Thursday, April 30, 2015
When Exactly Will The Fed Launch QE4?
Submitted by Tyler Durden on 04/29/2015 15:00 -0400
Money From Nowhere
On Friday, the S&P 500 and the Nasdaq closed at record highs. It’s the first time both indexes have done so since December 31, 1999. Why such optimism? High profits, you say. But where do profits come from?
Households have less money to spend than they did 15 years ago. And companies cannot make money just by selling things to each other. The only explanation is that customers – including the US government – continue to borrow and spend.
Corporations borrow money to buy their own shares. Consumers borrow to buy products. Either way, the money comes “out of nowhere” and falls on balance sheets like manna from heaven.
The great money temple, from whence fresh pronouncements shall issue today. How long before it floods us with fresh money again?
Photo credit: Susan Candelario
The Limits of Debt
US households appeared to reach “peak debt” in 2007. Now, the corporate and government sectors – not to mention students and auto buyers – are pulling up to their maximum debt limits, too.
Credit to US households and non-profits stood at $13.384 trillion as of March 18 2015 – still below the 2007 peak and declining in relative terms – click to enlarge.
“Everybody – including every corporation and government – has a capacity limit for debt,” says Swiss money manager Felix Zulauf. “Once they reach capacity, they stop buying. Then the additional sales turn to additional inventories, employees turn to jobless statistics, and profits turn to losses.”
Maybe the cycle will reverse soon. Maybe it won’t. But US corporate profits – already at record highs – can’t go much higher unless: (a) wages rise, (b) consumer borrowing rises or (c) government borrowing rises. None of which looks likely.
And without the hope of higher earnings in the future, why pay so much for stocks today? The S&P 500 is trading at 27 times the average inflation-adjusted earnings of the previous 10 years. Only twice in history have S&P 500 earnings, measured this way, been so pricey: at the peak of the dot-com bubble and right before the 1929 crash.
Ah, you might say, but this doesn’t account for central banks’ ultra-low interest rate policies. Without the supposedly “safe” income that bonds throw off, what’s an investor to do but reach for dividends and capital gains in the stock market?
But stocks are supposed to look ahead. You don’t buy a stock in anticipation of getting back the same thing you paid. You buy hoping to get more. And if prices have gone up because interest rates have gone down, what will they do now that interest rates are already down near all-time lows?
How much lower can interest rates go? (We’ll leave that question for tomorrow – I think you’ll be surprised.) In the meantime, let’s keep our eye on the US stock market. Why are stocks – and assets generally – so richly valued?
As of April 1, the CAPE (a.k.a. PE-10 or Shiller P/E) stood at 26.8 (chart by Doug Short/Advisorperspectives). Only the 1929 and 2000 mania peaks are still topping the levels of today – click to enlarge.
Here Comes QE4
“Nowhere” has provided a lot of money …
No one earned it. No one saved it. But here’s our prediction: Someone will miss it when it is gone! If the US money supply were a deck of cards, Uncle Sam has been slipping in extra aces for the last 44 years.
Between 1980 and 2008 these aces were in the form of current account deficits. The US bought more from overseas than it sold abroad, and financed the difference on credit. Fiat dollars went to overseas suppliers. Their central banks took the cash and sent much of it back to the US, where it was used to buy stocks and bonds.
From roughly 1990 to 2008, the flow of dollars into US financial markets from trade surplus countries (where exports exceeded imports) averaged about $400 billion a year.
According to the author of The New Depression, Richard Duncan, this money was an important source of the Nasdaq bubble at the end of the last century… and the sub-prime mortgage bubble at the start of this one. When those bubbles popped, the Fed came up with another source of liquidity – QE.
Take QE plus the amount of dollars accumulated overseas as foreign exchange reserves, subtract Washington’s borrowing (which drains liquidity), and you have what Duncan calls the “Liquidity Gauge.” Follow the gauge, he says, and you will know how loaded this deck really is.
For example, in 2013, low government borrowing combined with QE led to near record levels of liquidity. The S&P 500 reflected this with a 30% gain. What’s in store in 2015?
It doesn’t look good. Washington’s budget deficits are estimated to stay at about $500 billion a year until 2020. This will absorb a lot of liquidity to pay zombies. Also, the Fed has put its QE program on pause. If it stays that way, some liquidity would seep in from European and Japanese QE programs. But it would be fairly modest.
The only major source of liquidity would be from dollar foreign exchange reserves overseas. But world trade has slowed, greatly reducing those reserves. The result? Negative net liquidity for the next five years.
The bad news begins in the third quarter, says Duncan. Because income tax returns are due in the second quarter, it always brings in tax revenue to the US government. This reduces Washington’s need to borrow… leaving liquidity available to the stock and bond markets.
But in the third quarter, net liquidity is likely to turn negative. And the stock market is likely to correct. What then? The Fed will panic and announce QE4… and other measures. More on those tomorrow …
* * *
Although this chart is slightly dated (it shows foreign central bank monetization of US treasury and agency debt until December 2012), it illustrates that FCBs are an important factor in the liquidity game. The chart depicts a large portion of the recycling of the US current account deficit by mercantilist nations, which are usually blowing up their domestic money supply in the process. In the past two years, this has slowed down considerably though, as the US trade deficit has declined (chart by Michael Pollaro) – click to enlarge.
Tuesday, April 28, 2015
John Hussman: Fair Value On The S&P 500 Has 3 Digits
| Apr. 27, 2015 9:18 AM ET
Excerpt from the Hussman Funds' Weekly Market Comment (4/27/15):
We continue to classify market conditions among the most hostile expected return/risk profiles we identify. The current profile joins rich valuations with continued evidence of a subtle shift toward risk aversion among investors, which we infer from market internals (a variant of what we used to call “trend uniformity”), credit spreads, and other risk-sensitive measures.
Liquidity in both the stock and bond markets is thinning considerably. In bonds, quantitative easing by global central banks has resulted in a scarcity of available collateral, a collapse in repo liquidity, and increasing frequency of delivery failures, all of which is shorthand for a bond market that is becoming less liquid and more fragile to any credit event. Meanwhile, risk premiums are minuscule. Avoiding a negative total return on 10-year bonds now requires that interest rates must not rise by even one percentage point over the next three years. Bond yields have historically covered investors against a meaningful change in yields before resulting in negative total returns. On a one-year return horizon, bond yields presently cover investors for a yield change amounting to only about 0.25 standard deviations – matching mid-2012 as the lowest level of yield coverage in history.
In equities, price-volume action continues to show characteristics of distribution and growing illiquidity. The distribution shows up as periodic bursts of high-volume selling, followed by low volume advances as those modest pools of sellers back off and short-covering squeezes prices higher.
As we’ve seen across history, the problem with overvalued, overbought, overbullish markets with thinning liquidity and increasing risk aversion is that once a meaningful segment of speculators tries to sell, they find that there’s no natural demand at nearby prices, since value-conscious investors have no inclination to accumulate overvalued equities except at far lower prices that remove that overvaluation. Market crashes always reflect two features: extremely thin risk premiums in an environment where investors have shifted toward greater risk-aversion, and lopsided selling into an illiquid market. Under present conditions, we observe the precursors for both. That doesn’t force or ensure a crash, but it creates the underlying fragility that allows one.
The Nasdaq breaks even
Last week, the Nasdaq Composite finally clawed its way to breakeven, 15 years after its spectacular bubble peak in 2000. It’s a testament to the overvaluation of technology stocks in 2000 that it has required the third equity bubble in 15 years to reclaim that 2000 high, at least briefly. As you may remember, the Nasdaq Composite reached its intra-day high of 5132.52 in March 2000, plunging to 795.25 (down -78%) by October 2002. The Nasdaq 100, representing the most glamourous of the group, peaked at 4816.25 in March 2000, plunging to 795.25 (down 83%) by October 2002. Even a decade later, in 2010, both indices were still 60-65% below their 2000 highs. The 2000-2002 decline also took the S&P 500 down by half, wiping out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996.
It’s instructive to look back on the comments that we published in 2000 as the bubble, in hindsight, was about to burst:
“The issue is no longer whether the current market resembles those preceding the 1929, 1969-70, 1973-74, and 1987 crashes. The issue is only – are conditions more like October of 1929, or more like April? Like October of 1987, or more like July? If the latter, then over the short term, arrogant imprudence will continue to be mistaken for enlightened genius, while studied restraint will be mistaken for stubborn foolishness. We can’t rule out further gains, but those gains will turn bitter… Let’s not be shy: regardless of short-term action, we ultimately expect the S&P 500 to fall by more than half, and the Nasdaq by two-thirds. Don’t scoff without reviewing history first.”
- Hussman Econometrics, February 9, 2000
On the basis of valuation measures best correlated with actual subsequent market returns, we can say with a strong degree of confidence that the S&P 500 would presently have to drop to the 940 level in order for investors to expect a historically normal 10-year total return of 10% annually. That 940 figure for the S&P 500 would not represent some extreme, catastrophic outcome. It’s not a level that would even represent undervaluation from a historical perspective. It’s the level that we would associate with average, historically run-of-the-mill long-term equity returns. As we observed at the 2000 peak, “if you understand values and market history, you know we’re not joking.”
That said, if one believes that depressed interest rates warrant not only a low prospective return on stocks, but also virtually no risk premium whatsoever despite their significant full-cycle volatility, then you might be quite happy with the prospect of a 1.4% annual nominal total return on the S&P 500 over the coming decade, which is what we presently estimate from current levels, based on a variety of historically reliable methods (see Ockham’s Razor and the Market Cycle for the arithmetic behind these estimates). In that case, you might consider stocks to be "fairly valued" here. But you should still allow for a 940 level or below on the S&P 500 over the completion of this market cycle.
One might think that low interest rates would preclude the possibility of the market losing more than half of its value, but historically, one would be wrong. Outside of the inflation-disinflation cycle from the mid-1960’s to the mid-1990’s, the historical correlation between 10-year Treasury yields and 10-year prospective stock returns has been far weaker than investors seem to believe. Indeed, except for the 2000-2002 cycle, the final low that completes a market cycle has historically taken the market well below run-of-the-mill valuation norms, even in periods prior to the mid-1960’s when interest rates were similarly low and much more stable. One might think that Fed easing would preclude that possibility, until you realize that the Fed was easing aggressively and continuously throughout the 2000-2002 and 2007-2009 collapses.
The knee-jerk reaction to our valuation concerns is to substitute any consideration of historical evidence itself with a criticism of me, personally. Although this strategy overlooks some remarkably useful lessons that can be drawn from our experience in the recent half cycle, it won’t bother me if that’s what one needs to relieve the cognitive dissonance created by inconvenient historical evidence. As in 2000-2002 and 2007-2009, every share of stock outstanding will have to be held by someone during the downward completion of this cycle. Many speculators have volunteered to take one for the team (with margin debt hitting a record high last month, they’re in crowded company), and I understand why they don’t want to hear about downside risk.
As for making things personal, criticizing others has no bite when they’ve already admitted their stumbles, and especially when they’ve addressed them. So, as usual, I’ll follow the above with a full recognition of the points where I’ve been most incorrect (at least a while) in the past three decades. None of this is new to those who follow our work, but that kind of balance is always appropriate, and it may help to avoid the mistake of shrugging off current extremes.
While I was a raging, leveraged bull after the 1990 bear market, encouraged a constructive stance in early 2003 after the 2000-2002 plunge, and even shifted to a constructive stance in late-2008 after the market plunged more than 40%, the fact is that I was unprepared as a value investor for the late-1990’s bubble, and had to develop new bubble-tolerant tools to deal with it. We did so by developing measures of market internals that convey information about investor preferences toward risk. My 2009 insistence on stress-testing our methods against Depression era outcomes (what I called our “two data sets” problem in 2009) inadvertently exposed us to the same problem a second time, because the resulting methods of classifying market return/risk profiles incorporated – but didn’t sufficiently capture – the bubble-tolerant features of our pre-2009 methods. We ultimately imposed them explicitly as an overlay in mid-2014 (see A Better Lesson Than "This Time Is Different" ).
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The periphery is in so much debt they are staying within the Euro to prevent a financial collapse along with their current economic collapse
Submitted by IWB, on April 28th, 2015
Man Who Predicted Collapse Of Euro Against Swiss Franc Says World In For Another Major Surprise
Today the man who remarkably predicted the collapse of the euro against the Swiss franc warned King World News that the world is in for another major surprise.
Egon von Greyerz: “There is clearly apathy in the gold market now. Gold has essentially gone sideways for the last couple of years. Gold was at these levels in June of 2013. So for two years gold has been trading sideways with some volatility….
Read more at http://investmentwatchblog.com/the-periphery-is-in-so-much-debt-they-are-staying-within-the-euro-to-prevent-a-financial-collapse-along-with-their-current-economic-collapse/#3LmMh3V1Ibp3bREp.99
Consumer confidence gives back March's gain • 10:25 AM
Stephen Alpher, SA News Editor
- The Conference Board Consumer Confidence Index unexpectedly sild to 95.2 in April from 101.4 in March. The Present Situation Index fell to 106.8 from 109.5, and the Expectations Index to 87.5 from 96.
- "There is little to suggest that economic momentum will pick up in the months ahead," says Lynn Franco, Director of Economic Indicators at The Conference Board.
- The outlook for the labor market also retreated, with those anticipating more jobs in the months ahead falling to 13.8% from 15.3%. Those anticipating fewer jobs rose to 16.3% from 13.6%.
Even Goldman Warns Corporate Muppets—–Stop Top-Ticking The Market With Monster Buybacks
by ZeroHedge • April 27, 2015
One month ago, Goldman warned that the biggest risk for the market was the stock buybacks hiatus due to earnings season, which in turn resulted in what was almost a modest market selloff, before someone stepped in to buy: we say someone”” because we know for a fact it wasn’t retail or institutional flow, which has been pulling out of the market at the fastest pace in years…
So, yes “someone” – call it BOJ taking advantage of the CME’s “Central Bank Incentive Program” to buy E-minis, or call it Citadel spoofing the ES higher with the explicit blessing of the NY Fed’s Chicago office, it doesn’t matter. Point is stocks are higher even as actual flows are reversing.
However, while preserving the farce of the S&P’s relentless rise no matter the earnings recession, the 1% GDP or the negative funds flow, has been entirely a central bank mandate in the past month (one which will soon inlude the PBOC), the good news for the BOJs and the NYFeds of the world is that the stock buyback hiatus is almost over, and starting this week the bulk of companies can come right back and proceed to repurchase their stocks at all time highs.
And what a come back it will be. According to Goldman, the pace of buybacks is now absolutely off the charts, with nearly $1 trillion in buyback announcements expected in just this calendar year, a mindboggling number, one which is the same size as the largest annual Fed Quantitative Easing amount in any one year going back to the great financial crisis.
Corporate activity in early 2015 supports our view that the S&P 500 will return more than $1 trillion of cash to investors this year. We forecast an 18% surge in corporate buybacks and a 7% increase in dividends in 2015. S&P 500 repurchase announcements YTD in 2015 have totaled $265 billion, 59% higher than during the same period in 2014 (a 29% rise excluding GE).
Where is the buyback activity most acute?
Information Technology has the highest average buyback yield (5%) and total cash return yield (7%) among the S&P 500 sectors (see Exhibit 3). Telecom buyback yield averages 6% in addition to a market-leading 5% dividend yield. Information Technology, Consumer Discretionary, and Financials accounted for 56% of total buybacks during the last four quarters.
What Goldman does not show is that the biggest seller into the ravenous tech buyback frenzy has been none other than tech insiders, who are dumping record amounts of their own stock to their own company! We explained all of this in “The Nasdaq Has Become The Biggest Circle-Jerk In History.”
What Goldman does show it the absolutely staggering amount of buybacks due this year: at $900 billion in authorized buybacks, this means that not only will corporate America soon be drowning in debt – again – but that corporations are on pace to inject more liquidity into the market than the Fed did at the peak of its QE!
Our corporate trading desk estimates that authorizations will total $900 billion this year, 4% above the 2007 peak of $863 billion. We have witnessed a 23% increase in active orders compared with last year. So far this year 146 S&P 500 firms have announced dividend changes and 142 of the firms boosted their dividend. The average dividend hike has been 15%.
And here something peculiar emerges: Goldman appears to actually be lamenting the relentless buying spree that companies have (and will) unleash of their own stock all with the management’s intent of boosting their equity-linked compensation. It does so by reminding everyone – very vividly – what happened the last time buybacks were this high (pun intended):
Although we forecast strong buyback growth in 2015, US corporations should consider using their cash for other purposes. The S&P 500 P/E multiple stands at the highest level in the last 40 years outside of the Tech Bubble. In 2007, S&P 500 firms allocated more than one-third of their cash use ($637 billion) to buybacks just before S&P 500 plunged by 56%.
Is it legal for Goldman to remind muppets of what happened after the last stock bubble burst? We’ll ping the CFTC on that one…
Conversely, at the bottom of the market in 2009 firms devoted just 13% of their annual cash spending to repurchases ($146 billion). Like investors, many firms are poor market timers.
Yes they are. And speaking of which, isn’t it time David Kostin pushed up his 2100 year end S&P which is now 25 point below the latest print target, and is also on top of his S&P target one year from today?
Until he does, however, he has some advice for companies: stop buying back your stock.
Given current historically high equity valuation and a strong US dollar, for many firms a superior strategic allocation of cash could be overseas M&A rather than share repurchases. As an example, on April 7 FedEx (FDX) announced that it would acquire the Netherlands-based package delivery and logistics provider TNT Express for $4.8 billion, a 33% premium to the last closing price. Although the purchase was made with a long-term view, investors applauded the deal and FDX shares outperformed by 270 bp on the first day and the excess return has persisted.
And in parting, some philosophical words from Goldman’s chief strategist:
The aim of a portfolio manager (and a strategist) is to forecast what will happen, not what should happen. We expect companies will repurchase shares at a robust pace in 2015, and investors will reward these moves. However, from a strategic perspective, managements would in many cases better serve shareholders by pursuing acquisitions. Others have argued for more capital spending. However, capacity utilization is just below the 40-year average of 80% and many industries do not need additional capacity.
Don’t worry Goldman: once the bubble finally bursts and everyone, well mostly companies, hedge funds and central banks – retail checked out long ago – is stuck holding the bag and is desperate to sell to any bid you, like a good FDIC-backed samaritan (and funded with yet another Fed bailout) will be there to soak up all there is to sell. Because the aim of a good reported is to tell what will happen, not what should happen.
Monday, April 27, 2015
Sunday, April 26, 2015
A Geopolitical Looking Glass into the Real World Around You
11 Signs That We Are Entering The Next Phase Of The Global Economic Crisis
Well, the Nasdaq finally did it. It has climbed all the way back to where it was at the peak of the dotcom bubble. Back in March 2000, the Nasdaq set an all-time record high of 5,048.62. On Thursday, after all these years, that all-time record was finally eclipsed. The Nasdaq closed at 5056.06, and Wall Street greatly rejoiced. So if you invested in the Nasdaq at the peak of the dotcom bubble, you are just finally breaking even 15 years later. Unfortunately, the truth is that stocks have not been soaring because the U.S. economy is fundamentally strong. Just like the last two times, what we are witnessing is an irrational financial bubble. Sometimes these irrational bubbles can last for a surprisingly long time, but in the end they always burst. And even now there are signs of economic trouble bubbling to the surface all around us. The following are 11 signs that we are entering the next phase of the global economic crisis…
#2 The rig count just continues to fall as the U.S. oil industry implodes. Incredibly, the number of rigs in operation in the United States has fallen for 19 weeks in a row.
#3 McDonald’s has announced that it will be closing 700 “poor performing” restaurants in 2015. Why would McDonald’s be doing this if the economy was actually getting better?
Greece warned it will go bankrupt next week after failing to stump up enough cash to pay millions of public sector workers and its international debts.
Deputy finance minister Dimitras Mardas set alarm bells ringing yesterday when he declared the country had been ‘running on empty’ since February.
With a debt repayment deadline looming on May 1, Greece faces the deeply damaging prospect of having to snub its own employees to make a €200m payment to the International Monetary Fund.
#5 Coal accounts for approximately 40 percent of all electrical generation on the entire planet. When the price of coal starts to drop, that is a sign that economic activity is slowing down. Just prior to the last financial crisis in 2008, the price of coal shot up dramatically and then crashed really hard. Well, guess what? The price of coal has been crashing again, and it is already lower than it was at any point during the last recession.
#9 New home sales in the United States just declined at their fastest pace in almost two years.
Full article: 11 Signs That We Are Entering The Next Phase Of The Global Economic Crisis (The Economic Collapse Blog)
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“I’m Not Crazy, I’m Scared” – Why For One Trader, This Time It Is Different
Bloomberg’s Richard Breslow, author of “Trader’s Notes” is painfully accurate with his latest take on the “markets.”
I’m Not Crazy, I’m Scared
Over the last three days, we have reported that some of the most important investment voices in the world are more than a little scared about the ravenous appetite for risk playing out in the market, and the fact that they have been ignored is beyond unnerving. Central banks are driving all investment decisions, and what this implies is that they are in this trade so deeply that there is no obvious or practical exit.
Over the course of this week we have heard Larry Fink of Blackrock talking about the severe risks of investing in Europe; Bill Gross of Janus saying German bonds are the short trader’s dream; Pimco warning that markets have not addressed the potential of a Fed tightening (I remember 1994); the incoming CEO of Allianz, that TWO trillion dollar asset manager, saying, “We see generally meager growth prospects, political dangers and risks of a stock market crash.” Even Abby Cohen thinks it is a stock pickers world, not a buy anything and kick back world. And yet, the market didn’t even blink.
What is different this time?
Central Banks and their sovereign wealth funds have become the major players dominating market activity. One central banker after another has admitted they are fixated on market reaction to their comments and actions. They are relying on markets blessing their actions even though it was market dysfunction (and regulatory malfeasance) that brought us here. This is a dangerous situation. The focus must return to the REAL economy; we cannot trade our way out of past mistakes.
So the big question to ponder is why all these very smart people who control trillions of dollars of assets don’t seem to be voting with their money. If the biggest fund managers and thought leaders of the world were radically changing their asset allocations, wouldn’t we see it? Not if central banks are all on the other side of the trade. Maybe they think they can just hold to maturity. A wise central banker told me I should learn to live with central banks being the dominant force in the market, whether I like it or not. I, unhappily, think he is right. Oh, how I wish Louis Rukeyser could get them on his couch.
Full article: “I’m Not Crazy, I’m Scared” – Why For One Trader, This Time It Is Different (Zero Hedge)
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Growth forecasts for the second quarter? Heading south:
Submitted by IWB, on April 26th, 2015
It Already Looks Like This Quarter Will Be an Economic Disappointment
Fed officials need to see economic momentum to raise rates
You can now hear the echo of weak first-quarter economic reports in forecasts image: http://images.intellitxt.com/ast/adTypes/icon1.png for the second quarter.
for the second quarter.
Another round of weaker-than-expected data image: http://images.intellitxt.com/ast/adTypes/icon1.png — this time in the form of the March durable goods orders report released this morning by the Commerce Department — is casting doubt on the assumption that the U.S. economy will rebound in the second quarter after a series of shocks slowed growth in the first three months of the year.
— this time in the form of the March durable goods orders report released this morning by the Commerce Department — is casting doubt on the assumption that the U.S. economy will rebound in the second quarter after a series of shocks slowed growth in the first three months of the year.
A snap back is critical for Federal Reserve image: http://images.intellitxt.com/ast/adTypes/icon1.png officials who want to see a fair amount of momentum in the economy before they raise rates. The majority of policy makers said in March that they expect the first increase will take place this year. They also projected growth of 2.3 percent to 2.7 percent in 2015.
officials who want to see a fair amount of momentum in the economy before they raise rates. The majority of policy makers said in March that they expect the first increase will take place this year. They also projected growth of 2.3 percent to 2.7 percent in 2015.
Today’s report showed orders of non-defense capital goods excluding aircraft (an indicator known as core capex, a gauge of business investment image: http://images.intellitxt.com/ast/adTypes/icon1.png ) fell 4.6 percent last month from a year earlier.
) fell 4.6 percent last month from a year earlier.
Read more at http://investmentwatchblog.com/growth-forecasts-for-the-second-quarter-heading-south/#eSChFuQEwsHchzGl.99
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There will be some kind of default by Greece, former U.K. Finance Chief Nigel Lawson says
Submitted by IWB, on April 26th, 2015
Greece should never have joined the euro and will most likely default, according to a former United Kingdom government finance chief.
In an interview with The Wall Street image: http://images.intellitxt.com/ast/adTypes/icon1.png Journal, Lord Nigel Lawson, who was chancellor of the exchequer in the government led by Margaret Thatcher, a role roughly equivalent to U.S. Treasury Secretary, said “There is a game of chicken going on” between the Germans and the Greeks.
Journal, Lord Nigel Lawson, who was chancellor of the exchequer in the government led by Margaret Thatcher, a role roughly equivalent to U.S. Treasury Secretary, said “There is a game of chicken going on” between the Germans and the Greeks.
He thinks the Greeks simply will refuse to reform their economy the way the Germans desire because they believe the German’s will eventually “flinch.” Likewise, he said the German’s expect the Greeks to succumb to their demands.
Mr. Lawson, who opposed the early proposals for Britain to join the European single currency image: http://images.intellitxt.com/ast/adTypes/icon1.png , says there will “be some kind of Greek default” although it may be given a polite name. Eventually that default will “probably” lead to Greece leaving the monetary union, he explained.
, says there will “be some kind of Greek default” although it may be given a polite name. Eventually that default will “probably” lead to Greece leaving the monetary union, he explained.
Read more at http://investmentwatchblog.com/there-will-be-some-kind-of-default-by-greece-former-u-k-finance-chief-nigel-lawson-says/#RG2GTLIGDJJt4Tfl.99
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Germany Prepares For “Plan B”, Says Greece Would “Need Not Only A Third Bailout, But Fourth, Fifth Or Even More”
It has been a very disturbing 24 hours for Greece.
It all started during yesterday’s surprisingly short, just one hour long Eurozone finmin meeting in Riga, where Yanis Varoufakis not only got the most “hostile” reception yet being called “a time-waster, gambler, and amateur“, but for the first time one minister openly said that maybe it was time governments prepared for the plan B of a Greek default. This happened after Jeroen Dijsselbloem slammed the door on Varoufakis’ proposal for early cash after partial reforms.
And so, what was once anathema, namely the official hints that a Grexit is being contemplated at the highest ranks, has now become almost commonplace, courtesy of the backstop provided by the ECB’s QE, which has lulled everyone into a sense of calm because somehow the hope has been kindled that the ECB (which is rapidly running out of government bonds to buy) can offset the realization that what was once an “unbreakable union” is suddenly not only breakable, but no longer a union. As such the trillions in deposit outflows that will sweep the periphery are somehow to be ignored because, well, “Draghi.”
As Reuters reports, at a briefing with reporters after a tense meeting of euro zone finance ministers on Greece on Friday, Schaeuble was asked if euro zone finance ministers were working on a “Plan B” in case negotiations on funding with cash-strapped Athens fail.
He indicated that if he were to answer in the affirmative that ministers were working on a Plan B — what to do when Greece runs out of money and cannot pay back its debt — he could trigger panic.
To explain his position, he drew a parallel with the secrecy that was necessary during the initial stage of planning for German reunification in 1989.
“If back then a minister in charge — I was one of them — would have said beforehand, we have a plan for reunification, then the whole world probably would have said: ‘The Germans have gone completely crazy.'”
Still, even with three “correct” statements laying out clearly why Greece should Grexit, somehow we doubt that anything will happen even as the posturing on all sides reaches a fever pitch, because while Europe may have Q€ as recourse to a Greek contagion, Greece now has a Putin threat as its final trump card. Because the second Greece is kicked out (or is forced to leave), the construction of the Turkish Stream begins, and with it the cementing of Russian energy dominance for the next decade, as well as the collapse of Ukraine (and the billions of western aid flowing into Kiev over the past year) into irrelevance.
Saturday, April 25, 2015
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All in all, this is a good time to take profits and pare back on stock holdings. Not necessarily go short unless you are very aggressive and a short term seasoned trader…
Submitted by IWB, on April 25th, 2015
The durable orders number, ex-transportation which means aircraft, was very poor this morning marking seven months in a row of declines. It is the trend image: http://images.intellitxt.com/ast/adTypes/icon1.png , not the headline number, that is most important.
, not the headline number, that is most important.
Stocks image: http://images.intellitxt.com/ast/adTypes/icon1.png were off to the races, with ‘tech staples’ leading the charge.
were off to the races, with ‘tech staples’ leading the charge.
The Nasdaq set a new all time high.
The VIX is at its low for this year, an area of complacency we have not seen since the beginning of last December.
If you look closely at the composition of the market, you will find that in the major indices the declines were outpacing the advances image: http://images.intellitxt.com/ast/adTypes/icon1.png .
What this means is that the index moved higher on selective buying image: http://images.intellitxt.com/ast/adTypes/icon1.png in certain heavily weighted stocks.
in certain heavily weighted stocks.
All in all, this is a good time to take profits image: http://images.intellitxt.com/ast/adTypes/icon1.png and pare back on stock holdings. Not necessarily go short unless you are very aggressive and a short term seasoned trader, but in anticipation that the market momentum wiseguys are expecting the Fed to bail them out further at these valuations.
and pare back on stock holdings. Not necessarily go short unless you are very aggressive and a short term seasoned trader, but in anticipation that the market momentum wiseguys are expecting the Fed to bail them out further at these valuations.
Or the ECB and Bank of Japan image: http://images.intellitxt.com/ast/adTypes/icon1.png for that matter. We are in one heck of a nasty little bubble here in financial paper.
for that matter. We are in one heck of a nasty little bubble here in financial paper.
You might miss another ten percent to the upside, but the risks here make my skin crawl unless something changes. A narrowing market image: http://images.intellitxt.com/ast/adTypes/icon1.png on light volumes with a negative Advance-Decline number. Yikes!
on light volumes with a negative Advance-Decline number. Yikes!
Have a pleasant weekend.
Read more at http://investmentwatchblog.com/all-in-all-this-is-a-good-time-to-take-profits-and-pare-back-on-stock-holdings-not-necessarily-go-short-unless-you-are-very-aggressive-and-a-short-term-seasoned-trader-but-in-anticipation-that-the/#tgqASbyufagEqroL.99
Friday, April 24, 2015
The Fed’s Day Of Reckoning Nears
by The National Interest • April 24, 2015
by Christopher Whalen at The National Interest
The minimum takeoff or “vertical rotation” speed (Vr) of a fully loaded Boeing 777 airliner is about 155 knots (175 mph) at sea level. If the pilot attempts to pull back on the stick and lift off the runway before reaching Vr speed, then the plane is likely to smash its tail into the tarmac and possibly even crash.
This aeronautical example is also applicable to monetary policy.
For more than a year now, economists have been predicting that the Federal Open Market Committee would soon increase interest rates—this after seven years of near-zero short-term money rates. Investors and economists alike greatly desire to see a Fed rate increase as a sign that the U.S. economy has recovered from the 2008 market collapse. But because economic consumption and demand for credit remain anemic, and debt levels in the industrialized nations have actually increased since 2008, any attempt by the Fed to achieve “lift off” in terms of raising interest rates is likely to result in an economic stumble.
The current debate about the direction of monetary policy is proceeding as though the U.S. economy were actually recovered. Some FOMC members and market observers want to see a rate hike to forestall increased inflation, an ancient fear that seems to be ill-considered. The global economy is still confronted by excessive debt and secular deflation, perhaps not in terms of prices for financial assets, but certainly when we look at wages, employment and commodity prices. Indeed, despite the efforts by the Fed to reflate the global economy, the United States seems to be suffering from a prolonged period of slack demand, low investment and weak prices for key industrial inputs.
For the past several years, the FOMC has maintained a target of 2 percent inflation as one of the indicators it wishes to achieve before changing policy, yet today that goal seems further away than when the target was first adopted. Indeed, consumption seems to be falling around the world, along with global commodity prices. Even the rulers of communist China have embarked upon a program to boost economic activity. Yet, ironically, the inflation hawks in and around the FOMC continue to warn of future price increases.
Grant’s Interest Rate Observer reminds us that periods of secular deflation are often followed by steep increases in inflation:
Inflation may be hibernating, but it would be rash to count it out. Our five-year forward inflation swaps-rate gamble? On a hunch, we will say that the average rate will prove to be meaningfully higher than the 1½ to 2% now implicit in various markets.
Federal Reserve Bank of Richmond President Jeffrey Lacker said last week that despite weak job numbers and other bearish indicators, a good argument can still be made to raise rates at the U.S. central bank’s mid-June policy meeting.
“I think a strong case can be made that short term interest rates should be higher right now,” Mr. Lacker said in response to a question following a speech. He added that even with some signs economic activity might have softened over the start of the year, “I think the case is likely to remain strong” that rates should move up off of near zero levels by the June FOMC meeting.
Many investors and economists clearly are pressing for the FOMC to raise rates, but even if the Fed does act it is unlikely to move key rate benchmarks very much. Such is the level of fear of deflation within the Fed’s key monetary policy body that a quarter-point rate hike in June might be the only policy change during 2015. Moreover, if a rate hike were followed by continued indications of economic slack, then the FOMC might be forced to reverse direction, an eventuality that could hurt market confidence more than no action at all.
Many observers including this writer (See “Dangers Lurk in Fed’s Zero Rate Policy”) believe that the Fed’s policy of subsidizing debtors at the expense of savers via zero interest rates— known as “financial repression”—is actually accelerating deflation. Low interest rates also damage banks, pension funds and other financial institutions, which survive based upon the earnings from their investments. Indeed, the chief beneficiaries of low interest rates are heavily indebted corporations and governments such as Greece and Japan.
Bond investor Bill Gross criticized ultra-low interest rates, saying that financial repression could harm global growth instead of boosting it in the way that many central banks intend. “Low interest rates globally destroy financial business models that are critical to the functioning of modern day economies,” Gross, who oversees the Janus Global Unconstrained Bond Fund, wrote in his monthly investment commentary. “Negative/zero bound interest rates may exacerbate, instead of stimulate, low growth rates… by raising savings and deferring consumption,” he wrote, adding that pensions funds and insurance companies were particularly “threatened by low to negative interest rates.”
The FOMC seems to be caught up in the horns of a dilemma of historic proportions. On the one hand, economic activity measured by employment and consumer spending is insufficient to justify higher interest rates. On the other, low interest rates, which are taking trillions of dollars per year in income out of the hands of consumers and financial institutions, are arguably impeding growth and driving deflation. Zero interest rates have boosted prices for stocks, bonds and assets such as real estate, but without the validation of increased income, prices for these assets will likely decline sharply as and when the FOMC does change policy.
For the past several decades, the FOMC has used progressively lower interest rates to maintain nominal growth measured by GDP and job creation, but structural issues are making it increasingly difficult for the Fed and other central banks to keep the growth game going with cheap money. By no coincidence, former Treasury Secretary Lawrence Summers has suggested that the world faces a period of “secular stagnation,” but such views are mistaken.
Supporters of the secular-stagnation hypothesis, it seems, have identified the wrong problem,” argues Arvind Subramanian, Chief Economic Adviser at India’s Finance Ministry. “From a truly secular and global perspective, the difficulty lies in explaining the pre-crisis boom. More precisely, it lies in explaining the conjunction of three major global developments: a surge in growth (not stagnation), a decline in inflation, and a reduction in real (inflation-adjusted) interest rates. Any persuasive explanation of these three developments must de-emphasize a pure aggregate-demand framework and focus on the rise of emerging markets, especially China.”
Low population growth rates and other long-term structural factors suggest that the industrial nations do indeed face a period of lower growth, but this is due to a lack of focus on encouraging private sector investment and productivity growth in the industrial nations. Investment flows from emerging nations such as China, fueled by debt creation in the United States and EU, were the ultimate cause of the 2008 financial crisis.
Looking at recent weakness in prices for both stocks and bonds, financial markets are aware that the era of financial repression is nearing an end and that policymakers in the major industrial nations will soon be compelled to address the issues of low growth and excessive debt. If policymakers in the United States and EU want to address the twin issues of debt and growth, and avoid another economic calamity, then we must make the proverbial Boeing 777 go faster.
Christopher Whalen is senior managing director and head of research at Kroll Bond Rating Agency. He is the author of Inflated: How Money and Debt Built the American Dream (Wiley, 2010) and the coauthor, with Frederick Feldkamp, of Financial Stability: Fraud, Confidence, and the Wealth of Nations (Wiley, 2014).
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This Is How Junk-bond Investors Are Now Getting Whacked. They’ve Become Sitting Ducks, In A Market That’s In “extreme Overvaluation.”
Submitted by IWB, on April 24th, 2015
“In extreme overvaluation” – that’s how bond guru Marty Fridson characterizes the current junk-bond market. Junk bonds are supposed to offer high yields to entice investors image: http://images.intellitxt.com/ast/adTypes/icon1.png to take on the risks. They’re still – somewhat quaintly – called “high yield” in polite society. But it has become a misnomer in this era when investors are scrambling to buy just about anything to get even a teeny-weeny bit of yield, regardless of the risks.
to take on the risks. They’re still – somewhat quaintly – called “high yield” in polite society. But it has become a misnomer in this era when investors are scrambling to buy just about anything to get even a teeny-weeny bit of yield, regardless of the risks.
And now the risks are becoming apparent.
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It’s been tough out there. In a daily drumbeat of bad news from the energy sector, Sabine Oil & Gas said it would skip a $15.3 million interest payment. It’s looking for strategic alternatives. It needs to restructure its balance sheet. Stockholders have already been wiped out. It now has a 30-day grace period before a default would be triggered. Its debt took a hit. According to S&P Capital IQ/LCD, its 9.75% notes due 2017 traded at 15 cents on the dollar.
But even as old money is getting wiped out, yield-starved investors keep pouring new money into the sector.
The same day, Halcon Resources image: http://images.intellitxt.com/ast/adTypes/icon1.png , a fracking stalwart that has been drilling cash into the ground at dizzying rates, sold $700 million of second-lien junk bonds. So they didn’t come cheap, with a yield of 8.625%, according to LCD. Its shares are already a penny stock. The company said it would use the moolah to pay off part of its credit line; the bank is cutting the borrowing base from $1.05 billion to $900 million. And the old money? Halcon’s $1.35 billion of 8.875% notes dropped to 78.6 cents on the dollar. Back in June, they still traded at 109.
, a fracking stalwart that has been drilling cash into the ground at dizzying rates, sold $700 million of second-lien junk bonds. So they didn’t come cheap, with a yield of 8.625%, according to LCD. Its shares are already a penny stock. The company said it would use the moolah to pay off part of its credit line; the bank is cutting the borrowing base from $1.05 billion to $900 million. And the old money? Halcon’s $1.35 billion of 8.875% notes dropped to 78.6 cents on the dollar. Back in June, they still traded at 109.
There has been a wave of teetering oil & gas companies image: http://images.intellitxt.com/ast/adTypes/icon1.png that have been able to raise new money via second-lien debt to stay liquid a little longer. Energy XXI peddled $1.45 billion of second-lien notes in March at a yield of 12%. It would use the money to pay down its credit line that is getting cut in April. The old money got whacked: since the offering, XXI’s $650 million of 6.875% unsecured notes have plunged from 53 cents on the dollar to less than 36 cents on the dollar.
that have been able to raise new money via second-lien debt to stay liquid a little longer. Energy XXI peddled $1.45 billion of second-lien notes in March at a yield of 12%. It would use the money to pay down its credit line that is getting cut in April. The old money got whacked: since the offering, XXI’s $650 million of 6.875% unsecured notes have plunged from 53 cents on the dollar to less than 36 cents on the dollar.
Goodrich Petroleum, sold $100 million of second-lien notes to pay down its credit line that would be cut in April. A slew of other energy companies have sold almost $10 billion of second-lien bonds so far this year, Bloomberg reported. A record pace for this type of security image: http://images.intellitxt.com/ast/adTypes/icon1.png .
So the appetite for junk goes on.
“The extreme overvaluation of the high-yield market, initially observed in February, persisted in March,” Martin Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors, wrote in his column on S&P Capital IQ/LCD. Based on the firm’s econometric modeling methodology, junk bonds have been overvalued, though not at this extreme level, since mid-2012:
We believe this unusually long, unbroken stretch of overvaluation ultimately derives from a monetary policy that has the avowed purpose of driving investors into risky investments.
organizations may employ historical-median arguments to persuade individuals and institutions to continue pouring money into the asset class, but HY portfolio managers acknowledge that it is difficult to find decent values these days. They feel somewhat safe in paying rich prices, however, based on the assumption that the Fed will continue to hold a safety net under the market.
That strategy will succeed until it fails.
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But underwriters have been licking their chops. Investors chasing yield to the Fed’s whistle are blind to risks. They buy anything with a little extra yield without reading the small print. They do what the Fed tells them to: take on more and more risks. And so they no longer demand the normal protections when they buy junk bonds.
Hence, issuance of these “covenant lite” junk bonds has soared over the past few years as covenant quality has deteriorated. This chart by Fridson shows two measures: his (blue line) and Moody’s (red line). The scale ranges from 1 (strongest) to 5 (weakest). A multi-year trend that will be very costly for investors:
The deterioration of covenant quality in the first quarter is “not surprising,” Fridson writes, based on the inflow of new money into junk-bond mutual funds. As investors crowded in, issuers “took full advantage by obtaining bigger loopholes than ever before.”
There is a pernicious – for investors – long-term trend in play. Corporate debt issuers, thanks to the Fed’s machinations, have gained “the upper hand.” As Fridson put it:
Investment banks, whose ostensible role is simply to help
borrowers and lenders meet at the market-clearing yield, would like to portray themselves as the equivalent of football referees, who merely mark the ball where it was downed and start the next play. This would be an apt metaphor if, as in football, an objective third party (the league) chose and paid the referee.
In reality, the issuer selects and compensates the lead underwriter. For most new issues, pricing is fairly predictable and the investment banks cannot compete
on the basis of purportedly superior execution skills. Under these conditions, underwriters compete by seeing who can devise the trickiest ways of undermining the intent of the standard covenants.
This is particularly so with speculative-grade yields near their all-time low. Satisfied with their cost of debt, issuers are keen to exploit their advantage through ever more favorable borrowing terms.
OK, got it. Investor protections in the junk-bond market are going to heck. So why is this important? See Halcon’s latest bond image: http://images.intellitxt.com/ast/adTypes/icon1.png sale, the second-lien notes.
sale, the second-lien notes.
Existing unsecured bondholders with weak protections got whacked when they couldn’t stop the company image: http://images.intellitxt.com/ast/adTypes/icon1.png from issuing debt with second-lien claims on assets. The old money simply got shoved aside. They should have read the small print of the covenant. They’ll get even less during a debt restructuring or bankruptcy. And the value of these bonds dropped. These folks have eagerly become sitting ducks.
from issuing debt with second-lien claims on assets. The old money simply got shoved aside. They should have read the small print of the covenant. They’ll get even less during a debt restructuring or bankruptcy. And the value of these bonds dropped. These folks have eagerly become sitting ducks.
That’s why weak covenants are treacherous for investors. But hey, this is the greatest credit bubble in history. We should celebrate it while we still can, not quibble with it. And besides, the real owners of these bonds will never know. They’re hard-working Americans with conservative-sounding bond mutual funds in their nest eggs where these kinds of losses can fester in the dark.
But not every central banker thinks that this will end in bliss.
Agustín Carstens, governor of the Bank of Mexico and chairman of the IMF’s International Monetary and Financial Committee, is not an opponent of QE and interest-rate repression. Or at least, he toes the line. But he unleashed some stark warnings about how all this might turn out. Read… Central Bank Governor Veers Off Script, Sees “Illusion of Liquidity” & “Asset Bubbles,” Dreads Crash
Read more at http://investmentwatchblog.com/this-is-how-junk-bond-investors-are-now-getting-whacked-theyve-become-sitting-ducks-in-a-market-thats-in-extreme-overvaluation/#1PCwFs2c4Kqfr8UH.99