Tuesday, December 13, 2016

Every Uber Driver is a Wall Street Expert

While I never had the exact Joe Kennedy shoe shine worker experience, I did have a similar experience in Feb 2000 when my landscaper told me his wife was day-trading dotcom stocks.  The NASDAQ market began it's steady decline 4 weeks later.

Let's play a little game -  What do all of these dates have in common?

12/13/16 (today)

Well, they are the points at which by various measures the stock market entered EXTREME overvaluation. 

1929 - the crash that began the Great Depression
1972 - Stocks fall by 50% in 1973
1987 - Black Monday
1999-2000 - The Dotcom bubble bursts
2007 - the Housing bubble bursts
2013 - nothing happened *
2016 - Trumpian Nirvana

I've discussed 2013 before so I won't spend much time there but suffice to say the global economy began cooling in 2013 and really slid in 2014-2016 however US stocks have so substantially distanced themselves from the companies they supposedly represent that weak underlying fundamentals can be ignored in the face of what the charts show.

Well, the stock market is again the talk of the town as it was in Joe Kennedy's time at the shoe stand or when my landscaper was asking for my thoughts on the Webvan IPO (look it up if you have a short memory).  However, this time it's a very Trumpian rally.  For all of his many flaws, Mr. Trump has a flair for distraction -- getting people to focus on a shiny gold faucet while the walls crumble around them.  This is today's stock market where people are focused on the Dow crossing 20,000 while ignoring that 30% of the Dow companies have been replaced in recent years (ie, they kick out the poor performers to enhance the headline number) and the fact that almost all of the gain in the Dow this year is due to 7 stocks -

1) Goldman - Because Goldman again will be running the world.

2) UnitedHealthcare - Because rolling back Obamacare will mean keeping high premiums for workers, without providing coverage. YEAH!!

3)  Caterpillar - Because ..... oh, I can't even pretend here - this is ridiculous, their business is imploding but the stock has soared on the hopes of MORE Federal spending in 2020.

4) IBM, 3M and Chevron - Rising tides lift all ships

5) JP Morgan - whatever business falls through the cracks at Goldman might go to JP Morgan.

I believe that you make the most money when there are huge mistakes made that you can see coming.  Well, 2017 is a HUUUGE mistake bearing down on us.  You see stocks don't act in a vacuum - there are a whole host of other assets that this bubble is impacting.  I expect this stock bubble to continue to chase money out of bonds.  This has the impact of raising interest rates, which will further strengthen the US Dollar.  That's great if you're going on vacation to Europe or Japan, but ask someone in sales how much fun it is to sell their products that are now 20% more expensive because of currency shifts and you'll hear the other side of that equation.

Then the Fed will have to try to reign in bond yields by raising rates QUICKLY in 2017 and that will choke off any economic activity. Boom - The next recession will be at hand.  We'll get a little preview of that today when the Fed raises rates, but don't expect any real reaction until rates start to approach 1-1.5% again.

Next up.... Why cutting the corporate tax rate is a strategy from 1980 that is doomed (ok, maybe not doomed, but what are blogs for if not for hyperbole?).


Thursday, December 08, 2016

Just trust me this is really not fake news, I swear :)

The markets were again crushed by a surge of buy programs at almost the exact same time as yesterday and that was the story of the day.  If you bought at 11:59 and sold at 12:31 you made more than they average working man or woman makes in a week in 30 minutes.  Hooray for gamblin.... I mean investing!!

The subject of "fake news" is all over the media outlets tonight after Sec. Clinton addressed the topic at one of her first public appearances since the election.  While I don't deny that "fake news" does exist (there is a guy dedicated to writing these fake stories who makes a very comfortable living spreading falsehoods), my greater concern is the more widespread "misrepresenting every day occurrences" as news.

Allow me to explain using some weather examples - this morning one of the morning shows was in North Dakota talking about the frigid conditions where it was 6 degrees F.  Two weeks ago the morning shows were in Syracuse NY covering a lake effect snow event that dumped 8-12" of snow on the area.  By discussing these routine weather events --- Newsflash: it snows East of Lake Ontario in November/December and it's really, really cold in North Dakota --- as somehow newsworthy the media is creating a story out of thin air.  This isn't news, it's buzzfeed-style presentations designed to keep you glued to the TV to find out if that snow in Syracuse is coming to NYC or Boston (short answer - no b/c NYC and Boston are not near Lake Ontario, but conveniently they neglect to mention this fact in their story that talked about a "winter blast invading the Northeast").

On a more local level let's consider the story that has dominated the headlines for the past 72 hours in the North Country -- another lake effect snow event.  About 10 days ago you could see that it was going to be cold enough to produce snow if the winds stayed consistent when they reached Lake Ontario.  I mentioned to a family member that was traveling that "there will be snow in the traditional snow belt with a strong West/Southwest wind turning West by Thursday night".  It was clear that it was going to snow very hard in a very narrow band of mostly uninhabited land on the Tug Hill Plateau.  However, the National Weather Service issued a Lake Effect snow warning for Jefferson and Lewis counties (almost 2600 square miles combined) despite the fact that just a tiny fraction of those counties would be impacted.

Here is the snow map from the National Weather Service:

Now keep in mind where that bulls eye of the storm sits - that pink area in between Lowville and Pulaski and take note of this map.

Hmm, that's interesting, I wonder why that area that is going to get pummeled with snow is awfully green on the map?  Could it be because it's mostly uninhabited forests?  Uh, yes that's exactly the answer. 

So, that's my long-winded way of say that even local sources are guilty of trying to spice up a story to make you pay attention.  The reality is that this was a fairly typical lake effect event that will deliver snow to a fairly narrow section of forest land and snowmobile trails.  However, that is not a story that gets you to click on it 10 times a day.  If the story says LAKE EFFECT WARNING FOR JEFFERSON AND LEWIS COUNTY, you'll probably click all day for updates.  This isn't an example of "fake news" but it is rather disingenuous and this is a very common practice in the entire media industry.

Okay, that's enough ranting for the evening :)

Drive carefully if you live in Worth, NY.


Wednesday, December 07, 2016

Another day, another bunch of dollars

If you've been following the blog for any length of time you are well aware that I believe the markets disconnected from economic reality for good in the middle of 2013.  The past 3 years have seen consistent growth in asset prices while economic activity has sputtered from Asia to Europe to the US.

However, today may have finally been the day that broke the camel's back.  For no real reason, the market continues to levitate higher on hope and dreams that an individual who has failed repeatedly is going to somehow, magically jump-start growth for every company in America (side note - I'm admittedly biased - my first job involved restructuring some Trump debt after one of his bankruptcies and I felt like I had to take a shower after every interaction with his company.  They were shady, incompetent, demanding, and argumentative at every point of the negotiation and it was the catalyst that got me out of commercial banking). 

The grandest irony of this latest market rally is that while both Sen. Bernie Sanders and President-Elect Trump roundly criticized Sec. Clinton for her connection to Wall Street Banks it's the banks are driving this rally. 

The incredibly influential roles being filled by current and former employees of Goldman Sachs both in leadership and behind the scenes has pushed the shares of Goldman up 30% in a MONTH adding $20 billion to their market cap.  Goldman Sachs alone accounts for roughly 1/3rd of the 1300 point move in the Dow Jones Industrial Average since the election.  So, I guess it's less about draining the swamp and more about filling the swamp with guys who drive cars that are worth more than your house.  If you add in JP Morgan Chase and Caterpillar more than 1/2 of the gain of the Dow is attributable to just those 3 companies. 

So here we go again on the subject of computerized trading.  Today, the markets were up, but nothing was out of the ordinary until someone decided to pull some of the liquidity from the market.  The best way to think of this is to say that it's like going to the grocery store for bread and when you get there they take 100 loaves off the shelf and only leave 3 loaves on the shelf.  Well, those loaves will suddenly go up in price if 100 people rush to buy bread.  That is essentially, what happened today, the market dried up for some unknown reason at 1:31pm and sensing that the market could be easily moved, a computer bid for $3 billion worth of futures in 1 second.  This is by far the largest trade I've seen in recent memory.  Again, thinking about our bread analogy, there were very few stocks for sale and a MASSIVE order hit the market as that exact moment conveniently causing panic buying and rising prices.  This spurred more automated buying and it was off to the races. 

Here are some of the best things I've seen in the past week:


US Government Debt to GDP:

Think what was happening in the mid-1940's: we were emerging from the Great Depression, fighting WWII, and we were about to experience the greatest period of innovation and growth in our nation's history.  If Trump's spending plans are real it is very likely our debt to GDP will exceed the highest levels experienced since the end of WWII and the ramifications of that for everything from the dollar to interest rates is significant.

Electronic control of the markets:
The key quote in there is often ignored by the financial media that want you to think the stock market is still that big marble building in lower Manhattan.  100 companies with 5,000 servers control 90%----90%!!!!--- of the Nasdaq market.

The total value of US corporations has now exceeded the dotcom bubble.  I can't get this chart due to copyright restrictions, but it shows the value of all stock and debt of US companies and the run over the last month has now pushed us into uncharted territory.

This is very telling - the US 10 year note (that has been rising in yield) is currently yielding 0.5% LESS than it was in March of 2009 --- the absolute bottom of the financial crisis.  I can hear you all saying, "what??". Well, the yield on the 10 year note should go up as people believe the economy recovers and they stop seeking safe assets like US treasuries.  So, at the bottom of the Great Recession the Dow hit 6,500 and the yield on the 10 year note was roughly 2.9%.  Today, the yield is about 2.4%, indicating even greater fear and risk in the global economy today than in March of 2009, but the Dow is at 19,500.

Finally, this is the overall chart of market psychology.  I believe we're nearing peak Euphoria (we can get sillier from here, see Feb/Mar 2000 for reference), but I think by January we could be in the Denial phase.


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!

Tuesday, September 13, 2016

Lies and the lying liars that tell them

For a little context, I'm going to ask everyone to step into the WAYBACK machine and join me in 2008.  Commercial and investment banks around the country were going belly up as a result of their participation in liar loans that gave money to anyone with a heartbeat and surprise, that didn't work out so well when people stopped paying their mortgages.

Never fear, these banks were bailed out to the tune of $700 billion by future Fed Governor Neel Kashkari * (Did I ever tell you the story of how they decided on $700 billion? If not, see below).

Okay, so the remaining banks were saved and they've surely learned their lessons about lying and cheating their way to the top, right?

Fast forward to this weekend when it was revealed that Wells Fargo (yes, that favorite bank of everyone's favorite Billionaire Warren Buffett) had created millions of fake accounts in customers' names to meet sales goals.  Assume, for example, that your branch is supposed to open 100 credit cards/week.  Well, no one wants an extra credit card right now but Jane Doe did open a checking account with your this week.  So the branch manager (or someone) decides to take Jane's personal information, fill out a credit card on her behalf and PRESTO!! Only 99 more to go to meet their sales goal!  Wells Fargo will pay a small fine (without admitting guilt?? How is that possible? This is basically identity theft by a US bank!) and most will forget about this story in a week.  However, my question is: if Wells Fargo's lending standards are so lax that fake accounts with fake email addresses can be approved, what have they learned since 2008 and what type of loans are currently on their books?


* “What about $1 trillion?” Kashkari said.

“We’ll get killed,” Paulson said grimly.

“No way,” Fromer said, incredulous at the sum. “Not going to happen. Impossible.”

Okay,” Kashkari said. “How about $700 billion?

“I don’t know,” Fromer said. “That’s better than $1 trillion.”

Whatever that sum turned out to be, they knew they could count on Kashkari to perform some sort of mathematical voodoo to justify it: “There’s around $11 trillion of residential mortgages, there’s around $3 trillion of commercial mortgages, that leads to $14 trillion, roughly five percent of that is $700 billion.” As he plucked numbers from thin air even Kashkari laughed at the absurdity of it all."

- via Too Big To Fail     Andrew Ross Sorkin

Someone flipped the crazy switch

Since Friday the markets have been about as stable as a presidential candidate in sweltering 79 degree heat in NYC.  As a reminder, when last we left off, the markets tumbled 2.5% on Friday as a warning to the Fed that they better not raise rates.  Conveniently, three Fed governors spoke on Monday and told everyone to relax, they won't be doing anything crazy like raising rates and markets roared back (up another 1.8% or so).  Well, today the Fed enters their quiet period (thank goodness) and without anyone to talk about how awesome things are while simultaneously maintaining emergency levels of support for the markets stocks have almost given up all of Monday's gains.

We went through a period of unusual calm this summer - close to 40 days without a 1% swing in the markets - and that seems to have come undone overnight.  Those that follow the order flow closer than I do, say that there is a ton of "spoofing" or false orders in the market right now (ie, in Silver between 3:30am and 4:30am someone place 200+ buy orders and canceled that same order 200+ times) and they say that it's like someone "flipped the crazy switch" on the markets.  I'm not sure what to make of it right now but it's worth following.

BTW - As we are debating whether or not the Fed can come to our rescue again - note this chart from Deutsche Bank.  Basically, since the end of QE1 (3/2010) none of the subsequent Central Bank programs have moved the needle to drive growth.


Sunday, September 11, 2016

Rate hike rage?

The number one lagging indicator on Wall Street's daily performance has to be visits to my blog.  Friday afternoon and evening saw a pretty significant spike in visits which means something of interest must have happened :)

There were a number of contributing factors that seemed to get a little downward momentum going:

1) A Fed Governor making statements in support of gradual rate hikes.
2) European bonds selling off a bit
3) Oil prices slipping after another false data reading

However, none of these factors really could be labeled as a cause of a 2.5% sell-off.  I go back to the tried and true "temper tantrum" excuse.  Each time the Fed and other central banks have toyed with the idea of returning to a normal rate environment, the investing community has panicked as a group sold stocks hard and called the Fed's bluff.  With a Fed meeting coming up in less than 2 weeks and despite a tremendous amount of evidence pointing toward economic weakness, the Fed has a 30% chance of pulling a shock and awe move by raising rates.  While, I believe that isn't likely this Fed is about as disconnected from reality as one can be so who knows.  I think Wall Street wants to remind the Fed that their primary objective is no longer inflation control or employment stabilization but rather maintaining the S&P 500 near all-time highs.

The overnight futures look a little lower, however they are already bouncing a bit, but if history is any predictor (it shouldn't be, but it is with today's computer driven mkts), when the markets fall 1.5% or more on Friday, they are also down on the following Monday roughly 90% of the time.

Other interesting tidbits I read this weekend:

* Deutsche Bank posted some observations on the state of the US economy. 
"In the current business cycle, margins peaked at $18,752 per worker in Q4 2014. This compares to a ratio of $16,487 per worker as of Q2 2016. Margins have fallen because corporate profits have declined -6.3% annualized over the past six quarters,"

So what? Maybe companies are actually sharing the wealth a bit, right?  Well, the issue is that every time since WWII that margins peaked and then steadily declined that signaled a recession.  The median number of quarters from the peak of profit margins/worker to the next recession has been 8 quarters.  This would mean Q4 2016 (ie, 3 weeks away) could get very interesting.  If I'm not mistaken, I think some random blogger in upstate NY also said that there is a chance that we'll be in a recession by the time the November elections take place just last week. :)

* One of the issues I have with any state fighting to protect jobs at an aluminum producer (Alcoa in our case in NYS) with additional tax incentives and electricity rate adjustments is that we are fighting an arms race that we can't win.  Consider that since 2010 Chinese aluminum output has DOUBLED, US imports of aluminum jumped from 14% to 40% of total supply and the number of US smelters has fallen from 23 to 5.  China is racing to the bottom of this industry but that doesn't mean we have to follow them down the well. 

In a related story, there was an article this weekend that discusses a massive aluminum stock pile in the Mexican desert. 

"Two years ago, a California aluminum executive commissioned a pilot to fly over the Mexican town of San José Iturbide, at the foot of the Sierra Gorda mountains, and snap aerial photos of a remote desert factory.

He made a startling discovery. Nearly one million metric tons of aluminum sat neatly stacked behind a fortress of barbed-wire fences. The stockpile, worth some $2 billion and representing roughly 6% of the world’s total inventory—enough to churn out 2.2 million Ford F-150." 

6% of the TOTAL Inventory just sitting there ready to hit the market.  It appears that the stockpile has been set aside by a Chinese billionaire in effort to control a flooded market to some degree.


Wednesday, September 07, 2016

The US economy from 30,000 ft

 It's hard to overstate the degree to which we are in uncharted waters right now in the global economy.  Yes, US stocks remain near record levels but globally many economies remain stuck hovering just barely above recessionary levels despite 7 years of extraordinary efforts by global central banks and governments.  Consider the following data that has emerged in just the past couple of weeks....

The economy
* Class 8 truck orders - tractor trailers/dump trucks - have fallen on a year over year basis for 18 straight months.  They are back at the lowest levels in 5 years.  Some of this is the natural order cycle and some of this is attributable to reduced demand for trucking capacity.

*Earnings for the S&P 500 companies have fallen now for 5 consecutive quarters, while stocks remain at or near record highs.  The last time earnings fell like this was 2009.

* The year over year change in average hours worked has fallen to levels last seen in 2009 (So, 2008/9 will be a consistent theme).

* The US Nominal GDP growth year over year in 2016: 2.4%

In 2001: 2.4%
In 1990: 2.6%
In 1982: 2.9%

Why focus on those years?  They represent the LOW point of GDP growth yr over yr in the midst of the recessions.  So our current "growth" rates are equal to or below the worst growth in some of the most recent recessions.  Hmm...

* Rail volumes tumbled another 7% in the latest quarter and have fallen for 17 consecutive months.  This is principally driven by declining crude shipments but traditional rail freight is also declining.

The markets

* Most of the major US markets remain within a 1% of their all-time highs.  Despite the plethora of data that indicates a slowing US economy.  The belief that the Federal Reserve will (and CAN) continue to support equity prices is now the only investment thesis that matters.

* In the past 40 days, S&P 500 has traded in a range of only 1.77% (using closing prices). That is the tightest 40 day range EVER going back to 1928 (did anything happen in 1929?).  Increasingly, the markets are swinging + or - 0.5% multiple times per day but by the end of the day, the markets are nearly flat.  This is in the face of a tremendous amount of data that should have moved stocks meaningfully.  This complacency is troubling.

* Earnings estimates for the coming 12 months of the largest stocks in the world have a 20% spread versus their actual earnings.  This is the widest margin since 2009 (hmm, there's that year again).


*The 7th largest container shipping company filed for bankruptcy last week.  The impact on global supply chains will be felt for some time.  When your favorite made in China toy isn't on the shelf this Christmas season, you'll know who to blame.


Tuesday, September 06, 2016

The falling food price fallacy

There is a story starting to circulate in the mainstream media on falling food prices in the US.  This is at best a bit of lazy journalism or state sponsored propoganda at worst.

As the story goes, farm staples - eggs and milk - are tumbling in price so consumers are able to save massive amounts off their monthly bills (though you'd have to eat a LOT of eggs for that to be the case).

Last night CBS ran this story which sounds great on the surface -

"American shoppers are enjoying what could be the longest streak of falling food prices in a half century. That’s good, if you’re buying a shopping cart full of groceries, but it’s not so good for farmers.  Heather Buen said putting food on the table has gotten easier.
“I would say I can save anywhere from about $25 to $50 sometimes on my grocery bills in comparison to last year,” she said. 

The average price of a dozen eggs has dropped from $2.57 last year to a $1.54, down nearly 40 percent. A gallon of milk is about 40 cents cheaper..."

Okay, so let's look at this and separate fact from fiction.  Yes, egg prices are collapsing (I'll get to that in a minute) and milk and beef prices are down slightly, however, if you ask anyone that shops on a regular basis they can identify 10 items that have risen in price over the past year for every 1 item that has fallen.  All fruits and vegetables are up 20-30% from last year and most processed foods are up 5-10%.  The idea that grocery bills are shrinking is insulting to anyone that has to put food on the table for a family.

Eggs - I mentioned this recently to my Mom because I purchase a lot of eggs and it's a commodity much like corn, orange juice concentrate or even oil - you know what the market pays.  If you remember last summer there was a large outbreak of Avian flu in the Midwest.  This lead to a huge reduction in the number of laying hens as flocks were culled (at least 50 million by some estimates).  This caused prices of eggs to spike wildly last year and I paid a peak price of $2.24/dozen last year at the height of the bird flu. 

Well, fast-forward a year and all of those birds have been replaced and probably a few more.  Apparently, new chickens lay more eggs than older chickens (side note: in the era before incubators new chickens were born in the spring and commanded a higher price b/c they laid more eggs but some sellers would try to pass off older chickens as new chickens to increase their profits.  Thus, the origin of the phrase "that's no Spring chicken"). 

If you replace 50,000,000 chickens in the US at one time and you will create an egg glut the following year.  Last week I paid $0.78/ dozen of eggs at retail as a result of this glut.

There is one other potential cause of this glut - the Federal Reserve. One of the side-effects of the Federal Reserve's war on interest rates is that it encourages more borrowing at ultra low rates.  Maybe instead of adding 25,000 chickens to replace the birds you lost, you borrow money and add another 2 barns and add 150,000 chickens.  If you make that decision in a vacuum you might be okay, but if you make that decision along with 500 other egg farmers in the US who all make the same decision at the same time, well, now you have a glut. 

Last year when egg prices were soaring the story was "well, that's not inflation because it's a one time event".  Now when prices are falling, again most likely because of a one-time replacement of chickens, the media wants us to buy that it's great for consumers even if their $1.46 in savings are eaten up by higher hummus, black bean, apple or lettuce prices.

The more you know....

**** I have about 30 stories queued up ready to roll on the state of our economy, but I'll try to cover a few topics in each post so I don't flood your inbox.

Quick summary - I'm not sure I'd want to be running for President because I believe by the time Q4 2016 or Q1 2017 rolls around we may be in a recession.


Monday, August 15, 2016

Tell me if you've heard this one "Stocks at all-time highs again..."

So, another day another record as the stock market computer simulation continues its one way march to higher and higher levels.  Since the "catastrophic" Brexit vote in late June stocks have been on a relentless tear higher and have bounced over 10% off the post Brexit lows. 

So, a rational person might ask - wow, what kind of great news is driving this enthusiasm?

Could it be....

* the fact that earnings for the S&P 500 fell about 3% in Q2 on the heels of a 5% decline in Q1 (wait don't we want earnings to be growing?)?

* the fact that companies the S&P 500 have never been more leveraged (ie, they owe more debt relative to their cash flow than at any time in history?)?

* data that shows 8 of the 40 worst months in history for year over year retail sales have occurred in the last 2 years (wait, that doesn't sound good at all)?

* US productivity numbers that fell in the latest quarter dragging the 4 qtr average to 0.175% or basically 0 over the past year (hey, I'm sensing a pattern here - this doesn't sound very good either)?

* the Empire Mfg Survey which slipped back into contraction in the most recent month (contraction is the opposite of growing, right?)?

* signs of a collapsing economy in both China and Japan (oh, I don't like the sound of the word collapsing)?

* tumbling US GDP expectations - down from 3% in January to around 1.6% now?

* climbing oil prices based on hopes and rumors vs. the global oil glut?

 Okay, obviously I'm be a little facetious. The data has been abysmal for the past 6-12 weeks and yet stocks continue to be bid.  The simplest explanation is that there are two pillars holding up the stock markets:

1) The worse things appear in the global economy the more the central banks seem to be willing to do anything to support stock prices.  Unfortunately, there is no model for how to manage the global economy when it's growing 1% and stocks are at all time highs. At some point this experiment will unwind but

2) There is active futures buying occurring every night/morning from 2-3am.  This requires only a little capital to sway the markets that are controlled by algorithmic traders.  Once a direction is established overnight, the programs continue to move the market in that direction after the traditional market open.  Until someone decides to call this buyer's bluff, they recent trend may continue.

It may take something dramatic to move our markets back to a reality based environment but for the time being enjoy the stock market recovery that continues without a true economic recovery.

I'll try to provide a heads up when I think trends are shifting.

Friday, August 05, 2016

Clueless: The Economist's edition

So for the third straight month not a single economist was in the ballpark of the jobs number released this morning.  The magnitude of the "beat" this month will clearly get people excited but since I've been following these reports for close to 20 years I thought I'd share some insight that you might not get from the screaming commentators on CNBC.

Payrolls continue to be driven by voluntary and involuntary part-time work.  This is important because of the way the BLS measures part-time work. If I work job 1 for 15 hrs on the weekend and job 2 for 20 hrs during the week and job 3 for 5 hrs in the evening, most people would say that almost equals a full time job (40 hours) but since the BLS doesn't weed out for duplicate job holders, this person working 3 part-time jobs counts as 3 JOBS for the government statisticians.  It's hard to quantify the impact this is having on the jobs data, but my belief is that the impact is substantial.  As employers look for ways to avoid added costs tied to full-time employees, the percentage of part-time employees has jumped substantially.  However, given our old methods of collecting data I don't believe we're getting an accurate picture of the US jobs market.

We also have to contend with the issue of seasonal adjustments.  Seasonal adjustments make sense as long as they are consistent with those used historically as they allow us to compare July jobs with those in January when the weather impacts are more substantial.  However, this month the BLS seems to have pulled a completely random number out of the air.  The adjustment factor accounted for the majority of this month's outperformance (non-adjusted payrolls added 85,000) and was much more significant than any recent adjustments.  Again, it's too hard for most reporters to provide this level of detail in a 30 second piece on the jobs report but it should give us pause when we see a headline number that varies this much from the underlying data.

Ironically, this "good news" should mean an end of the perpetual panic mode for Central Banks like Federal Reserve and that should remove the bid underneath the stock market.  However, in a very thin Friday session the computers are having their way with the markets and we've pushed through to new highs again (look for a note on how the oil markets were manipulated this week coming soon). 

Thanks again for reading. 

Wednesday, August 03, 2016

Just trust us...

A couple of stories today to highlight the growing reach of corporations and their seemingly never-ending quest to know everything about you.

First, via a group of privacy experts at Princeton comes news that a security flaw that could allow companies to track a user's web traffic via their battery status is actually being used on the web to actually track your user's web patterns.  Some of this is fairly technical but I highlighted the key components.

"Two security researchers from Princeton University have shown that the battery status indicator really is being used in the wild to track users. By running a specially modified browser, Steve Engelhard and Arvind Narayanan found two tracking scripts that used the API to “fingerprint” a specific device, allowing them to continuously identify it across multiple contexts.

 And while it is only tracking scripts using it now, Olejnik warns that unscrupulous actors could do more.

Some companies may be analyzing the possibility of monetizing the access to battery levels,he writes. “When battery is running low, people might be prone to some – otherwise different – decisions. In such circumstances, users will agree to pay more for a service.”

Then comes news that Comcast - one of the behemoths of the cable/broadband industry - 
is arguing to the FCC that "charging consumers more money to opt out of "snoopvertising" should be considered a perfectly acceptable business model."

Comcast is arguing that protecting your own privacy should be a paid luxury option, and stopping them from doing so would raise broadband rates.  So in their version of the world if you would like to not have Amazon, Walmart, UnitedHealthcare, Pepsi, etc., not receive a notice of every move you make online you should have to pay more for your broadband access.  If the FCC were to allow this line of thinking I imagine our beloved TimeWarner/Charter would be the next in line to apply this logic to your monthly bill.

Finally, this story on our favorite little vampire squid - Goldman Sachs - who agreed to pay a whopping $36 million fine for leaking confidential Federal Reserve information to clients.  This begs the questions

a) Um, why the **** does Goldman Sachs have "access to confidential Federal Reserve" information?

b) How much incremental business and revenue was derived by Goldman by leaking this information?

However, I'm sure hitting them with a fine of 0.1% of revenues or roughly 5 large bonuses will really teach them a lesson.


I'll have some thoughts on an increasingly dangerous set up we are facing in the global markets soon.

Friday, July 22, 2016

Keep on truckin'

I read are really good article this week that explains how the markets have become an incredibly large computer simulation that is virtually devoid of fundamental focus.

While I won't go into all the details here, I think it is a very interesting theory and one that I would love to see us test some day. 

Anyway, the point I'm trying to make is that we continue to separate from reality in the markets.  The latest example of this lies in a little followed stat called Class 8 truck sales.  These are large trucks used to make long hauls across the US.  In the latest data published for June, Class 8 orders were down 8% from May of 2016 and down 34%!! from June 2015 to their worst levels since June 2009.

Every time orders for these trucks has slipped 30-40% year over year a recession has commenced within 6 months.  I'm not yet ready to predict a US recession but I think it is very possible that by the time we head to the polls in November, we will be in a recession.

Given this backdrop remember that stocks are basically the most expensive they've ever been on a variety of metrics.  They say that they don't ring a bell at the top of the markets but I hear a lot of ringing in my head.

Mind the Non-GAAP

I think one of the cardinal rules of blogging is to never delve into the world of accounting or you risk losing like 97% of your readers but here goes...

We have a crisis in the financial world that is going under-reported.  The burgeoning industry of Non-GAAP earnings reports.  To begin with, let's define GAAP - Generally Accepted Accounting Principles - which dictates how companies and their CFOs recognize things like revenues, expenses, etc.  Without a common language and standards it is very hard to compare to companies.  These standards have been in place for roughly 75 years and while there is a move to adopt the more globally accepted International Financial Reporting Standards (IFRS), for the time being GAAP is still the standard for good corporate citizens.

Well, about 8 years ago a couple of trends started to emerge:

1) Tech startups with lumpy revenues and expenses started trying to smooth their income statements by reporting certain costs as "non-recurring" and reporting earnings as Non-GAAP. 

2) Large industrial players started charging off huge costs as one-time restructuring fees and also started reporting earnings as Non-GAAP.

The two poster children for these techniques are Solarcity in the tech world and Alcoa in the industrial world.  The problem with these definitions is that the companies and their investors have become addicted to the beautiful non-GAAP results that can be posted quarter after quarter. Consider that in the last 12 months Alcoa had a net loss according to GAAP of $500 million.  However, they reported $1 billion of "non-recurring, restructuring charges" and published a "non-GAAP" PROFIT of roughly $500 million. 

Now when it comes to issues like paying taxes or begging for another bailout from NY State, Alcoa will clearly point to their $500 million loss, but when they talk to investors they just say abracadabra and POOF! Hey, look at that we made $500 million last year!!

Now when it was just a weird solar panel company run by Lex Luther or a bit player in the aluminum market I let it slide but in the past few weeks here is a short list of the obscure companies that have reported Non-GAAP  nonsense -

Johnson & Johnson

These aren't startups or companies where liberal accounting should be the norm.  These principles are called GENERALLY ACCEPTED for a reason and the media and the investing public should demand more from public companies.

I believe that we could draw more attention to this issue if we started calling non-GAAP numbers by a new name which reflects that the numbers are in fact the opposite of Generally Accepted:

"Q1 EPS rose 12% according to Abnormal Accounting Principles"

"While GAAP revenue fell 2% it actually rose 6% according to the company's use of Questionable Accounting Principles"

To the SEC's credit they are starting to get more active in discouraging the use of non-GAAP reporting but until the media and analysts team up to ignore these faux reports, companies will keep up the non-GAAP games.

Okay - that's enough accounting talk for the next 6 months :)


Friday, July 15, 2016

We hold these truths to be self-evident...

that stocks and bonds cannot correlate forever.

Okay, so I'm paraphrasing a bit.  However, we are in the midst of a historic sequence in the markets which either:

a) will mean that every basic principal of investing is no longer valid or

b) will eventually reverse course

The premise that I'm referring to is that equities (stocks) are bought because they are a bet on future growth prospects.  You buy stocks when you think there will be increasing income earned by these stocks which will be reinvested to grow the business or returned to shareholders in the form of dividends.

You buy US government bonds as a safe haven in the storm when the economy is sending warning signs of recession and you are focused on capital preservation.

Well, the yield (interest rate) on the 10 year US Treasury bond fell to it's lowest level ever last week.  Not the lowest level of the decade or the past 20 years......EVER. 

This implies to those that studied ECON 101 that the prospects for the US economy are not very strong (the previous low was set during a period from 1940-45, the heart of the Great Depression).

Okay, but stocks also surged back to record levels in the US this week so clearly the prospects for earnings and dividends must be soaring as well, right?

Notice how these three measures moved in unison until the February stock market rescue.  Since that time earnings expectations for the S&P 500 have continued to tumble while stocks have resumed their meteoric rise. 

I often lament the loss of fundamental focus in the markets but this chart really conveys that message better than anything I could say or write.  While the traditional media likes to report to you the daily moves in the S&P and the Dow know that those numbers no longer correlate to what is happening in the real world. 

So, the question we have in front of us is - are bonds correct in telling us the global economy is unraveling or are stocks correct in telling us that everything is awesome? 

I'll try to offer some answers in a coming post.


Wednesday, July 13, 2016

Celebrate Good Times, Come On!!!

I've held off commenting for a bit because there is just so much information to share that I didn't know where to begin.  I'll do my best to chip away at a variety of topics over the coming weeks while trying not to flood your inbox with random updates.

Lions and Tigers and Brexit, Oh my...
Three weeks ago the world was told to hold its collective breath because the UK might be voting to leave the EU.  The night before the vote the gambling books in the UK (which are thought to have predictive powers) went sharply "all-in" on the Remain side of the bet.

Subsequently, reviews of those books seems to indicate that it was a few large bettors trying to move the market.  The thinking seems to have been "Hey, if we bet enough on REMAIN that it makes it seem like we have inside knowledge.  That will be reported widely and it will discourage the LEAVE voters from even coming to the polls."

The first half of that equation was correct - it was reported far and wide before the vote that "Remain seems all but a certainty based on late betting". However, the trouble with democracy is that you still have to actually have a vote and the LEAVE campaign pulled off the win with roughly the same percentages that were predicted in polls two weeks before the vote.

Uh-oh.  Didn't the Prime Minister of the UK David Cameron say that Brexit could effectively lay the groundwork for a new world war and waves of genocide around the globe?  The "Remain" camp had actively spread a campaign of fear that was focused on political, economic, social and societal upheaval if "Leave" won the vote.

Then, just when everyone expected a global market collapse, what happens?  The sharpest rally in the global markets in years.  7-10% around the world in two weeks!!!

If there is one consistent theme that I hope you've learned from my blog it is that when EVERYONE is certain of X, you can be assured that Y will happen. Markets were certain to collapse after the Brexit and instead the S&P and Dow have now hit new all-time highs.

Now as for WHY that is happening and what it means for the future...tune in tomorrow.

Tuesday, April 19, 2016

What a long strange road it's been...

I thought I'd take a moment to revisit what has transpired in the global markets over the past two months because it really has been unprecedented.

Back in mid-February the global markets were sitting on a razor's edge.  From a technical perspective if stocks fell another 1% they looked like they might fall 50%.  This technical backdrop was coupled with a fundamental picture that was deteriorating across the globe.  China, technology, oil, energy, pharma, everything was (maybe is??) entering a slowdown at the same time.  This had all of the hallmarks of a major 2008/2009 meltdown lining up again.

And then just as it seemed the stars had aligned something changed almost overnight.  The key catalyst that started the market's historic surge from February (up 14% in 2 months - roughly an 85% annualized rate of return) was the bounce in crude oil prices.

If you remember in February we were starting to see the first signs of retail gasoline prices cracking the $2.00 mark.  West Texas crude oil was hovering around $31/ barrel and the outlook was grim.  The world is awash in oil right now and central bank policies have encouraged many countries and companies to expand capacity beyond what the market can bear.  These companies and countries  need to keeps pumping oil to make their debt payments but this supply issue is coupled with another major problem -- the growth in demand for oil is falling right now.  Okay, so in a logical world you would say - supply is growing, demand is falling the price of this product should continue to decline.  However, we no longer operate in a world dictated by logic.

The oil markets are now heavily influenced by the same electronic trading platforms that have made a mockery of our stock markets.  These trading bots, for lack of a better term, are scanning every headline for a hint on the direction of crude oil.  Conveniently, at the moment when oil prices and the US stock market were on a razor's edge word began circulating that OPEC was going hold a meeting to discuss a production freeze in April.

The problems with this concept are many -

1) OPEC members are notorious cheats.  They say they will only produce X, yet they will produce x+10%.

2) OPEC's influence is waning in light of US/Canadian/Russian production.

3) You have to get parties that don't particularly like one another (Iraq, Iran, UAE, Saudi Arabia) to agree to terms.

However, the rumor of a meeting set off a buying frenzy in the oil markets which ultimately spread to other commodity classes (Why? No one knows, why ask questions, just BUY!!!).  This is an oversimplification but there are many stock programs that see the world through a simple lens of "if/then" relationships.

Since, oil prices were up that must mean demand was going up, right?

And if demand is going up, that means the global economy is picking up steam and that must mean stocks are set to rebound so....


Now, there have been other catalysts that have played a role - the Fed's unclear messaging, Japan's panic move to negative interest rates, etc - but the most significant and consistent driver of the oil and stock markets has been this idea that oil prices were going higher.

Every day brought a new rumor - "Russia says......", "Iran says......." "Saudi minister says......" and every headline brought more buyers.  Then a funny thing happened - they met this weekend and the result was no agreement on production.

Wait, WHAT!?!?! So, the 15% bounce in stocks and the 30% bounce in oil prices that were all driven by the premise of a major agreement on reducing supply has been a fraud?  Obviously, this means oil prices and stock prices are set to plummet, right?

Again, we are trying to apply logic to an illogical world.  Yes, the immediate reaction by the humans in the market was to sell both oil and stocks (oil slipped 5% and some global markets were off 3% immediately) but as the programs started kicking in around 9:45 am yesterday it was clear that this was not your father's market.  Stocks and oil prices ripped higher for the rest of the day until the Dow managed to end above 18,000 for the first time in 9 months.

So, that's the back story of the past 2 months, but let's consider what is going on in the US right now.

* Q1 GDP estimates are around 0.3% to 0.5% growth.  That's a round error away from being in contraction.  Seven years into the "recovery" the US is growing at about 1/10th of what would be considered healthy.

Well, you might say Q1 2014 and Q1 2015 were weak as well - true, but remember we blamed that weakness on a polar vortex and East Coast blizzards.  Who can we blame for this weakness in the wake of the warmest winter in 20 years?

*Freight shipments are weak and trailing even weak first quarters like 2015 and 2014.

* Look at some of the early results from huge US companies - IBM, Morgan Stanley, Goldman Sachs - the disconnect between these results and a stock market that is within a whisper of its all-time high is strange.

* I continue to believe that the real price of oil given the current supply/demand picture should be around $25/barrel.  When evaluating a forecast like that you have to ask yourself are you a bigger believer in the power of market fundamentals or Central Bankers?  The Central Banks have had a much more significant role over the past 7 years but over the past 100 years I'd say that fundamentals tend to win out.

To summarize - I'm feeling a little like Don Quixote at the moment because I know certain things to be true but the markets are telling me that what I know is wrong every single day.  Eventually, that may change but until then I'll be out tilting at windmills.


PS - I wrote this late at night and my spell check isn't working so please excuse any errors :)

Friday, February 12, 2016

Was Time Warner reading my blog?

Suddenly at 8:57 last night - bang! No internet, no TV, no phone.  That'll teach me to tell people how to avoid their silly rental fees. *

Later I found out that it wasn't just me, but for a moment I was ready to slip over to the side with people wearing tinfoil hats.

Speaking of crazy conspiracies...have you noticed 2.5% jump in stocks since yesterday afternoon?  This might be one of the world's greatest coincidences of all-time, but yesterday as the S&P 500 slipped right down to that critical 1812 number that was about to cause sell orders to flood the market when a strange oil headline crossed about the prospect of OPEC meeting to cut production.  This headline single-handedly saved the stock market as oil stocks spiked dragging everything else along for the ride.

Today we had a variety of headlines that seemed to indicate that the Fed was not seriously considering negative interest rates at this time (but Japan said that just one week before going to a Negative Interest Rate Policy).  This should have taken some wind out the market if they were hoping for more free candy from the Fed, but the computers that read the headlines missed the context and only picked up on the words Fed & Negative Interest Rates.  This sparked some more panic buying in the morning which beget more buying and the week was saved.

Now we have to deal with the fact that
* the oil headline that saved the market has been ignored by the only parties that really matter - Russia & Saudi Arabia (who appear to be ready to go to war in Syria against one another so I'm thinking they aren't in a real cooperative mood)

* the statement issued to the WSJ was sent around midnight in the middle east which seems a bit odd

* and even the WSJ questioned the validity of the production cuts, but no matter, the active traders had their best week in years and you get to sleep better this weekend as the stock market avoided collapsing for another week.


PS - don't buy any of the nonsense headlines that today's rally was sparked by strong US retail sales. They were wildly over-inflated by seasonal adjustments and if you believed those numbers you'd be selling stocks today because it would bolster the Fed case for raising rates further.

* A special note for Time Warner customers: They are starting the campaign to add a set-top box rental to your account.  If you currently just run the cable wire into the back of your TV, that will no longer work as of June 2016 and you'll need to get a device (like a $40 Roku) or rent a set-top box for $3/month from your friendly neighborhood cable behemoth. For someone like myself with 4 televisions in the house that is $12+/mth forever and I wonder if they'd ever raise the price of the rental? :)  I'm buying an HD antennae and if that provides an adequate signal I'll probably cut the TWC cord for good.

Thursday, February 11, 2016

Not trying to cause a panic, but it's time to FREAK OUT!

Just kidding, relax and take a deep breath.

Global markets are under severe pressure and the numerologists...um, sorry Technical market analysts are running the show right now.  If you remember last week I said the number that everyone on Wall St. was worried about was 1812.  This represents the low of the S&P 500 way, way back in Jan 2016 (yeah, three weeks ago) and it seems like the programs want to retest that number (futures are bouncing around but were 1814 last I checked).

A significant break below that level and I don't know what the machines will unleash but it may not be pretty.

So what's driving this latest move?  I'd guess it's some pretty vague "sentiment" like

* Concerns about Central Banks having few policy tools left


* Fed Chairwoman Yellen's comments yesterday which almost asked the market to crash.

Okay, so that's probably a bit extreme, but in a nutshell this is what the head of the Federal Reserve said -- if markets were to continue to swoon, the Fed could consider reversing its plan to tighten.  This is code for "if Wall Street wants more free gov't cheese in the form of lower rates or direct intervention, stocks need to go lower first".

The market and global economy are acting very much like they did in 2013 when I first saw signs of weakness.  What I did not expect was that the Fed would come to the rescue once again as soon as equity prices dipped.  The major investment houses are about to call the Fed's bluff again - will the Fed come to the rescue for the umpteenth time and more importantly, will it even matter to the markets?

Today might be a wild day as the Fed Chair Yellen will be speaking throughout the day while the markets continue to gyrate.

** Update: This is how crazy the markets have become - in the past 30 minutes before the markets have even opened, buyers have flooded the market assuming that this dip will be sufficient to induce the Fed to act and the futures are well off the lows of the morning.  Good luck trying to figure out how this relates to the actual value of a company anymore.  The stock market is just game of 1's and 0's for the computers.

One final note that I thought I should mention.  When it comes to predicting the outlook for global trade and by default global economic growth would you rather listen to an economist who has never worked outside of a university (ie, most of the current Fed Reserve Bank heads) or someone who runs the world largest shipping company?  Hmm, I'll take the shipping CEO for $200 Alex.....

Well, the CEO of Maersk (you see their containers EVERYWHERE) told the Financial Times yesterday that "It is worse than 2008. Oil is as low as it was in 08-09 and freight rates are lower.  The external conditions are much worse...." so, that's something to keep in mind.


Wednesday, February 10, 2016

Everything is fixed. Go back to your regularly scheduled program.

For the second time in 2 weeks the market stared straight into the abyss and bounced.  The bounce began on Monday when a determined set of programs bought stocks in consistent enough intervals to drag in other programs that use plain vanilla if/then strategies.

Overnight stocks soared on ........ insert random idea here -
Trump victory?
Clinton loss?
The German government promising to save Deutsche Bank?

However, the most likely cause is the one the markets can't seem to live without - Fed Chair Janet Yellen is speaking today.  So, the expectation is that she will utter something even beyond what is taken for granted now, the prospect of negative interest rates or QE4, but perhaps preemptively taking the next Fed rate hike off the table.

At this point the Fed's credibility is the asset that is in the most danger so it will be interesting to see how the market reacts, but right now they want to make money on the buy side so it's a green day for everyone (except Solarcity - YIKES!).


Monday, February 08, 2016

Selling Vonn Miller Jerseys in Charlotte?

With China effectively shutdown for the next week as a result of the Lunar New Year celebrations most people expected a relatively calm week on Wall Street.  However, that calm was severely disrupted this morning - specifically at around 4:55am when someone stepped on the selling accelerator.

A specific sell order hit the market at just before 5am and while it was not particularly large it hit at a moment when the markets were quite "thin" (ie, few buyers and sellers in the market).

Imagine trying to sell Vonn Miller jerseys this morning in Charlotte to understand what it means to sell into a thin market.  You might have to lower your price quite a bit to complete a sale :)  This sell order took the markets lower just as European markets were preparing to open.

So, what is triggering this late round of worries?  Well, there are the usual suspects of slowing growth, concerns about the Central Banks becoming less effective, etc., but I think the greatest concern that I have seen lies in Germany.

Credit Default Swaps (CDS) are incredibly complicated instruments but for simplicity's sake let's just call them insurance.  They are insurance against a company becoming unable to fulfill its obligations.  During the 2008 crisis the CDS signals from Lehman, AIG and Bear Sterns were the most consistent warning signs that something was very, very wrong.  You can use these prices to help calculate the market's assumption that a company may default.

Well, Deutsche Bank (likely the largest bank you've never heard of) has seen their risk of default rise from about 5% to over 16% in the past couple of weeks.  Anything above 10% is disconcerting in my opinion and there doesn't seem to be much relief in sight.  Deutsche Bank also has about $55 trillion - yet trillion with a T - in counterparty exposure.  This simply means that what impacts Deutsche Bank impacts every major financial institution in the world.

I don't know how this will play out and I'm not ready to forecast that Deutsche Bank is the next Lehman Brothers, but this is the stuff behind the headlines that is actually moving the markets.  The lessons of 2008 have been completely ignored and the global banks are more concentrated today than in 2008 and they have assumed even more risk.

For the record my past employers included Lehman Brothers, AIG and..... yep, Deutsche Bank.  I'm going for the global financial crisis catalyst trifecta :)


PS - remember 1810-1815 on the S&P 500 (currently 1880).  If we were to close below those levels the computers will likely go haywire trying to find a new bottom and it could be significantly lower (note, I'm not a technical analyst and I think that technicians are more closely related to numerologists than analysts, but the markets are ruled by the charts right now).

Friday, January 29, 2016

Kudos to National Grid

I am not typically a fan of our local utility as they continuously escalate prices in an era when their cost of electric production should be plummeting, but I've seen them locally taking a proactive step and I wish more companies would follow their lead.

As part of their work to manage the growth of trees around overhead power lines the National Grid does routine tree trimming to take away limbs that could impact the power lines in the event of a wind or ice storm.

In the past week they have been concentrating their efforts around our community and the evidence is everywhere.  I think if you looked around you'd be hard pressed to find a single tree that is threatening our overhead power lines right now.  Given the warm, El Nino influenced winter we're having and the similarities to 1998 when our region was hit by a paralyzing ice storm this is both proactive and surprisingly visionary.

I hope that this isn't just some government grant to keep stabilize National Grid payrolls, I'm hopeful that this is an example of a large corporation realizing that a small investment today can pay great dividends in the future through reduced exposures.

More companies should take up the "Invest for Today, Win Tomorrow" mantra over the "Cut Costs Now, Cut Costs More Tomorrow" policy that is so prevalent in corporate America today.


* I know the tree trimming can be controversial because it can give some of the trees a fairly odd shape, but the benefit of having electricity during the next major storm should offset any discomfort you feel from looking at ugly trees :)

Has the world gone crazy all at once?

Overnight the Bank of Japan announced a fairly shocking move to Negative Interest Rates (you'll hear this referred to as NIRP - negative interest rate policy).  This really caught investors flatfooted because just a week ago the Bank of Japan said they had no plans to adopt such a policy.

In a nutshell, here's what this means - If you buy a government bond in Japan (ie, lend them money) you get to pay the government for the pleasure of lending them your money.

Yes, this is crazy, but this the world we live in now.  Japan has now joined a number of European countries in trying to reflate their economies using old world techniques.

This is akin to a cable TV company hearing that subscribers are leaving them for Amazon Prime & Netflix so they decide to give you a free typewriter with every upgrade.  The central banks around the world are fighting a losing battle to increase inflation (and wages, etc) with tools from the 20th century.  However, we're in the 21st Century and the globalization of our economies means that these tools will no longer work.  Deflation is a beast that can't be contained within borders.  If prices rise in country X, you move your operations to country Y to lower costs.  This is why we are seeing so many of our global economies struggle.  In the long run, this is a very bad sign for the world's 3rd largest economy and it furthers my argument that Japan is a larger version of Greece with a worse demographic outlook.

The global stock market reaction has been very weird.  Initially stocks soared 2% globally only to fall back into negative territory within the hour and then soar again in a very organized trade overnight. While I think you could argue that this is a mild positive for the Japanese stock market (their plan is to weaken the value of the Yen which will increase stock prices, however since your Yen will buy less the average citizen would not be impacted) but the argument that ALL stock prices should rise is really flawed.  The 2nd and 3rd largest economies in the world are beginning to engage in a global currency war (China might pull their own black swan and really devalue the Yuan in response).  This will make our products much more expensive globally and damage the US economy in the long-run.  Currency wars are a zero sum game, if Country A wins, Country B loses.

However, markets are no longer based on rational thoughts like these.


Good luck and remember that Selling the Rips has been the only winning strategy in 2016.


Wednesday, January 27, 2016

Americanize, Americanize, View the World From American Eyes

Any chance to use one of my favorite song lyrics in a blog post is always a plus.

This is a very long article from Atlantic magazine (does the Atlantic even bother to write short articles?) but I'd suggest you take 10 minutes and give it a read this weekend if you value your privacy.

"The company has taken roughly 2.2 billion license-plate photos to date. Each month, it captures and permanently stores about 80 million additional geotagged images. They may well have photographed your license plate. As a result, your whereabouts at given moments in the past are permanently stored. Vigilant Solutions profits by selling access to this data".

As my increasingly wary teen daughter said tonight "We might have to resort to riding our bikes to the store so Amazon won't know when we're out of milk".

Since I'm in a link sharing mood: This interactive chart from McKinsey should be on the home screen of every parent with a child looking at colleges.

While at first it appears very cluttered, I'd suggest you breakdown the data by selecting specific industries (uncheck the "ALL" box on the right hand side of the chart).

In essence, the chart is designed to show you the percentage of a job that can be automated (ie, replaced by a robot or software) versus the pay of that job.  Ideally you want to be in the lower right hand of the chart --- low % of automation & high salary.  However, more interesting are the jobs in the middle and toward the top.  These jobs are high paying but are subject to a high degree of automation.  Network administrators, nuclear power plant techs, etc., these jobs might be in real trouble when companies look to cut costs through automation.

I'd say however, that much of this chart is based on standard industry inputs.  They show very high demand for financial planners, etc., however, I actually think that industry will be completely dead in 20 years so take it all with a grain of salt.  Either way it should prompt some interesting conversations.

And as various doctors in our family have all confirmed make sure your children grow up to be Nurse Anesthetists :)


Has #BTFD been replaced with #STFR?

Today's little temper tantrum in the market caught most of us by surprise.  The consensus expectation for what the Fed would say was actually pretty accurate and yet, the market acted as if it was surprised that most Fed forecasters were actually right.

After 7 years of extraordinary measures to attempt to rescue the US economy the Fed decided in December it was time to see if the economy could ride down the driveway without its training wheels.  The market has responded as it has at each previous point in the Great Recovery - selling off hard and demanding more Fed measures to prop up equities at any and all cost.

This created a clever hashtag related to the markets: Since the Fed has our back, every time the market falls just Buy The Flipping Dip - #BTFD (though the actual word probably isn't flipping but this is a family blog, right?)

Well, now that the Fed seems to be working with either bad data, old data or is just clueless, the markets have become rattled and the question bouncing around Wall Street is should we Sell The Flipping Rip - #STFR (ie, sell every bounce).

So far in 2016, #STFR is winning this battle of wills, but there will be plenty of opportunities for the dip buyers to have their day.

Facebook will be the talk of the town tomorrow after delivering good results (though average daily users seems to have plateaued thankfully).  I'd expect plenty of Fed chatter as they try to confuse the market with what their message REALLY is.

If you've been on the right side of the trading in 2016, this has been an incredibly lucrative year in the first month.  However, I suspect many active traders are getting burned by chasing ideas and that means there may be fewer natural buyers if we get close to those dangerous levels on the S&P 500 again - 1820 is a number to have on a post-it note in your office.  If we break that number the implications for everything from state budgets to the 2016 elections will be huge.