Markets Rally, Despite Yellen’s Worst Efforts

This woman is all wrong. If you heard her testimony, you know she’s delusional. She’s still talking rate hikes. I know the market thinks she’s fucking around, but she’s not.

She is dead serious when she says that the Fed has to raise rates now in order to avoid RAPID FIRE rate increases to fend off outrageous inflation caused by runaway economic growth. She even said the drop in crude might give the economy an unexpected jolt. No mention, however, of how many oil and gas jobs will be lost in the process and how all of that oil debt will get hashed out.

I am going to repeat one important part again. I just have to.

She believes raising rates now will help contain the economy from some amazing growth that apparently is right around the bend.

Will someone please explain this to me? I can’t analyze this anymore. My head is going to explode.

When asked why she’s paying banks 50bps for keeping reserves at the Fed, she said the Fed was using those funds to buy treasuries and MBS and have profited nicely on them. She furthered, the gains had last year in the Fed’s giant $4 trillion portfolio permitted them to kick back $100 billion in profits to the government, to be spent wildly on asinine projects.

There you have it. Get it?

$600 billion has been transferred back to the treasury since 2008.

Watch out for a possibly downside reversal.

God I hate that acronym.

At any rate, the Facebook, Amazon, Netflix and Google oligarchy ruled the roost in 2015. During 2016, they’ve been decapitated, down more than 17%, collectively, since 1/1.

Here are the returns.

FB: -4.8%
AMZN: -28%
NFLX: -25%
GOOGL: -9.8%

For the day, all of the FANG members are rallying.

According to the stock market manual that I received upon passing my series 7 exam many years ago, markets should rally today. About an hour ago, all of the elements were present for a rally. Oil was higher. Gold was lower. The number one worry of the market, DB, was up 13%. And, treasuries were lower and equity futures were sharply higher.

Let’s review how things look now.

Oil is down 1.5%

Gold is down 0.6%

DB is up 5.3%

TLT is up 0.22%

And the NASDAQ is higher by 50.

Let’s be clear: the market wants to rally. We need to see the animal spirits displayed on Wall. But things have moderated a bit. Should the market fear Yellen’s comments, due to begin at 10am, this rally might unravel and losses will be abundant.

I am leaning towards bullish. I am 33% allocated in SPY, 25% TLT, the rest cash. I have a mandate to purchase more SPY today, but will wait until after Yellen’s comments to do so.

By the way, if you haven’t see the ads festooned all over the site, we are doing free trials for Exodus this week. Join us.

Crude was almost $29, before Yellen’s prepared remarks were released, indicating the Fed chief is probably more interested in the menu items at her local deli than the capital markets.

Futures have been cut in half. Treasuries are firming and oil is collapsing to the low $27s.

Don’t worry, however, the drop in crude is ‘transitory’, as Janet likes to say.

In prepared statements just released, Janet Yellen acknowledged the fact that the fucking world has been falling apart, and the financial system is in tatters.

“Financial conditions in the United States have recently become less supportive of growth,” Yellen said in testimony prepared for delivery Wednesday before the House Financial Services Committee in Washington. “These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market.”

Big fucking deal. Any normal person with half a brain would say that now.

Here is the real horseshit.

The Fed chair repeated her projections that inflation will eventually move back toward the bank’s 2 percent target, downplaying concerns over declines in inflation expectations. She attributed the drop in market-based measures of inflation expectations to technical reasons, citing changes in risk and liquidity premiums in the market for U.S. Treasuries. Survey-based measures of expectations are low but “reasonably stable,” Yellen said.

So the drop in inflation expectations are ‘technical reasons’?

She’s leaving the door open for a March hike, as unbelievable as that may seem.

“The FOMC anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” Yellen said, repeating language from the committee’s January statement almost verbatim.

Yellen noted that U.S. economic growth in 2015 slowed to an estimated 1.75 percent, restrained especially by the impact of a strengthened dollar on exporters. Still, she said, household spending had gotten a boost from lower fuel prices and steady jobs growth, a trend she expected will continue.

“Ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending, and global economic growth should pick up over time, supported by highly accommodative monetary policies abroad,” Yellen said.

Futures have pared gains, from +150 to +90 and treasury yields have gone lower since these ridiculous statements were released.

If the FOMC delayed the start of policy normalization for too long, it might have to tighten policy relatively abruptly in the future to keep the economy from overheating and inflation from significantly overshooting its objective.

The FOMC anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate. In addition, the Committee expects that the federal funds rate is likely to remain, for some time, below the levels that are expected to prevail in the longer run…Of course, monetary policy is by no means on a preset course. The actual path of the federal funds rate will depend on what incoming data tell us about the economic outlook, and we will regularly reassess what level of the federal funds rate is consistent with achieving and maintaining maximum employment and 2 percent inflation.

FML

Markets are in rally mode this morning, ahead of Chair Yellen’s testimony. It’s a bit of a risk for buyers, since Yellen has done nothing to indicate a stubbornness and wanton disregard for markets or sentiment, ever since becoming Chair.

Nevertheless, the stage is set for what looks like an explosive move to the upside.

First and foremost, DB is sharply higher. This is the poster child for distressed banks. It needs to rally fast and furious.

Check.

Oil is higher.

Check.

Gold is lower. There can be no arks or safe haven rallies, if equities are gonna bounce.

Check.

The ark is taking on some water. It may need to come in for some repairs.

Check.

NASDAQ futures are sharply higher.

All Yellen has to do now is sound rational by acknowledging current risks and the market will go on a two week 10% rippage to the upside.

If she fails to please, we’ll descend into anarchy.

Happy trading.

This man is out of his fucking mind. Or, maybe he’s not. Maybe central bankers are out of their minds. Either way, the specter of  -4.5% rates, to me, is a great perversion of decency, an injurious policy harking back to medieval days.

Having studied the lack of fallout in Switzerland, where the benchmark rate is minus 0.75 percent, Malcolm Barr and Bruce Kasman reckon the trick lies in a tiered system as already deployed by the Bank of Japan and in some places of Europe, whereby only a portion of reserves are subjected to negative rates.

On that basis, they estimate if the ECB just focused on reserves equivalent to 2 percent of gross domestic product it could slice the rate it charges on bank deposits to minus 4.5 percent. That compares with minus 0.3 percent today and the minus 0.7 percent JPMorgan says it could reach by the middle of this year.

The Bank of Japan’s lower bound on a similar basis may be minus 3.45 percent, while Sweden’s is likely minus 3.27 percent, the economists said. Should they also go negative, the Fed could cut to minus 1.3 percent and the Bank of England to minus 2.69 percent in JPMorgan’s view, reflecting how the ratio of reserves to assets is higher in their economies than elsewhere.

Out of Ammunition

Concentrating on 25 percent of reserves would allow the ECB to cut to minus 4.64 percent and the Fed to minus 0.78 percent. Making no change to the current regime would allow Draghi to lop to minus 1.36 percent, they said.

Easing the fall is that the JPMorgan economists bet that banks are unlikely to be able to pass on the cost of the policy to borrowers, reducing potential repercussions. They also see limited pressure on bank profits or for a need to stash cash.

This sums it up:

“It appears to us there is a lot of room for central banks to probe how low rates can go,” they said. “While there are substantial constraints on policymakers, we believe it would be a mistake to underestimate their capacity to act and innovate.”

Swiss 2 yr bonds are yielding -0.93%.

Shares of Deutsche Bank are higher by 12% in Germany today, continuining the rally after the FT reported the company might buy back some of their bonds. Their COCO bonds are trading high 60’s/low 70’s, on par with Amazonian banks in the jungles of Brazil and Greece.

Not everyone agrees with the assesssment of the market, when it comes to DB. James Bevan from CCLA believes there is ample liquidity, with a modicum of currency risk.

The Japanese Yen carry trade is always a topic of interest. Whenever the Yen strengthens, people get all panicky and shriek in horror, worrying about apocalyptic downward moves in the NIKKEI. Well, considering the NIKKEI was off 900+ last night and another 600+ tonight, I think it’s fair to say the Japanese market has crashed.

Look at the action in the usd/jpy cross over the past 8 days. Stunning.

Japanese bonds are now negative yielding, all the way to 10 yr durations.

This is extremely disconcerting for people who hoped the Bank of Japan’s actions would spur some buying interest in Japanese equities. The exact opposite has occurred. Yen has soared, bonds have soared and equities have literally crashed.

When markets get dicey like this, I like to offer free trials for our market intelligence platform, Exodus, to show people how it can help them.

Here’s one simple example of how one could use it.

Year to date, companies with positive free cash flow, totalling 2,544 names, are down a median of 11.58%. Here is the screen.

If you tweak the screen to scour for performance data for negative free cash flow companies, the year to date losses soars to 19.98%.

Again, this is one simple analysis that I found interesting tonight. We have a huge crowd of experienced traders and money managers inside the community notes, as well as predictive algorithms that have delivered time in and time again. In case you weren’t around for when I announced it, I am exclusively trading the oversold signals in 2016, offering members and incredibly transparent and real time view of my trades, featured and archived in both email alerts and the Exodus blog.

Enough of the sales pitch. It’s free for the next 5 days, enjoy.

If you need additional details about the software, feel free to request a live demo ([email protected]) or visit BlackLightAnalytics.com for a recording of a live webinar, delivered by Vince.

***CLICK HERE FOR FREE TRIAL ACCESS***