Source:Sentiment Trader
Source: Pension PartnersSource: Pension Partners
Source: Jesse Felder
In a previous life I was an Institutional Fixed Income Salesperson for HSBC in the early 1990’s. It was there that I realized that the fixed income folks rule the world. The size of the global credit markets dwarves the global stock markets. The stock rally off the low of 2009 was in essence a second derivative effect of one of the greatest fixed income credit rallies the world has ever seen. It has literally been an outright market manipulation of epic proportions. The Fed and other Central Banks have have taken credit supply out of the market which has spilled over into a relentless bid in the equity market the likes of which we have never seen before. This rally is not built on sound fundamentals but instead it has been built on easy credit. Why does this matter? It matters because credit is deteriorating rapidly and the sugar high in the equity markets is about to crash hard. I am even more convinced that the unwind will go down one of two ways. We either crash or the Fed continues to prop this up and a revolution ensues from the continued enrichment of the few. I say that because in order to prop this up the Fed will actually have to start buying stocks outright to prevent a crash and that is when it will become hard to stomach politically. We should have crashed in October last year but the Fed conspired with Japan, China and the ECB in the QE handoff. Since then the US markets have essentially gone nowhere. So despite massive efforts of the CB’s we have reached the end game. Each intervention which used to buy months now only buys days before gravity reasserts itself on both credit and stocks. We have reached zero marginal return of QE and CB intervention.
The current disconnect between stocks and credit is at unsustainable levels. Either Credit needs to quickly reverse and unicorns and rainbows continue or stocks will have a very scary correction within the next 40 trading days. My guess is that we will see at least a 20% correction that will happen very quickly. After that it depends on what the Fed decides to do or not do.
The first chart is from Jason Goepfert at SentimentTrader: “Over the past 30 years, the only time stocks shrugged off high yield sell-offs to this degree was in 1999-2000.” On a two year rolling basis we are now in march of 2000. You may have noticed the blow off top in the Nasdaq we just had on awful breadth. The internals of whole market are dreadful and continue to deteriorate. The indices are being held up by fewer and fewer issues. It is only a matter of time until they collapse from exhaustion. The second two charts show both high yield and investment grade credit spreads widening. The final chart shows that this most recent rally is a gigantic head fake that credit does not buy into yet. If I had to pick how the divergence closes my guess is stocks collapse quickly. Fixed income traders are usually right compared to equity traders…not the other way around.
Complacency in the stock markets is at record highs and most folks are still looking up and have tremendous faith in the Central Banks. Here is the dirty little secret: CBs don’t have power except that bestowed to them by market participants. The speculators have levered up on the free money provided to them by the Fed and other Central Banks. As long as the credit flows so does the party. Credit markets are telling you that the party is ending. The one thing about credit parties is that they end very very fast due to the contagion of the collateral chains. If you choose to ignore this then do so at your own peril. Why is the party ending? Primarily because we have issued too much debt in both the public and private markets over the last seven years that can not possibly be supported by current collective cash flows. In fact the easy money has essentially caused deflation through mal-investment and over capacity. The energy complex is an example of credit chasing projects that will be zeros because too much capacity was produced which lowered prices. The credit markets are starting to sniff out this risk and it is only a matter of time until the equity markets reprice this risk.
The large ETF firms are getting bank lines ready to provide liquidity for redemptions. If they are preparing shouldn’t you? Larry Fink is so concerned he is trying to get the SEC to approve internal loans from BlackRock funds that have excess cash that can be lent to those hit with redemptions that lack cash. The writing is on the wall.
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Blue,
I have mentioned in previous posts that the fixed income guys are the smartest in the room. As for continuation of the equity rally, the Fed will likely intervene and buy stocks. Its been a while since I read a speech by uncle Ben, cant remember the year, but it was his play book and he used it to a tee. The equity market is the last policy tool left and they will keep it alive at all cost, even civil unrest.
I have always viewed HY as a proxy for equity and the degree of divergence is beyond troublesome. I would like to know what indicator/factors you are using to say within 40 days or so.
Thanks for the posts.
Meh, The PPT will just put in a bid on the HYG….There is nothing to stop them. Print money, buy stuff that is down. Rinse, repeat.
doesn’t the fed routinely buy stocks already?
how does the little guy get / stay on the right side of this?
Great post, the only thing I disagree with is the Fed’s next QE being to buy back stocks. The only buybacks they can do that will prevent a collapse would be to buy back publicly traded company’s debt and retire it. The basic materials sector is overflowing with companies whose balance sheets are screaming default unless the commodities they deal with shoot up far, fast, and soon. No amount of buying back stocks can prop up companies heading for bankruptcy.
Right when Obama leaves office is when shit hits the fan. He is the most corrupted official ever to be in office.
Blue, when you say the stock rally has been built on easy credit and the credit supply being minimal, is that combo of investors reaching for yield, margin interest very low, both, or something different?
Also, what chart in this post do you use to determine whether credit is deteriorating? Asking for my own knowledge and learning. Appreciate the post and response.
It seems Carl Icahn agrees with you
http://www.caseyresearch.com/articles/the-next-financial-disaster-starts-here
Don’t blame the CBs, blame the voters and the politicians, they want the gravy train and the good times to roll on.
The bubbles have been caused by billions oh humans, not a few central bankers, stuck between a rock and a hard place.
The Fed won’t buy equities, but it will lose its charter in the years ahead.
GM- Why do you think the fed will limit themselves from equity purchases?
$DIA 05/20, $IWM 06/23, $SPY 07/20, $QQQ 07/20. A rolling blowoff top that ended with $GOOGL’s ramp and $AAPL’s decline.
BearRaid, there’ll be trillions flowing into US equities as the global govt bond bubble bursts.
The Fed will have to buy the govt bonds to fund Uncle Sam.
Ultimately futile, but Uncle Sam is the boss!
GM- You make a good point, I would contend that there is nothing to stop them from buying bonds and equities with both hands. “Emergency Temporary Measures…blah blah blah”
GM: What evidence is there that the US Treasury bond “bubble” is going to burst anytime soon? Wake me up when the 10yr is at -4%.
Where is the PPT today?
Right on. Hopefully your TZA is in the positive territory.
McClellan calling his shot. At most 1 more marginal high and it has to come on the next push higher, or not at all.
http://www.mcoscillator.com/learning_center/weekly_chart/rasi_shows_bull_market_waning/
That article above is eye-popping. $HYG trades millions and millions of shares daily, while the underlying bond literally only trades 13 times a day on average. Unreal. When the shit hits the fan the rush for the exits is going to be absolutely gnarly.
This is how crashes happen. Illiquidity. Sticking to my call of a gap down of over 10% sometime this year on a night when all foreign markets have a death drop, similar to 1987. All it takes is one domino to fall to bring the whole thing down.
Give me a break man. The market is up 34% since 2000. That’s 1.9% annualized for 15 years. 15 years of consolidation while earnings are up 115%.
Every time the market drops 2-5%, I read articles like these. This has been going on since 2009 and will continue until the bears are finally snuffed out, if they aren’t already.
Can we have a 10-20% drop? Sure why not? If biotechs crash then it could spill over to the market. But to suggest that market is on the verge of massive crash is irresponsible and has been wrong since 2009.
Jon V,
Ignore warning signs and buy this dip then. A euphoric rush into large cap tech names. Unemployment 42 year lows. Commodities crashing and the accompanying oil patch crash along with the high yield debt problem. Transports in a clear downtrend. China economic warning signs, not to mention a crashing equity market. Sovereign debt issues bubbling up everywhere.
You said something very prescient I think in your post. “this…will continue until the bears are finally snuffed out, IF THEY AREN’T ALREADY.”
Very good point. Most bears are probably snuffed out at this point.
Good luck.
Nice post Amigo. The party is truly over. Turn out the lights.
https://youtu.be/gmQuIpM4h6A
I do wish it would stay a little longer though.
https://youtu.be/KsTXFcGUMqg
Qci – I’ve heard different variations of the same argument from bears for 6 years now. Dubai, Greece, PIIGS, flash crash, Egypt revolution, Japanese tsunami, taper tantrum, Greece again, Detroit bankruptcy, Chinese ghost cities, municipal bond bubble bursting, Puerto Rico collapse, high yield debt collapse (versions 1 and 2), Japanese “bear market” (after 75% rise in a year (let’s ignore that it’s up 75% since that bear market), momentum stock “bear market” in 2014, Ebola, Greece again, Chinese “bear market” (after 150% rise in a year (let’s ignore its still up significantly for the year and their economy is growing faster than any country excluding India), high yield debt crash (version 3)…numerouse Hindenburg omens, head and shoulders topping patterns, crashing commodities + rising dollar meaning destruction of market (cuz the market NEVER went up in the past 100 years when that happened).
Every bearish argument has been destroyed. The latest rendition is that high yield debt is a disaster. I remember this same argument twice previously already. Or wait, maybe it’s that the China market is down 20% (again let’s ignore the rise prior to that). Shit I can’t remember which “horrible” omen is the latest. All I know is I’m glad I ignored zero hedges warnings since 2009
PB, the bond bubble will burst in due course, in waves, across the planet.
Meanwhile, calm down.
‘Every bearish argument has been destroyed’.
Too funny. It’s going to be fun to watch this one burst.
Jon V,
Thanks for the reply. It’s nothing personal. Sounds like you are more of an investor than a trader and I can’t fault you for not wanting to just liquidate all your holdings. You may be right that we’re going to keep going in true blowoff type fashion. I’m not even saying that we aren’t in 1927 right now. I think if we are in 1927 were still very likely to get a “false breakdown” type move before the blowoff given what is going to happen with currencies and sovereign debt in the next 2 or 3 months. We will know soon enough.
But you could go back to 1929, 1987, 2000, 2007, etc. and find people making the same basic argument that because the Bears have been wrong all these times they can never be right. I think that kind of argument is filled with hubris and little substance, with all due respect.
A correction of 10-20% that ends up being a false breakdown is absolutely what you should want here IMO. And I think there is a good chance that could play out because of the capital that will flow into the U.S. when Europe implodes. The implosion has already begun IMO, you’re just not hearing about it yet. What’s going on on the ground in Greece is absolutely terrible with no chance of improvement. One thing that isn’t priced in here is a Grexit via revolution, and the contagion effect in similar countries.
There are warning signs flashing in emerging market currencies like Brazile and South Africa. No one is talking about the AUD/USD issues starting to pop up.
I realize you view all this as another wall of worry and maybe it is. I don’t think the global finance system is ready for currency implosion and the accompanying debt problems on this wide a scale. We live in interesting times.
Qci I don’t get why it’s always “collapse is imminent” or “blowoff top is coming” or we have to be in a 1929 type scenario. In the prior 15 years we have had returns of 1.9% annualized. Compare that to 10.95% in the 15 years prior to the 1929 top.
Apples to oranges
Jon V.,
Without getting into the minutiae, I believe what we have here is a huge debt bubble that will cause a chain of events no one thought possible, basically the collapse of governments the world over and I believe the end game is in motion. There is no global growth and there won’t be for a while due to the hang over that is coming. Earnings are illusory and supported by stock buybacks, accounting gimmicks and outright fraud. I’m not saying that some of these companies won’t be great long term.
And earnings projections are most likely grossly overstated. For one thing the USD is going to see an incredible bid into the madness that is coming. This will crush corporate earnings and help to precipitate a recession at least. With all that said, the rush into US assets could theoretically push the US equity market into that unreal mania phase like 1987. This is why I say any correlated selloff here could be a false breakdown. It’s all going to depend on what happens into these collapses of foreign governments.
In any event, you’re not going to get grind mode IMO. We’re going to see epic volatility. I’m just trying to call it like I see it. I don’t consider myself and bull or a bear and have no dogmatic of the market. I just don’t think that the next couple of months the play is to be long. I don’t see the risk/reward as being in my favor. Keep in mind I’m not an investor. Anyways, please continue the discussion any time. I love the debate and it keeps me open-minded.
QCI,
I like your viewpoint. I think it makes a lot of sense. I’m sure you’ve already seen, but Raoul Pal has some interesting research that agrees with your thesis. Out of curiousity; which instruments do you think benefit from your thesis playing out? You mentioned volatility ( I agree) but would you make a play on that ie: VIX? Thanks for any input.
Qci-
“I believe what we have here…no one though possible” ; do you know how many people have said this? Why do you think there was a massive bubble in gold?
Billie jones- read this from Ru Paul…back about 70% ago
http://www.businessinsider.com/raoul-pal-the-end-game-2012-6
Guy is a joke
Jon V.,
Dude was about 3 years early. It’s those guys that end up losing it all before the move starts. Currencies and government debt in many countries is starting to spiral into a black hole. Even Saudi Arabia is having problems. One of the reasons they refuse to reduce oil production is because they aren’t able to service their debt without that oil income. Same thing is happening in the oil and gas industry.
I know companies that have reduced their independent contractors (oil and gas employs a lot of independent contracts from title work/lease buying to drilling) over 80%, yet the rig count and oil production doesn’t go down. Why? Because they have to keep drilling to pay off debt. Dominoes should start falling soon in the industry from bankruptcies to distressed sells. $CHK eliminated their dividend to save cash. I mean things are really bad on the ground here in the industry. There are tons of great short opportunities within the $XLE. Most high-yield debt is already worthless, we just don’t know it yet. $HYG is a zero shot and will decline in a rapid and spectacular fashion once the defaults in the oil patch start. Could be the trade of the year.
But that’s just one aspect of the debt bubble. Sovereign debt is the bigger issue. More and more “Puerto Ricos” should start popping up in the news very soon. We’re weeks if not days away.
If I’m wrong feel free to clown me.
QCI – How long have you been preaching this? Be honest about it. You sound like (insert name here – Karl Denninger, Bill Cara, Tim Knight, Bill Prechter, Peter Schiff, etc.)
Blue,
Chinese open giving me very weird vibes if you know what I mean.
Jon V.,
A few weeks of calling this a possible top (whether it be intermediate or THE top) maybe? I’ve been talking about this timeframe for a few months. I’ve always planned to start getting very bearish a couple of months before the Armstrong turn date (October 1) and what do you know the markets looks incredibly weak.
I thought it was interesting that my 401k administrator sent out a notice of extreme changes and limitations on moving money around…30 day freeze if you try to move to cash.
I can’t help but think they’re scared.
Guys,
Thanks for comments. I am camping and out of pocket. I am watching certain levels. If taken out then I fear bull is over. I will let you know if that happens. Matt Bears comment does not give me the warm and fuzzies.
the ushers just whispered ‘fire’ to each other as they move to the exits
that’s your tip off to borrow every penny you can from the 401k and stop new money going in. matching smatching
Blue,
You got any favorite energy shorts into the armageddon of hedges rolling off in the next couple of months?
I think my favorite is $CLR. It has zero hedges and should be frozen out of the credit markets as the bankruptcies start rolling in. I think it’s a zero shot. My fear is a distressed sell, but even that should come at lower prices.
Interesting thread!
If SPY crosses its 200 day average, it will be interesting to see what happens afterward.
Oh, you are so correct in your assessment. Five positive outside months in a little over one year is telling us the speculation is rampant and the party will soon be over.
Its almost comical how confident bears are getting after a 3% decline. This is how sad it has gotten for them.
What’s sad is the eternal optimism at is based on massive artificial QE bubble. That story does not have a happy ending for the bulls.
bushwacker – what makes you think there’s eternal optimism? every time there’s a 3-4% drop every claims the market has topped. does that strike you as eternal optimism?
Just when the world was going to collapse (because of a 3% correction)…
Jon V.,
Bears have obviously been premature numerous times, but this particular setup is the best one I’ve seen yet for a big correction. I think bears are warranted to be confident this time around, even in the face of today’s short squeeze. But, you gotta be quick to admit defeat in this market.
http://www.theburningplatform.com/2015/07/28/sometimes-they-do-ring-a-bell-at-the-top/
Great article basically calling for an imminent crash/deep pullback. I said a few days ago a v-reverse “everything is clear” rally would probably precede a deep a pullback or even crash. Everything is lining up for a swing high this week or in early August.
“Bears have obviously been premature numerous times, but this particular setup is the best one I’ve seen yet for a big correction. ”
I don’t know man. Sitting 2% from all time highs with sentiment weak doesn’t strike me as a topping pattern.
I will say I think there’s a chance we get a strong correction in biotechs soon which could spill over to a 10-12% correction in the market. But the economy is pretty solid, not spectacular, and in that environment the odds of a big drawdown is low. You need to see deterioration in the economy to cause the big drops.
By the way, Jon Hussman is a bit of a laughing stock. He manages money and look at the all time performance of his funds. Only one happy with that is him because he still collects the fees.
He’s too inflexible in his thinking, unwilling to adjust his models for things like globalization of earnings, yielding higher margins and distorting things like Mkt Cap / GDP. He also doesn’t exclude huge one time drops in earnings from things like CAPE. Adjusting is the means to survival
QCI – I’ve found that the key to success in this business is finding undervalued stocks and focusing solely on that. Once a generation you will run into a 1929, 1938, 1974, 2000, 2008, but if you look at what worked in 2000 it was value. Value wins just about out every time. Find the undervalued companies trading at discounts to book, earnings, sales, low payout ratios…and you will outperform. Focus on all of the other noise (direction of market, momentum stocks, chasing prior winners, options trading, etc) and I guarantee you will end up losing money
Well, since I don’t hold anything longer than about a week that strategy isn’t really for me. I use the stock market as a secondary income source from trading, not really to buy and hold.
But anyways, I think the fundamentals of this stock are market are absolutely terrible and supported by Fed cocaine, stock buybacks and generous accounting rules. And, I don’t think the economy is all that rosy. Hence, why “full employment” (if you really believe those fake ass unemployment numbers) is not a bullish signal.
Anyways…
Cramer went “off the charts” to tell us all that his chartist is predicting new ATHs all because the VIX was at 16 and not 11. Just another indication of a top. If only we could get Gartman bullish again.
In cramers defense he has been bullish since 2009 unlike most people on this thread. Gartman is a joke
YELP is most certainly yelping this morning. The BlueStar called that nonsense a long time ago. And that nonsense may not be long for this world. Nice call Blue, hope you profited.
thoughts?
http://kingworldnews.com/bill-fleckenstein-8-2-15/
Hello all,
Back from Vacation. appreciate all your comments. I enjoy polite banter and debate. John V is correct 95% percent of the time. This however is an abortion of a market. Post shortly. Juice yelp was nice. There are many more like it. Take a look at NUS.
@JonV
By all means criticise Hussman for missing the turn in 2009.
But at least do it honestly. I’ve read him for years, he caught both tops (in 2000 and 2007), and re-invested at the bottom in 2003.
He is totally flexible and has adjusted his approach.
And when the cycle unwinds over the next few years, he’ll be way ahead of all of the trend followers once again.
GM – Look at Hussman’s returns inception to date. Would you want him to manage your money? That’s a long time for losing returns. What, in that record, would you call flexible?
Take a look at:
HSGFX (http://finance.yahoo.com/echarts?s=HSGFX+Interactive#symbol=HSGFX;range=my)
HSDVX (http://finance.yahoo.com/echarts?s=HSDVX+Interactive#{%22showArea%22:false,%22showLine%22:false,%22showOhlc%22:true,%22lineType%22:%22bar%22,%22range%22:%225y%22,%22allowChartStacking%22:true})
HSTRX (http://finance.yahoo.com/echarts?s=HSTRX+Interactive#symbol=HSTRX;range=my)
HSIEX (http://finance.yahoo.com/echarts?s=HSIEX+Interactive#symbol=HSIEX;range=my)
Compare each of these with the total return from the S&P 500 inception to date for each one. Seriously, this guy is a total joke. The dude should be an economist. And as Warren Buffett said “We think any company that has an economist has one employee too many.”
Jon V,
On strategic return fund, it will be interesting to review once the cycle completes.
I agree with Hussman though, one has to choose whether to allow a bubble to make one look like a fool before it bursts or after. There’ll be plenty of fools in a few years, Hussman won’t be one of them.