Just 2 months ago, the illustrious muppet catchers at Goldman Sachs stated that both stocks were 30-45% overvalued but lifted its year-end target in what we subjectively described as 'moronic drivel'. Then, 2 short weeks after that 'upgrade', the same thought-provoking sell-side strategist downgraded stocks on the basis that a 'sell-off in bonds could lead to short-term weakness in stocks'. Now, with the S&P 500 closing at new record highs on the worst employment data of the year, Goldman is at it again - upgrading equities to overweight for the next 3 months, rolling index targets forward, and piling investors into high-yield credit. Welcome to muppetville...
"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
- Obama says Missouri shooting death tragic, reflection needed (Reuters)
- U.S. Weighs Iraq Rescue Mission to Save Yazidis (WSJ)
- Maliki says Abadi's appointment as Iraqi PM 'has no value' (Reuters)
- Iran Joins U.S. in Backing Replacement for Iraq’s Maliki (BBG)
- Kurds Push Attack in North Iraq as Maliki Clings to Power (BBG)
- Obama Donors Embrace Corporate Inversions He Criticizes (BBG)
- Syrian Forces Advance on Aleppo, Rebels Fear Another Siege (WSJ)
- Israel, Palestinians pursue Gaza deal with ceasefire clock ticking (Reuters)
- Ebola Drug’s Success Bolsters Approach for Other Diseases (BBG)
- With Natural Gas Byproduct, Iran Sidesteps Sanctions (NYT)
- Kazakhs to Hoard Food as Putin Sanctions Rattle Alliance (BBG)
The Loudest Warning Yet: "This Stage Should Lead To Increased Risk... System Less Able To Deal With Such Episodes"Submitted by Tyler Durden on 08/06/2014 11:29 -0400
"Suppression of yield and vol induces investors to take on more risk (QE III). The market clings to perception of certainty regarding outcomes, despite the Fed shifting commitment modes from time or level-based to data dependent. This stage of policy should eventually lead to increased uncertainty and risk." Translation: the TBAC itself - i.e., America's largest banks - whose summary assessment this is, is now actively derisiking.
The three charts below are still another reminder that the Fed’s heedless fueling of the third financial bubble this century has done enormous damage to the internals of financial markets. In this case, investors and savers being brutally punished by ZIRP were herded into bonds funds in a desperate scramble for yield. Yet the market’s structural liquidity condition has gone in the opposite direction. Dealer inventories of corporate bonds have plummeted by nearly 75% from pre-crash levels, meaning that the ratio of dealer inventories to bond fund assets has virtually been vaporized. The implication is no mystery. When the financial markets eventually succumb to a “risk-off” selling panic, the corporate bond market will gap down violently, "everyone is hoping to be first through the exit,” warns Citi's Matt King, "by definition, that’s not possible."
Yesterday, in what was probably a case of moronic drivel penner's remorse, the same firm which just upgraded its S&P price target by 150 points two weeks ago, decided to... downgrade stocks. But only kinda, sorta and only for the next 3 months: Kostin is unwilling to go so far as to tell the whole truth so while he did downgrade stocks to Neutral through October, he is still Overweight equities over the next 12 months. In other words, sell in July but don't go away, and keep on buying over the next 12 months, or something. To wit: "We downgrade to neutral over 3 months as a sell-off in bonds could lead to a temporary sell-off in equities. This makes the near-term risk/ reward less attractive despite our strong conviction that equities are the best positioned asset class over 12 months, where we remain overweight."
As we have been highlighting for a few weeks, something is rotten in high-yield credit markets. This week, the mainstream media is starting to catch on as major divergences in performance (high-yield bond spreads are 30-40bps off their cycle tights from just prior to MH17 even as stocks rally to new record highs) and technicals weaken. However, as BofA warns, flows follow returns and this week saw the biggest outflows from high-yield funds in more than a year. Investment grade bonds saw notable inflows as investors chose up-in-quality, rather than reach-for-yield, for the first time in years... equity investors, pay attention.
It appears "reach for yield" has consequences after all - and remember how exuberant the market (stocks) were after PR managed to get that bond off earlier in the year? Quietly behind the scenes and away from the exuberant stock market trading headlines of the mainstream media, Muni bond markets are in turmoil. Thanks to the 'shenanigans' in Puerto Rico - after lawmakers last month approved a bill allowing some public corporations to restructure debt - PR bonds have collapsed to record lows (and dragged a number of large Muni funds with them).
"US lending to businesses is reaching record levels but banks are privately warning that the activity should not be seen as evidence of an economic recovery." And the stunner: "Much of the corporate lending is going to fund payouts to shareholders, finance acquisitions and fuel the domestic energy boom, bankers say, rather than to support companies’ organic growth."
Abe's honeymoon is over. Following nearly two years of having free reign to crush the Japanese economy with his idiotic monetary and fiscal policies - but, but the Nikkei is up - the market may have finally pulled its head out of its, well, sand, and after last night's abysmal economic data from Japan which saw not only the highest (cost-push) inflation rate since 1982, in everything but wages (hence, zero demand-pull) - after wages dropped for 23 consecutive months, disposable income imploded - but a total collapse in household spending, the USDJPY appears to have finally been dislodged from its rigged resting place just around 102. As a result the 50 pip overnight drop to 101.4 was the biggest drop in over a month. And since the Nikkei is nothing but the USDJPY (same for the S&P), Japan stocks tumbled 1.4%, their biggest drop in weeks, as suddenly the days of the grand Keynesian ninja out of Tokyo appear numbered. Unless Nomura manages to stabilize USDJPY and push it higher, look for the USDJPY to slide back to double digits in the coming weeks.
These Fake Rallies Will End In Tears: "If People Stop Believing In Central Banks, All Hell Will Break Loose"Submitted by Tyler Durden on 06/24/2014 15:11 -0400
Investors and speculators face some profound challenges today: How to deal with politicized markets, continuously “guided” by central bankers and regulators? In this environment it may ultimately pay to be a speculator rather than an investor. Speculators wait for opportunities to make money on price moves. They do not look for “income” or “yield” but for changes in prices, and some of the more interesting price swings may soon potentially come on the downside. They should know that their capital cannot be employed profitably at all times. They are happy (or should be happy) to sit on cash for a long while, and maybe let even some of the suckers’ rally pass them by. As Sir Michael at CQS said: "Maybe they [the central bankers] can keep control, but if people stop believing in them, all hell will break loose." We couldn't agree more.
Believe it or not, the main driver of risk overnight had nothing to do with Iraq, with the global economy or even with hopes for more liquidity, and everything to do with a largely meaningless component of Japan's future tax policy, namely whether or not Abe (who at this pace of soaring imported inflation and plunging wages won't have to worry much about 2015 as he won't be PM then) should cut the corporate tax rate in 2015. As Bloomberg reported, Abe, speaking to reporters in Tokyo today after a meeting with Finance Minister Taro Aso and Economy Minister Akira Amari, said the plan would bring the rate under 30 percent in a few years. He said alternative revenue will be secured for the move, which requires approval from the Diet.
For the first time since early 2010, the risk of European investment grade credit is lower than that of the US. As BofA notes, recall that the European sovereign crisis escalated in the first part of 2010, as Greece had to be bailed out for the first time, and concerns spread to other countries in the periphery. However, that European spreads have now recovered - after trading at times more than 60bps weaker than US spreads - reflects more on differential technicals (flows) than fundamentals (reality). Credit spreads are currently driven mainly by technicals; this is not to say that technicals in the US credit market are not strong – they are – only that European technicals are stronger. Furthermore, with now completely divergent central banks, BofAML believes that European technicals are going to remain stronger for longer. As they conclude, "relatively stronger US fundamentals lead to relatively weaker technicals," - or put another way "good news is bad news" for US credit markets...
The central banks have created moral hazard on a scale which is simply unbelievable and set a stage for a bonfire of the vanities seldom, if ever, seen in history. Professional Investors who have spent a lifetime playing these contrarian opportunities offered by human behavior are being carried out on stretchers as historic market behaviors fail to materialize. "Never in my 30+ year career as a market observer have I seen so many out on a limb which is about to be sawed off." Those who live within the matrix are fully loaded for a recovery which is not and will not appear. But when the leverage fails, the world’s developed economies will be thrust into the next leg of the cleansing process of deleveraging and the destruction of it will be equally bigger. This conclusion is firmly on the horizon; let’s call it the great insanity.
If predicting yesterday's EURUSD (and market) reaction to the ECB announcement was easy enough, today's reaction to the latest "most important ever" nonfarm payrolls number (because remember: with the Fed getting out of market manipulation, if only for now, it is imperative that the economy show it can self-sustain growth on its own even without $85 billion in flow per month, which is why just like the ISM data earlier this week, the degree of "seasonal adjustments" are about to blow everyone away) should be just as obvious: since both bad news and good news remain "risk-on catalysts", and since courtesy of Draghi's latest green light to abuse any and every carry trade all risk assets will the bought the second there is a dip, the "BTFATH mentality" will be alive in well. It certainly was overnight, when the S&P500 rose to new all time highs despite another 0.5% drop in the Shcomp (now barely holding on above 2000), and a slight decline in the Nikkei (holding on just over 15,000).