For the US, it’s now shooting fish in a barrel – but just for now. The three-pronged plan the Fed has started to execute is plain for everyone to see... And it will have the rest of the world begging for mercy.
"October: This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February.” - Mark Twain
"When Bad News Becomes Bad News" - Albert Edwards Presents His "Second Most Imporant Chart To Investors"Submitted by Tyler Durden on 10/02/2014 18:16 -0400
"amid the inevitable impending global economic and financial carnage, when people, like Queen Elizabeth ask, as she did in November 2008, why no-one saw this coming, tell them that many did. But just like in 2006, before the Great Recession, investors once again chose to tilt their ears towards the reassuring siren songs of the Central Bankers and away from the increasingly hysterical ramblings of the perma-bears and doomsayers."
We have now done the math and compiled the Q2 earnings for the S&P 500 and we can indeed confirm that (at least in the second quarter) the buyback part is not only over but has ended with a thud, with the total notional amount of buybacks completed in Q2 plunging by 27% in Q2 to "only" $117 billion - the lowest since Q1 of 2013!
"We had a relatively dry period during the Medieval Warm Period, 900-1400AD. There were several prolonged periods of drought that lasted decades to over a century during that time. That period was followed by a cooler, wetter period (the Little Ice Age) that continued until the 19 century. However, the tree-ring records suggest that the 20 century was unusually wet, meaning we had fewer droughts on average than the previous 1000 years.... the past decade in California and the West has been pretty dry, and the concern is that these climate conditions could continue for several more decades. We've seen these broader cycles of wet-dry in the past."
Native Americans appear to have been in a constant state of warfare, with many tribes becoming extinct well before the arrival of Columbus. Not only did these tribes have to compete for food but also genes, where problems associated with inbreeding likely led to the common practice of raiding one another for women and slaves. The arrival of the Europeans did not make things any better, and not before long they were also fighting among each other.
"two landmark firsts have occurred only recently, with the S&P500 breaking above 2,000 and the 10y bund yield breaking below 1%. Our Ice Age thesis has long called for sub-1% bond yields and I see this extending to the US and UK in due course. It is the equity markets where I have been consistently surprised. QE has been an essential driver for the equity market, providing the fuel for the heavy corporate bond issuance being used for share buybacks. Companies themselves have been the only substantive buyers of equity, but the most recent data suggests that this party is over and as profits also stall out, the equity market is now running on fumes." - Albert Edwards
Climate change continues to drive energy policy, despite the fact that there is no way to reconcile eradicating energy poverty in much of the world with reducing carbon dioxide emissions. This is one of the many conundrums of the climate change debate - a debate that has been taken over by social media and propaganda, while scientists struggle to get back into the game and engage the public.
- EU to weigh extensive sanctions on Russia (FT)
- U.S. lifts flight ban to Israel (Reuters)
- Russia says will cooperate with MH17 probe led by Netherlands (Reuters)
- Norway faces ‘concrete and credible’ terrorist threat (FT)
- Don’t Tell Anybody About This Story on HFT Power Jump Trading (BBG)
- But... but... PMI: Unilever Sales Growth Misses Estimates on Asian Slowdown (BBG)
- World’s Biggest Wealth Fund Reviews $8 Billion Russian Stake (BBG)
- Qualcomm latest US tech company to reverse in China (FT)
- Hamptons Home Sales Rise as Buyers Find More Inventory (BBG)
Borrowing heavily from Albert Edwards "Ice Age" analogy of our new normal, PIMCO's Bill Gross, after explaining why he does not have a cell phone, discusses the "frigidly low" levels of "The New Neutral" in this week's letter. Confirming Ben Bernanke's "not in my lifetime" promise for low rates and a lack of normalization, Gross explains that the "the new neutral" real policy rate will be close to 0% as opposed to 2-3% (just as in Japan) leaving an increasingly small incremental rise in rates as potentially responsible for popping the bubble. Gross concludes, "if 'The New Neutral' rates stay low, it supports current prices of financial assets. They would appear to be less bubbly," clearly defending the valuation of bonds knowing that he can't expose stocks as 'bubbly' without exposing his firm to more outflows.
Like Bush Saying “You’re Either With Us or Against Us”
... the most effective alpha-generating investment strategies are parasites. An alpha-generating strategy of the type I’m describing uses the market itself as its habitat. It’s not an investment strategy based on the fundamentals of this company or that company – the equivalent of a geographic habitat – but on the behaviors of market participants who are living their investment lives in that fundamentally-derived habitat. A parasitic strategy isn’t the only way to generate alpha – you can also be better suited for a particular investment environment (think warm-blooded animal versus cold-blooded animal as you go into an Ice Age) and generate alpha that way – but I believe that the investment strategies with the largest and most consistent “edge” are, in a very real sense, parasites.
We would be the first to espouse the view that, in speculative markets, the 'sentimentals' can long trump the fundamentals, but there is a counterpoint to such a projection, not that many wish to countenance it. The dispiriting truth is that some of the steam has already gone out of the US and were this to continue to be the case, given that esteemed institution’s pathological aversion to short-term difficulty, the Fed's "taper" might yet prove an all too short-lived gesture in the direction of a belated restoration of monetary sanity. As the following 3 charts suggest, equity 'sentimental' valuations are at extremes and fundamentals are deteriorating rapidly, making for an uncomfortable rock- and hard-place-straddle for a Fed that faces 4 reasons it has to Taper (sentiment, deficits, technicals, and international resentment).
If You Don't Buy Global Warming, Great ... Use This Info to Talk to Your Friends Who Do