Ichimoku Blues! Rocky Times Ahead For Emerging Market Currencies (And Stocks/Gold)

The bloodbath for emerging-market currencies that erupted Friday may just be getting started, according to the Ichimoku cloud strategy that correctly forecast last year’s five-month slide. The technical analysis shows that MSCI’s currency gauge has once again broken downward through its forward-looking cloud, or the space between two moving averages. Once it pierces the cloud multiple times, it’s likely to gain momentum in that direction.

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The S&P 500 also remains above the Ichimoku cloud. Also a sign of rocky times ahead.

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This scary chart supports the Ichimoku cloud expectation of a rocky road ahead for the S&P 500 index.

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The gold spot could also experience turbulence, but less so. Gold is near the top of the Ichimoku cloud.

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Fed Sees No 2019 Hike, Plans September End to Asset Drawdown (Big, Bad Jay!)

“Big Bad Jay” Powell today announced today that there would be no more rate cuts in 2019 and balance sheet shrinking would halt in September.

Federal Reserve officials scaled back their projected interest-rate increases this year to zero and said they would end the drawdown of central bank bond holdings in September sending benchmark Treasury yields to the lowest level in more than a year and bolstering market bets on a rate cut in 2019.

The median rate projection of Fed officials compared with two hikes in the December forecasts, which spooked investors at the time. In its statement following a two-day meeting in Washington, the Federal Open Market Committee repeated January language that it will be “patient” amid “global economic and financial developments and muted inflation pressures.”

“Patient means that we see no need to rush to judgment,” Fed Chairman Jerome Powell said in a press conference after Wednesday’s decision. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.”

The Fed’s signal that it will keep interest rates on hold for the full year reflects concerns that economic growth is slowing, lower energy prices are weighing on inflation and risks from abroad are dimming the outlook. The projections go further than the one-hike forecast analysis.

Here is today’s FOMC Dot Plot.

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Here is yesterday’s FOMC Dots Plot.

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On the announcement, 10-year US T-Notes yields dropped 7+ basis points.

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And the 2-year and 5-year Treasury Note yields are BELOW The Fed Funds Target Rate!

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Dot Plot Fever! Fed’s Dot Plot Detached From Market Pricing (Target Rate CUT More Likely Than Rate Increase)

The Federal Reserve may be suffering from “Dot Plot Fever.” 

The Fed may need to lower the expected path of rate hikes (the “dot plot”) to satisfy equity markets, which appear to be pricing for less-hawkish monetary policy in the coming year. The S&P 500’s current multiple of about 18.5x trailing EPS implies slightly less than one 25-bp hike through the next 12 months, based on our fair-value model. Bond markets, measured by OIS and fed funds futures prices, appear to be expecting no change in the latter over that time.

If the Fed reduces expectations in-line with bond markets, equity markets would likely get a significant boost. Our fair-value model suggests the current level of two-year yield and yield-curve spread imply a market multiple closer to 20x.

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The financial market isn’t expecting any target rate increases, but a rate cut is in play for Q4 2019 and Q1 2020.

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Inflation, as measured by the US Federal Government, is rising and at its highest level in several years. But the 2-year Treasury Note yield continues to slide.

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Deutsche Bank + Commerzbank = Ogre Zombie Bank (Nothing Plus Nothing = Nothing)

What do you get when you merge German zombie Deutsche Bank and zombie Commerzbank? An ogre zombie bank!

Or as Billy Preston almost sang, “Nothing Plus Nothing Equals Nothing.”

Both Deutsche Bank and Commerzbank are trading at under $10 or 10 Euros per share. This is down from over $100 per share for Deutsche Bank in the 2000s and Commerzbank was trading at over 200 Euros as well. How the once mighty have fallen.

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Earning per share for Deutsche Bank have plummeted despite efforts to revamp their business model.

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The same goes for Commerzbank.

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While Commerzbank hasn’t issued any contingent collateral (CoCo) bonds, Deutsche Bank has issued 4 CoCo bonds. Here is the 6% CoCo bond. The good news? Both CDS and the yield to maturity (YTM) have been declining in 2019, likely reflecting the expected merger of the two.

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The downside? Merging two large zombie banks creates an “Ogre Zombie” bank. One that the ECB and German government cannot permit to fail.

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An Occurrence At The Federal Reserve: Increased SMART Money & Equity Volatility, Crushed Bond Volatility

Ambrose Bierce wrote a short story about a man being hanged during the American Civil War and what went through his mind in his final moments. It is called “An Occurrence At Owl Creek Bridge.” Hauntingly similar to today’s plight: overoptimistic expectations before being hung, then …. snap.

In summary., Ben Bernanke and The Federal Reserve entered the markets in 2008 in force. The Fed Funds Target rate was raised once during President Obama’s two terms as President, but eight times since President Trump’s election as President. Plus, The Fed’s Quantitative Tightening (in terms of its balance sheet) begin in earnest in 2019.

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Once The Fed hurled its monetary weight at the economy in 2008, the stock market had an amazing run. but since The Fed started to raise rates and began their balance sheet unwind, the S&P 500 index has increased in volatility as has the SMART Money Flow Index.

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The bond market volatility indices have gotten crushed by central banks.

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On the real estate front, equity REITs, like the small cap Russell equity indices, seemed to be benefit greatly from The Fed’s Zero Interest Rate Policy and QE. Mortgage REITs, on the other hand, kind of died with the financial crisis and never recovered. The RCA CPPI commercial real estate index too off like a missile.

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Like in the Ambrose Bierce short story “An Occurrence At Owl Creek Bridge,” The Fed and other central banks are quitting any attempts at rate normalization (for fear that they might hear that dreaded “snap” at the end of the monetary rope].

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US Residential Construction Spending Slumps For 6th Straight Month As US Banks Report $251 Billion of “Unrealized Losses” On Securities Investments in 2018

Today is a double whammy for bad news for the US economy.

First, The Census Bureau monthly construction spending report reveals that highway and street spending rose 11.7% in January. The biggest decline was communication spending.

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BUT, US residential construction spending slumped for the 6th straight month. It is beginning to resemble “The Matterhorn” plunge of the 2000s.

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The second whammy is the FDIC report  revealing that US banks reported $251 billion of “unrealized losses” on securities investments in 2018, the most since 2008.

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For a less grim chart from The Federal Reserve (and a different metric), here is US Commercial Bank Liabilities Net Unrealized Gains (Losses) Available for Sale.

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Double whammy!

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Undun! S&P 500 Index Comes Undone From 10Y Treasury Yield As Term Premium Hits Low

The Treasury market has come undone (or undun as The Guess Who sang).

The S&P 500 index has come undone from the 10-year Treasury Note yield.

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Meanwhile, the 10-year term premium is at a new low, likely due to persistently low inflation.

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No sugar tonight?  Don’t worry! The probability of a Fed rate cut in 2019  is minimal.

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Alarm! Europe’s And US Bond Volatility Grinding To A Halt (Precursor To Recession)

European bond volatility (according to the Merrill Lynch 3-month EUR option volatility estimate) has plunged to the lowest level on record.

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A similar chart for the US bond market is the Merrill Lynch Option Volatility Estimate for 3-months shows exactly the same thing. The US bond market is grinding to a halt.

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Note that the US MOVE 3-month estimate hit a low in May 2007, just ahead of The Great Recession of 2007-2009.

Alarm!

 

Deja Vu? Bankers Get Creative to Offload CLO Risk in U.S. and Europe (Here We Are Again!)

Bankers dumping business loans and corporate debt in the forms of Collateralized Loan Obligations off on investors in the US and Europe? As New York Yankee legend Yogi Berra once said, “It’s déjà vu all over again.”

(Bloomberg Quint) — Arrangers of collateralized loan obligations are innovating their way through a tough market as they try to shift a stockpile of warehoused assets from their balance sheets.

The year’s first batch of new CLO issues to price in the U.S. includes two transactions with short maturities and one static deal, where the underlying pool of loans remains the same throughout its lifetime. These non-typical features are offered to draw in investors some of who have grown more cautious after leveraged-loan prices dropped and CLO funding costs rose at the end of last year.

Investors say similar structures are being touted in Europe as well. And it’s not the first time that more creative structures have appeared: short-dated deals emerged in 2015 and 2016 when market conditions deteriorated during the oil and gas crisis and liability spreads ballooned.   

Issuance of CLOs — bonds whose cashflows are provided by an underlying pool of loans — soared last year as investors wanted exposure to higher-yielding, floating-rate debt. The market stalled toward year end amid the broader market volatility and weaker sentiment. CLO managers are now trying to navigate the slow recovery in the market.

*Pine Bridge Capital has a nice “CLOs for Dummies” article.

Although CLOs are primarily bank and corporate loans, they can degrade quickly like the “subprime” loans in 2008/2009 (as discussed in The Big Short somewhat accurately).

CLO for dummies

And like the period of time discussed in The Big Short (and other lated books and movies), the “A” rated tranches are looking good in terms of impairment rates, but the “killler Bs” are looking stressed.

CLO impairment rate

The CLOs 2.0 average structures (aka, “Cov Lite” loans) have higher risk.

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While this is NOT a chart of CLOs, it does show the growth of corporate debt since the financial crisis, particularly at the A and BBB ratings.

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Makes one ponder holding a protective asset like … gold.

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Here we are again!

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Retail Inferno! Gap, JCPenney, Victoria’s Secret, Foot Locker, 465 Store Closures in 48 Hours (Examples Of Columbus OH-Based Washington Prime REIT And Limited Brands)

The retail inferno continues!

Last week, the US experienced a large crash in retail spending in December in the form of MoM Real Personal Consumption Expenditures.

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Then we have this gut-wrenching report on retail stores.

The ‘retail apocalypse’ is alive and well this week with major chains such as Gap, JCPenney, Victoria’s Secret and Foot Locker all announcing massive closures, totaling the death of more than 465 stores over the last 48 hours.

In the last 48 hours alone, several shopping-center staples unveiled plans to trim their footprints across the U.S. Gap Inc. said it would slash the store count of its struggling namesake brand by 230 locations over the next two years, just hours after J.C. Penney Co. confirmed it would shutter18 department stores. That news came on the heels of L Brands Inc.’s decision to close 53 Victoria’s Secrets in North America this year. And it’s not just apparel: Tesla Inc., whose galleries are often inside shopping centers, just said it’s moving all its sales online.

These moves come on top of all of the chains that have already announced they’re closing down or reducing their footprints due to bankruptcy. This includes Payless Inc., which is abandoning 2,500 stores, Things Remembered, which is closing most of its 400 stores and selling the rest, while mall favorite Brookstone Inc. slims down operations and Sears continues to shutter locations. Taken as a whole, many of today’s shopping centers are becoming little more than an assemblage of fast-fashion retailers, Apple stores and food courts.

As an example of how retail Real Estate Investment Trusts (REITs) have been hurt by changing consumer shopping habits, take Washington Prime REIT (formerly Glimcher REIT) from Columbus Ohio. With Amazon’s rise since 2014, Washington Prime has dived from over $20 per share to its current share price of $5.14.

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Also, Columbus, Ohio-based Limited Brands (aka, L Brands) was trading at over $100 per share in 2015, but is now trading at $27.50. The Limited empire once included The Limited, Limited Too, Limited Express,. Galyans, Henri Bendel, Abercrombie and Fitch, Lane Bryant., Lerner, Victoria’s Secret, Bath and Body Works and Pink. Only the last three still have a mall footprint with The Limited going solely on-line. How the mighty have fallen.

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Of course, empty space can be repurposed with gyms (Planet Fitness), churches, physician’s offices, more bad chain restaurants and … day care facilities.

But it isn’t just retail. Check out the crashing price per square foot of suburban office space for Northern Virginia where office conversions are all the rage.

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And Northern Virginia office vacancies are launching into outer space.

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