Friday, November 30, 2018

Reversal Of Fortune

Throughout this selloff, there has been one thing missing - capitulation by over-leveraged momentum gamblers. The question on the table when that happens is, who will be on the other side of the trade? My guess as always is "no one". Why? Because the recession trade is now on in size...

But first, the fate of global markets now hangs on a photo-op between Trump and Xi. What could go wrong? As usual, bulls did not wait until Monday to get the answer, they panic bid the S&P 500 130 points this week ahead of this weekend's summit. 1100 Dow points on the week:


The casino closed nearly unchanged for the month of November despite massive intra-month volatility. The real story of the month was the collapse in crude oil.

The largest since October 2008. Is anybody home?

The only thing that stopped the decline was a short-covering rally ahead of the December 6th, OPEC meeting. 

Here we see the casino unch in November - started the month at the 200 day and ended at the 200 day.

With all of the short-covering and Santa Rally euphoria Skynet 
was able to give the illusion of control this past week, compliments of a 130 point panic rally ahead of this week's summit:

Getting back to the theme of this post - capitulation and lack thereof, the large cap internet ETF had a death cross this week:


And yet this overall decline has seen no sign of fear or capitulation.

The rotation to recession accelerated during November. Out of growth and momentum into laundry detergent. Just remember, this can't be due to recession, because everyone knows the 'Conomy is doing fantastic.

"This is yet another indication of high risk aversion"

"It's the feel-good time of the year"

What S&P futures traders, oblivious to everything else on the planet, SHOULD be asking themselves is how long can cereal and diaper stocks keep "leading". Considering there is ZERO growth in those markets.

EM Currencies have been rallying for three months straight, preventing Emerging Markets from final imploding.

Something tells me that is going to end. Badly.

The world awaits

Thursday, November 29, 2018

2018: The Year Of The Bong

Sadly, the gambling cycle is over. Only people with misallocated capital don't want to admit it i.e. everyone you know. Cannabis may have been the recreational drug of choice for pikers, but for high rollers the 2018 drug of choice was... 

"Tax cut"

First, on the subject of why one should never mix gambling and bong hits, exactly one year ago today on CNBC, Jimmy Altucher predicted that Bitcoin would reach $1 million by 2020. Subsequently, cryptocurrencies have shed $700 billion in market cap.

He top ticked the market. The self- appointed "guru" of crypto currencies turned out to be the Bernie Madoff of crypto. 

And of course cannabis stocks had two big rallies this year, both of which coincided with "new highs" in the S&P. What else?

Slight divergence on the second high (lower pane):

Getting back to the real drug of choice, the tax cut, contrary to popular belief, the trade war between the U.S. and China is not the greatest threat to the U.S. economy - the greatest risk stems from the well-cultivated and ubiquitous stoner high that the U.S. economy is strong. Trump and the Fed are now boxed in by all of their bullshit, and admitting the truth is unfortunately a foreign concept...

"The sharp pullback surprised economists, who had expected pending home sales to rise by 0.5 percent, matching the increase originally reported for the previous month."

Surprised economists? I don't believe it. The job description for every economist should have as primary requirement - "enjoys having head permanently installed in own ass".

Speaking of the cost of capital, here below is the key reason why now is NOT anything like the 2016 Central Bank engineered soft landing. Money markets are now yielding more than the S&P 500, which has led to substantial rotation back to "cash". Whereas in 2016, there was a rotation out of cash:

Of course it's long-term rates that are imploding the housing market. What we learned today is that balance sheet unwind will continue indefinitely, and that the Fed and banks believe it's "running smoothly":

Speaking of running smoothly, here we S&P volatility with the Fed balance sheet. The last two times the balance sheet contracted directly preceded 2010 Flash Crash and 2011 Fiscal Cliff implosion.

This time, there is liquidity withdrawal on the short end and the long end at the same time.

We've never seen that much implosion capability before.

The gambling cycle is over, however those with misallocated capital don't want to admit it. 

Wednesday, November 28, 2018

Betting The Farm On Herbert Hoover

Never before has so much capital been put at risk by one confab, as is at risk by this weekend's G20 circle jerk. With four weeks left in the year, the stakes could not be higher. Bulls better pray that Donny gets back on his meds...

But first, for Jimmy Cramer and other bulltards celebrating the newly dovish Fed, this is what a "neutral" 2% Fed Funds rate portends going into recession:

Speaking of recession, Trump's disastrous economic policies are imploding his own base. The trade deficit just widened again in October. His base never get tired of "winning"...

Recall, that soybean farmers are betting that the trade war with China gets wrapped up post haste so they can sell their excess inventories at higher prices. 

"Prices for agricultural products like soybeans have dropped to a 10-year low since Trump imposed sweeping tariffs on Chinese goods earlier this year. And farmers across different markets have grown increasingly nervous about how their businesses will fare if the trade war continues."

The casino is break-even on the year. Which at minimum throws in question the value of record stock buybacks and mega tax cuts. With four weeks left in the year, the stakes could not be higher.

Here is a potential wave count. For those who don't subscribe to Elliott Wave Theory, regardless the symmetry between the two fractals is uncanny. Both "v" wave downs had large overnight gaps. Both wave "2" retracements have large upside gaps. The only open gaps are all below today's close.

If this count is right, December will be a bloodbath on a scale few can imagine. 

Today's rally almost tagged the 200 dma:

The Nasdaq is weaker than the S&P. The recent low undercut the October low. Volume on this advance is weak relative to recent down days:

Down volume is already the heaviest in eight years - since the 2010 Flash Crash. Heavier than the 2011 -20% S&P selloff. Apart from 2010, this would be the heaviest selloff since Lehman:

Momo stocks backtesting one year support. The 200 dma a distant memory:

Large cap internet (FANG) well below the 200 day:

Oil did not partake in today's "everything" rally:

“Crude not being able to rally with risk-on [sentiment] across the board and U.S. dollar weakness in all asset classes says a lot... “We feel a break of $50 is inevitable” for WTI."

The world waits

This will make 2008 seem like a fucking picnic


Human History's Largest Leveraged Buyout

In the absence of any real demand or growth, what we are witnessing via these asinine stock buybacks funded with debt, is a leveraged buyout of the U.S. stock market. Twice as much corporate debt as 2008 and 3x as much low grade debt. Which will end in mass corporate bankruptcy. In such a scenario, the stock holders get nothing...

Apple is exhibit A of a company impairing its balance sheet as a proxy for iPhone growth. It doesn't work.

The biggest widely believed lie of this entire era is that what is good for the stock market is good for the U.S. economy. Notwithstanding mass layoffs in the millions proffered to the false gods of capital in 2009 to keep this Ponzi scheme going, the delusion that shareholder interest is aligned with domestic economic well-being remains sacrosanct. This same lie has been told for forty years straight - the reign of Supply Side economics - all while imported deflation and "free trade" suppressed wages and kept bond yields and deflation on an ever-descending trajectory.

Now, anchored to the zero bound...

In other words, rates below (red) are now neutral at 2% despite capacity utilization (blue) at a forty year cycle low. And stocks are loving it. Why? Lower cost of capital.

At least Cramer is happy now:

"Jim Cramer says stocks could rally if weak economic indicators lead the Federal Reserve to pause its rate hikes."

File that under careful what you wish for.

These are the real economic indicators:

Tuesday, November 27, 2018

Quantitative Uneasing: Collapse On Auto-Pilot

Throughout this era, multinational corporations took good jobs in one end and crapped shit jobs and stock buybacks out the other end. All while taking on historically unprecedented amounts of debt. Many if not most will go bankrupt...

Speaking of bankruptcy, the casino-bankrupter-in-chief, when he's not renegotiating Globalization on Twitter, has now decided to manage the Federal Reserve in his spare time.

Rule #1 of incompetent management, always have someone else to blame:

"Whoever keeps making all these bad hiring decisions - you're fired. I specifically requested a Fed that would only ever increase asset bubbles"

"They're making a mistake because I have a gut and my gut tells me more sometimes than anybody else's brain can ever tell me."


Unfortunately, what Donny and his acolytes don't seem to understand is that there is no such thing as "free money". It was Donny's massively irresponsible end-of-cycle BORROWED tax cut that raised long-term interest rates.

And apart from the lowest short-term rates in U.S. history ruining the most excellent 'Conomy ever, where Donny is really getting shafted is on the long end, but his Kentucky Fried gut doesn't know anything about Quantitative Uneasing, which is now on auto-pilot to the tune of $50 billion per month indefinitely:

Recall that on the way up, correlation between stocks and the Fed balance sheet was almost 100%, which is what it appears to be on the way down as well:

Fed balance sheet (red)
Dow Industrials (blue)

"In the last decade, the amount of corporate bonds outstanding nearly doubled to $9 trillion, from $5.5 trillion."

There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, close to triple the amount of 2008, 

Exhibit A of brewing trouble is G.E.

"Then there is AT&T. With about $183 billion of debt outstanding, it is now one of the most indebted companies on the planet"

“We’re going to stress test our whole corporate credit market for the first time...From a markets perspective, it’s going to be interesting. There probably will be some really scary moments in corporate credit.”

In summary, between the Federal Government and Federal Reserve, almost $2 trillion in Treasury bonds will get sold this year. Which is raising borrowing costs for the entire planet.

Which is why risks today are far beyond 2016: