“To the intelligent man or woman, life appears infinitely mysterious, but the stupid have an answer for everything.” ~Edward Abbey
The Market Has Spoken: The Fed Made A Policy Mistake And "Quantitative Failure" Looms - What Comes NextSubmitted by Tyler Durden on 12/19/2015 14:43 -0500
"Since the risk of Quantitative Failure brings with it the risk of more extreme policies/politics in 2016, the natural hedges are gold & volatility. Gold in particular will be interesting to watch in coming months. The Fed’s determination to raise rates means gold prices should fall. If in contrast gold rises with Fed hikes that’s a clear sign of a “policy mistake” and investors anticipating the need for more inflationary policies next year."
Having closed lower for 8 of the last 9 weeks, gold has become the momentum-chasing hedge fund community's latest target. Despite empirical data showing no relationship between higher rates and 'lower' gold, the meme continues as Managed Money added to its already record short position in gold futures this week, pushing the leveraged bets to the most extremely bearish in history.
"In a worst case scenario, the real economy effects of the oil sector and the earnings slowdown hit the frothy commercial real estate and REIT sector, which in turn begin the widening of the contagion begun by energy high yield. Combine this with the sudden stop to lower quality energy credits I believe is inevitable and you likely have stall speed – or even recession. And that’s where subprime auto ABS, student loan securitization and US munis come into the picture for the US domestic economy. Those markets get hit in recession."
It is widely assumed that the gold price must decline when the Federal Reserve is hiking interest rates. It seems logical enough: gold has no yield, so if competing investment assets such as bonds or savings deposits do offer a yield, gold will presumably be exchanged for those. There is only a slight problem with this idea. The simple assumption “Fed rate hikes equal a falling gold price” is not supported by even a shred of empirical evidence.
"Rising rates and falling profits are not a good combination for asset prices, so we will turn sellers of risk in early 2016."
Depsite the exuberant buying-panic of the first Fed rate-hike in 9 years lifting stocks to within spitting distance of record highs, under the surface, equities are roiling. In fact, the average stock's distance from its highs is now at 19%... just outside of bear market territory.
While the S&P 500 closed the day higher by nearly a half of a percent, there were just 810 Advancing Issues on the NYSE vs. 2326 Declining Issues. As a percentage of the total, the Advancing Issues equated to just 25.8% of issues. If that sounds low, you are correct. Going back to 1965, it is in fact the 3rd lowest percentage of Advancing stocks of ANY day that the S&P 500 closed higher. In other words, out of 6,702 Up days since 1965, yesterday ranked 6,699th in terms of breadth.
"we moved to generally “neutralize” our positions by taking on derivative positions to hedge ourselves. We did so mid-morning yesterday and now are comfortable sitting through the Fed’s decision… or “non”-decision as the case may be… later this afternoon."
Soaring junk bond redemptions; rising investment grade (and high yield) yields pressuring corporate buybacks; record corporate leverage and sliding cash flows; Chinese devaluation back with a vengeance; capital outflows from EM accelerating as dollar strength returns; corporate profits and revenues in recession; CEOs most pessimistic since 2012, oh and the Fed's first rate hike in 9 years expected to soak up as much as $800 billion in excess liquidity. To Wall Street's strategists none of this matters: as Bloomberg observes, virtually every single sellside forecasts expects "no end to the bull market."
"It is time once again to seek the safety of the sidelines. This is not the time to be aggressively bullish of equities but rather this is the time for… as we say here in the South… “hunkering down,” for getting smaller, for curtailing exposure."
Dow Transports have been weak all year. Down 18.3% year-to-date, Trannies are set to close lower for a 4th straight quarter for the first time since 1994. Today's plunge broke below the August crash lows and pushed the index into bear market territory...
Since 1929, there have been only eight such instances, and each one was followed by bear market losses of 30% or more...
Elections are misunderstood. On the surface they are contests between zombies and cronies. The zombies (leftists, socialists, Democrats) want lots of little handouts. The cronies (rightists, Wall Streeters, Republicans) want fewer but bigger ones. All the loot comes from the voters – who willingly give up both their money and their liberty believing that, somehow, they are better off for it. But the real winner is the Deep State. It usually controls the candidates... and continues to gain power and resources, no matter which side wins. But the Deep State is not immune to setbacks.