The best silver lining Goldman Sachs found when faced with the total and utter collapse in their global leading indicator swirlogram was - (probably) stabilizing. The only improving factor across all their global economic components was the US initial jobless claims (and that has been a farce wrapped in a debacle for 2 months of 'glitches'). Having led global industrial production for a few months, it seems the indicator is crashing back to reality as the summer's hopefulness is exsanguinated from hard and soft data around the world.
Barring any exogenous shock, and assuming that current reported earnings estimates actually occur, the S&P 500 will be sporting a P/E ratio of 21.17x in 2015 if fed balance sheet correlations hold. However, if earnings growth stagnates then valuation multiples will rise dramatically from current levels. The further that multiples deviate from the long term mean the greater the eventual reversion will be. Should we have an expectation that the same monetary policies employed by Japan will have a different outcome in the U.S? Anything is certainly possible. However, history suggests that artificial, liquidity driven, market inflations always end poorly.
The only numbers that matter today are 16000, 4000 and 1800: those are the Fed's closing targets for the Dow Jones, the Nasdaq and the S&P. Following last night's Chinese euphoria which saw the Shanghai Composite surge by 2.87%, or up 61.4 to just under 2,200 on renewed hopes for Chinese reform by 2020, the Fed's price targets should all be quite easily achievable. And not even the rising home prices in 69 out of 70 cities year over year, and 65 over month - the same as last month, with new nome price inflation at 0.6% overall and 0.8% for the first tier cities, was able to put a dent in the reflationary spirits in the Mainland. Additionally, news that China would join the US and Europe in "adjusting" its GDP calculation method, which would add R&D expensing into the bottom line, and as a result boost the overall number, is, well, helping things. Finally, with today's POMO a rather whopping $3-$4 billion, it is only a matter of time before all three of the previously noted psychological resistances are promptly taken out by the Fed's open markets desk.
It is becoming increasingly obvious that we are seeing the disconnect between financial markets and the real economy grow. It is also increasingly obvious (to Citi's FX Technicals team) that not only is QE not helping this dynamic, it is making things worse. It encourages misallocation of capital out of the real economy, it encourages poor risk management, it increases the danger of financial asset inflation/bubbles, and it emboldens fiscal irresponsibility etc.etc. If the Fed was prepared to draw a line under this experiment now rather than continuing to "kick the can down the road" it would not be painless but it would likely be less painful than what we might see later. Failure to do so will likely see us at the "end of the road" at some time in the future and the 'can' being "kicked over the edge of a cliff." Enough is enough.
Discussion of a market bubble (in stocks, credit, bonds, Farm-land, residential real estate, or art) have dominated headlines in recent weeks. However, QEeen Yellen gave us the all-clear this morning that there was "no bubble." Are we currently witnessing a market bubble? It is very possible; however, as STA's Lance Roberts notes, if we are, it will be the first market bubble in history to be seen in advance (despite Bullard's comments in opposition to that "fact"). From a contrarian investment view point, there is simply "too much bubble talk" currently which means that there is likely more irrational excess to come. The lack of "economic success" will likely mean that the Fed remains engaged in its ongoing QE programs for much longer than currently expected - and perhaps Hussman's pre-crash bubble anatomy is dead on...
Following a brief hiatus for the Veterans Day holiday, the spotlight will again shine on treasuries and emerging markets today. The theme of higher US yields and USD strength continue to play out in Asian trading. 10yr UST yields are drifting upwards, adding 3bp to take the 10yr treasury yield to 2.78% in Japanese trading: a near-two month high and just 22 bps away from that critical 3% barrier that crippled the Fed's tapering ambitions last time. Recall that 10yr yields added +15bp in its last US trading session on Friday, which was its weakest one day performance in yield terms since July. USD strength is the other theme in Asian trading this morning, which is driving USDJPY (+0.4%) higher, together with EM crosses including the USDIDR (+0.6%) and USDINR (+0.6%). EURUSD is a touch weaker following a headline by Dow Jones this morning that the Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly, citing Germany’s Frankfurter Allgemeine Zeitung who source an unnamed ECB insider. The headline follows a number of similar stories in the FT and Bloomberg in recent days suggesting a split in the ECB’s governing council.
Whether it is the conference board, Gallup, Bloomberg, or pretty much any other measure of the economic confidence or consumer comfort in the US, the numbers have been falling (or plunging) despite the incessant rise of US equities. The reason this is of particular note, as we have discussed previously, is that this pattern of exuberant highs in stocks with fading confidence-inspiration has ominous overtones for future performance... (especially for those hoping for moar multiple expansion). The UMich data this morning merely confirms the trend with the lowest print since Dec 2011 (3 misses in a row). This is the biggest miss since Feb 2006!
Another day, another collapse in a measure of the 'peoples' confidence. Despite the animal spirits of euphoric dot-com bubble betting that is the new-normal US equity markets, it seems both rich and poor are not loving it. Bloomberg's consumer comfort index dropped to -37.9 - its lowest since October 2012 having dropped for the 6th week in a row. The last time we saw a collapse of this size, the Fed saved us all with QE3... what this time?
As the S&P 500 continues to push to one new high after the next, the bullish arguments of valuation have quietly given way to "it's all about the Fed." The biggest angst that weighs on professional, and retail investors alike, are not deteriorating economic strength, weak revenue growth or concerns over the next political drama - but rather when will the Fed pull its support from the financial markets. For the Federal Reserve, they are now caught in the same "liquidity trap" that has been the history of Japan for the last three decades. Should we have an expectation that the same monetary policies employed by Japan will have a different outcome in the U.S? More importantly, this is no longer a domestic question - but rather a global one since every major central bank is now engaged in a coordinated infusion of liquidity. Will the Federal Reserve "taper" in December or March - it's possible. However, the revulsion by the markets, combined with the deterioration of economic growth, will likely lead to a quick reversal of any such a decision.
Just as Friday ended with a last minute meltup, there continues to be nothing that can stop Bernanke's runaway liquidity train, and the overnight trading session has been one of a continuing slow melt up in risk assets, which as expected merely ape the Fed's balance sheet to their implied fair year end target of roughly 1900. The data in the past 48 hours was hot but not too hot, with China Non-mfg PMI rising from 55.4 to 56.3 a 14 month high (and entirely made up as all other China data) - hot but not too hot to concern the PBOC additionally over cutting additional liquidity - while the Eurozone Mfg PMI came as expected at 51.3 up from 51.1 prior driven by rising German PMI (up from 51.1 to 51.7 on 51.5 expected), declining French PMI (from 49.8 to 49.1, exp. 49.4), declining Italian PMI (from 50.8 to 50.7, exp. 51.0), Spain up (from 50.7 to 50.9, vs 51.0 expected), and finally the UK construction PMI up from 58.9 to 59.4.
The overnight fireworks out of China's interbank market, which saw a surge in repo and Shibor rates (O/N +78 to 5.23%, 1 Week +64.6 to 5.59%) once more following the lack of a follow through reverse repo as described previously, and once again exposed the rogue gallery of sellside "analysts" as clueless penguins all of whom predicted a quick resumption of Chinese interbank normalcy, did absolutely nothing to make the San Diego's weatherman's forecast of the overnight Fed-driven futures any more difficult: "stocks will be... up. back to you." And so they were, despite as DB puts it, "yesterday saw another round of slightly softer US data that helped drive the S&P 500 and Dow Jones to fresh highs" and "the release of weaker than expected Japanese IP numbers hasn’t dampened sentiment in Japanese equities" or for that matter megacorp Japan Tobacco firing 20% of its workforce - thanks Abenomics. Ah, remember when data mattered? Nevermind - long live and prosper in the New Normal. Heading into US trading, today the markets will be transfixed by the FOMC announcement at 2 pm, which will likely say nothing at all (although there is a chance for a surprise - more shortly), and to a lesser extent the ADP Private Payrolls number, which as many have suggested, that if it prints at 0 or goes negative, 1800 on the S&P is assured as early as today.
Following the lowest UMich confidence print in 2013, Gallup's economic confidence collapse, and Bloomberg's index of consumer comfort signaling major concerns among rich and poor in this country (in spite of record highs in stocks), today's Conference Board Consumer Confidence data continues to confirm a problem for all those 'hoping' for moar multiple expansion. From 80.2 in September, confidence collapsed to 71.2 (the largest MoM drop in 2 years) to its lowest in six months, and notably below expectations. As we have noted in the past a 10 point drop in confidence has historically led to a 2x multiple compression in stocks (which suggests the Fed will need to un-Taper some more to keep the dream alive). Hope for the future dropped to 7-month lows but what is perhaps most intriguiging, just as with the Bloomberg surveys, we are seeing the wealthiest cohorts confidence plunging (even as stocks soar to new highs). It would appear the Fed has lost its wealth effect inpiration.
For those curious what Bernanke's market may do today, we flash back to yesterday's AM summary as follows: "Just as it is easy being a weatherman in San Diego ("the weather will be... nice. Back to you"), so the same inductive analysis can be applied to another week of stocks in Bernanke's centrally planned market: "stocks will be... up." Add to this yesterday's revelations in which "JPM Sees "Most Extreme Ever Excess Liquidity" Bubble After $3 Trillion "Created" In First 9 Months Of 2013" and the full picture is clear. So while yesterday's overnight meltup has yet to take place, there is lots of time before the 3:30 pm ramp (although today's modest POMO of $1.25-$1.75 billion may dent the frothiness). Especially once the market recalls that the NOctaper FOMC 2-day meeting starts today.
Despite Joe Lavorgna's seemingly gigantic cognitive dissonance in the face of this report, the pending home sales data collapsed in September (and remember this is before the shutdown and was heralded at the time as buyers rushing to buy before the risk of the shutdown slowed acceptances). Affordability, argued by some serial extrapolators as still being 'relatively' positive - has drastically weighed on housing at the margin just as we argued previously. This is the first annual drop in 29 months, the biggest drop in 40 months, and the biggest miss against expectations in 40 months. Even the typically full of spin, NAR Chief economist had to admit "this tells us to expect lower home sales for the fourth quarter, with a flat trend going into 2014." Apparently, if one is to believe the spin, overheard everywhere in September: "Hmm, government may shut down next month - let's not buy a house."