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

The hysterical media is your friend when it comes to trading political risk headlines.  While looking at populism’s global tsunami, the establishment media has been exaggerating the downside risks, helping markets create fantastic buying opportunities.

Our friend Albert Edwards notes:

While we are on the subject of inflation, Brexit has been interesting for the stupidity of many of the headlines trying to support a particular bias (both ways). Perhaps the most stupid was this one in the London Evening Standard just ahead of the June referendum, “Couples delaying having babies because of fears over a Brexit.” –

After all the Brexit horror headlines, UK stocks are up 23% from the June lows.

This nonsense persists, with surging headline UK CPI inflation being attributed to sterling’s slump in the immediate aftermath of the vote. What utter tosh. German and US headline CPI inflation have risen even more quickly!

After all the Deflation Fears surrounding the Brexit, the Inflation Surge in CPI has been Impressive

As the world faced the Brexit vote, there were countless stories of deflation fears.  We witnessed a wide call across the media for a U.S. ten year Treasury bond heading to 1.00%.  Then the unthinkable happened, bond yields surged with inflation fears, we touched 2.62% in December, back at 2.42% today.

We went against the crowd, recommended clients get short bonds in July.

“Yesterday, the U.S. 10 year hit our long held 1.40% target. A sea of bond bears has become an ocean of bulls. Brexit’s risk to the global economy has created an opportunity for those willing to step in and short bonds in the face of a large group of clowns rushing to the exits (abandoning their long held bearish bond positions).  Buy the TBT ETF, bonds are a screaming sell.”

The Bear Traps Report, July 7, 2016

Larry McDonald; creator of THE BEAR TRAPS REPORT and managing director of ACG Analytics, believes it’s a great time to get into the retail sector

“This Senate is toxic, guys. This tax bill is light-years away from happening, and even when it does happen, let’s just say it does pass, the tax cuts on the individual side and on the corporate side eventually will outweigh the border adjustment tax negative on retail,” he said in an interview with CNBC’s “Halftime Report” on Friday.

“Here’s the key number: 24. The retail space over the last 24 months is underperforming the S&P by 24 percent — the most significant underperformance for the retail sector since the 1990s recession. The risk reward is fantastic,” McDonald said. “Get long retail.”

CNBC Trading Nation – February 10, 2017

[ There is an special offer on The Bear Traps Report Subscription today ]

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

Where are bond yields going with risk of a euro breakup on the rise?  Click here (above) for our latest report.

Jobs Recap

Reflation Trade Hype so far Trumped by Secular Dynamics

Since mid December, Utilities (DPG ETF) are up 10%, with a flat S&P 500.   The much hyped reflation trade has been put on hold.

Net net, the today’s jobs number was a disaster.  In recent years we’ve been lectured about the 15 million jobs created since the financial crisis, but wages are not growing.

The inequality explosion continues, hello Michigan, Pennsylvania and Wisconsin.  Middle class America lives on average hourly wages times hours worked. *U6 unemployment is still growing, 9.2% To 9.4%.   This begs the question, how much worse would the numbers have been without the unemployment wage increase in 19 states in January?

*This measure of unemployment includes the total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force. Persons marginally attached to the labor force are those who currently are neither working nor looking for work, but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

The Missing 4 Million Young People from the Labor Force

We don’t believe Trump wants his legacy wearing a 4.7% start in unemployment, he’s likely to shake up the bureau of labor statistics. There are approximately 4 million people 18-54 years old that are not in the U.S. labor force. On the other hand, at 250k new jobs a month, we’ll chop through that number in 16 months, about the same time the tax cuts and infrastructure spending are actually oozing through the U.S. economy.

– As we expected, the Jan jobs number was topside at 227k vs consensus estimates of 180k but the market is more focused on something else. The real story as was in the soft wages number. AHE only rose by 3 cents of 0.1% month over month, below estimates. We also saw the strong December wage growth number revised lower, with two-tenths downward revision to Dec earnings (now +0.2%). This sums up the reaction in bonds, across the curve there is strength as YoY AHE is is now 2.5% from 2.9% after the Dec report. Chances of a March hike are pretty much gone with this weaker wage number and more dovish statement from the Fed on Wednesday. March hike odds are now around 15%. We think this number puts pressures on the massive short position in bonds.

– The headline number did have strength, but much of it was priced following the ADP number on Wednesday. The market was looking for wages to continue along the lines of the December report, that is where the bonds move is. This was amplified by the fact that minimum wage rose in 19 states during January, which should have lead to a meaningful increase in AHE. But we expected it to be overshadowed by other factors.

– To us, the headline number coupled with slack in wages points to an employment picture that will still confuse the Fed. Wages should have taken the baton from headline NFP by now, if we are really at full employment. We also some of this slack in the massive plunge in “not in the labor force” which dropped 736,000. There were population adjustments in this release, but that is still a big number. The “slack” did not end there, Janet’s favored reading, U6, actually rose 0.2% to 9.4 from 9.2 in December. This jobs picture points to the fact the labor market is not so obviously at full employment. A growing 3 month moving average of 183k a month and slack in wages will push the doves to give the economy more time.

– There were some sectors that offered positives. Retail trade added 45.9k, Service Providing was strong again and manufacturing actually added jobs for the third straight month, a big pull on the headline number seems to be gone.

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

Where are bond yields going with risk of a euro breakup on the rise?  Click here (above) for our latest report.

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

“When patrons are falling over themselves to buy bonds, it’s important to remember how fast the tide can turn. A BOND SELL OFF in Europe will trigger a SELL OFF in the US. The capitulation panic inducing investors to buy bonds is reaching insanity levels. We believe global bond markets are very close to a substantial near term top as well. Bonds are a screaming sell, we’re adding to our TBT short bond position.”
The Bear Traps Report, July 6, 2016

Political shifts have been the biggest driver of global equity market returns over the last 18 months, U.S. equity investors must keep an eye on Paris in 2017.   As we head into the election season in Europe, we believe the French elections (April 23 & May 7) will offer investors a buying opportunity. We fully expect either François Fillon or Marine Le Pen will be the new French president. This means a shift towards more domestic economic growth and lower regulation and taxes. We believe French equities are…..

Impact on U.S. Stocks?  Pick up our latest report, click here above:

France’s bonds are underperforming peers across the euro area as investors brace for presidential elections, with National Front leader and open euro critic Marine Le Pen leading a major opinion poll for the first round of the vote. The yield on 10-year French securities is the highest relative to Spanish debt since April 2010, while the spread between French and German yields is close to the widest in more than two years. – Bloomberg

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

Where are bond yields going with risk of a euro breakup on the rise?  Click here (above) for our latest report.

Wall St. spent the last sixty days piling investors into Trump “reflation” trades, now the new administration is making the crowd look like they are way ahead of themselves.    There are a number of secular forces the street has misjudged as we head into 2017, the road to their beloved “reflation” trade is filled with pot holes.

Crowded reflation trades revolve around a strong U.S. dollar, higher bond yields and inflation.  It’s been unanimous, Wall St. is convinced of swift legislation coming out of Washington which will support U.S. economic growth.  The equity market has been priced for perfection relative to the high execution risk.  We have no doubt this reflation trade is coming, just not on the fantasy time line Wall St. has promised.

With nearly 50% of S&P 500 sales outside of the USA, the Trump administration wants to stop the bleeding.

Late Monday, the U.S. dollar fell to the lowest level since December 8th after Treasury Secretary to be, Steve Mnuchin’s remarks were published.

“From time to time, an excessively strong dollar may have negative short-term implications on the economy.”

U.S. Treasury Secretary nominee, Steve Mnuchin, January 23, 2017

Trump Walking the Dollar Lower

The Bloomberg Dollar Spot Index fell to a six-week low after Mnuchin said an “excessively strong dollar” could have a negative short-term effect on the economy. Futures on the Nikkei 225 Stock Average dropped after the yen rose by the most since July. Energy and industrial shares led the S&P 500 Index lower, though equities finished above their session lows. European shares fell to the lowest level of 2017. McDonald’s Corp. and Halliburton Co. declined after results disappointed. Gold rose to the highest since November. Ten-year Treasury yields fell a second day, Bloomberg reported.

DXY Dollar Index, Heading South for the Winter

The U.S. dollar extended declines after Treasury Secretary nominee Steven Mnuchin raised concerns about the currency’s strength. That came as stocks slid and Treasuries gained after President Donald Trump targeted reworking America’s trade relationships.  Trump and Mnuchin know a strong dollar will punish America’s middle class, something they’ve pledged NOT to do.  Nearly 50% of sales within the S&P 500 (America’s largest companies) coming from outside the USA.  A strong greenback makes U.S. products overseas much more expensive, this hurts job creation in the USA.

There are three dollar trades our team is focused on for 2017, get them here:

Where are bond yields going with risk of a euro breakup on the rise?  Click here (above) for our latest report.

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

Where are bond yields going with risk of a euro breakup on the rise?  Click here (above) for our latest report.

One VERY Crowded Trade

As President-Elect Trump becomes President, bonds have given up their 2017 gains recent days. The question is, whats driving the move?

To get our latest report on where bond yields are headed, click on the lick above. 

As yields have headed higher over the past few days, much as been blamed on Fed Chair Janet Yellen’s more hawkish tone and growth excitement with regard to the President elect. We think there is another element that is very involved in the yields move, this weeks survey results.  “Survey” is the key word, not based on economic data but on survey’s of business sentiment.

We look at the Philadelphia Fed Manufacturing Index as an input into our ISM (Institute of Supply Management)  model.  Not only is the headline correlation strong, more so than other regional survey points, but also the sub indexes have a strong statistical relationship. The headline number continued its post election strength to 23.6, highest level of the year. Sub indexes such as new orders and employment indices moved decisively into growth mode.

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

Where are bond yields going with risk of a euro breakup on the rise?  Click here (above) for our latest report.

Philly Fed vs U.S. 10 Year Bond Yield

The index also has a pretty strong correlation with 10 year U.S. treasury yields. We believe, there was a specific section that the market was taken a back by, the “prices received” section. This showed that companies expected to be able to pass on any increase in prices to the consumer, an inflationary sign. This puts a lot pressure on bond prices, has created an opportunity.  We’ve rarely seen a trade this crowded, sentiment so one sided.

The most important figure in the Philly Fed report, with regard to the market, was “Prices Received”, which also made a new high. This suggests that businesses are starting to pass on higher costs to their customers. The bond market was repricing this, especially at the longer end. We still believe much of this is sentiment driven, but it is worth paying close attention to in coming months.

However, as positioning is so one sided in bonds, much of this inflationary acceleration is priced in.

CFTC 10 yr Treasury Positions, Even Your Grandmother is Short Bonds

To get our latest report on where bond yields are headed, click on the lick above.

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

Where are bond yields going with risk of a euro breakup on the rise?  Click here (above) for our latest report.

Markets Overreact to Mnuchin’s Comments on Recap and Release?

Fannie Mae and Freddie Mac stocks dropped significantly during Treasury Secretary Nominee Steven Mnuchin’s confirmation hearing. Senator Mark Warner (D-VA), who previously authored a bill that would do away with the GSEs, pointedly asked Mnuchin whether he supports a “recap and release” of Fannie and Freddie. While the exchange ended with Mnuchin agreeing that he does not support any measure that would lead to “private gains and public losses.”

Fannie Mae $FNMA Equity

The market seems to have taken these comments to mean that Mnuchin would not support allowing the GSEs to retain capital. However, earlier during the questioning Mnuchin also stated that “for very long periods of time Fannie and Freddie have been well run without creating risk to the government. These are very important entities to provide liquidity in the mortgage market. Senate Banking Committee Chair Mike Crapo (R-ID) clarified Warner’s comments saying he is concerned the GSEs would be recapitalized and put back in the market without any reform. Mnuchin responded that the status quo is unacceptable and his priorities are that the taxpayers are not at risk and that capital is not eliminated in the housing market.  Overall, Mnuchin’s comments were supportive of Fannie Mae equity and Preferreds, he indicated the government conservatorship must end, saying “for many years these companies were well run government entities.”

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

Where are bond yields going with risk of a euro breakup on the rise?  Click here (above) for our latest report.

Volcker Rule

“I do support the Volcker Rule,” Mnuchin, 54, said during the committee’s hearing on his confirmation. “I think the concept of proprietary trading does not belong in banks with FDIC insurance.”

The rule was one of the core components of the 2010 Dodd-Frank Act, and its strict limits on banks betting with their own money was meant to keep Wall Street from taking dangerous risks and acting against their customers.

Recap via Bloomberg

• Mnuchin endorses strong dollar in “long term”.
• Distances himself from “recap and release” of Fannie and Freddie, but won’t say how he would deal with them.
• Supports continuing to enforce Russian sanctions.
• Wants to boost headcount at IRS and update technology.
• Called for a “21st Century” version of Glass-Steagall.
• He supports the Volcker Rule in general but says implementation needs to be improved.
• Went out of his way to talk about cutting regulations that hurt community and small regional banks.
• Wants to preserve the CFPB, but fund it out of general budget.