DO HIGHER INTEREST RATES ALWAYS CHASE STOCKS HIGHER?
Today, waiting in my email new mail box, was a post from Business Insider and Sam Ro suggesting that what we need to see in order to get a 20% stock market jump is rising TBond yields. Really? Low rates and high margin are keeping this market from falling, with fewer and fewer participants. Wouldn't higher rates reduce margin investments and eliminate potential investors? Not according to Sam Ro.
We are getting a rise in TBond yields. Does that guarantee higher stock prices?
This, of course, does make sense, a certain kind of sense. When investors desert the bond market, yields rise to try to attract them back; and this can be a sign that investors are becoming more confident in the strength of the economy which should lead them into more risky assets set to appreciate in a rising economy with increasing earnings of companies. Of course, investors could be deserting the bond market for another reason: because they understand that bonds are a bubble and are beginning to break.
There is another understanding connected to this. The Fed WILL NOT LET THE BOND MARKET BUBBLE BREAK. Bernanke is poised to continue buying more TBonds in the next quarter, some $1.3 Trillion dollars in QE is apparently being targeted to be thrown back into the Black Hole of Deflation in order to....protect old debt by supporting new debt and providing a floor for bond prices, beyond which they cannot fall.
What does this type of price and market manipulation do to old relationships, such as stocks and bonds? We don't really know. Bernanke admits that the US and the world are in 'new territory' as far as government manipulation is concerned. "We are in uncharted territory," Bernanke tells us, mostly with pride; although there is some fear in his eyes also.
Are Americans super-confident that the economy is coming back, and that the Great Non-Depression is being defeated? Recent headlines suggest not: "Consumer Confidence PLUNGES to levels last see in 2011."
Who are the investors who really matter? Clearly they are not John and Julie Public, who are deserting the stock market in droves and apparently not coming back. Hedge funds and pension fund traders are the Big Money that might make stocks rise and bonds fall in they desert the bond market.
Let's look at Sam Ro's logic:
If We Want Stocks To Keep Surging, Government Bond Yields Need To Rise
Sam Ro | Jan. 29, 2013, 2:00 PM | 869
Stocks have staged a remarkable rally with no major corrections.
In a new research note to clients, Citi global equity strategist Robert Buckland discusses what happens after 20 percent rallies in the stock markets. Specifically, he looks for what the key drivers were that extended previous 20% rallies.
"Our study of previous +20% rallies shows that for equities to fly there needs to be a combination of (1) lower than average starting valuations, (2) double digit EPS growth, (3) rising PMIs, (4) higher US government bond yields and, (5) sustained flows into equities," wrote Buckland.
Most of those points may seem pretty obvious. But the point about rising government bond yields isn't always intuitive.
Here's Buckland on bond yields (emphasis ours):
Bond market confirmation
Rising profits and improving economic activity are often not enough for market momentum to be sustained. Often the improving environment for equities needs to be mirrored by a deterioration for fixed income investors. We find the first 20% gain in markets is often accompanied with stable bond yields (we use US treasuries). But for markets to make double digit gains from here we usually need to see core government bonds yields rise by 50 basis points or more. They tend to decline by 80 basis points when markets fall from here (Figure 8).
We believe rising bond yields help equity markets in two ways. First, higher yields drive a steeper yield curve which has previously been a robust forward indicator of future economic and profits growth. While QE has weakened the signaling effect of the yield curve, there are still many who take their guide for economic activity and equities from the bond market. Second, falling bond prices encourage a shift of money back into equities, as investors chase returns. In the case of pension funds, higher yields, in theory, should reduce the present value of future liabilities and free up more cash to allocate to riskier assets...
Well, TBonds are falling. Treasury yields are rising. We showed a picture of the 10-years Treasury a few days ago, breaking up out of a long term decline and bottoming consolidation pattern. The 20-year and the 30-year yields are not reversing up so dramatically -- but they are trending up.
Oddly, TIPS are also trending down. TIPS are supposed to protect investors from inflation. Usually, a shift out of bonds into stocks indicates that an expectation of economic growth will stir inflation fears. This doesn't seem to be happening. Also, Muni-Bonds are languishing, and seem to be headed lower also.
There is a lot of information in the media that shows the recovery -- the so-called recovery -- which is almost entirely based on more world-wide debt and less world-wide organic growth -- is breaking down. England, France, and Japan are becoming desperate. The EU now tells us that a bailout of Cyprus is more necessary and potentially more dangerous than the continuing Greece default.
German growth is faltering; and German officials are making all kinds of noise about currency wars and Japan's irresponsible attempts to monetize debt by currency devaluation (which was apparently acceptable when America, Switzerland and England did it). A falling yen apparently means cheaper automobiles, which threatens the Germans directly.
The UK is heading into a trip-dip recession. UK debt is sky-high; and the UK says it cannot back off on austerity because debt is suffocating its economy.
America saw its GDP shockingly contract as well, the numbers released yesterday. Suddenly, we heard all the cheerleaders tell us this was really good news, since it was caused by a reduction in military spending, government cuts in spending. This shows HOW DEPENDENT our economic 'recovery' is on government spending more than it should. What happens when Republicans get their wish to cut even more? More collapse of GDP: a Great Depression. (I agree with the Republicans in this. I also believe in higher interest rates -- that cheap money is NOW a plague -- not always, but NOW, in the back half of the cycle.)
US company earnings are not growing. Do pictures lie? Look what the S&P 500 companies are saying about corporate health.
What rational investor is going to look at this data and conclude that the economic recovery is 'still on'? Shell's profits sank 6% today, shocking analysts. But Bull Market investors are very good at tailoring their perception to the desires of the animal spirits.
Spain is in a lot more trouble than they have been trying to admit.
Ambrose Evans-Pritchard writes about Spain:
The country's retail sales plunged 10.7pc in December from a year earlier as austerity bites deeper, one of the worst months since the crisis began. The Spanish car lobby (Anfac) said the country's output of vehicles has fallen below 2m for the first time since 1993, crashing 17pc last year. The industry has shrunk by a third since the boom.
Ominously, car exports plunged even faster at 18pc, dimming hopes that foreign trade can lift the economy out of slump as internal demand shrinks. While Spanish exports have been a bright spot over the past three years - keeping pace with German exports - the momentum has faltered due to lack of investment.
Citigroup said it now expects Spain's economy to contract by 2.2pc this year and another 2pc in 2014, pushing unemployment to 28pc.
The effects of the slump will overpower any gains from fiscal austerity. The bank said public debt will surge from 88pc to 110pc of GDP in just two years.
Well, China are recovering, right? Sort of. But, as I mentioned a few days ago, Society-General released a report projecting the hard- or crash-landing begun in China in 2012 will hit rock bottom in 2014 with major effects world-wide. In the chart below, the reader can see the negative effects of the expected Chinese collapse on leading (I hate to use that word -- in that there is not much leadership being show in the world at the moment) economies around the world. Note: Society General expects this depression to run into the near future and comes very near to confirming my prediction of a bottoming in global economies in 2019.
And just when you think the banks' problems are over, after LIBOR-rate fraud and outright thievery, the FSA in England says up to 90% of credit swaps written by English banks were mis-priced and banks could be liable for huge payback payouts. Harry Wilson writes:
More than 90pc of the complex interest rate derivatives sold by banks to small businesses could have been mis-sold, according to the findings of a review by the Financial Services Authority. The FSA said that its analysis of 173 sales of interest rate hedging products to SMEs by Britain's four largest banks found that 90pc "did not comply with one or more of our regulatory requirements" as it launched a full review.
Martin Wheatley, chief executive designate of the Financial Conduct Authority, accused lenders of selling businesses "absurdly complex products" and said many customers could now expect compensation from their banks.
The swaps were presented as a "no-cost" form of insurance to protect small businesses against a rise in interest rates, but the unregulated instruments turned into significant liabilities.
Falling base rates were meant to help small businesses but with these products they generated charges that devoured savings and destroyed some once-sound family firms. They typically locked firms into rates of between 5pc and 6pc over base rates and as base rates fell, the charges kicked in.
And that's not all of today's BREAK UP THE BIG BANKS NEWS: A potentially even more shocking and explosive bank scandal is brewing in Italy, perpetrated by the oldest bank in the world Monte dei Paschi. Again from Mr. Evans-Pritchard:
"The situation is explosive," said Tito Salerno, head of the prosecuting team in Siena, describing the fast-moving events at Italy's third-largest bank as extremely grave.
The Milan bourse tumbled 3.4pc and yields on 10-year Italian bonds spiked 15 basis points to 4.31pc as the political scandal widened.
Monte dei Paschi (MPS), the world's oldest bank dating back to 1472, is under investigation for covering up losses on derivatives and paying over the odds for its €9bn (£7.8bn) purchase of Banca AntonVeneta in 2007. Italy's press alleges that the inquiry has unearthed a network of bribes and kickbacks, a claim denied by the bank.
The lender has lost €6.4bn since early 2011 and the damage is mounting. Italy's weekly news magazine Panorama reports MPS could face another €500m losses from its "Chianti Classico" venture into property loans, a claim also denied.
MPS has had to be rescued a third time, issuing a €4.5bn convertible bond at a 9pc interest rate. The stock price has crashed 95pc.
Covering up losses on derivatives. If American prosecutors were looking at American banks for this same thing, our wonderful, recovered banks would be making headlines also. In America we like to look the other way, and pretend that nearly everyone in power 'plays by the rules' -- even though we know this isn't true.
So, interest rates are rising, banking scandals are flaring, global economies are faltering, including America's economy, but this should lead to a bear market in equities. I don't get it. Wait. I think I get it: more US Dollar Devaluation always makes bubbles in stocks, commodities and houses become larger and more....malignant. It's these continued malignancies that are making Big Money experts move into stocks again.
Jim Jubak wites that the new and improved QE coming around the bend as Operation Twist expires could hurt TBond prices.
Jubak writes that more and more Fed spending will lead to higher yields on bonds and eventually inflation all over the world, inflation that will be very hard to control:
The Federal Reserve's Operation Twist is scheduled to expire this month. That program to swap about $270 billion in short-term Treasurys for longer-term, five- to seven- year debt in order to lower long-term interest rates - to support the recovery of the housing sector and to stimulate economic growth -- is almost certain to end with the year.
But Fed Chairman Ben Bernanke and company are also almost certain to replace Operation Twist with a new, more aggressive program of quantitative easing. The fallout from this will be new pressure on bonds that could eventually send investors fleeing -- and those who aren't careful will get hurt in the rush.
A New Buying Binge.
The Fed is clearly worried that the debate alone over the fiscal cliff -- or worse, the actual expiration of all of the Bush tax cuts, the Social Security tax reduction and extended unemployment benefits, plus the automatic budget cuts imposed by the debt-ceiling deal -- could slow the economy and even send the U.S. back into recession.
Recent speeches by Federal Reserve governors and basic math all suggest the new program will be an out-and-out plan to buy five- to seven-year Treasuries. That would continue the thrust of Operation Twist but get around a big problem the Fed now faces: It has become increasingly difficult for the Federal Reserve to sell its short-term holdings of Treasuries and to buy medium-term debt to replace them because the Fed has effectively sold most of its short-term holdings.
The new program would require the further expansion of the Federal Reserve's already massive balance sheet, which stood at $2.85 trillion as of Nov. 21. That $2.85 trillion level has been relatively stable since June 2011.
The new plan would change that. The number floating around Washington and Wall Street mentions Fed buying of about $45 billion in Treasuries a month. That would easily push the Fed's balance sheet to more than $3 trillion sometime in 2013.
It seems like higher Treasury interest rates might stem from the sense that our ship of state is being driven by a madman (Bernanke has more power than Obama; he can't start a war -- but he is handing billions to his friends and is determining who gets rich and who doesn't) -- and that sensible Americans would get out of stocks and bonds and commodities, as the economy looks to sink lower. Of course Ben doesn't want to reward sensible Americans, so he keeps interest rates at zero, as he revs up the Inflation Machine BEYOND all sane levels. Horrible things could happen to America because of this. We have a madman driving our speedboat faster and faster. We are in 'uncharted waters' and he is driving faster and faster. Lucky for us, Ben apparently doesn't drink.
But people (inside and outside the FED) are starting to wonder aloud if Ben has lost contact with reality.
A LESSON IN RELIGIOUS PHILOSOPHY. Numerology and the Trinity.
Those sensitive to the discussion of religions ideas should change channels now.
All of my regular readers understand that I believe history (American social history if not all history) moves in 36-year (360°) cycles. Eighteen years of expansion (inflation) ALWAYS followed by eighteen years of contraction (deflation). The Eighteen years of Inflation I call Day-Cycles; the Eighteen years of Deflation I call Night-Cycles.
How does the idea of the Trinity fit into this picture? The Trinity, in Catholicism, defines God as being composed of Three Persons: The Father, the Son and the Holy Ghost. How does the Trinity idea fit with my economic system?
Day Cycles (18 years of Inflation) are the Age of the Father, the Age of One, Unity, Law, Order. Night Cycles (18 years of Deflation) are the Age of the Son, the Age of Two, Division, the Unity broken in half. This brings pain and darkness because the original Unity is broken. 1911-1929 was the Age of the Father; 1929-1947 was the Age of the Son.
1983-2001 was also the Age of the Father, America United and led by the unerring Father Knowledge and Will. The Age of the Father is Fascist, Patriarchal, orderly, traditional, with the man on top. When the Age of the Father ends, when the Father 'dies', the Son is born. The Son is the Soul. The Father is Fire; and Fire always tries to rise; the Soul is Water, and Water always falls. The Son resists the Father, resists tradition, rebels against authority. The Son balances his Father's Will with Love -- and seeks to balance the wealth of the world by choosing to give his wealth to the poor instead of the rich. 1965-1983 was an Age of the Son. Communism and other forms of populism in favor of a smaller gap between rich and poor is always a part of this Age of the Son.
Another metaphor I like involves the Age of the Father -- Number One -- as being the time the sap rises up the Tree of Life. The Age of the Son -- Number Two, opposition, duality -- is the time the sap falls back down from the fruit to the branches and the trunk, back into the root-system of the Tree of Life. The sap spends the Winter with the poor. The Father cares about Power and Wealth and the strongest Will of the strongest hunter. The Son cares about Justice, Fairness, and Decency. That is the Soul's domain.
Then comes the mysterious Holy Spirit, the third person in the Trinity. The number 3, which synthesizes the two oppositions, 1 and 2. Interestingly 1 plus 2 equals three. But how does the number 3 fit into this picture. To understand the Holy Spirit's place in this trinity one must understand the idea of ouroboros, the Snake Eating It's Own Tail, the symbol of Eternity or of an Eternal Process.
A secondary picture of the ouroboros is useful to our understanding in that it reminds me of the Christmas wreath, symbolic also of eternity, through the rebirth of the Son of God.
Ok, the real magic of this system of though comes in through the agency of the Holy Spirit, pneuma, the fiery wind or 'Breath of God', tongues of flame and alchemical transformation. The Holy Spirit, the synthesis, magically fuses (through fire, or the mystery of alchemy) the Father and the Son together, making the Son the Father. This makes the Age of the Father begin again, without missing a beat.
In my system, we have 18 years of the Father and Inflation (Light and Matter) (1911-1929; 1947-1965; 1983-2001; 2019-2037), we have 18 years of the Son (Darkness and Anti-Matter) (1929-1947; 1965-1983; 2001-2019...you will see that each of these ages is about deconstructing the world the Father has built, for the Father is the builder and the Son deconstructs what the Father has built). Magically, at the bottom of every full 36-year Cycle, the Trinity, the Father, the Son and the Holy Ghost are fused: 1911; 1947; 1983; 2019. The One in 1983 becomes the Two in 2001 becomes the Three in 2019 -- and the Three become One again.
I know this is hard for those who are trapped in the Number One (Reason, Logic, Male Thinking) to conceptualize. The poetic mind is needed in order to see this reality.
This mystical marriage of the 3 and rebirth only happens at the bottom of the cycle, in December, on December 21 in fact: the Winter Solstice, the birth of the Son Hero or Sun God, when a new cycle always begins. Hence Christian honoring of the birthday of Jesus Christ on December 25.
This explains why my faith in the 2019 bottom in the global economic deflation is unshakable. I can see it with my mind.
It is interesting to see that the final book of the New Testament, the Book of Revelation, plays exactly the same role of the Holy Spirit in fusing The Age of the Son, the New Testament, to the Age of the Father, the Old Testament. The Book of Revelation is the 'book of the Holy Spirit' -- and the main players in the Book of Revelation -- Satan (Saturn), Jesus Christ, Mary (the Great Deep of the Night Cycle Waters, Chaos ruled by the Waters), and Michael the Archangel are all emblems of this Midnight transition from the Black Hole Deflation and Contraction to the White Hole Inflation and Expansion coming in 2019.
In a different sense, 2019 is the tip of Mount Ararat, on which Noah's Ark comes to rest. 2019 in Polaris, the Northern Pole Star, toward which we are sailing this current version of the Ark.
Still long because Bernanke has not been fired. From Leonard Cohen's 'Closing Time':
"There'll be hell to pay when the fiddler stops..."
Bernanke is the fiddler in this contet -- a Dull Fiddler indeed.
Took profits in RIMM. Almost a 100% gain in three months. I'm not really negative on RIMM. Note the trend (red line) in the top pane: still making higher highs and higher lows. But I'm following my system.
Buy Signals: CRL, Charles River Labs; MGM, MGM/Mirage; GNW, Genworth Financial.
SHORTSELL: HLF, Herbalife
Best wishes to all,
Michael J. Clark, Hanoi