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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Janet Yellen’s Fire Hose

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday June 8, at 2pm.

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This morning, copper and oil continue their great divergence.  Someone’s right on the global economy, we think it’s Dr. Copper.

The amount of metals and mining bonds trading at distressed levels is $26 billion after peaking at $86 billion in February and starting at $31 billion in October. With most commodity prices below last October’s levels, it appears these changes have been driven by the various measures that the companies have undertaken rather than an upturn in commodity prices. Additionally, companies with bonds continuing to trade at distressed levels may signal the market is expecting more drastic restructuring measures. – Bloomberg



Janet Yellen’s Fire Hose

A dovish turn yesterday from Chair Yellen put more goodies in the “risk on” bag.

“When would it be appropriate to resume normalization of interest rates? What she really said today was: ‘I have no idea.” And it was the right answer,” said former Fed Governor Laurence Meyer, who now heads the Washington firm LH Meyer Inc. “Normalization is a concept. There is no time frame.”

In January, the Fed told use they would hike rates 4x this year, today the market is telling us they’re nearly done for 2016.  The poorly thought through four rate hike promise to markets was a horrendous risk management move by the Fed.  In a little over a month, the U.S. dollar ripped from 94 to 100.

Next, China, emerging markets and commodities were crushed by the Fed’s unwise management of global risks.  Today, Janet Yellen doesn’t have her hand of the wheel anymore, China does.  She’s still putting out the fire.

“Coming credit crisis will put Fed on hold for 2016.”

Bear Traps, December 11, 2015

Global credit and economic risks have VETOED the Fed policy path for 2016, something we stressed back in December.

File_004 (1)This green line is even LOWER after Friday’s Jobs Bomb.

The global economy is driving the U.S. rates bus.  Over the last year, what U.S. economists have been consistently getting wrong, is the fact that global conditions are overpowering the U.S.

Global GDP

Outside the USA: $61T

Inside the USA: $18T

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Big Blow to Puerto Rico Bailout Bill on Capitol Hill

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With $2B of debt maturities, much of which are General Obligation bonds due in July, all eyes are on Washington and their proposed bailout plans.
With our partner ACG Analytics
Puerto Rico’s next governor and congressional representative will be individuals who oppose the bill to address territorial fiscal issues passed by the U.S. House of Representatives Committee on Natural Resources May 25th, a primary election in the islands’ New Progressive Party (NPP) determined yesterday.
Support of the bill is believed to have been the deciding factor in the defeat of Pedro Pierluisi, the territory’s Resident Commissioner in the House, in the gubernatorial primary. The bill’s Federally-appointed board within the Government of Puerto Rico that would be able to overrule the Legislative Assembly and the governor on matters affecting finances became the major issue of the campaign after the Committee vote.
General Obligation Bonds, 8s due 2035
Primary victor Ricardo Rossello, son of the governor from 1993 until 2001, stepped up his opposition to H.R. 5278, which carries the acronym “PROMESA.” With 90.1% of polling stations reporting as of this morning, his margin of victory was 2.1%.
The primary for the nominee to replace Pierluisi in Congress was also won by a PROMESA critic, Puerto Rico House of Representatives Minority Leader and Republican Party Chair Jenniffer Gonzalez. She overwhelmed the only candidate on the ballot other than Pierluisi to have supported the bill drafted by the U.S. Treasury Department with Republican U.S. House leaders and acceptance by House Democratic leaders. Her victory with a whopping 70.6% of the vote over the PNP’s 2000 gubernatorial candidate who ran with Pierluisi, however, was due to a number of factors.
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Both candidates for the Popular Democratic Party (PDP) nomination for Congress opposed H.R. 5278. The nod was taken by former PDP President and House Minority leader Hector Ferrer, the party’s first noteworthy critic of Governor Alejandro Garcia Padilla (PDP). Ferrer was the favorite of the nationalist (“sovereigntist”) wing of the PDP, although he is not clearly a member of that faction. With 57.7% of the vote in 92.5% of polling paces, he bested Senator Angel Rosa, whose support came primarily from the “commonwealth” wing of the party.
PDP President David Bernier was unopposed for their party’s nomination. He, too, rejects H.R. 5278.
All four nominees said at the end of last week that they would travel to Washington, DC to lobby against the bill this week.
Bond Insurer MBIA


In addition to rejecting the authority of the bill’s board, they also want Puerto Rico to place a greater emphasis on consensual debt restructuring with creditors than on forced reduction in the nominal value of bonds. They also hope that Federal legislation to address Puerto Rico’s fiscal problems will provide greater equality for the territory in Federal programs and include other measures that would ease strains on the insular budget and boost the islands’ economy.
Rossello has, additionally, stressed that he would bring about substantial economies in government spending, minimizing the need for debt restructuring.
U.S. House Republican leaders have planned for the full House to consider PROMESA Thursday and/or Friday. Rules Committee Chairman Pete Sessions (R-TX) has notified House Members returning to session tomorrow that proposed amendments must be filed by 10:00 a.m. Tuesday.
How House leaders of both parties and representatives of States of Puerto Rican origin will react to the rejection of PROMESA in the results of the primaries is unclear. Representative Nydia Velazquez (D-NY), who played a key role in enlisting House Minority Leader Nancy Pelosi (D-CA) to be an aggressive advocate for Puerto Rico debt reduction legislation, wavered in her support for the bill recently because of insular opposition but reportedly left a meeting between the Treasury Department’s lead official on the legislation, Antonio Weiss, and New York elected officials of Puerto Rican origin Friday afternoon recommitted to the legislation.
It is also unclear whether Pierluisi will continue to support the bill in light of its rejection in the primary. His support has been seen as critical to the measure, particularly because Gov. Garcia Padilla says that he cannot support it because of its fiscal control board. Last night, Pierluisi closed ranks behind Rossello but said that he would continue to fight for Federal legislation to address Puerto Rico’s fiscal situation. A key advisor, however, said that this might not include urging the House to pass H.R. 5278.
Even if the House passes PROMESA, it faces an uncertain future in the Senate, with several senators of both parties harboring reservations or expressing opposition before the primaries. Democratic presidential candidate Bernie Sanders (D-VT) has pledged to block passage and sponsor an alternative.
With 69.25% of polling places reporting as of this morning, Sanders had received 37.5% of the vote in the Puerto Rico Democratic presidential primary with Hillary Clinton having 59.4%. The bill was also the major issue in their contest with Clinton expressing concerns about the power of the control board and provisions concerning pensions, retirement accounts of individual bondholders, and pay of workers in Puerto Rico. Clinton won 68.5% of the vote in Puerto Rico against a much stronger campaign by fellow Senator Barack Obama in 2008.
Puerto Rico Economy Continues to Weaken
Puerto Rico’s economy was 1.9% smaller in April than it was a year before, according to the territorial Government Development Bank’s Economic Activity Index. The measure, which has a high correlation with the islands’ Gross National Product, edged down 0.1% from March to April. The slide since last July’s beginning of the territory’s fiscal year was 1.3%.
Cement sales were the major drag on the economy, falling 13.3% over the year. Cement is used is most construction in the islands. Gasoline consumption was the only economic indicator that registered an increase. It grew 2.9% during the year.
Leading economist Joaquin Villamil also pointed out this weekend that the manufacturing Purchasing Managers Index fell 5% during the first quarter of this year from the same period the year before, while government revenue increased 5.4% because of greater taxation.
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Off Balance Sheet Hell

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday June 8, at 2pm.

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The explosion of off balance sheet financing in China is creating Lehman like risk across Asia’s financial system.

U.S. equity investors must keep an eye on China.  The last two elevator shaft drops in the S&P 500, 12% last August – September and 14% in January – February, both had there genesis in China.

“The regions face high levels of contingent liabilities.” Moody’s

“Off balance sheet financing increases uncertainties.” S&P

Year-to-date, there have already been 71 downgrades by S&P Global Ratings and 150 by Moody’s.

China Off Balance Sheet Financing*

Q22016: $300B

Q12016:  $160B

Q42015: $230B

Q32015: $230B

Q22015: $140B

Q12015: $0

*local government bond issuance surges to a fresh record high

Shadow Banking 2.0

An Evil Thirst for Yield

Lets not forget, from December 2001 through November 2004, the Federal Reserve kept rates between 1% and 1.75%, down from 6.5% in 2000.

Fed Funds

The net result?  Trillions of dollars flowed into shadow banks in the USA as investors sought higher yields.

The same thing is playing out today in China.

Cost of Default Protection on China

China CDS

Direct sales of local government bonds have surged to a record 2 trillion yuan ($304 billion) since March 31, up from 906 billion yuan in the first quarter, fueled by a program to swap expensive debt for cheaper municipal securities. Moody’s Investors Service and S&P Global Ratings say that while municipal notes are a more transparent way of raising money than the previous practice of using private financing vehicles, the concern is that authorities are still resorting to off-balance-sheet funding methods.


The Global Epicenter of Risk

2015-16: China / Asia

2010-12: Europe

2006-8: USA

One of our classic systemic risk indicators is found in global banks positioned near the epicenter of risk.  Standard Chartered is a leveraged bank with a high concentration of risk focused on Asia.

Stan Chart

“Our negative outlook on the Chinese sovereign ratings reflect both slow economic rebalancing and growing financial risks,”

“Non-government debt is still growing relatively quickly and off-balance-sheet financing increases uncertainties in the financial system that could worsen the impact of any potential economic or financial shock on China,” 

S&P Global Ratings

Cost of Default Protection on Indonesia and Malaysia

Malaysia Indonesia

Our trade ideas focused here include….

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U.S. Dollar Trading like a Biotech Stock around Jobs Reports

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday June 8, at 2pm.

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Over the last few years, Wall St. banks have lectured us, over and over again on expectations of “strong” jobs reports, oh “how resilient the U.S. economy is.”

“We must be ready for life after liftoff in a rising rate environment.” 

Wall St’s Economists

Today, they have their tail between their legs.  Even the emperor, Goldman Sachs, who just two months ago was calling for three rate hikes in 2016, has backed away and lowered the bar.

U.S. economy looks to be in danger of losing its main pillar as employers throttled back hiring in May to the lowest level in almost six years.  The slowdown — payrolls rose by 38,000 after a downwardly revised 123,000 in April — raised questions about the ability of consumers to keep spending at a good clip.  Bloomberg

The U.S. Dollar on Jobs Report Friday

DXY JobsThe U.S. dollar has been acting like a biotech stock in and around incoming jobs data.  Central bankers have far too many asset managers trying to create alpha (returns) around their speeches and incoming data.  The result?  Capital destroying  volatility in and around news flow.  Each time we see far to many people on once side of the boat, listing her closer to capsizing.

Wall St’s Expectations and Crowded Trades

File_000 (8)

On January 1st, by now the street was expecting 220k to 260k new jobs a month.  On Friday, a rough patch in the U.S. economy and a Verizon strike has the crushed the crowd, just 38k jobs were created in May vs Goldman’s 165k above.  In recent years, the secret to trading Fed policy and the U.S. economy has been found in measuring just how crowded expectations have become, how much has been priced into each trade.

$13T of Debt = 1m New Jobs

Since 2007, full time jobs in the U.S. have only increased 1m while the population has surged by 23 million people.  That’s a lot of former workers (contributors) at the beach.  This is NOT “full employment.”  That’s a fantasy. BLS data.

Since 2007, U.S. government debts are $10T higher, while corporate debt has advanced by $3T (that’s a doubling).  Blind economists are missing the impact of leverage on the economy.  Entitlements are clearly crowding out the private sector.  BLS data.

Scared Rabbits

The poor street’s terrified economists, after being embarrassed for four of the last 5 months, having their “jobs bar” far too high, now they’re faced with even more uncertainty.  We’ve seen this show so many times before, group think is a bad place to be.  Huddled together, they feel more secure, but in the end they just make it easier for those willing to take the other side of the trade.   There is a reason 99% of economists have never sat in a risk seat, it will stay that way for years to come.

What are they Missing?

For well over the last year, we’ve stressed the global wrecking ball that is the U.S. dollar.  Since early 2014, we’ve maintained both a 1.40% target on the U.S. 10 year and zero rate hikes for 2015 and 2016, that’s been our position well stated in our Bear Traps reports.  U.S. economists have been far too focused on the U.S. economy instead of the international picture as well as credit risks’ impact on Fed policy and rates.

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Global Investors Hiding Out in the U.S.

An interesting look at year to date ETF flows from Bloomberg.  Nearly $56B inflows to the U.S. this year vs $17B outflows from Japan and Europe.  The PE on the S&P 500 has expanded from 17x to 19x this year, it appears a lot of investors are hiding out in the U.S.

Pick up out 21 Lehman Systemic Indicators Here


In Millions of U.S.

Country Netflow Netflow Flow%
United States ł +55,914 +3.1
Canada +3,519 +6.8
China +2,198 +2.3
United kingdom +1,660 +5.6
Brazil +723 +13.6
Australia +710 +5.9
Colombia +247 +26.6
Asia Pacific* +219 +2.9
Latam Region* +164 +10.6
Europe ex UK* +140 +3.3
Russia -358 -6.1
Taiwan -369 -4.6
India -400 -2.8
Mexico -521 -11.8
Italy -700 -11.5
Spain -880 -23.5
Japan -1,208 -0.6
European Region* -3,683 -3.4
Germany -3,722 -8.5
Eurozone* -8,905 -5.0


Lehman 2.0, China Moves to “Securitize” Toxic Debts

This morning, Reuters and Bloomberg are reporting securitization of distressed assets once again is emerging as a creative venue, this time for Chinese banks to offload their toxic bad debts.

Pick up out 21 Lehman Systemic Indicators Here

 File_002 (1)

Central Banks and Investor’s Reach for Yield

 Act #1: 2004-8

$3 Trillion:  US Mortgage Backed Securities, CDOs, RMBS, MBS, NINJA loans (No Income, No Job, No Assets)

 Act #2: 2010-16

$5 Trillion: Commodity Debt, Emerging Market government debt, EU Bank CoCo debt, MLP debt, China SEO Debt, Puerto Rico debt


File_000 (2)

In a repeat of 2007-8, Central Banks have kept interest rates far too low for to long.  This forces yield hungry investors to reach for yield, oh how we’ve seen this show before. The bottom line, trillions (U.S. dollars) of capital is in places it just shouldn’t be.

The fundamental problem, 99% of central bankers have never taken professional risk, they’ve never hit a 90mph fast ball.  The have written and theorized at great length on the subject, but they’ve never actually been in the game.

File_001 (2)

In 2007, they couldn’t see the 2008 financial crisis coming at U.S. financial markets, as many recall Fed Chair Ben Bernanke lectured us “subprime risks are contained.”  The Iceberg was right there, they couldn’t see it. 

Today, they sit back as the disgusting debt load floats, floats and floats higher.

File_002 (2)

The recent success of bad-debt securities sales by Bank of China and China Merchants Bank may prompt more securitization by China banks. The six largest listed banks are all taking part in a 50 billion yuan ($7.6 billion) pilot program, Reuters reported. Broker Guotai Junan estimated bad-loan securitization will reach 1.5 trillion yuan in 2016. The sales may limit credit costs and help banks’ profits.


Companies Impacted: Bank of China and China Merchants Bank sold distressed asset-backed securities totaling 534 million yuan in May. AgBank and China Construction may soon follow with similar plans, according to the Shanghai Securities Journal. ICBC and Bocom are also participating in the pilot program.

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