by ilene - February 11th, 2016 4:01 pm
Watch Phil with Kim Parlee on Business News Network's Money Talk.
1) Phil gives his outlook for U.S. markets and the US economic economy. Canada may be heading into a recession because the energy is sector dead for years, at least, but the U.S. economy is slowly improving. What is the basis of Phil's 5% rule? Watch the video.
2) Phil explains why oil demand is falling globally and what the implications are for energy-rich economies like Canada. Hint: The TSX (Canada's oil weighted index) is not going to recover. Oil is not going to recover. Oil's not a thing anymore – like wagon wheels. This is why the Saudis aren't holding back on selling their oil. Canada is due for some painful adjustments.
3) Natural gas – Phil gives the details of his options play of the year.
by ilene - February 11th, 2016 2:04 pm
Courtesy of Pam Martens.
Congressman Sean Duffy Says Fed Chair Janet Yellen Has Refused to Comply With a Subpoena
Yesterday during the House Financial Services Committee hearing to take semi-annual testimony from the Fed Chair on monetary policy and the health of the U.S. economy, a tense exchange took place between Congressman Sean Duffy and Fed Chair Janet Yellen. (See video clip below.) Duffy effectively accused Yellen of defying a Congressional subpoena related to a House investigation of a Fed leak in 2012.
The House investigation centers around a quite brazen newsletter put out by a firm called Medley Global Advisors that in 2012 reported what the Fed’s FOMC minutes were going to reveal the following day. One revelation from the newsletter referred to continued large bond purchases by the Fed as follows:
“Tomorrow’s minutes will reference a staff paper that concludes the market has capacity to absorb purchases this large for a period of time.” When the Fed released its minutes the next day, there was just such a finding.
Medley Global Advisors was sold to the Financial Times newspaper in February 2010. In the press release announcing the deal, Medley Global Advisors was characterized as “a premier provider of macro policy intelligence to the world’s top investment banks, hedge funds and asset managers.”
by ilene - February 11th, 2016 12:46 pm
Courtesy of Charles Hugh-Smith Of Two Minds
The key take-away: focus on owning income-producing assets, not a primary residence.
One truism of investing is to follow the lead of those who are building wealth. This chart reveals the foundation of the wealth of the top 1% and the next 9%; business equity, i.e. ownership of enterprises. Compare the assets boxed in red:
The wealthiest households' primary wealth is businesses and shares in businesses. The bottom 90% depend on the family residence as a store of wealth, and on debt as a means of funding asset purchases and consumption.
Primary residences were once a reliable store of wealth--a store that was accessible to working families who were willing to pinch pennies and save up a down payment.
But now that housing has been financialized and globalized, it is prone to boom and bust cycles like every other risk-on financialized asset. Unfortunately, recent history shows that many middle-class households bought homes at the top and rode the post-bubble burst down.
Those fortunate enough to own homes in bubble-prone regions may benefit from speculating in housing, but playing this speculative game requires cashing out at the top of the bubble--something few have the knack for.
Building a profitable business isn't easy. That's why many of the wealthy let entrepreneurs take the risk of starting businesses and then buy the business for a premium once it has proven to be profitable.
But many entrepreneurs refuse to sell out, preferring to hold their businesses as a family asset that can be passed on to the next generation.
It's also worth noting that the wealthiest 10% own over 90% of the securities and stocks, 84% of trusts (essentially tax havens) and almost 80% of non-home real estate (i.e. second homes and income-generating properties).
Primary residences represent a mere 10% of the wealthiest 1%'s assets.
The key take-away: focus on owning income-producing assets, not a primary residence. The second key take-away:
Don't finance your assets with debt; finance your income-producing assets with savings and sweat equity, not borrowed money.
It is not accidental that the wealthiest 1% hold very modest levels of debt.
by ilene - February 11th, 2016 11:19 am
Courtesy of John Rubino.
For banks, the recent news is pretty grim. But it’s about to get much worse, based on the following:
(Barrons) – Ye olde yield curve keeps getting flatter. Wednesday continued the trend — which is most pronounced between two and 10-year maturities. At 2:30 p.m., the two-year note was at .71%, 1.6 basis points higher than Tuesday’s close, while the 10-year was 2 basis points lower at 1.71%.
That’s just 1 percentage point of spread between the two-year and ten-year Treasury notes.
Peter Boockvar of The Lindsey Group says this flattening is “the most noteworthy event” in the bond market in the past week. He believes investors are saying something about the U.S. economy. He said of the 2s/10s spread:
It is down from 103 bps yesterday, 108 bps the day before and versus 116 bps just one week ago. There is no question that the longer end of the curve has gotten a firm bid from the spillover effect from the continued easing in Japan and soon to be more from the ECB and the crushing of yields those regions have seen but I believe it is also a message from market participants of how they feel about the US economy.
A flattening yield curve squeezes bank profits, making an already tough environment even tougher. And that’s before the mountain of dicey paper (issued in more innocent times) starts blowing up. See:
All this stress and complexity is being reflected in bank share prices this morning:
But it gets even more complex and stressful when you consider who owns these suddenly-imploding equities:
(Bloomberg) – When it comes to the selloff in bank stocks, there’s plenty to blame: credit concern, earnings, negative interest rates, and souring sentiment.
Another theory: Burned by the rout
by ilene - February 11th, 2016 10:39 am
Look at the bar chart at the end of the post and ask: Do markets move in cycles? What are my long term objectives? And, is this time different?
Courtesy of Michael Batnick, The Irrelevant Investor
People invest their hard earned dollars to earn a return above and beyond inflation. At a three percent inflation rate, your purchasing power would get cut in half over twenty years. As the value of your dollar diminishes over time, the goal when investing is to maintain and even grow the value of your money.
You’ve seen this chart before, it shows that $1 invested in 1926 would have grown to $5,386 today, a whopping return of 538,547%, or 10% a year.
What you don’t always see is the real growth of $1, or what the returns would be after you factor in inflation. Once this is accounted for, stocks have returned 40,670% over the last ninety years, or 6.9% a year (I used an arithmetic scale here for affect, the chart above uses a log scale).
The chart above clearly demonstrates how much inflation eats into returns. Still, an 8.5% average real return, or 6.9% compounded is pretty darn good. If an investor earned 6.9% for twenty years, their total return would be 280%. Sounds good right? Here’s the kicker. Real returns aren’t owed to anybody, they’re earned the hard way.
Over all ten-year periods, the real rate of return for stocks has been positive 85% of the time. While these are pretty good odds, you probably wouldn’t feel invincible if somebody told you there was a 15% chance that you could lose money investing over the next decade. The image below illustrates that investing is not for the faint of heart.
As you’re probably painfully aware, the S&P 500 hasn’t made any progress over the last two years. If you’re feeling a little frustrated, I have some bad news for you, this is how stocks works. The stock market doesn’t owe you anything. It doesn’t care that you’re about to retire. It doesn’t…
by Market Shadows - February 11th, 2016 10:14 am
Financial Markets and Economy
Treasury 10-year yields dropped to the lowest level since 2012 as falling equities drove investors to the relative safety of government debt and Federal Reserve Chair Janet Yellen said weakening stock prices pose a risk to the economy.
Oil Is the Cheap Date From Hell (Bloomberg)
It’s scary out there. The rout in the stock market that began around Jan. 1 took a turn for the worse early this month. By Feb. 10 the Standard & Poor’s 500-stock index was down 9 percent for the year. That’s its worst start since the recession year of 2008. Falling oil prices were blamed: A meeting between Saudis and Venezuelans aimed at curbing production had ended inconclusively.
Federal Reserve Chairwoman Janet Yellen had a tall order going into her Capitol Hill testimony — give investors something to smile about. In the harsh daylight, she appears to have bitterly disappointed them, as she failed to release enough doves.
Global Stocks Slide After Fed Sparks Investor Concerns (Wall Street Journal)
Global stocks staged a sharp retreat as a cautious tone from the Federal Reserve, downbeat company news and a fresh fall in oil prices fueled anxiety about the health of the world economy.
Here's what coco bonds are and why investors are freaking out about them (Business Insider)
After a rally on Wednesday, banking stocks are falling hard again on Thursday.
Deutsche Bank is down over 3% in Frankfurt, Credit Suisse is down over 6% in Switzerland, and in London HSBC is down over 4%, Lloyds is down over 4%, Barclays is down over 5%, and Royal Bank of Scotland is down over 4%.
It means bank stocks have reverted to the trend of the year so far: falling.
by ilene - February 11th, 2016 9:58 am
Courtesy of Pam Martens.
At 8:00 a.m. this morning, futures on the Dow Jones Industrial Average were flashing a 274 point plunge at the open of the stock market at 9:30 a.m. ET, following a selloff of 99.64 points by the close of trading yesterday.
There’s plenty of things rattling this market, not the least of which is the continued weakness in the share prices of the mega Wall Street and European banks. Analysts have started asking on business news outlets if there is something going on that the public can’t see.
Adding to the market angst was the jumble of questions Fed Chair Janet Yellen received during her semi-annual testimony before the House Financial Services Committee yesterday. One particular line of questioning from multiple members of the Committee was on whether the Federal Reserve has the legal authority to use negative interest rates as part of its monetary policy tools. Central banks in Europe and the Bank of Japan have deployed negative rates and financial markets have a built-in assumption that the Fed could do likewise. Yellen threw a bucket of cold water on that assumption with two revealing remarks.
First, Yellen said that the Fed had looked at the possibility of using negative rates in 2010, explaining:
“We got only to the point of thinking it wasn’t a preferred tool. We were concerned about the impact it would have on money markets. We were worried it wouldn’t work in our institutional environment.”
by ilene - February 11th, 2016 8:44 am
Initial jobless claims dropped notably last week (from 285 to 269k) but the overall trend (away from the noise) appears in tact. The smoother 4-week average remains near 12-month highs and as Goldman notes weakness is widespread – "there is only limited evidence that the rise in claims is due to distress in the energy sector." Continuing claims dropped modestly to 2.239mm but, as Goldman adds, "the persistence of the recent move suggests more might be going on, and we are treating the increase as more than just noise."
And finally, here is Goldman explaining why it is time to be concerned…
Initial and continuing claims for unemployment insurance benefits have moved steadily higher since late last year. After nearing their respective post-crisis lows of 256k and 2,146k this past October, initial and continuing claims are now higher by 29k and 112k, respectively. Both series can be volatile, and one should be cautious about reading too much into the week-to-week changes. But the persistence of the recent move suggests more might be going on, and we are treating the increase as more than just noise.
And moreover, Goldman warns that they find only limited evidence that the recent increase in claims directly relates to distress in the energy sector.
And looking forward, every 1k increase in claims (relative to the breakeven rate) implies a slowdown in monthly payroll growth of just over 4k. Therefore, a further rise in claims to 300-315k, if sustained, could imply payroll growth closer to a trend-like rate—assuming the benefits take-up rate and other aspects of labor market flows remain unchanged.
by ilene - February 11th, 2016 7:20 am
Here is this morning's market update from JPM's Adam Crisafulli
It's hard to imagine an uglier morning. The two things markets hate most right now (neg. central bank rates and bad bank headlines) occurred overnight as the Riksbank dropped its rate further into neg. territory and SocGen put up bad earnings/guidance.
The combination of those two events, coupled w/very fragile sentiment, extreme risk aversion (a function of enormous P&L destruction YTD), Yellen's testimony (which wasn't sufficiently dovish or concerned about financial market volatility from the perspective of markets), and CSCO's cautious macro commentary, are weighing very hard on equities so far Thurs morning.
The main Eurozone indices (SX5E and SXXP) are both down "3% today, "6% WTD, and —16% YTD. The SX7P Eurozone bank index is off >5% today, —10% WTD, and nearly 30% YTD.
Ironically, some of the worst carnage in months is occurring while China is shut and the Yuan has been rallying (the CNH has been creeping higher over the last few days, albeit on very thin volumes).
Trying to divine the end of the rout is difficult given the globe is in the midst of a series of tightly intertwined, self-reinforcing, and correlated trades and narratives (i.e. oil slumps and drags inflation down with it which prompts CBs to ratchet up accommodation which sinks banks which crushes general market sentiment and the overall price declines tighten financial market conditions and scares corporate execs and actual economic activity begins to deteriorate).
A lot of the price action feels very forced and perfunctory but that doesn't make it any less real or painful.
by ilene - February 11th, 2016 2:40 am
“One day it started raining, and it didn’t quit for four months” ~ Forrest Gump
What’s especially frustrating right now, besides the fact that the S&P 500 is now in a 13.2% drawdown, is that we’re not seeing any sense of panic. While every bounce attempt is getting smaller in both size and duration, the market has yet to do the proverbial flush that we all seam to be waiting for. The “all clear” moment, if you will.
The last time stocks were selling off like this was the summer of 2011 when the S&P 500 fell 21.58% peak to trough. But do not, I repeat do not call this a bear market, because using closing prices it “only” fell 19.39%. GMAFB. Anyway, that episode did end in the type of “get me out” selling. In the chart below, SPY is shown in gray while the blue line represents the daily volume divided by the 30-day average volume. You can see that the spike in coincided not exactly at the bottom, but pretty darn close. The volume was more than twice as much as the 30-day average for five days in a row and believe it or not, this is the only time this ever happened.
Right now on the other hand, we’re seeing zero signs of capitulation. Again, SPY on the left axis, volume relative to 30 day volume on the right.
Maybe we will get the flush or maybe we won’t. Maybe we get a flush, consolidation, then more flushing. Who knows? There is no formula for markets like this, which is what makes it so fascinating to watch. In the short term, fundamentals mean literally nothing and lines in the sand are drawn and erased daily. Psychology takes over and selling begets more selling until….”and then just like that, somebody turned off the rain and the sun came out.”