Wednesday, August 26, 2015

Today's Links


  "Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small.... But business in 1929 was not sound; on the contrary it was exceedingly fragile. It was vunerable to the kind of blow it received from Wall Street. Those who have emphasized this vulnerability are obviously on strong ground. Yet when a greenhouse succumbs to a hailstorm something more than a purely passive role is normally attributed to the storm. One must accord similar significance to the typhoon which blew out of lower Manhattan in October 1929."      Extracts from "The Great Crash: 1929", John Kenneth Galbraith, First Published 1955, Chapter 10: "Cause and Consequence", Page 204.

"Whereas in 2007 we had a stock bubble driven at least somewhat by market fundamentals, in 2015 it’s just the long, drawn-out drama of a drug addict pumping too much heroine for too long. Now, detox is ahead!"  Harry Dent

Russell Napier: "Another asset purchase program by the Fed will not help this time. It’s like if you are lying in the hospital and the doctor says "The good news is you are getting more medicine. The bad news is it does not work."

1--The party is over for junk bond investors
More than $8 billion has poured out of high-yield bonds and the carnage is expected to continue

More than $8 billion has poured out of the nearly 200 high-yield mutual and exchange-traded funds tracked by Lipper over for the last three months. While high-yield bond ETFs actually took in money last week despite poor performance, outflows are likely to continue. "...There have been outflows from the sector in nine of the last 10 weeks. Investors have been shying away from high yield bonds for much of this year...
Moody's is expecting the default rate to rise from here—predominantly due to distressed energy and commodity-related issuers. The general increase in market volatility will also hurt every other non-investment grade company....

In the ultra-low interest rate environment since the financial crisis, junk bonds have been a favorite place to find more yield. Not anymore.
Investors are bailing out of high-yield bond funds as the global economic picture deteriorates. Prices of speculative grade debt—bonds rated BB/Ba or less—have fallen along with stocks as worries about China, the Eurozone and global economic growth intensify.
"Spreads are widening across all sectors of the market in response to the heightened uncertainty of the economic outlook," said Jon Lonski, chief markets economist at Moody's Analytics. "There's a reduced expectation for business activity."

2-- China’s Stocks Slump as Rate Cut Fails to Stop $5 Trillion Rout

3--Get With the Program: Bubbles Don’t Correct, They BURST!
We had the stock bubble in 1987, the tech bubble of early 2000, the real estate bubble in early 2006, another stock bubble into 2007, oil in mid-2008, gold in mid-2011 – and now, a final stock bubble into 2015.
They’ve all burst, or are still bursting!
Oil’s down more than 65% from its secondary peak in 2011 and was down 80% from its all-time high in 2008. Gold’s down 40% from its 2011 high....

Bubbles typically crash 70% to 80% before they fully deleverage. But when they burst, they usually kick off with a 20% to 50% slide right out the gate – most often within a matter of months


5---Current Low Oil Price Has Nothing to Do With Supply and Demand

All these things still don’t explain the panic in oil markets other than financially driven events that aren’t directly tied to the supply and demand of oil ...

In addition to the precipitous drop in oil is the mystery of oil imports which, over the last three months, have risen dramatically while U.S. production has fallen. Why would this occur as the media continues its portrayals of a supply glut in the U.S.?

Last week, and almost every week in which oil inventories have risen, it has come as a result of surging imports at a time that U.S. refineries have promised 700,000 barrels per day in additional light sweet oil capacity dedicated to shale production.
Suffice it to say, something smells rotten. Since June, U.S. imports have risen by over 1 mb/d to near record levels achieved back in April of this year. How can we be awash in domestic production yet be importing record amounts of foreign oil...

If the chart below is correct and gasoline supplied to the U.S. domestic market rose 500,000 barrels per day while U.S. production held nearly flat since the start of 2015, how in the world are inventories in the U.S. so high according to the EIA? ...

As I stated in previous articles, until the Fed admits the strong dollar and rate hike threats are off the table signaling a policy change, efforts on depressing oil prices won’t subside. The U.S. economy is weakening not strengthening and has been for some time. Historical QE initiations have started at just about these times, as markets begin to crash, yet we still hear about higher rates. Has the FED changed course on stimulus instead, using falling commodities vs. QE? Maybe for a time, but recent data indicates that isn’t working either.
Look for a significant U.S. dollar correction in the coming months, marking a turn in commodities in general. Until then, we are in a perfect storm where forces are driving prices lower with little regard for the fundamentals, due to Fed policy and just the pure greed of funds who can push oil futures lower, so as to maximize short equity returns or to buy assets on the cheap.:

It is clear that it is no longer supply and demand for oil that is dictating the price but is instead the financial markets and more importantly money flows tied to central bank policy.
Bearish sentiment in the oil markets is taking over as net short positions near record highs. According to Reuters, 50 to 60 hedge funds have taken short positions that account for around 160 million barrels of oil in near term contracts. In fact, the amount of short positions in oil options and futures now exceeds levels in the great financial meltdown of 2008, believe it or not, despite talk of a good economy and the Fed needing to raise interest rates. Madness, right
Fundamentally, almost every bear case presented by the media in 2015 has been proven false. Doomsday events such as rig count (vertical rigs being dropped vs. horizontal), Cushing overflowing, China demand slowing, to Iran floating storage of 50 million barrels being unleashed, U.S. production rising, have all been dispelled.
In fact, as I said, the fundamentals have even improved as U.S. production has entered into decline, crude stocks have been drawing down since the spring, and demand for gasoline is at record highs (much higher vs. expectations going into 2015).....

6--Deflation is baaack
Investors and policymakers are back again weighing the possibilities of deflation if China slows down further and commodity rout continues. China is extremely prominent in global trade, especially in commodity space, which makes the developments in the country extremely vital for global inflation, which continues to lag all the growth.
  • US inflation expectations as measured by 5 year- 5 year (5y/5y) inflation expectation using swap dropped to lowest level in 5 years. It is even worse for one year break even inflation, which since July has been declining steadily beyond negative and now hovering below 1.5%.

  have nothing to base this on, but those are my exact feelings which is why I looked at the trouble in the credit markets for answers. But here's what's interesting: The Dow dropped nearly 600 pts on the day, but  10-year and the 30-year Treasuries hardly budged. (just 2 basis points each) which means that the optimistic view of the stock market capitulated to the pessimistic view of the bond market which sees slow growth and zero inflation for as far as the eye can see. There seems to be a realization that sky-high valuations are not sustainable when the economy is stuck in the mud and growing under 2% per year
How do emerging markets cause a global problem?
Some of the emerging markets borrowed massively in foreign currency in the past. The rapid depreciation of their currency creates solvency issues. If there is a significant default in the emerging markets, we are a facing a global crisis. The last thing the world needs in times of slow global growth is a credit crunch. But such a credit crunch somewhere in the emerging markets is very likely

Here's more from Andrew Ross Sorkin at the New York Times:

Since 2004, companies have spent nearly $7 trillion purchasing their own stock — often at inflated prices, according to data from Mustafa Erdem Sakinc of the Academic-Industry Research Network. That amounts to about 54 percent of all profits from Standard & Poor’s 500-stock index companies between 2003 and 2012, according to William Lazonick, a professor of economics at the University of Massachusetts Lowell."

Robert Shiller: I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.

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