The SocGen strategist says the West is about to be hit by a wave of deflation from emerging market economies and that central banks were unaware of the disaster about to hit them.
“I realize most people think I am talking utter garbage but I’m used to that. And maybe I am! But the truth will come out in the next recession which may be pretty close now,” Edwards says.
“The previous bear market low was in March 2009 when the S&P reached 666. I think we’ll go below that within this bear market.
“Developments in the global economy will push the U.S. back into recession. The financial crisis will reawaken. It will be every bit as bad as in 2008-09 and it will turn very ugly indeed.
“Emerging market currencies are still in freefall. The U.S. corporate sector is being crushed by the appreciation of the dollar.
He says the U.S. economy is in far worse shape than the Fed realizes: “We have seen massive credit expansion in the U.S. This is not for real economic activity; it is borrowing to finance share buybacks.”
Edwards attacked the “incredible conceit” of central bankers, who had failed to learn the lessons of the housing bubble that led to the financial crisis and slump of 2008-09. “They didn’t understand the system then and they don’t understand how they are screwing up again. Deflation is upon us and the central banks can’t see it.”
Note: Edwards's "Ice Age" thesis goes back to Aug. 2008, and was reiterated in Dec. 2009, Sept. 2011, and May 2012.
JPM strategists note that earnings expectations have been managed aggressively going into earnings season. Four months ago, the "hurdle rate" for S&P 500 stocks was +5% Y/Y; now it's -4% Y/Y. “If this were to materialize, it would be the weakest quarter for EPS delivery so far in the upcycle.”
Energy sector earnings consensus signals only single-digit losses, while oil prices are 36% below the 21015 average.
Sees euro-zone earnings outperforming U.S. for second year running.
Overall, firm says risk/reward for stocks is poor. Use bounces as selling opportunities.
Russell Investments is planning its annual index realignment today, affecting more than $5T in assets. Credit Suisse estimates $42B will trade as a result of the adjustment, resulting in one of the biggest trading days of the year in terms of dollar volume.
Asset managers and investors will have to realign their portfolios to match up with the new shifts in indices such as the Russell 2000 and the Russell 3000.
Due to the expected surge in volume, exchanges are now busy preparing for possible technical issues occurring over the course of the day.
Yesterday, the London Stock Exchange said it will acquire Frank Russell for $2.7B.
London Stock Exchange (LDNXF) has announced that it is buying the asset-management and stock index unit Frank Russell for $2.7B. A large chunk of the funding for the acquisition will be based off a $1.6B rights issue to be issued in September.
The stock-index operations of Frank Russell include the Russell 2000 barometer of small-cap stocks, while the investment business has $256B in assets under management.
London Stock Exchange (LDNXF) is in exclusive negotiations with Northwestern Mutual Life Insurance to buy the latter's asset-management and stock index unit, Frank Russell, which the WSJ reports could be worth $3B.
The stock-index operations include the Russell 2000 barometer of small companies, while the investment business has $260B of assets under management. (PR)
Stocks are set to add to yesterday's losses at the open, with S&P 500 (SPY) futures down 0.2% and Nasdaq 100 (QQQ) off 0.3%. The small cap Russell 2000 (IWM) - which entered correction territory yesterday - is down 0.2%.
Europe's posting moderate losses and the Nikkei finished down 1.4%, though Shanghai climbed 0.9%.
The 10-year Treasury yield holds at 2.50%, about its lowest level of the year, and gold is flat at $1,295 per ounce.
If Pfizer is successful in acquiring U.K.-based AstraZeneca, its plan to redomicile there will save it millions in corporate taxes. The tax arbitrage scheme, called an inversion, creates a holding company in the foreign country with the lower tax rate. Britain's corporate tax rate is 21% (20% next year) which is substantially lower than the U.S.'s top rate of 35% (up to 40% when state and local taxes are included).
About 24 U.S. companies have employed this strategy since 2008. Ireland, Canada, Switzerland and the Netherlands are also popular destinations for redomiciling.
According to Reuters, many of the m&a deals this year have been driven, at least in part, by tax inversions.
Predictably, investment bankers are working feverishly to generate deals in various industries that take advantage of the loophole before Congress acts to close it.
Some lawmakers say that the best solution is to reform the U.S. business tax code.
Members of Congress say that the moves are symptomatic of the need to revamp the U.S. tax code.
The U.K. corporate tax rate is 21% compared to the top U.S. rate of 35%. American firms must also pay taxes when they repatriate foreign profits after receiving credits for foreign taxes. This is why the ex-U.S. corporate cash horde is so large.
Stock index futures are marginally lower after a couple of ugly sessions, with the best news for stock bulls maybe being a loud, above-the-fold headline on Marketwatch.com that Dennis Gartman is "Scared" and has exited the stock market (in yen terms?).
Europe's off more than 1% and the Nikkei fell another 1.4% overnight, but buying continues in emerging markets, led last night by a 1.9% gain in Shanghai.
The 10-year Treasury yield is up a basis point to 2.71% and gold gets some mojo back, up 1.1% to $1,312 per ounce.
Making the rounds on trading desks is this chart of the DJIA (DIA) of the last 18 months superimposed on a chart of the index during the same time frame in 1928-1929. The short version: If form holds, the market is set for another epic crash.
In the more nuanced version, the chart says little except for again proving the hardwired tendency of the human brain to see patterns where none exist, and one is reminded of similar exercises over the past few years making the case for the Dow breaching its financial crisis lows.
Technical guru Tom DeMark, however, is starting to believe: “Originally, I drew [the chart] for entertainment purposes only ... Now it’s evolved into something more serious.”
Tom McClellan: "There is no guarantee that the market has to continue following through with every step of the 1929 pattern. But between now and May 2014, there is plenty of reason for caution.”
A "public service" from John Hussman who presents this long-term chart of the S&P 500 (SPY -0.3%) matched against occasions when the Investors Intelligence poll registered Bears at less than 18.5%, the Shiller P/E ratio stood above 19, and the S&P 500 was at a 5-year high: 1973, 1987, 2007, and today.
It's the bull market everyone continues to hate ... BAML's sell-side indicator - a contrarian take based on attitudes of strategists - continues to read in extreme bearish territory, suggesting more gains ahead for stocks. The level of bearishness now is actually greater than that of the March 2009 market bottom.