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Updated March 14, 2017

Positioning in High Yield, Net % Overweight Longs

2017: -12%
2016: +17%
2015: +28%
2014: +41%
2013: +36%
2012: +43%
2011: +9%
2010: +22%
2009:  -17%
2008: -28%
2007: -10%

Merrill Survey data, March 2017

Our institutional clients are growing far more concerned with the insanity in the junk bond market.  There’s a lot of crummy coupons on crummier credits.  As credit quality moves down yields should move higher, this has not been the case over the last year.   High yield is starting to show real signs of a crack in the foundation, for the first time since 2009 long – overweight positioning is negative.  This is one of our 21 Lehman Systemic Risk Indicators, click here for more:

Oil’s Pain is High Yield’s

Over the last week, junk bond funds posted their biggest outflow this year as investors yanked more than $2 billion from BlackRock Inc.’s iShares iBoxx High Yield Corporate Bond ETF.

Companies issuing high yield debt now see their borrowing costs close to the obscene cheap levels observed just before the 2008 crisis.  We’re seeing asset managers are buying protection against losses, while junk-bond funds posted the biggest redemptions since November.

Junk is Rolling Over While Equities are Smiling

Cash high yield bonds traded very weak today as hedgers sprayed the street over the last hour of trading.  Both investment grade and high-yield debt moved wider (higher yield – lower bond prices) without much support.  Oil’s plunge kept many buyers on strike.  Likewise, there’s $19B of new high yield supply, banks are hedging their books in size.

In March, we’ve seen a divergence between high-yield bonds and equities, this speaks to trouble ahead.   As we witnessed in 2015 and 2016, credit (junk bonds) led stocks lower (weeks in advance).

Junk Omen

Markit CDX North America High Yield Index is composed of 100 non-investment grade entities.  The index is nearly 30bps wider this month, a move from 300bps to 330bps.  Average borrowing costs on the debt rose by the most in four months, according to Bloomberg index data.

Oil and Junk: Connect the Dots

Large shale companies announce substantial increases in  (capex) spending for this year, and the U.S. government says domestic oil output next year will surpass the record high set in 1970. OPEC ministers have said they are keeping a close watch on shale production to decide in late May whether to extend their oil-supply cuts into the second half of the year.  U.S. shale is MASSIVELY levered to oil.  Their colossal debt load keeps them pumping out supply, placing a ceiling on prices.

U.S. Oil Production*

2017: 9.1m
2016: 8.2m
2015: 9.6m
2014: 8.5m
2013: 7.1m
2012: 5.5m

*High yield bonds, syndicated loans sold to fund this binge? $3T!!

BIS Data

Oil prices plunged 5 percent on Wednesday to their lowest level this year, falling just above $50 a barrel, on investor concerns about unbridled growth in America’s shale basins swelling U.S. inventories.

With the S&P 500 relatively steady in the last week, the HYG high-yield bond ETF (below) has taken a leg lower, this is a ominous sign for market pros.

In 2017, the S&P 500 is up 6% while the HYG iShares iBoxx $ High Yield Corporate Bond ETF has wiped out nearly all its gains, a strong divergence indeed. 

Moody’s: North American High-Yield Bond Covenant Quality, on the Lows

One of our 21 Lehman Systemic Risk Indicators is found in junk bond covenant quality.   As we wrote in our New York Times bestseller, froth in the credit markets is the ultimate signal of a coming risk off.  We measure froth by covenant quality analysis.   Let us explain.

When the Fed keeps interest rates too low for to long, investors begin to cheat and reach for yield.  The distant pain of the credit crisis is almost forgotten.  Like a bad relationship in years past, after the healing it’s time to love again 🙂

The same is true bond covenants,  the weaker the terms the more power CFOs (issuers / companies) have over investors.  By our measure, they’ve NEVER had more power than today.

A true moral hazard, as credit quality has deteriorated in swift fashion, buyers keep up demand for crummy coupons on crummy credits.  Moody’s new report indicates the average covenant quality is down at 4.28 in the last six months of 2016.  Moody’s measures bond covenant quality on a five-point scale, with 1.0 denoting the strongest investor protections and 5.0, the weakest.

Investor protections remained at their weakest level, with the cumulative average covenant quality score hitting 4.00 for the first time in December.  One word, UGLY.

In a desperate reach for yield, investors were more willing to purchase bonds rated B1 and below.  As a result, bonds rated single B and Caa/Ca made up a larger percentage of total issuance.

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

New Issues Strong

Five more issuers for $2.8b were placed on the calendar today.  Eight deals for $4.7b to price later today, making it the second busiest day for issuance since June.

A sudden and sharp shift by the Fed from no likely hike in rates until May of this year to a near-certain hike this month, gave a big and expected push to new issuance.

Market expectation of a likely rate hike moved from 32% on Feb 1 to 94% end of last week, causing issuers to expedite their refinancing plans.

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

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

A weekend filled with HIGH drama in Asia and Washington has S&P 500 futures off 10 handles in the first few hours of this week’s trading session.   We essentially have civil war breaking out inside the Executive Branch of the United States government.

“A phrase I keep hearing from Trump ally after Trump ally: “deep state.” Growing belief inside White House that elements of their own Intelligence Community are aligned against them.”

Robert Costa, Washington Post

Headlines Over the Weekend

FBI asked Justice Department to refute Trump’s wiretapping claim – CNN / NYT

Mark Levin on Trump Wiretapping Claims on Obama: ‘The Evidence Is Overwhelming’ – Brietbart

Trump angry and frustrated at staff over DOJ Head Sessions fallout – CNN

Obama faces Congressional Inquiry. Congress to probe Donald Trump’s explosive claims Barack Obama wiretapped him – Drudge

Geraldo: Obama operatives planted landmines for Trump – FOX

S&P 500 Futures – ES1

After the weekend punches thrown in Washington, the S&P has violated its one month trend line.  Today, our friend Niall Ferguson noted in The Sunday Times:

“The House Republicans have a 200-day plan as follows.  First, regulatory reform, including repeal of the Dodd-Frank banking act and deregulation of the energy sector. Second, the repeal of Obamacare and its replacement with a more competitive market-based system. Third, comprehensive tax reform, including lower rates on personal and corporate income tax, a new border adjustment tax (BAT) and abolition of the inheritance tax.”

U.S. equities are up on a ledge on hopes of an aggressive 200 day agenda, this weekend’s ugliness in Washington throws a money wrench into those plans.  Distractions are high, toxic relations between Dems and Rs higher.

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

Asia Risk Off

Stocks in Tokyo and Seoul fell and the yen strengthened after a North Korea missile launch, while investors also weighed messages from China’s National People’s Congress and Federal Reserve Chair Janet Yellen.

Dollar Yen, Risk On Takes a Break

Many market participants look at dollar yen as the ultimate expression of a “risk on” or “off” mood.  A stronger yen has a lot to do with the current flight to quality and political risks on the rise.

U.S. stock futures were also lower on geopolitical risk surging in Asia.  Prime Minister Shinzo Abe said the government will hold a National Security Council meeting today after North Korea fired four ballistic missiles. The move comes as South Korea and the U.S. undertake annual military drills that Pyongyang has called a prelude to an invasion. Tensions have been rising over North Korea, which also conducted a missile test during Abe’s state visit to the U.S. last month and is suspected of being behind the assassination of its leader’s half brother in Malaysia. – Bloomberg

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

“There’s nothing in this world, which will so violently distort a man’s judgement more than a sight of his neighbor getting rich. ”

J.P. Morgan, 1907

Important Headlines Last Week
*YELLEN: MARCH HIKE APPROPRIATE IF ECONOMY EVOLVES AS EXPECTED

*DUDLEY: CASE FOR TIGHTENING HAS BECOME A LOT MORE
COMPELLING

Gold Miners, a Rates Trade

In recent years, many gold bugs still haven’t figured out trading gold and the miners has become far more of an (interest) rates rather than a inflation trade.

Let Us Explain

Heading into the last two Federal Reserve rate hikes (December 2015 and 2016), each time the gold miners $GDX lost 43% in the six months preceding the rare FOMC action.  Many of gold’s loyalists have been sucked into losing investments by focusing on deficits and money printing as gold’s chief price influencer.   They didn’t get the joke.  It’s been all about interest rates and negative yielding bonds, but is this all about to change?

Global Government Bonds with Negative Yields vs. Gold

2017 March:  $9.3T vs. $1234
2016 December: $7.8T vs. $1125
2016 October: $9.6T vs. $1265
2016 September: $12.4T vs. $1350
2016 July: $13.8T vs. $1375
2015: $1.4T
2014: $175B
2013: $0
2012: $0
2011: $0
2010: $0

Bear Traps Report and Bloomberg data

If we gave you one billion dollars would you put it in a negative yielding German government bond or 0% gold, both offer similar liquidly.   Bottom Line: as you can see above, the amount of negative yielding bonds on earth has been the KEY driver of gold prices in recent years.  So much of gold’s price action has been tied to interest rates and anticipating Fed policy from Janet Yellen and Company.

Our Sell Call to Clients from Early February:

“Last week, the Fed statement was very dovish relative to expectations, now it’s likely the governors on the Fedspeaking (coming speeches from Fed) tour will come out on the hawkish (point to a March rate hike) side in the near term.  Positioning the gold miners is a rates trade, very similar to Eurodollars.  As we’ve stressed in recent years, the Fed “shows it to you and then they take it away.”  This is classic Lucy and the football behavior from the FOMC, we’ve seen this show so many times. Likewise, as we move through the middle innings of the Trump reflation trade unwind, the risk – reward in owning the gold miners has become less attractive, it’s time to SELL our Gold Miners $GDX.”

The Bear Traps Report, February 7, 2017

Where’s the Trade?  Join us here:

The Federal Reserve has been Gold’s Biggest Driver, NOT Deficits

Gold is off 2.4% its recent highs, while the miners ($GDX) are 15% lower since their February 8th high, that’s a profound underperformance.  As you can see above, in the months and weeks before that only two rate hikes in the last 11 years, the gold miners $GDX plunged an average of 43% each time.  Now, what about the next rate hike from the FOMC?

Fed Fund Furfures for a March 2017 Rate Hike vs. the Gold Miners $GDX

Today: 94% vs. $22.20
One Week Ago: 40% vs. $23.17
Three Weeks Ago: 26% vs. $25.71

Bloomberg data

Recent speeches from Fed governors have driven rate hike expectations MUCH higher for a hike this month, but this time the gold miners are only off 15%, not 40% +?

What’s Going on Here?

There’s no question in mind, gold’s price driver eventually will shift from FOMC interest rates policy and negative yielding bonds globally back over to inflation expectations.  Getting the timing right on this future development will present us with a colossal trading opportunity.  Click on the link below and join us. 

Where’s the Trade?  Join us here:

The Fed Funds Rate and Financial Crisis’ Evolution

FOMC Policy 1970-2017

As you can see above, since 1970 Federal Reserve accommodation has grown both in scale and duration ahead of each financial crisis.  More disturbing facts lie in the explosion of destructive power found in the last three global wrecking balls, as the financial panics have become far more deadly.  As the next Lehman moment comes at us, the opportunity will be found in gold and the miners.

Where’s the Trade?  Join us here:

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

Latest Polls: Monday, March 6, 2017

Macron vs Le Pen second round -> now at 60/40, lowest percentage for Macron since Feb 23rd, and down from 63% last Thursday.

Fillon vs Le Pen 44%, Fillon 56%. Lowest percentage of the past month (recorded also on Feb 20th)

On the Run

“Trump 2.0 in France?  National Front leader Le Pen is hostile to free trade, rejects open borders, and says globalization is destroying France.”

60Minutes

The political establishment is on the run globally, after losses in the U.K. (Brexit) and the U.S. (Trump) – they’re digging deep into the dirt, using the judicial system in France to try and influence the presidential election.   There are so many investment opportunities baked in the analysis of this process.  The politically induced swings in financial markets HAVE NEVER been greater.

Le Figaro Poll, from March 5, 2017

*POLL SHOWS MACRON 1ST-ROUND SUPPORT AT 25%, LE PEN AT 26%
*POLL SHOWS LE PEN WOULD GET 27% OF SUPPORT IF JUPPE CANDIDATE
*POLL SHOWS FILLON 1ST-ROUND SUPPORT DOWN AT 17%
*POLL SHOWS MACRON WOULD GET 20% OF SUPPORT IF JUPPE CANDIDATE
*POLL SHOWS JUPPE WOULD GET 24.5% SUPPORT IF CANDIDATE
*FILLON SAYS HE’S STAYING IN FRENCH PRESIDENTIAL RACE

LE FIGARO POLL

The establishment media is your best friend in the financial arena, they are consistently underselling the global tsunami that swept Trump and Brexit into power.  Time after time, trades are mispriced in the market as participants have trusted BOGUS polling data.

Elections: The Road Ahead in France, Netherlands, Germany and Italy

The once promising presidential bid of French conservative Francois Fillon, already seriously weakened by pending (politically triggered) corruption charges, was “coming apart Friday” with the resignation of his campaign director and his campaign spokesman, adding momentum to a stream of defections and panicking his party.

Fillon appeared increasingly alone with the resignation of two key officials, and other high-profile supporters following them out. But he did not balk.   Minister Alain Juppe again was being mentioned as a potential Plan B for The Republicans party, which could find itself without a candidate as the April 23 first round of the presidential election nears. A runoff between the top two candidates is May 7. Juppe had refused filling in for Fillon in the past. – AP

French Election 2017

Odds Juppe’s success are on the rise.  France is looking more like Venezuela by the day.  Using the judicial system to eliminate political opponents is a rusty sword used in banana republics, now it’s moving to the developed  world, how pathetic, how sad.   The media is telling us the Fillon candidacy is apparently doomed (indictment scheduled for March 15), the runner up for center right party, Alain Juppe, possibly could his place. This would put Juppe vs Macron (Center left) and Le Pen, who’s also engulfed in mini-scandal and if so, polls now tell us Juppe odds are surging (see above). Accordingly, we saw Le Pen odds declining and Euro currency rallying late Friday.  Fillon COULD drop out as early as this weekend and market participants don’t want to be short Euro into this possibility.  French Republican party will hold a political committee on Monday, instead of Tuesday, to review the case of its presidential candidate Francois Fillon, according to Agence France-Presse Saturday.  Senator and Fillon’s closest ally Bruno Retailleau says the meeting “has no importance,” on BFM TV.

Pick up our latest report here:

Political Risk in Europe Creating Divergence

We’re witnessing two powerful forces at work here.  On one hand surging political risk in France is a 10,000 pound lead weight on the Euro, creating a powerful divergence from gold above.  On the other, surging inflation risk in the Eurozone has political leaders scratching their heads looking at Mario Draghi’s ECB.  It’s either insanity or a trade war?  A near $85B a month of QE bond buying from the ECB with a Eurozone PMI up at 56, highest since 2011.  Really???  The ECB has a case of political addiction to EMERGENY central banking tools in an economy well above crisis levels. 

Lessons of 2011 and 2012

We must focus on Europe, the political risk calendar coming at us this Spring, Summer and Fall and filled with market moving events.

Eurozone Credit Risk Contagion, Leaking Over to U.S. Equities

Keep in mind, EU political triggers in the Spring / Summer of 2011 and 2012 took the S&P 500 down 20% and 11% respectively.

Trade ideas:

Netherlands

In the Netherlands, general elections are planned on March 15.   The leader is found in a Trump-like PVV party as populism’s surge rolls on.  They are on pace for nearly 35 MPs out of 150.  A right turn here after Brexit and Trump increases the chances a follow on in France.

Europe Bond Yields on the Rise, Political Risk or Inflation?

Focus is on the French presidential election with round one taking place on April 23 and the run-off on 7 May.  Uncertainty focused on in the spread of French sovereign bond-yields to German Bunds at the highest levels since 2012 (at 95bp as of March 3, up from 45bp in January 2017. 

Pick up our latest report here:

In another move toward the global populist revolution, far-right National Front candidate Marine Le Pen leads in polls of voting intentions for the first round (at 28-29% support) but similar to Trump last summer, lags her opponent independent candidate Emmanuel Macron in some opinion polls to date of the second round.
The significance of the French election mainly relates to the potential consequences of the surprise outcome of a Le Pen victory (betting markets currently ascribe a 36% probability to a Le Pen win). Le Pen has been highly critical of the Eurozone and the EU and advocates a ‘return to monetary sovereignty’ for France (including introducing a French currency), a referendum on EU membership and a range of anti-globalization and anti-immigration measures.

Inflation at 5 Year Highs in Europe

In the UK, the House of Lords last month took up proposed legislation for the UK government to trigger Article 50 to formally begin EU Brexit proceedings, which is planned before the end of March.   The ECB is buying $80 to $60B a month of government bonds with inflation expectations now at five year highs.  There’s growing concern in Frankfurt Germany, we think a taper is coming a lot faster than market expectations.

In Italy, the likelihood of early elections in 2017 appear to be receding, but the resignation of former PM Renzi as leader of the centre-left PD party highlights ongoing political uncertainties. Meanwhile, hopes for an early resolution of the current standoff between Greece, the IMF and Greece’s European creditors appear to be in vain, even though we expect an agreement over the second bailout to be reached in time for the Greek debt maturities in July 2017.

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

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

Heading for an ominous 2007 inverted U.S. Treasuries curve? Federal Reserve hiking rates to save face into secular headwinds?

Breaking: *US Treasury Bond 5Y-30Y CURVE FLATTENS, APPROACHES 2017 LOW, POST CRISIS LOWS – Bloomberg

If we’ve learned just one thing after 30 years on Wall street, Credit Markets Lead Equities.  The smart money is in the much larger credit (bond) markets, equities routinely follow, see below.

U.S. Treasury Bonds*

30 Year: 3.06%
5 Year: 2.05%

*Only 1% more yield for an extra 25 year investment, that’s one FLAT curve.

Spread Between 5 Year and 30 Year Bond Yields

Why should you care?  Since the year 1900 nearly every recession was proceeded by a very flat to inverted 5s – 30s curve.  This curve is the great recession indicator.   Notice how flat (inverted) this 5s-30s curve was just prior to the 2008-9 Lehman triggered, recession.  Equities couldn’t see the crisis coming but the long end of the Treasury curve did.  The U.S. Treasury curve should be steepening into an economic growth cycle, not flattening (as we are above). 

U.S. Treasury 5s – 30s Curve Prior to Recessions

Yield Spread between the 5 year and 30 Year Treasury Bond

2008-9:  15bps (October 2007)
2001-2: -58bps (April 2000)
1991-2: -10bps (May 1990)
1981-2:  -30bps (June 1980)

Ahead of every major recession since 1950 the 5s – 30s U.S. Treasury curve has flattened five to 20 months BEFORE the economic downturns.  Since 2011, the 5s – 30s yield spread has moved from 300bps to 100bps, fierce flattening.  During economic downturns U.S. Treasuries offer investors a flight to quality, the net result bond prices surge.  Heading into economic contractions bond buyers deploy cash on the long end (30 year bonds) of the yield curve.

Today, while the front end of the U.S. Treasury curve is in sell off mode, the long end is NOT.   Bond bulls have migrated out in colossal fashion into the 30 year bond meadow.  They’re hanging out there in size, it’s one large possy.

What’s Going On?

A perfect storm of divergence is taking place.  Amid “secular stagnation” and sustainable economic growth concerns, the Federal Reserve hiked interest rates only once in the last eight Obama years.  Today, they’re (the Fed, recent Speeches Dudley, Williams, Brainard) signaling their second hike since the election of President Donald Trump?  Why do they have so much confidence in the new President?  Long term U.S. Treasuries do NOT, they think reflation estimates are over done.

Fed Fund Furfures for a March Rate Hike

Today: 94%
One Week Ago: 40%
Three Weeks Ago: 26%

Bloomberg data

The Bottom Line?

Although the Fed is desperate to play catch up with rate hikes, the long end of the curve (long term bond buyers) are NOT sold on a sustainable path of rate hikes as well as the much hyped relation trade.  Stubborn secular forces are overpowering the Fed and Trump’s agenda for now.

There’s a deep hidden signal here, join us at the Bear Traps report, click on this link.

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

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

The yield spread on French bonds is accelerating over their German counterpart. As Socialist Party candidate Hamon deepens talks with far Left Melechon, the net winner is France’s anti-Euro skeptic Marie Le Pen.

First Round, French Presidential Election

LePen : 26%
Macron: 23%
Fillon: 19%
Hamon: 15%*
Mélenchon: 12%*

Ipsos

Political Risk Driving Markets

*Yield spread on French bonds accelerating over German (at 77bps, widest since Feb 8-). Socialist Party candidate Hamon deepens talks w far Left Melechon, net benefit to hard line Euro-skeptic Marie Le Pen.

Our Index of 27 Lehman Systemic Risk Indicators is on the rise, very similar to the spring of 2011.  Over the years with certainty we can say, credit leads equities.  Credit markets were stressed for weeks ahead of major drops in U.S. stocks in 2011, 2012, 2015 and 2016.

Lurking under the surface of European bond markets, capital is piling on bets that will reap large rewards if the risks in the euro zone surge substantially.

Investment Grade Bond Spreads

Europe v US

Feb 2017: +33bps
Feb 2016: -22bps

Bloomberg data

Investment grade bonds in Europe are DRAMATICLY under-performing their U.S. counterparts, even as the ECB has been buying bonds across the Eurozone.

Markets across the continent have started to price in the increased potential for anti-euro candidates to win elections in France and Italy. Recent positioning in German and French bonds are hedges against a blow-up in the risk of a breakup in the common currency,

Two Year France vs. German Bond Yields

We witnessed this in 2011-12 during the height of the Grexit contagion drama across the Eurozone’s periphery.  The front end of the German yield curve has outperformed over the past three weeks, with 6-month and two-year yields dropping 10-14 basis points, while open interest in two-year futures has jumped by more than 100,000 contracts, per Bloomberg data.

France vs. German Bond Yields 2012-2017

Over a 5 year perspective, French yields are still well contained, but the divergence from Germany is profound.

We have a full report going out today, pick it up here below:

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

“Congress — we’re all tied up in knots. The (Better Way) House Tax Reform plan won’t get 10 votes in the Senate.”

Senator Lindsey Graham, South Carolina, February 15, 2017

As we noted in our New York Times bestseller, “A Colossal Failure of Common Sense,” correlations within the S&P 500 nearly touched 1 (hit 94% in 2008, see below**) in those fateful days following Lehman Brothers’ collapse.

As fears surge in markets, stocks as well as different sectors start acting more and more and more like each other.   Think of a powerful black hole sucking up everything in its path, one by one even the highest quality names get pulled into the abyss.

As we look at the first sixty days of 2017,  we’re witnessing a massive re-pricing of risk.  It’s as if there is no risk.  Markets have moved past the long feared Brexit and U.S. election votes, they’re looking forward to lofty promises of tax cuts and deregulation.

Sector Rotation

Steady sector rotation has had a calm hand in pushing correlations lower in 2017.  Over the last sixty days, the well advertised Trump “reflation trade” brought billions into financials, consumer cyclicals and small caps stocks (out of utilities, consumer staples and large capitalization –  FANG -stocks).  It’s been an eerie perfect pass of the baton from monetary policy to hopes for fiscal follow through in Washington.

The data below is nothing short of stunning, current correlations are through the 2007 lows!

1. S&P 500 Sector Correlation

2017: 21%
2016: 67%
2015: 77%
2014: 55%
2013: 57%
2012: 68%
2011: 84%
2010: 74%
2009: 88%
2008: 94%**
2007: 28%
2006: 32%
2005: 51%
2004: 57%
2003: 68%
2002: 79%
2001: 82%
2000: 65%

Bear Traps Report, Bloomberg data

Sector correlation analysis is part of our 27 Lehman Systemic Risk Index of Indicators.  With certainty we can say, over the years sector correlations in the low 20s are HIGHLY unsustainable, a real warning sign to lighten up on exposure to equities.   Today, we’re well through the 2006-7 lows, an EXTREME level of equity market complacency.  No matter what the media tells you, since the Trump election fear just does not exist in financial markets.  Both sector and stock correlations are at all time lows.

2. Over the last year correlation plunged as complacency surged, we focused on EM vs DM below.

Emerging vs. Developed Market Correlation

Feb 2017: 28% (Dollar Index 100.90)
Feb 2016: 82% (Dollar Index 100.90)

Bear Traps Report, Bloomberg data

Remarkably, correlation between EMs and DMs has been extremely low relative to an elevated U.S. dollar DXY index.  Higher commodity prices, China’s controlled currency devaluation, as well as their 2016 stimulus plan have been supportive of lower correlations.

3. With Correlations Near Record Lows, Lets Look at Crowded Trades 

Commodity Futures Trading Commission

Net Speculative Bond Positions

2017: -$140B
2016: +5B
2015: -$26B
2014: -$40B
2013: +18B
2012: +$22B
2011: -$20B
2010: -5$B
2009: +$11B
2008: +$84B
2007: +$50B

CFTC data, 10 year equivalent, in billions

Will the last guy / gal getting into the reflation – short bond trade please close the door, there’s no room in here.  If you ask Wall St., you can’t find a bond bull.  Positioning is over the top bearish on bonds, one very crowded trade.

4. Wilshire 5000: Equity Mkt Cap to U.S. GDP
The Buffett Indicator

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

Pick Up our latest report here: