New highs at the closing (SPY +0.3%)! Is this the end of the rally, or just the beginning? So many analysts are now issuing warnings, sometime dire, that the markets is especially fragile and subject to a serious 'correction'. But then, didn't we hear these same words back in 2010? Let us know what you think.
NEW YORK (Reuters) - U.S. stocks edged higher in afternoon trading on Tuesday, pushing the Dow above the 19,000 level and the S&P 500 above 2,200, though a fall in healthcare stocks weighed on the market.
WASHINGTON (Reuters) - U.S. home resales rose in October to their highest level in more than 9-1/2 years as homebuyers, buoyed by an improving labor market, took advantage of still-low mortgage rates to snatch up properties after many were shut out during the busy summer selling season.
TOKYO/SYDNEY (Reuters) - An ambitious Asia-Pacific trade pact linking the United States and 11 countries lay in tatters on Tuesday after U.S. President-elect Donald Trump said he would kill the deal on his first day in office on Jan. 20.
VIENNA/DUBAI (Reuters) - OPEC will debate an oil output cut of 4.0-4.5 percent for all of its members except Libya and Nigeria next week but the deal's success hinges on an agreement from Iraq and Iran, which are far from certain to give full backing.
WOLFSBURG, Germany (Reuters) - Volkswagen will need to conquer the Americas, the region at the center of its emissions scandal, to deliver a turnaround at its core VW brand, Europe's largest carmaker said on Tuesday.
NEW YORK (Reuters) - Wall Street's three main stock indexes hit record highs for a second straight day on Tuesday before trimming gains, while European shares also rose on expectations that markets would benefit from U.S. President-elect Donald Trump's policies.
ROME (Reuters) - Italy's industry minister pledged on Tuesday to support business deals with Iran potentially worth billions of dollars, undeterred by fears U.S. President-elect Donald Trump could put slowly thawing international relations back on ice.
NEW YORK (Reuters) - Traders bet on Tuesday that an interest rate increase by the Federal Reserve next month is a near lock following stronger-than-expected economic data and expectations of big tax cuts and federal spending under the Trump administration.
ATHENS (Reuters) - Greece will continue talks with international creditors on fiscal and labor reforms, aiming to wrap up the second review of its bailout program by early next month ahead of a euro zone finance ministers' meeting, government officials said on Tuesday.
Deutsche Bank's long-held analogy of "plate-spinning" central bankers acting like the old popular circus act where the performers would spin plates on numerous poles and run between them in order to re-spin before they came crashing down to the ground, has held perfectly for several years. Over the years more plates have been added and central bankers have had to run faster and faster between them to stop gravity taking over.
But now Deutsche Bank is concerned:
Up to this year we've felt confident that they could continue this art for the foreseeable future and thus keep asset prices elevated as a result. We accepted that such policy wasn't conducive for growth and prevented reform/creative destruction, but was positive in the short-term for most assets tied to monetary policy in some valuation form or another.
However 2016 has been a landmark year as we seem to have reached a point where the faster the plates are spun the more the unintended short-term consequences. The banking sector - especially in Europe and Japan - has been severely constrained by negative rates and flatter curves. If the sector was healthier they could withstand such an attack on their profitability but with inherent underlying weakness and with a need to build better regulatory defenses, monetary policy has started to be a sizeable negative. Given how important banks are to the wider economy then it's no longer a win-win when central banks ease policy further. In fact in some cases the opposite outcome could materialise.
And assets are starting to misbehave...
Figure 9 shows the Stoxx 600 bank index against 10 year Bunds and then ...
Markets have been on a tear since election night. The principle reason: The perceived notion of another set of stimulus packages hitting markets during the next presidency. Specifically the notions of corporate tax cuts and increased infrastructure and military spending have sent financial and industrial stocks flying higher resulting in new highs on many indices.
The global central bank inspired multiple expansion that has transpired in 2016 as a result of over $2.2 trillion in annual QE programs and continued low rates found another boost in the new found belief that more easing is coming in form of a Trump presidency. The result: Both stocks and yields have risen dramatically in just a couple of weeks on an expected reflation trade.
The main themes that have emerged: 1. Lower taxes are good for earnings and will stimulate the economy. 2. A large infrastructure bill and increased military spending is good for corporations that supply such services and hence are good for employment. Ergo buy stocks. Inflation is coming and that's good for banks and hence good for stocks.
This all sounds good on paper and this is all it is at the moment as nothing of the sort will come to fruition until at least 2017, but these items are clearly being priced into markets.
But there is a big problem with all of this: None of the policies priced in actually look to address the promises made.
Let's start with the budget. And note the current budget is already running at a deficit of $616B for the current year.
One can argue that few industries have "suffered" more under central planning than billionaire hedge fund managers, and as 2016 goes on, so does the suffering continued.
It is no secret to regular readers that over the past decade, hedge funds have not only underperformed the market, but have failed to generate "alpha" since 2011.
As we have shown year after year, the centrally-planned "New Paranormal" has been a disaster for traditional alpha generation, since with all traditional fundamental relationships flipped upside down thanks to the Fed, the only way to generate outsized returns for one's investors (and one's offshore bank account) was to be massively levered beta, or merely wrong.
Sadly for the 2 and 20 crowd, in the third quarter this troubling trend continued, with Goldman's latest Hedge Fund Trend Monitor reporting that in te first 9 months of 2016, the hedge fund industry generated a mere 4% return, underperforming the broader market's 9% YTD return and as Goldman notes, "on pace to lag the S&P 500 for the eighth straight year"
Compared to last quarter's update, when we showed hedge funds returning only 3%, implies that in Q3 the Hedge Fund industry added a grand total of 1% in P&L.
President-elect Donald Trump made a lot of promises during his more than 18-month run to win the White House. Now as he retreats from some positions, investors are wondering if he'll stick with his promise to block the AT&T-Time Warner merger.
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