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Liquidity Crisis/ Credit Freeze Incoming?While the talk is about the Coronavirus, many are now wondering why central banks are using tools for a financial crisis to fight off a virus. If you follow my work, we were expecting some sort of event to occur for governments and central banks to save face. We knew interest rates were going to 0 (and negative) and QE was going to be reinstalled. However, QE was a one time desperate policy to prevent another 1930's like global depression. If we went back on it, it could trigger a confidence crisis since people would realize QE did not work and that we are going to be in a QE and low interest rate policy FOREVER. Many already know this to be the case. Interest rates cannot normalize given the debt that is out there...and son to be increasing dramatically. We have seen rate cuts and emergency rate cuts by many central banks. Canada cut rates by 1% in less than 3 weeks. The Fed will be doing the same. However, the most important think to note is the liquidity being provided to the system. 1.5 Trillion to be exact by the Fed, which will increase more. We have been saying that the repo crisis beginning last year in Fall was something to watch. It meant central banks were beginning to lose control of the system. There was some bank, or banks, that was running out of liquidity and needed daily or weekly injections of money to survive. This has led to confusion on whether this is QE since the Fed's balance sheet has been increasing (we are up to 4.2 Trillion...during the 2008 GFC, we took it up to 4.5 Trillion). The Fed is saying this is not QE. Again, it really is about wording here. QE was a way for central banks to keep long term interest rates low, and provided stimulus. They did this by buying long term bonds from the banks which meant the Fed got the bond, and then cash was added into the system by entering the banks asset sheet. Repo is a way to keep short term interest rates low. The Fed is providing liquidity into the system and in return, the banks must provide collateral (they are saying it is high grade collateral ie US treasuries, but the banks could very well be giving the Fed their toxic assets). With this 1.5 Trillion dollars, we are seeing the beginnings of a liquidity issue. The system was about to freeze up and interest rates were about to spike. This has a lot to do with the fact that corporations are feeling the pinch. Especially the OIL companies. Oil has gotten decimated and many of these US oil producers are not making money. In fact, they are having a hard time just to keep the lights on. When Oil fell in 2014, banks were forced to provide loans to these oil companies to avoid massive layoffs. So now these banks have provided loans to these oil companies, loans they never would have taken, and this is why when oil falls, the financial sector tends to fall with it. These oil companies are zombie companies. They will never pay back their debt, and will need more debt to survive. Fast forward to today, and these oil companies need access to more debt to survive. Banks do not want to be loaning money right now in this environment, because most of them do not have the capital to do so, and rates would have to be high given the risk of the loans in this environment (knowing oil may remain low due to an impending recession meaning these oil companies will not be making money for a long time). This 1.5 trillion injection was the Fed saying: look, we will give you (the banks) liquidity and will guarantee you do not fail by making bad loans. Please use this money to loan to corporations (oil, cruise ships, airlines) who need this money to survive and prevent massive layoffs. This large injection is needed to keep the interest rates (the price of money) low. This is why many are watching to short the junk corporate bonds, mainly JNK and HYG. Over 50% of junk bonds are of oil companies... Once again, this is not free markets. Central banks, after leaving the Gold Standard (hard money system) now target interest rates as a way to devalue money to achieve policy goals (inflation and employment). Soft/fiat money is really a centrally planned system. If we were in free markets, the debt would be priced much higher. The Fed is facing a liquidity crisis right now and are desperately attempting to prevent a credit freeze. They have even issued currency swap lines with many other central banks in the world, who are now injecting massive amounts of money from keeping they system from freezing. Remember, because the US Dollar is the reserve currency, they can print as much money as they want and not have to worry about their debts. There is always an artificial demand for the dollar (the French called this exorbitant privilege). Hence why I believe the Russians and Chinese were attempting to target US Dollar demand even through Oil with Iran (As the US Dollar gets stronger, most nations cannot use the Dollar to purchase Oil which means Iranian Oil looks attractive since the Iranians do not take Dollars for Oil and will happily take your currency for their Oil). This is why the Fed is the central bank really for the world as they can bail anyone out by printing Dollars. So what does this mean going forward? We have a Fed meeting on the 18th. Where the Fed is expected to cut 75 basis points, but Fed futures is showing a probability of cutting down to 0. Expect QE to also be officially announced. If we are going to see more debt being issued, AND governments doing large scale relief programs and bailouts as Steve Mnuchin said they would, interest rates will have to be low and stay low for a very long time (think forever) in order to service this debt. This is not a virus issue, but a debt issue. I do expect a possible credit freeze is coming. Where all credit cards, debit cards and ATM machines stop working. Here in Canada, banks are already putting limits on how much cash you can withdraw daily. Once this occurs, government and central banks will be seen as saviours with their digital money solution. Who knows, they may even say the virus is transmitted through cash, so we must stop using cash. My readers know I have been warning about digital money for a very long time. It is coming. It will make government much bigger and much powerful. This is once again all about debt. If governments are going to essentially run everything and bail everything out, they will need more taxes. A digital money system allows governments to track and tax all money. It will be specifically targeted towards small business' who have many tax loopholes, which will be removed and then small business essentially enter the tax realm of the employee. It will be used to track and tax money restaurants receive as tips, your private jobs you do for your neighbours and other people, and also to tax your sales on Craigslist or Ebay. With digital money, you can also implement MMT, which is likely coming with this virus. Many sport arenas and other business' have been closed, and these people who work there are not going to receive money for a month or more. They either need access to more debt, OR these business' will have to provide a salary for them while they are not working. Government may very well step in and do this. The socialist economists know that giving people more money, and then this money competing for the same number of goods and services just increases the price of things since we are not increasing PRODUCTIVITY. The solution to this is excessive taxation, as a way for government to then REMOVE this money supply from the system. What they will do is use the green infrastructure and green taxes as their excuse to increase taxes on the people. It also helps in boosting the economy with government creating jobs for infrastructure projects, to the Keynesians delight. People would not make a fuss about paying more taxes because they do not want to be labelled climate change/global warming deniers. There are many other things that digital money can be used for such as only giving people money if they meet certain habits and social conditioning (eat well, exercise well etc) which means it will be governments and large tech corporations that will define what an ideal human is. Also, certain ideas and speech can be punished and banned, especially if it speaks out against authority. Your access to to your money can be turned off, and you would be asked to report to some government bureaucracy building for scolding and reinstating access to your money. Corporations will also be able to use the data on your spending habits. Dr. Pippa Malmgreen on a Real Vision show gave a great example of this. Imagine a husband and wife. The husband is in Las Vegas, and his electronic payments show that he is buying a dress for a woman that is a different size than that of his wife. The wife is at home and orders a Ben and Jerry's tub of ice cream through uber eats at night and is watching some self-help, positivity videos late at night. The algo's will be able to deduct that the chance of divorce is high, so banks should consider increasing interest rates to account for this risk. Also if the wife or husband are attempting to look for a new job, the algo's can tell the employer that their mental frame is not in the right place right now so it is best to NOT hire them. So these are very crazy times right now, but my readers know that I have been warning about some sort of event being used to usher in a new system, but more importantly for governments and banks to maintain confidence. They have been saying the economy is strong, and their monetary policies have been working. Central banks are quickly going to become the BUYERS of last resort, and the Fed will get the green light to actively purchase stocks just like the Bank of Japan, the Swiss National Bank, and the European Central Bank (of course many already think this is happening with the Plunge Protection Team, but needs to be officially announced so the people know central banks will prop the markets). So will stocks go up? Put it this way: there will be nowhere to go for real yield other than stocks. When bonds hit 0 or close to 0 and even negative (I am talking about US Treasuries here), it will not make sense to buy bonds for yield. Bonds will not be traded. Pension funds and Fixed Income funds will drastically need to change their approach, and I have argued that many pension funds are indeed in the stock markets, as it is the only place to make real yield. Again, central banks are morphing into the most powerful institutions in human history. They will be buying up everything. This virus allows governments to push for bigger and more powerful governments, as government and central banks will look like saviours coming out of this. Remember, as President Obama's chief of staff Rahm Emmanuel once said, do not let a good crisis go to waste.
OANDA:SPX500USD
by Uncharted-FX
2
A look at corporate debtThis chart illustrates the increasing importance of cheap money, which is being driven by buybacks. Once interest rates get to a certain point (via Eurodollar futures ) the S&P 500 falls apart. The point at which it falls apart seems to be dependent on a certain downward-sloping level. Historically, interest rates prairie dog above the meme line for a bit but once they go back into their hidey holes the top of the S&P is close. With my luck the Brent Johnson's dollar milkshake theory will probably be right and the complete opposite will happen. Okay that's great. At least we know yields will eventually make their way down to 0% so... all in bonds then, right? Not exactly. Take a closer look at the available bond funds, specifically the allocation to corporate credit and the ratings of that corporate credit. There is a solid chance that you will see a lot of BBB. BBB is the last level of "investment grade" debt before it becomes "junk". Once it gets downgraded to junk the pension funds and insurance companies that own most of it are required to liquidate it. The BBB bucket alone accounts for roughly 54% ($3T) of all corporate debt and dwarfs the size of the junk bond market and if the downgrades start happening the junk spreads will get blown out. My prediction: the floodgates will open when a seemingly healthy company defaults due to drop in revenue (and subsequently free cash flow due to being overleveraged) and the ratings agencies are forced to start downgrading companies that should have been downgraded a long time ago. Fear of being downgraded will finally sink in and companies will be forced to look at their margins and free up cash. The first order of business is reduce largest portion of SG&A: payroll. A gigantic portion of the population is nearing retirement and they will be the first to be shown the door It sucks but that's just how it works. On top of that, all of these people that just got retired are trying to hit some magic number and are either 100% S&P or 100% "X Retirement 2025" fund, which consists of a lot of equities and a ton of BBB garbage that doesn't know its garbage. So no income, no available jobs, halved 401k. Fantastic. Time to downsize but unfortunately there is nothing to downsize to because everyone else is doing the same thing. Only option is to build, rent, move in with children, or buy a double wide. So I like small houses and ELS , which is a trailer park REIT. Bullish: High-quality bonds: TLT , BND REITs: ELS Bearish: Trash bonds: JNK , HYG Insurance companies: the infamous AIG , AFL
G
by fsuaouo
VIX, junk credit and the National Activity IndexThis long term weekly chart compares the relationship between: 1) economic fundamentals 2) fears of falling equity prices 3) expected default rates in credit markets The top half of the chart overlays the long term correlation between the VIX (in orange) to speculative corporate bond yields (blue). The bottom half of this chart shows the Fed's National Activity Index in white. The Fed's National Activity Index is a weighted average of 85 indicators of growth in national economic activity: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. It appears the most recent quote on this monthly index lags by as much as 60 days. The BAML junk B grade bond index currently yields spread of 4.3% over the 10 year treasury yield. The spread is the 'risk premium' investors earn over the risk free treasury rate, and is thought to imply current expectations of the default rate for credit. The chart history shows how as the economic conditions deteriorate the fears of default can quickly spike. The VIX index value is calculated from current price of the S&P500 index options. The VIX quote gives a measure of the market's expected annualized change in the S&P 500 index for the next 30 days.
TVC:VIX
by dime
The unwind is comingJPYUSD broke out today with a huge 1% move to break out of a 4 year long wedge. This is a bit of a technical move, but it has loads of fundamental implications. Before I go into detail, note that before and during every major market breakdown, JPY spikes, at least in modern times. It has a reputation as a safety currency / safe haven due to this reputation. The reason being that Japan has had extremely low interest rates for a very long time, making it an ideal currency to borrow in, then purchase foreign bonds. IE, a carry trade. The reason it's a safe haven is that when risk starts to occur, traders who have huge positions built up buying foreign fixed income of any variety will sell those positions, and will re-purchase their Yen as they do so. The problem here is that this can become a bit of a feedback loop. As we see liquidations in these bond positions, this will force more traders to cover, resulting in the Yen rising more and more. This started to occur in 2007 before the financial crisis.. it was actually one of the dominant stories of that era (see www.marketwatch.com) . If only more people knew what this meant for overall financial markets. US High Yield One of the biggest risks that has been identified by many people over the past 1-2 years has been the pervasive reach for yield. There has been a significant bubble of corporate debt built up over the past decade, and a lot of it is covenant light, or poorly rated. When the yen rises, corporate debt gets liquidated... Turns out, a significant portion of the buyers of US corporate debt have been asian buyers who's own sovereign bonds are negative yielding. There have been recent stories that many of these purchases have been made un-hedged even... So long story short, the JPYUSD carry trade can be used to proxy risks to the US corporate debt bubble, and by association, the global reach for yield. This is a trade that can seriously unwind... big potential for negative convexity here in my opinion. IF this continues to break to the upside, it'll cause a lot of issues in markets globally, but watch the high yield space (BDC's, corporate bond etf's, etc).
by GTStockmaster
2
JNK / W1 : Overbought & Divergent... Risk down the corner ?NOTE : The low risk trading area reamains higher in the context channel (the gray ribbon) but we're signaling overbought on the trendchannel... This may be a concern if the market reverses here... Cause reversing on trendchannel means there will pbly be a trend trade to come right after... Not the best case scenario for stock though if junks were about to break down the major support trendline. SIDE NOTE : Some analysts say that there is a dangerous bubble in corporate credit... So this may add to the technical view seen here. If anything goes wrong in the sector, junks may be the first to show signs of tension... CONCLUSION : It's not something to trade just like that, more likely something to bare in mind for the coming months... as a potential systematic risk trigger that could cause hell of a panic wave... Hope this idea will inspire some of you ! Don't forget to hit the like/follow button if you feel like this post deserves it ;) That's the best way to support me and help pushing this content to other users. Kindly, Phil
AMEX:JNK
by PRO_Indicators
THE WEEK AHEAD: TAX LOSS TIME; OIH/XOP/XLE, XRT, JNKWith but a few trading days left in 2018, it's time to consider taking tax losses in non-tax deferred accounts Personally, I flattened out of virtually everything on Friday, taking my lumps here particularly in my SPY, QQQ static, defined risk core positions in this fairly atypical year-end sell-off so that I can start off 2019 fairly clean, with smaller 2018 capital gains being the small consolation prize. Nevertheless, I still have a few crap piles left that I'll continue reducing cost basis on because I don't need the losses here and/or want to hold on to them for potential use next year, as well as a couple things that have "magically" worked out in the short- to medium term that I don't want to take gains on. Along with this broad market sell-off, however, comes potential opportunities, and I've been pouring over sector exchange-traded fund charts to see where the comparatively huge weaknesses lie for potential bullish assumption plays to start off the new year. Here are a couple of preliminary ideas, the brass tacks of which I'll get into after we ring in the new year. OIH/XOP/XLE Pick your poison. With oil crashing from a high of nearly $77/barrel at the beginning of October to finish Friday at $45.42, OIH, XOP, and XLE have followed suit, with OIH hitting lows not seen since the turn of the century; XOP and XLE aren't far behind. The play: I generally favor upward call diagonals, since you can fiddle with front to back month duration, and therefore maximum per trade exposure as compared to WOF*-fing or SPACK**-ing which subjects you to full notional risk, meaning that you'll have to mentally aside the buying power for those in order to take on a full one lot of shares (13.65 for OIH, 25.35 for XOP, and 56.11 for XLE) if you're going the WOF/SPACK route. Going longer dated with the back month requires a wider diagonal spread for an ideal setup (break even at or below market price of underlying; debit paid <75% of the spread width), so you can tailor the setup to your account size and/or risk appetite for the play; personally, I don't like to go with anything shorter than split month, since I like to have plenty of opportunity to reduce cost basis, and a one-month doesn't give you that, in my opinion. You'll naturally want to compare and contrast whether going call diagonal versus naked short put gives you buying power relief on margin, particularly for something like OIH, which was trading at 13.65 as of Friday close. The buying power effect of a 13 short put, for example, should be about 20% of notional, or 2.60. In a cash secured environment, you'll generally always get relief, since the short put would invoke 13.65 in notional/buying power, and a 90/30 upward call diagonal regardless of which expiry you use for the back month is unlikely to involve something greater than a 13-wide.*** XRT Fourth quarter earnings are generally the best quarter for retail, given the amount of cash people lay out for the holiday season. XRT is at long-term range lows, so I like a bullish assumption play to take advantage of this seasonality, with the front month in fourth quarter earnings season (Jan or Feb) and the back month in the next (March or April), since earnings are likely to contract off of their holiday peaks. As with the OIH/XOP/XLE bullish assumption play, you'll want to compare and contrast a short put over the relief you'd get over doing a 90/30 diagonal, and evaluate whether the possibility of taking on full notional risk is something you want to do given your risk appetite and/or account size. * -- "WOF" -- "Wheel of Fortune" put sold at the nearest the money strike. Run to expiration, you keep the premium if it expires worthless. If assigned, you proceed to sell calls against. ** -- "SPACK" -- "Short Put/Acquire/Cover" put sold generally at the 20-30 delta. Run to expiration, you keep the preem on worthless expiry. As with the WOF trade, you proceed to sell calls against, at or above your cost basis. *** -- The OIH April 18th 30 delta short call strike is at the 16, so a 13-wide would be a back month at a 3 strike. The lowest strike available in any expiry is a 10. JNK Yes, junk. With a 5.88% yield as of Friday close (1.98/share annually; $198/one lot versus TLT's 2.85%), junk is attractive from a yield perspective and could be a decent place to park cash here while the equities markets gyrate themselves out. Nevertheless, well, it's "junk," and really the only way I want to be in it is if I can fully hedge it while sucking in the divvies. This is how the setup would work. First, price out the next monthly at-the-money/out-of-the money short call vertical. For example, the March 34/36 short call vertical is paying .33 at the mid with a delta metric of -27.16; sell it. Because it's -27 delta, you'll want to buy 27 shares of JNK, resulting in a delta neutral, fully hedged position. Naturally, you'll have to manage it as you would any other position, rolling the short call vertical down or out in time to keep the full setup (stock + short call vert) in delta balance, with the downside being that if price moves up into your short call vertical, you'll have to in all likelihood widen it out to receive a credit for it on roll. Of course, 27 shares of JNK is probably not going to rock your world with divvies, but you can scale up over time or at the gate.
AMEX:SPY
by NaughtyPines
Small Caps Lead Broader Markets $IWMSmall caps are often used as a gauge for domestic growth because they are more sensitive to changes in economic conditions, such as input costs, wages, financial stress... Many were caught off guard by the equity rollover in early October, but few were paying attention to what was occurring. In late September, financial conditions began to tighten and credit spreads began to roll higher. I wrote about this several times for my subscribers. There is a strong correlation between dollar strength and rising credit spreads. twitter.com The correlation between small caps (IWM) and credit is rather significant. The 30-week correlation between junk (HYG) is .92 and investment grade (LQD) .85. It's also important to understand that over half of all Russell 2000 companies make no money, which is detrimental when margin compression occurs. There is no reason to doubt why the Russell rolled over, leading broader U.S. equities, just as financial conditions began to tighten.
AMEX:IWM
by TheMacroStrategist
Are stocks crashing? Watch the junk credit spread.With the increased volatility this year after such a long period without any significant declines has got some wondering if the market has peaked, or even about to crash. To get a better idea of what’s going on ‘under the hood’, we can study the high yield ‘junk credit’ market. High yield is also known as ‘junk credit’ for its higher risk of default and being rated below investment grade. This heightened risk means greater sensitivity to market conditions, and can serve as a 'canary in the coal mine'. The Merrill Lynch High Yield index has a yield of 6.36% at the moment. This is close to the 6% combined ‘yield’ of the S&P500 trailing earnings and dividend. When junk bond market is under stress and fear of default is rising, the yields ‘blow out’ or spike quickly. (We’re seeing this happen right now with concerns over TSLA credit). The chart shows how yields 'blew out' during times of stress. The orange line is the additional yield offered by the high yield index after subtracting the ‘risk free’ treasury rate. This ‘spread’ gives us a better idea of the risk premium demanded by junk credit investors. Currently the spread remains lower in around the range under 3.6%. The S&P500 index in blue is compared to the Merrill Lynch B grade corporate yield spread. At each of the previous peaks before the stock market crashed, there was a sudden spike in the credit spread. We even saw this spike in 2011 and 2015 when default fears increased. At the moment we’ve yet to see a similar jump in the high yield spread. Which would suggest that currently investors are not sensing any increasing risk of default (at least for now). A spread approaching the long term median or average range of 5% would give cause for alarm. The Merrill Lynch high yield spread chart is updated daily here: fred.stlouisfed.org The WSJ updates bond benchmarks daily here: www.wsj.com
F
by dime
1
My most important chart of allThis is the main chart that I am watching at the moment. It has all the information on it that I need to see the markets direction. The main drivers on this chart are oil and JNK (junk bonds). As you can see stocks SPX have diverged to the upside while USD/JPY has diverged to the downside. I am watching in particular for the JNK support to break down with oil. It could be that JNK and oil bounce short term off this support. I expect that that everything will reconnect with USD/JPY at some point. It will be interesting to see what happens. You can see that everything else diverged from USD/JPY in mid Feb.
AMEX:JNK
by TheTradersBias
The Dimon Bottom Hype Is OverCNBC has loved to refer the recent pullback in the SPX as the "Dimon Bottom" because CEO Jamie Dimon purchased roughly $26 million worth of JPM shares. However, it's not looking for those wanting to hold to believe in the recovery dream. Whether investors want to believe it or not, the U.S. economic cycle is rolling over; and, considering the very high correlation to the SPX, J.P. Morgan shares will unlikely be saved. Since 2014, I been warning of potential headwinds from energy exposure in U.S. banks. It may not cripple the sixth-largest bank in the world, but death by 1,000 cuts won't be any better for shareholders. On Tuesday, JPM reported a 20 percent decline in trading revenues, as well as a $500 million increase in provisions (up 60 percent) due to their energy exposure. Fee revenues were down 25 percent. Technically, the weekly chart is showing more downside is to come. Traders are watching a 20-weekly bearish convergence with the 50- and 72-weekly EMA. Price action is, also, currently below the 200-weekly EMA. The inability to show support above this level and challenge $59.60 could poise further stress on shares. Near-term, we'll see price action test the trend/price demand between $52.30-$53.50. A close below $52.30 would open up $48.3 and trend lower to $43.74. If looking at Fib. retracements, a close underneath Aug 24, 2015 Black Monday low, 1.618 Fib. extension would stand at $37.54. This would be my target for Q2-17. Please feel free to comment and share charts! And follow me @Lemieux_26 Check my posts out at: bullion.directory www.investing.com www.teachingcurrencytrading.com oilpro.com
NYSE:JPM
by CommoditiesTrader
HYG Leading SPY Lower?Junk bonds are typically just that - junk. But, the iShares High Yield Corporate has been one of those crowded trades that just do not die. After witnessing the immaculate short squeeze from 1,864, the SPX staged an impressive rebound. But as I mentioned earlier today (on my InvestFeed - link below), the SPY is looking weak, and the ADX, which measures trend strength, is beginning to fall. This is interesting because HYG tends to flow with the SPX (and SPY). As equities had a sharp correction so does high-yield The opposite is also true, and junk bonds rallied along side equities. SPY also acts more "violently" when prices diverge greatly. According to ETF Daily News, roughly $10.7 billion was injected into U.S. equity ETFs last month, while $8.3 billion of inflows were seen in U.S. corporate bond ETFs - the largest monthly inflow recorded. HYG took in just over $5.5 billion. This is important because today's trader shows the epitome of herd behavior: all cramming into a few trade ideas. So, when that idea doesn't material, traders flee and the response is not exactly orderly. Price action is on a few minor support levels, but there is bearish EMA, RSI and DMI momentum. ADX looks to be moving upwards supporting negative price action. If the SPY breaks down lower (I'm expecting mid-160k NFP tomorrow), this could spell trouble for HYG. CommoditiesTrader now on InvestFeed: beta.investfeed.com Please follow me on Twitter @Lemieux_26 Check my posts out at: bullion.directory www.investing.com www.teachingcurrencytrading.com oilpro.com
AMEX:HYG
by CommoditiesTrader
4