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01Jun2015 Market Update: Averages Sea Saw Into The Green From Morning Lows, U.S Bonds Take A Beating, Market Risks Growing

Written by Gary

Roller coaster Monday is once again scaring the bejesus out of timid investors. Sea-sawing down to negative territory then wiggling its way back up to opening morning highs.

Markets are finally trading sideways that has a lot of investors worried about the markets stability while the clock is ticking on Greece. Markets will find it harder to ignore the risks as U.S. Treasury bonds took a beating this morning as an upbeat manufacturing release brightened the U.S. growth outlook.


Here is the current market situation from CNN Money

North and South American markets are mixed. The S&P 500 is higher by 0.42%, while the Bovespa is leading the IPC lower. They are down 1.67% and 0.03% respectively.

Traders Corner - Health of the Market

Index Description Current Value
Investors.com Members Sentiment: % Bullish (the balance is Bearish) 57%
CNN's Fear & Greed Index Above 50 = greed, below 50 = fear 40%
Investors Intelligence sets the breath Above 50 bullish 58.0%
StockChart.com Overbought / Oversold Index ($NYMO) anything below -30 / -40 is a concern of going deeper. Oversold conditions on the NYSE McClellan Oscillator usually bounce back at anything over -50 and reverse after reaching +40 oversold. -34.10
StockChart.com NYSE % of stocks above 200 DMA Index ($NYA200R) $NYA200R chart below is the percentage of stocks above the 200 DMA and is always a good statistic to follow. It can depict a trend of declining equities which is always troubling, especially when it drops below 60% - 55%. Dropping below 40%-35% signals serious continuing weakness and falling averages. 56.31%
StockChart.com NYSE Bullish Percent Index ($BPNYA) Next stop down is ~57, then ~44, below that is where we will most likely see the markets crash. 62.47%
StockChart.com S&P 500 Bullish Percent Index ($BPSPX) In support zone and rising. ~62, ~57, ~45 at which the markets are in a full-blown correction. 64.20%
StockChart.com 10 Year Treasury Note Yield Index ($TNX) ten year note index value 21.81
StockChart.com Consumer Discretionary ETF (XLY) As long as the consumer discretionary holds above [66.88], all things being equal, it is a good sign for stocks and the U.S. economy 76.74
StockChart.com NYSE Composite (Liquidity) Index ($NYA) Markets move inverse to institutional selling and this NYA Index is followed by Institutional Investors 11,074

What Is Moving the Markets

Here are the headlines moving the markets.

Hibernating consumers cast pall on U.S. growth outlook

WASHINGTON (Reuters) - U.S. consumer spending unexpectedly stalled in April as households cut back on purchases of automobiles and continued to boost savings, suggesting the economy was struggling to gain momentum early in the second quarter.

Techno-Narcissism & The Real Limits To Growth

Submitted by Howard Kunstler via Kunstler.com,

If there is a Pulitzer Booby Prize for stupidity, waste no time in awarding it to The New York Times' Monday feature, The Unrealized Horrors of Population Explosion. The former "newspaper of record" wants us to assume now that the sky's the limit for human activity on the planet earth. Problemo cancelled. The article and accompanying video was actually prepared by a staff of 23 journalists. Give the Times another award for rounding up so many credentialed idiots for one job.

Apart from just dumping on Stanford U. biologist Paul Ehrlich, author of The Population Bomb (1968), this foolish "crisis report" strenuously overlooks virtually every blossoming fiasco around the world. This must be what comes of viewing the world through your cell phone.

One main contention in the story is that the problem of feeding an exponentially growing population was already solved by the plant scientist Norman Borlaug's "Green Revolution," which gave the world hybridized high-yielding grain crops. Wrong. The "Green Revolution" was much more about converting fossil fuels into food. What happens to the hypothetically even larger world population when that's not possible anymore? And did any of the 23 journalists notice that the world now has enormous additional problems with water depletion and soil degradation? Or that reckless genetic modification is now required to keep the grain production stats up?

No, they didn't notice because the ...

Why the Fed will change its exit strategy: substantiated

Originally posted at Bawerk.net. You may also follow us on Twitter.

Why the Fed will change its exit strategy: substantiated

In Why the Fed will change its exit strategy again we argued that the added net supply of TSY from the Federal Reserve over the next coming years will create problems for elevated markets as the reallocation of funds held by the private sector and corresponding higher interest rate will pop the bubble the Federal Reserve created in the first place.

In today's missive we would like to substantiate this argument as some clueless commentators called it crap economics; as usual they did so without even attempting a rebuttal.

To reiterate; since the Federal government is running a deficit and is expected to do so for the foreseeable future, per Congressional Budget Office (CBO) and White House Budget forecasts, an end to the Federal Reserve reinvestment strategy means net supply to the private market must increase correspondingly.

The chart immediately below depicts the expected development in TSY issuance using CBO deficit projections along with Federal Reserv ...

Intel to buy Altera for $16.7 billion in its biggest deal ever

(Reuters) - Intel Corp agreed to buy Altera Corp for $16.7 billion as the world's biggest chipmaker seeks to make up for slowing demand from the PC industry by expanding its line-up of higher-margin chips used in data centers.

OPEC's Pricing Leverage Is Weakening

OPEC is expected to leave its oil output unchanged at a meeting in Vienna this week, a contrast with the cartel's past muscular role as a swing producer that could even out price bumps.

How Wall Street Helps US Oil Producers Extend-And-Pretend

In "When QE Leads To Deflation: A Look At The Global Supply Glut", we outlined, for all to see, how the monetary policies pursued by the world's central banks have not only failed to create demand and meaningfully lift inflation expectations, but have in fact the opposite effect, creating a global supply glut and, in an irony of ironies, deflation.

The cycle, which Citi says is "how zombies are born", is nowhere more evident than among US oil drillers. Companies who would have otherwise been rendered insolvent by plunging crude prices have been able to keep drilling thanks to i) record low borrowing costs and ii) voracious demand for corporate issuance and â€'undervalued' equity attributable to the fact that risk free assets fetch at best an inflation adjusted zero and at worst have a negative carry.

Access to cheap cash keeps the supply coming which in turn keeps prices suppressed in a cycle that feeds on itself creating Citi's "zombie" companies in the process. We've bemoaned this central bank-assisted aberration for quite a while now have variously warned that given the completely illiquid conditions that exist in the secondary market for corporate credit, the last thing anyone needs is a primary market bonanza for junk-rated borrowers. As for equity issuance, what gullible investor wouldn't want to jump on a secondary from an otherwise insolvent producer. After all, prices will rebound eventually. BTFD, people.

Once the revolver raids start up again in October (when banks will once again assess credit lines to oil and gas producers) the defaults may be just around the corner. Then comes the rush to the HY ETF ...

U.S. Government Bonds Fall

U.S. Treasury bonds took a beating on Monday as an upbeat manufacturing release brightened the U.S. growth outlook.

Disney CFO James Rasulo steps down

(Reuters) - Walt Disney Co said James Rasulo has stepped down as chief financial officer, effective June 30.

Time Warner Cable CFO Arthur Minson leaves to join startup

(Reuters) - Time Warner Cable Inc said Chief Financial Officer Arthur Minson would step down effective immediately, less than a week after Charter Communications Inc agreed to buy the company for $56 billion.

Another 'Break' Adds To The Equity Bear Case

Via Dana Lyons' Tumblr,

For the past 12 months, we have been taking note of a gradual accumulation of ancillary factors suggesting the longer-term outlook for stocks was becoming less attractive. At the same time, the factors most vital in supporting the persistence of the bull market in the intermediate-term continued to be constructive. As we mentioned yesterday, though, that has started to change. Today, we offer another example of an important gauge of stock market health that is beginning to show cracks: the Equal-Weight S&P 500 Index.

As the name implies, the Equal-Weight Index applies an equal weighting to all of the components in the index, regardless of price or market cap. Taking this more democratic view of the index makes it easier to assess how strong the broader "market" really is versus the cap-weighted S&P 500 Index, which may be supported by a relatively small number of its biggest constituents.

The last time we looked at the Equal-Weight Index (by way of the Guggenheim Equal-Weight S&P 500 ETF, ticker RSP), was at the end of March. That post noted a positive development as the ratio of the index versus the cap-weighted S&P 500 SPDR (SPY) had just broken out to an all-time high. This suggested that the broad market was still quite healthy. As today's Chart Of The Day reveals, however, things have changed.

Can't Stop Texting While Driving? Use This

You've heard it a million times: Don't text and drive. Dr. Sanjay Gupta offers tips on how to break the dangerous habit.

U.S. stocks choppy in early trade on mixed economic data

(Reuters) - U.S. stocks were choppy in early trading, giving up their gains from a strong opening, as investors digested a slew of data that sent a mixed picture on the pace of the economy's recovery.

French Unemployment Surges By Most In 7 Months To New Record High

Is it any wonder Marin Le Pen's Front National Party is a) leading in the polls, and b) pushing for an EU in/out referendum? Whatever it is that France (and/or Europe) is doing, is not working. Despite all the promises, French unemployment has risen practically non-stop for 4 years and just hit a new all-time record...

Hollande #Fail

But of course none of that matters... the CAC 40 is surging...

Or, this is how Paul Krugman summarized the ongoing disintegration of Europe in 2010:

The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works.

Indeed.

Merkel, Hollande, Tsipras call was 'constructive': Germany

BERLIN (Reuters) - A phone call on Sunday between German Chancellor Angela Merkel, French President Francois Hollande and Greek Prime Minister Alexis Tsipras took place in a "constructive" atmosphere, the German government said on Monday.

"By Almost Every Measure Stocks Are Overvalued" Warns Goldman After Slamming Corporate Buybacks

Over the weekend, we first reported that none other than Nobel prize winner Robert Shiller said that in his opinion, unlike 1929, this time everything - stocks, bonds and housing - was overvalued.

Curiously, none other than Goldman's chief equity strategist, David Kostin echoed this sentiment when in his latest weekly note to clients he said that "by almost any measure, US equity valuations look expensive. The typical stock in the S&P 500 trades at 18.1x forward earnings, ranking at the 98th percentile of historical valuation since 1976. For the overall index, the aggregate forward P/E multiple equals 17.2x, a rise of 63% since September 2011, compared with the median expansion of 48% during 9 previous P/E expansion cycles. Financial metrics such as EV/EBITDA, EV/Sales, and P/B also suggest that US stocks have stretched valuations. With tightening on the horizon, the P/E expansion phase of the current bull market is behind us."

Don't tell that to the SNB, the BOJ or any of the other central banks once again buying Emini futures hands over fist with freshly printed money and a complete disregard to cost basis or downside and losses.

Of course, for Goldman to say all of this, it means either the bank is already full to the gills with ES puts, or is just hoping to buy up the S&P to 3000 and above. Here is what else Kostin says on record valuation:

Spot What's Wrong With This Headline

Bloomberg reports the following.

Federal Reserve Vice Chairman Stanley Fischer said bankers who have engaged in wrongdoing should be punished, and he chided the industry for pushing back against financial regulations adopted to prevent another conflagration.

"Individuals should be punished for any misconduct they personally engaged in," Fischer said in a speech to bankers Monday in Toronto.

Well then... if a Fed vice chairman says bankers should be punished for, you know, "crimes" then so be it.

Which in retrospect seems a little odd: why would anyone, let alone the second most important person on the planet, feel the need to state something that, for every other human being is self-evident?

Which reminds us, just how many of the market's caught-red-handed criminal manipulators have gone to jail?

Stanley? Anyone?

The War on Cash: Your Deposit at the Bank Can be Converted to Equity If a Crisis Hits

As we noted last week, one of the biggest problems for the Central Banks is actual physical cash.

The financial system is predominantly comprised of digital money. Actual physical Dollars bills and coins only amount to $1.36 trillion. This is only a little over 10% of the $10 trillion sitting in bank accounts. And it's a tiny fraction of the $20 trillion in stocks, $38 trillion in bonds and $58 trillion in credit instruments floating around the system.

Suffice to say, if a significant percentage of people ever actually moved their money into physical cash, it could very quickly become a systemic problem.

Indeed, this is precisely what caused the 2008 meltdown, when nearly 24% of the assets in Money Market funds were liquidated in the course of four weeks. The ensuing liquidity crush nearly imploded the system.

Because of this, Central Banks and the regulators have declared a War on Cash in an effort to stop people trying to get their money out of the system.

One policy they are considering is to put a carry tax on physical cash meaning that your Dollar bills would gradually depreciate once they were taken out of the bank. Another idea is to do away with actual physical cash completely.

Perhaps the most concerning is the fact that should a "systemically important" financial entity go bust, any deposits above $250,000 located therein could be converted to equity... at which point if the company's shares, your wealth evaporates.

Indeed, the FDIC published a paper proposing precisely this back in December 2012. Below are some excerpts worth your attention:

This paper focuses on the application of "top-down" resolution strategies that involve a single resolution authority applying it ...

One Of These Two Is Not "Seasonally-Adjusted" Enough

Once upon a time, the Chicago PMI was the best advance indicator, printing usually some 24 hours in advance, to the ISM's Manufacturing "report on business" seasonally-adjusted survey. Unfortunately, in 2015 this has no longer been the case, with the Chicago manufacturing data tumbling into contraction territory for 3 of the past 4 months (most recently printing near 6 year lows), even as the ISM data has printed consistently telegraphed improving seasonally-adjusted survey results (coming in a time of -0.7% GDP growth).

Which makes one wonder: is the Chicago manufacturing snapshot no longer an accurate indication of what to expect from the US manufacturing sector, or, the real question, is one of these two data sets not not seasonally-adjusted enough. (that's of course rhetorical: everyone knows that it is the worse data that always needs more seasonal adjustments).

One more thing worth noting: the last time the Chicago PMI printed dramatically below its ISM cousin was in late 1999, early 2000, just ahead of an imminent recession.

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To contact me with questions, comments or constructive criticism is always encouraged and appreciated:

gary@econintersect.com

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