On Borrowed Time

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday at 3:05pm ET

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Updated 4/5/17 at 7:10AM ET

In his just released annual letter to shareholders, the CEO of the largest bank in America repeats a warning heard in recent months across this great land.

“It is Clear that Something is Wrong with the U.S.”

When a political novice wins the U.S. Presidential Election with 84% of U.S. counties (2623 of 3112), it’s important to dig deeper than Russian hacking, there’s far more here than meets the eye.

“It is understandable why so many are angry at the leaders of America’s institutions, including businesses, schools and governments. This can understandably lead to disenchantment with trade, globalization and even our free enterprise system, which for so many people seems not to have worked.”

Jamie Dimon, CEO J.P. Morgan

U.S. Credit Deterioration is Picking Up Steam, Fastest Since Lehman

Hardly anyone has noticed, but in the fourth quarter of 2016 there was a surge in financial stress across America, a shift in financial conditions that may have had a hand in the election outcome.

Am I more Likely to Default on a Loan Payment in the Next 12 Months*

Age 35-46 Years Old: 21% vs. 16%
Age 21-36 Years Old: 37% vs 24%

*Data looking at Q4 2016 vs Q4 2015

UBS Evidence Lab

The cycle is turning, right before our very eyes.  In recent months, we’ve found a substantial amount of evidence in capital markets pointing to credit formation reaching a saturation point.

December 2016, a Turning Point

Prime MBS

If you look at high quality prime loans, there’s more evidence of a credit event in December 2016.  Across the board in consumer credit we witnessed spikes in credit card charge offs, auto loans gone bad, sour commercial real estate, student loans and an uptick (above) in Prime Mortgage Delinquencies.

We’re seeing surging defaults in commercial real estate securitization pools, credit card receivables and even prime auto loans.  The icing on the credit cake is margin debt’s historic rise.  Equity bears have been talking up this leverage class since 2014, but this time there’s far more collateral evidence of easy credit “saturation.”

Credit Rolling Over Faster than anytime Since Lehman Brothers

File_001 (96)

Every day, December 2016 is looking more and more like December of 2007.  The credit deterioration has been sharp and swift.  After auto loans, credit card receivables and commercial real estate; Commercial and Industrial loans is another area we have our eye on.  This $2T segment of the U.S. financial system hit an air pocket during the last three months of 2016 with non-residential property financing in a 5.5% plunge, a rate of change to the downside not seen since 2008.  Special thanks to the Telegraph for this chart.

Corporate lending is in meaningful contraction as the U.S. Federal Reserve has finally initiated their rate hiking cycle.  The Fed hiked rates for the third time in two years in March.  Once again, central bankers are smoking in the dynamite shed, they’ve waited far too long to  raise rates.  They’re clearly tightening monetary policy into ugly credit deterioration.

Listen to Economists or Data?

Data vs Sentiment

In many spots around the economy, data is rolling over but the survey sentiment remains strong? 

“While the Fed is worried about the economy overheating, bank loans and leases continue to slowdown on a year over year basis. Part of the reason we think the economy is actually losing steam is because of this precipitous fall in lending (credit contraction) over the past year.”

The Bear Traps Report, March 10, 2017

Equity market’s hopes are pinned high on a economic shot of adrenalin from Washington, but a fumble (Paul Ryan’s Health Care Repeal and Replace failure) up on Capitol Hill has fiscal stimulus well over a year away in our view.  This is looking more and more like a bridge too far.

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Atlanta Fed Q1 GDP Forecast in the Month of March

2017: 1.0%
2016: 0.6%
2015: 0.2%
2014: 0.7%

Do you think there’s a seasonal GDP problem here with the Atlanta Fed reading?  For sure, Q1 has consistently been an under-performer over the last four years. 

As bond bulls in a sea of bears in 2015, we made a stand.  Back then, Wall Street (consensus estimate from economists) was calling for ten Fed rate hikes in 2016-17.  We argued, because of the colossal debt build 2006-2015, a small 25bps hike has the destructive power of three interest rate hikes.

One Hike = Three Hikes

“One of the most popular bond indices, the Barclay’s U.S. Aggregate, has a market value of $17.9 trillion today. This compares to a market value of $8.3 trillion at the time of the last Fed rate hike on June 29, 2006. A look around the world is an eye opener; the Barclay’s Global Aggregate has a market value of $42.2 trillion versus $21.9 trillion on June 29, 2006. Some of this is already priced in of course, but the quick and dirty calculation tells you that for the U.S. Agg, a 25bps hike has 2.53x the impact of a 2006 era move and for the Global Agg, the impact is around 2.36x a 2006 era move in terms of the value of immediately repriced assets. This gives the adage “interest rates up, bond prices down” profound new meaning.  Put another way, the amount of losses by global bond investors in percentage terms for a given hike in rates is around 2.5x as powerful as it was the last time the Fed hiked rates over nine years ago. So might 25bps act a bit more like 62.5bps.  We’re bond bulls, NOT bears, Wall St. has rate hikes wrong.”

Quote from The Bear Traps Report, September 2015

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

M1 Money Supply Growth Rolls BEFORE Recessions

Chart 1970-2017


Above, the red line and circles represent recessions and the white line shows us M1 money supply growth.  As banks pullback from lending M1 contracts, typically out in front of recessions.  As you can see above, M1 has been trending lower since October’s 10.8% growth rate, to 8.1% in February.  The good news is we’re far from the real danger zone for M1 growth.  Ahead of the 2008, 2000 and 1990 recessions, each time M1 was negative 6-9 months prior to real economic stress.  On the other hand, the U.S. economy heading in that direction, our model will be focused here in the months to come.

Stocks and Borrowed Cash: Margin Debt Surged to 58-Year High at Trump Rally’s Peak

Margon Debt Load“A record $530 billion was extended as credit by brokerages for stock buying at the end of February as the post-election rally peaked, according to data released Wednesday by the New York Stock Exchange. While some investors interpret such speculative buying as signals of imminent market reversals, Michael Shaoul, chief executive officer of Marketfield Asset Management, says that’s not the case. He notes that the current pace in equity credit growth is nowhere near where it was in 2000, and the cost to borrow only slightly exceeds the 1.97 percent yield that S&P 500 companies offer as dividends.”


Pick up our NY Times bestseller here:

Book Cover

Stocks Bought with Borrowed Money

March 2017: $530B*
2007: $390B
2000: $285B

*58 year high

Bloomberg data

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Pick up our latest report here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Consumer Credit Deterioration and Subprime Auto Loan Defaults touch highest level since Financial Crisis

U.S. subprime auto lenders are losing money on car loans at the highest rate since the aftermath of the 2008 financial crisis as more borrowers fall behind on payments, according to S&P Global Ratings.  Losses for the loans, annualized, were 9.1% in January from 8.5% in December and 7.9% in the first month of last year, S&P data released March 10, 2017.

Motor Vehicle Loans Owned & Securitized

Auto LoansSo, lets get this straight.  We have an economy near full employment in what every economist on Wall St. calls a strong jobs market, with surging auto loan defaults?  This is moral hazard gone bad, the Fed has kept interest rates so low for so long – the net result?  We have an ugly, smelly pile of bad loans on our hands.  In 2006, clueless economists lectured us “we cannot have a surge in home mortgage defaults with the labor market as strong as it is.”  That was their “blind spot.”  Trying to manage risk while looking at stale, traditional economic metrics, it’s pathetic.

Supply of Automobiles at 30 Year High, Outside 2008-9 Recession

File_000 (158)

This is an eye opener, record supply level vs sales.  It speaks to credit market saturation, sellers simply cannot find more “qualified” buyers.  They’re reaching deeper into the risk spectrum. 

Deleveraging Since the Financial Crisis?  It’s Leverage on Leverage

c loans

U.S. auto loans in the fourth quarter reached about 9.2% of all household debt, the highest share in data going back more than a decade.  the average amount used to finance a new-car loan also reached a record $29,469, according to Bloomberg. To support sales growth and keep monthly car payments affordable, lenders have been lengthening the terms of loans to consumers — in many cases as long as seven years.  It’s pure comedy, an asset that depreciates faster than a summer vacation is receiving longest term financing ever?!

The Great Enabler that is the Federal Reserve

FF Rate

As central banks suppress the natural level of the cost of capital, a moral hazard oozes through capital markets.  The bottom line, money ends up in places it just shouldn’t be as investors reach and reach and reach for yield.  Interest rates should be used to price risk, today the risk-pricing mechanism hasn’t simply collapsed, it’s toxic.

Ally Pain, Ally Financial Inc.

“As you’ve heard from many lenders, we’re closely watching the environment, and we’ve seen some more noticeable shifts recently…

Consumer losses have also been drifting higher, and most notably in lower credit tiers. You’ve heard back from others as well. We have seen some additional deterioration in the first quarter, and we believe that the delayed tax refunds may have had an impact here.”

Jeffery Brown, Ally Financial CEO, March 21, 2017

U.S. Credit Card Delinquencies

2016: +9%
2015: -9%
2014: -15%
2013: -21%
2012: -30%
2011: -38%
2010: -11%
2009: +38%
2008: +30%
2007: +6%

Four quarter, rolling % change

Thomson Reuters Data

Nearly $1.3T of Subprime Debt in the USA

Here’s the Breakdown

File_001 (97)We’ve come full circle since “A Colossal Failure of Common Sense” (our 2009-10 global best selling book, now published in 12 languages).   Over the last 100 years, after each financial crisis there’s a spectacular metamorphosis.   It’s a transformation into another serpent, another beast and it’s powerfully depicted above.   The mortgage market has “found religion,” only 6.8% of financing for new homes is subprime.  Flowing down hill (thanks to Central Banks – Ben and Janet), the water has simply found its way to another location.  Nearly nine years after Lehman’s failure, we’re seeing a substantial increase in risky lending in places like student loans, credit card and auto loans. 

Q4 Data, U.S. Credit Card Charge-off Quarterly 

2016: $8.5B
2015: $6.6B
2014: $6.5B
2013: $6.9B
2012: $7.8B

Fitch, Fed data

Once again, credit card delinquencies should NOT be going up with the economy at full employment.  Any first year economist out of college can tell you that, BUT they are.  At some point when the Fed’s easy money policy reaches the saturation level in the economy, even with a decent jobs market, credit quality deteriorates.  This is clearly happening now in our view.

Defaults on Student Loans

2016: 4.2m
2015: 3.6m
2014: 2.9m

Roughly 1.1. million borrowers entered default on their Direct Loans, a type of federal student loan, last year, about the same as the previous year, according to an analysis of publicly available government student loan data by Rohit Chopra, a senior fellow at the Consumer Federal of America, a network of more than 250 nonprofit consumer groups. Overall, there were 4.2 million borrowers in default in 2016, up 17% from 3.6 million the year before, as some borrowers exited default while others remained in the red. – Marketwatch data

Non-Housing U.S. Consumer Debt Load*

2017: $3.8T
2007: $2.5T

*Auto, credit card, student loans, other

NY Fed, Equifax Data

From Our Friend Chris Whalen

An early voice heading into the 2008 credit crisis, Chris Whalen is a man to listen to.  He’s one of the best bank credit analysts from Wall St.  We recap a section of his blog “Citigroup: Canary in the Coal Mine” below.

Credit Divergence: Citi vs JP Morgan

CDS Citi Divergence

“Even today, the relatively elevated credit profile of Citi’s customer base is reflected in a gross loan charge-off profile that at 126bp at the end of 2016 is more than a standard deviation higher than the average for the large bank peer group.  Loss given default (LGD) for Citi is almost 80%, again far higher than large cap asset peers like JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC). Indeed, Citi in credit terms is really more comparable to below-prime lenders such as CapitalOne (NYSE:COF) and HSBC (NYSE:HSBC).   The 126bp of default reported by Citi in 2016 maps out to roughly a “BB” credit profile for its portfolio, again reflecting a deliberate business model choice that has selected a below-prime business as the bank’s model.  COF, by comparison, reported 265bp of gross defaults at year-end 2016, roughly a “B” credit profile.  COF’s loan loss rate is more than three standard deviations above the large bank peer group with an LGD of 77%, according to the TBS Bank Monitor.  Of note, COF showed a risk-adjusted return on capital of just 1.6% at year end ‘16 while Citi reported a RAROC of 3.8%. Since the nominal cost of capital for most large banks is well into double digits, you may be wondering why these banks are still here.  Indeed, most large banks don’t earn their cost of capital, either in nominal or risk adjusted terms.  But it is only when you look at these banks based on RAROC that you understand that the big zombie banks are perennial value destroyers. Smaller regional and community banks, by comparison, routinely earn double digit real, risk-adjusted returns on capital.”

From our friend Chris Whalen

Back to Auto Loans, Prime Starting to Creep Higher

File_000 (156)

The final stage of credit deterioration’s saturation point is found in the shift over to “prime” or high quality borrowers.



Consumer Confidence in Trump Fiscal Plan Soars

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday at 3:05pm ET

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Consumer Confidence in March rose to 125.6 vs. 116.1 prior Month

– Forecast range 110.0 to 118.0 from 69 estimates.
– Present situation confidence rose to 143.1 vs. 134.4 last month.
– Consumer confidence expectations rose to 113.8 vs. 103.9 last month.

Why are Consumers So Confident?

CC newWe’ve heard so much about record low approval rating for the Trump White House, but Consumers are singing a different tune.

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here


Tax Reform and Sky High Market Expectations, Why Should You Care?

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday at 3:05pm ET

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Blog Updated, Monday March 27, 2017 at 7:50am ET

Minutes after their hopes of undoing Obamacare unraveled, the White House and top Republicans shouted from the rooftops (in careful coordination); they’re moving on to another ambitious goal — overhauling the U.S. tax code for the first time since 1986.

S&P Futures Sunday Night, March 26, 2017

S&P Fut new

The S&P futures ES1 opened down at 2331.75, just through last week’s low.  Look for the bulls to defend this level overnight as the White House shifts gears on fiscal policy initiatives. 

“We will probably start going very, very strongly for the big tax cuts and tax reform, That will be next.”

President Donald Trump, after the House bill was pulled from a scheduled floor vote on Friday, March 25, 2017

Stocks in the U.S. suffered their worst week since the November election of Donald Trump.  Investors turned to bonds as U.S. Treasuries rallied for the second week.

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Wall St. was All Beared Up on Bonds Heading into 2017

Bonds Election

Since early March, the S&P 500 is off 2.6% while bonds are nearly 4% higher in recent weeks.  Coming into 2017, the policy execution bar was too high for the White House, equity markets are starting to price in a reality check on expectations.  After the monster bond rally, the yield on the U.S. 10 year Treasury bond is down near 2.37%, while Wall St’s year end yield target is 3.25%.

Near Record U.S. Treasury Shorts

CFTC Shorts

They’re piling out of U.S. Treasury shorts this morning as the “reflation trade” unwinds in a big way. 

Since December 15, 2016

Gold Miners $GDX +21.2%
Mexican Equities $EWW: +16.1%
Emerging Markets $EEM: +13.1%
Dow Jones Utilities: +11.1%
S&P Consumer Staples $XLP: +8.8%
Nasdaq 100 $QQQ: +8.2%
Long Term Zero Coupon Bonds: +6.1%
Long Term Treasury Bonds: +4.5%
S&P 500 $SPY: +2.5%
Financials $XLF: +0.5%*
Russell 2000 $IWM: -2.1%*
Regional Banks $KRE: -4.5%*

Dow Jones Transports: -4.8%
Oil Producers $XLE -12.1%

Bloomberg data

*Consensus Wall St’s “Overweight” Sectors for 2017’s Reflation Trade

Year after year we witness the same story.  Wall St. crowds their clients into glorious theme trades.  Each year, the road less traveled captures the honey pot.  When you hear a heavily bought in consensus from this mob, run – don’t walk – the other way.   Nearly all of Wall St’s “overweight” sectors for 2017 are underperforming this year.  The much heralded “reflation trade” has been put on hold as markets rethink the upside of Washington policy’s impact. 

U.S. 10s Touch 2.37%, Sunday March 26, 2017

10s new 15U.S. 10 year Treasury yield is through its hundred day moving average (see the green line above), the first time since October 4, 2016. 

Fed Rate Hikes?

Futures Market Probability

Rate Hike In?

June: 51%
September: 114%
December: 155%
Fed Dots: Two More Hikes in 2017

The futures markets are currently pricing in 50% probability of a move by June, 115% probability of a move by September, and 155% probability of a move by the end of the year.   A look at the Fed’s “Dots” (Fed governors public forecasts for interest rate direction) are currently projecting two additional moves this year, 31% more than what’s currently priced in.

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Q1 Returns of the iShares 20+ Year Treasury Bond $TLT ETF*

2017: +5.2%
2016: +13.5%
2015: +12.8%
2014: +7.3%

*from the December low to the Q1 high.

It’s nothing short of pure comedy, Wall St’s been the gang that can’t shoot straight on bonds year after year.  Each December, they’ve obnoxiously lectured investors about reasons to get out of bonds.  They come up with pathetic themes to corral the masses; the “great rotation,” the “reflation trade” and “life after liftoff” focused on Fed policy and “higher interest rates.”   This year it was Trump’s growth agenda, wrong again.  Every year it’s been a different excuse to get out of fixed income securities.  But so far in 2017, bonds, utilities, and defensive stocks have been the place to be.

Euro’s Dominance in 2017, Came After a Pan from Wall St.

Euro vs bbdxyWall St. was confident in December, they argued the ECB is in the middle of a $2.5T asset purchase program, while the Fed is hiking rates 3-4x, stay long the dollar.  Wrong again.  The dollar is at the same level is was during the week of the election of President Trump, it has given back all its gains.

We’re Hosting a Policy Call for Clients

Join Our Team in Washington, ACG Analytics and the Bear Traps Report will host a policy call on Monday, March 27, 2017 at 10:00am ET.

Implications of ACA Healthcare: Repeal Failure on the Trump Agenda:  Our team will analyze what the future holds for Healthcare and Tax Reform and how competing interests in the GOP will affect the legislative environment of Trump’s first term.

Join us here:

There’s a Colossal Tax Reform Earnings’ Premium Built into the S&P 500

S&P new

Some Wall St. analysts say corporate tax reform is now a happy meal not a big mac.  In other words, only a much smaller plan will be able to get through Congress now as revenue neutral ambitions are far more challenging.  As Washington policy execution stumbles, there’s an uneasy feeling creeping through in markets.  The hole just got deeper, now up to $2T with the border adjustment tax BAT in trouble & ACHA savings gone.  Bottom line, without key tax revenue offsets we’re looking at a corporate tax cut near 30-28%, not 20-15%.

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

“There is a disconnect between the Trump stimulus execution risk and how far we’ve come in terms of expectations. An actual fiscal boost is more than 12 months away in reality, Obamacare took well over 300 days to land on the President’s desk while the Dems controlled the House, Senate and the White House. As much as well all want to believe Mr. Gridlock is dead, he’s still breathing.  As we head into 2017, gold miners, consumer staples, bonds and utilities are our favorite options as the street has unanimously bought into the crowded ‘reflation trade’ narrative.”

The Bear Traps Report, January 8, 2017

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

The Road Ahead

Tax reform legislation climbs a far different mountain than the health bill. In December, we recommended clients overweight U.S. Treasuries, Utilities and Consumer Staples with a focus on “the high probability of political fumbles in Washington.”

Wall St. is Heavily Bought in to Tax Reform’s Success

We noted in December in our Bear Traps Reports, the difficulty congressional Republicans have had in reaching consensus on the health legislation can very easily lead to a pullback from their lofty ambitions on tax reform. Bottom line: the more extreme reform ingredients of the House Republican plan on tax reform are more at risk today.   Hot topics like the border adjustment and interest expense provisions that make up the destination based cash flow tax (DBCFT), will have far more uphill battle passing in an environment where near-unanimous support in the Senate will be necessary.

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Expectations from Wall St., Numbers You Need to Know
Tax Reform = S&P Earnings Boost Corp*
Earnings Premium: New Corporate Tax Bracket vs Earnings Addition to S&P 500 from Tax Reform

32% v 0% (earnings boost)

30% v +3.5% (earnings boost)

25% v +6.5% (earnings boost)

20% v +9.5% (earnings boost)

15% v +12.5% (earnings boost)

Bear Traps Report Data

*This is on top of the Street’s assumed 14% earnings growth based on economic, stock buy back and dividend payout forecasts.

S&P 500 Earnings

2017: $142*
2016: $116**

*Street’s forecast including successful tax reform
**Actual latest year (trailing four quarters to December 2016) GAAP earnings was $95.35,  latest year “operating” earnings (removes “unusual” items) was $106.45 per Bear Traps and Bloomberg.

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

S&P 500 Twelve Month Forward Earnings Per Share Estimate

2017: $134.50
2016: $126.75
2015: $129.90
2014: $131.20

The forward 12-month P/E ratio for the S&P 500 is 17.5. This P/E ratio is based on Wednesday’s closing price (2348.45) and forward 12-month EPS estimate ($134.50).  Of the 111 companies that have issued EPS guidance for the first quarter of 2017, 79 have issued negative EPS guidance and 32 have issued positive EPS guidance.- Factset

As you can see, there’s 200-250 S&P handles tied to tax reform’s MEANINGFUL success.  Without the “expected” earning growth from tax reform, the current 18 PE on the S&P is far higher, well above 20 in our view.

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Wall St’s S&P 500 Targets for 2017

Best Case with Full Fiscal Policy Option: 2810*
Base Case with Partial Fiscal Policy Option: 2510
Worst Case with No Fiscal Policy Execution: 2090**
S&P 500 Today: 2343

We went through 12 different research reports from Wall St’s analysts, these are their best and worst case fiscal policy scenarios.

**Assumes no fiscal policy action (tax reform, repatriation, infrastructure) and a reversion to the mean in near record high CEO, small business and consumer confidence.

*Assumes full fiscal policy execution over the next 12 months (tax reform, repatriation, infrastructure, deregulation).

S&P 500 Sales Growth

2012-2016: 1.9%
2003-2007: 7.5%
1995-1999: 7.2%

Factset, Barclays

On the positive side, you can see why markets are so pumped up on Trump.  Sales growth found while looking at S&P 500 companies only grew at 1.9% during the mature years of the Obama economic recovery.  This data is well below normal levels and speaks to substantial upside if “animal spirits” are fully embraced in the years to come.

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here


Deal or No Deal on Health Care

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here


House leaders delayed a scheduled vote on their embattled health-care bill as conservatives mulled a deal proposed by the Trump administration aimed at winning Republican holdouts’ support.

The House had been planning to hold a vote Thursday, but a senior GOP aide says that will be delayed. A Republican leadership notice said that votes are now possible Friday. – Bloomberg




White House spokesperson and implies vote still scheduled for tonight.   There’s some doubt if the vote is still on since there’s still no deal with Freedom Caucus.

S&P 500


Markets were optimistic today’s discussions between the OMB Director and the head of the Freedom Caucus re: eliminating essential health benefit requirement under Obamacare would corral the necessary Freedom Caucus votes. But GOP moderates are beginning to defect now amid the uncertainty in what final healthcare coverage that produces.  As moderates ultimately fall in line, the GOP still needs the entire Freedom Caucus.  This put pressure on the White House to make a final offer.  The GOP cannot afford to take this bill too far to the right, that will just kill its chances in the Senate.


Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here




The ‘crash protection’ index is sending a warning flare for the market — or not

The chart of an obscure index is making its way around Wall Street. And some say that its recent surge suggests that traders are now more interested in protecting their portfolios from serious downside.

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

That would be the CBOE skew index , which is near all-time levels. As the CBOE puts it, the index “measures the perceived tail risk of S&P 500 log returns at a 30-day horizon.” In other words, it represents an attempt to use options prices in order to determine the market-implied probability of a crash.

“We’re at very significant levels” on the index, strategist Larry McDonald (THE BEAR TRAPS REPORT founder and editor) said on Monday March 20, 2017 – CNBC’s ” Trading Nation .” In a blog post, he wrote that the main reason for the index’s high level is that “Too many market participants don’t trust the rally, [so] want to buy [longshot] downside protection.”




Some have gone even further, suggesting that the chart shows investors are becoming more nervous about crashes, and that people are paying more to protect themselves against a “black swan” event that could be just over the horizon.

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Yet this thrilling story becomes a bit more prosaic once the skew index is brought under the microscope.

The CBOE volatility index , or the VIX, has remained at notably low levels all year. This indicates that options traders remain confident that the S&P will not move too much.

Meanwhile, since it only measures the relative prices of options, the CBOE skew index “has a big bias to when absolute levels of implied volatility are uncommonly low,” Jake Weinig, founding partner of options-focused hedge fund Malachite Capital, said Monday on CNBC’s ” Trading Nation .”

In fact, far from crash protection becoming more expensive, “tail puts are actually near their cheapest levels in the history,” Pravit Chintawongvanich of Macro Risk Advisors wrote in a derivatives strategy note Tuesday.

The skew index is accurately showing that these long-shot puts have become more expensive relative to ordinary puts and calls, but “that is missing the forest for the trees,” Chintawongvanich added.

Since it actually measures something exceptionally narrow, “I don’t read into this index too much,” Weinig said. The index “certainly is meant to drive fear, but [its high level] can probably be explained by banks buying protection to protect against balance-sheet costs, or different type of relief like that,” he added.

That is to say, the skew index may merely be picking up the fact that certain parties retain a willingness to buy crash-protection options — no matter how unlikely it may be that they ever pay off

(Special thanks to Alex Rosenberg – CNBC, click here for his post)

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here


SKEW Surge, What Does It Mean?

Join our Larry McDonald on CNBC’s Trading Nation, today at 3:05pm ET

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

CBOE SKEW is the most significant since just before Brexit, clients this weekend we’re talking up this development and its implications.


Realized vol 10-11 (cheap)
Out of the Money vol 22-24 (far more expensive)

Skew RichThe Skew index as a measure of the slope of the implied volatility curve is as much a function of low implied volatility as it is a demand for cheap downside hedges given the low absolute premium.  Note from attached chart over the last 15 months, SKEW index spikes (above) have tended to occur at interim market pull backs.

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Reasons for High SKEW today in the Market?

1. Too many market participants don’t trust the rally, want to buy out of the $ downside protection.

2. Too many have missed the rally, doubling down on downside protection.

3. Some are worried about a breakthrough in Washington, a deal on tax reform and health care, buying out of $ upside for a monster breakout.

4. Geopolitical Risk:  North Korea vs Rex Tillerson, U.S. Secretary of State.

Saber rattling this weekend and Friday. Some investors are worried about a US / Japan attack on N Korea.

5. Quarter End (Q1) a week from Friday:  Investors trying to protect gains, they’re buying out of $ downside protection.  U.S. equities are extremely rich to fundamentals, tooooo much riding on perfect Trump policy execution in Washington.

CBOE SKEW Index is a global, strike independent measure of the slope of the implied volatility curve that increases as this curve tends to steepen. The index is calculated from the price of a tradable portfolio of out-of-the money S&P 500 options, similar to the VIX Index.  – Bloomberg

Pick up our latest note here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here


Inflation? U Michigan Data Hits All Time Low

Join our Larry McDonald on CNBC’s Trading Nation, this Wednesday at 2:20pm

Join us here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

U.S. Treasuries rallied in a big way this week.  Today, data for March point to very tame inflation.  Bond bulls argue the Federal Reserve could target for a even slower pace of interest rate hikes this year than it had forecast on Wednesday.

U.S. 30-year and 10-year Treasury yields, which benefit from low inflation since reduced purchasing power erodes their interest payouts, fell about two basis points after preliminary University of Michigan data showing low inflation in early March. – Reuters

“In December, half of FOMC participants started to factor in fiscal policy economic growth conditions into their 2017 and 2018 outlook.  With the Obamacare Repeal and Replacement legislation of life support, the stalled growth engines in Washington are piling up.  The execution bar has rarely been higher for D.C. politicians to come together and pass their much heralded agenda.  To us, the probability of caution coming out of the FOMC is surging.  We think they walk back their fiscal policy assumptions for 2017-18.  Bottom line: heading into the Fed meeting we are long duration – U.S. Treasury bulls through the TLT ETF and long gold miners through the GDX ETF. ”
The Bear Traps Report, Morning Note of March 15, 2017

Join us here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Looking at this week’s Fed meeting, changes to economic forecast were very minor from their December gathering.  This was was our view expressed to clients earlier this week.  Some on the Street were looking for an uptick in the Fed’s near term inflation projections.  The firm / specific statement that their inflation target is symmetric took the street by surprise.  Too many market participants were bought into inflation fears.  The Fed statement was modified to say that the committee looks for “sustained” return to 2% inflation.  In other words, no concern of an overshoot.

Inflation in Free Fall, a Bond’s Best Friend

umich 5-10 yr inflation expectationsThe very soft University of Michigan 5-10 year inflation expectations gave long term bonds a bid today. Number came in at 2.2% for March vs 2.5% from February.  It’s now at the lowest level since the recording began. While this survey data point does not have the biggest sample size, it does speak to longer term inflationary pressures being overstated.

Join us here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here