If all it took to push stocks to ever recorder(est) highs, granted on no volume, but recorder(est) highs nonetheless, was for correlation algos to pick a carry FX pair trade du jour which to push the Nikkei, or the Dax, or - most frequently - the S&P higher, then all equity indices would already been in scientific digit territory. And since they aren't, it is only logical that prosperity through currency debasement can only "work" for so long.
But how long? Well, when it comes to the primary carry pair du jour, the Dollar-Yen, the answer may be just a few hundred pips more, before it all comes unglued for Japan's Prime Minister whose first stint in the role ended in a prophetic bout of epic diarrhea, Shinzo Abe.
The oil industry is no longer what it once was, it’s not even a normal industry anymore. Oil companies sell assets and borrow heavily, then buy back their own stock and pay out big dividends. What kind of business model is that? Well, not the kind that can survive a 40% cut in revenue for long. Cheap oil a boon for the economy? You might want to give that some thought.
While the biggest news of the day will certainly be China's rate cut (and the Dutch secret gold repatriation but more on the shortly), here is a list of all the other central-banking/planning events which have moved markets overnight, because in the new normal it no longer is about any news or fundamentals, it is all about the destruction of the value of money and the matched increase in nominal asset values.
"The multiple expansion phase of the current bull market ended in 2013. The strong S&P 500 YTD price gain of 10% roughly matches the realized year/year EPS growth of the index. The index has climbed by 17% annually during the past three years as the consensus forward P/E multiple surged by nearly 60% from 10x to 16x. ... We forecast US stocks will deliver a modest total return of 5% in 2015, in line with profit growth. The US economy will expand at a brisk pace. Corporations will boost sales and keep margins elevated allowing managements to both invest for growth and return cash to shareholders via buybacks and dividends. Investors will cheer these positive fundamental developments."
"We are still amazed by the chart [below], but it summarises the problem for those seeking to short stocks with fundamental weaknesses. In the last three years, the MSCI World Index has risen by 38% (11% per annum) whilst reported profits have risen by just 3% (that’s just 1% per annum!). As the events of last month attest, central bank actions–not profits–are driving equities forward." - SocGen
As US QE has come to an end, depriving the world of US$1 trillion printed dollars a year, SocGen's Andrew Lapthorne warns, there are still plenty of things for investors to be concerned about. Indeed with asset prices where they are, investment returns look paltry from here on, as not only is there a long list of macroeconomic issues to worry about, but bottom-up firm level indicators are also flashing red. Valuations, as measured by median price to cash flow ratios, are near historical highs, and the spread of company valuations within the market is near historical lows. The implication is that downside risks are mispriced.
After a brief hiatus the previous week, speculators have piled back into the most-over-crowded trade in the world - Long The US Dollar. As Goldman Sachs notes, overall USD speculative net long positioning increased $2.0bn to $45.7bn - a new record high.
Every day for the past several years, sometime after 3pm, bullish market participants exhale a sigh of relief when as if out of nowhere, an "unexpected" surge of buying lifts stocks into the 4 pm close. There are several explanations for what some have dubbed if not Divine, then certainly centrally-planned intervention. This is the time when ETF creation and (far less frequently) redemption takes place. As a result, in a world in which the bulk of liquidity has shifted away from single name stocks and even futures toward ETFs, trends in the creation and redemption of ETFs are key to watch to determine how the market may move purely for to technical reasons (since fundamentals died some time in 2009). Which is why we note, with little surprise, that according to SocGen, Equity ETFs posted a record level of monthly creations in October, driven by US, regional eurozone and UK indexations, perhaps explaining the relentless levitation of the market on ever lower volume especially in the latter part of the day.
"Japan is no Zimbabwe. Neither was Israel, yet from 1972 to 1987 its inflation averaged nearly 85%. As its CPI rose nearly 10,000 times, its stock market rose by a factor of 6,500 … Regular readers know that I don’t generally make forecasts, but that every now and then I do go out on a limb. This is one of those occasions. Mapping Israel’s experience onto Japan would take the Nikkei from its current 9,600 [as of October 2010] to 63,000,000. This is our 15-year price target." - Dylan Grice
Back in late September, we posted what Albert Edwards thought at the time was "The Most Important Chart For Investors" which was quite simply, a chart of the USDJPY. Considering the BOJ's overnight move, he was absolutely correct. So for all those who missed it, here it is again, because it explains not only where the Yen is headed next, but why, sadly, this could well be the end of Japan and the mirage of a recovery that has had everybody hypnotized for the past 6 years.
QE destroys societies, economies and financial systems, it doesn’t heal them. So maybe it’s a touch of genius that the great powers of global finance have first pushed Keynes into the academic world and then academics like Bernanke and Yellen into positions such as head of the Fed, making everyone blind to the fact that what they think is beneficial, including many who think they’re real smart, actually hurts them most. This whole thing is so broken and perverted it’s getting hard to understand why anybody would want to continue clinging on to it. But then, what does anybody know? 95%+ of people have been reduced to pawns in someone else’s game, and they have no idea whatsoever.
Burst Chinese Housing Bubble Leads To First Annual Price Decline Since 2012; Prices Drop In Record 69 CitiesSubmitted by Tyler Durden on 10/24/2014 08:04 -0400
It has been over six months since the Chinese housing bubble has popped. What's worse, as overnight housing numbers out of China confirmed, the government has so far failed to contain the fallout, and according to the National Bureau of Statistics, which is anything but, after a fifth straight monthly decline, Chinese home prices have now wiped out all price gains in the past year. This was immediately spun as bullish by media outlets and sellside experts as "raising expectations the government will have to implement more economic support measures to cushion the blow." I.e., buy stocks because central banks will push risk prices artificially higher yet again. In other words, bad is still good and failure continues to be success.
Today US activity will be very light given the Columbus Day holiday. As DB summarizes, we have a relatively quiet day for data watchers today but the calendar will pick up tomorrow and beyond with a big focus on inflation numbers amongst other things. Indeed tomorrow will see the release of Germany’s ZEW survey alongside CPI prints from the UK, France and Spain. Wednesday’s data highlights will include the US retail sales for September, the Fed’s Beige Book, CPI readings from China and Germany, US PPI, and the NY Fed Empire State survey. Draghi will speak twice on Wednesday which could also be a source for headlines. On Thursday, we will get Industrial Production stats and the Philly Fed Survey from the US on top of the usual weekly jobless claims. European CPI will also be released on Wednesday. We have the first reading of October’s UofM Consumer Sentiment on Friday along with US building permits/housing starts. Yellen’s speech at the Boston Fed Conference on Friday (entitled “Inequality of Economic Opportunity”) will also be closely followed.
With the USD experiencing its longest stretch of weekly gains since Bretton Woods, it appears, as SocGen notes, that recent currency movements have triggered nostalgia of the pre-crisis world when dollar strength was synonymous with a prosperous global economy. However, given the extreme positioning and potential for policy-maker complacency, SocGen warns the paradox is thus that a strong dollar tantrum could be a more worrying scenario than a Fed tightening tantrum.
Which incidentally has nothing to do with stocks or bonds, and everything to do with all-important FX. To wit: "If a clear break in the yen downwards against both the dollar and euro is occurring, not only will this spell trouble for the beleaguered Chinese economy and exacerbate deflation in the west, but it will also break the spell of German economic dominance"