Thanks to Goldman, Disney, and3M, The Dow has surged this morning, topping 22,500 for the first time as Nasdaq has suffered since Europe closed...
Nasdaq dipped red briefly..
It seems European markets closing prompted selling in Tech stocks...
It appears Europe"s close also sparked a buying panic for value stocks...
And here"s why...
A broken market fixes all ills.
The Fed confirmed yesterday that stocks are in a bubble.
Lost amidst the usual Fed-speak about inflation and other items were the following nuggets.
1) “Equities” (read: stocks) were the primary reason the Fed discussed financial stability risks.
2) The Fed raised its assessment of financial stability from “notable” to “elevated.”
3) The Fed discussed “stock valuations.”
This is simply incredible. Remember, we"re talking about the Fed here... a group of people who go above and beyond to ignore risks in order to maintain the status quo.
Put another way, the stock market bubble is now so massive that even THE FED is talking about it. Indeed, the Fed is even openly states that the bubble might cause financial instability (read: a CRASH).
It’s not difficult to see what the Fed is talking about. Based on their cyclical adjusted price to earnings ratio (CAPE) stocks are in CLEAR bubble territory.
As you can see, stocks are currently as overpriced as they were at the 1929 peak. Indeed, the only time stocks were MORE expensive was the Tech Bubble: the single largest stock market bubble in history.
They say you don"t ring a bell at the top. But what the Fed did yesterday is DARN close.
So what happens when the markets wake up to the fact that yet another massive bubble is beginning to burst?
You"ve been warned.
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One week ago, we closed the book on the long-running debate whether gross (and net) leverage is the highest on record, when we showed a chart from Goldman according to which net debt/EBITDA for all companies (with or without energy) is the highest on record, surpassing the previous credit bubble peak by nearly 0.3x turns. Furthermore, as Goldman said that the time, "given we are 8+ years into an economic expansion, we believe it’s prudent to also view this via a “normalized EBITDA” lens (i.e., median NTM 2007Q1-2017Q1). On this basis, aggregate leverage (ex- Energy) would move up to 2.1x, roughly 20% higher than current levels and 18% above the prior cycle peak."
Of course, none of the above matters right now; in fact if anything as Friday"s oversubscribed Tesla bond sale as well as yesterday"s massively oversubscribed sale of Amazon bonds confirmed, investors still can"t get enough of corporate debt.
But how much longer can this relentless re-leveraging continue before something snaps, or before someone finally pays attention? According to BofA"s chief credit strategist, Hans Mikkelsen, the answer is 2018.
We republish from our weekly the preliminary review of 2Q US high grade credit fundamentals. As highlighted in that piece gross leverage (ex. financials, commodities and utilities) jumped 0.11x to 2.38x, nearly matching the all-time high of 2.41x reached in 1Q 2002 during a recession.
Recall that the 2017 BofAML Corporate Risk Management Survey showed that roughly two-thirds of US companies do in fact plan to use some of the overseas cash to pay down debt. A lot of companies - but not as many - also have plans for each of the categories "Share repurchases", "M&A", "Capital expenditure", "Dividends", "Fund Pension" and "Other". But these are also the usual uses of proceeds for new issuance, suggesting that that overseas cash will be used over time in place of supply, thus further reducing gross leverage as existing bonds mature. However, even despite this corporate balance sheets overall will remain relatively stretched and we think that 2018 is when corporate bond investors again get very concerned about fundamentals... This as less uncertainty about US fiscal policy, and continued economic growth of just around 2%, incentivize companies once again to accelerate M&A and share repurchases.
Well, if this is what "less uncertainty about US fiscal policy" looks like just over a month before a debt ceiling debate which increasingly looks like it could result in a technical default by the US, we would hate to see what more uncertainty is. What is just as ironic, is that in the very same BofA report, however by a different author, we read that in the second quarter, borrowing by high grade corporations outpaced earnings, again.
We provide a preliminary read on market fundamentals for US non-financial high grade issuers as most 2Q results are out by now. The results show increasing leverage as companies continued to accumulate debt at rates faster than they grew earnings.
We estimate that median gross leverage increased to 2.38x from 2.27x in 1Q, while net leverage rose more modestly to 1.72x from 1.69x in 1Q. On a YtD basis gross and net leverage increased by similar 0.16x and 0.18x, respectively, from 2.22x and 1.54x in 4Q-2016 (Figure 4). Coverage also weakened to 10.69 in 2Q from 10.89 in 1Q (Figure 5).... YoY debt growth accelerated to 2.3% during the quarter after slowing down to 1.5% in 1Q. Margins and liquidity were both mixed in 2Q and capex growth rates remained little changed at low levels. While the pace of supply moderated in 2Q from the record pace in 1Q (Figure 6), the aggregate market debt rose 3.6% QoQ, outpacing the increase in LTM EBITDA by almost a percentage point, resulting in higher leverage. Most of the largest leverage increases were related to M&A funding. Companies also likely front-loaded issuance to take advantage of lower interest rates.
BofA"s attempts at spin aside, we agree that even in a case of "higher uncertainty", whatever it may look like, companies would probably issue even more debt, as they rush to take advantage of every last greater fool out there investing with other people"s money, before the rug is pulled out from a buyside community which appears to be staffed almost entirely with 20 year old "managers" who have never, in their professional lives, seen a debt crisis.
With every passing month, the ECB gets closer to its (QE)D-Day: the day when it runs out of bonds to buy, which according to recent calculations could take place in just a few months unless the ECB taper its bond purchases soon.
In its latest monthly purchase, the ECB revealed that, according to Bloomberg calculations, the estimated weighted average maturity of purchases of German bonds under the ECB’s PSPP in July declined once again to around 5.18 years vs 5.33 years in June, although it was modestly higher compared to the record lows of 3.99 years in May and 4.7 years in April and March.
Curiously, as the average maturity of Bund purchases dipped, all other nations saw a modest increase, while France soared to the highest on record:
As Bloomberg notes, the latest estimates may have been influenced by the reinvestment of matured bonds by the Eurosystem, as the specifics of this are not released. It adds that in July, there were €19BN in German sovereign redemptions, €20BN from Spain and €36BN from France. The ECB have specified that reinvestments can take place in the month they fall due “or in the following months if needed.”
So how much time does the ECB have left before it runs out of bonds to buy? For the answer we go back to a DB analysis we highlighted two weeks ago, whose highlights we repost below:
* * *
When Will The ECB Run Out Of German Bunds To Buy: Here Is The Math
Apart from the macro economic rationale for tapering the most important, if not only limiting factor which will result in a moderate tapering of the QE programme starting in the coming months is the lack of eligible government bonds, Bunds in particular, for central bank purchases.
As a reminder, the current eligibility criteria (which admittedly can be changed) for government bonds is that they should be euro denominated, have a remaining maturity of 1Y to 31Y and an issue and issuer limit of 33% applies. The issuer limit is different from the issue limit as it takes into account central banks" holdings of government bonds outside of the asset purchase program as well.
Using ECB data, one can estimate the remaining eligible universe taking into account the reinvestment needs and the impact of gross issuance on the eligible universe. This is what Deutsche Bank has done recently, assuming that 70% of German PSPP purchases are in central govt. bonds with the remaining 30% in regional government bonds and local agencies. The bank then estimates that the remaining eligible universe of bonds is €114bn. Further assuming gross issuance for the remainder of 2017 and 2018 to be € 69bn and € 150bn respectively, I.e. a total of EUR 220bn, the eligible universe increases by 33% of this amount which is €73bn. This takes the total eligible universe by the end of 2018 to approximately €185bn.
At the current pace, Bund purchases until the end of the year should amount to €50bn. Should the ECB continue monetizing debt at the current pace it will not have enough eligible bonds by the end of 2018.
This is where the taper comes in: at an aggregate QE pace of €40bn per month from Jan-18 onward, a €20bn reduction of the current monetization pace, total QE purchases of German govt bonds would amount to €67bn. Additionally, estimating that reinvestment needs until the end of 2018 would amount to €40bn, this takes total QE purchases to €157bn which is comfortably below the available eligible universe of €185bn, however virtually no eligible bonds remain going into 2019.
Summarizing DB"s calculations, if the ECB were to reduce the pace of QE to €40bn per month starting from Jan-18, the ECB should not run out of German government bonds to purchase until early 2019. On the other hand, if it keeps the current pace of QE, it will run out of paper by late 2018, and even with a downward revised €40bn monthly total, the ECB will have almost no German bonds left to buy in early 2019. Furthermore, even tapering to €20Bn in late 2018 or 2019 will only extend total QE by just a few more months at best.
There is a last resort: either by then Germany starts running a huge budget deficit - obviously a very touchy political issue - which the ECB will be delighted to fund, or Greece will finally be eligible for QE and will be delighted to step in to Germany"s shoes, allowing the ECB to monetize Greek bonds, although it will take some very imaginative Goldman financial engineering to allow the ECB to monetize the (defaulted) Greek bonds that it already owns...
Spot silver prices have slipped lower since the payrolls data this morning and are now testing (and rebounding) the overnight flash-crash lows as Japan opened...
Spot Silver...
The futures volume is considerably lower in this drop than the $475mm dump last night...
Gold is also falling...
In the past few months we have extensively covered the end of China"s credit impulse...
As the following chart from Goldman demonstrates, it has been China where policy uncertainty has stealthily exploded in the past three months according to policyuncertainty.com, while making virtually no new headlines.
Here is the visual confirmation of where the global reflation trade has "come" from:
The chart below shows the amount of credit created as a percentage of GDP during the five years prior to major downturns globally.
As a result: whereas back in Jan "16 the global credit impulse was positive to the tune of 3.8% of global GDP (of which China comprised 3.5% of global GDP) it has now fallen back to -0.1% of global GDP (China"s contribution is -0.3% of global GDP).
Net / net, “inflation” remains the most critical driver of cross-asset pricing—so if ‘price is news’ and inflation is preparing to fade further (without any seeming ‘US fiscal policy’ booster shot coming near- to medium- term), be ready for negative impact on risk-assets.
* * *
But now, as Citi writes, some market commentators in recent weeks have highlighted that perhaps there is a major risk that consensus opinion is again overlooking the influence of China’s credit cycles, and thus perhaps overstating the potential contribution of future Chinese demand growth to the global outlook. And Citi"s EM strategists think that the recent macro-prudential tightening in China could possibly contribute to more negative spillovers in the coming months.
As Citi notes, as China turns to tighter monetary conditions, this tends to be quite bearish for the hard data...
Across the board, on average, these charts suggest material downside risks to YoY growth in measures of domestic activity.
As Citi concludes, tighter monetary conditions in China, if sustained, may mean that the period of unexpectedly strong Chinese activity growth, which started in 2016 Q1, is coming to an end. Despite continuing to use higher money-market rates to discourage leverage, the PBoC have enough in their toolkit to ease liquidity conditions if needed. But investors should be warned that volatility may not be contained till the end of the year...
The lagged response of the world"s equity markets to Chinese liquidity is hard for even the most ignorant asset-gatherer to ignore - or argue causally.
And so that is it - the one chart that ties suppressed global equity volatility to the credit cycle in China - this will not end well.
China’s contribution to the broader global recovery may be waning. Further legs to the global reflation theme may now rely even more so on the Trump administration’s ability to deliver on key campaign promises, and gioven this week"s debacles, those seem less likely than ever.
And the bottom line is simple - and even if China folds on its monetary tightening path, the next phase of volatility is baked into the cake.
The last time American consumers were this confident about the national economy was August 2001.
As a reminder, the market is not the economy... and a rising economic confidence on the heels of rising stock prices does not "forecast" the economy...
For those who believe there is more left in stocks to run, we note that economic confidence was rising to these levels in July 1997 - so you have about 30 months until the world implodes by that measure.
There"s just one problem with that exuberance...
"Soft" versus "Hard" Data again!!
The pressure point in Asian stock markets this week has been the decline in Chinese equities (the biggest weekly drop in 4 months).
Despite a stellar performance of the economy the outlook for the Shanghai Composite Index isn’t promising as the government is taking advantage of better growth to spur deleveraging.
For a market relying more on liquidity than fundamentals, China’s worsening monetary conditions index suggests tough times ahead...
As a reminder, the Shanghai Composite Index, notorious for its wild swings over the past two years, has gone 86 trading days without a loss of more than 1% on a closing basis, the longest stretch since the market’s infancy in 1992.
The last 4 days have highlighted the unusual effect in Chinese stocks.. each time the Shanghai Composite dropped over 1% (red dotted line) it was miraculously lifted to ensure it closed with a loss less than 1%...
As Bloomberg reports, authorities favor a steady stock market because it helps companies fund investment and repay debt by issuing new shares, which could help boost economic growth, according to Yin Ming, a vice president at Baptized Capital in Shanghai.
“The national team is behind it,” Yin said. “State funds will likely continue to be a market stabilizer.”
So one wonders, is China desperate to delever the speculative fervor in their markets... but do it just 1% at a time? Can the "market" really be that well centrally planned? We will see...
If the 6-month lag in Chines commodities is anything to go by, the breakdown in Chinese stocks is nowhere near over...
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For those looking toward the end of the week, today is "pro-forma" Wednesday, because this is a four day week as U.S. equity markets are closed for Good Friday. And, as Art Cashin writes in his overnight note, as "every year, the Good Friday close produces lots of erroneous theories about why we close. So, once again, we offer the explanation we wrote a few years back"
The Myth Of The Crash That Caused The Stock Market To Close On Good Friday – In the over five decades that I’ve been in Wall Street, each Easter season sees the re-blooming of an old – and erroneous – myth.
That myth contends that the NYSE opened on a Good Friday and the terrible Black Friday crash occurred. Thus, chastened and shaken, the Governors vowed never to open on a Good Friday again. It never happened.
Thanks to the nice folks in the NYSE archives we were able to establish a few facts. Records clearly show the NYSE closed on Good Friday as far back as 1864. Before 1864 records on the subject are a bit harder to find but there is high likelihood that the Exchange closed on Good Friday all the way back to 1793. (It was founded on May 17th, 1792 so Good Friday would have already passed that year.)
There was a famous and terrible Black Friday crash in Wall Street but it was primarily in the gold market. It came about when the “corner” on gold that Jay Gould and Jim Fisk had constructed (with some help from President Grant’s brother-in-law), collapsed. That occurred on September 24th, 1869, a little late in the year for Good Friday. You will also note from the search of the records that the NYSE was closing on Good Friday at least five years earlier and probably, much, much longer.
Lastly, for some unexplained reason, the NYSE stayed open on three Good Fridays. On April 8, 1898, the Dow closed down a half point. That’s hardly a crash. On the other two, April 13th, 1906 (a Friday the 13th) and March 29th, 1907, the Dow actually rose.
One day after UK PM Theresa May officially unleashed the Article 50 letter proclaiming the beginning of the end of Britain within the EU, the UK stock market had rallied over 16% since the vote that elites said would bring armageddon. However, remove the support of a collapsed currency and things look very different for a US dollar investor.
The UK"s FTSE 100 - whose megacap members get the majority of their revenue from outside the UK - looks very different when adjusted for the depreciation of the pound.
In fact, for a dollar investor, they remain underwater since the Brexit vote, having never seen a "return to even" since, thanks to the near 19% collapse in cable...
Even as dollar investors in Japan, Germany, and the US seem to have done uniformly well...
This is the biggest drop for Bank stocks since Brexit, as investor concerns over Trump"s reform agenda grow...
And, as Nanex points out, S&P 500 futures liquidity is collapsing today.
Why? Because whereas the BTFDers have been willing to jump in and, well, BTFD, on days where there is a sharp move lower, both the HFTs and the carbon-based traders step aside and pull their bids, unsure if this is "the start" of the selloff. Maybe this time they are right, as the bank bloodbath continues:
By EconMatters
We discuss the Stock Market Bubble is this video and provide some metrics to help the Federal Reserves Members spot the Bubble, since they seem to be having difficulty spotting the Bubble Market. The Fed should call an emergency meeting tomorrow, and hike rates the 50 basis points they were supposed to do last year, but passed on.
This Federal Reserve is the most clueless Federal Reserve in a long line of incompetent Federal Reserves. They have followed in the exact footsteps of the 2007/08 Financial Crisis Playbook, it is as if The Federal Reserve is trying to Destabilize the entire Global Financial System on purpose.
We are definitely witnessing the euphoric phase of the stock market bubble, because investors couldn`t be more blindly bullish than they are right now. This is the equivalent to the shoe shine story regarding the Market Psychology right before the 1929 Market Crash, clueless ebullience is off the charts right now in Financial Markets!
Do you spot the Bubble now Janet Yellen? I will give you my person number, and I will be happy to walk you through it, so that you understand the magnitude of why this is the biggest stock market bubble of all time.
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Sometimes you just have to laugh...
Minneapolis Fed"s Neel Kashkari said earlier...
"we are keeping our eyes open for asset prices to try to look for signs of bubbles” but admitted that it is "very hard to see asset bubbles in advance."
Indeed it must be... if your salary depends on it.
The S&P 500 has now gone a stunning 50 days without a 1% swing...
The S&P 500 Tech Sector has gone a record 14 days without a single loss...
And the NASDAQ 100 index is now at its most overbought since 1992 - most notably more overbought than at the peak of the dotcom bubble in 2000...
Hey, Neel, do you see the bubble now?
How about now?
But don"t worry, earnings expectations must be soaring to support this exuberance, right?
Wrong!
Finally, as Bloomberg"s Cameron "macroman" Crise notes, if you’re looking for another reason to get bearish US equities, try this: the ratio of equity to bond returns is approaching all-time highs in data going back 29 years.
By EconMatters
We discuss Priceline setting a new record high as another example of an overvalued tech stock in an overall tech bubble with a 41 p/e, very reminiscent of the 2000 tech induced market crash, with a bunch of over valued tech stocks leading the markets to unsustainable record highs, only to crash to record lows wiping out years of gains in six months. We have hit the Euphoria phase of the stock market bubble!
When will Central Banks stop doing this bubble strategy with Monetary Policy, it ends the same way every Bubble Monetary Cycle, in a Financial Market Crisis and Economic Crash. James Bullard`s dovish comments today inspired more bubble building, Central Bankers are so irresponsible and asleep at the wheel. They deserve to start going to prison for this crap, nobody can be this incompetent, especially after what just happened with regard to excess risk taking inspired by Fed Monetary Policy in the 2007 Financial Market Crisis!
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