Morgan Stanley

On the heels of a 59% plunge in new Class 8 orders, we get a fresh take on freight transportation from Morgan Stanley and as you might expect, the picture is most assuredly not pretty. The bank's TLFIs are bumping along at their lowest levels since the crisis for flatbed, hot van, and refrigerated, suggesting the malaise is widespread.

My overriding theme and the central drama for the coming year is that unexpected events can take on greater importance as the Federal Reserve ends its near-decade-long Zero Interest Rate Policy. Consensus premises and forecasts will likely fall flat, in a rather spectacular manner. The low-conviction and directionless market that we saw in 2015 could become a no-conviction and very-much-directed market (i.e. one that's directed lower) in 2016. There will be no peace on earth in 2016, and our markets could lose a cushion of protection as valuations contract. (Just as "malinvestment" represented a key theme this year, we expect a compression of price-to-earnings ratios to serve as a big market driver in 2016.) In other words, we don't think 2016 will be fun.

Two weeks ago we said that "those who have savings at US banks, please don't hold your breath to see any increase on the meager interest said deposits earn." We were wrong: some should certainly have held their breath, because as the WSJ reports today, "some bank customers won’t have to wait much longer to reap benefits from the Federal Reserve’s decision to raise interest rates." Some, such as clients of J.P. Morgan, which will begin raising deposit rates for some of its "biggest clients" in January. "Biggest" clients, of course, is a universal euphemism for "wealthiest."

"By now, it’s an all-too-familiar drill. After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization. A majority of financial market participants applaud this strategy. In fact, it is a dangerous mistake."

“To the intelligent man or woman, life appears infinitely mysterious, but the stupid have an answer for everything.” ~Edward Abbey

• Oil heads for third straight weekly loss as supply weighs (Reuters)
• BOJ's $2.5 Billion ETF Boost Seen Having Little Impact on Stocks (BBG)
• Japan core CPI seen flat in November, household spending down (Reuters)
• Dollar gets altitude sickness as BOJ disappoints (Reuters)
• Fed Hikes, but Some Rates Veer Lower (WSJ)
• White House calls for 'common sense steps' to help Puerto Rico (Reuters)

Earlier today Jefferies reported another quarter in which its Fixed Income revenue could best be described as dismal: Fixed Income posted a nominal $8.4 million in revenue: a whopping 83% collapse from the already subdued $48.6 million a year ago.  The biggest irony is that while other banks are clamoring to be allowed to "prop trade" again, Jefferies which has had the green light to do just that as it never got an FDIC bailout and remains the only sizable pure-play investment bank, just got crushed precisely due to its junk bond prop trading.

Soaring junk bond redemptions; rising investment grade (and high yield) yields pressuring corporate buybacks; record corporate leverage and sliding cash flows; Chinese devaluation back with a vengeance; capital outflows from EM accelerating as dollar strength returns; corporate profits and revenues in recession; CEOs most pessimistic since 2012, oh and the Fed's first rate hike in 9 years expected to soak up as much as $800 billion in excess liquidity. To Wall Street's strategists none of this matters: as Bloomberg observes, virtually every single sellside forecasts expects "no end to the bull market."

It's official: two of America oldest publicly traded companies will merge, with Dow and DuPoint merging as equals in a combined company that will have a $130 billion market cap and will be named DowDuPont. And while shareholders already benefited from the deal with shares of both consitutents rising by 10% in the days preceding the official announcement, the biggest loser are once again the employees: the combined company announced that as part of the $700 million in restructuring efforts, 10% of the combined company's employees will be laid off.

According to the latest set of emails released by the State Department, and first reported by the Daily Caller, Hillary intervened in a request forwarded by her son-in-law, Marc Mezvisnky, on behalf of a deep-sea mining firm, Neptune Minerals, to meet with her or other State Department officials.

From "Thundering Herd" to thundering-mad. Having recently laid off 100s of staff and cut compensation plans, AdvisorHub reports that Mother Merrill may be canceling Christmas for its roughly 14,500 brokers - "we’re hearing that in many regions the Bank of America-owned brokerage firm has sent out word that there will be no Merrill-financed holiday parties this year." Such Grinch-like moves have little precedent, and brokers in some areas have retaliated.

While it will hardly come as a surprise to its employees (who were warned a week ago that 25% of all fixed income workers would lose their jobs in the immediate future) most had hoped that the bailed out bank would at least have the ethics to wait with the layoffs until after the new year, now just three weeks away. It did not.

• Anti-Trump Effort Launches Super PAC (WSJ)
• Muslims decry Trump's proposal to keep them out of US (AP)
• Debate Heats Up Over No-Fly List, Gun Sales (WSJ)
• OPEC Takes Down Oil Majors as Lower-for-Even-Longer Kicks In (BBG)
• Chinese Companies Are Trapped in IPO Logjam (WSJ)
• Republican Ted Cruz vaults into first place in new Iowa poll (Reuters)

"The liquidity picture for EM corporates in 2017 looks less appealing, due to a 38% yoy increase in USD bond maturities (to USD122bn) and lingering uncertainty on commodity prices (an important component of the corporate sectors’ cash flow) and FX (a headwind for domestic-oriented players). A further depletion in cash buffers and reduced appetite for certain portions of the EM corporate universe may lead to increased refinancing stress in 2017."

The mainstream media is increasingly suggesting that we have once again entered into a 'Goldilocks Economy.' The problem is that in the rush to come up with a 'bullish thesis' as to why stocks should continue to elevate in the future, they have forgotten the last time the U.S. entered into such a state of 'economic bliss.' You might remember this: "The Fed's official forecast, an average of forecasts by Fed governors and the Fed's district banks, essentially portrays a 'Goldilocks' economy that is neither too hot, with inflation, nor too cold, with rising unemployment." - WSJ Feb 15, 2007. Of course, it was just 10-months later that the U.S. entered into a recession followed by the worst financial crisis since the 'Great Depression.'