Just 10 Companies Account For 33% Of All Market Gains Since Trump"s Election

Yesterday we laid out the reasons why French bank SocGen unveiled a surprisingly contrarian forecast, according to which the S&P would tumble from its current level over 2,600 to 2,000 in 2018, representing a more than 20% bear market drop...

... the drop catalyzed by rising interest rates pressuring P/E multiples, a late cycle economy nearing recession, equities trading at record valuations, and with everyone short vol begging for a vol short squeeze. Not surprisingly, SocGen"s unspoken advice was to get out now.

And while many of the negative factors highlighted by SocGen had already been discussed here in the past, there were two we warned to bring attention to: the market"s multiple expansion since Trump"s election, and the narrow leadership in the S&P.

As we noted yesterday, contrary to the widely accepted narrative, while the S&P 500 has risen 24% since Trump"s election, only half of this performance has been driven by earnings growth; the other half is from P/E expansion. But why would P/Es rise at a time when the Fed is tightening? As SocGen speculated, assuming that analysts have not factored tax reform into their earnings forecasts, tax reform expectations have been the driver of P/E expansion. There is a problem with this: while the S&P 500 index tax rate is currently 26.6%, assuming that US companies generate 43% of their profits abroad (here) and pay 35% of their US profits on taxes (i.e. with no loopholes for US profits), the average tax rate outside the US would be 15.5%. A decrease in the US tax from 35% to 20% as planned by Trump’s tax reform would thus theoretically boost earnings by 8.5%. The 12-month forward P/E has risen 12% over the last 12 months. In other words, roughly 150% of Trump"s tax cuts have been priced in!

However, another especially interesting observations goes to the leadership of this 24% rally since Trump"s election, which - while hardly a surprise - was largely driven by a handfull of companies, or ten to be precise.

As SocGen calculates, just 10 contributors of the S&P 500’s bull run have accounted for 33% of the S&P 500 performance. Tying to the above, the bank also points out that all of the companies listed below have seen their P/Es expand over the last 12  months, in some cases - like Nvidia, WalMart, Boeing and Amazon - dramatically. In fact, only three companies (Apple and the two banks) have 12-month P/Es that are below the market average (18x). Lastly, keep in mind that except Amazon, all of the companies already pay a  corporate tax rate below the current US federal tax rate (35%), and five companies even pay a tax rate that is below the 20% rate targeted by Trump’s tax reform.

As we asked two days ago when we showed that the bulk of hedge funds gains in 2017 have come from holding this same handful of companies, what happens to hedge fund performance - and the S&P 500 - when, for whatever reason, the tide turns and the winners are the first to be sold?

The Moment Gary Cohn Realized His Entire Economic Policy Is A Disaster

Ever since 2012 (see "How The Fed"s Visible Hand Is Forcing Corporate Cash Mismanagement")  we have warned that as a result of the Fed"s flawed monetary policy and record low rates, corporations have been incentivized not to invest in growth and allocate funds to capital spending (the result has been an unprecedented decline in capex), but to engage in the quickest, and most effective - if only in the short run - shareholder friendly actions possible, namely stock buybacks.

We got a vivid confirmation of that recently when Credit Suisse showed that the only buyer of stock since the financial crisis has been the corporate sector", i.e. companies repurchasing their own shares...

... with SocGen showing previously that virtually all the net debt issued this century has been used to fund stock buybacks.

While one can debate the implications, the above two charts show one thing clearly: corporate incentives have been perverted in the past decade, and instead of allocating capital to ensure long-term business growth, companies have rushed to cash out, with shareholders benefiting the most, while management teams got record bonuses as a result of their stock price-linked compensation bogeys.

The eagerness to shift incentives away from buybacks to capex is also the basis for much of Trump"s economic policy as designed over the past year by his top economic advisor, former Goldman COO Gary Cohn who is the White House Economic Council director. In fact, the motive behind the administration"s entire push for tax reform (cutting corporate tax rates) and offshore cash repatriation, is to the funds domestically, though not on buybacks and M&A (which also leads to "synergies" and other headcount reductions), but on reinvesting the funds in growing one"s business and hiring.

Which is why we were amused to observe the following brief interchange yesterday between Gary Cohn and an audience made up of executives, where in the span of a few seconds Gary Cohn realized that his entire economic policy had been a disaster.

During an event for the Wall Street Journal"s CEO Council, an editor at The Wall Street Journal asked the room: "If the tax reform bill goes through, do you plan to increase investment — your company"s investment, capital investment?" He asked for a show of hands.

Alas, as the camera revealed, virtually nobody raised their hand.

Responding to this "unexpected" lack of enthusiasm to invest in growth, Cohn had one question: "Why aren"t the other hands up?"

VIDEO: CEOs asked if they plan to increase their company"s capital investments if the GOP"s tax bill passes.
A few hands go up.
"Why aren"t the other hands up?" Gary Cohn asks.#WSJCEOCouncil pic.twitter.com/TD2oAlN27S

— Natalie Andrews (@nataliewsj) November 14, 2017

His confusion was understandable: this one simple experiment revealed that Cohn"s entire economic policy was a disaster. And while the former Goldman president tried to cover up his disappointment with laughter, the cognitive dissonance between the stated intention behind tax reform, and what it would ultimately achieve, or rather not achieve, was painfully obvious to everyone.

Adding insult to injury, last month the White House released a paper arguing slashing the corporate tax rate would increase average household income.  Kevin Hassett, the chair of the Council of Economic Advisers (CEA) chairman, said on a call last month the main reason why cutting the corporate tax rate would boost wages is because doing so would make it less expensive for companies to invest in capital assets such as machines.

“More assets like machines let workers produce more, and when workers can produce more, businesses can afford to pay their workers more,” he said last month. Unfortunately, virtually no CEOs have any intention of using freed up funds to reinvest in themselves.

Ironically, Cohn"s epiphany took place just as tax reform is approaching the final stretch in Congress and it increasingly appears that at least some form of corporate tax cut will be enacted. We say ironically, because the only thing Trump"s reform will achieve is to dramatically accelerate recently slowing buybacks, which in turn will push stocks to new all time highs as price-indescriminate CFOs and Tresurers tells their favorite VWAP trading desk to just "wave it in." Which means that the White House paper suggesting corporate tax cuts will boost household income is correct... if it focuses only on the incomes of the richest 1% of households.

"Tremendous" Demand For 7Y Treasurys; Second Largest Buyside On Record

An ugly 2Y auction (with the highest yield since 2008) on Tuesday, a mediocre 5Y auction yesterday, and now a blistering 7Y auction, in which the Treasury sold $28 billion in "curve belly" notes at a high yield of 2.13%, stopping through the When Issued by a surprisingly strong 1.1bps, the highest since April.

As Stone McCarthy described the auction in one word, "Tremendous", noting it a buyside takedown which was the second largest on record.

The internals were impressive: the bid to cover of 2.70 surged from last month"s 2.46, was solidly above the 2.55 six month average, and was the highest since April. It was also the third highest in the past 5 years. Indirect bidders couldn"t get enough, and were awarded 70.6% of the takedown, their highest allotment since April, and above the 69.3% 6MMA. Likewise, Directs waved it in, and took down 19.0%, the highest since December 2016, leaving Dealers holding only 10.4%, the second lowest award for the class on record, higher only than the 8.8% this past April. 

In short, a very strong auction, whether or not driven by China as SocGen speculated earlier, and one which not only pushed the curve lower, but also sent the USDJPY to session lows, validating one of the strongest correlations we have observed in recent months.

SocGen: "Now Entering Dangerous Volatility Regimes"

With the VIX back to a 10-handle and eagerly eyeing single-digits once again, commentary on market complacency and the low VIX, which was blissfully gone for the past month when the VIX surged valiantly if briefly only to be smacked right back down, has returned. In a note from SocGen"s Praveen Singh, the French bank analyst boldly goes where so many prognosticators have gone before, and looking at the evolving cross-asset volatility trends, warns that the market is "now entering dangerous volatility regimes."

Hardly stating the unknown, Singh writes that "expected volatility has been falling consistently. Over the last year, expected volatility has been falling on a consistent basis. When we look at equity and  government bonds, the current  level of volatility is well below long-term average volatility. Falling volatility normally means stable environment for risk assets."

So time for some (familiar) numbers: the current low level of volatility happens less than 2% of the time for equities. In the following chart, SocGen plots the distribution of equity volatility based on data since 1994. The bank"s analysis suggests that average equity volatility has been above the current level 98% of the time. This means that volatility is more likely to go up than fall further from current levels... at least in theory, of course. In practice, what it means these days is that some central banks unload a few thousand VIX contracts to prevent any vol spike at just the right time.

Undeterred, SocGen presses on and warns that - central banks aside - in the past, equity volatility has bottomed at around current levels and rose subsequently. Volatility has a strong mean-reverting tendency.

"Hence, we observe that periods of particularly low volatility are often followed by periods of relatively higher volatility."

Of course, It"s not just equities: The low level of volatility is pervasive across asset classes and as Singh shows in the chart below, "we compare the current level of volatility with the historical range. We find that for most asset classes the current level of volatility is near the lower end of its long-term range."

Again, none of the above is new, and it goes to one fundamental theme involving vol: mean-reversion, a phenomenon which always happens, yet which has been sorely lacking in the space for a long, long time. As such, all SocGen is saying is that "it"s time"... but is it? Many traders have been crushed betting on an imminent vol surge, which never materialized. Why will this time be any different? Here"s SocGen"s rationalization:

How long can volatility stay this low? In the past, when equity market volatility was around the current level, it went on to rise by 3 points in the subsequent 12 months. In the below charts, we show evolution of equity volatility between 2007 and 2009. We note that:

• Equity volatility troughed in February 2007, around eight months ahead of the US equity market peak. The current level of equity volatility is very similar to what we saw in February 2007. Equity market volatility started to rise in the subsequent months.


• We note that the dislocation in equity market volatility is much greater than the dislocation in government bonds.

Finally, does SocGen"s concern mean investors should get out of stocks? Well... not really. As Singh concludes, the current low level of volatility makes equities our preferred asset class as risk-adjusted return is higher. However, a subsequent rise in volatility means: i) Balanced asset allocation, i.e. 50% equity and 50% fixed income, is better than a more dynamic (higher equity) allocation. ii) Equity re-allocation i.e. avoid areas where risk-adjusted return is deteriorating (US equity allocation has been reduced in our latest Q-MAP balanced portfolio). iii)  Increase cash allocation (our cash allocation has been increased from 5% to 10%).

So after predicting that a 2007 vol episode may be imminent (as a reminder, back then the VIX briefly tagged 80 in the process destroying all vol sellers), SocGen"s brave reco is to increase cash from 5% to 10%. One may just buy bitcoin instead.

JPMorgan Lists Four "Red Flags" Why It Is Starting To Sell Stocks

While most banks have in recent weeks expressed concerns about the recent, near record high levels in the S&P - which is now 67 points above Goldman"s year end price target of 2,400 - few have been willing to go out on a limb and announce they are short the market, and that the bull market is now over (unlike Gartman who on Friday staked his reputation that the "Bull market has come to an end" only to unleash another rally in the S&P in the next two days).

Overnight, JPM"s Misla Matejka has done just that, and in his latest equity strategy note writes that JPM "continues to see the risk-reward for equities as unattractive" for 4 main reasons: i) complacency seen in VIX and in HY spreads could unwind further, ii) EPS momentum is deteriorating, iii) valuations are "outright expensive", and iv) liquidity will be turning.

If the JPM strategist had left it at that, it would have been notable as it would be one of the very few, unhedged bearish recos on Wall Street. He did not, however, and said that after the early periof of turbulence, markets will continue rising, effectively nullifying his warning because what"s the point of selling just to have to buy again a few weeks or months down the line, or as Matejka put it the "medium-term fundamental view remains that equities are in an upcycle and that the potential consolidation should be used as another good entry point."

Hedging aside, here are the details of Matejka"s short-term bearish call, who writes that "we have been very bullish on equities in 1H, but think they will be consolidating during the second half of the year. Equities performed strongly in 1H and the key positive catalysts moved behind us. Now that SXXP is down 4% since May, where to from here? We believe a continued weakening in USD will keep helping EM & commodities (OW) and any rise in Bund yields will help Eurozone Banks (OW), but we think broader equity markets are likely to continue consolidating."

Looking at the big picture, JPM sees the following "headwinds" as immediate red flags:

• 1) The change in liquidity provision by the main central banks is likely to have an impact on equities, given very elevated P/E multiples currently. In 2H ’13, Fed tapering was ultimately positive for equities, after an initial correction, but then the starting P/E for MXWO was 30% cheaper than current. Also, CPI, PMIs and EPS were all up then, but that might not be the case this time around. Will central banks make a “policy mistake” by tightening liquidity into potential growth and inflation weakening? Within this, we think US bond yields remain stuck in a range, but the potential for Eurozone yields to move up is greater.

• 2) Earnings delivery likely to weaken in 2H, post a strong Q1 and still adequate Q2. We were very bullish regarding the upturn in earnings, but the hurdle rate is much steeper in 2H and the base effects are turning less positive. The potentially weaker activity and pricing backdrop into year-end could be the headwind. Global PPI, which is typically strongly correlated to global EPS momentum, is likely to decelerate in 2H. After spending months in positive territory, we note SXXP EPS revisions are outright negative now, lead lower by Cyclicals. Stocks’ reaction to Q2 misses, and to the beats, was poorer than typical.

• 3) Soft patch in global activity ahead? US growth momentum is mixed, with a rollover in manufacturing, credit, housing and car sales. US CESI is negative – the gap between CESI and SPX remains uncomfortably high. China new project starts are soft. The last time this happened, in summer ‘15, a phase of significant de-risking followed. A big stimulus package stabilised the activity then, but this time around, a new support programme might not be forthcoming. Shibor rate is up 200bp ytd. Eurozone has been very strong so far, but even that region could see some softness ahead. We note Eurozone PMIs are sequentially lower for two months in a row.

• 4) Equity multiples are in outright expensive territory. There is some complacency in risk pricing, with HY spreads near record low, and VIX as well. Aug-Sep seasonals were typically weak

Enough for JPM"s bearish near-terms: now here is the longer-term bullish perspective: as part of the hedge, the JPM strategist asks if "the potential increase in volatility during the 2H something that might become more sinister than just the typical profit-taking given poorer seasonals, a valuation headwind from bond yields repricing, and a likely soft patch in global earnings and activity momentum?" And answers "We don’t think so." Here"s why:

1. Earnings base remains depressed in EM and in Eurozone. There is significant medium-term upside potential from here in both regions.


2. Credit conditions are supportive, real rates are low and yield curves are generally steep.


3. Equities are still under-owned, where the only buyers over the past 10 years have been the corporates, through buybacks. There are some signs that this is starting to change.


4. Even though in absolute terms equities appear pricey, the relative value proposition between equities and fixed income still holds.


5. USD behaviour might not add to the risk-off concerns. Typically, as one enters a de-risking phase, USD has tended to rally. This, in turn, has become a problem for EM, as the EM central banks need to hike interest rates in order to protect their currencies, which ultimately hurts EM growth. Also, a rallying USD is a headwind for commodity prices. We do not see USD strengthening this time around.

* * *

The cliff notes version of the above, of course, is "hedging one"s bets": if stocks drop, JPM has 4 reasons why that should have happened. If they don"t, JPM has 5 reasons why they should continue higher. Perhaps the most important take home from all of the above is the following statement from JPM: "the only buyers over the past 10 years have been the corporates, through buybacks." This is a concern, because as we showed earlier using a SocGen chart, the amount of corporate buybacks has declined by 20% Y/Y, the biggest drop since the financial crisis...

... leaving open the question "who will step in to buy"?

BMO Finds An A New Source Of Systemic Risk

In a time of suffocating, crushing market complacency (which has made the lives of financial analysts so boring, they have even quantified what complacency is), a pet hobby that has emerged within the financial community is to find new possible sources of underappreciated systemic risk. One such attempt comes from BMO"s Mark Steele today, who notes that aside from the pressure that the short to medium end of the curve is dishing out as Central Banks turn hawkish, "the market dishes out some of its own early signals of a more important nature."

Steele says he created a basket of Chinese Bank CDS to look for systemic risk there, and yesterday it notably broke above a narrowing trend – Exhibit 1.

Breaking the basket down, BMO highlights China Construction Bank as the key member that shows the greatest, albeit liquidity induced, "breaking bad" spike – Exhibit 2

Here, Steele will stop readers before they go asking about BofA, or SocGen, credit risk, to say that the bank"s systemic risk basket sleeps like a baby. His spin would be to tell you that it seems an opportune time to buy protection – Exhibit 3.

So is a Chinese bank the potential source of the next systemic risk? His answer: "The systemic risk problem this time round won’t come directly from a Chinese bank. The potential Lehman will come indirectly. We update that basket from I Never Kissed a Bear with the overnight breakdown below – Exhibit 4"

For those asking, the basket in question is charted below: it represents what Steele believes are China"s Systematic Risk Entities - aka China"s chronic acquirors profiled here at the end of June - that got a call from the Chinese Bank regulator at the end of June. He then adds "If we had to break down the basket to have the market call out the potential Lehman, we’d say it was (Wicked?) Wanda."

"Oil Hits The Floor And Is Now Set To Soar": Citi

One day after Goldman issued a confused, rambling note in which the bank cuts its 3-month WTI price target by $7.50 from $55 to $47.50 saying "Spot WTI oil prices at $43/bbl are now back to November pre-OPEC deal levels, down from $52/bbl just a month ago and vs. our prior 3-mo $55/bbl forecast. How did it go so wrong?" yet kept a bullish long-term outlook (underscored by a bullish follow up note by Goldman"s commodity head, Jeffrey Currie because Goldman is always hedged) and on the same day that Socgen likewise cut its Q3 and Q4 Brent forecasts by $7.50 to $50 and $52.50 (and 2018 by $6 to $54) on a weaker supply-demand outlook, oil bulls were in urgent need of reassurance.

So, courtesy of Citi, the one bank that will never stray too far from its bullish bets on crude (perhaps due to its role as OPEC"s impresario to the hedge fund world), and its head technician Tom Fitzpatrick, here is the explanation why oil is now due for a rebound, or as Citi puts it... 

"Oil hits the floor and is now set to soar!"

• We believe that WTI Crude has posted a short term bottom. Previous short term bottoms have typically seen strong upside follow through with an average low to high rally of 22% over three weeks. 


• The present price action on WTI Crude is also very similar to that seen in October/November of last year and in that instance, we saw a rally of nearly 23% in the 3 weeks after the low was posted. 

• We are very focused on the price action seen in October and November of last year where we fell for 5 weeks from a high of $51.93 to a low of $42.20. This time, we also fell for 5 weeks from a high of $52.00 and hit a low of $42.05 last week.


• The bounce after the November low saw WTI rally to $51.80 over three weeks and a similar move this time around looks likely to us. Such a move would also be consistent with the rebounds off prior lows.


• Previous short term bottoms in WTI Crude have been followed by aggressive rebounds in the 3 weeks that follow. On average these rebounds have resulted in a move higher by 22%. If last week’s low is a short term bottom (which is our bias), a bounce like the average one see over the last 18 months would suggest a move up to $51.29, in line with what we would expect to see if we follow the November 2016 bounce highlighted above.

• Daily momentum has crossed higher from stretched levels and similar turns higher in momentum have corresponded with major bottoms in WTI Crude.


• In addition, we have now firmly taken out good short term resistance at $43.76 (May low) on a closing basis and we held that level on a retest yesterday.


• Interim resistance worth keeping an eye on in the short-term comes in around the March lows of $47.

• It is worth noting that net Managed Money positioning has become significantly cleaner in the last few months and a large increase in shorts has actually been seen (biggest short since the deflation story dominated the narrative in mid-2016)


• Further price appreciation in Crude could therefore see an unwind of shorts with plenty of room for longs to add to positions.

Then again, considering that exactly one week ago Citi issued a note titled "Here Comes The V-Shaped Rebound In Oil", we can see why readers may be skeptical.

Deutsche: The Fed Gave Trump Just Enough Rope To Hang Himself With

There has been no shortage of sellside reactions to last week"s Fed rate hike, which have run the gamut from congratulatory as per BofA and Credit Suisse, to the outright critical, as we showed last week in a note from Goldman Sachs, RBC and SocGen, all of whom accused the Fed of either misleading the market, or soon being being forced to double down on its hawkish message as a result of the dramatic easing in financial conditions as a result of a rate hike.

A somewhat compromise take was provided by JPM"s quant Marko Kolanovic last week who shared the following reaction to the Fed hike:

Fed Put and Buying the Dip: Early this month, the Fed surprised the market by telegraphing a March hike. At the time, investors started speculating whether this was a sudden hawkish turn, or even a politically motivated decision. We think it might have been the move of a prudent monetary Dove. Hiking in March, gives the Fed the option to skip June should there be market turmoil (e.g. related to French elections). Indeed, the market-implied probability of a June hike dropped yesterday from 60% to 50%. After the dovish hike yesterday, extreme short positioning in bonds, and the selloff in rate sensitive assets (such as precious metals and REITs) snapped back. The short squeeze in these assets could have some momentum in the next several days. The dovish Fed outcome implies that the ‘Fed Put’ is likely still alive and well...

Which brings us to the latest, and most whimsical take yet, that of Deutsche Bank credit derivatives expert, Aleksandar Kocic, who usually tends to have some of the more unconvential views on monetary, or any other, policy. He did not disappoint on Monday, when in Deutsche Bank"s latest weekly note, he writes that there are basically two different possible endings to the current economic situation, or as he puts it, "the future is bimodal" with "volatility to be found between politics vs. policy."

Here is a summary of his reaction to the Fed"s third rate hike in a decade

The subtext of the last week"s Fed "package" is a compromise motivated by a desire to extend the comfort zone and to hedge their position against possible fiscal irresponsibility, while, at the same time, not stand  in the way to any possible fiscal stimulus (or its absence) by hiking too aggressively.... Depending on the interplay between degree of political resolve and the Fed actions we could see two distinct paths of resolution of the existing tensions in the mid- or long-run.

And his detailed take:f

Last week, the Fed delivered what appears as a dovish hike, in all likelihood to be followed with two hikes more in 2017 and three in 2018. Such a choice of the Fed action was a compromise driven by the developments in the labor market and the key events in Europe, on one side, combined with the risk associated with the approval of the fiscal stimulus, on the other. The subtext of this compromise can be interpreted as being motivated by the Fed’s desire to extend the comfort zone and to hedge their position against possible fiscal irresponsibility, while, at the same time, not stand in the way to any possible fiscal stimulus by hiking too aggressively.

Despite all the efforts not to create more uncertainty, this is likely to create at least mild ambiguity regarding the long-run. A Fed which is not in a standby position waiting for the fiscal package to arrive and kick in is going to be supportive for USD and higher real rates. The March FOMC “package” (in terms of rate hike, dots, rhetoric and Q&E) implies effectively a real rate rise and is most likely bearish for breakevens, which could diminish the effect of the border tax on the trade deficit and, as such, reduce the impact on growth potential. In addition, having higher real rates increases the costs of borrowing and possibly creates political resistance against deficit expansions and structural steepening of the curve. On top of that, given what we saw in the last weeks, this suggests that the political process around the budget plan and the Legislative package already expected by the market is going to be anything but smooth, which is adding further doubts about its success and timing.

Depending on the interplay of politics and policy -- degree of political resolve and the Fed actions -- we could see two distinct paths of resolution of the existing tensions in the mid- or long-run. On one hand, it appears that the Fed is removing uncertainty around the terminal rate, while on the other, politics is creating a binary outcomes which could have a dramatically different effect on long rates. In that context, we are facing a future with bifurcating back end of the curve. Either political bottlenecks clear and the stimulus gets approved and goes full force leading to higher growth potential with subsequent rise in price levels and structural steepening of the curve, or political tensions effectively sabotage either its arrival or content (or both), and the curve initially bear flattens or even twists with rate shorts capitulation accelerating the rally of the back end.

The above, simply summarized: the Fed has given Trump just enough rope to hang himself with; and since all that matters now is how effective the President will be in passing his political agenda - which is not looking good- should Trump fails, the one of two possible outcomes that is most likely is the one where the "curve bear flattens or inverts", prompting the next, long overdue, recession. 

Citi: "There Is Something Strange Going On... Something Doesn't Smell Right"

With the Dow Jones rising excruciatingly close, or within 0.37 points of 20,000 on Friday only to let down the market cheerleaders in the last minute, it would appear that there is nothing one can throw at a market which is determined to keep rising no matter what happens in the world.  So leave it to our favorite skeptic, Citi"s Matt King to throw a fly in the ointment by asking how is it possible that "nothing sticks to markets."

He proposes one possible reason: perhaps analysts were overly pessimistic going into the election and year end, which is possible considering the "most synchronized DM upturn in years"...

... an upturn, which however, has been largely predicated by the reflexivity of soaring stock markets, which in turn have spiked not on actual news, but frontrunning the "everyone"s-a-winner-under-Trump" trade...

... which however may never actually materialize in practice, and which could very well also lead to a recession as the surging dollar leads to a global GDP slump while paralyzing financial conditions (see recent record FX volatility in China).

As King then notes, earnings bullishness gets you only so far, and as the chart below shows, the recent surge in global stock prices is not a function of earnings, but expanding P/E multiples relative to Trasuries, which then prompts him to ask why, now that yields are surging, "shouldn"t we be discounting using higher bond yields."

This is turn prompts King to propose one of his trademark rhetorical questions: "There Is something strange going on" adding that "something doesn"t smell right" in a world in which uncertainty is soaring yet spreads are collapsing, as SocGen first pointed out last month in its "most frightening credit chart", even as leverage also keeps rising.

What is the "key ingredient" in the mix that makes sense out of this market chaos? Simple: according to King, central bank buying of anything that is not nailed down is the "missing link."

Furthermore, despite all talk of a shift from monetary to fiscal stimulus, "central banks aren"t done yet", not by a long shot:

Which in turn has - so far - allowed markets to ignore the reality that the credit bubble is getting bigger by the day as debt and interest coverage continue to rise while EBITDA still shrinks, resulting in late cycle fundamentals and valuations.

And yet, there is always a tipping point: according to King, such a point would arrive once real yields spike higher "not matched by a pick-up in growth."

His final rhetorical question: how long until this tipping point happens? The answer: 50 basis points.

Now if only a 50 basis point spike in real yields would also put an end to all the other "strange things" taking place in a world which is burning every day, yet where the Dow Jones is partying like it"s 19,999.