Tuesday, November 22, 2016

And you get an All-Time High and you get an All-Time High and you get....

Remember the famous Oprah episode "And you get a car, and you get a car and you get a car...."?  Well, that's the way the market has acted ever since the election 2 weeks ago.  Everything is perfect in a world that was apparently falling apart just two short weeks ago, so of course all four major US stock indexes hit new record highs yesterday.  If you want the same old tired explanation of why this happened you can click over to CNBC but I'll give you an alternative view because apparently alternative news is all the rage these days.

1) Everyone expected a crash with a Trump election so obviously the opposite had to happen.  If there is one consistent theme I've discussed here over the past 8 years, it's that when everyone expects the market to do one thing it does the exact opposite.  While we did get an immediate crash in response to the election results, the overnight buyers turned the tide and that let the computers run amok.

2) The stock market has become a full game simulation. This is another topic we've discussed before, but in the past you would have looked at various policies of Mr. Trump, assigned a likelihood of their implementation and then discounted that back 3-5 years to assign a value to those policies.  So for example, you might say, if every project proposed were enacted it might boost Caterpillar sales by 8% in 2020 which could increase earnings by 5%-10% so maybe the stock could go up 5-10% over the next 4 years.  Instead, the computer run 50,000 of these scenarios overnight and decided that Caterpillar should go up 8% in two days based on some hope of future business opportunities (and ignoring the fact that year over year sales at Caterpillar have now fallen for 47 straight months).

The Trump rally is based on the assumption that he will get Congress to approve more shovel-ready infrastructure projects.  While I question how many more projects like this even exist (it seems like every bridge from Canada to Washington, DC is under construction), remember that we are running a $1 Trillion deficit annually.  Debt levels are at almost $20 Trillion and Trump wants to SPEND MORE and cut taxes (ie, bringing in less revenues).  The best case scenario I've seen is that in Year 1 we'd have a $2 Trillion deficit under the Trump Administration.  Can you assure me that all of the deficit hawk Republicans that railed against President Obama's spending are now going to endorse going even more in the red for the sake of getting some pork in their district?  Maybe, but I'm not convinced.

The second part of this equation is the previously discussed Brexit. The computer based traders need to only look back 5 months to the reaction of the markets after the Brexit vote to find their path.  You can basically lay the chart of the US stock markets on top of the UK markets post-Brexit and you'll see the exact same pattern.  Massive selling followed by panic buying.

3) Is the market really rallying? This is one of the least reported stories but so far the vast majority of gains in the market have been concentrated in the Financial sector.  Wait, didn't Trump get elected as an anti-Wall Street guy?  Not according to the markets which seem to love the concept of less regulation (though I don't know how they could get less regulated), while ignoring things that are going to really cut into earnings like a rapidly rising US dollar and jumping interest rates.

4) No one is noticing interest rates. Despite all of the euphoria over the stock market it's worth noting what's happening in the bond market.  Since June the 10 year bond (upon which all mortgage rates are based) has jumped from 1.35% to 2.25% with about half of that jump hitting post-election.  Mortgage rates have moved up about 40 basis points in the past three days.  To put that into context if you wanted your mortgage payment to remain flat on Thursday of last week you could have bought a $200,000 house.  Today, you could only pay $190,000 - a 5% decline in 3 days. 

Interest rates took a much needed breather yesterday but like every other market they are run by algos trading off charts and the charts for interest rates are very scary.  If we break through a couple of key levels we could looking at mortgage rates in 5-6% or higher range in very short order (every 1% increase in interest rates knocks roughly 10% off the value of your house --- very rough math).  I know none of my readers would say this but about 98% HGTV viewers would say "Wait, what? Housing never goes down in value!!!".  Interest rates remain incredibly low, even at 4% on a 30 year mortgage but if that changes and we revert to historical norms expect many people that bought more house than they could afford to really struggle.  See 2008 for what happens next.

Consider just one industry like farming - the nation's farmers have debt to income levels last seen in the 1980's as farmers have built and expanded in an effort to gain efficiencies of a larger operation.  That's okay if interest rates remain low, but if they start to spike and farm income levels remain low, you're going to see another wave of farm bankruptcies in the coming years that echoed what happened in the 1980's.

5) King Dollar is on top again.   This one made me LOL - One media outlet shouted this headline last week "America is great again as US Dollar hits 14 year highs".  You might want to ask the CEOs of IBM, Ford, Apple or Google what they think of a stronger US dollar.  It makes our products much more expensive in the rest of the world and makes imported substitute goods even cheaper here in the US. The net result of this will be more companies moving jobs overseas and/or declining earnings for US companies unless the markets reverse.


Have a great Thanksgiving and remember to fill your plate with veggies :)

Wednesday, November 09, 2016

The World Turned Upside Down

I guess now I know why I never went into political prognostication.  I'll leave the political analysis to others because they've done such a great job at it in recent months (sarcasm).

However, regarding the markets, the moves have been very predictable.  At around 8pm last night it was clear that something was going on because the markets were turning red fast.  As the night wore on the losses for the markets continued to mount because Wall Street really was rooting for gridlock.  No movement on trade, healthcare, taxes, social security, etc was a positive in Wall Street's mind, but that all changes with a Trump presidency and a Republican controlled Congress.

However, after plunging to their aftermarket limits in the early going last night (down 5% across the board) a relatively small bid has moved markets back to green at the open.  The model here that everyone is obsessed with is Brexit where a swift sell-off was met with steady buying by the computer algorithms and that seems to be the way things are playing out right now.  However, I'd caution that there are many, many differences.  The most notable of which is that the Brexit will happen in phases over many years.  President Trump takes office in two months.  The market has no clear understanding of what his relationship with Fed Chair Janet Yellen will be like, what industries will be impacted by the potential repeal of Obamacare, how reduced military spending will impact us domestically and abroad, how he would finance the infrastructure spending he plans, etc.

The good news is that we finally have something to debate in the markets again.


Monday, November 07, 2016

The race to the bottom

The computers have anointed Secretary Clinton as the next President based on the latest FBI memo sending stocks soaring all the way back to their levels from a week ago.

I typically resist the urge to comment on political matters because there is no winning in that arena.  However, I did want to share an article written by another trader on the state of America on 11/9/16.  It's a sobering, yet accurate depiction of the challenges we face and our inability or unwillingness to face those challenges.  We've become a nation of can kickers who allow ourselves to be distracted by the latest social media announcement or random reality TV show (I know this doesn't apply to my readers - I'm talking about the general populace :) ).

I was struck when watching a documentary about the election of 1992 on how Ross Perot was obsessed with our staggering national debt which at the time was $4 Trillion.  A quarter of a century later it sits at $19 Trillion and we're adding nearly a trillion a year to that total.  Using the Federal Reserve's own projections, this debt is expected to cost the US almost $800 billion in interest by 2021.  This assumes that we are able to manage interest rates during this period which is a huge assumption.  If interest rates move more than expected we could easily see our annual interest cost exceed $1 trillion/year or probably 25% of our operating budget. 

Anyway, take 5 minutes that you might otherwise spend watching MSNBC or FoxNews breakdown early voting in some random Ohio town and read "Hitting Rock Bottom".

With regard to our local races, I don't believe anyone is really addressing the big issues.  However, I'll say that I find it very ironic that surrogates for our current Congressional Rep are attacking her opponent for "Only recently moving to the district and own 6 'expensive' properties out of state".  I say it is ironic, because our Congressional Rep has really not lived in our district since high school, but this sums up the state of politics in America today.  Confuse and attack rather than discuss long-term solutions.

Finally, a prediction:
Secretary Clinton wins the Presidency and names NY Senator Gillibrand to become Secretary of State.  Rep. Stefanik runs for the Senate to replace Senator Gillibrand in a special election in 2017.

Thursday, October 13, 2016

What'd you miss?

That's just a little spin on the song "What'd I miss?" from the Broadway hit Hamilton which has been on non-stop repeat in my household since my kids bought the album (side note - it is really good if you like history and/or modern music - listen to Cabinet Battle #1 for a sample and note there is some mildly nsfw language).

Overnight we received another data dump from China which will fuel concerns about a global slowdown in consumer demand and stocks are reflecting that mood right now (most European markets are down about 1%).  This will take us a back to the September tantrum levels (when the markets sold off over the hint of rising interest rates.) and the next move may be interesting. 

Here are some of items that caught my eye so far this week:

* The idea that there is cash on the sidelines waiting to rush into the markets may be a fallacy as liquid assets as a percentage of household wealth sits at its lowest levels since the dotcom bubble (1999).

* Railroad intermodal cargo fell for a second consecutive quarter.  Last time that happened was .... say it with me.... yep, 2009.

* HSBC made headlines yesterday forecasting an imminent crash saying that earnings expectations and valuations have become "unmoored from corporate realities". I'd argue that we've been unmoored from reality since at least 2014 but tomato, tomahto.

* Consumers reporting that they may miss a credit card payment hit its highest level since 2014.  Most worrisome was a real increase in those reporting concerns with incomes over $100,000 - which is indicative of a stretched high-end consumer.

* Alcoa kicked off earnings season with a face plant (don't be confused by $AA's stock price - they did a 1 for 3 reverse split last month) and Goldman said that once again expectations are way too high for Q3 earnings.


Tuesday, October 04, 2016

An Interesting Distraction

With 30+ days to go in the US election cycle we could all use a little distraction.  Enter a quick little quiz brought to you by the fine people at MIT called the moral machine.

The quiz debates the issue of autonomous driving and if confronted with a question - ie, crash the car and kill three passengers or drive straight into 4 pedestrians crossing against the light, which would you chose?  After you take the test you'll see where you stand relative to others who have taken the test (let's just say you don't want to be a dog in my version of the future).

While it seems like a bit of a silly experiment, the reality is that autonomous driving is coming faster than anyone predicted and since the greatest danger to computerized driving is the unpredictable actions of humans around the cars, there may come a time when the computers will have to develop their own moral compass for situations like these.

You can visit the MIT site here and just click "start judging" to determine who gets to live another day in our robot driven future.

Friday's market turn around was nothing short of amazing given the bad info upon which it was based.  If you remember, everyone was very concerned about Deutsche Bank having a Lehman moment (though I'd say they are more Bear Sterns, but tomato, tomahto) when a bunch of tweets hit twitter about a "deal" that had been reached with the Dept of Justice (allegedly reducing their fine from $14 billion to $5.4 billion).  These tweets from random sources with little supporting information were then picked up by a French news agency which gave the story further credibility. 

Well, over the weekend we learned that not only is there no deal in place, the CEO of Deutsche Bank hasn't even met with the DOJ yet.  Deutsche Bank's stock has stabilized and remains off the Friday morning lows, however the insurance on Deutsche Bank (CDS if you watched the Big Short) has not receded at all indicating that there is still ample fear in the market re: DB.

Lots of interesting reading coming in the next few posts.


Friday, September 30, 2016

Friday's data review

Lost in the constant stream of headlines on Deutsche Bank is the data that has come out this week on the state of the US economy.

In August the consensus GDP estimates for Q3 and Q4 in the US were around 3.8% growth and 2% growth.

A month later we are at at 2.3% for Q3 and 1.2% for Q4.  Q2 Real GDP growth was just 1.4% and 58% of that "growth" was due to higher health care spending.  If you add in utility costs, health care and utilities accounted for 96% of the 1.4% growth in Q2. 

This is why the Federal Reserve is in such a tough spot.  They know they have to start hiking rates but they are watching an economy that seems to be slipping back toward recession.

Other data to note:

* Cass Freight index for August was the lowest since 2010 (measures North American Freight volumes).

* The World Trade Organization (WTO) said global trade will expand by just 1.6% this year, the slowest rate of growth since the financial crisis and down from initial estimates of 2.8% in April.

* This is a very troubling chart that I hadn't seen before this week.  It show that when US M&A activity (mergers and acquisitions) peaks, it is followed by a sharply rising period of new unemployment claims.  Logically, this makes sense as companies merge there are redundancies and thus, you layoff some people to save costs but the evidence on this chart makes it very clear we should see a sharp uptick in unemployment claims in early 2017.

* Core durable goods orders fell again for the 20th straight month.  We've never had a stretch this long without entering a recession.

* Domestic heavy truck sales in August were the lowest in 3 years and down 29% from the prior year.  This has been a very good indicator of economic expectations in the past.  

Finally, I'll just leave this chart here because it clearly indicates the rising influence of global central banks on our markets via thefelderreport.com.  Household financial assets to disposable income seems to indicate we're in the bubble to end all bubbles.  It's so interesting to see the way the markets used to behave 1954-1995 before Mr. Greenspan and company decided to spur speculation.  Since, that time we've entered a rolling cycle of boom and busts.


Will Deutsche Bank be strike three?

If I haven't mentioned it before my previous employers on Wall St. included:

* AIG - a company that should have failed during the 2008 crisis.
* Lehman Brothers - a company that did fail during the 2008 crisis


* Deutsche Bank - a company that seems to be following the Lehman playbook word for word. 

 I won't bore you with all of the details so we can focus on what is happening right now.  The market is not sure if DB will survive and they are cutting back their exposures (trading, deposits, counterparty activities) to DB.  This has a snowball effect of weakening DB further, causing more speculation about their future, etc, etc.

The EU seems very divided on the issue of saving DB (who has a the largest derivatives exposure of any bank in the world) and it's my hunch that this will get worse before it gets better.  Ultimately, I believe Germany would step in to save them but I don't believe the broader EU will offer much support.

So why do I care about some German bank?
Well, they are the largest investment bank in Europe, they have $1.8 trillion in assets, they have ties to every major bank around the world which makes them perhaps the most systemically important bank and they have notional derivatives exposure of somewhere around $51 trillion (yeah, with a T - that's real money).

The markets are clearly concerned about DB right now but the broader EU banking industry is in trouble.  I have serious concerns about the health of some Italian and Spanish banks and DB's issues might be the catalyst that starts a wave of banking issues across the EU. 

It will be interesting to watch this play out and much like in 2008, every headline about a bailout or non-bailout may swing the markets substantially.


** Update - after being down nearly 9% DB shares are now up slightly on the day after a series of twitter rumors started gaining steam.  The rumor is that the Dept of Justice in the US would be willing to negotiate a lower settlement over fraud allegations ($5.4 bil vs. $14 bil) to help stabilize DB.

Well, if we've learned anything it's that we must save the banks at all costs, right?

Thursday, September 22, 2016

Welp, Wall St 1 - Fed 0

So, roughly 2 weeks ago, Wall Street threw a one day panic in an attempt to swing some on the fence voters at the Federal Reserve.  Stocks plunged a whopping 2% from all-time highs and it seemed like the end of the world.

We spent the next two weeks bouncing around as various entities tried to assuage the markets.  Well, yesterday we finally, got the word that yes, everything is indeed awesome and the US economy is cranking along perfectly but we still have to keep interest rates at historically low levels because even a minor uptick could cause the Great Depression 2.0 (ok, there's a little sarcasm in there).

However, Wall Street's panic attack seems to have worked and they got what they wanted.  No rate hike and a 1% jump in stocks (which looks to be followed by a push back to near all-time highs today).

The disconnect between the markets and the economy grows wider by the day and the Fed has no exit plan in my opinion.  For example, in the Fed's own words yesterday they cut the 2016 GDP forecast to 1.6-1.8% and cut the long-range sustainable growth of the US economy to 1.7% to 2%.  However, this weaker outlook was one of the catalysts cited by many as spurring the buying in yesterday's market. 

Yes, a weaker long-term outlook for the US economy is cited as a reason you should buy stocks.

However, while the markets remain fixated on the Fed's moves, there is something that bears watching.  The London Interbank Rate (LIBOR for short) has been spiking since mid-summer as a result of some regulatory changes.  This is effectively tightening money supply without the Fed's input and I think many people have underestimated its impact.  While the Fed gets all of the headlines, the LIBOR sets the base rate on some $350 trillion (yeah, with a T) in debt.  This movement is going start really pinching companies with floating debt just as the economy starts to falter (October/November). 

Sounds fun!