pebblewriter

Author: pebblewriter

  • FOMC: What Elephant?

    Over the last 20 years, we’ve seen two yield curve (2s10s) inversions: essentially all of 2000 and Dec 2005-May 2007.  The inversions themselves posed no issues for equity markets.  It was the dramatic unwinding of those inversions that produced crashes.Eight months ago, we almost had another.  2s10s had fallen to a trend line connecting those two previous curve lows. Instead of bouncing, however, 2s10s continued falling — reaching a low of .18 on Aug 27.

    Unfortunately, the optics of this approach to an inversion are troublesome.  It is commonly believed that inversions presage recessions.  So, the brain trust in the Eccles Building has a little tightrope walking to do.

    They need to increase the short end of the curve to stave off (understated) inflation and build some cushion for the next financial calamity.  But, to avoid an inversion, they must scale back their intervention in the 10Y — at least enough so it can keep pace with the rapidly rising 2Y.

    Eagle-eyed observers might note that both recently out above the trend line connecting previous highs. Not so coincidentally, this occurred as the above-referenced trend line connecting the 2s10s lows was breached and equities began their Jan-Feb swoon.Can the Fed keep the plates spinning a little longer?  Without question.  Especially if Powell is successful in convincing investors algos that the economy is strong but there is no wage pressure and inflation poses no real threat.

    Should that narrative fail, however, the spectre of higher rates alongside soaring debt levels might finally awaken equity and bond investors to the elephant in the room.

     *  *  *

    So far, the damage resulting from Friday’s channel breakdown has been contained to the August highs.  But, still ahead, EIA inventory reports and the FOMC statement and press conference.

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  • Charts I’m Watching: Sep 25, 2018

    After bouncing off our initial downside target yesterday, stocks ramped nicely into the close and overnight.  But, the overnight ramp job is fading fast, and it remains to be seen whether the backtest scheduled for the opening bell will hold.

    The focus over the next couple of days is, of course, the Fed.  There is strong consensus for a rate hike tomorrow.  In addition, the market faces the headwinds of the tariff war(s), growing turmoil in D.C., and the usual instability in the Middle East, etc.

    Will investors press the pause button?  It all depends on the comments offered by Powell et al.  Some have argued that the Fed was hopelessly behind the curve — even before Trump’s tariff war amped up inflation.

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  • What’s Going on With Bonds (And, Why Doesn’t the Market Care?)

    The trade dispute is officially a trade war.  You’d never know it from looking at the stock market.  The bond market, however, is a different story.

    Tariffs will clearly add to inflationary pressures.  But, even before the “trade wars are good, and easy to win” gaffe, the Fed and a bevy of inflationary economic reports had been working the short end higher.

    As we’ve maintained [see: Inflation…Goalseeking] stock valuations aren’t adverse to rising inflation.  It was only those rises above the Fed’s official 2% target which produced downturns between 2009-2017.

    And, even though the 10s2s spread has generated plenty of trepidation, it was rapid spikes in the spread — not the inversions themselves — which did the most damage.

    The Fed has little to fear from inversions except, as is the case with QE, the difficulty in walking them back without popping the equity bubble they’ve blown.  The general perception is that inversions usher in recessions, but surely the Eccles brain trust has a solution to that pesky problem.

    No, the issue the Fed is grappling with these days is how to get the rest of us to believe that higher inflation and higher interest rates don’t really matter.  A scant 7 years ago, when the Debt Ceiling Crisis of 2011 and US downgrade were the news of the day, the S&P 500 plunged over 22%.  Total interest expense on the $14.8 trillion in government debt was $454 billion.

    Interest expense this year will total about $520 billion on $22 trillion in debt.  The doubling in short-term and floating rate debt funding and the sharp decrease in rates on long bonds (averaged 5.8% in Sep 2011) has allowed interest expense to increase only 15% while the amount of debt grew 46%.

    But, any way you slice it, $520 billion in interest expense is a tough pill to swallow — especially when we’re running a $1 trillion deficit.  Japan, here we come.

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  • Quad-Witching: Sep 21, 2018

    We’re off to a quiet start so far, with futures up a few points in sympathy to rising oil and gas prices — both up over 1% — and, a bounce in the dollar index.

    OPEC is slated to meet over the weekend, and it’s not unusual to see oil rally in advance of a policy meeting.  It’s also not unusual to see the leader of the free world resort to Twitter to express his dissatisfaction with oil prices which are rising largely as the result of his own policies.

    Speaking of which, Walmart is the latest (and largest) retailer to warn of higher prices as the result of Trump’s proposed tariffs.

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  • Charts I’m Watching: Sep 20, 2018

    Yesterday was all about fine tuning, positioning SPX/ES for a breakout — which arrived at 2am courtesy of the breakdown in VIX we were expecting.

    Is the start of another prolonged period of VIX bashing?  And why now?  Has it anything to do with DXY finally breaking down?

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  • Fine Tuning

    ES reached new highs yesterday, but SPX reversed at its .886 Fib retracement.  Which should we believe?  Since VIX is plunging in the minutes before the open, indications are that this morning’s selloff will be just enough for SPX to flesh out its latest rising channel — also on the way to new highs.

    What could go wrong?  Plenty.  For one, 10Y yields are threatening to break out of a channel dating back to Jan 2000.  This seems to me to be a very dangerous game the Fed is playing.

    The Fed clearly wants more headroom in rates on hand for the next economic disaster.  And, the 2Y continues pushing higher, perhaps to buoy the dollar and keep inflation from running away.

    As the 2Y rises, the 10Y must at least keep pace in order to prevent a yield curve inversion.  But, yield breakouts have been unhealthy for stocks over since 2015.  With debt accumulating quickly, why would this one be any different?

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  • The Devil’s Playground

    Catch this news flash yesterday?  Trump, ironically at a White House meeting with the National Council for the American Worker:

    You’re gonna see on China, today, right after close of business…we’ll be announcing something, uh, and it will be a lot of money coming into the coffers of the United States of America, a lot of money coming in, but you’ll be seeing what we’re doing uh right after close of business today, the markets closing.  Thank you.

    Note the repeated emphasis on the market’s closing. Was there something about the announcement that required a delay?  To paraphrase…the after-hours markets are the devil’s playground.

    The S&P 500 plunged 22 points from Friday’s highs, then recovered just in time for a well-engineered close: down only 16 points on the day.  More importantly, it closed at 2888.80 – just above yesterday’s 10-DMA at 2888.70 (2888.80 today.)

    After the close, of course, the futures tanked – shedding 14 points before being saved by the usual suspects: VIX, WTI and USDJPY.  Trump’s announcement didn’t come right after the close.  In fact, it didn’t come until after 3 1/2 hours had passed.  Why?That’s how long it took to get the safety net properly positioned.  USDJPY, which had just backtested its IH&S neckline, spiked sharply moments after the announcement.

    VIX, which had just backtested the broken white channel, suddenly reversed and headed lower.

    The overnight action was impressive, with the usual timely plunges when ES faced important tests. How much more of a smackdown will resurrect stocks’ rally?Whether the rebound will hold or not is anyone’s guess.  China has already announced retaliation – which Trump insisted will lead to a $267 billion expansion of US tariffs.

    Futures are under pressure again, and interest rates are threatening to break out on the obvious (to everyone except Trump, apparently) inflation threat that tariffs pose.  Might investors care that the trade wars could, as Jack Ma theorized, last for 20 years?

     

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  • Tariff Trouble

    Stocks slid sharply on Friday following news that tariffs on an additional $200 billion in Chinese goods would be announced today.  We got the usual V-shaped recovery by the close; but, futures are still a few points in the red this morning.

    The biggest impact, so far, has been on rates.  The 10Y popped through its triangle and is testing an important channel top while topping 3%.

    The 2Y is keeping pace.

    DXY is trying mightily to hold the line, but it’s looking iffy.

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  • Retail Sales Plunge

    Retail sales disappointed, coming in at a paltry 0.1% — well below expectations of 0.5%.  Once again, we see how dependent the data is on gas prices.  And, once again, we’re left to wonder if the number would be positive at all if: (a) accurate inflation adjustments were used, and (b) the impact of the trade wars wasn’t already being felt.

    The dollar index, which had completed a H&S Pattern, scurried back above the neckline in an attempt to keep futures in the green.

    ES is still positive by a few points after breaking out yesterday on the expected “timely” breakdown in VIX.

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  • Deutsche Bank: End of the Road?

    I first began focusing on DB in September 2016, when a consulting client asked me to opine as to whether the stock was circling the drain or represented a buying opportunity.  In our original post [see: Deutsche Bank, Will it Survive?] I concluded that a huge falling channel dating back to 1997 made it a buy at 11.23.

    DB bounced 90% at 11.19, and has since become a favorite trading vehicle of mine — bobbing and weaving predictably enough to have produced some excellent returns over the past two years.

    In our last post to focus on DB [Deutsche Bank: On the Ropes] we noted DB had reached channel support which, if broken, would suggest downside to 10.30 (another test of the huge white channel.)

    DB reached 10.29 on Jun 27, then reversed and nailed our upside target at 13.06.  From July 25’s CIW…

    Had the rising purple channel held, 14.72 was up for grabs.  But, the channel broke down on Aug 9.  As we noted a few days later [see: Currency Crisis on the Horizon] there was little support remaining other than the 10.29 lows.

    We were looking for a deep retracement (10.62) and/or white channel backtest a few days later when DB tested 11 again.Clearly, 10.62 would still look like a decent downside target were it not for the fact that someone (say, a Frankfurt-based central bank) is propping up the stock.

    While it has obviously completed a H&S Pattern that targets well below 10.62 — all the way down to 8.78 — the pattern hasn’t been permitted to play out yet.

    Just yesterday, Reuters reported that Deutsche Bank is looking into “loosening the bond” between its retail and investment banks (good bank, bad bank?), which sounds to me like a precursor to a more dramatic restructuring than has been discussed to date.

    Deutsche Bank is considering an overhaul to loosen the bond between its retail and investment banks, according to three people with knowledge of the matter, a move that could make it easier to merge some or all of the group with rivals.

    The German lender is examining creating a holding company structure, a step that would give it more flexibility to strike merger deals, as it seeks to regain its footing following years of heavy losses and multi-billion-dollar penalties.

    The possibility is likely to be discussed at a meeting of management later this week in Hamburg, other people familiar with the matter said, as the bank’s new chief executive, Christian Sewing, sets a new course for the struggling lender.

    Given the $11 floor under the stock and the increased threat of a merger, spinoff, or other value-enhancing restructuring, continuing to hold short is a riskier proposition.  If it dips below 11, go for it.  Or, consider going long here with stops at 11.

    Either way, DB has been a great trading vehicle for the past two years.  But, it might very well have reached the end of the road.

     

     

     

     

     

     

     

     

     

     

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