It is increasingly certain that the future will not be like the past. Previous downturns have been equally devastating but the primary causes eventually reversed themselves; low commodity prices recovered and damaging government policies were rescinded. This recovery will be different for a variety of reasons which will combine to cap growth, opportunity and profits, even if oil and gas prices spike. The following major changes appear permanent...
Japan has proven that decay can be stretched into decades, but it has yet to prove that gravity can be revoked by central bank monetary games.
The stock market and the economy are moving in two completely different directions right now. Even as stock prices soar, big corporations are defaulting on their debts at a level that we have not seen since the last financial crisis. In fact, this wave of debt defaults have become so dramatic that even mainstream media is reporting on it...
"Our “Japanification” theme argues for big, fat, volatile trading ranges being the norm. The rallies (Japan rallied +20% every year during the 1990s (Chart 8) and the fades are always driven by Policy (panic & complacency), Profits (troughs & peaks in PMI’s) & Positioning (fear & greed). As bulls begin to dominate, confidence in the macro improves & the Fed starts to talk-up prospect of rate hikes, we would use Q2 to add to volatility exposure." - BofA
The market is standing at the proverbial “crossroads” of bull and bear. From a “fundamental” perspective there is not much good news. The past week we saw numerous companies beating extremely beaten down estimates. However, while JPM and C got a boost to their stock price, the actual earnings, revenue and profits trends were clearly negative. But that is the new normal. We live in an environment where Central Banking has taken control of financial markets by leaving investors “no option” for a return on cash. Therefore, the “hope” remains that asset prices can remain detached from underlying fundamentals long enough for them to catch up.
So what do you do? Play the short-term chase the market game or the longer-term wealth devastation game. The choice is yours to make, the consequences will be for all to share. “I will tell you my secret: I never buy at the bottom and I always sell too soon.” – Baron Nathan Rothschild
What is clear is that the Federal Reserve has gained control of asset markets by gaining control over investor behavior. “Are you afraid of a market crash? Yes. Are you doing anything about it? No.” Again, it’s back to fundamentals versus expectations. Someone is going to be very wrong.
As the growth mirage fades (and short-squeeze ammo runs out), so crude and copper carnage is reappearing. Amid its biggest plunge since early Jan, Copper is now down 10 of the last 12 days and crude is plunging back towards it 50-day moving average. Amid this bloodbathery, precious metals are bid as Saxo Bank sees Gold "heading back to its highs and beyond."
The market reaction from last week’s dovish FOMC statement took many by surprise, including BofAML's HY Strategy team, but as they say the High-Yield Emperor has no clothes, warning that the underlying commentary provided by Chair Yellen shows the vulnerability for high yield issuers to longer-term growth trends. Couple the deteriorating fundamentals for HY issuers with downgrades outpacing upgrades by a ratio of 3.5:1 and a worsening of global growth potential, and they believe the recent rally, though boosted by strong inflows and cash generation, will ultimately fade.
When it comes to the "here and now", which in the Fed's centrally-planned market is driven almost excusively by momentum ignition algos, complacency indeed rules (VIX 13). But even the merest glimpse into the near future, or rather how the present environment may disconnect with what may happen tomorrow, or next week, or, as the case may be, in three months, institutional investors are more concerned than ever before. But is this a confirmation that the US stock market is about to have a new "Deutsche Bank" moment?
Today Janet Yellen and the FOMC will go back to square one and try to reset global expectations unleashed by the ill-fated December rate "policy mistake" hike, when at 2pm the Fed will announce assessment of the economy, even if not rate hike is expected today. Just like in December the Fed will be forced to telegraph that it is hiking rates as a signal of a strengthening US, and global, economy where "risks are balanced" and hope that the subsequent global reaction will not be a rerun of what happened in January and February when confusion about the Fed's intentions led to a global market rout.
Call buying of stock options has been extremely subdued relative to puts recently – typically a bullish contrarian signal; however...
What are the “top trumps” that could send bond, credit and equity markets substantially higher or lower than currently expected? Here are the six "positioning, policy and profits" indicators that will determine the next leg in the market.
With yesterday’s impressive equity rally, every trader is asking the same question: “Can U.S. equities go green on the year?” To think through this question, we outline the scenarios that DO push equities higher (a good jobs number, a quiescent Fed, and good economic data) and compare them to those that DON’T (presidential politics, oil prices, and corporate fundamentals).
“Betting against gold is the same as betting on governments. He who bets on governments and government money bets against 6,000 years of recorded human history.” – Charles De Gaulle