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.