The High Yield Problem

This goes back to the negative feedback loop I discussed last week, the auto-catalyst that Wall Street jerks off to whenever there is a crisis.

The reason why the financial crisis happened was because we went from super low rates and the subprime mortgage industry was built upon it — homeless men in mansions borrowing from their HELOCs. Today, after a decade of ZERO interest rates, what do we have? Corporate balance sheets FESTOONED with debt, taken out to buoy stock prices, pay bonuses, having a grand old time.

But what happens when the party ends and companies like At&t stare into the abyss and see $186 billion in debt?

The debt/equity ratio comes into play and when the equity part of the equations drops off, the debt becomes all the more meaningful. As unbelievable as it might seem, if the debt/eq ratio gets too out of whack, confidence is lost and the underlying company is considered insolvent. Covenants are broken and the stock goes to zero.

How much debt are we talking about? Excluding the banks, who have trillions by themselves, we’re looking at around $10 trillion plus. Look at the graphic below, provided by Exodus, and you can see the average debt/eq ratio is under 0.8. Some sectors are worse than others. For example, the oil and gas industry has about $300b barreling into the danger zone.

This distress can be seen in HYG or JNK, as bonds for lower quality debt reflect the deterioration in the fundamentals.

And here’s ~$2 trillion in debt whose stocks have raced down more than 10% today. The average debt/eq ratio for these bowsers is 2.3x.

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We’re getting respite now and bargain shoppers are piling in, tripping over each other in an effort to grab some crumbs of profit. We’re late in the year too, which means hedge funds will desperately grab at alpha, otherwise go out of business. This is the market we’re in now. The backdrop is gloomy.

The Fed is almost certainly going to hike rates in December, especially since Trump is calling them out. The China trade talks, if they fail, will really cast a dark shadow over stocks. If they’re successful, well, we go back to the way things were before.

Does anyone really think status quo will work now?

With WTI -30% this quarter, I believe the market is forecasting a severe economic slowdown. Morgan Stanley talked about it yesterday.

We can do some valuation analysis on stocks like AAPL, take their lowest estimates and extrapolate a price target based upon a 10 year moving average of their p/s and PE ratios; but what good is that is the E portion of the PE is a moving target lower? That’s the issue here. We’re looking at FPEs and saying ‘oh, markets have 20% upside from here’, based on numbers that might disappear.

The Nasdaq is building steam now and my trades are working. But I’m not disillusioned. Take your profits quickly and prepare for the rough roads ahead. I wouldn’t stay very long after this week.

We had a lot of fun yesterday. The market was up nicely and Cramer was scared of stocks. We felt better than him, smarter, better looking, more hair. Now we feel the same, ugly, fucked, forked, radish.

Oil is down 30% for the quarter and I think it’s fair to say, without pause, we are in a bear market.  The stocks I bought yesterday are sharply lower today. Actually, I bought inverse ETFs and they’re sinking. If things do not firm up, if things do not get better, I’ll be selling them and hiding in my home with lots of cash. I’ve been through so many bear market — I consider myself an expert on these matters. Heroes die first; cowards get to live another day, smell the lavender infused air, eat well, enjoy the good times.

We may be heading into a prolonged downturn — an ordinary and hazardous bear market, so BEWARE fuckers and don’t think the market is good and ready to coil higher — ’cause it isn’t.

Ahead of the all important G20 meetings in Buenos Aires, US officials are floating an old story via the main stream regarding China’s involvement in the American opioid crisis. Approximately 70% of opioid related deaths are due to fentanyl and the supply is coming from China, via the US Post Office (mailed via gelatin tablets) or through the Mexican Cartel.

Back in August, Trump chimped out over this issue.

Source: BBG

A commission set up by the U.S. Congress said Chinese authorities are not doing enough to halt the flow of the synthetic opioid fentanyl and related chemicals into the U.S., where the substance has been linked to an epidemic of overdose deaths.

“U.S. officials have proposed strategies for Beijing to systematically control all fentanyl substances, but the changes have not been approved by the Chinese government,” Sean O’Connor, policy analyst for the U.S.-China Economic and Security Review Commission, wrote in a Nov. 26 report. Faxes seeking responses from the National Medical Products Administration and Ministry of Public Security were not immediately answered.

Fentanyl exporters have skirted Chinese laws by shifting to analogues, or molecules that have similar effects on the body, but do not fall under bans the country has imposed on fentanyl itself. China has been too slow to add new categories of analogues to the list of prohibited substances, according to the U.S. report.

President Donald Trump in October 2017 declared widespread opioid abuse a public health emergency and vowed to use the federal government’s legal powers to pursue companies that helped fuel the epidemic. Trump said at the time that he would raise the issue of Chinese fentanyl making its way to the U.S. with Chinese President Xi Jinping as a top priority “and he will do something about it.”

The commission reinforced a conclusion made in a February 2017 brief calling China “the largest source of illicit fentanyl and fentanyl-like substances in the United States.” Domestically, China does not have a fentanyl abuse problem, according to the report.

The opioid epidemic has emerged as one of the U.S.’s most pressing public health matters, claiming a life every 19 minutes, according to the U.S. Surgeon General. Cost estimates range, but a 2016 study in the Medical Care Journal estimated the annual economic cost of opioid overdose, abuse and dependence at $78.5 billion.

The U.S.-China Economic and Security Review Commission was created by Congress in October 2000 to investigate and submit an annual report on the national security implications of trade between the U.S. and China.

I’m sure most Americans aren’t aware of this information and that’s the point: gin up some real anger to gain public support for Trump’s trade war. As an investor, I view this two ways.

1. Trump is doubling down on his trade war and is trying to gain popular support.
2. Trump is using this issue as a wedge in his negotiations with President Xi to gain an edge.

Honestly, I haven’t a clue how this will be concluded. However, I do know, one way or another, this trade war will not last long.

I don’t give a fuck.

Bought 3x FANG ETF, FNGU — because we’re heading higher tomorrow. I bet my balls on it. Stocks closed at the highs. White candles everywhere. Cramer is an absolute faggot, absolutely. Let them come — we will cut off their heads and play football with them.

Top picks: FAS, TNA, FNGU

Get in Exodus and invest in your future, you miserly fucks.

Best way to play short term pivot points is 3x ETFs. Correct? Why bother buying 10 stocks when you can buy a few 3x ETFs, which gives you exposure without non-systematic risk?

I own FAS, TNA, and TMF — the latter being defensive The first two provides me with 60% exposure to stocks with only allocating 20% of my assets. I remain, inexorably, cash rich at 65%. I find today’s action to be constructive and will add to my longs if we head higher tomorrow. I also believe leveraged ETFs were created for markets such as this — being able to allocate quickly is paramount when trying to time a bottom.

What if we sell off today?

Dreadful.

Suppose we give it all back tomorrow?

Even worse.

My best guess is for a continued rally into Friday and then a fade next week — heading into the Fed meeting.

This is making rounds today. Frankly, I don’t even know what to think about it. Their case: GDP to plunge from 4% to 1% and earnings growth from +20% to +4%.

Holy shit.

And then this troll says EM is preferred. I heard this nonsense just before the 2008 market collapse — fuckheads thinking the US would drop but China rise. WRONG.

ZH has the full rundown. Here are some highlights.

Macro turning points: The world still faces slower growth, higher inflation and tighter policy. But 2019 should see a turning point in this narrative, specifically in US growth, inflation and policy relative to the rest of the world.
Market reversals: Turning point in macro coupled with extreme pricing means we expect: 1) US and European yields to converge. 2) USD to make a cyclical peak. 3) EM assets to outperform. 4) US equities and high yield to underperform. 5) Value to outperform growth.

Where we differ: We think our calls for USD weakness, UST outperformance, US equity underperformance, value > growth and EM vs. US credit are non-consensus, materially different from market pricing, or both.
Strategy implications: We remain neutral equities (+0%), underweight credit (-5%), neutral government bonds (+1%) and overweight cash (+4%). Within this defensive posture, we are taking larger relative positions, and adding to EM.
While the note is quite bearish on the US, where growth is seen slowing to an annualized rate of just 1% by the third quarter of 2019, it is also a glowing praise of stocks outside the U.S. which the bank expects to do better than their American peers.

In a nutshell the bank’s 2019 global macro outlook is that this will be a year in which EMs “retake the lead” as a result of:

Global growth slows towards trend
US/DMs slow
Fed pauses/dollar weakens
China easing works
Growth differentials move in EMs’ favour

One thing of note is Morgan’s belief the Fed will pause and cause the dollar to decline. This is nonsensical rubbish. The Fed will pause and markets will drop, if the economy slow. But the dollar will not drop. The dollar is a safe haven and will increase in value, providing global markets weaken. I know this is the opposite of what this fucker is saying but I really don’t know what the fuck he’s smoking. If US markets get smoked, EM will get smoked even more. Their economies are weak and fragile, just like this guy’s jaw.

Look at his absurd dollar forecast.

Enough is enough. Cramer was very busy fear mongering this morning and I can only take so much of this horseshit. The banks are the most oversold in many, many years.

We’ve got white candles now and those fuckers often lead to higher prices.

Who’s to say markets won’t sell off later on today or maybe tomorrow? Right?

That’s how losers think. I’ve got a god damned plan and I’m willing to see it through.  This is a 10% position.

I noted over the weekend the stocks down massively from the highs. Here’s what’s working now.

These stocks are mostly defensive and not what you’d like to see on the 52 week high list.

CLX, UAL, O, AZO, COL, HRL, UDR, HCP, EQR, ESS, UHS, AVB, WELL, PLD.

And here are the only industries higher over the past 3 months.

Morgan Stanley is out with a bearish note on stocks today.

Cramer just tweeted this.

“Talk about classic bear market behavior,” Cramer said in a tweet. “We crater all week and then we open up huge on nothing, but because we are so oversold it is hard to let things go.”

I’d embed the damned thing — but he blocked me about a decade ago. I must’ve made fun of his bald head back then. Now that I’m bald and odious too, just like him, perhaps he’ll soon release me from his prison and permit my pursuing of his content.

It’s true what he says, bear market gap ups and all. The best rallies are often in bear markets and they come out of nowhere, very hard to catch, impossible to buy. Case in point: you buy the open or the close today, hoping for continuation, and get fucking poleaxed into the street. The best play, if this is a bear market, would be to sell the opening rip and get short at 3:30pm, or even sooner. The risk, of course, is an extended run. I just completed some research about this — which I will share with members of The Capstone Programme — which will be launching this week — highlighting the instances when markets plunged by 5% or more in a single month and what to expect afterwards. You’d be surprised by the results.

What is The Capstone Programme?

An achievement in finance that will make you a better god damned trader/investor — 1 on 1 conference calls with yours truly covering a range of topics tailor made to educate and mentor you as needed.