The Bubble Deflates – And Crash Risk Rises

Submitted by Pater Tenebrarum  –  The Acting Man Blog

A Harrowing Friday – Momentum Stocks Continue to Break Down

The release of Friday’s payrolls report was the worst of all worlds for the US stock market. This typically happens in bear markets: suddenly fundamental data that wouldn’t have bothered anyone a few months ago are seen as a huge problem. Why was it seen as problematic?

The report somehow managed to be weak and strong at the same time – it showed weakness in payrolls growth, but the entirely artificial U3 unemployment rate, which is distorted by the fact that a huge number of unemployed are no longer counted as unemployed, but rather as simply having “left the labor force”, fell below 5% at the same time.

0715_socialmedia_630x420Photo credit: Mike Kemp / Getty Images

This fact should keep the labor market-focused Keynesian leadership of the Fed (primarily Ms. Yellen herself) from moving very swiftly toward a loosening stance – although everybody knows this is what will eventually happen anyway. Does it actually matter? Not in reality, but it certainly matters to an already frayed market psychology.

If there is one chart that describes best that the US stock market has a really big problem now, it is probably this one:

1-NDX-SPX ratioThe ratio of the Nasdaq 100 Index to the S&P 500 Index. The Nasdaq, which is primarily driven by big cap tech stocks was the one leading sector that still managed to hold things together while market internals deteriorated throughout 2015. Now its relative strength is beginning to break down as well – click to enlarge. Continue reading

The Spook In the Casino – Recession Just Ahead, Part 1

The wise guys keep buying the dips owing to the simple proposition that there is never a lasting bear market without a recession. So after today’s blow-out we are likely to get another call to scoop up the “bargains” because the correction has run its course and the US economy is still chugging along notwithstanding the contretemps in China and other places of purportedly limited moment.

Indeed, on the basis of Wall Street’s muscle memory alone there is surely another dead cat bounce on its way any day. But here’s the memo. BTFDs is not working any more and, more crucially, there is a recession coming and soon. And then the bear will maul, not simply paw as today.

The fact is, BTFD hasn’t worked on a net basis hasn’t for about 730 days now. The S&P 500 closed today where it first crossed in February 2014.
^SPX Chart

^SPX data by YCharts

In light of this extended dwell time in no man’s land, it is not surprising that the market is getting spooked. After all, the real driver of the post-March 2009 rebound of the stock indices was the Fed’s massive intrusion in money and capital markets, not a sustainable recovery of main street business activity or real household incomes. Real net CapEx is still below 2007 levels, for example, as is the real median household income.

And most certainly the market’s 220% gain between the post-recession bottom of 670 and the May 2015 peak of 2130 was not owing to an explosion of corporate earnings. If you set aside Wall Street’s annually renewable ex-items hockey stick, what you actually have on the profits front is a paltry 8% cummulative gain since the pre-crisis earnings peak way back in June 2007. Continue reading

No Surprise To Find Dealers Hoarding For A Third Time

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

If the world is poised upon the precipice of “deflation” and the ugly economic consequences of reduced “money supply”, at the middle of all that are the primary dealers – still. While it is technically correct to claim that the Fed expanded its balance sheet to $4.5 trillion, with $2.4 trillion left after autonomous factors for bank “reserves”, that actually means very little without almost perfect assistance of the primary dealers. The idea of QE was that buying securities from these dealers would leave them no choice but to turn around and use some of those reserves in either money markets further on, or in outright purchasing of other risky securities. And if those reserves were further offered into money markets, such cheapening rates would spark the tide of risk taking or some forsaken “animal spirits.”

Dealers, for their part, don’t really make money from holding securities; in fact, no financial institution does as spreads are simply too thin. The wholesale world is a leveraged world, leaving leverage in all its forms as the basis of both liquidity and derivative math-as-money. We can only infer leverage available through certain opaque and imperfect windows. One of those is primary dealer holdings of UST coupons.

Conventionally, commentary assigns dealer holdings as they would any other portfolio, as speculative trade – as in recently “short” UST bonds on the expectations that the Fed would hike rates (and further that any rate hike would actually matter for something). While that might play a role in some settings, overall it doesn’t affect dealer holdings in that way. Here are the latest figures for what primary dealers reported in their coupon inventories:

ABOOK Feb 2016 Dealer Hoarding Changes Current

Continue reading

“Gold’s Fundamentals and Technicals Look Better and Better”

Submitted by Mark O’Byrne  –  GoldCore

Gold surged another 1.5% higher yesterday, and had its best closing level since mid-June as strong physical demand and concerns about the global economy, the banking sector and the risks of a new global financial crisis saw further gains.

gold beach ball
Gold jumped $34.70, or 3%, to $1,192.40 an ounce and registered its best single-session point and percentage gain since December 2014.

“Gold was like a beach ball that had been pushed too low in the water and is now bouncing higher with a vengeance,” Mark O’Byrne, research director at GoldCore, told MarketWatch:

But prices have climbed by more than 12% higher in just 5 weeks so a “correction is quite possible and may take place when gold reaches $1,200 per ounce.”

He says a correction is likely on tap, but the “more important question is whether gold has bottomed and we are in a new bull market.”

“We believe we are and gold’s fundamentals and technicals look better and better,” said O’Byrne.

Global stock markets are facing sharp losses amid more signs that international growth is tapering, led by the world’s second-largest economy, China.

Market participants said this week’s start of the Lunar New Year—a holiday in China and many parts of Asia—was helping drive physical demand for gold.

“While the Chinese Lunar New Year is the high point for Chinese gold demand, it does not drop off significantly afterward as the steady current of growing middle classes continues to attract demand,” said Julian Phillips, a founder and contributor to GoldForecaster.com.

“This is not just a one-off purchase when they become middle class—it signals the start of a continuous purchasing pattern,” he said.

Other metals on Comex traded mostly higher. March Silver, outpaced the gains in gold to gain 55.7 cents, or 3.8%, to $15.34 an ounce.

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

‘Panic Situation’ As Asia Stocks Tumble Amid Fears Of New Global Recession (G.)
Global Bond Rally Near ‘Panic’ Level With Japan Yield Below Zero (BBG)
Japan’s 10-Year Yield Falls Below Zero for the First Time (BBG)
US Bank Stocks And Bonds Clobbered By Recession Worry (Reuters)
Investors Dump Stocks, Seek Safe Havens As Bank Fears Flare (Reuters)
Banks Bonds Are “The Epicenter Of Growth Concerns Globally” (BBG)
Goldman Sachs Sees Near-Zero Risk Of UK Recession Despite Market Tantrum (AEP)
Chesapeake Energy Plunges On Bankruptcy Fears (Forbes)
150 Oil And Gas Companies “At Risk Of Bankruptcy” As Prices Fall (BBG)
US Oil Industry Woes Grow As Storage Levels Hit ‘Critical Level’ (MW)
Jim Rogers: “The Market Knows It’s Over” (SHTF)
Can Hobbit Tourism Save New Zealand’s Troubled Dairy Farmers? (BBG)
Turkey’s Erdogan Threatened To Flood Europe With Migrants (Reuters)
35 Refugees Die Off Turkish Coast (Guardian)