http://www.marketwatch.com/story/4-reasons-why-the-bond-market-is-going-wild-2015-05-12 4 reasons why the bond market is going wild By Ellie Ismailidou Published: May 12, 2015 2:49 p.m. ET 4 Getty Images Will yields remain corralled? So much for a safe haven. European and, to a lesser extent, U.S. government bonds have sold off sharply since mid-April, pushing yields higher as investors grapple with a move that’s pushed yields on eurozone debt back to levels seen before the European Central Bank launched its quantitative-easing program earlier this year. Bonds are now making headlines amid price swings , aggressive bets by big investors, and fears of a possible bubble . Here’s a look at four factors driving the action in the bond market: “Fighting four Feds” Currently, the Federal Reserve, the European Central Bank, the Bank of Japan, and China’s central bank are maintaining accommodating monetary policies, with China having announced its third rate cut in six months on Sunday. Aggressive monetary easing, including bond-buying programs by the Fed, the ECB and the Bank of Japan, had pushed government yields to record lows, particularly in the eurozone where about 25% of the market is still trading at negative rates . And the rest of the fixed-income market has followed the government bond market’s lead. This is what David Tepper, founder of Appaloosa Management and one of the most successful hedge-fund managers of recent years, called having to “ fight four Feds ” at last week’s Sohn Investment Conference. Not only does this leave investors starving for yield but it also masks the underlying fundamentals of the respective economies, leaving trading activity to be driven primarily by technical factors. In other words, price action has less to do with views on a bond’s intrinsic value and more to do with anticipating future market activity, said Bonnie Baha, head of DoubleLine Capital’s global developed credit team. Less yield for more risk Yields are still quite low. And in the current low-rate environment, investors are forced to take on more risk as they seek often meager yields. Despite the recent selloff, “bond market valuations remain unattractive” because yields remain too low and credit spreads are still below average, wrote analysts at Morgan Stanley in a report this week. Morgan Stanley Bond guru Jeffrey Gundlach, the chief executive of DoubleLine Capital, also advised investors to dump high yield bonds during a private event in New York on May 5. The debt is trading at such high prices that it might prove more rate-sensitive than investors think, and could tank when the Federal Reserve delivers a rate hike. Meanwhile, high-yield issuance in April was a robust $37.27 billion, which was the second highest tally for the month on record behind the $38.8 billion from April 2014, according to SP Capital IQ LCD data. Combined with March’s record $38 billion and the $54 billion priced during February and January combined, volume for the first four months of 2015 was $129 billion, a 13% gain over last year’s pace. Lack of liquidity Recurring bouts of heightened and unexplained volatility have ensured that concerns about a lack of bond market liquidity has remained in the spotlight. Read: Mile wide, inch deep: bond market liquidity dries up . In a demonstration of that volatility, the 10-year German bund TMBMKDE-10Y, +1.88% yield has jumped by 60.9 basis points since nearing zero on April 20, trading Tuesday at 0.67%. A lack of liquidity is another byproduct of the ECB’s bond-buying program, which removes supply from the market. It is also a function of “increased bill demand and growing constraints on dealer balance sheets,” according to a May 8 report by Bank of America analysts. Bank of America This in turn has contributed to a rise in volatility for both stocks and bonds, wrote Russ Koesterich, BlackRock’s global chief investment strategist, on May 11. The MOVE Index—a measure of bond market volatility—jumped from 70 to 90, a nearly 30% move in less than two weeks, he said. Fear of a bubble Worries about a potential market bubble have also been on the rise, as bonds attract “a number of opportunistic and more speculative type” of investors, including hedge funds, that are buying in hopes of selling at a higher price. That is also why bonds were a hot topic at the Skybridge Alternatives, or SALT, conference last week, where some hedge-fund managers warned about a possible fixed-income bubble . Fortress Investment Group’s Michael Novogratz warned that a bond selloff comparable to 1994, when U.S. government bond yields jumped sharply as the Fed began hikes, could be in store if long-dormant inflation pressures begin to emerge. More from MarketWatch ELLIE ISMAILIDOU Ellie Ismailidou is a markets reporter based in New York, covering U.S. Treasurys and bond markets. You can follow her on Twitter @ellieisma .
These diverging trends point to a market correction, says UBS By Anora Mahmudova Published: June 12, 2015 1:44 p.m. ET 119 Riesner: 15%-20% correction this summer likely Everett Collection Divergence is a problem. A UBS analyst joins a chorus of technical experts who see the U.S. stock market in the process of hitting a top and expect a major correction this summer. Michael Riesner, head equity technical analyst at UBS, in a note to investors presents a number of charts to support his ‘toppish’ warnings. The SP 500 is about 1% below its all-time high set last month, but what’s worrying Riesner is what he describes as “intact and growing divergences on macro and inter-market levels.” In simpler terms, Riesner is working about the divergence between the SP 500 and high-yield bonds, 10-year Treasury yields and inflation expectations. The chart below depicts the divergence between the SP 500 returns SPX, -0.70% and widely used high-yield exchange-traded fund iShares iBoxx $ High Yield Corporate Bond HYG, -0.37% over the past decade. FactSet Riesner’s prediction of a correction would have been accurate more than a year ago, since that is when divergences started. But the fact that they continued and grew is worrisome. Here’s a look at the SP 500 compared with the 10-year Treasury yield TMUBMUSD10Y, +0.84% which should be moving in the same direction but have been diverging lately. FactSet Riesner also talks about market breadth, which is diminishing as prices continue to climb. This is what Riesner means by so-called market breadth: “Since May last year we see fewer stocks hitting new highs and fewer stocks trading above their 200-day moving average, which mirrors increasing selectivity, as evidence of a maturing bull cycle and leading indicator for an important top,” he wrote. Apart from the divergences represented above, Riesner points to corrections/divergences in utilities XLU, -0.89% and transports DJT, -0.41% the volatility known as Vix VIX, +7.24% bottoming in July 2104, rising volatility in the euro-dollar pair EURUSD, +0.0799% performance of cyclicals and defensive sectors, semiconductors and housing. Riesner’s conclusion: a major correction is likely to occur this summer, but surviving that, the bull market will continue to march higher next year with a target for first half of 2016 at 2400-2500. “Strategically we expect the market moving into an important early summer top followed by a 15% to 20% correction into Q3 before starting another tactical bull cycle into H1 2016. The main point of the note, perhaps, is that the best antidote for a market that is “toppish” is a correction. Read: Why you should care that Robert Prechter is warning of a ‘sharp collapse’ in stocks More from MarketWatch 11 oil stocks that are forecast to rise up to 53% Warren Buffett got it right about Twitter Zombie foreclosures climb in L.A. area, other major cities MORE NEWS FROM MARKETWATCH Top Stories ANORA MAHMUDOVA Anora Mahmudova is a MarketWatch markets reporter based in New York. WE WANT TO HEAR FROM YOU Join the conversation COMMENT
Opinion: Dow Transports are calling bull on the stock market’s rise By Mark Hulbert Published: Mar 25, 2015 3:37 p.m. ET 112 The index may be signaling that the economy is stalling CHAPEL HILL, N.C. (MarketWatch) — It’s been four months since the Dow Jones Transportation Average DJT, -2.03% hit its all-time high. Should you be worried? Those who say “no” can point to more recent strength in the broader market averages. Just three weeks ago, for example, the SP 500 SPX, -1.46% reached a record. But others aren’t so sanguine. Some argue that the transportation sector is a leading economic indicator, reasoning that companies transporting goods to market will exhibit weakness when a recession looms. And the Dow Transports are now 4.3% below a high of 9,310.22 from Nov. 28, and 3.4% below a closing high of 9,217.44 on Dec. 29. Statistical support for considering the transportation sector to be a leading indicator comes from the Bureau of Transportation Statistics in the U.S. Department of Transportation. Several years ago, in a study titled “ The Freight Transportation Services Index as a Leading Economic Indicator ,” that bureau found that this index over the past three decades “led slowdowns in the economy by an average of four to five months.” To be sure, not all transportation-industry benchmarks are exhibiting as much weakness as the Dow Transports. Just a week ago, for example, the SP Transportation Select Industry Index XTN, +1.23% drove to a new all-time high. But the SP transportation index is less heavily weighted to freight-transport companies than the Dow Transports — and it is the freight sector of the transportation industry that appears to have the greatest success as a leading economic indicator. The stock with the largest weighting in the SP Transportation Select Industry Index is car-rental company Hertz Global Holdings HTZ, +0.05% while FedEx FDX, +0.08% has the biggest weighting in the Dow Jones Transportation Index. Furthermore, even though the U.S. Department of Transportation’s Freight Transportation Services Index is reported with a six-week time lag, it is telling the same story as the Dow Transports: It shows a top being hit in November of last year. Since then, the index has declined two months in a row, according to the department’s latest release. Advisers paying close attention to the transportation sectors are followers of the Dow Theory. That’s because, according to at least some of the Dow Theorists I monitor, the Dow Transports must close above its Dec. 29 closing high to reconfirm that stocks remain in a bull market (above 9,217.44, in other words). If it fails to do so, and the broad market instead proceeds to break below its January lows, then the primary trend will be considered bearish. In the meantime, according to Jack Schannep, editor of TheDowTheory.com, the market remains “betwixt and between” these bullish and bearish trigger levels. Until the market plays its hand, we wait. For how long must we do so? Schannep, in an email earlier this week, told me that it theoretically could be quite some time. That’s because, according to the Dow Theory, “there is no set time for confirmation to occur after divergence.” Furthermore, since the Dow Theory considers the last signal to remain in force until reversed, and that last signal was bullish, the primary trend is presumed to remain up. There is a catch, however, according to Schannep: “The longer it takes for the market to reconfirm a bull trend, the more suspect that trend becomes.” So the bull market has its work cut out for it. Click here to inquire about subscriptions to the Hulbert Sentiment Indexes. STOCK REFERENCES DJT -180.99 -2.03% SPX -30.45 -1.46% XTN +1.31 +1.23% HTZ +0.01 +0.05% SHOW ALL REFERENCES MORE NEWS FROM MARKETWATCH Top Stories Trending Recommended Stocks are overpriced, overleveraged, headed for trouble U.S. stocks hammered as fears about quarterly results intensify Dow Transports are calling bull on the stock market’s rise Saudi Arabia launches military operations in Yemen Why more U.S. colleges will go under in the next few years DATA PR You’re Getting Ready To Retire… Is Your Money… TalkMarkets Recommended by MARK HULBERT Mark Hulbert has been tracking the advice of more than 160 financial newsletters since 1980. Subscribe now to Mark’s premium newsletters and get 30 days free.
Once a bond is issued the issuing corporation must pay to the bondholders the bond's stated interest for the life of the bond. While the bond's stated interest rate will not change, the market interest rate will be constantly changing due to global events, perceptions about inflation, and many other factors which occur both inside and outside of the corporation. The following terms are often used to mean market interest rate: effective interest rate yield to maturity discount rate desired rate When Market Interest Rates Increase Market interest rates are likely to increase when bond investors believe that inflation will occur. As a result, bond investors will demand to earn higher interest rates. The investors fear that when their bond investment matures, they will be repaid with dollars of significantly less purchasing power. Let's examine the effects of higher market interest rates on an existing bond by first assuming that a corporation issued a 9% $100,000 bond when the market interest rate was also 9%. Since the bond's stated interest rate of 9% was the same as the market interest rate of 9%, the bond should have sold for $100,000. Next, let's assume that after the bond had been sold to investors, the market interest rate increased to 10%. The issuing corporation is required to pay only $4,500 of interest every six months as promised in its bond agreement ($100,000 x 9% x 6/12) and the bondholder is required to accept $4,500 every six months. However, the market will demand that new bonds of $100,000 pay $5,000 every six months (market interest rate of 10% x $100,000 x 6/12 of a year). The existing bond's semiannual interest of $4,500 is $500 less than the interest required from a new bond. Obviously the existing bond paying 9% interest in a market that requires 10% will see its value decline. Here's a Tip An existing bond's market value will decrease when the market interest rates increase .The reason is that an existing bond's fixed interest payments are smaller than the interest payments now demanded by the market. When Market Interest Rates Decrease Market interest rates are likely to decrease when there is a slowdown in economic activity. In other words, the loss of purchasing power due to inflation is reduced and therefore the risk of owning a bond is reduced. Let's examine the effect of a decrease in the market interest rates. First, let's assume that a corporation issued a 9% $100,000 bond when the market interest rate was also 9% and therefore the bond sold for its face value of $100,000. Next, let's assume that after the bond had been sold to investors, the market interest rate decreased to 8%. The corporation must continue to pay $4,500 of interest every six months as promised in its bond agreement ($100,000 x 9% x 6/12) and the bondholder will receive $4,500 every six months. Since the market is now demanding only $4,000 every six months (market interest rate of 8% x $100,000 x 6/12 of a year) and the existing bond is paying $4,500, the existing bond will become more valuable. In other words, the additional $500 every six months for the life of the 9% bond will mean the bond will have a market value that is greater than $100,000. Here's a Tip An existing bond's market value will increase when the market interest rates decrease . An existing bond becomes more valuable because its fixed interest payments are larger than the interest payments currently demanded by the market. Relationship Between Market Interest Rates and a Bond's Market Value As we had seen, the market value of an existing bond will move in the opposite direction of the change in market interest rates. When market interest rates increase, the market value of an existing bond decreases. When market interest rates decrease, the market value of an existing bond increases. The relationship between market interest rates and the market value of a bond is referred to as an inverse relationship. Perhaps you have heard or read financial news that stated "Bond prices and bond yields move in opposite directions" or "Bond prices rallied, lowering their yield..." or "The rise in interest rates caused the price of bonds to fall." If you were the treasurer of a large corporation and could predict interest rates, you would... Issue bonds prior to market interest rates increasing in order to lock-in smaller interest payments. If you were an investor and could predict interest rates, you would... Purchase bonds prior to market interest rates dropping . You would do this in order to receive the relatively high current interest amounts for the life of the bonds. (However, be aware that bonds are often callable by the issuer.) Sell bonds that you own before market interest rates rise . You would do this because you don't want to be locked-in to your bond's current interest amounts when higher rates and amounts will be available soon. 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The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. 最好的交易就是有三件事情都对你有利：基本面，技术面和市场氛围。 First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. 首先基本面显示市场的供需关系不平衡，所以可能会有大的趋势产生。 Second, the chart must show that the market is moving in the direction that the fundamentals suggest. 其次图表显示价格走势和基本面符合。 Third, when news comes out, the market should act in a way that reflects the right psychological tone. 第三，当新闻公布后市场反应出的心态应该是准确的。
Is This A 2007 Redux? Submitted by Tyler Durden on 07/20/2013 17:06 -0400 Ben Bernanke Bond China Eurozone Federal Reserve Goldilocks Gross Domestic Product Guest Post John Hussman Market Timing Price Action Reality Recession Submitted by Lance Roberts of Street Talk Live blog , I read a very interesting prediction from noted market bull Jeff Saut who, in an interview with Eric King of King World News , stated that: "For the past two and a half months I have targeted tomorrow, July 19th, as the intermediate-top on both my quantitative timing and technical models. So I think tomorrow is the potential turning point for the first meaningful decline of the year. I have been raising cash for the past few weeks and I think this correction in the stock market will be roughly 10% to 12%. It's just a question of, is this thing going to end with a whimper, or is it going to end with a bang? The shorts have been absolutely destroyed here. We could see a blue-heat move that carries the SP 500 somewhere between 1,700 and 1,730. That would be the ideal pattern, but they don't operate the market for my benefit so you have to take what they give you. I don't think anybody can time the market on a consistent basis, but if you listen to the message of the stock market you sure as heck can decide when you should be 'playing hard' and when you should not be playing as hard, and so I'm not playing that hard right here." Whether, or not, Jeff is right about the exact date of the market top it does bring attention to the recent correction and subsequent rally to new highs. Was that correction just a pullback in an ongoing upward bullish trend or is the beginning of a more major topping process much as we saw in 2007? The chart below shows the price action of the market from 2003-2008 as compared to 2009 top. The interesting thing about the historical price action is the potential timing of the Federal Reserve's "tapering" of the current bond buying scheme. The market advance prior to 2008 which was driven by excess liquidity derived from the credit boom cycle - the current advance has been driven almost entirely by the liquidity pushed into the system by the Federal Reserve. The extraction of that liquidity could well mark the top of the current cyclical bull advance later this year or in early 2014. It is not just price patterns that have me concerned but rather other similarities between these two advances that should be noted as well. Leverage The next chart below is the amount of leverage in the financial system as measured by the level of margin debt. Margin debt has currently risen to an all-time high during the current liquidity cycle much the same as was witnessed prior to the financial crisis. As you can see spikes in margin debt, as market exuberance begins to form, generally takes place near market peaks. The current spike in margin debt to record levels is not necessarily a sign of good things to come. Valuations Market valuations have been expanding over the last couple of quarters as prices have been artificially inflated while earnings growth has deteriorated. The result has been a push of market valuations, as measured by P/E ratios, to levels in excess of those witnessed at the prior market peak. The chart below shows reported trailing twelve month price-earnings ratios for the seven quarters leading up to the peak in earnings. While valuation measures are historically horrible market timing devices, especially when the market is being pushed by liquidity, they do give some insight as to extremes. I should not have to remind you that post the peak in reported earnings in 2007 they fell sharply to a low of just $6.86 per share by March of 2009. Of course, at the peak in 2007, the economy was growing, there was no threat of recession, housing related issues were "contained" and Bernanke calmly explained that we were in a "goldilocks economy." Just six months later the economy was in a recession and the financial crisis had set upon us. While I am not saying that the same thing is about to happen - what does concern me is the extreme amount of confidence that currently exists that we have once again entered into that same "goldilocks" state. Earnings Of course, you cannot really discuss P/E ratios without discussing the trend and trajectory of earnings. Reported earnings were steadily rising as we entered into the peak of valuations in 2007. At that time the belief was that market prices would continue to rise along with earnings. The problem was that belief was quickly shattered as the initial waves of the recession began to set in. Currently, that same belief is once again largely prevalent. The chart below shows the historical trend of reported trailing twelve months earnings per share versus the stock market. Despite the fact that earnings have been stagnating for several quarters now; the belief is that at just any moment the economy will kick into gear and earnings will play catchup with rapidly rising valuations. This has historically been a losing proposition. Valuation excesses tend to be mean reverting through a fall in the numerator rather than a rise in the denominator. Economic Growth Looking at earnings, valuations and price are all important to whether or not we are currently near a peak in the financial markets. However, ultimately, it is the economy that will drive all of these issues in the future. The chart below shows annualized growth rates of quarterly real GDP for the periods of 2004 through 2007 and 2009 to present. The importance here is that in both cases the actual rate of economic growth peaked near the middle of the economic cycle and then began to wane. The polynomial trend lines shows this a little more clearly. Of course, as stated above, despite clear evidence that the economy was beginning to struggle the inherent belief by most mainstream analysts and economists was that the "soft patch" would quickly recover. Unfortunately, that was not the case. The impact of the recession in the Eurozone, and the slowdown in China, is clearly impacting corporate earnings and revenue which puts the current market at risk. Is This A Market Top? Mr. Saut's very bold prediction that we are likely making a market top currently is certainly attention grabbing. The reality, however, is that the current "liquidity driven exuberance" could keep the markets "irrational" longer than logic, technicals or fundamentals would dictate. Are we likely forming a market top? It is very possible. We saw the same type of market action towards the last two market peaks. However, it will only be known for sure in hindsight. The many similarities between the last cyclical bull market cycle and what we are currently experiencing should be at least raising some warning flags for investors. The levels of speculation, leverage, price extensions, duration of the rally, earnings trends and valuations are all at levels that have historically led to not so pleasant outcomes. John Hussman summed it up well recently when he stated: "Given the present evidence, however, my real concern is that much like the rolling tops of 2000 and 2007, each pleasant breeze here lulls investors into complacency – but in the face of overvalued, overbought, over bullish conditions that, from a cyclical and secular standpoint, should probably have them wide-eyed with terror. We can't rule out that the bough will sway for a while longer despite the weight, but we won't embrace the situation by putting our own baby on the twigs. It's quite crowded up there already." 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Some Stock Markets Are More Equal Than Others: Global Performance Since 2009 Submitted by Tyler Durden on 07/28/2012 12:19 -0400 Back in March 2009, when the US financial system was imploding, one of market oddities was that European financial risk was far more muted than that of its American counterparts, with European stock markets trading, on a relative basis, far better than the epic collapse that the SP had just experienced having plunged by over 50% in months. It was this freefall that forced the Fed to take on the most daring capital markets rescue attempt ever attempted, and by injecting and guaranteeing tens of trillions at the nadir of the financial crisis, it spawned a doubling of the US stock markets (at a huge cost: US capital markets are now all centrally planned, and the price of gold: that inverse indicator of faith in fiat currencies, has also doubled in the past 4 years following an epic fiat dilution orgy). Over the same time period, Europe has demonstrated what happens to capital markets when there is no central planner willing and able to accept the risk of runaway inflation in the future (not to mention soaring deficits and deferred austerity) in exchange for instant stock market gratification right here, right now. End result: the French, Italian and Spanish stocks markets have barely budged since their 2009 lows (and Spain is well below). How does this look in the context of all global stock markets on a Price to Book ratio? The answer is below. The next logical question becomes: just why is the global investor willing to pay over 2 times book value for the average US stock, and unwilling to pay more than 0.8 Book for Italy and Spain. And how long until the realization that the rickety house of cards supporting the US stock market's 2.0+ P/B ratio is resting purely on the shoulders of a profligate Fed now that US corporations have once again resumed their downward "profitability" trajectory? 9490 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Bill Gross On Doo Doo Economics Things That Make You Go Hmmm - Such As The Spread Between Gold And Gold Miners Futures Tumble, Spreads At Record, Euro Drops On Another Awful Spanish Auction; More LCH Margin Hike Rumors "China Accounts For Nearly Half Of World's New Money Supply" A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed
Physical Gold vs. Paper Gold: The Ultimate Disconnect Submitted by Tyler Durden on 04/23/2013 21:29 -0400 Central Banks China Commitment of Traders ETC Exchange Traded Fund Futures market George Soros Goldman Sachs goldman sachs Gross Domestic Product Guest Post LIBOR MF Global Peter Schiff Precious Metals Purchasing Power Sovereign Debt Submitted by Bud Conrad of Casey Research , How can we explain gold dropping into the $1,300 level in less than a week? Here are some of the factors: George Soros cut his fund holdings in the biggest gold ETF by 55% in the fourth quarter of 2012. He was not alone: the gold holdings of GLD have contracted all year, down about 12.2% at present. On April 9, the FOMC minutes were leaked a day early and revealed that some members were discussing slowing the Fed $85 billion per month buying of Treasuries and MBS. If the money stimulus might not last as long as thought before, the "printing" may not cause as much dollar debasement. On April 10, Goldman Sachs warned that gold could go lower and lowered its target price. It even recommended getting out of gold. COT Reports showed a decrease in the bullishness of large speculators this year (much more on this technical point below). The lackluster price movement since September 2011 fatigued some speculators and trend followers. Cyprus was rumored to need to sell some 400 million euros' worth of its gold to cover its bank bailouts. While small at only about 350,000 ounces, there was a fear that other weak European countries with too much debt and sizable gold holdings could be forced into the same action. Cyprus officials have denied the sale, so the question is still in debate, even though the market has already moved. Doug Casey believes that if weak European countries were forced to sell, the gold would mostly be absorbed by China and other sovereign Asian buyers, rather than flood the physical markets. My opinion, looking at the list of items above, is that they are not big enough by themselves to have created such a large disruption in the gold market. The Paper Gold Market The paper gold market is best embodied in the futures exchanges. The prices we see quoted all day long moving up and down are taken from the latest trades of futures contracts. The CME (the old Chicago Mercantile Exchange) has a large flow of orders and provides the public with an indication of the price of gold. The futures markets are special because very little physical commodity is exchanged; most of the trading is between buyers taking long positions against sellers taking short positions, with most contracts liquidated before final settlement and delivery. These contracts require very small amounts of margin – as little as 5% of the value of the commodity – to gain potentially large swings in the outcome of profit or loss. Thus, futures markets appear to be a speculator's paradise. But the statistics show just the opposite: 90% of traders lose their shirts. The other 10% take all the profits from the losers. More on this below. On April 13, there were big sell orders of 400 tonnes that moved the futures market lower. Once the futures market makes a big move like that, stops can be triggered, causing it to move even more on its own. It can become a panic, where markets react more to fear than fundamentals. Having traded in futures for over two decades, I want to provide some detail on how these leveraged markets operate. It's important to understand that the structure of the futures market allows brokers to sell positions if fluctuations cause customers to exceed their margin limits and they don't immediately deposit more money to restore their margins. When a position goes against a trader, brokers can demand that funds be deposited within 24 hours (or even sooner at the broker's discretion). If the funds don't appear, the broker can sell the position and liquidate the speculator's account. This structure can force prices to fall more than would be indicated by supply and demand fundamentals. When I first signed up to trade futures, I was appalled at the powers the broker wrote into the contract, which included them having the power to immediately liquidate my positions at their discretion. I was also surprised at how little screening they did to ensure that I was good for whatever positions I put in place, considering the high levels of leverage they allowed me. Let me tell you that I had many cases where I was told to put up more margin or lose my positions. Those times resulted in me selling at the worst level because the market had gone against me. The point of this is that once a market moves dramatically, there are usually stops taken out, positions liquidated, margin calls issued, and little guys like me get taken to the cleaners. Debates rage about the structure of the futures market, but my personal opinion is that a big hammer to the market by a well-heeled big player can force liquidations, increase losses, and push the momentum of the market much lower than the initial impetus would have. Thus, after a huge impact like we saw on April 13, the market will continue with enough momentum that a well-timed exit of a huge set of short positions can provide profits to the well-heeled market mover. Moving from theory to practice, one of the most important things to keep your eye on is the Commitment of Traders (COT) report, which is issued every Friday. It details the long and the short positions of three categories of traders. The first category is called "commercials." They are dealers in the physical precious metals – for example, gold miners. The second category is called "non-commercials." They include hedge funds and large commercial banks like JP Morgan. Non-commercials are sometimes called "large speculators." The rest are the small traders, called "non-reporting" since they are not required to identify themselves. The ones to watch are the large speculators (non-commercials), as they tend to move with the direction of the market. Individual entities could be long or short, but in combination the net position of the group is a key indicator. The following chart shows the price of gold as a blue line at the top, and the next panel down shows the net position of these large speculators as a black line. You can see that over the long term, they move together. When the net speculative position is above zero, this group is betting on rising gold prices. Of course, the reverse is true when it's below zero. In this 20-year view, the large speculators were holding net negative positions during the lowest point of the gold price, around the year 2000. As the price of gold rose, their positions went net long, and they profited. An interesting thing about the chart above is that the increasing amount of net longs reversed itself before gold peaked in 2011, suggesting that these large speculators became slightly less bullish all the way back in 2010. The balance remains net long, but it remains to be seen how long that lasts. What is not so obvious is that these large speculators are so big that they can affect the market as well as profit from it; when they initiate massive positions in a bull market, they drive the price of the futures contracts even higher. Similarly, when they remove their positions or actually go short, they can push the market lower. So what happened a week ago was that a massive order to sell 400 tons of gold all at once hit the market. Within minutes the price plummeted, and over a two-day period resulted in the largest drop of the price for futures delivery of gold in 33 years: down $200 per ounce. We don't have the name of the entity that did this. However, the way the gold was sold all at once suggests that the goal was not to get the best price. An investor with a position of this size should have been smart enough to use sensible trading tactics, issuing much smaller sell orders over a period of time. This would avoid swamping the market; and some of the orders would be filled at higher prices and thus generate more profit. Placing a sell order big enough to affect the overall market price suggests that someone with powerful backing wanted to drive the price of gold down. Such an entity could have been a large speculator who already had a sizable short position and could gain by unloading some of its short position once the market momentum had driven the price even yet lower. Or it could be a central bank – one that might be happy to have the gold price move lower, as it would provide cover for its printing of more new money. Of course, it could be some entity that owned long contracts and wanted to get out of the position all at once. We don't know, but this kind of activity, resulting in the biggest drop in 30 years, raises more than just suspicion when we consider how important the price of gold is to many markets around the globe. Can markets really be influenced by big players? Well, was the LIBOR rate accurately reported by huge banks? Have players ever tried to corner markets? The answer to all the above, unfortunately, is yes. There's an even bigger problem with the legal structure of the futures market: even the segregated funds on deposit can be pilfered by the broker for the brokerage's other obligations. That is what happened to MF Global customers under Mr. Corzine. (I had an account with a predecessor company called Man Financial – the "MF" in the name. I also had an account with Refco, which is now defunct. Fortunately, the daggers did not hit my account, since I was not a holder when the catastrophes occurred.) My take: the futures market is dangerous, and not a place for beginners. One last note: after the Bankruptcy Act of 2005, the regulations support the brokers, not the investors, when there are questions of legality about losses in individual investment accounts. Casey Research will be producing a report with much more detail on this subject in the near future. So, what now? We aren't going to see a secret memo – no smoking gun to confirm that what happened on April 13 was an attempt to affect the market. Still, the evidence is suspicious. When big entities can gain from putting on big positions, the incentives are big enough for them to try – LIBOR, Plunge Protection Team, Whale Trade, etc. , all support this view. The Physical Gold Market Previously, there was little difference between the physical and paper markets for gold. Yes, there were premiums and delivery charges, but everybody regarded the futures market as the base quote. I believe this is changing; people don't trust the paper market as they used to. Instead of capitulating to fear of greater losses, the demand for physical gold has hit new records. The US Mint sold a record 63,500 ounces – a whopping 2 tonnes – of gold on April 17 alone, bringing the total sales for the month to 147,000 ounces; that's more than the previous two months combined. Indian markets, which are more oriented to physical metal, now have a premium of US$150 over the futures price in Chicago. Demand at coin dealers has increased as the price has dropped. And premiums are much bigger than they were as recently as a week ago. Here is a vendor page that quotes purchase prices and calculates the premiums on an ongoing basis. It shows premiums of 50% and more in many cases. On eBay, prices for one-ounce silver coins are $33 to $35, where the futures price is quoted as $23. A look on Friday April 19 shows one vendor out of stock on most items: Buy - Sell On SilverBullion 2013 Sealed Mint Boxes Of 1 Oz. Silver American Eagles - Brand New Coins 500 Coin Min. (1 Sealed Box) Buy @ Spot + $1.80 Sold Out 2013 Sealed Mint Boxes Of 1 Oz. Silver American Eagles "San Francisco Mint" Brand New Coins 500 Coin Min. (1 Sealed Box) Buy @ Spot + $2.00 Sold Out 90% Silver Coin Bags (Our Choice Dimes Or Quarters) $1,000 Face Value Figured at 715 Ozs Per $1,000 Face $1,000 Face Value Min. We Buy @ Spot + $1.70 Per Oz (Spot + $1.70 X 715) Spot + $4.99 Per Oz (Spot + $4.99 X 715) 90% Silver Coin Bags 50 Half Dollars $1,000 Face Value We Ship in 2 $500 Face Bags $1,000 Face Value Min. We Buy @ Spot + $1.90 Per Oz (Spot + $1.90 X 715) Sold Out 90% Silver Coin Bags Walking Liberty Half Dollars $1,000 Face Value We Ship in 2 $500 Face Bags $1,000 Face Value Min. We Buy @ Spot + $2.10 Per Oz (Spot + $2.10 X 715) Sold Out Amark 1 Oz. Silver Rounds ( Made By Sunshine ) Pure .999 BU 500 Coin Min. Buy @ Spot -15c Sold Out Clearly, the physical gold market today is sending different signals than the paper market. The Case for Gold Is Still with Us The long-term fundamental reasons to hold gold are undeniably still with us. The central banks of the world are acting in concert in "currency wars" or "the race to debase." As they print more money, the purchasing power of each unit declines. They are caught between the rock of having to keep interest rates low to support their governments' huge deficits and the hard place of the long-term effect of diluting their currency. If rates rise, even First World governments will be forced to pay higher interest fees, leading to loss of confidence in their ability to pay back their debt, which will bring on a sovereign debt crisis like what we have seen in the PIIGS or Argentina recently. The following chart shows the rapid growth in the balance sheets as a ratio to GDP for the three largest central banks. I've extrapolated the expected growth into the future based on the rate at which they propose to buy up assets. One could argue about how long these growth rates will continue, but the incentives are all there for all central banks to bail out their governments and their commercial banks. I fully expect the printing game to continue to provide the fuel for hard-asset investments like gold and silver to increase in price in the years to come. Buying Opportunity or Time to Flee? So what does it all mean? The paper price of gold crashed to $1,325 in the wake of this huge trade. It is now hovering around $1,400. My first reaction is to suggest that this is only an aberration, and that the fundamentals of the depreciating value of paper currencies will eventually take the price of gold much higher, making it a buying opportunity. But what I can't predict is whether big players might again deliver short-term downturns to the market. The momentum in the futures market can make swings surprisingly larger than the fundamentals of currency valuation would suggest. Traders will be looking for a significant turnaround to the upside in price before entering long positions. However, a long-term, fundamentals-based trader has to look at the low price as a buying opportunity. I can't prove it, but I think the fundamentals will drive the long-term market more than these short-term events. The fight between pricing from the physical market for bullion and that from the "paper market" of futures is showing signs of discrimination and disagreement, as the physical market is booming, while prices set by futures are seemingly pressured to go nowhere. In short, I think this is a strong buying opportunity. What would you do if the government outlawed gold ownership? If you had taken the steps outlined in Internationalizing Your Assets, you'd have little to worry about, as much of your gold – indeed, most of your assets – would be protected. Internationalizing Your Assets is a must-see web video for anyone concerned about losing wealth to increasingly desperate politicians. The event premiers at 2 p.m. EDT on April 30 and features some of the world's foremost experts on international asset protection, including Casey Research Chairman Doug Casey and Euro Pacific Capital CEO Peter Schiff. Attending Internationalizing Your Assets is free. To register or for more information, please visit this web page .
What Happened The Last Time We Saw Gold Drop Like This? Submitted by Tyler Durden on 04/15/2013 11:59 -0400 Lehman The rapidity of gold's drop is impressive, concerning, and disorderly. We have seen two other such instances of disorderly 'hurried' selling in the last five years. In July 2008, gold quickly dropped 21% - seemingly pre-empting the Lehman debacle and the collapse of the western banking system. In September 2011, gold fell 20% in a short period - as Europe's risks exploded and stocks slumped prompting a globally co-ordinated central bank intervention the likes of which we have not seen before. Given the almost-record-breaking drop in gold in the last few days, we wonder what is coming ? This is what it looked like in Q3 2008... and in 2011... and now... and it seems safety is bid dramatically elsewhere as 2Y Swiss rates plunge 4bps to -7bps - their lowest in 4 months... Charts: Bloomberg Average: 4.74074 Your rating: None Average: 4.7 ( 27 votes) Tweet - advertisements - Login or register to post comments 69111 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: What Happened The Last Time IBEX Jumped This Much? What Happened The Last Time Gold And Central Banks Were So Far Apart? This Is What Happened This Time Last Year After Ben Bernanke Spoke To Congress Here Is What Happened The Last Time A Trader Was Caught Manipulating CDS Marks What Happened The Last Two Times VIX Closed Below 15%?
Yen Surges As Japan's Deputy PM Says Excessive Yen Gain "Corrected" Submitted by Tyler Durden on 04/08/2013 20:23 -0400 Bond Green Shoots Japan Nikkei Yen The circus continues. For this evening's entertainment, the countrty Deputy PM Taro Aso explains the "excessive JPY gain has been corrected," upon which USDJPY instantly strengthens 40 pips reversing all the post-US0-close JPY weakness. Of course, the market reaction was evidently enough for him to swallow his words and 'retract' his comments mere moments later. At the same time, the BOJ declares: *BOJ MEMBERS AGREED JAPAN'S ECONOMY STOPPED WEAKENING While their optimism is welcome, facts (as they often do) stand tall in the face of their rhetoric as Japan's Macro index and manufacturing new orders (to name just two recent data points) do not even show second-derivative green shoots. And for the third and final act of this evening's early debacle, 30Y JGB yields have slammed 9bps higher (as JGB Futures prices look set for another halt). The Bottom is in? The Bottom is in? What happens when Aso opens his mouth... ruining the 100 target the world had for 2am... (maybe push it back to 3 or 4am)... and it looks like we are set for another JGB Futures halt as long-dated Japanese bond yields are blowing higher once again... and 20Y even more volatile... and just to add to the fun - SGX entire futures exchange down.... Mini JGB's and Nikkei 225 yet to open on SGX... Average: 4.9 Your rating: None Average: 4.9 ( 10 votes) Tweet - advertisements - Login or register to post comments 10547 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Rajoy Summarizes Overnight (And Recurring) Sentiment: "There Are No Green Shoots, There Is No Spring" 17 Macro Surprises For 2013 Chris Martenson Interviews Mike Shedlock, Discusses Deflation, The Fed, Gold And Other Subjects VIXterminating, Voluelmess Ramp Left To The US Stock Market For Second Day In A Row Japan Megaquake And Tsunami - Gold Mixed As Yen Surges Against All Currencies
Some Taxing Questions About (Not So) Record Corporate Profits Submitted by Tyler Durden on 02/13/2013 12:03 -0500 Apple David Einhorn GAAP Gross Domestic Product Housing Bubble Ireland Netherlands Recession Tax Revenue Treasury Borrowing Advisory Committee One of the recurring memes of the now nearly 4 years old "bull market" (assuming the recession ended in June 2009 as the NBER has opined), is that corporate profits are soaring, and that despite recent weakness in Q4 earnings (profiled most recently here ), have now surpassed 2007 highs on an " actual" basis. For purely optical, sell-side research purposes that is fine: after all one has to sell the myth that the US private sector has never been healthier which is why it has to immediately respond to demands that it not only repatriate the $1+ trillion in cash held overseas, but to hand it over to shareholders post-haste (see recent "sideshow" between David Einhorn and Apple). However, a problem emerges when trying to back this number into the inverse: or how much money the US government is receiving as a result of taxes levied on these supposedly record profits. The problem is that while back in the summer 2007, or when the last secular peak in corporate profitability hit, corporate taxes peaked at well over $30 billion per month based, the most recent such number shows corporate taxes barely scraping $20 billion per month! Does this mean that when one excludes all the usual non-cash exclusions, and all the endlessly recurring non-recurring items, all of which which feed the EPS line from a GAAP, and non-GAAP basis, and focuses solely on actual earnings generated by US companies, which form the basis for tax accounting purposes, that the real profitability of the US private sector, and by implication, the SP, is at best two thirds of where it was at its peak in 2007, and if so does this mean that the actual earnings multiple applied to true recurring earnings is some 50% higher than where the sellside brigade wants to retail investor to believe it is? We don't know, but we do know that while Individual Income taxes have returned to their 2007 peak as per the latest quarterly Treasury Borrowing Advisory Committee presentation (blue line chart below), Corporate Taxes still have some 50% to go before the prior peak is regained (green line). There is also another explanation. US Companies have built up their massive cash hoards over the past 5 years due to an even more aggressive pursuit of tax shelter and loophole strategies, as well as an even more aggressive use of deferred tax assets and NOL carryforwards, meaning that all the cash that they have not paid to the US government, has ended up on their balance sheet, and which cash shareholders are now demanding be dividended or used to fund buybacks (preferably with leverage). While the first explanation is relevant from a valuation standpoint, implying that corporate profitability is far lower than conventional wisdom believes to be the case and thus the market is widely overvalued, the second explanation goes straight to the most sensitive issue facing the administration currently: namely deficit reduction. Because while the administration does everything to "close the spending hole" by hiking income taxes on the wealthiest, what happened to any discussion about corporate taxes especially on those megacorps who pay zero domestic taxes and barely any tax in offshore shelters like Ireland, the Netherlands or the Caymans? Because something tells us if indeed Corporations are rolling in record profits, they should at least be paying the same amount of taxes as they did during the last credit and housing bubble, instead of 66% of it. Finally: if corporations were to simply catch up to where tax payments were in the summer of 2007, this would imply an annualized government tax revenue difference of some $120 billion. While hardly a massive sum in the context of the US $1+ trillion deficits, it would take some pressure off the US consumers, be they rich or poor, and actually stimulate the one driver that at last check still accounted for some 70% of US GDP: consumption. Average: 5 Your rating: None Average: 5 ( 4 votes) Tweet - advertisements - Login or register to post comments 5521 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: 2012 Year In Review - Free Markets, Rule of Law, And Other Urban Legends Taibbi: "Goldman Raped The Taxpayer, And Raped Their Clients" iTax Avoidance - Why In America There Is No Representation Without "Double Irish With A Dutch Sandwich" Taxation No Record Profits For Old Assets: Jim Montier On Unsustainable Parabolic Margin Expansion For Dummies Is JPMorgan About To Take Over America, Again?
What If Corporate Earnings Have Topped Out? Submitted by Tyler Durden on 01/08/2013 10:13 -0500 Bear Market CPI ETC Gross Domestic Product Guest Post Medicare Unemployment Via Charles Hugh-Smith of OfTwoMinds blog , The market may have reached cyclical highs in corporate earnings. That does not bode well for additional stock market advances. If corporate earnings have topped out, what will push the stock market higher? The usual answer is "central bank intervention," but history suggests that in the long run, the market eventually correlates to corporate earnings. Earnings up, market up; earnings down, market down. Frequent contributor B.C. recently shared some insightful charts of SP 500 (SPX) earnings. Here are B.C.'s comments on the first chart: Note that real earnings (CPI adjusted) in '09 fell to the levels of the 1920s-30s, 1890s, and 1870s, and to the levels of the 1970s in nominal terms. A "typical" cyclical decline would take earnings back to the long-term trend from 1932 and the log trend line at $40s-$50s from $87 today. Also, recall that the Fortune 300 firms have revenues equivalent to 50% to 100% of private GDP at $425,000/employee, so they are the economy. A decline of 50% for profits would be the equivalent of 10% of private GDP, which would match or exceed the decline in '08-'09, risking an increase in the Unemployment rate of 50-100% and a fiscal deficit exceeding 100% of tax receipts after Social Security and Medicare receipts. The next two charts track long-term historic trends: here is B.C.'s commentary: Reported earnings of the SP 500 (SPX) are highly cyclical with a periodicity of ~51 months. Earnings are contracting year-over-year (yoy) as occurred in late '07 and early '08, early '01, etc. Profits as a percentage of GDP at 10-11% are 65-70% above the historical average and 130% above the historical average during recessions and bear market troughs, implying the risk of up to a 55-60% decline in profits and profits as a percentage of GDP, i.e., a roughly $1 trillion decline or an equivalent of 10% of private GDP. The 10-yr. average P/E and 16- and 20-year real changes and real total returns to date for the secular bear market imply the risk of a crash at some point in the next 1/2 to 4 years and no real change to the SP 500 for 20 years, indicating just how grossly overvalued stock prices are historically. Thank you, B.C. for the charts and incisive commentary. Is it mere coincidence that the SPX has doubled over the past four years as corporate profits soared? If we haven't yet reached the 51-month cycle peak, we are certainly close. What happens to the post-QE market if earnings decline? 4th Quarter Earnings Will be an Unmitigated Disaster (EconMatters) Average: 4.5 Your rating: None Average: 4.5 ( 4 votes)
Four Reasons Why There Is No 'Pent-Up' Capex Spend Submitted by Tyler Durden on 12/17/2012 12:36 -0500 Morgan Stanley Consensus seems convinced (and short-term market prevarications suggest) that once we get past the 'uncertainty' of the fiscal cliff, then there will be a surge in pent-up spending from companies in the first half of 2013 . Morgan Stanley's Adam Parker snubs the mainstream meme and looks at the data - finding four significant reasons why a surge in capital spending is unlikely. From 'average' sales-to-capex ratios and manufacturing utlization to inventory levels and the overall trend in deprecation , Parker interestingly questions whether "high capital spending is ever good?" Via Morgan Stanley, The consensus sees pent-up demand for capital spending from C-level executives ready to spend , but who want clarity on a number of laws that may change in the coming year. While no doubt uncertainty has weighed on corporate decision-making, we thought it might be timely to look at capital spending trends a bit more holistically. Our conclusion – a large capital spending surge is unlikely. Is high capital spending ever good? We analyzed the correlation between changes in capex-to-sales and prior, current and future sales growth. If capital spending picked up in the energy sector following a fiscal compromise, that would likely be more bullish than it would be for telecom, as the former is historically associated with future sales growth, whereas the latter is generally a reaction to past sales growth. While we don’t see it as likely, a capex ramp in technology and materials is typically positive for higher sales later in the subsequent year, even if it causes a nearer-term sell-off in stocks. Generally, though, low capital spenders have usually been rewarded relative to their high-spending counterparts. In health care and materials, higher capital spending historically has been much better than in technology or telecommunications. Investment conclusion: Four reasons why we don’t think a large capital spending surge is likely. 1. Current and forecasted capital spending-to-sales levels: While global capital spending relative to sales is forecasted to be down in 2013, it is close to average levels over the past decade. Four of ten sectors (utilities, materials, energy, and technology) are forecasted to have above “trend” capital spending to sales for 2013, so upside surprise is not as likely here . 2. Manufacturing utilization: While utilization levels have risen sharply from the 2008 lows, recent trends have slowed. The steadiness of the recent decline and the ample room for higher utilization until capacity is tight suggest that a surge is not likely . Only six of 22 major industries have utilization levels above their long-term average. 3. Trend analysis: We analyzed the cyclical level of DA expense (above the trend level) and compared it with capital spending expectations at the industry group level. On the margin, we think staples and technology may spend more capex in 2013 than industrials and consumer discretionary stocks, relative to current expectations. 4. Inventory levels: Structurally, global inventory-to-sales has been downward sloping for years. However, over the last decade or so, inventory levels have stabilized at just less than 10% of sales. While US inventory levels seem leaner than those outside the US, a big inventory build requiring a capacity surge seems implausible. Perhaps auto components, electrical equipment, and construction could see some build, particularly relative to communications equipment. Source: Morgan Stanley Average: 4.6 Your rating: None Average: 4.6 ( 5 votes) Tweet Login or register to post comments 4840 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: David Rosenberg: "RIP Wealth Effect" Watch The NAR's Larry Yun Explain The Pending Home Sales Miss What Every Farmer And Commodity Trader Will Be Glued To Tomorrow at 830ET Is The Inexplicable American Consumer Rebelling? From Cautious Optimist To Skeptical Pessimist
The Two Charts You Should See Before Risking A Dime In The Market In 2013 Submitted by Tyler Durden on 12/16/2012 17:29 -0500 Ben Bernanke Ben Bernanke EuroDollar Gross Domestic Product Guest Post Via Charles Hugh-Smith of OfTwoMinds blog , Two charts suggest a major decline is ahead in 2013. "Don't fight the Fed," blah blah blah. Really? What did the market do after QE3 and QE4 were duly announced? It tanked. What if the Fed is out of tricks? It's not really a question; Fed chairman Ben Bernanke said as much in his press conference. It's not clear if the Ibogaine was wearing off or just kicking in, but the Chairman had an apologetic deer-in-the-headlights look of, "Gee, we're out of tricks and I'm sorry to have to tell you what is painfully obvious to everyone who isn't stoned silly on Delusionol (tm)." Now that the Fed's magic hat is visibly out of rabbits, there are all sorts of complexities we could hash over such as the effects of bank charge-off rates on GDP or the Theater of the Absurd "fiscal cliff" play-acting, but why waste all that time and energy when a number of charts forecast trouble for the stock market in 2013? The first overlays bank derivatives with positive fair value against the SP 500 (SPX), lagged 28 months. Is it cricket to lag or advance indicators? Technician Tom McClellan thinks so, as his forward-12-months eurodollar COT/SPX chart has been eerily prescient in forecasting major market moves in 2012. Here is an article on the chart: Stocks And Euro-Dollar Futures Positioning (11/7/12) Keeping in mind that there is no one indicator or chart that accurately forecasts market moves consistently over time, consider this overlay of bank derivatives and the SPX: Charts courtesy of longtime correspondent B.C. Hmm. If there is a correlation here, it doesn't look positive for equities in 2013. Those familiar with McClellan's chart know that it forecasts a serious decline in the SPX in early 2013, followed by a countertrend rally that tops in May. The decline after May is the Big One that punishes everyone who stayed long the SPX. Next up, a long-term chart (from 1973 to the present) of the SPX, adjusted to the trade-weighted U.S. dollar. Were this basic A-B-C pattern to hold, the SPX will reverse sharply in 2013 and fall to the nearest trendline around 600, with a drop into the 300s possible. Yes, yes, I know it's "impossible" since the "Fed has the market's back," but the Fed may have to buy most of the market if it wants to keep it elevated at current levels. As a lagniappe, there is a third pattern suggesting a major decline just ahead: Three Peaks and A Domed House Pattern Signals An End To The Bull Market . Anyone who has studied a few charts knows that it is usually possible to torture a chart to fit the pattern one has already selected as the "likely outcome" (i.e. confirmation bias). But even with this caveat firmly in mind, 2012's SPX bears an uncanny resemblance to the classic Three Peaks and A Domed House Pattern. Here is another analysis of three peaks and a domed house . Could these charts be way off in their forecast? Of course. Nobody knows what the market will do tomorrow, much less next month or next year. Maybe the bulls predicting a new high in early 2013 will be proven correct. We will just have to see what happens. But as the saying has it, "Forewarned is forearmed." Thank you, B.C., for sharing your charts with us. Average: 4.533335 Your rating: None Average: 4.5 ( 15 votes) Tweet Login or register to post comments 15597 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Bernanke's Libor Alternatives EURUSD Surges To 3-Week High; Risk-Assets Mixed Pump, Dump, And Pump; Black Gold Red, Stocks Green, Bonds Blue NYSE Volume: Is This Some Joke...? Yen Set To Regain Funding Crown Soon?
If The Market's Disconnect With Economic Reality is Over, Watch Out Below Submitted by Tyler Durden on 10/19/2012 18:14 -0400 Equity Markets Reality As market participants ponder the disappointing post-QEtc. performance on their 'Bernanke/Draghi-Put'-floored equities, perhaps these three charts will help in comprehending just how much hope there is in the world's equity markets. The disconnect from macro-fundamental is not unique, but has had significant and extremely rapid repercussions in the past. It seems, however, that just like AAPL, everyone believes everyone else to be the greater fool - and this time is different . Germany's DAX 'disconnected' from economic reality in 2007 (to the euphoric side) and in 2011 (to the dysphoric side). It seems once again that hope has taken over... The SP 500 also exhibits the same disconnect - though even more significantly... This happened before in the US... That didn't end so well either... Charts: Bloomberg Average: 5 Your rating: None Average: 5 ( 7 votes) Tweet Login or register to post comments 10272 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: All The Olympic Charts That's Fit To Print, And More Trade War Escalates: China Threatens US Over Renewable Energy The 4 Most Disconcerting Charts For European Equity Holders Europe 'Soars' To 4-Day High On Draghi 'Solution' Guest Post: Why QE Won't Create Inflation Quite As Expected
Fed Balance Sheet Composition Update Submitted by Tyler Durden on 10/06/2012 11:36 -0400 Bond Recession St Louis Fed System Open Market Account For those curious how the Fed's ongoing takeover of the US bond market looks like, below is a visual update. A simple maturity distribution: Over the week ending October 3rd, the average maturity of the Fed's System Open Market Account (SOMA) treasury holdings increased from 118.03 to 118.62 months. Before the onset of the Maturity Extension Program (MEP), the average maturity of the Fed's treasury holdings was around 75 months. The Fed has surpassed the original average maturity target of 100 months for the first MEP. The average duration of the Fed's (SOMA) holdings increased to 7.31 years (87.67 months) for US Treasuries in the October 3rd week from 87.33 months in the prior week. The measurement of duration risk translates to an average price decrease of approximately 7.31% for each percentage point increase in all yields. The net effect of maturing assets and treasury issuance over the week caused the average maturity of all marketable treasury securities to rise to 65.36 months from 65.28 months. The stock of the Fed's holdings reduced the average maturity of marketable treasury debt held by the private sector by 9.64 months from 9.58 months in the prior week, and the privately held public debt average maturity rose to 55.73 months from 55.70 months. Since the recession, the Fed has lengthened the average maturity and duration attributes of the SOMA. It appears that they have reduced the supply of issues mostly in the seven to ten year range, owning 70% of some issues in that range. And the punchline: The amount of ten-year equivalents held by the Fed increased to $1.333 trillion from $1.325 trillion in the prior week, which reduces the amount available to the private sector to $3.550 trillion. There were $4.884 trillion ten-year equivalents outstanding. The Fed owns 27.2% of the bond market expressed in 10 year equivalents. Assuming the Fed's balance sheet rises to $5 trillion by the end of 2014, this number will rise to nearly 60%. Source: SMRA and St Louis Fed Average: 5 Your rating: None Average: 5 ( 6 votes) Tweet Login or register to post comments 8551 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: The Fed Now Owns 27% Of All Duration, Rising At Over 10% Per Year Wall Street Gives Treasury Its Blessing To Launch Floaters; Issues Warning On Student Loan Bubble Is the Ten-Year going to 3%? 3bps To Go Until QE3 Makes Treasuries America's Second Safest Security Behold The Fed's Takeover Of The Bond Market
disabled. Guest Post: As M2 Money Supply Rolls Over, The Stock Market Will Follow Submitted by Tyler Durden on 07/11/2012 11:37 -0400 Submitted by Charles Hugh Smith from Of Two Minds As M2 Money Supply Rolls Over, the Stock Market Will Follow M2 money supply rose sharply, driving the stock market higher. Now it has peaked and rolled over. That does not bode well for the Bull market. Our Chartist Friend from Pittsburgh kindly shared a chart of M2 money supply and the SP 500 stock market index (SPX). The correlation between expansion of the money supply and the stock market is worth studying. The primary point is that “real growth,” i.e. rising wages and profits powered by increases in productivity, does not require massive growth of M2. Here is Chartist Friend from Pittsburgh's explanatory commentary : "He who controls the money supply of a nation controls the nation." President James A. Garfield Except during periods of exceptional earnings growth like we had during the pre-internet computer boom when companies like Microsoft, Oracle and Intel were improving business productivity by leaps and bounds, the trend of the stock market (and economic growth in general) tends to closely follow changes in Fed controlled money supply growth. The outlier earnings growth of the 1980's and early 90's PC and database revolution was so strong that the Fed was able to take its foot off the monetary accelerator without causing a corresponding drop in stock prices. Once every business was fully computerized in the mid 90's the Fed floored it again to support stocks and create the Internet Bubble. Since then every time the Fed has taken its foot off the M2 accelerator the market trend has turned negative and the economy has gone into recession. That appears to be what is happening right now. Note the clear correlation of the 1987 crash and the breakdown from a 20-year dome-top of M2 growth that occurred during the late 80's. The two downtrend lines are parallel on the chart. Thank you, Chartist Friend from Pittsburgh . As many observers have noted, you can expand the money supply but if that money ends up stashed as bank reserves, it never enters the real economy, nor does it flow into household earnings. The velocity of that "dead money" is near-zero. M2 declined in the housing bubble as the velocity of money skyrocketed: everyone was pulling money out of housing equity via HELOCs (home equity lines of credit) and spending the "free money" on cruises, furniture, big-screen TVs, boats, fine dining, etc. The recipients of that spending also borrowed and spent as if the "free money" would never end. If M2 expansion is the only thing propping up an artificial market, what happens to the stock market rally as M2 rolls over?
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