Mar 19, 2018 - Liu He, long seen as a leader in Beijing's effort to cure the country's debt addiction, has ... China to
The BondBeat Monday, March 19, 2018
See GP disclaimer HERE
What’s On OUR Minds HERE is what was on my mind over the weekend … please direct your attention TO the MONTHLY visual of 2s30s and lets keep this one on the back burner -- watch if/when spread nears 60bps:
It was on TOP RIGHT of single page sent out which was delivered with this email: Sat 3/17/2018 3:08 PM SUBJ: which curve u watching? quitters never win & winners never quit; REBALANCE IN TO FI comin end March (DB); fear vs greed
Good afternoon. HERE is a link through to this weekend’s updated single-page PDF to help as you prepare for the FI week ahead. This weekend you’ll be greeted by a visual of: 2s30s MONTHLY, 1977-curr – WATCH 60bps, don’t WAIT for inversion ...OUR thoughts: I continue to like mkt and want to buy dips. Maybe FOMC gives us some then again, if we DON’T get hawkish hike so widely anticipated, what IF curves BULL STEEPEN? Just a thought and maybe an opportunity. IF there’s any sort of steepening, would be interested in FADING – ie getting into flatteners unless, of course, the Fed changes the ‘game’ this week? Be that as it may, we consider many different curves (very front end, 7s10s – nearly inverted, and 2s30s). I ALSO update Global NEGATIVE RATES visual – did you know market value of negative rates now back UP OVER $8tril? QT? Really?? **ALSO NOTE IF YOU READ THIS WEEKENDS NOTE/THOUGHTS, YOU WILL ALSO FIND A FEW THINGS FROM BARRONS THIS WEEKEND WORTH A LOOK AHEAD OF THE COMING WEEK. •
• •
Current Yield: More Companies Stumble Under Debt Load (but wait, I thought a good rate on debt was an asset? ask a zombie – and DB for more) Up and Down: Why the Bulls Should Be Nervous (in a Bob Farrell inspired single word, MASSIVE INFLOWS – ok, 2 words, kill me) INTERVIEW w/GUNDLACH on what HE is worried about. No matter WHAT asked, it always seemed to come back TO 30s vs 3.22%. Stocks. Gold. You name it … READ and watch IT as well as the curve…
In addition TO the positions update you’ll find linked thru to this morning, it’s instructive to note one aspect which I missed … highlighted by Stephen Spratt/BBG with his opening commentary for BBG CFTC data shows big ramp up in back-end longs after strong 30y auction/CPI which gave a green-light for long duration/flatteners heading into FOMC; while the aggressive TY was position was pared down {NSN P5P8WGSYF01S } Here’s a look at the visual HE refers to (or at least one version OF it) that did NOT make it up to our Positions.pdf (but DID make it TO this mornings TECHS.pdf
Game ON … NO SHORTS FOR YOU … in fact, there are quite a few spec LONGS and offering to help get arms around this mornings price action -- whereby BOTH STOCKS AND 30s … are lower? For somewhat MORE on positions, we’ve grown fond of the following resource
Here is a short summary and this week’s links (below) to the latest Commitment of Traders changes that was released on Friday. FX Speculators pushed US Dollar bearish positions higher for 3rd week Bitcoin Speculators raised their bearish net positions this week WTI Crude Oil Speculators decreased bullish net positions for 2nd week 10-Year Note Speculators sharply cut back on their bearish bets this week Gold Speculators pushed their bullish bets to lowest level in 10 weeks S&P500 Mini Speculators slightly lowered their overall bullish positions Silver Speculators decreased their bullish net positions this week VIX Speculators cut back on their bullish net positions Copper Speculators trimmed their bullish bets to lowest since December You’ll NOTE as we have been following this for a couple/few weeks now, the way in which they present the RATES section -- focused on the all-important 10yr specs -- the evil do’oers, if you will, have ‘sharply cut back on BEARISH bets … interestingly, they frame it on top of a popular BELLY ETF … IEF, noting The commercial traders position, hedgers or traders engaged in buying and selling for business purposes, totaled a net position of 511,659 contracts on the week. This was a weekly shortfall of -101,182 contracts from the total net of 612,841 contracts reported the previous week.
IEF ETF: Over the same weekly reporting time-frame, from Tuesday to Tuesday, the 7-10 Year Treasury Bond ETF (IEF) closed at approximately $102.33 which was an advance of $0.40 from the previous close of $101.93, according to unofficial market data. HOPEFULLY this helps frame how it is we collectively prepare and position FOR this weeks FOMC … WE will continue to think MACRO -- flatteners make most sense -- and acknowledge biggest risk is GROUP THINK tilted towards 3 becoming 4 in ‘18 (YOU count up how many times the sell-side talks of HAWKISH HIKE) SO risk is that is WRONG. Curve snaps steeper. We’d look to then FADE said steepening as we face REBALANCE at quarters-end (for more see DBs US FI Weekly on this weekends stuff) For NOW, though, with stocks AND bonds both offered, and lacking a truer feel for and EXCUSE of the price action, it’s best to quit while we’re behind and hit send… Have a good start to the day DESPITE all the red on the screens, yours (and ours) BUSTED BRACKETS and the mkts wait and see mode ahead of the weeks FOMC meeting! Best, Saul/Steve
Items of Interest
EconoDay Economic Calendar AND, ripped from the BBG:
Bloomy’s Fed-speak Calendar March 19th, 2018
GPs Key Econ Indicators January 16th, 2018 -> Our “Economic Graph Package” is used by some of our clients to include in their monthly or quarterly reports. We have most of the major economic indicators included to give an accurate snapshot of the economy. GPs 5yr & Under Summary January 10th, 2018- > this is our chart package we call the “One to Five Year Daily”. It tracks agency bullet spreads to Treasuries, date to date, to compute the real maturity spread levels (in basis points) out to five years. We track agency callables against agency bullets and Treasuries. We compare equal maturity dates when tracking these spreads because the effective durations of callables are not stable. So over time we have a consistent
methodology that we use to determine “value”. Please give us a call for more in depth explanation. GPs Index Spread Summary January 11th, 2018-> We use certain Merrill Lynch indices, which are described at the top of each graph, to try and determine optimal entry and exit points for each sector. Though the indices should have similar durations, they commonly don’t match precisely so we’ve included the green line (which should be read off from the right axis) to allow you to take the curve into account when looking at historical spread relationships.
GPs Daily Pivots March 19th, 2018 -> the pivot point is essentially a mechanism for analyzing the short-term supply and demand factors affecting the market. It has limited applications for long- term decision making. Professional futures floor traders, also known as locals, are the biggest proponents of the pivot technique. Scalpers, brokers, market makers, and other short-term traders also use the technique, while upstairs or longer-term traders occasionally look at the pivot for ideas of what the floor traders are doing. The pivot point is basically the weighted average price of the previous trading day, calculated as the average of the previous trading day’s high, low, and closing prices. It represents the major point of inflection each day. Unless there has been significant market news between the previous trading day’s close and the current trading day’s opening, locals often try to test the near term support, resistance, and pivot point. For example, many floor traders cover their shorts and go long into the pivot level if the market opens above the pivot point and starts to sell off.
MMO for March 19, 2018 There is little doubt that the Fed will raise rates this week, and our guess is that Wednesday’s dot-plot will suggest a somewhat more hawkish policy stance for 2019 and 2020 as well. Separately, the spread between the IOER rate and the effective fed funds rate tightened a week sooner than we anticipated. We continue to expect another one-basis-point tightening in June. …The Fed’s estimate of longer-run GDP growth is also likely to turn higher this quarter. In some ways, that would be a more striking shift than the uptick in the near-term growth estimates. The chart above shows that the Fed’s forecasts of year-by-year GDP growth have become progressively more optimistic (or, rather, less pessimistic) since late 2016. Its estimates of longer-run equilibrium growth, however, have been sliding for more than eight years. That should change in the March SEP. We’re not big fans of the tax bill due to its exorbitant cost, and we think there is little chance that it will “pay for itself,” but it is not unreasonable to assume that the supply-side benefits of the bill will boost the economy’s growth potential by at least a couple of tenths of one percent over the next few years. We expect the median FOMC estimate of longer-run GDP growth to increase from 1.8%
in December to 2.0% or 2.1% this quarter. However, that would probably be at least half a percentage point below the FOMC’s forecasts for actual GDP growth over the 2018-19 period, implying rising pressure on the productive resources of the economy. …Update:
IOER-FF Spread
…A frequent question from readers at the end of the week was whether the March corporate tax date had played a role in the heightened pressure at mid-month. The answer is no, for the simple reason that the March corporate tax date no longer exists. For many years, corporations were required to make their final tax payments for the preceding calendar year on March 15. Starting last year, however, corporations were put on the same schedule as individuals, who generally make their final payment for the previous year and first quarterly payment for the new year at the same time on April 15. A few corporations with non-standard fiscal years still pay taxes in mid-March, but the total is greatly reduced. The Treasury booked only $5 billion of corporate tax receipts on March 15 itself this year, versus $24 billion on the last major March payment date in 2016.
In The Press NOW:
March 19, 2018 6:34 a.m. ET
EU Agrees on Brexit Transition Terms but Ireland Issue Remains By Valentina Pop
The European Union has agreed on the broad terms of Britain’s two-year transition deal after leaving the bloc in March 2019, according to an EU official familiar with the discussions, but Ireland remains “an issue.” March 19, 2018 5:30 a.m. ET
Higher Deposit Rates May Finally Be Coming to Your Bank Account The Federal Reserve has raised short-term rates five times since late 2015, but banks largely stood pat on deposit rates for rank-and-file customers. Now, with the Fed expected to lift rates again this week, there are signs this could change.
Updated March 18, 2018 6:58 p.m. ET
Trade Groups Ask Trump to Halt China-Tariff Plans Forty-five groups representing a wide swath of the U.S. economy are asking the president to work with other nations to press Beijing to end restrictions on foreign firms instead of imposing tariffs on China. March 18, 2018 9:00 a.m. ET
Fed’s Thinking on Future Rate Increases Will Come Into Focus This Week Fiscal stimulus, steady economic growth and very low unemployment have raised questions about bank’s current approach March 18, 2018 1:51 p.m. ET
The Next Housing Crisis: A Historic Shortage of New Homes A decade after the construction boom, fewer new houses are being built in America than at almost any time before. ‘It’s a good time to be here in Grand Rapids, if you can get a house.’ March 18, 2018 7:00 a.m. ET
Why More States Are Tussling With Their Teachers Teachers from Kentucky, West Virginia, Oklahoma and Arizona have staged strikes and demonstrations, and they have threatened walkouts over new proposals to install limits on pensions, wage increases and benefits. March 18, 2018 12:45 p.m. ET
Congress Braces for Battle Over Massive Spending Bill Congress will enter its last major fiscal battle before November’s midterms this week, as lawmakers prepare to debate a mammoth spending bill that offers them the last chance to settle dozens of longrunning fights. Mar 16, 2018 12:53 pm ET
Is America Running Out of Unemployed People to Fill Jobs? The number of job openings in the U.S. has touched another record high while the number of Americans readily available to fill those roles trends lower, according to Labor Department data released Friday. March 16, 2018 5:30 a.m. ET
In Targeting China, Trump Could Hit a Big U.S. Export
The White House is considering limiting visas to Chinese students as part of measures targeting Beijing over its trade practices. That could hit one sector where the U.S. runs a big trade surplus: higher education.
March 17, 2018
CURRENT YIELD
More Companies Stumble Under Debt Load …For years, friendly debt markets have allowed issuers to push the “maturity wall”— where tons of bonds come due simultaneously across the high-yield market. Right now, that peak is about 2022. That’s spawned what Deutsche Bank researchers are calling “zombie firms,” whose interest payments exceed the earnings they retain. By their metrics, the percentage of zombies has more than tripled from 1996 to 2% of companies in the FTSE All World index in 2016, according to Deutsche Bank—and that doesn’t include private companies. Zombies hurt productivity and business dynamism: The U.S. has half as many young firms today as it did in the late 1970s. “If bankruptcies represent an essential process of capitalism’s creative destruction, that too has slowed, and are now the lowest they’ve been since at least 1980 in the U.S.,” the researchers wrote.
Deutsche may get its wish for more bankruptcies: Rising rates tend to reveal flaws in debt-heavy balance sheets. SOMETIMES zombies die even in a friendly market. It’s a law of financial gravity: Too much debt—high-yield or otherwise—can sink any company. Hefty interest payments hamstring management. Profits must flow to service debt, instead of allowing product development or cost cuts to remain competitive against lower-cost operators.
THE FINANCIAL CRISIS: 10 YEARS LATER
What Is Jeffrey Gundlach Worried About Now? The CEO of DoubleLine Capital called the subprime debt crisis 10 years ago. Today he sees “magical thinking” in cryptoocurrencies and bets on a low VIX.
…Barron’s : You were remarkably prescient about the subprime-mortgage crisis and the heartache that followed. Do you see echoes in today’s market of that highly speculative era? …Today we see a similar sort of magical thinking in the cryptocurrency market. Long Island Iced Tea changed its name to Long Blockchain [ticker: LBCC], and its shares shot up nearly 300%. The company merely said in its announcement of the name change that it was thinking about exploring partnerships with blockchain companies. [Blockchain is the technology behind bitcoin and other cryptocurrencies.] Eastman Kodak [KODK], an American icon whose market cap had shrunk to $100 million, announced it was going to float a digital coin, and its market cap also tripled.
…What
is your stock-market forecast?
I expect the market to close the year down. I had thought the trouble would come later in the year, but rates rose pretty quickly. I don’t have a ton of conviction about interest rates. The bond market and the dollar got oversold and are working that off, but neither seems able to rally, which isn’t a good sign. It suggests the dollar’s next move will be down and the next move in rates will be higher. With correlations having become positive, the rise in bond yields likely will lead to a decline in stocks. So many markets are now at critical junctures. A yield of 3.22% on the 30-year Treasury is kind of like the last stand for the great bull market in bonds. The declining trend line on the 30-year yield and all other parts of the yield curve has been broken on the upside. If the 30-year breaks above 3.22%, we’ll be in a rising yield trend from any traditional charting perspective. The 30-year has been trading in a narrow yield range, of between 3.08% and 3.22%. This isn’t going to last; the trend will break.
UP AND DOWN WALL STREET
Why the Bulls Should Be Nervous …Regardless of politics or geopolitics, the renewed enthusiasm on the part of investors implied by the latest fund flows should give bulls pause more than the unending flow of news on the tube or your phone. Just before the market suffered its sinking spell in early February, there was a similar surge of buying of mutual funds and ETFs, totaling some $100 billion in January, as Gluskin Sheff’s David Rosenberg relates. Moreover, foreign investors poured $33.5 billion into U.S. equities in January after buying an even larger, $37.1 billion in December, according to Treasury data.
That follows almost perfectly the script of Bob Farrell, the legendary market analyst, with whom Rosenberg worked at Merrill Lynch, and whose wisdom has long been featured in this space: “The public buys the most at the top and the least at the bottom.”
Xi Taps Harvard-Educated Adviser to Tighten Grip on China’s Economy Liu He, long seen as a leader in Beijing’s effort to cure the country’s debt addiction, has been given unprecedented sway over its financial levers.
March 19, 2018
In N.H., flurry of activity stokes speculation that Trump might face primary challenger President Trump is set to visit the state today, following visits this year from fellow Republicans Sen. Jeff Flake (Ariz.) and Gov. John Kasich (Ohio). Trump’s trip is billed as an official visit, but it is also an opportunity to shore up support and stave off a potential challenger to the sitting president — something that hasn’t happened since 1992.
March 18, 2018
Trump dismisses McCabe’s notes as ‘Fake Memos,’ rails against Russia probe For the second straight day, the president was unrestrained in his commentary about Robert S. Mueller III’s expanding investigation, which is probing Russia’s interference in the 2016 presidential election and possible links to his campaign. Trump also attacked the integrity of former FBI deputy director Andrew McCabe, who was fired last week.
March 16, 2018
Analysts: Toys R Us might have survived if it did not have to deal with so much debt After a private-equity takeover, the retailer devoted precious resources to paying off $5 billion.
Published 1:35 p.m. ET March 18, 2018
5 reasons Toys R Us failed to survive bankruptcy
Brexit deal hopes push sterling above $1.40
Sterling zipped above $1.40 for the first time since late February, with traders appearing optimistic on the chance of a Brexit transition deal.
Fed eyes further rate rises at first Powell meeting
Analysts expect bullish statement amid hints of four rate rises in 2018
China to name Yi Gang as new central bank governor
US-educated economist was longtime deputy to outgoing head Zhou Xiaochuan
‘Death cross’ in Dax fires up the bears
One for the chart watchers: Germany’s stocks have formed a dreaded “death cross” - a market sign interpreted by some traders as suggesting the index will weaken further.
Troubled CEFC China unveils asset pledge by key unit for loan In September 2017, CEFC Shanghai was 51.3b yuan in debt repayable within 12 months, had 33b yuan in outstanding long term interest-bearing loans, 20b yuan in cash and deposits, and 55b yuan in shareholders’ equity 18 Mar 2018 - 11:30pm
China worries that Shanghai free-trade port might be too free 19 Mar 2018 - 5:34am
China's housing prices continue to stabilize Xinhua | Updated: 2018-03-19 13:21
Used car sales pick up momentum By Ma Si | China Daily | Updated: 2018-03-19 10:11
China's rail freight up 8.2 pct in February From The Blog-O-Sphere: Here you’ll find postings and research from the likes of Barry Ritholtz’s Big Picture, Pragmatic Capitalism, Kimble Charting and Zero Hedge - along with everything else we stumbled across that WE need to point out …The point of all this is to pass along things that strike us as interesting – even though they may NOT be our very own…
