Opinion: Investors avoiding both stocks and bonds looks bearish for market – MarketWatch 11-05-15

Salient to Investors:

Conrad de Aenlle at Conrad de Aenlle’s Funds for Thought writes:

Louise Yamada at Louise Yamada Technical Research Advisors says ICI’s report of net withdrawals from both stock and bond mutual funds in July and August is a pattern not seen since the fall of 2008.

Todd Rosenbluth at S&P Capital IQ says mutual fund withdrawals around August were soaked up by ETFs: mom-and-pop investors accounted for the majority of mutual fund flows and institutions were behind the ETF flows – The trend away from mutual funds and toward ETFs represents an ongoing shift to passive products as people do not want to pay up to lose money.

Morningstar found 5 prior months over the last decade when investors had net withdrawals from stock mutual funds and ETFs combined, and from bond funds: 2 coincided with minor blips in long bull markets, and 3 occurred just before or in the middle of corrections or bear markets.

Read the full article at http://www.marketwatch.com/story/investors-avoiding-both-stocks-and-bonds-looks-bearish-for-market-2015-11-05

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The real impact of a decade of low interest rates – MarketWatch 11-05-15

Salient to Investors:

L.A. Little at Technical Analysis Today writes:

  • We have created mountains of debt to solve our existing debt problems.
  • Debt creation causes currencies to devalue and prices of most financial assets to rise for at least a while until the next country does the same.
  • Bonds are slumping just at the prospect of the Fed raising rates for the first time in a decade in December, and most likely only by 0.25%. A quarter point rise matters because almost all the trades are highly leveraged, and it is unknown how much the market will price in further rate increases.
  • While dollar strength deepens deflation, its more serious effect is on those countries, fund managers, et al that have used the cheaper dollar to go on a debt-buying binge. IIF estimates this debt doubled from 2008 to 2014 to $6.8 trillion, while non-financial corporate bonds in emerging markets tripled since 2008 to $2.6 trillion, to over 80% of GDP.

Read the full article at http://www.marketwatch.com/story/the-real-impact-of-a-decade-of-low-interest-rates-2015-11-05?mod=MW_story_recommended_default&Link=obnetwork

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Here comes your biggest melt-up for stocks since 1998 – MarketWatch 10-30-15

Salient to Investors:

Nour Al-Hammoury at ADS Securities expects stocks to drop in November on the fears of a rate hike in December until the Fed changes its mind again.

Steve Sjuggerud at the Daily Wealth said stocks will soar over the next 18 months because we reached an extreme of fear in August: a la late 1998.

Bespoke Investment Group says the SPX is more than 2 standard deviations above its 50-day moving average, its most overbought level of 2015.

Read the full article at http://www.marketwatch.com/story/here-comes-your-biggest-melt-up-for-stocks-since-1998-2015-10-30-9103015?mod=MW_story_recommended_default&Link=obnetwork

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Wall Street’s Latest Bounce – Ostrich Economics At Work – David Stockman’s Contra Corner 10-20-15

Salient to Investors:

David Stockman writes:

The price of financial assets is now artificial and wildly inaccurate. $300 trillion of global finance cannot remain stable much longer.

Bulls believe the Fed is on hold until at least next March, while Wall Street is projecting S&P 500 earnings of $130 per share on an ex-items basis for 2016, and which will never happen. The S&P is overpriced at 21 times earnings, and at 30 times trailing earnings or more when honest GAAP earnings for Q3, 2015 come in at $95 per share or less, versus the peak $106 per share in Q3 2014. More than $5 trillion of current cash flow and new debt is now allocated to corporate stock buybacks, M&A deals and LBOs.

Alan Blinder and Mark Zandi admit QE has possible negative side-effects, but say that for the most part they have yet to materialize. All the while the global economy heads into a deflationary conflagration.

This mother of all bond market bubbles will bring down the entire financial system when it inexorably bursts: central banks have vast powers, but they cannot repeal the law of supply and demand. $19 trillion of central bank bond-buying during the last two decades has dominated debt pricing on the margin for most of this century. Last week’s 60 basis points for 2-yr treasury notes or 210 basis points for 10-yr money do not reflect a surfeit of private savings or business and household hoarding of cash but a giant surplus of credit.

Real net business investment is still 17% below its 2000 level. Junk debt has risen from $1.3 trillion at the 2007 peak to more than $2.5 trillion today driven by yield-starved money managers and homegamers.

Debt-crippled, junk-rated Dell is buying EMC for $67 billion, or 17 times free cash flow for 1% annual growth, funded almost entirely with junk debt and tracking stock on EMC’s major asset, a public company that pays it no dividends or other regular cash returns. In a PC industry which is disappearing at a rapid rate.

China is headed for massive economic and financial conflagration, which will spillover into the rest of the world because the entire emerging market economy was built on China’s runaway economy and investment bubble. China’s insane accumulation of foreign exchange reserves over two decades of massive and blatant currency pegging could not continue indefinitely which is why it has seen $850 billion capital outflow of the last 4 or 5 quarters and a $500 billion drop in FX reserves since late 2014. There is no way to manage a $28 trillion house of debt cards, which grew by 56 times in less than two decades, to a soft landing.

The bubble is bursting in socialist Brazil, in Australian mining, in Canadian real estate, in the North Dakota Bakken, and in the German export machine, as China and its EM suppliers are being forced into liquidating dollar and euro credit, and stop buying luxury cars and engineering machinery on borrowed money.

Read the full article at http://davidstockmanscontracorner.com/wall-streets-latest-bounce-ostrich-economics-at-work/

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We’ve Seen This Picture Before – Global Markets Down $13 Trillion Already – David Stockman’s Contra Corner 09-29-15

Salient to Investors:

David Stockman writes:

  • The global economy is drastically overbuilt on $225 trillion of debt. The 2008 collapse was quickly arrested by unprecedented central bank money printing, which is unavailable this time around because interest rates cannot go any lower and QE does not stimulate economies at peak debt, and only inflates financial asset prices.
  • Emerging market central banks must shrink their domestic monetary system and credit to prevent massive capital flight. Developed market central bank have inflated financial asset prices but not the main street economy.
  • Corporate profits will accelerate their decline in the year ahead and valuation multiples will contract for the foreseeable future due to the coming worldwide recession caused by accelerating global commodity price declines, capital spending plunge, and declining trade volumes.
  • The S&P 500’s rise of nearly 1000% from October 1987 to the May 2015 peak was due to central bank money printing and not the domestic business cycle or economic growth. Real median household income since 1989 has not changed.
  • Bull markets do not die easily, especially those caused by easy money and central bank bailouts, so expect market tops to be tested again and again – for the S&P 500 in the 2075-2125 range – until dip-buyers capitulate.

Read the full article at http://davidstockmanscontracorner.com/weve-seen-this-picture-before-global-markets-down-13-trillion-already/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+AM+Wednesday

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Looking for the lifeboats – The Economist 09-19-15

Salient to Investors:

  • Both equities and government bonds are overvalued but are unlikely to fall in tandem. Long-term investors should ignore short-term market declines because over the long-term, asset prices rise – US equities overcame the dotcom bubble and 2008 financial crisis to reach record highs in 2015.
  • However, equities could be in for a long slow decline, a la Japan, the first rich country to fight deflation and zero interest rates. Japanese equities are still down 50% since the end of 1989, while bond yields have remained very low since the late 1990s. At least Japanese investors could have escaped into foreign assets, but that option is narrowing because all the developed world faces deflation, including emerging markets.
  • Robert Shiller at Yale said more investors fear US stocks are overvalued than at any time since 2000. Deutsche Bank says government bonds are the most expensive they have ever been.
  • AQR research found that:
    • In the 10 worst quarters for global equities between 1972 and 2014, equities lost more than 18% on average, bonds gained 4.8%, commodities and gold gained. Corporate bonds lost value, relative to government bonds.
    • In the 8 bad equity quarters since 1990, hedge funds lost and average of 5.2%, excluding trading costs and fees, but a combination of value, momentum, carry, defensive and trend-following strategies would have produced very good returns, excluding trading costs and fees.
    • In the 10 worst quarters for government bonds between 1972 and 2014, bonds lost 3.9% on average, while equities gained 3.5% on average thanks to a big gain in Q2, 2009, gaining in 6 of the 10, and commodities rose.
  • In the 10 worst quarters for government bonds, cash averaged a small gain.
  • Back-testing strategies is unsafe because there is no guarantee that they will be as successful in future.

Read the full article at http://www.economist.com/news/finance-and-economics/21665026-which-investments-work-best-when-markets-decline-looking-lifeboats

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The zero rate trap – The Economist 09-18-15

Salient to Investors:

No Fed tightening was a sensible decision. The Fed is in a trap: low interest rates have raised global equity markets, whose collapse in August helped in preventing the Fed from raising rates.

Most British homeowners have variable rate mortgages so while interest rate cuts staved off a potential disaster in the housing market, the UK housing market did not return to more affordable price levels as it did in the US.

May Rostom at the Bank of England says:

  • The ratio of house prices to first-time buyer incomes in London is 9.4 versus 2.6 in 1996 and 7.2 at the last peak in London.
  • The 1971-1980 and 1981-1990 birth cohorts face sharply rising debts to get on the housing ladder but their incomes have not risen near as fast.
  • Since 1995, the debt of older generations has barely budged, while that of those aged 25-45 has shot up in real terms. A world where younger households reach 65 and still have debt is possible.
  • The widening wealth inequality across income or socioeconomic categories is also across generations as the low-rate regime has boosted asset prices for the older generations that own the assets.

The Bank of England is in a trap: if it raises interest rates and forces down house prices, young people not yet on the housing ladder would benefit, but for those with high debts, it would be a disaster. Building more houses is not enough: even Savill’s forecast of a 55% rise in homebuilding over a 5-year period would produce only 167,000 units in 2018, versus the 240,000 needed.

Read the full article at http://www.economist.com/blogs/buttonwood/2015/09/asset-markets-and-monetary-policy

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Three economic crises, cutting rates and banning cash – The Economist 09-18-15

Salient to Investors:

Andy Haldane at the Bank of England said:

  • Inflationary reputation is hard-earned and easily lost central bank promises to re-anchoring the rate at some future point is damaging to macro-economic stability.
  • Further QE, especially making it permanent, risks blurring the boundary between monetary and fiscal policy and hurts central bank independence.
  • The “Anglo-Saxon” crisis of 2008-09, the “Euro-Area” crisis of 2011-12 and the potential “Emerging Market” crisis of 2015 onwards are all caused by huge global liquidity, inflated then deflating capital flows, credit, asset prices and growth in different markets and regions. The emerging market growth cycle has turned decisively – The IMF forecasts growth will slow to below 4% in 2015.
  • The risk to UK growth and to UK inflation at the two-year horizon is significantly to the downside, so raising UK interest rates is a ways off.

The average central bank rate decrease in a recession is 3%- 5%, currently not possible, so central banks have 3 options. A) Increase the inflation target, say from 2% to 4% – acceptable because economists believe only double-digit rates are damaging – to try to get workers to demand higher wages to compensate and so create inflationary pressures. B) More QE. C) Impose negative interest rates on commercial bank reserves, which would result in consumers keeping their money out of banks.

Read the full article at http://www.economist.com/blogs/buttonwood/2015/09/economics-and-monetary-policy

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US central bank leaves interest rates unchanged – BBC News 09-17-15

Salient to Investors:

The Fed’s forecast for slow rate increases probably means 0.25% in 2015, 1% in 2016, and 1.25% in 2017.

Karissa McDonough at People’s United Wealth Mgmt said economic uncertainty and the slowdown in China drove the Fed’s decision to keep rates at zero, because the US has been linked globally to a much greater extent than ever, even before the financial crisis.

James Sproule at the Institute of Directors said the Fed’s decision lacks the bold and necessary steps that must be taken to normalize monetary policy.

John Longworth at the British Chambers of Commerce said the Fed decision was correct given the global uncertainty.

Read the full article at http://www.bbc.com/news/business-34286230

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Inflation Targeting Unmasked – The August CPI Crushed The Case For ZIRP – David Stockman’s Contra Corner 09-17-15

Salient to Investors:

David Stockman writes:

The August CPI gives the Fed an excuse to keep shoveling free money into the casino. No Fed rate increase would be a clear indication of its fear of reining in Wall Street’s greedy and gamblers and that Keynesian central banking in the last two decades has been a fraud.

A market correction is long overdue and eventually unavoidable.

The BLS inflation report shows that prices of commodities and goods are falling due to global deflation, while the cost of shelter and domestic services is briskly rising: averaging the two is purely a statistical accident, and outside of the Fed’s ability to shape. Falling prices for commodities and goods cannot be countered by supplying more free money to the Wall Street casino.

The Fed’s 2% inflation target is arbitrary and there is no historical evidence that it is connected with economic growth or gains in wealth and living standards.

7 years of interest rate repression has fueled a near 45% rise in direct auto credit outstanding and even bigger rise in new leased vehicles, resulting in a flood of used cars, prices of which have fallen 1.5% during the past year, while new car prices have remained flat due to excess global production capacity.

Since 2000, inflation has outstripped real household incomes. The index for services less energy services has risen by at a 2.6% compound rate, with no deceleration evident. More than 66% of living costs for average households comprise shelter, transportation, medical care, education and entertainment; which have risen at annual rates of 3.1%, 2.1%, 2.2% 3.5%, and 2.7% respectively.

China is the epicenter of the global deflation and the leading edge of the collapse in the petro-states, commodity exporters and mercantilist exporters which fed on China’s boom. By pegging their currencies at artificially low exchange rates, they created huge current account surpluses which they then invested back into developed market stocks and bonds.

The US economy cannot be decoupled from the global deflation. Dollar denominated assets – treasuries, ETFs and individual stocks – were financed not out of savings from current global production, but from central bank fiat credit.

Saudi Arabia’s $350 billion annual surplus has become a deficit, where it will remain for years as world oil demand falters and supply increases from investments.

Financial markets will be hurt by petro states liquidating their assets to cover current account deficits.

Read the full article at http://davidstockmanscontracorner.com/inflation-targeting-unmasked-todays-cpi-crushed-the-case-for-zirp/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday

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