Pure Evil

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Price to Earnings, Debt to EBITDA, Price to Book; these are the values that used to drive stock market prices.

Not today…

Per the New York Fed

“We document large average excess returns on U.S. equities in anticipation of monetary policy decisions made at scheduled meetings of the Federal Open Market Committee (FOMC) in the past few decades. ”

Breaking: NY Fed Note

Get our latest report below on trading in and around central bank shenanigans:

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Recession Odds Surge to 55%

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Wall St. is finally waking up to recession risk.  The credit markets have been warning us since last November, but U.S. economists have been in deep denial.

What are plummeting interest rates saying about the outlook for the economy? The spread between the yield on 10-year U.S. Treasury notes and two-year notes is the narrowest since 2007. A model maintained by Deutsche Bank analyst Steven Zeng, who adjusts the spread for historically low short-term interest rates, suggests the yield curve is now signaling a 55 percent chance of a U.S. recession within the next 12 months. That marks the highest probability generated by the model so far in this expansion, and may be a cause for concern as Federal Reserve officials meet this week in Washington to discuss next steps for policy. – Bloomberg


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Stock Market Volatility, 3 Things You Need to Know

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Time To Sell Volatility

How We Look at the VIX, Chicago Board Options Exchange Volatility Index

“The Trade: We believe the risk – reward in getting long volatility is the most attractive since last November. We are buyers of the VXX ETN.”

The Bear Traps Report, May 31

On May 31st, we stressed to subscribers there’s value in buying volatility during holiday shorted weeks.  In recent years, we’ve witnessed a collapse in volatility during light volume trading weeks near holidays.  This is especially true in and around month end / quarter end.

Dramatic Shift in the VIX Futures Curve


Over the last 15 days, the VIX has surged from 13.12 to 22.15.  On May 31, we made the point to subscribers that volatility was mispriced relative to Brexit, China and U.S. election risks.

“When funds crowd together they buoy trades well past arguable fundamental valuation, next all race out together.”

Paul Tudor Jones

Central bankers keep moving the entire student body left, then the entire student body right.  Negative interest rates globally have investors thirsting for yield and alpha, the net result has been some of the most crowded trades we’ve ever seen.   What many investors don’t realize is you can use this phenomena as your friend or your enemy.

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Our research shows, in the post Lehman era, as Fed policy has had more and more influence over market performance, stock market volatility has substantially plunged (cheapened) around holiday shortened weeks.  Memorial Day, the Fourth of July and Thanksgiving are prime examples below in the chart.

VIX Holidays2.gif

“In acknowledging global economic risks, shooting the March rate hike right between the eyes and then talking the dots from 4 to two.  The Fed drowned market volatility, held its head under the water and watched for the bubbles.  Now is the time to buy it on the cheap.  Buy the VXX ETN (iPath S&P 500 VIX Short-Term Futures ETN)”

Bear Traps, May 31st, 2016

VIX may 31 call

A few weeks ago, we were between Fed meetings, thus making them ideal occurrences for maximum volatility suppression.

In the weeks ahead of the “widely expected” March rate hike (in January 83% of Wall street’s economists and strategists said the Fed would hike again rates by March).  The dollar surged, oil plunged and the street panicked and sent the VIX to its highs for the year in mid-February.

Next, the Fed took out their fire hose, they shot the March and June rate hikes between the eyes.  The dollar plunged, commodities and emerging markets soared, “risk on” was born again.

As the Fed has backed off their beloved rate hiking policy path, the VIX plummeted to around 13 in late May.  The same people who were caught holding plunging stocks in February, were telling us to sell volatility, this was a sure buy signal.  Again, volatility was clearly mispriced relative to Brexit, China and U.S. election risks.

VIX Futures Curve: From Steep Contango, to a Move Toward Backwardation

Today, the spread between the VIX 2 month futures contract vs 8 month coming way in, the most substantial curve flattening since mid April.

VIX Futures Curve

Description Last
Jun16 21.7000
Jul16 ↓21.5700
Aug16 21.4300
Sep16 21.7300
Oct16 22.0300
Nov16 ↓21.9900
Dec16 ↑21.7500
Jan17 ↑22.5500
Feb17 22.6000

VIX 2 vs 8 Month

Market bottoms are typically found during periods of backwardation in the VIX futures curve, see above.

How We Measure Risk and Reward

Let us explain, on February 10th investors were paying up for near term downside insurance on stock prices.  The front month VIX futures contract was trading substantially higher than the longer term outer months.  In other words, the March contract was trading rich to the September contact (see the green above in the chart).

In the fear of February, this was a buy signal for stocks; we recommended our subscribers to get long financials and oil names in our Bear Traps reports and on CNBC.

In recent weeks, the opposite has occurred, the VIX futures curve went into steep contango.   In other words, the longer term VIX futures contract (December) was trading higher than the near term contracts (June).  When the contango “widens” to extreme levels it is a sign of complacency in the markets, this is one of the reasons we recommended that subscribers get long volatility.

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How Low Can You Go Japan?

Fresh Record Lows

Japan’s 10 year bond touched -0.16%, a record low yield.

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Japan 10 Year

Asian stocks tumbled as anxiety over the ‘Brexit’ vote and forthcoming decisions from the U.S. and Japanese central banks stoked demand for haven assets. Crude oil also slid.

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Japanese shares fell to a one-month low, leading losses in Asia following the steepest slump in global equities since February. The yen climbed with gold, and 10-year Treasury yields fell for a fifth straight session, as traders favored safer assets ahead of a week where Chinese data on factory output and retail sales will be followed by meetings of the Federal Reserve and the Bank of Japan. The pound slid to its lowest level in almost two months after a poll showing a 10 percentage-point lead for Britain to leave the European Union sent it tumbling late on Friday. Oil retreated on an increase in U.S. drilling rigs.  – Bloomberg



The Fed has China Debt Bubble’s Blood on its Hands

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IMF officials warned this weekend, China must act quickly to address mounting corporate debt, a major source of worry about the world’s second-largest economy.

China’s surging debt load has profound implications for U.S. equity markets, it’s the subprime mortgage crisis all over again, just a different serpent, another beast.

David Lipton, first deputy managing director of the IMF, warned in a speech to a group of economists in the southern city of Shenzhen that companies’ indebtedness is a “key fault line in the Chinese economy.”


The U.S. Federal Reserve clearly has the China debt bubble’s blood on its hands.  As the Fed kept interest rates near zero for 8 years and expanded its balance sheet, Chinese companies used the easy money gravy train to LEVER up (see below).

China Debt 2

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“Company debt problems today can become systemic debt problems tomorrow. Systemic debt problems can lead to much lower economic growth, or a banking crisis. Or both,”


China, whose economy grew in 2015 at its slowest pace in a quarter of a century, has been trying to deal with with rising debt levels and overcapacity.

People’s Bank of China warned in its mid-year work report that the government’s push to reduce debt levels and overcapacity could increase bond default risks and make it more difficult for companies to raise funds.

Corporate debt in China stands at about 145 percent of gross domestic product, a dangerously high ratio. State-owned enterprises, accounted for a staggering 55 percent of corporate debt but only 22 percent of economic output, according to IMF estimates.

China must deal with both creditors and debtors and to address governance problems in both the corporate and banking sectors.

 “The lesson that China needs to internalize if it is to avoid a repeating cycle of credit growth, indebtedness, and corporate restructuring, is to improve corporate governance.”


China leverage side effects continue to explode.  Pick up our latest trading ideas, click on this link:

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“Here’s Why Bonds are a Screaming Buy.” Bear Traps, March 2016

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“Here’s why bonds are a screaming buy, (1.97% on the U.S. 10 year).”

Our Larry McDonald; March 14, 2016 on CNBC (1.64% today)

While Wall St. economists and strategists  have been lecturing you to get out of bonds since 2014, we’ve maintained a bullish stance on bonds for the last 3 years.  Equities have trailed bonds by a long shot in 2016.

See our Bullish Bond call on CNBC here.

100 to 150

Just look at the German 30 year bond, crushing stocks since 2014.

German 10 Year

3.50% to 2.45% Since 2014

US 30 Year

Where do bonds go from here, get on our next Bear Traps report below:

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S&P 500 Earnings Fraud

If we told you the S&P 500 has made $118 for three years running with zero growth, would you believe us?

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On January 1st, Wall St. told us the S&P would make $124.25, but now they’ve come clean, they only expect $118, we’re at $113.

Earnings x Multiple = S&P Value

$118 x 19 = 2242

$118 x  18 = 2124

$118 x 17 = 2006

$118 x 16 = 1888

Ironically, it was the same story last year, $123.85 expected earnings, only to finish at $117.50.

$113 x 19 = 2147

$113 x 18 = 2034

$113 x 17 = 1921

$113 x 16 = 1808

S&P 500 EarningsIt’s a magic act, stocks can rise for years without earnings growth, presto!

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