2013 taper tantrum type rout.  It won't be as bad as the 2013 selloff in bonds, but even half the move of 2013 would take the 10 year from a low of 1.33% to around 2%.

If the last gasp up move in the US equity market plays out like I expect later this year into early 2017, that should be enough to get the Fed to talk hawkish, the ECB to taper bond purchases, and put pressure on bonds.

By the way, if the bond market had any kind of short term strength, it would be much higher off those mediocre jobs number (+156K) today.  But it is essentially flat from yesterday's weak close.  We should see a bit more bond market weakness over the next few trading sessions, and that will not help equities at all.

Tuesday, October 4, 2016

ECB Taper Trial Balloon

This is a biggie.  The ECB is sending out trial balloons on tapering QE to see how the market reacts.  If the market reaction in equities is not too negative over the coming weeks, the likelihood of a ECB taper goes up significantly.  The bond market is going to feel the pain in the coming months.  This feels like a mini version of the winter/spring 2013 just before the Fed announced their taper.

In 2012 you had a run to all time lows in 10 year yields on the back of the mini European sovereign debt crisis in 2011.  In 2016 you had a run to all time lows in 10 year yields on the back of a oil market crash.  The parallels are a bit eerie, and there are quite a few differences between the two, the main one is that stocks are overvalued now versus being arguably undervalued then.  But the similarities are there.  In both cases, central banks got too eager to provide stimulus with QE and overdid it, providing much more than the market needed.

These rumors have a lot of substance because the ECB is starting to run out of Bunds to buy.  Remember, Germany doesn't have much of a budget deficit and has a much smaller stock of bonds than US or Japan.  They literally will be forced to reduce their Bund purchases anyway because of the liquidity that they would destroy if they continue beyond 2017.  It will be a monkey in the bond market's back for the remainder of the year.  Plus you have worries about a Fed rate hike in December.  Lots of negative catalysts now lining up in bonds.  Be careful bond bulls.

Monday, October 3, 2016

Central Bank Heroin

The central banks have abused and overused their powers to try with all their might to avoid a recession. Not even a deep recession, but a garden variety cyclical recession.  We had plenty of them from the 1970s to the 2000s when secular growth was much higher.  But since 2008, we haven't had one, even with the worst global demographics and debt overloads in the past 80 years.

In the process of avoiding a recession, they have made the financial markets dependent on artificially low interest rates and asset purchases.  A move of 20 bps in 10 year yields to over 1.74% over one week in September was enough to cause nervousness in the equity market.  That is the definition of being hooked on low interest rates.  The stock and bond market are heroin addicts.  The central banks are the heroin dealers.

What we saw in September is a prelude to what will pester this market in 2017.  You had the ECB and the BOJ both refuse to give the market what it wants, which is more heroin (QE and more negative rates).  Instead, they decided to kick the can.  They have shown their reluctance to go even more negative with their NIRP.  Draghi is taking a wait and see attitude even with Brexit and Kuroda has disappointed market expectations in consecutive meetings by not expanding QE purchases and has adopted a yield control tactic, which effectively admits that they can only lower long term interest rates further by cornering their JGB market and making it even more illiquid, something they don't want to do.  With the 2 year yield in Germany touching -0.70%, we are hitting the limits of how low rates can go before you have many putting cash in safes.

Don't believe the paper napkin economist/fixed income experts that say NIRP is bad for equities and the economy.  If it wasn't for NIRP, the eurozone would be in even worse shape.  Sure, the banks' difficulty in passing on the costs of negative interest rates to their customers hurts their profitability, but it is a net benefit for their customers, which is much more important than the banks.  The lowering of corporate borrowing costs and mortgage rates is a definite boost that is ignored under the paranoia that negative interest rates hurts savers.  It only hurts savers who don't hold stocks or bonds or real estate.  Which is a small minority limited to poor people, who frankly, don't matter to the financial markets.

During the next recession, monetary policy will not be of much use.  It has distorted asset prices enough that they have created bubbles which make the economy even more vulnerable when the cycle takes a downturn.  Economic stimulus will be almost solely dependent on fiscal policy, which we saw in 2009 as being too little and too delayed in its implementation to be of much help to the economy or the markets.

The ingredients of a coming bear market are the following:

1) S&P 500 overvaluation.
2) Global government bond overvaluation and limited room to lower rates further.
3) Real estate overvaluation and speculation based on artificially low interest rates.
4) Deteriorating fundamentals as profit margins are no long expanding and revenue growth is in the low single digits.
5) Potential financial crisis in China based on overissuance of cheap credit and a gigantic real estate bubble.
6) Limited benefit that further monetary stimulus will provide in a future recession or crisis.  The heroin addict has built up a huge tolerance for the drug, it will take enormous amounts to see an effect, which could lead to overdose and disastrous consequences.

As for the current market, and the flavor of the week, Deutsche Bank, it is a nonissue, because there is no systemic risk from having to pay Justice Department fines.  It is paid and over with.  $5 billion these days is like a drop in the bucket when you consider that is what the ECB is buying on average in government debt in one trading day.

Friday, September 30, 2016


Deutsche Bank will be bailed out if necessary.  There was some scaremongering among the fast money crowd due to some hedge funds pulling money out of Deutsche Bank but that doesn't mean anything.  There is no way that Germany will let Deutsche Bank go down.  Even before it gets to that situation, you know the ECB will come up some kind of rescue plan because of the potential systemic risks of letting a bank with a gigantic derivatives book go bankrupt.  That doesn't mean that Deutsche Bank is a good stock to buy, because if there is a bailout, the shareholders will be diluted massively.

The market is alread starting to shrug off the Deutsche Bank fears and DB is actually up in premarket, as the fears are way overblown.  A Department of Justice fine is not going to take down a bank, as it will be settled down to a level that will be painful for DB but not put in under.

The market has been chopping back and forth as good and bad news hits the tape.  We had the OPEC production cut pre-deal on Wednesday, and then DB on Thursday.  It is perfectly symbolic of this tape.  A tape that is in a hurry to go nowhere, chopping back and forth.  Expect more of this type of action for the next couple of weeks, as October tends to bring out the fear mongers.

Wednesday, September 28, 2016

Sloppy Market

The action reminds me of 2015, from March to August.  Just a mess of a low volatility chop fest, but with a grinding higher bias that was quite annoying.  Of course that ended with a vol spike, but this time, the vol spike just hasn't lasted as long and its back to the S.O.S.  Low volatility, occasional one day drops like Monday that act like resets so the market doesn't go too high.  Of course those drops have very little follow through, and the selling peters out.

The market has weeded out those that sell on weakness, and has repeatedly rewarded dip buyers who build up dry powder after a couple of weeks of grinding rally.  So these dips don't encourage more selling, but are met with an army of dip buyers who have been doing well buying weakness.  That results in markets like this.  Of course, once you get saturation on the long side, you finally get a big drop in one day like you did a few weeks ago as soon as a little bearishness comes in.

Tough here, but still expecting a bit more weakness into October, despite Trump losing the debate and seemingly having no clue on policy.

Monday, September 26, 2016

Debate Jitters

This is presidential debate jitters.  Sure, we have Deutsche Bank weak but the main source of the uncertainty is how the debate turns out.  And with most events where people are negative about, its sell first, and ask questions later.

The move after the post Fed euphoria was a last gasp rally before we go down in earnest on the presidential election fears.  Mostly the fear of Trump.  I don't believe it is warranted, but a lot of people with money don't like the guy, and are scared of him rocking the boat.  So they will reduce equity positions ahead of time.

It is a tricky market, the strong rally in both stocks and bonds fooled me post-Fed and I thought we would challenge all time highs, but it was a fake out.  We have entered a risk off time period that should last till middle of October.  I don't want to get too negative because I do think that risk off period will set up a post-election relief rally that should be substantial but first things first.  We need to get people scared ahead of the elections.  Look for more weakness in the coming weeks, but not a super high level of conviction due to end of year performance chase pressures that are always looming in the background.

Thursday, September 22, 2016

Fed Excuses

We got your typical positive Fed day yesterday on the FOMC punt till December.  After all, they say they are not political so it must not be because of the election.  But everyone that is a realist and not a buyer of the media hype knows that the Fed is not raising rates because of the election in November.  Nothing more, nothing less.  If it wasn't about the election, then they would be hiking already considering their "strengthening" case for raising rates.

The market ate it up.  It loves to see the Fed chicken out and it responded promptly with a quick spike and has basically gone straight up since.  It is unusual to see such a big gap up after a Fed rally day on expected non-hiking news but this market seems to always surprise on the upside.  Once again, I am surprised to see this market already blast through 2160 like it was just a tiny speed bump.

Now everyone who is underexposed to equities have to play catch up and need to buy for fear of missing another post-Brexit type rally.  Memories are short, but the crowd remembers being fooled by a scary dip only to see it reverse higher even faster.

I figured the market would be a bit more cautious about rallying into the presidential elections with Trump doing better in the polls but the fear of being left behind again is greater than the fear of a possible Trump presidency.  We got bonds screaming higher as well, and that usually means this thing is not going down today.  This central bank dependent stock market loves a strong bond market.  With 2160 being blasted to smithereens and with this screaming bond market, I will refrain from shorting this until we hit new all time highs.

Wednesday, September 21, 2016

Yield Curve Control

That is the first time I have heard a central bank explicitly target a non-short term interest rate.  They are in effect saying that they will use QE to keep 10 year yields around 0.  That effectively turns the JGB yield curve into a stagnant one from overnight rates out to 10 years.  They are now explicitly trying to manipulate all interest rates on the curve.  This has never happened before.

They are just admitting that they will not let market forces affect JGBs.  But the fact is that they are already doing this, because they are the market.  In effect, there is very little liquidity in JGBs because the BOJ owns over a third of the bonds and can keep buying.

The Fed meeting today should be a non-event.  The economic data has come in weaker lately and that provides just the perfect excuse to kick the can till after the elections.  Still expecting a short lived pop on the Fed non rate hike and then a selloff afterwards in the coming days.  I would use any pop today towards S&P 2155 to 2160 to short.