Stocks and Bonds Correlation Inversion Next to Go Belly Up?
Editorial by Vince Lanci:
Knock- Out Calls and Powell Puts
Friday, Mark Fisher gave his feelings that both bonds and stocks are due for a fall and said that 'shorting both in a ratio format' would be something to look at. Before delving into the brief but insightful interview, I'd like to share from a macro view why I agree, though the timing eludes me.
To me this has to happen as a harbinger to the end of QT. When S&P touches as low as 2000, I'd imagine bonds wont be doing well. Only then do I feel we get a "Powell Put". All we've seen this past month was a a hopium based "knock-out call" . Fisher's comments are consistent with my macro view that believes stocks are in denial. US markets have a lot more hope of QT ending than Powell has intention of ending it. And thus, a lot further to fall. I don't know the speed, but the direction is seemingly obvious. Nothing will change until all the hope and volatility lower is shaken out.
QT Won't End Like You Think it Will
It has been my contention that when QT dollar drainage becomes too much, QT itself won't end. The government will most likely end only one leg of the process. QT depends on collaboration between the treasury and the Fed. While the Treasury offloads its bloated balance sheet (leg one), the Fed hikes rates (leg two) to mute the inflationary effect of issuing more debt. They most probably wont stop offloading debt but they will stop hiking; at least at first. QE comes after that
QT Reduced to the Absurd
Left as things currently are the glide path in front of us can be imperfectly explained by reducing QT to absurd ends. If QT continues, there will be an "infinite" amount of debt issued and a solitary USD to use to buy that debt. This forces satellite countries to pick sides between the current reserve currency and the next one however that may be tied to the Yuan in part.
Only when dollar drainage becomes too much for everyone else will our own equity markets truly reflect the issue; then we get the swan song for both bonds and stocks Fisher suggests as another QE is beseeched. Then everything can scream higher with real assets and we get whiff of bad inflation as it becomes obvious the only way out is to permanently monetize our debt
Mark Fisher on Nat Gas Next Week, Shorting Paper Assets, and Pizza Wars
On Friday, Mark Fisher stopped by for a brief one-on-one with Michael Aronovitz. We pulled that interview out of the OppTrader report as as a 'Best of ' piece based on subscriber views.
During the chat, Mark opined on stocks and bonds:'paper assets may be a good sale here in general'. He got specific citing that he's thinking about a ratio short combo of selling stocks and bonds and the reasons why.
Also discussed was energy with an emphasis on NG next week. In the past Mark has noted that expiring energy contracts frequently have a mini short covering rally. Friday he made particular note that while the worst may be over for Nat Gas shorts, he found it hard to believe 'that anyone would want let their shorts go out uncovered' and that last minute variables make it very risky to do so. He sees the Jan NG contract going out higher, or at least making a final spike before rolling off.
Finally, special note was made of what he called the impending "pizza wars". We will leave that for the listener to decipher except to offer this: If a price war in a relatively recession resistant industry were to take place, that could catch a lot of longs flatfooted
We think this is a good, concise interview where answers were given and rationales for options explained if not in this interview, in previous ones Mark has given on these topics- Vince Lanci
OppTrader Weekly Report:
Weekly ES Chart: Surely the Fed will save us
Daily ES Chart: Sell The Rip indeed
- GLOBAL SLOWDOWN: This past week China, EU, Japan all reported softer than expected data.
- FRUGAL FED : Powell likely to raise again this week making it 4 for 2018.
- TRADE PARALYSIS: China/US tensions drag on, handcuffing corporate and gov't leaders' ability to plan for 2019 and beyond.
- THE EUs FULL PLATE: between Brexit, The French tax revolt, and the on-again off-again Italian budget battle, EU leaders have a lot to juggle
- ENERGY DILEMMA: Crude Oil is -10.5% YTD and 33% off the October 3, 2018 highs of $77 a barrel even as OPEC details remain unresolved
- HOUSE POOR: US Housing market cooling show no signs of slowing
- WTI could not hold a bid - any rally above $53 has been sold
- S&P 500 closed below 50 and 100 day moving averages.- technically all look horrible.
- Sector Losers: small caps, tech, and transports took turns leading sell-offs
- Precious metals trading well despite stronger US Dollar (Gold +1.3% Silver +2.9%) - buy Friday's ugly action may spell the end of that. Watch the CNH
- Financial ETF -12% YTD, 17% off September high - but worse than we expected
- Technology ETF +2% YTD, 15% off October high- still up on year despite panic
- Transportation ETF -10%, 18% off September high - in line with Tech sell-off
- Home Builders ETF -24%, YTD, 30% off January high. - OppTrader regional survey says residential inventory overhang is toxic, re-purposing commercial space a struggle
As we enter the second half of December have a look at MTD performance:
- Lessons from Larry Benedict on how to shake a trading slump (free webinar).
- Intro to Volatility Concepts - Echobay's Vince Lanci (powerpoint)
- Brynne Kelly and Mike Korn Talking Energy (Nat Gas Cash vs Futures)