Macro (125)

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Bonds Are 'Housing' All Over Again

As German bond yields breach unthinkable levels, BK was struck by a chart from Deutsche Bank – it is a chart of German yields since 1807.

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Take a moment to reflect on this chart – in over 200 years, German bond yields have never been lower. This period of time includes such notable and notorious events as:

  • US Civil War
  • The British Railway Mania Bubble
  • The Panic of 1873 and The Long Global Depression
  • Industrial Revolution
  • Thomas Edison’s Invention of Electric Light
  • Invention of the Automobile
  • Stock Market Panic of 1907
  • World War I
  • 1929 Stock Market Crash
  • The Depression of the 1930’s
  • World War II
  • Japan’s Real Estate Bubble and Crash
  • The Dot-Com Bubble
  • 1987 US Stock Market Crash
  • 1997 Asian Currency Crisis
  • 1998 Russian Default and Long Term Capital Management Bailout
  • 9/11
  • The US Housing Bubble and 2008 Great Financial Crisis

During each of these spectacular and horrific events, German bond yields managed to stay in a range of roughly 4-10% with the occasional spike up or down. However du

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Admin

Seven Ways To Trade The Brexit Vote

Next week will be a historical one for both the United Kingdom and the global economy. On June 23rd the British people will decide whether to leave or stay in the European Union. Polls have been mixed over the last couple months, but the latest out show momentum for leaving, which is scaring the markets.

Loss of British sovereignty is the fundamental reason for leaving the EU, as many supporters want to take back control of U.K. borders in order to curb immigration. Those that wish to stay in the EU say there are severe short-term economic consequences that would make trade difficult and slow the economy. Even President Obama recently said that if there is a Brexit, the U.K. would go to the “back of the queue” in American trade deals.

While debate and speculation is running rampant, markets are watching the British Pound closely. Last week U.S. indices tracked and moved with the Pound tick for tick, showing that traders are very concerned about the upcoming vote.

So how can you profit

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most-valuable-exports-middle-east.jpg?width=750We’ll start with the obvious: the number one export for many countries here is crude oil or related petroleum products. Middle Eastern countries made up a significant portion of global oil export revenues during 2015 with shipments valued at $325 billion or 41.3% of global crude oil exports.

Saudi Arabia, Iraq, United Arab Emirates, Kuwait, Iran, and Oman were all among the top 15 exporters of crude oil in 2015. Russia and Kazakhstan, countries on the Central Asian part of the map, were also members of that same group.

Regimes in the region found that there were many other corollary benefits from this economic might. Unrest could be stifled by rising wealth, and these countries would also have more influence than they otherwise would in global affairs. Saudi Arabia is a good example in both cases, though a major driver of Saudi influence has been slipping in recent years.

Outside of Oil

Aside from exports of oil, there are some other interesting subtleties to this map. One of the most

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Stock-Market-Bubble.jpg?zoom=1.5&fit=800%2C540&ssl=1&width=600

Of course, no where does it say how long this can continue but it's important to be aware. No, it can't go on forever.

We are now entering earnings season once again. Pre-announcements have been the second-worst seen over the past decade.1291333?profile=RESIZE_1024x1024

This has analysts lowering estimates. In fact, they’ve been lowered so far quarterly earnings now look to fall all the way back to 2009 levels.

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For the trailing twelve months earnings are now back to 2011 levels…

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…even while stocks remain 75% above their own levels from back then. Taken together you get a price-to-earnings ratio of 24, higher than any other time over the past several years.

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It should go without saying that extreme valuations and falling earnings are not a bullish recipe for stocks.

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So the fundamentals are not supportive of higher prices. What then has been driving them higher in recent weeks?

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And the greater fools are none other than the companies themselves…

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…for now. If earnings don’t turn around soon (and corp

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Admin

Debt Doesn't Go On Forever

1291294?profile=RESIZE_480x480NYSE margin debt fell again during the month of February. After the selloff in stocks that kicked off 2016, this should come as no surprise. Investors are usually forced to reduce leveraged bets during these sorts of episodes in the stock market. In fact, this forced selling can actually exacerbate the volatility. And because margin debt is only now beginning to come down from record highs, surpassing those seen at the 2000 and 2007 peak, this should be of concern to most equity investors.

To fully appreciate this risk, I prefer to look at margin debt relative to overall economic activity. When leveraged financial speculation becomes large relative to the economy, it’s usually a sign investors have become far too greedy. As Warren Buffett would say, this is usually a good time to become more fearful, or conservative towards the stock market.

Not only did margin debt recently hit nominal record-highs, it hit new record-highs in relation to GDP, as well. In other words, over the past s

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Admin

Recession Proponents Watching Yield Curve

Is our economic recovery truly as strong as charts would imply?  Are we strong enough to stand on our own at these levels, or have we overshot the boundaries thanks to quantitative easing?  Are economics in the U.S. strong enough or does recession lie ahead?

Curve watchers Anonymous has an eye on the yield curve. Here is a snapshot of year-end-closing values from 1998-12-31 through 2015-12-31.

Yield Curve Year End Closing Values 1998-2015

yield%2Bcurve%2B2015-12-31.png

Unlike 1999-2000 and again 2007-2007, no portions of the yield curve are inverted today (shorter-term rates higher than longer-term rates).

Inversion is the traditional harbinger of recessions, but with the low end of the curve still very close to zero despite the first Fed hike, inversions are unlikely.

Yield Curve Differentials: 3-Month to Longer Durations
yield%2Bcurve%2B2015-12-31A.png


Yield Curve Differentials: 1-year to Longer Durations
yield%2Bcurve%2B2015-12-31B.png
Yield Curve Differentials: 2-year to Longer Durations

yield%2Bcurve%2B2015-12-31C.png

In general, albeit with some volatility, the yield curve has been flatteni

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Admin

3Q Earnings Worst Since 2009

This U.S. earnings season is on track to be the worst since 2009 as profits from oil & gas and commodity-related companies plummet leaving many to wonder, is the worst behind us or is there more to come?  Is China's growth story over or taking a 'rest'?  We've lived on ghost cities creating demand for so many years; where is the next growth story?

So far, about three-quarters of the S&P 500 have reported results, with profits down 3.1 percent on a share-weighted basis, data compiled by Bloomberg shows. This would be the biggest quarterly drop in earnings since the third quarter 2009, and the second straight quarter of profit declines. Earnings growth turned negative for the first time in six years in the second quarter this year.

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The damage is the biggest in commodity-related industries, with the energy sector showing a 54 percent drop in quarterly earnings per share so far in the quarter, with profits in the materials sector falling 15 percent.

The picture is brighter for the telec

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Admin

Cash Flow Out Of Emerging Markets

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Worldwide money flows are of interest to a long term investor and the flight out of emerging markets has been striking.  Weren't emerging markets supposed to where our expansion was to take place?  What now?

According to the IIF, the volatile market conditions have taken a toll on capital flows to emerging markets, with net non-resident portfolio flows in August falling into negative territory for the first time in 2015, according to the Institute of International Finance’s latest EM Portfolio Flows Tracker. Outflows were estimated at $4.5 billion in August compared to inflows of $6.7 billion in July.

“Portfolio flows to emerging markets have retreated sharply in the last few weeks,” said Charles Collyns, chief economist at the IIF. “Emerging market investors have been spooked by rising uncertainty about China, and stress has been exacerbated by a combination of fundamental concerns about EM economic prospects and volatility in global financial markets.”

Emerging market equity flows f

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Admin

The New Face Of Competition For Profits

The world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end. Our new McKinsey Global Institute report, Playing to win: The new global competition for corporate profits, projects that the global corporate-profit pool, which currently stands at almost 10 percent of world GDP, could shrink to less than 8 percent by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years (exhibit).

Exhibit

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From 1980 to 2013, vast markets opened around the world while corporate-tax rates, borrowing costs, and the price of labor, equipment, and technology all fell. The net profits posted by the world’s largest companies more than tripled in real terms from $2 trillion in 1980 to $7.2 trillion by 2013,1 pushing corporate profits as a share of global GDP from 7.6 percent to almost 10 percent. Today, companies

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Admin

Over the years, it's become essential (to me) to understand monetary policy and money flows across the globe. With all of the recent 'pining' over whether the Fed will begin to raise rates this year, I felt this piece from Financial Times gave a great representation of who is worried over what, and why.  I truly recommend you give if it a read.  There's also more discussed on this article.  Enjoy.

Why is the Fed considering raising interest rates now?

America has seen its longest private sector hiring spurt on record, and unemployment has halved since its peak. The Fed thinks the hot jobs market could spur a pickup in inflation and wages. Given it is tasked with keeping inflation low, it is considering raising the cost of borrowing to keep the economy on an even keel.

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Why have rates in the US been held so low for so long?

The US was hit by the crash in its housing market and banking sector between 2007-09. The Fed felt it needed to pull out all of the stops t

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Admin

Chinas Move Won't Help U.S. Tech Firms

China’s moves to spur its slowing economy and restore investor confidence are having an important but less obvious effect on the tech sector: Strengthening Chinese companies that already were making life difficult for U.S. rivals, many of whom have staked their growth plans on the world’s second-largest market.

The government’s surprise decision in early August to devalue China’s currency, in particular, could make it harder for U.S. companies to sell into the country by making their products more expensive to local buyers.

At the same time, a cheaper yuan makes Chinese-produced goods less costly abroad—dovetailing with government policies that have been promoting foreign sales by Chinese technology vendors.

“We see the key driver [of government action] being exports,” said Handel Jones, a consultant at International Business Strategies Inc. who has written books on China’s high-tech sector. Chinese companies “will become more aggressive.”

Once known mainly for its low-cost manufacturi

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Admin

China’s market downfall has been dramatic and painful for the investors involved. But so far there has been little immediate impact on the rest of the world, because China tightly limits foreign investment in mainland stocks.

China’s stock markets are, for the most part, a mom and pop affair—about 80% of the trading that happens in Shanghai and Shenzhen is done by Chinese individuals. They represent at most 14% of the total Chinese population.

But there’s little doubt the effects of this downturn will be felt globally—it just may take some time. After all, Chinese investors have lost more about $3.4 trillion in equity value from the markets mid-June peak until the July 7 close:

And although the government is supporting state-owned companies in the markets, other companies have seen their market value plummet.

As of July 8, about half of the stocks that traded in Shanghai and Shenzhen have voluntarily halted trading indefinitely—which potentially puts the brakes on everything from co

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Admin

Jobs. The Winners And The Losers

It’s time for what is arguably the world’s most influential monthly economic update.  The US economy generated 280,000 new jobs in May, as the world’s largest economy continues to shake off a sluggish first quarter.

The unemployment rate rose slightly to 5.5%. We’ll be rounding up our best charts, as well as the best ones we see from around the web in the lead-up and aftermath of the 8:30 a.m. data release.

Now let's take a look at the winners and losers.  Notice the 253,000 people who previously had no job and were not looking.........that's a big shift if you ask me.  One to the bullish side.  They're up off of Mommy's couch (finally).

overview_may_jobsday.png?width=500

A look by sector breaks it down.

sector_may_jobsday.png?width=500

A big gainer? Healthcare no doubt.  One has to wonder how many in Congress, attempting to repeal Obamacare, have "this" in the back of their minds.....or "should".

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The new loser making a new low.........manufacturing.

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Now for some historical perspective.  We're still getting there..........

1291281?profile=originalAnd again we

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Admin

Britain Declares Deflation

20150523_BRC337.png?width=300According to The Economist, in May 19th official statisticians announced that Britain entered deflation in April, with consumer prices standing 0.1% lower than a year earlier. It is first time since 1960 that annual inflation has been negative. Back then, prices pepped up again quickly. The Bank of England expects a similar rebound this time, on the basis that the recent fall in the price of food and fuel will be a one-off. But for inflation to return to the bank’s 2% target, sustained growth in wages is necessary. That means the bank is keeping a close eye on inflation expectations; if Britons start accepting lower pay rises on account of stagnant prices, deflation could persist.

Here in the U.S. fears of deflation still linger with strength in the U.S. Dollar continuing to quash any strong moves in commodities.  We've discussed it a few times before here and here. Tomorrow's GDP and PMI will be watched closely.  At least it won't be a boring Friday morning.

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Admin

Remain Long China. The QE Continues

I see no reason why not to stick with Shanghai at this point.  They're behind us at in terms of supporting their economy and it's not an easy ride (as Ben Bernanke will attest).  china-man-bicycle-bike.jpg?width=300

According to BusinessInsider, a bunch of data about the state of China's economy came out Tuesday night, and altogether it told us one thing — nothing the government has been doing to save its economy from falling deeper into a slowdown is working.

Since November, China has cut benchmark interest rates three times, including once Saturday. It has also loosened mortgage policies to prop up the housing market.

But none of it's enough. Especially when you look at the data from Tuesday night.

Lets walk through the scariest stuff:

  • M0 growth, or just the cold, hard cash floating around the economy, fell to 3.2% from 6.7%.
  • Total social financing, a number that measures loans and all credit and debt in the country, fell by 32% since the same time last year and 11% from the previous month.
  • And worst of all, fixed-ass

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Admin

The Early Stages Of A Bond Bear Market

I'm crazy to do this, but it sure looks like the Great Bond Bull Market has ended and we are in the early stages of another bond bear market. 
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The Great Bond Bull Market started in the fourth quarter of 1981, after the 10-yr Treasury yield hit an all-time of almost 16%, and about a year after the year-over-year change in the CPI hit a post-Depression high of almost 15%. It most likely ended 31 years later, in July 2012, when the 10-yr yield fell to 1.4% at the height of the PIIGS crisis, and three years after the CPI hit a post-Depression low of -2.1%.

10-yr%2Bvs%2BCPI.jpg


As the chart above shows, inflation is arguably the principal driver of yields.

By the way, the first bond bear market of the current century started in 1950 and also lasted 31 years. The bear market that is now beginning to unfold will undoubtedly also be many years in the making, and we can only guess at how much yields will eventually rise. I certainly hope they never get as high as they did in the early 1980s, and I don't expec

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Admin

The Four Global Forces Breaking All The Trends

In the Industrial Revolution of the late 18th and early 19th centuries, one new force changed everything. Today our world is undergoing an even more dramatic transition due to the confluence of four fundamental disruptive forces—any of which would rank among the greatest changes the global economy has ever seen. Compared with the Industrial Revolution, we estimate that this change is happening ten times faster and at 300 times the scale, or roughly 3,000 times the impact. Although we all know that these disruptions are happening, most of us fail to comprehend their full magnitude and the second- and third-order effects that will result. Much as waves can amplify one another, these trends are gaining strength, magnitude, and influence as they interact with, coincide with, and feed upon one another. Together, these four fundamental disruptive trends are producing monumental change.

1. Beyond Shanghai: The age of urbanization

The first trend is the shifting of the locus of economic activi

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Admin

Time To Ring The Register

Traders dumped high fliers and the broader stock market was slammed amid worries about the first profit decline in six years and more signs of nagging weakness in the U.S. economy.

Stocks fell sharply, as the VIX [ .VIX 15.44 up.gif +1.82 (+13.36%) ] jumped more than 13 percent. The Dow [ .DJI 17718.54 down.gif -292.60 (-1.62%) ] was off 292 points at 17,718 Wednesday, and the S&P 500 [ .INX 2061.05 down.gif -30.45 (-1.46%) ] fell nearly 1.5 percent to 2061. The Nasdaq [ .IXIC 4876.52 down.gif -118.21 (-2.37%) ], affected by selling in tech and biotech, lost 2.4 percent.

"It had a big run. It's only natural to see a correction," said Steve Massocca, Wedbush managing director. "We had excessive ebullience and some of that is burning off. I think that durable goods numbers weren't particularly good today. I think people are starting to get concerned that king dollar is going to cause earnings issues. A lot of companies are in their quiet periods so the stock buybacks are halted."

Stocks tanked in late morning but had

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