The Real Great Rotation Will Be A Shift Away From Money

Includes: JNK, SPY, XLP, XLY, XRT
by: Russ Winter

The "great rotation" is the newest propaganda meme for the masses. On Google search stats, the last major spike was the 2007 market high. This one has been around for awhile and now shows a recent search surge. However, the money flows into equities represent the pull forward of selling into December to take advantage of lower tax rates. January is primarily a return of this investment, and not new money of any consequence. January almost always sees money coming to the market, so this is being exaggerated. Even if there was a rotation, that would spell the death knell of the credit and bond bubbles. Credit and bond bubbles need constant new credit, not diversion to equity.

Last week it was Lloyd Blankfein (GS Braces for Bond Blowup) and George Soros, and now more signs that big players are done milking the bond and credit bubble and have moved on to warning the unwashed masses.

- Bill Gross in Barron's Roundtable advises investing in gold, oil.

- Then Via Fox Business Network, Charlie Gasparino reports that Appaloosa Management Founder David Tepper put out for bid $400 million of hybrids for HBOS PLC, Royal Bank of Scotland and Commerzbank. Gasparino goes on to report that this indicates Tepper might be turning bearish on financials due to some trouble in Europe.

- Here is another story about UBS sending warning letters out to clients concerning bond risk. Gasparino is used by these operators to help execute their schemes and plans.

- Dan Fuss of Loomis Sayles is the third bond fund manager to be called a "bond god" (the other two are Bill Gross and Jeff Gundlach). He is strongly of the view that the current fixed income market is out of control, and that a reckoning is coming. From Bloomberg: "This is the most overbought market I have ever seen in my life in the business," Fuss, 79, who oversees $66 billion in fixed-income assets as vice chairman of Boston-based Loomis Sayles & Co., said in an interview in London.

As background and despite no evidence if improving socio-economic conditions in Europe, we are witnessing a credit bubble in debt securities globally. At the same time scandals and fresh banking problems are emerging.

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The FAO grains price index shows prices are at the level seen in the 2007 commodity run, as well as the 2011 Arab Spring. Grain stocks are not far from 2007 levels, weather worldwide is dicey with volatility off the charts, and unlike 2007 when central banks were backing off, today the central banks are going hog wild. Accordingly risk of global unrest and revolt is at high levels.

18 to 24 month consolidation periods in gold price are not unusual, and have tended to match the subsequent move. Since Draghi promised to save Europe, preferences for money has been expressed by excessive speculation in high risk European assets. In fact a contributor at Zero Hedge has written a piece showing that it has been the Fed's money printing that has showed up in large foreign/international banks in Europe. In turn it has been the trading of these foreign banks into Euros and European sovereigns and debt that has driven the inflation of financial assets generally.

What is important to understand there has been an enormous shift in favor of money (the bubble in money), which suggests that the next large shift will be away from money. Also as the economic outlook deteriorates it will also cause a cut back in spending on inessential goods. So where will a reduced preference for money come from? I cite Alaisdair Macleod on the clue that all that extra money that has been channeled into capital markets since the banking crisis. When the bullish factors for government bonds and other financial assets are replaced by the prospect of rising interest rates and falling prices, there will be a rush for the exits across a wide range of capital markets. Collapsing bond and other asset prices will also set off a new crisis by undermining the false fictitious capital used as collateral backing the entire banking system and that would include collateral held by central banks. Cash and financial assets will be an unattractive alternative to owning vital commodities and monetary hedges, such as precious metals.

Today's lull in the flow of bearish news only serves to conceal the repositioning of the sovereign wealth funds and of other prescient institutional investors, seeking to protect themselves, ahead of this event. Now with the credit alarm being raised by key players the herding may be on.

In terms of actionables, I am focused on shorting consumers via the ultra cheap XRT, XLY and XLP puts. When and if the market drops say 3%, these puts will rise 6-8 fold. I am using XLI puts. SPY futures positions are at extreme net longs and shorts have already been squeezed out of these markets, but I'm avoiding SPY because of the chance that energy, material and inflationary sectors could run higher. I am continuing to pair this using gold/GDX type names which are truly undervalued and I believe will benefit when the credit/bond bubble fractures.

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On January 4 consensus on the S&P 500 was $25.51. At month end with 66% reported the number was $23.48. Making matters worse some of the beats that have occurred come from black boxes Wells Fargo, JPMorgan and Goldman Sachs.

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I use [[JNK]] puts to bet against the credit excess bubble. Late last week that inflated sector showed a little stress. Once the credit bubble fever breaks, the $85 billion in Fed money printing will cause money preferences to flow into more problematic areas (for the real economy), such as gasoline (already up 45 cents in six weeks), food prices and monetary metals. The new round of consumer inflation will create an even more extreme gap between consumer stock prices and fundamentals.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.