Lucy and the Football, Wall St. Faked Out Yet Again by the Fed

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

Pick up our latest report here:

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

Lucy and the Football

Heading into Fed meetings, each time public “Fedspeak” (governors on the speaking tour) raise the hawkish bar (expectations for a more aggressive policy path – rate hikes). In every instance, Wall Street gets drawn in, gold heads into capitulation. Next, the “dovish hike” (below sky-high expectations) triggers the gold rally. Rinse and Repeat.

Gold Miner’s $GDX Returns after Fed Rate Hikes

Mar 2018: +5% (so far)
Dec 2017: +17%
Jun 2017: +17%
Mar 2017: +18%
Dec 2016: +36%
Dec 2015: +136%

Bloomberg data

Hook, Line, and Sinker

Each and every time the Fed has hiked rates, their effort to signal the hike has been well over-cooked.  In an effort to provide transparency they’ve consistently oversold rate hikes.  Wall St. (sell-side economists) take the sales pitch hook, line, and sinker.  It’s “Lucy and the Football” over, and over and over again.  Heading into the Fed meetings, very consistently, the hawkish song (threats of pulling away accommodation)  from the Fed has punished gold, only to see a beautiful relief rally each time.

Managing and Measuring the Street’s Expectations is the Key

The Federal Reserve has been gold’s best friend. Heading into (rate hike) Fed meetings, each time the public “Fedspeak” (governors on the speaking tour) raises the hawkish bar (expectations for a more aggressive policy path – rate hikes). In every instance, the Wall Street gets drawn in, gold heads into capitulation. Next, the “dovish hike” (Fed delivering well below sky-high expectations) triggers the gold rally. Each round of expectations out of balance has led to higher gold (and gold miner’s) price action in the weeks after rate hikes.

Since last week’s Fed Meeting, the probability of a June rate hike has plunged, from 90% to near 73% – while gold has surged from $1307 to $1350. When you’re trading gold, you’re actually trading eurodollars, the Fed rate hike expectations curve.

Gold Silver Cross, Speaks to a Global Economic Recession

The divergence between the two means prices for gold are 82 times those of silver, which is 27% more than the 10-year average and the highest level in two years, data analyzed by WSJ Market Data Group show.  A higher gold-to-silver ratio is viewed by some investors as a negative economic indicator because money managers tend to favor gold when they think markets might turn rocky and discard silver when they are worried about slower global growth crimping consumption. Industrial uses account for about 55% of demand for silver, according to the Silver Institute, leading some traders to link it more with base metals like copper and others.

China Warning

The precious metals ratio last stayed above 80 in early 2016, when worries about a Chinese economic slowdown roiled markets, and in 2008 during the financial crisis. The ratio’s recent rise comes as speculators have turned bearish on silver and inventories in warehouses have risen, a sign there could be too much supply.

COT Data, Bullish

Our friend Jordan Roy Byrne notes net speculative positioning in Silver (against Open Interest) hit 1.7% this week, the lowest on record. To us, this is more than BULLISH.  Friday’s commitment of traders (COT) report showed speculators shifted aggressively net short, something NOT seen every day, and commercials are almost in balance, which is also unusual and bullish in our view.

MSCI World Equities vs. the Gold Silver Cross
This is a bit of a mindblower.  Over the last twenty plus years highs in the gold-silver cross (extremely weak silver pricing relative to gold) were met with bear markets in global equities.  Which makes a lot of sense, for decades silver has been a global economic bellwether.   In the 2017-18 global equities, paradigm stocks have climbed even as silver has dramatically cheapened.   To us this speaks to deleveraging in China, industrial metals are pricing in some pain, a lookout warning for the global economy (and equities).  Pick up our full report here.

 

Must Read from the WSJ on Silver, well done.

Pick up our latest report here:

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

Facebooktwitterrssyoutube

Oil Impact: President Trump and the Iran Deal, Countdown to Conflict

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

Pick up our latest report here:

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

“President Trump, by demanding on Friday that European allies agree to rewrite the Iran nuclear deal within 120 days or he will kill it, set himself a diplomatic challenge that would be formidable even for an administration with a deep bench of experienced negotiators.”

The New York Times, January 12, 2018

By now, most market participants know the abrupt “You’re Fired” Rex Tillerson (former U.S. Secretary of State) moment was driven by a conflict with the President over the Iran deal.

Countdown to May 12th

Brent is nearly 4% higher over the last week as Tillerson’s exit has put a bid under crude.  The perception across commodity trading desks is that the U.S. is far more likely to pull out of the agreement as early as May 12, the next deadline for the White House to extend the waiver on the sanctions.

The North Korea Connection to the Iran Deal

Some of our contacts in Washington doubt the Trump – Kim Jong-un meeting (North Korean leader Kim Jong-un) will actually happen.  They believe it’s a stunt by North Korea.  As the theory goes, NK’s Kim Jong-un wants to push talks out to mid-May when the next JCPOA (Joint Comprehensive Plan of Action – US Department of State) deadline is going down.  What a coincidence, that’s around the same time President Trump has threatened he will withdraw from the Iran Deal.  If the White House does pull the U.S. out, North Korea will fully pursue a nuclear program openly and justify it by claiming the U.S. can’t be trusted in international agreements.  The Trump Administration has said they want to meet before May which backs that up this line of thinking.

Large Upside for Crude if the U.S. Kills Iran Deal

Oil bulls have their minds on 2012.   As the U.S. launched touch sanctions with a bullseye focused on Iran’s oil industry.  Exports plunged by over one million barrels a day.  As we look toward the May 12 deadline on the Obama era Iran deal, a repeat of the drama six years ago would DOUBLE the expected supply deficit in the second half of this year.

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

Facebooktwitterrssyoutube

Why the Libor Spike Matters to Stocks and Profit Margins

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

Pick up our latest report here:

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

Four Rate Hikes Mr. Powell?

“We agree with the market’s hawkish assessment of Powell’s comments this week. At this point, we see roughly even odds that the median dot will show 3 hikes (2.125%) or 4 hikes (2.375%) for 2018 in March, and we think the median dot for 2019 is likely to move up from 2.7% to 2.875%.”

The Goldman Victory Lap, Feb 28, 2018

Three Month Libor

2018: 2.00%
2017: 1.05%
2016: 0.62%
2015: 0.28%
2014: 0.21%

Bloomberg data

Refinancing???  As your eyes are trained on the surging numbers above, think about the impact on corporate credit and profit margins.  With the total amount junk-rated “floating rate” corporate loans up near $2.3T to $2.4T, and a smelly pile of ($1.2T) BB or less rated paper, “Houston, we have a problem.”

The Fed is Sitting at the Banquet of their Consequences

The surge in three-month libor matters because the entire ecosystem of U.S. short-term corporate finance is being repriced.  The Street is finally waking up to credit risk tied to rising rates.  In recent months we’ve warned, at the current pace of spending in Washington – a year from now we’re looking at quarterly Treasury auctions in the neighborhood of $23B – $26B for long bonds vs. $13-$15B now.  But above all, we must keep our eye on short-term, adjustable rate corporate finance.

Pick up our latest report here:

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

Without the Easy Money Gravy Train, Central Banks create Victims. Exit Strategy?  Oh Really???

“The first casualty from the shortage of $ Libor funding looks like it may well be $DB Deutsche Bank. Libor-OIS spreads are blowing out, as is Libor spread over Fed Funds. A state bailout awaits at some point…”

Raoul Pal

Powell’s Shot Across the Bow

Powell was hawkish on Tuesday. He may continue in that vein today, but he also has the opportunity to temper his comments. President Trump has used the stock market as a measure of his performance. While the Fed is clearly independent, Powell will not want to be pointed to as the reason for a bear market. PCE is reported before his comments today. PCE, as well as employment (w/avg hourly earnings) next Friday, and CPI the following week will be important inputs in formulating expectations for the Fed path. With markets fully pricing in 3 moves this year, we will need a fourth dot to justify the pricing.

Our Associate Arthur Bass, Wedbush

HYG Flash Crash
iShares iBoxx $ High Yield Corporate Bond ETF

It’s very clear, there’s substantial single name (specific companies / large drawdowns) pressure within the high yield index HY CDX, the same applies to the HYG.  Financial conditions are tightening at the fastest pace since 2015, those who are swimming naked (most highly levered) are being taken out to the woodshed.

Short-term, Adjustable rate Corporate Finance

In recent years, CFO’s across America stuffed themselves on an easy money gravy train of Federal Reserve (enabled) sponsored cash.  It was an “all you can eat” buffet and one by one they sat down for supper.

“Ultimately, many years from now, we’ll all be seated at the banquet of our consequences.”

Robert Louis Stevenson

Pumped Up Profits Margins Come with a Price

With pressure to keep profits high, many corporate heads of finance made one of the same mistakes Lehman made, the classic “maturity mismatch.”  Borrowing in the short term, at floating rates is the cheapest form of financing there is – it pumps up profit margins.  But when you borrow short-term and lend/spend long, there’s a price to pay if interest rates spike.  Quite frankly, the refinancing cycle is less attractive than a weekend at Guantanamo Bay.  If the FOMC stays on course, a very expensive and financially destructive consequence awaits many CFOs around the corner.

Floating Junk

Total Floating Rate Junk Loans: $2.3-$2.4T*
*BB or less rates Portion: $1.2T
*B or less portion: $500B

Bloomberg, Barclays data

Interest Coverage Ratio Evaporation

In recent years, many investors have talked up the interest coverage ratio across corporate balance sheets as a form of group therapy.  “Oh, it’s ok.  Even though leverage is at record levels, interest coverage (companies’ ability to meet interest payments) is very healthy.”  If you heard this once, you heard it one thousand times.  Now, think about the power of $2.3T of floating rate – speculative grade – paper at cheap financing terms 2010-17.  By borrowing short term at adjustable rates, U.S. CFOs juiced profit margins to record levels in 2016, but at what consequence?  What happens when short-term interest rates surge?  Memories of subprime adjustable-rate mortgages and their impact on U.S. consumption?

Three Month Libor

As the spike in three-month libor marches higher – with an impact on adjustable rates in mind – Mr. Powell may re-think those four rate  hikes (for 2018) by the time the March 21st Fed meeting arrives.  At the current pace, a large portion of U.S. junk-rated companies will have a very challenging refinancing mountain to climb.

Interest Coverage Decay

If you’re looking at total debt over EBITDA, lower quality U.S. corporate debt issuers’ are levered 4.4 to 4.6x.  Yes, that’s up at 2007 nosebleed levels, look out.  Relax, it’s nap time on the Yoga pad, “interest coverage is fine.”  In recent years, ridiculously low rates placed interest coverage rations at a healthy 4.3x.  But wait.  What happens to that smelly $1T pile of  BB in rated floating rate loans when libor spikes?  In our view, interest coverage plunges below 3x on lower quality paper.  If Powell’s FOMC goes through with (Street’s expectations) hikes 3-4x rate hikes this year, we’re looking at a substantial surge in the default cycle.  The Fed likes to pretend they have an exit strategy, but if you do the math, they’ve buried themselves in a “moral hazard” abyss.

Pick up our latest report here:

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

Facebooktwitterrssyoutube