JUNE 2016 : MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV)
US Treasury Bonds and a flattening Yield Curve clearly suggests that the Credit Market sees something more concerning ahead than does the US Equity markets? It has been my experience that credit markets seldom get it wrong and the equity markets seldom get it right!
The gap we are seeing between the 10Y UST and the annualized US nominal growth has been a harbinger of major market drawdowns in the past. The 2 standard deviation measure on the 10Y UST is consistent with what we saw in 2000 and 2008 before major market corrections. Will it be different this time?
One way of answering that question is to look at margin debt being used to fund equity purchases. It isn’t just the elevated levels that must be examined but rather what happens after peaks. When credit cycles turn we often see margin debt fall off. The chart below is a classic telltale currently being ignored, though the smart money according to BoAML (we have shown this in previous reports) has been exiting the markets for 12 consecutuve weeks.
It isn't often that long term Moving Averages like the 12Mo and 24 Mo cross. They are something to be watched closely as they have been consistently accurate indicators of problems ahead for equities. Earnings are expected to fall in Q2 which will be the 5th consecutive quarter. Revenues are expected to fall for the sixth consecutive quarter. How does a market rise on consistently falling earnings and revenue?
We have talked previously about falling corporate cash flows and EBITDA. Corporations are being forced to shore up earnings to even falling levels by once again cutting labor costs….… and something many corporation are dearth to do – cut dividends!!
Expanding PE’s have been the savior todate but they are now at 81%above their long term regression. What do the equity markets see ahead that merit these PEs? They don’t see the Recession the debt markets see. Rather they see more money printing and cheap rates. Unfortunately those leanding the money don’t see that! Someone is terribly wrong!
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