Charts That Matter- 29th dec

ECRI’s U.S. Weekly Leading Index (WLI) fell to 144.7 as WLI growth decreased to -4.4%, a 199-week low.

(The WLI is one of many ECRI leading indexes, including some with longer leads over cyclical turning points in economic growth)

A cycle ends every ten years…. one ending now – Nomura

Tariff Revenue Has Surged in Recent Months (tariffs are stealth taxes on broke consumers)

Would you want to tighten more given these charts?
The Richmond Fed is not the only indicator that points to below-50 readings in the ISM index ( below 50 is sign of contraction)three to five months from now – financial condition indices point in the same direction. Would you tighten further if you were the Fed and looked at these charts? At least it becomes much trickier than otherwise. Even though the ISM is not a particularly precise indicator of US GDP trends, it is worrisome if the ISM index drops as swiftly as indicated by some of our models by now.( Nordea)

2019 outlook I wish I had written…..

Raul writes his outlook for 2019 and this was precisely the view I would have put across ………

“That’s where the Fed is now. You can let interest rates rise, as Powell et al are indicating they want to do, but that will cut off debt growth, and since debt is exclusively what keeps the economy going, it will cut into economic growth as well. Or you can keep interest rates low (and lower), but then people have less and less idea of the actual value of assets, which can, and eventually necessarily will, cause people to flee from these assets.
Powell’s rate hikes schedule looks nice from a normalizing point of view, and g-d knows what normal is anymore, but it would massacre the zombie markets the Fed itself created when it decided to kill the actual markets. You can get back to normal, but only if the Fed retreats into the Eccles Building and stays there until 2050 or so (or is abolished).
They won’t, the banks whose interests they protect will soon be in far too dire straits, and bailouts have become much harder to come by since 2008. It’ll be a long time before markets actually function again, and we won’t get there without a world of pain. Which will be felt by those who never participated in the so-called markets to begin with. Beware of yellow vests.”

Read full article

https://www.theautomaticearth.com/2018/12/2019-zombie-markets-before-the-fall/

Charts That Matter- 27th dec

There is a direct correlation between QT days and performance of stock market on those days. The week in which FED does QT are normally negative for US stock markets and we have two big ones coming in January

The bear market analog courtesy of McElligott at Nomura. This chart tells the story, while we are in a bear market, we are oversold and odds are the market will spend months consolidating this December 2018 market drop.

Stocks and bond yields trade in lock-step, suggesting widely anticipated large month-end and quarter-end pension rebalancing flows. S&P 500 erases 2.8% drop in biggest reversal since 2010, while US 10y yields initially had fallen to 2.73% before climbing back to 2.78%.

These charts explain how China’s Huawei took over the world

Nomura’s McElligott Tells You ‘Why We’re Here’ And Where He Thinks We’re Going

McElligott of Nomura writes in a note …..how the calendar and thin liquidity are together contributing to wild price action before again suggesting that January could be better.

“This seizure-like behavior isn’t endearing risk-taking in the final days of 2018, despite panicking some who are always under the grasp of FOMO, however, my belief of ‘the January effect’ is alive and well on the buy-side, with many PMs stating to me that they plan to significantly gross-up both longs- and shorts- as the calendar turns”, Charlie writes, adding that his view “continues to be that we will see powerful risk-rallies in standard bear-market fashion in the coming-months which ‘traders can trade’.”
That said, this is all “for rent” – so to speak. “In time [these] will be faded 1) as long as the Fed continues with normalization and 2) against the backdrop of the simple realities of the late-stage business cycle”, he continues, before warning that similar to October, January is set to be another large “QT month” as “the Fed’s balance sheet run-off continues including two heavy weekly QT periods during the first- and third- weeks of January along with [next month] being the first month following the cessation of the ECB’s bond-buying program.”

As far as the broader macro backdrop, McElligott notes that the stage still appears set for the U.S. econ to come in weak. The catalysts are familiar and include steady real yields despite the bleed in breakevens, the waning of the fiscal impulse, the lagged wealth effect from plunging stock prices and “the cyclical reality of corporate deleveraging which inherently means lower CAPEX.”
With all of the above in mind, the environment is conduce only to tactical trading, with directional expressions stuck in suspended animation and conviction lacking until we get a definitive sign from the Fed

In Defense of the Fed

Stephen Roach writes…..

Despite howls of protest from market participants and rumored threats from an unhinged US president, the Federal Reserve should be congratulated for its commitment to normalizing interest rates. There is simply no other way to break the US economy’s 20-year dependence on asset bubbles.

“The Fed, it is to be hoped, is finally coming clean on the perils of asset-dependent growth and the long string of financial bubbles that has done great damage to the US economy over the past 20 years. Just as Paul Volcker had the courage to tackle the Great Inflation, Jerome Powell may well be remembered for taking an equally courageous stand against the insidious perils of the Asset Economy.

It is great to be a fan of the Fed again.”

Read More

https://www.project-syndicate.org/commentary/federal-reserve-right-to-raise-interest-rates-by-stephen-s–roach-2018-12

You Owe $86,000 per Person in your Household- Pay up now

Martin Armstrong writes….The total global debt hit a record $184 trillion, which is the equivalent to more than $86,000 per person. That is actually more than double the average per-capita income. People ask me will our solution work? Can we really just end government debt and convert it to cash restricted to investing in domestic companies? I will put it this way. There is absolutely NO OTHER CHOICE!!!!


We either default, which will result in civil war and revolution, or you inflate your way out like Venezuela so your Social Security check will not even buy a cup of coffee. A default will result in war. People will then riot demanding they have been cheated. Inflating the way out is completely different. You paid them what was promised. It’s not your fault it buys nothing.
To inflate the way out requires a completely different set of patterns. Right now, the theory is that WE THE PEOPLE are the problem. If we all paid what the government thinks we should then they will be fine. They increase taxes and increase enforcement and believe it is their divine right of kings to act in this manner. What we are witnessing so far is not the inflation path – but the hardline path that leads to only violence as we are witnessing in France.

Charts That Matter- 26th dec

Profit expectations are unraveling. India, perhaps the biggest emerging-market favorite of global money managers, is missing earnings projections by almost 15 percent. China, the world’s second-biggest economy, is trailing by 17 percent. Six other markets including South Korea and Mexico are falling short by more than 20 percent.
There are handful of outperformers, but they’re countries where analysts typically give cautious projections, such as Russia and Argentina, because a seemingly endless stream of trouble makes predicting earnings difficult.

Among 30 emerging markets, 16 trade at a standard deviation above the 10-year mean. In other words, companies are earning more profit for each dollar of their share price. Returns from Argentina are almost three standard deviations above normal, the best value-for-money across the emerging world. India stands at Bottom

Growth rates are expected to slow significantly for some of the tech world’s superpowers. Disillusionment and promise in a whirlwind year.

Time In Market More Important Than Timing The Market…..ask Japanese investors
The Japanese Index (Nikkei 225) chart is terrifying.This is 50 years. It’s been 30 years since a new high.

The impact cost is going up and if you are in large AUM funds then it you, investor who is paying for it.

Charts That Matter- 25th Dec

Bond market is showing the challenges Germany face. The bonds from VW, Bayer & Deutsche Bank have plunged because investors have lost confidence in the companies. Bayer suffers from Monsanto takeover, VW from emissions scandal, DB from continuous scandals (holger)

Fear Index Vix jumps by 15% as stock market rout deepens w/ S&P plunges to lowest level since May2017.Daily sentiment Index for equities is at 4 and bond at 93…. extreme not seen for a long time

The World Will Pay for Not Dealing With Debt: Inventive policymaking has only made the problem worse, guaranteeing that any eventual restructuring will be all the more painful. US is best placed with almost 50% of their debt held by foreigners. Just Inflate away the debt

While everyone wants to discuss interest rates, the impact of balance sheet reduction may be more important than hikes and if that isn’t addressed, expect more volatility and stock market problems.

Adjusted monetary base drops by $57 billion over two weeks to $3.365 trillion, the lowest level since July 2013.
LIQUIDITY MATTERS

Market Update

Alex Writes for……This is the best explanation I’ve heard as to what’s driving this slow drip selloff in markets. It mirrors what I’ve been hearing from the fund managers I talk with .

The following is from Kuppy’s blog Adventures In Capitalism (emphasis by Alex).

Moving to small caps; I’ve been involved in this sector for nearly two decades. I can only think of two other times where I have seen so much pain and frustration amongst my small cap friends. That would be the 2008 to 2009 period and to a lesser extent during the first few months of 2016. I am stunned at how many high-quality businesses trade for mid-single digit cash flow multiples—despite strong balance sheets. I’m even more stunned at how many slightly leveraged businesses trade at low single digit cash flow multiples. It’s outright insane how many companies trade for massive discounts to NAV. Take a look at shipping for instance—you have dozens of companies where you can liquidate the fleet and double your money based on current vessel values. This is despite the fact that charter rates are up and values are increasing. Of course, this still doesn’t quite compare to anything exposed to the energy sector. These things are being given away as dozens of energy funds liquidate and sell everything they own. You could say that some of these businesses are challenged—they aren’t all challenged. Moreover, they shouldn’t all be declining by a few percent a day—with hardly an up day.

What is going on? You are witnessing a massive culling of the hedge fund industry as hundreds of funds are liquidated and thousands more get sizable redemptions. Many of these funds own the same companies—the outcasts from the indexed world, the cheap, the unloved; the same stocks that many other hedge fund managers own. With the hedge fund industry going in reverse, there is suddenly no natural buyer for what must be sold. As a result, you are seeing waves of forced sell orders and few buyers. It is creating rather insane bargains all around.

Like all trends, this one too will end. If your fund is facing a year-end redemption, you need cash in hand by December 31 and you probably finish selling a few days before then. Therefore, at most, there’s 9 ½ days left to make sales. It may get even uglier—it may not. No one knows how to time this. What I suspect, is that the pain will finally abate in two weeks. Or at least the forced selling pain will be done. If you look at Q4, despite only a small drop in the S&P, it has been one of the most painful that my friends or I can remember. There are lots of guys down 20% to 30% this quarter and suddenly forced to de-lever further, to get their risk ratios in order. This sort of pain and indiscriminate selling creates lots of opportunities.

Hedge funds have been getting slaughtered this year. The back and forth chop of the market has essentially taken a sickle to the bloated money management space. This is a good thing for us active traders and was kind of inevitable. There’s just too many money managers all crowding into the same damn trades.

Anyways, this hedge fund killing field, as Loeb put it, is driving end of year redemptions which means forced selling of positions. The Russell small-cap index is now down -27% on the year, with many good individual names I track down 40, 50, 60%+.

Anytime there is forced selling in the market, opportunities are created. This time is no different. I expect this grinding persistent selloff to abate sometime in the next week or two, as it looks like we’re seeing that total sentiment capitulation event that we’ve been waiting on.

Sentiment is nearing outright ridiculous levels…

The equity risk premium (difference in earnings yield versus treasury yields) via Sentiment Trader is now 4 standard deviations below average. This is extreme…

According to SentimentTrader when the ERP Z-score is below -2, the annualized return shot up to 40.1%.

According to the latest BofAML Fund Manager’s Survey, money managers continue to hold large amounts of cash. This is NOT something you see at the top.

And then here’s how every quarter performed following a 10%+ down quarter post-WWII via Bespoke Investments.

The market is setting up for a MAJOR buying opportunity. There’s likely a bit more pain ahead in the short-term but I think a bottom is near. Our puts in NVDA, BABA, TSLA, as well as our DAX short and long bond / long VIX position is hedging us well. We’ll look to take profits on a number of these trades in the week(s) ahead.

Read Full Post

https://macro-ops.com/a-special-announcement-and-market-update/