It looked like it was breaking down a couple weeks ago, however, out came Fed chatter to steer it higher. The chart below shows the trading range the USD has been stuck in and the moments where Fed chatter began earlier this month.
With the USD strengthening again, weakness is coming back to emerging markets and commodities, especially gold. Crude however has held up due to falling production and rig counts.
TIPPING POINTS, STUDIES, THESIS, THEMES & SII
COVERAGE THIS WEEK PREVIOUSLY POSTED - (BELOW)
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - May 22nd, 2016 to May 28th, 2016
TIPPING POINTS - This Week - Normally a Tuesday Focus
RISK REVERSAL - WOULD BE MARKED BY: Slowing Momentum, Weakening Earnings, Falling Estimates
EU BANKING CRISIS
JAPAN - DEBT DEFLATION
US STOCK MARKET VALUATIONS
US STOCK MARKET VALUATIONS
Why Deutsche Bank Thinks A Fed Rate Hike Would Unleash A Stock Market Crash
Following this week's FOMC Minutes shows, which violently repriced June rate hike odds from 4% to 30% and July from 20% to 50%, the cries of lenienecy have begun, and nobody is doing so louder than Deutsche Bank which in an overnight credit summary note tries to make it clear that "the market is not ready for a June hike."
Why is Germany's largest bank, whose stock price is trading just barely above 52 weeks lows and level not seen since the financial crisis so worried? Simple: "the hawkish minutes will weigh on risk, bias yields lower, and flatten the curve" for the simple reason that the Fed is so clueless it "seems to be interpreting recent easing in financial conditions as an opportunity to force rate expectations higher." Instead, the Fed is once again confusing cause and effect, and DB says the "ease in financial conditions occurred precisely because of the Fed’s dovish turn earlier this year." Hence why DB is confident a hawkish turn will push markets right back where they were in December and January, prior to the February Shanghai Accord.
Of course, we already gave this explanation last fall, just before the Fed's December rate hike. It's time to give it again, and amusingly, DB agrees because as Dominic Konstam writes, "If you think you’ve seen this movie before it’s because you have."
Alas, it is indeed deja vu all over again:
Like during 2015, the Fed appears bent on pushing rate expectations higher, and the operative question is whether the more hawkish turn to Fed rhetoric will up-end risk and tighten financial conditions to the extent that a rate hike is imprudent if not impossible given the latent fault lines in the global economy.
Last year the Fed attempted to prepare the market for a September hike at the June meeting with a decidedly negative result, and then had another go in October for the December meeting with the result that markets tolerated December lift-off before coming apart early in 2016. The operative question is whether markets are sufficiently calm for the Fed to use the June 2016 meeting to pave the way for a July hike.
And this is why Deutsche Thinks that just like in July/August and January/February, as the market starts to earnestly pricing in a June/July rate hike, everything is about to plunge once more:
We think the answer is no because the issue is not just the timing of a single hike toward some static goal for rate level in 2017. What is at issue is the existence of some Shanghai “accord” whereby global policymakers have agreed explicitly or implicitly that excessive dollar strength is counterproductive and that policymakers should shift their focus to domestic demand and structural reform within an environment of dollar stability, at least through the next G20 in early autumn. If there is no accord then divergent monetary policy could drive the dollar stronger, restarting among other things speculation against CNH versus the dollar rather than CNY versus the entire CNY basket with now very familiar results: reserve loss exacerbating higher Fed expectations for US rates, and downward pressure on risk assets with a non-trivial chance that China might devalue and, worse yet, do so in a lumpy fashion.
Or just as we said on Thursday, it will be all up to China again to stop the Fed's rate hike:
Still, assuming the Fed ignores Deutsche Bank's laments for a reprieve - because as we saw in February, DB may well be the first bank to go under should the market be swept by another global round of risk off - this is how a rate hike could take place.
The risk is that the Fed might use the June meeting to pre-announce a press conference around the July meeting, or in some other way “pre-commit” to a July hike. The issue is that with still benign wage pressure and inflation, premature and more aggressive Fed hikes would drive real yields higher for the wrong reason. This is the policy error scenario. Yellen’s timeout drove real yields roughly 70 bp lower from the late 2015 highs, but levels have already more than doubled from the lows by virtue of little more than “why not raise rates for the sake of it” rhetoric. What Fed officials seem to be suggesting is that they might be growing increasingly nervous about low real rates fuelling asset classes like equities, investment grade credit, and gold even though other risky assets such as high yield and emerging markets do not perform well absent higher breakevens. The risk case is then that an overly aggressive Fed would push real yields up and breakevens down, thus undermining risk assets generally.
But which risk asset is at most, pardon the pun, at risk?
One issue is precisely what risk asset valuations are telling us. If we consider risk asset valuations as a function of Fed-related variables – say, breakevens and real yields –market valuations of HY, IG, and EM are more or less consistent with “fair” levels given these variables and their historical relationship with asset valuations. Note that DXY appears too high from this perspective, while oil appears too low.
The outlier appears to be SPX, where valuations appear excessive given the breakeven/real yield framework.
And while DB's points are mostly valid, its agenda becomes fully transparent with the next sentence:
This is not to say that the Fed can never raise rates because of negative impact on financial variables, but it is far from clear to us that the Fed should be hiking against financial market froth when many asset classes have only partially recovered from losses last year.
Actually that's exactly what it says (ignoring the pleas by all those hundreds of millions of elderly retirees whose only source of income used to be interest income and who have been left for dead under a central bank regime which only caters to its commercial bank owners) and the longer the world eases financial conditions, either via QE or ZIRP or NIRP, the more impossible it will be for the Fed to ever hike; in fact the next big move will be just the one Deutsche Bank has been begging for all along - unleashing helicopter money.
In fact, we are confused by Konstam's note: if indeed DB wants (and needs) a monetary paradrop (recall "According To Deutsche Bank, The "Worst Kind Of Recession" May Have Already Started"), then a policy error is precisely what the Fed should engage in. Not only will it send markets into a long, long overdue tailspin, one from which the only recovery will be the bubble to end all bubbles, the end of monetarism as we know it courtesy of the quite literal money paradrop, but reset not just the US economy but that of the entire world, in the process wiping out tens of trillions in unrepayable debt, and allowing the system the much needed reboot we have been urging ever since our start in 2009.
We are confident that just like everything else predicted on these pages, it is only a matter of time now before this final outcome is also realized.
SHRINKING REVENUE GROWTH RATE
CREDIT CONTRACTION II
US DOLLAR STRENGTH
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
Market Analytics - WEDNESDAY STUDIES
STUDIES - MACRO pdf
TECHNICALS & MARKET ANALYTICS
TECHNICALS & MARKET ANALYTICS
Share Buybacks Now Bought Out, American Enterprise in Decline
“The practice is even starting to reek of death to market bulls.”
I have pointed out in previous articles how most of the growth in stocks over the past few years has been due to stock share buybacks. Without this hideous (and at one time illegal) practice, there would have been no bull market over the last few years.
That’s right. Research from no other place than Wall Street, itself, indicates that almost all of the returns since 2009 have been due to stock share buybacks!
Liz Ann Sonders, chief investment strategist and perma-bull at Charles Schwab, recently acknowledged that “… there has not been a dollar added to the U.S. stock market since the end of the financial crisis by retail investors and pension funds….” Since every buyer has a seller (and vice versa), what group or groups had enough of a buying presence to push the S&P 500 14.2% off of the February closing lows? Corporations. (Seeking Alpha)
Most people assume what has kept the market afloat this year after sinking 11% at the start of the year was a mixture of better news out of China, oil prices stabilizing, and indications that the Fed won’t raise rates as much as thought. But the real thing bouying the market could be something else: Stock buybacks…. The stock buybacks come at a time when major investors including individuals, foreign investors, and pension funds have been selling off their shares, according to a note from Goldman Sachs, amid market volatility and weak oil prices. (Fortune)
Stock share buybacks may be winding down
But you cannot do share buybacks forever. Companies have been using profits and loading up on debt to make these share buybacks for so long that the law of diminishing returns is kicking in here, too.
First, it is kicking in because companies are nearing the end of their capacity to keep eating themselves. Earnings have been falling while debt has been stacking up, and so the capacity just isn’t there any more. (And I mean even the doctored earnings — as almost all major corporations have moved away from GAAP reporting policies — have been falling badly.)
Secondly, buybacks have gone insane to the point where the practice is even starting to reek of death to market bulls who are growing wary of them.
Over the past five weeks, the value of shares bought back has fallen 42% (yoy). The number of scheduled buybacks has fallen off substantially this year (35% below last year’s pace). So, we can anticipate the market will lose some of the hot air that once kept it aloft.
Here are two confusing headlines for you, released this week within 24 hours of each other: First comes Bloomberg’s “Bull Market Losing Biggest Ally as Buybacks Fall Most Since 2009.” Ah, but then came the Financial Times, with “US companies step up share buybacks in the first quarter of 2016….” At face value this would seem difficult. However, Bloomberg and the FT are in fact measuring two different things.
Bloomberg has been looking at buyback announcements so far in 2016…. The FT meanwhile has been looking at preliminary numbers for the first quarter from S&P/Dow Jones indexes. These suggest that US buybacks were actually up 20% in this year’s first quarter, compared to the old year’s last…. So, what’s the upshot?…
As David Lefkowitz, senior equity strategist at UBS, puts it: “earnings per share were down around 6% in the first quarter so it’s not terribly surprising that there should be a slowdown in buyback announcements.” He stressed however that buyback announcements are just that – announcements not activity. He also pointed out that the oil sector’s early-year wrestle with ever-lower crude prices, and profit worries at the major banks, have left corporate America with a lot less cash to flash….
Corporate buybacks may not continue at the pace we’ve seen since about 2011, but it seems unlikely that they’re going to fade away either. (News.Markets)
In other words, leftover buybacks from prior announcements are still unfolding, but announcements of additional buybacks are diminishing quickly as corporate cash drops.
Buybacks have transformed America into an Alzheimer’s ward of enterprise
We are now a nation full of companies with much bigger piles of debt and much less capacity to keep propping up their share prices with buybacks because those companies are rotting from within. Buybacks syphoned money away from capital expansion and research and development in order to deliver candy to investors now at the cost of crippling the company down the road.
All of that was smiled upon (until now) by Wall Street and government for saving the day while losing the decade. Yes, a decade of potential recovery has been consumed by milking corporations dry, and there will be hell to pay as a result of this self-consuming greed.
Former Republican presidential candidate, Carly Fiorina, championed this kind of corporate management during her stint at Hewlett-Packard until the Crowned Executive Officer was forced off her throne. During her brief reign, HP bought back $14 billion of stocks, which was more than its entire profits during that same period ($12 billion).
That was total self-cannibalism, as during that time HP practically eliminated research and development, caving in to the idea that it was no longer capable of innovation and dominance in the consumer electronic field that it had long dominated. They gave up and walked away from their staple market of personal computers and home printers. Then they rejigged this plan into severing off separate companies. Contrasting this to Apple, can you even think of the last thing HP invented? Can you even remember the last thing that someone else invented that HP successfully produced and popularized?
Because of her great accomplishment at HP, Fiorina believed she was qualified to become president of the United States. Having successfully gotten rid of her, did HP learn anything? Of course not. Her successor tripled down on all of this, buying back $43 billion in shares on $36 billion in profits! Following him, Leo Apotheker did the same thing, buying back nearly a billion dollars in stock every month of his brief eleven-month reign. This is a company that knows how to eat itself one leg at a time.
“HP was the poster child of an innovative enterprise that retained profits and reinvested in the productive capabilities of employees. Since 1999, however, it has been destroying itself by downsizing its labor force and distributing its profits to shareholders….” HP declined to comment. (Reuters)
And this is the new corporate norm for America. Last year, corporations spent almost a trillion dollars on share buybacks and dividends, even though it was largely a year of declining profits. Maybe I should say because it was a year of declining profits. So, they weren’t doing it because they had the money to spend. Like HP, many spent money they didn’t earn.
That’s what you do when your business stinks so bad no one wants your stock because you have started to smell like the toe fungus and old urine that odorizes a bad nursing home. When the company is selling its own limbs on the meat market, it might not be in the healthiest of shape.
When profits are in perpetual decline, you cover the stink of your own slow death with the sweet smell of candy. You throw grain (dividends) to the market bulls to get them to gather.
What have stock buybacks gotten us?
No wonder corporate stock buybacks were illegal until Reagan changed that during his tenure of deregulation. Yes, that deregulation did wonders for the stock market for a long time. It’s amazing how rich shareholders can become (especially the board members and CEOs) when they dine for years on their own company. It’s also amazing how rich you can become when no one is paying for the largess because it is bought on credit.
However, greed and self-delusion among America’s corporate leaders has finally reached the zenith that comes just before self-annihilation. That is what happens when you get carried away with taking the regulations off of avaricious activity. Greed gets bolder and bolder as it explores the outer limits of its success. Evil contains the seeds of its own destruction. It always reaches too far.
Responsible use of credit buys innovation (research and development) or production expansion for the future. Greedy and irresponsible use buys profit sharing for the present when profits are down. That lack of rigorous self-discipline is the new American leadership norm.
For all of this, corporate bosses get bigger and bigger pay and eventually rise to become presidential candidates. That’s because they are best suited to run a country that advocates this kind of business by stripping away the laws that once governed such greed.
Those laws were created because past experience taught us that humans couldn’t be trusted to act in the company’s (and the nation’s) long-term best interest, instead of their own immediate self-interest. Left on their own, many would reap and run. We always forget the lessons of the past, so we ditch those laws when they seem to restraining our progress.
However, the buybacks aren’t yielding the returns they once were, and the corporations have already taken on a load of debt for past buybacks that is even threatening the credit rating of some. Earnings have declined steadily as money spent on building for the future has dropped dramatically. It looks like the golden years when companies buy themselves are winding down, and we shall all convalesce together.
International Business Machines Corp. (IBM) is a poster child for questionable buybacks…. Over five years, IBM bought back $59.1 billion in common shares, while its stock returned only 5%. Meanwhile, the S&P 500 returned 81%…. There have been plenty of solid arguments that IBM could have made much better use of that money by investing in its business. After all, the company’s annual sales have declined 24% over the past five years, while its earnings have dropped 16%. (MarketWatch)
COMMODITY CORNER - AGRI-COMPLEX
THESIS - Mondays Posts on Financial Repression & Posts on Thursday as Key Updates Occur
FRA Co-founder Gordon T. Long is joined by Kristin Tate in discussing her book and the outlook of Millennials on the upcoming US election.
KRISTIN TATE is is a political columnist and author of “Government Gone Wild”.
In her book she says D.C. politicians are shipping our friends and family overseas to fight in wars we shouldn’t be fighting. They monitor our emails, record our phone calls, and peer into our snail mail. They spend our hard-earned cash on things no disciplined family would buy. They tell us who we can marry and what we can put in our bodies. They throw us in overcrowded prisons for smoking pot. They take lavish trips around the world, staying in five-star hotels… and it comes straight out of our paychecks. This isn’t freedom?
Government Gone Wild is a brash, bold ride through the carnival of absurdities that our broken system has become. This isn’t about Democrats vs. Republicans… it’s about inspiring hard working Americans to give a damn so we can take our country back. This is your wakeup call. You’re not anywhere near as free as you think you are – but you can be. We’re not as prosperous as we once were – but we can be.
GOVERNMENT GONE WILD
“You could really open my book on any random page and start reading and not be confused.”
If you want Millennials to not be apathetic you have to get their attention in a way that will let you keep their attention. They grew up with technology and have a shorter attention span, so it’s unrealistic to expect a young person who’s not already politically involved to pick up some long boring book.
The book takes the reader through various topics; everything from social issues to taxes to foreign affairs.
“The main message throughout this book is that whenever too much government gets involved, usually our freedoms are eroded.”
Once you get young people interested, once you get the conversation going, it’s usually easier to keep their attention. The battle’s getting their attention initially.
The book is a really light read, filled with a lot of shocking facts that a lot of people don’t know about our government, but it’s presented in a very fun way.
“One thing I really try to show Millennials is how we really need to start demanding accountability from our politicians.”
We’re scraping to get by and all this money we’re using to pay our taxes are going toward these sanctimonious politicians to live like kings and queens. There’s a lot of things we can do to turn this country around, but you’ve got to show young people why they have to care and why they need to demand accountability from our politicians.
ON THE SPECTRUM BETWEEN BERNIE SANDERS AND DONALD TRUMP
Poll after poll shows that Millennials tend to be more socially accepting of diverse lifestlyles, so maybe more socially to the left, but we’re also fiscally conservative. It’s kind of libertarian.
“I would say that I tend to be a representation of that – socially more liberal and fiscally conservative. It’s kind of libertarian.”
Even if they don’t know what the word ‘libertarian’ means, if you ask them about these issues many young people want the government to stay out of our personal lives and out of our wallets.
A few decades ago, something like gay marriage was very controversial, but this generation has grown up with these social issues and they are a little closer to home than previous generations.
“I see the future of the Republican party as being a little bit more libertarian, and if these older Republicans don’t start understanding that you’re going to keep seeing younger Millennials flock to the Democrats because they really see these social conservative issues as deal-breakers.”
CURRENT ELECTION ISSUES
You have a record number of Millennials living with their parents, the job market is awful, and you do have a lot of young people who do have college degrees working low wage jobs. We’re depressed, and that’s why Bernie Sanders is doing so well. He’s sending a message that sounds positive to young people about the future, even though socialism would destroy this generation. A lot of young people don’t realize that when they hear him talk about income inequality and wealth distribution.
“If the Republicans or Hilary Clinton want to grab some of this Millennial vote, they need to start showing young people how their policies will lead to jobs… and how their policies will bring prosperity to all Americans. That’s what young people care about.”
They get these soundbites of positivity from Bernie and that sounds better than anything else they’ve heard. That’s why they’re so excited about Bernie. It’s depressing, but young people are all about bumper sticker politics; if you want to get their attention you need to spread your message in catchy, easy to understand ways. Bernie Sanders doesn’t really need to show young people how he’s going to make these things a reality because right now he’s the only one giving them any hope at all.
“There’s a lack of understanding of what capitalism is, but the fact that young people say they like free enterprise gives me home that fiscal conservatives can still spread their message to young people effectively.”
The movements behind Bernie and Trump are very similar. People are fed up with the Republicans and the Democrats. The voters are fed up with these establishment bureaucrats who do not look out for the people, on both sides of the aisle. That’s why they flock to Bernie Sanders.
“Although I don’t love Trump or Bernie, the fact that both of them are so popular does give me hope because they’re both outsiders and it shows me that people want something new and that they understand that the system is broken.”
If Hilary gets the nomination, young people will continue to be frustrated. Hopefully they’ll start to understand once they get into the job market, they’ll understand that we need more capitalism and less socialism.
“I do think that politics as we know it is changing forever in the US. I think this whole notion of having two establishment parties is crumbling… I see more apathy than ever, but I also see in some other way more awareness of what’s going on.”
It’s easier to hold people more accountable because of technology, and this increased awareness of what our politicians are doing and this connectiveness because of technology will only make the two party system crumble even more. We’re seeing this huge movement toward outsiders, toward politicians who are not career bureaucrats, and we’ll continue to see that in future elections.
“More government involvement is not what we need; we have too much socialism right now… capitalism is our friend, the job market is our friend, a great corporate environment is our friend. I want Millennials to wake up to this stuff and hopefully vote in a way that would lead to these for a free market policy down the road.”
For many weeks in a row now we have been asking, mostly jokingly, how with everyone else (both retail and "smart money") selling, and with stock buybacks sharply lower in recent months, is the market higher. Specifically, who is buying?
This question is no longer a joke. After this week's 17th consecutive outflow by "smart money" funds (mostly on the back of surging hedge fund redemption), moments ago we got the latest Lipper fund flow data. It was, as BofA put it, "unambiguous risk-off weekly flows."
As BofA also put it: "Equities continued to experience outflows and lost $3.32bn (-0.1%) last week, their 4th consecutive decline. Year-to-date, equity funds have lost $58.6bn (-0.6%), the largest ever dollar outflow in any 22 week period for the asset class"
And yet, despite record retail outflows, despite record smart money selling, despite slowing buybacks, the S&P is not only higher on the year, but just shy off all time highs. At this rate the central banks will really need to reassess their strategy before they lose what little credibility they have left.
Here are the fund flow details from BofA's Michael Contopoulos:
Equities continued to experience outflows and lost $3.32bn (-0.1%) last week, their 4th consecutive decline. Year-to-date, equity funds have lost $58.6bn (-0.6%), the largest ever dollar outflow in any 22 week period for the asset class.
Global high yield saw a 4th consecutive week of outflows, led by non-US HY’s $2.2bn (-0.9%) outpour and partially offset by a minor $131mn (+0.1%) inflow into US domiciled high yield funds. The divergence is likely a result of US HY’s outperformance since the February 11th lows, outpacing its European counterpart by 6.5% over the 3.5 month span. Also a contributing factor is the ECB announcement of its Corporate Sector Purchase Program, which has caused European investors to pull money out of EU high yield and invest in ECB-eligible high grade corporates. Within the US, ETFs led the inflows (+$180mn, +0.5%) compared to a $49mn outflow (-0.0%) from non-ETFs.
Meanwhile, loans gained $94mn (+0.1%) in net inflows, driven by the greater odds of a summer rate hike. Investment grade corporates continued to benefit from sizeable inflows, gaining $1.29bn (+0.1%) last week for the 14th straight inflow. Other asset classes we track reporting flows last week include EM Debt (-$324mn, -0.1%), munis (+$1.23bn, +0.3%), money markets (+$7.41bn, +0.3%), and commodities (-$271mn, -0.3%). As a whole, fixed income funds recorded a $2.53bn inflow, or +0.1% of AUM
And the global flow details from Michael Hartnett
Equities: $9.2bn outflows (7 straight weeks) (note $11.1bn mutual fund outflows partially offset by $1.9bn ETF inflows)
Bonds: $2.6bn inflows (inflows in 12 of past 13 weeks)
Precious metals: tiny $32mn outflows (only the second week of outflows in 20 weeks)
Money-markets: $12.2bn inflows
Fixed Income Flows (Chart 2)
First inflows to Govt/Tsy funds in 14 weeks ($0.6bn)
Largest outflows from HY bond funds in 15 weeks ($2.1bn)
Largest outflows from EM debt funds in 14 weeks ($0.3bn)
$2.5bn inflows to IG bond funds (12 straight weeks)
$1.2bn inflows to Munis (36 straight weeks)
Inflows to TIPS funds in 14 of past 15 weeks ($0.3bn)
Equity Flows (Table 2)
Japan: $0.9bn outflows (first outflows in 3 weeks)
Europe: $3.3bn outflows (16 straight weeks)
EM: $2.0bn outflows (4 straight weeks)
US: $1.1bn outflows (outflows in 6 of past 7 weeks)
By sector, first outflows from REITs in 14 weeks ($0.2bn); largest financials inflows in
5 months ($0.5bn); 6 straight weeks of tech outflows ($0.4bn)
To summarize: everything except ETFs was sold in the past week; while global equity outflows in 2016 are now at a record high $105 billion for the 22 week period.
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
THE CONTENT OF ALL MATERIALS: SLIDE PRESENTATION AND THEIR ACCOMPANYING RECORDED AUDIO DISCUSSIONS, VIDEO PRESENTATIONS, NARRATED SLIDE PRESENTATIONS AND WEBZINES (hereinafter "The Media") ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY.
THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
Gordon emperically recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, he encourages you confirm the facts on your own before making important investment commitments.
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