Wednesday, June 5, 2013

The Stock Market May Be In Trouble: A Very Ominous Signal

I believe that the junk bond market is starting to price in the deteriorating economic fundamentals and has begun a price correction to reflect the expectations of higher credit risk for companies which require cash flow growth to service their debt. It is my view that the stock market will soon "catch up" to the junk bond market in a big sell-off that will be triggered soon by something - perhaps even a bad employment report this Friday  - Dave in Denver
The Seeking Alpha article from which that quote is derived was actually written by me on Monday night and published yesterday mid-day by SA.  So my call that the stock market could incur a significant sell-off should be measured based on Monday's close of 1640 on the S&P 500 (SPX) and 15,254 on the Dow.  As I write this, the SPX is trading at 1612 (-1.7% from Monday) and the Dow at 14,991 (also -1.7% from Monday).

The reason I believe the stock market is vulnerable to a big sell-off here has to do with a signal that is being emitted by the junk bond market.  I lay out my entire case in this article:  Ominous Signals  As you will see, I discuss the sell-off going on in the junk bond market and what it could imply for the stock market.

On another note, I've been seeing the decibel level in the media being turned up loudly about the rising the probability that the Fed could "taper" QE.  What amazes me about this nonsense is that before QE2 and QE3, the same chorus of Fed heads and writers/bloggers were promoting the same crap - about three or four months prior to the Fed actually pulling the trigger on even more QE.  I recall specifically that Phoenix Capital and Bill King of the King Report were adamant that QE2 was the last of the printing.  They should be eating a lot of humble pie for their intransigent insistence that QE would stop at QE2 but King is now certain that tapering is imminent.  Amazing how tragically ephemeral most people's memories seem to be.

The fact of the matter is that 1) the economy is going into a tail-spin, especially the housing market (more on that soon with hard data as evidence) and 2) QE was never intended to prop up the economy.  Huh?  Ya, that's right.  QE is 75% about keeping the banking system from collapsing and 25% about keeping the Government funded at low interest rates.   If you look at the change in the Fed balance sheet since QE began, it has gone up so far by about $2.4 trillion.  Well guess what, and not coincidentally?  The Excess Reserve Account at the Fed of the Too Big To Fail banks has gone up in the same time period by $1.8 trillion.  Wow.  That math works - that's 75% of the QE.  The rest of the QE has funded the Government and the housing market.

My point here is that QE is not going to "taper," although the Fed will jawbone and tap dance as if they are going to taper until it becomes obvious to everyone that they're going to have to increase QE.  IF for some reason the Fed were to "taper," it will make my prediction of a huge stock market decline look even more prescient.


  1. Credit Default Swap ETFs Coming To Market

    Unlike other products now on the U.S. market, a new family of proposed ETFs from ProShares that is focused on credit default swaps (CDSs) will allow U.S. investors a "pure play" to weigh in on credit quality for the first time. Bond issuers, especially low-credit issuers, have benefited immensely from the Federal Reserve’s low-rate policy as yield-starved investors have crept down the credit spectrum in search of real return. It’s not just U.S. companies that have loaded up on debt either, “global bond issuance is up a stunning 53 percent from the same period in 2012,” according to CNBC. But after a long sustained upward move in bond prices, some are nervous this beast might turn around to bite them. ProShares’ filing seems to capitalize on investor anxiety and be an attempt to placate it.

    However, much like overleveraged homeowners leading up to the financial crisis, corporate executives can be—and often have the incentive to be—shortsighted in the sustainability of borrowing.

    The problem is that much of the debt being issued will be paid down by issuing more debt. That can quickly become a vicious cycle if the cost of borrowing rises.

    If ProShares brings these ETFs to market, which appears likely, they would be the first CDS ETFs to trade in the United States. As such, a few words of caution regarding credit default swaps are in order.

    First, because they are swaps, they bear counterparty risk. If you’re long the CDS—and short credit quality—keep in mind that if your positioning is correct, the credit quality of your counterparty may well deteriorate congruously with the companies whose credit you’re shorting.

    Second, remember that a “credit event” must be determined to be such by the International Swaps and Derivatives Association.
    If you remember Greece a year ago, there was skepticism as to whether the mandatory haircuts placed on Greek debt would actually qualify as a “credit event.”

  2. I totally disagree Dave. The FED will stop printing sooner than most people think. As soon as the mushroom cloud appears they will be blinded, and no longer be able to find the damn handle.


    1. If that's the case, my Seeking Alpha article will look brilliant. But it would also be the first time in the history of a fiat currency system that the Central Bank/Govt stopped printing before the currency collapsed. It's usually a bad bet to bet on an extreme outlier event occurring...I'll stick with my call that we get more QE, not less.

    2. I was being sarcastic. I think they will stop printing only when the pitchforks come out. Literally.

    3. LOL. Sorry I missed the sarcasm. I quickly posted the comments this afternoon so I could get to a tennis match.

      I do recall being surprised you were thinking QE would stop. I'm ready for the equivalent of a French Revolution here...

  3. American Insanity: How to Buy a Home in Martha’s Vineyard with Zero Money Down

    The absurd new housing bubble created by Banana Ben Bernanke’s cheap money, private equity slumlords and crony foreign oligarchs looking to launder their ill-gotten funds, continues to provide what would be hilarious headlines if only they weren’t so sad. In the following story, we find that courtesy of the Department of Agriculture (USDA), the struggling folks on Martha’s Vineyard have access to zero money down home loans. The USDA you ask? Well, it turns out that the “entire island is designated as a rural area eligible for a USDA loan.” Why do we even have a government at this point?

  4. We'll just know the end is not just near but here when Bennie The Banana Republik bankster appends that witty CFTC disclaimer statement just released
    onto the end of all the Fed statements, & even onto the end of all his speeches.

  5. A spate of articles over aT zero hedge including the unexpectedly low ADP print along with the triggering of the Hindenburg Omen last week are casting some long and ominous shadows towards the NFP on Friday. Somehow and against my usual cynical instincts concerning any BLS stats especially the NFP, I think we are in for a surprise on Friday. Chris Martenson has an excellent article on housing bubble 2.0 on his site detailing the mass bloc purchases of homes across the country with Bernankes funny money with JPM and Blackstone scooping up tens of thousands of mortgages.

  6. here's how the math works;

    1.8% TNX and debt service is 16% of the budget.

    a 50% increase in rates takes TNX to 2.7% and debt service is 24% of the budget. Game over. No discretionary spending.

    You need the world to be able short your sovreign and your currency. The yen carry trade thru July 07 worked because Mrs. Hozikowa dint have to pay the interest on the debt. If a hedge fund shorts JGB, they pay the interest on the shorted debt. That's like WHY we all got over-leveraged. The long jGB got shorted and the margin credit bought 20 X the credit. Japan never had to pay the coupon, interest, %.

    Do ben and jack Lew have this luxury?

  7. Dave, I wonder why the cartel has been doing such aggressive price suppression since 2011, especially since debt ceiling crisis in August 2011. Do you have any guess?

  8. Simon Mikhailovich of Tocqueville Bullion Reserve on gold

    Simon Mikhailovich is weary of excessive debts and complex financial technologies. Gold remains the only uncorrelated asset that possesses the attributes required in the current environment but not all gold investments are appropriate. He joins Nicolette de Joncaire of l'Agefi to discuss the proper way to hold gold assets.

    etp's ~fools gold...........

  9. I really enjoyed your article. Can't wait to see your housing market article as Nevada's housing recovery is nothing but a "bubble". Everybody sees it yet it's allowed to happen as this state is pretty much dust from the lack of Leadership and the lack of will to go against the power players here. The States are playing btheir version of the Federal Government (except they can't print money).

    "ashes,ashes,we ALL fall down!"

  10. Simon Mikhailovich is weary of excessive debts and complex financial technologies. Gold remains the only uncorrelated asset that possesses the attributes required in the current environment but not all gold investments are appropriate. He joins Nicolette de Joncaire of l'Agefi to discuss the proper way to hold gold to invest in stocks