The Business Of Finance Thread!

Prices and earnings. 2 bifurcating subjects that have baffled investors and money managers since the start of 2015, exactly when the Fed ended its QE program for good (coincidence or trigger?). For almost 2 years now, the correlation between forward earnings expectations and the broad market have broken down almost idiosyncratically.

More current developments have caused both prices (S&P 500) and consensus earnings expectations to go practically nowhere but in circular gyrations.

While the U.S. corporate sector is technically already in an earnings recession, equity prices have not caught down to the earnings-implied fair value, which makes us wonder how much more of the technical driven (short covering) rally there is left in the tank.

Tread wisely.

Most investors have never heard about Puerto Rican bonds but they now do. After a contentious period of internal strive, the Commonwealth state is now "almost certainly" set to default on more than $400mn in public debt, sending government bond yields soaring to record highs, spreads to record wides, and bond prices to record lows.
For every $1 invested in this series of 4.704% Puerto Rico bonds at par issue, they will now be worth 20¢, or 5 times less than principal. But then again, this analogy is besides the point — Investors will likely not get a single cent back assuming the treasury doesn't honor its 36¢ offered recover price. For those unhedged folks who haven't bought CDS protection, good luck.

Guess which is the best performing asset group for April and since the start of 2016? Commodities. The rally in commodity prices has placed it in the top performing spot with WTI see Ong the highways total returns for a major financial asset in April, followed closely by Brent, silver. Global equity returns were more sparsely distributed and so were those of fixed income assets. The YTD performance breakdown is almost similar with commodities claiming top spot and the Shanghai Composite being the worst performer (asset price deflation still going on?).

The most interesting fact that we note is asset returns have hardly been negative so far in 2016 (and especially in April), when weighed in U.S. dollars. This is probably because of the broad based weakness in the greenback, which is not measured as a major asset in this breakdown.

While we have been writing extensively on the weakness of the U.S. dollar and resulting strength in commodities such as the precious metals (gold, silver, platinum), we can not give less of a damn when it comes to being realistic. Now is the time to be realistic, we feel.

Just on the technical side of the market (price action and market structure), the DXY (U.S. Dollar Index) is currently at its May 2015 lows which is a key technical support area. Gold and silver are conversely at their January 2015 highs which are both key technical resistance areas. Gold managed to trade briefly above the key psychological big figure of $1300.

Since their respective inflection points, the DXY is down -8%, gold up +24%, and silver +31%. These are some seriously big numbers that were talking about. 8% is a huge deal for a currency index, for the lesser learned of you.

We also note that positioning data indicates that large speculators (momentum chasers) are heavily long gold and silver, and have turned net short the DXY for the first time since 2012 (the most short USD in more than 3 years)...

We aren't bearish the precious metals or bullish the USD. In fact, if you've been following us, we have been advocating long exposures in the precious metals complex since early February, and have been shorting the USD since around the same time.

This is merely a heads up to traders and opportunistic folks, if you get what we mean. Trade accordingly...

Hedge fund strategies have hardly been more bimodal — the most and least own stocks have been top performers within the HF strategy matrix.

That is, the stocks that were most hated, most shorted, and therefore least owned by HFs have seen the highest returns since the start of 2016, when grated as a strategy. They have also performed extend my robustly since mid-2015.

Similarly, the stocks that were most loved, most longed, and therefore most owned by HFs have seen the second highest returns (after the Low Concentration basket) since the start of 2016, when grated as a strategy. They have also performed extend my robustly since mid-2015.

All this while other traditional strategies have fared with varying degrees of success. This is perhaps the reason why so many hedge funds are seeing record amount of redemptions from their investors, and have been so flummoxed as to why it has become so exceedingly difficult to even match total returns on simple index strategies such as the 'Dogs Of The Dow'.

It's definitely not an easy time to be a HF manager now.

The Japanese yen is extremely expensive relative to its spread-implied fair value. Spot USDJPY is trading at 106.50, a good 2000 pips below where the 2-year UST/JGB yield spread implies it should (126-129). This major decoupling started September or 2015 after the BoJ increased the size of its QQE program.

On the other side of the coin, the U.S. dollar has been rather well contained by real yields, as proxied by the 10-year TIPS yield (treasury inflation protected securities, basically CPI inflation-hedged treasuries).

Do you see an trade opportunity here?

Oil Slips Again

After bouncing off $45 at the start of Monday trading WTI crude has slid further following a relatively large inventory build at Cushing; proving that for much of 2016 (so far) most American storage facilities have been getting fuller, not emptier despite rapidly falling production and rig counts.

Has Smart Money Become Stupid?


Presented without much comment other than to smirk about the fact at how wrong most investors and professional fund managers have been about where stock prices were heading to. Like we've been painstakingly detailing for the last couple of weeks (if not months), "smart money" clearly doesn't believe in this rally and refuses to buy into it, instead selling heavily (with near record amounts during some weeks this year). The market doesn't care, for it will do whatever it wants and trade however high or low it wants...

From BofAML:

"In April, the Sell Side Indicator — our measure of Wall Street’s bullishness on stocks — fell by 1ppt to 51.9, its lowest level in over a year. This was the indicator’s biggest one-month drop in the past two years, as the S&P 500 rallied 15% from the February lows through mid-April. This triggered a contrarian Buy signal in the model for the first time since January. While sentiment has improved significantly off of the 2012 bottom, today's sentiment levels are still below where they were at the market lows of March 2009. Strategists are still recommending that investors significantly underweight equities, at 53% vs. a traditional long-term average benchmark weighting of 60-65%.

The Sell Side Indicator is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month. We have found that Wall Street’s consensus equity allocation has been a reliable contrary indicator. In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa."

Key NFP Report This Week


Last week was all about central bank activity. The U.S Federal Reserve unsurprisingly left interest rates unchanged, while the Bank of Japan shocked the world by doing absolutely nothing - sending whirlwinds through the global financial markets - including having a depreciating effect on the U.S. dollar.

The U.S. economy and the U.S. dollar will again be in the market's crosshairs this week, as April's Non-farm Payrolls
(NFP) report is set to be released this Friday morning, EST.

We preview Friday's key market event in today's Snippet, click below to get into our thoughts and analysis:
Dollar Eyed With Key April NFP Report This Week

AUD Plunges

The Aussie dollar is plunging today after the Reserve Bank of Australia (RBA) unexpectedly cut interest rates by 25bp from 2% to the current 1.75%. This follows last week's record low Australian core CPI inflation, and overall sluggishness in its economy.

On another note, if ‪#‎China‬ is what it really claims it is (soaring commodity prices and industrial profits) then why would Australia (China is Australia's largest trade partner) need to ease monetary policy? Think about that.

Smart Money Being Dumb....?

Truly unprecedented. 14 weeks in a row of selling by the so called "smart money", as the latest BofAML Client Flow report shows. "This has been the longest uninterrupted selling streak in our data history", going back to pre-Lehman days of 2008.

The funniest fact, as we've laughed about for the past couple of weeks? That the so called "smart money" trinity consisting of hedge funds, institutional, and private clients have been heavy sellers all while stocks have been ripping higher from their February lows. For any trader to do this professional, he would likely get the boot from his desk in a matter of weeks, if not days. But this group of clients can't care less.

Repeating ourselves, if "smart money" is selling, and retail money is most probably also selling (or at least staying in the sidelines), then someone has to be buying en masse. And that someone, or in this case something, has been the issuer of common stock, the companies themselves.

It's honestly getting tiresome for us to, week after repetitious week, to keep on blaring on this topic. Yea we know, it's both amusing and boring at the same time. Let's see how long this record "uninterrupted selling streak" lasts.

From BofAML:

"Last week, during which the S&P 500 fell 1.3% in its biggest weekly decline since early Feb., BofAML clients were net sellers of US equities for the 14th consecutive week, in the amount of $2.8bn. As we noted last week, this has been the longest uninterrupted selling streak in our data history (since ‘08)—previously the longest streak was 12 weeks (in late ‘10).

Net sales continue to be led by institutional clients, while hedge funds and private clients were also sellers. Buybacks by our corporate clients—which are seasonally light in April— decelerated last week, and are cumulatively tracking below levels we saw last April. Net sales last week were in large and mid-caps, while small caps saw net buying.

• Hedge funds have been net sellers on a 4-week average basis since early Feb.

• Institutional clients have been net sellers on a 4-week average basis since early Feb.

• Private clients have been net sellers of US stocks on a 4-week average basis since early January.

• The four-week average trend for buybacks by corporate clients suggests a pick-up in S&P 500 buybacks in 4Q15, but more recently, a seasonal slow-down."

Well done ECB, well done...

The ECB has mostly lost control of the euro, as deeper negative rates (NIRP) and an bigger bazooka (boosted PSPP or QE program) have not only failed to weaken the euro against major currencies but sent it rallying more than 400 pips post event.

This has led to massive underperformance in European equities. A stronger euro means bad for European stocks, and this chart illustrates that perfectly. Are central banks really out of ammo? The market believes so...

Post FOMC and BOJ, we have this:

The havoc that both the Fed and BoJ have wrought is not to be joked around with. Whilst oil promptly soared to $45 (WTI) mostly on a weaker dollar, it has erased all of its gains and is now lower pre-Fed. Stocks have mostly gone down, and today's selloff is rather sharp. Treasures are largely unchanged although we're seeing high intraday volatility in yields. Gold is the only major asset that has held on to its impressive gains (again mostly on dollar weakness).

The scene is messy, very messy.

US Gas Prices

U.S. pump gas prices have surged 29% in the last 2 and a half months, and are at October 2015 levels. Although this is much less than the rise in crude prices, it has negatively affect consumer sentiment (confidence and outlook) in a sizable way.

The Turkish lira, which for the last 2 months has been rallying against the U.S. dollar, has one of its worst weeks since 2008, plunging more than 4% against the greenback Wednesday after a parliamentary crisis exploded into threats that the PM would resign. This coupled with a capitulation of the short USD trade, general risk aversion across risk assets, and flight to safety flows has decimated lira longs. And we weren't spared either. Our books were heavily long the lira going into the week and took a sizable hit when the lira started crashing.

These are exactly the risks that we overlooked when trading exotic and EM currencies. Lesson learned...

#Forex #Stocks #Turkey #Istanbul #Politics #Trading #Investing

t's not just the low and middle income group of Americans who are feeling discouraged that their economy is going nowhere despite the fiction peddled by their leaders that all is well. High income Americans (annual income above $75,000) are now staring to loose faith in their economy, too.

The Bloomberg High Income Americans Confidence index fell by the most since 2013, while the comfort of "rich consumers" declined substantially in April.

Perhaps of the stock market was able to continue rising, this group of better off Americans can be rallied to consume and spend more... There needs to be some work done.

Yen Selloff Imminent?

Is the yen ripe for a selloff (USDJPY rally)?

Despite an unprecedented amount of monetary easing taking place at the Bank of Japan, the yen has - since the middle of 2015 - been on a consistently strengthening trend versus the USD. As paradoxical as it may seem in a period when the Fed talked about, and then did raise interest rates coincident to the BOJ firing off ever more arrows, the strengthening yen has been the reality. That reality may be about to take a breather, though, as too many investors have moved to the same side of the boat in betting on yen appreciation while the “smart money” is net short the yen.

Note: Higher USDJPY = Weaker ¥ & vice versa

In the chart below we show the net commercial trader positioning on yen options and futures contracts. Commercial traders are the “smart money” in that times of their extreme positioning often coincide with inflection points in the markets. They are the opposite of small speculators, who often have extreme positioning at inflection points as well, except that it’s the wrong positioning.

At the moment, the “smart money” commercial traders are carrying a near record net short position on yen options and futures of about 68,000 contracts. Previous periods of positioning near this extreme level have usually coincided with with a pause in appreciation or a selloff of the yen.

HY credit maybe grossly outperforming equities and risk in general but somehow, the world's largest and most traded junk bond ETF just saw the highest ever redemption of $2.3bn over 4 days. This is despite HYG rallying to late February levels and after seeing some decent amount of inflows (issuance?) earlier this year. Is this a one off which can be explain by a particular incident, or will there be follow through on the coming days and weeks?

Watch to find out.

READ FULL ARTICLE HERE:
http://www.businessoffinance.com/dai...licopter-money

Technology and mass robotization are probably the single biggest threats to our jobs. Jobs of both the blue and white collars are gradually being replaced by robots that are much more cost efficient and productive. Plus, robots have no want for minimum wages, or hold strikes in protest for what is now a huge skill deficiency in the labor force across the world.

Even younger generations like us are much under equipped to compete with the robots that we build. When jobs are at risk of vanishing entirely, and is happening at a pace that far exceeds what any society can keep up with, a slow burning depression is likely to set in. Most current education systems are not equipped to train students for a robotized and highly digitized world. We all know what the issue is, but no one has the ability to change the direction the broader society is heading in.

So will politicians and central planners dabble with the risk of upsetting the status quo for a potential change in direction? Unlikely. Setting up such a change takes years if not decades, far exceeding even the longest of terms in office. As political leaders come and go, so do their policies and advocates. It is therefore almost impossible to effect preemptive change before real harm has been inflicted.

Rather, Janus Capital's Bill Gross believes central planners will stick to what they have always been best at: Printing money (QE), lowering interest rates or bringing them sub zero as we've seen recently, and fiscally stimulating economies with debt funded programs thereby creating a false impression of prosperity when there isn't.

Then comes the prospect of Helicopter Money, a term first coined by the American economist Milton Friedman, and then further popularized by former Fed Chairman Ben Bernanke. Printing loads of money, and dropping them out of helicopters over the city — free money as it is called. Consumers, having picked up free money on the streets will be compelled to spend them as they believe such is a one-off event and will never happen again. But it does...

As such Bill Gross believes that the Fed will revert back to QE and lower interest rates sometime in 2017, and the reintroduction of fiscal stimuli (something that could very well happen if Trump is elected into the White House). The music won't be allowed to stop.

READ FULL ARTICLE HERE:
http://www.businessoffinance.com/dai...licopter-money

Yellen, we have a problem. April's jobs data was a disaster (as we had forewarned) and markets are starting to get properly concerned this time, judging by the way in which they reacted. A June rate hike by the Fed now seems less likely than ever before, with the Fed Funds futures market implying a mere 4% chance of a hike next month when the FOMC reconvenes to decide on the future of the U.S. economy.

READ MORE BELOW:
http://www.businessoffinance.com/sni...te-hike-busted