Markets Take a Dive After Fed Announces Balance Sheet Unwind to Begin Shortly

The perennial bear at Zerohedge pointed to a recent analyst note, warning of a balance sheet unwind. Naturally, it’s cataclysmic.

“If Bonds Are Right, Stocks Will Drop Up To 20%.” This point can be summarized simply as follows: there is $1 trillion in excess TSY supply coming down the line, and either yields will have to jump for the net issuance to be absorbed, or equities will have to plunge 30% for the incremental demand to appear.

An unwind of the Fed’s balance sheet also increases UST supply to the public. Ultimately, the Treasury needs to borrow from the public to pay back principal to the Fed resulting in an increase in marketable issuance. We estimate the Treasury’s borrowing needs increase roughly by $1tn over the next five years due to the Fed rolloffs. However, not all increases in UST supply are made equal. This will be the first time UST supply is projected to increase when EM reserve growth likely remains benign. Note both the 2003-06 and 2009-13 increase in UST supply were met with the largest increase in Chinese buying of USTs. With this unlikely to repeat, we believe price sensitive buyers need to step up.

Our analysis suggests this would necessitate a significant rise in yields or a notable correction in equity markets to trigger the two largest remaining sources (pensions or mutual funds) to step up to meet the demand shortfall. Again, this is a slower moving trigger that tightens financial conditions either by necessitating higher yields or lower equities.

The Fed didn’t hike rates this meeting, but they did announce they’ll be unwinding their $4.5t balance sheet starting in October — dubbed ‘balance sheet normalization’. She did say, however, they’ll likely hike once more in 2017.

She said the balance sheet will be reduced ‘gradually and predictably.’

Here’s Yellen trying to explain the Fed’s tight monetary policy, saying she was puzzled by the lack of inflation — chalking it up to ‘transitory’ circumstances.

Don't worry, the lack of inflation is 'transitory.' It's been transitory for 9 years now. She's insane. pic.twitter.com/YBbQDTAA5c

— The_Real_Fly (@The_Real_Fly) September 20, 2017

Yellen admitting that she has no idea why inflation is sub 2% pic.twitter.com/Pv3LDgcCLX

— The_Real_Fly (@The_Real_Fly) September 20, 2017

Markets are not greeting this news with joy and glee. Stocks have taken a dive and the dollar is ripping v the euro, +0.98%.

On the downside, as could be expected with dollar strength, is gold — off by 0.7% — reversing today’s gains.

I was having descriptive dreams of broccoli spears chasing me down Wall Street. As I attempted to cut a corner, a gigantic asparagus man clothes lined me and slapped the shit out of me with his leafy hands. I’m pretty sure a minor form of delirium had set in, likely due to a heightened temperature.

As expected, I woke up every half hour, almost in a sheer panic about my stock positions. Alas, I woke up around 12:46pm, for the last time, and they were all doing just fine.

There is notable strength in both UAN and SMI today, the former being a recipient of a very rare ’emergency buy’ yesterday. I will be regaining my strength soon, as I am currently drinking a bottle of water with a vitamin c packet in it and a pumpkin bagel filled with delicious slimy vegetables.

Outliers to the upside are oil and the downside semis. It’s a do nothing day, for the most part. What have you been doing with your meaningless lives?

I caught some sort of wild variant of the flu yesterday and I’ve been medicating myself ever since. With mega doses of vitamin C, some decongestants, and fever suppressants, I feel as if life simply isn’t worth continuing under these present conditions. Nevertheless, I march on into the complacent market, filled with rainbows and sunsets.

I am going back to sleep, immediately following this post and can make no commitments as to when I will be returning.

I see Jimmy Kimmel is trending on Twitter, which confirms my suspicion that I had been wasting away discussing politics and the cavemen who cavort in it.

Early going, futs are flat, but gold is higher by 0.6%.

WTI is the big show-stopper, with gains of 1.2%.

Hurricane Maria made a direct hit on Puerto Rico, with winds of 155mph.

BREAKING: Hurricane Maria makes landfall near Yabucoa, Puerto Rico at 6:15 a.m. local time with winds of 155 mph pic.twitter.com/O2WNR7FjjV

— NBC News (@NBCNews) September 20, 2017

And here’s some other nonsense from my Twitter stream.

Ok, off I go. Don’t even think about waking me up. I’ll likely wake up every 30 mins anyway, induced by nightmare’s of me losing all of my money in FIZZ.

The ETF industry has made a mockery of hedge fund managers. Warren Buffett is on the precipice of winning a 10 year $2 million bet against an active manager, for waging $500,000 that the mundane SPY would trounce his funds over a 10 year time frame. Said fund manager only managed to eek out ~2% annual returns since then, humiliating himself in the process.

Excluding dividends, the S&P 500 is up ~13% this year. Not too many fund managers can claim to be up that much.

According to Barclay’s, the hedge fund industry is woefully underperforming the market as a whole this year, sporting just ~6% returns. Naturally, to get a pure apples to apple comparison, we’d need to ex out bond funds and special situation arbs. Nevertheless, I think it’s fair to say the vast majority of hedge funders can’t trade to save their lives and are crushed on a regular basis vs static, boring, low fee, ETFs.

Here are some of the top performing unleveraged ETFs this year. Let me know if your manager beat these.

GBTC +487%
XIV +99%
KWEB +69%
CQQQ +66%
EMQQ +65%
BRF +61%
LIT +61%
BBC +55%
PLND +55%
REMX +51%
ARKG +51%

They’re guiding way down on earnings, a long winding staircase into the abyss of a retail landscape, post Amazon, in ruins. Shares were already down in excess of 55% over the past year, prior to this harrowing calamity. With these numbers catching even the most bearish off-guard, you should expect carnage in the after-hours, carnage in tomorrow’s pre-market, and a blood bath to ensue during tomorrow’s trade.

Over the past two years, BBBY had kept up the canard by issuing big discounts, which left sales flat and earnings dropping off the cliff, to the tune of 30%. Apparently, their efforts to increase foot traffic have failed and the chickens are now coming home to roost.

Shares are off another 13% in the after hours.

Reports Q2 (Aug) earnings of $0.67 per share, $0.28 worse than the Capital IQ Consensus of $0.95; revenues fell 1.7% year/year to $2.94 bln vs the $3.01 bln Capital IQ Consensus.

Comparable sales in the fiscal 2017 second quarter decreased by ~2.6%. Comparable sales from customer-facing digital channels continued to have strong growth in excess of 20% for the 13th consecutive quarter, while comparable sales from stores declined in the mid-single-digit percentage range during the fiscal 2017 second quarter.

Includes the unfavorable impacts of approximately $.08 per diluted share of cash restructuring charges associated with the acceleration of the realignment of our store management structure announced on August 3, 2017. The estimated costs associated with the impact of Hurricane Harvey of approximately $.02 per diluted share; and the impact of the new share-based payment accounting standard of approximately $.01 per diluted share.

Co issues downside guidance for FY18, sees EPS of $3.00 (prior: down LSD-10% from $4.58) vs. $4.00 Capital IQ Consensus Estimate.

The Co’s planning assumptions reflect actual results through the fiscal second quarter and the continuation of the trends the Co has been experiencing, and the unfavorable impacts of: the cash restructuring charges associated with the acceleration of the realignment of our store management structure; Hurricanes Harvey and Irma; the adoption of the new shared based payment accounting standard; and further increases in its overall expense structure to reflect some of the accelerated spending associated with the Company’s organizational changes and transformational initiatives. The Company is now modeling net earnings per diluted share for the full year to be about $3.00, with the balance of the net earnings per diluted share to be split approximately 20% in the fiscal third quarter and approximately 80% in the fiscal fourth quarter.

I am over here drinking a hot hot cup of extra dark roast (the darkest roast the earth could offer me), listening to WQXR- Classical FM, perusing the recent winners and one sector stuck out like a sore thumb. It wasn’t your faggotry in the lithium ion space, or my very manly (indeud) plays on FIZZ, OLED or even XIV. It was the god damned agricultural chem space, a sector that has been bedraggled by obtuse losses for the better part of the past decade.

Gone are the sweet, harmonious, days of the $100 tomato.

Or is it?

According to the metrics vested in me, I spied magnanimous gains, both expressly enjoyed and retained, in UAN, CF, IPI and even AGU and POT.

This prompted me to take immediate action, without even thinking about the untoward consequences of my impulsive behavior. I logged into my brokerage account and purchased UAN, the very lowest of the low on a very ugly totem pole. Immediately thereafter, I felt a sense of relief, as if I had done my duty. Ergo, this emergency has been justly explained and you’re all informed.

Take a brief look at the numbers for UAN, perhaps there’s a cyclical change happening now. Look at that revenue growth.

Good day to you.

The lithium story is as old as the day is long. But for some reason, which I am apparently ignorant about, this is happening again. Perhaps it’s Tesla related, or maybe the automobile industry is truly trying to adopt these batteries in a large way. Other than dicking around with lithium batteries inside of my flashlight, I have little enthusiasm for the sector.

But what the fuck do I know anyway, right?

Lithium, as represented by LIT, is up 62% for the year.

The main play, Chilean miner, SQM, is higher by 121% this year.

Some other plays include, but not limited too, BYDDF (+21%), HPJ (+109%), ALB (+57%), FMC (+63%).

Now I could do a cursory google search or ask a friend of mine to send me a report on the industry, summarize it and then post it here for your pleasure. But why bother doing that? What in the fuck is your purpose anyway, aside form leeching and complaining, taking, and stealing?

How about you tell me why Lithium is such a great investment now and I’ll patiently wait here, waiting a bowl of cereal (coconut milk) eagerly anticipating your report?

My newly minted OLED position is off to a great start, as the Apple transition over to the technology causes widespread panic and supply chain angst. I intend to profit immensely by this discord, via OLED, or another means.

I sold out of FAZ. It didn’t work. The banks didn’t collapse. It’s a memory.

Moving on, I am still optimistic that we might see some sort of hurricane this year threaten the United Steaks, causing PGTI to gap higher once more. Also, volatility should begin to ramp up a bit, especially during the latter part of September. My XIV position is earmarked to be sold at $95. As the Lord is my witness right here, right now, I shall sell it at $95 or more, in the not-too-distant future.

Both SMI and FEYE are consolidating — nothing to worry about there. I am, however, eagerly awaiting the breakout of my FIZZ — which has tempered its violence to the upside over the past week or so. I imagine parents are busy with back to school activities, running around without adequate amounts of water flowing through their systems. Might I suggest venturing over to the local grocer to pick up a case or two of La Croix Mure Pepino?

Quit being an immense faggot and buy some now.

The Graham-Cassidy bill is picking up steam in the Senate, which would eliminate the employer and individual mandate, permitting people to choose flimsy plans on the cheap. As you could imagine, the healthcare mafia is panicking over this and are likely rushing to lobby Sen. McCain’s office to vote against such a measure.

Some of the standout losers include MOH (-6%), CNC (-4.6%), WCG (-4.3%),AET (-3%).

The gist of the new proposed plan would transfer power over to the states via grants by eliminating federal funding.

Source: NY Mag

But Graham-Cassidy does something even more radical: eliminating federal funding for Obamacare marketplace subsidies and the Medicaid expansion, and replacing it with one block grant to the states.

“If you like Obamacare, you can re-impose the mandates at the state level,” Cassidy told CNN. “You can repair Obamacare if you think it needs to be repaired. You can replace it if you think it needs to be replaced. It’ll be up to the governors. They’ve got a better handle on it than any bureaucrat in Washington.”

Sen. Paul sums it up.

“I think this is a game,” said Senator Rand Paul, one of the few GOP senators openly opposing the bill. “I think this is a game of Republicans taking money from Democratic states. What happens if Democrats take power back?”

Breadth stands at 49% today, with banks leading on the upside. Incidentally, I closed out my FAZ position.

For the first time ever, Norway’s sovereign wealth fund, which was launched 20 years ago to invest their oil money, has surpassed $1 trillion.

“I don’t think anyone expected the fund to ever reach 1 trillion dollars when the first transfer of oil revenue was made in May 1996. Reaching 1 trillion dollars is a milestone, and the growth in the fund’s market value has been stunning”, said Yngve Slyngstad, chief executive officer at Norges Bank Investment Management.

The fund’s administrators said that on Tuesday 19 September 2017 at 2:01 a.m. local time, the fund value hit $1,000,000,000,000, or $1 trillion, for the first time.

The bank said a strengthening of the world’s major currencies against the U.S. dollar combined with strong equity markets during 2017 had rapidly increased the U.S. dollar value of the pooled capital.

The fund is broadly diversified and is very open about how the money is invested. If you’re interested in the details, check here.

The fund is ~65% long equities, upwards of 30% fixed income and a little real estate.

Norway’s GDP for 2016 was $370 billion, or $70k per capita.

Here’s the top countries, sorted by highest GDP per capita.