Wednesday, November 22, 2017

The last 2 years have been absolutely brutal for any fans of price discovery, volatility and anything analytical mattering. Nothing matters. Be it divergences, valuations, earnings misses, slowing data, yield curve, equal weight, internals, catastrophes in nature, slowing loan growth, slowing auto sales, slowing real estate, retail apocalypse, debt levels, etc…I can drone on. Nothing matters. Markets keep drifting higher despite it all.

Price discovery as we used to know it, the back and forth of buyers and sellers engaging in the argument of forward valuations based on expected earnings growth, has ended with the disappearance of sellers as part of the normal market functioning:

Corrections as a means of price discovery don’t exist any more. Every day we don’t have a 3% correction is a new record in length of time without any such correction. And the chart above illustrates this adequately. It is a global phenomenon, it’s not only US based.

5% corrections, what also used to be regular part of markets and a bare minimum at that, have also disappeared:

Not quite at a record, yet the message is nevertheless clear: There’s not much happening in these markets on a day to day basis.


The abomination of what passes for intra-day trading ranges these days illustrates the point quite nicely:

Whatever downside does occur can’t sustain itself for more than minutes, a couple of hours at best. Case in point: The $DAX was only negative for 1 hour 16 minutes after the surprise collapse of German coalition talks on Monday. Nothing matters.

Hence it is no surprise sentiment is as bullish as it is. Recall allocations are all bullish, people, funds, even central banks all own the same shrinking universe of stocks.


Indeed there is not even a sense that anything could change this program:

This chart of the global Dow Jones, more than any other, shows how historically out of balance this rally has been. Red bars don’t exist and this is the steepest uninterrupted ascent ever accompanied by the steepest volatility compression ever.

In this context yesterday’s capitulation by Goldman Sachs was classic. They were the investment bank that kept citing valuations as a major concern and were the most bearish on 2017. Then they capitulated. Now their mid range target is 2850 for 2018.  with little to no downside risk:

That’s if the exuberance stays rational they say, if it goes irrational they covered themselves with an irrational scenario of 5300.

As I said classic. It is notable how both Monday and Tuesday were suddenly flooded with bullish forecasts. I won’t bother to recite them all here, I gave you a glimpse yesterday.

I’m just highlighting this as a latest example of the complete lack of any divergent views remaining in the marketplace. Which is fine. It simply illustrates market sentiment, but also again underscores the extent of the bubble.

And yet while bulls cite supposed great growth figures the ECB keeps printing like we’re in the middle of the financial crisis:

The numbers behind the chart via Holger Zschaepitz: “#ECB ramps up balance sheet expansion despite booming #Eurozone economy. Total assets rose by another €24.1bn to a fresh life-time high of €4,411.9bn on QE program, equals to 40.9% of Eurozone GDP.”

Now that’s just intellectually insulting. If things are so great we wouldn’t need this level of intervention or any intervention.

But this is what they are doing. Every day. I keep asking: What is the organic market price balance without intervention? The answer remains the same: Nobody knows as we haven’t seen markets without intervention other than the brief moments were they produced full out panic. 2011 and early 2016 are examples coming to mind.

So I continue to view price extensions and disconnects to be a direct result of trillions of dollars in ongoing intervention and exacerbated by record ETF inflows.


Let’s be clear: I don’t know how or when it ends, but it will end. Our primary mission here is to figure out what we consider good risk/reward set-ups knowing that we are finding ourselves in the most one way focused and technically disconnected markets in decades:

But this is precisely the point in time when the $GS capitulation takes place and all the bullish forecasts are coming out. And I understand why they are coming out. No corrections have taken place and we are in a bullish seasonal part of the year.

Now that we have entered the seasonally most bullish time of the year I can certainly understand the silence of the bears. What is there to say? No rationally reasoned argument has mattered, prices keep going up and there appears absolutely nothing on the horizon to stop this train.

Indeed, not only are bulls bullish, but some of the remaining bears I still see floating about have resigned themselves to talk blow-off top coming and are busily identifying higher upside targets from 2700-3000. Funny that. Bulls are bulls and bears are bulls.

But this is the lay of the land folks.


Add some oversold signal charts coinciding with new all time highs and I could easily argue 4 to 5 weeks of upside coming:

The message: Markets cannot possibly go down. There is no risk. Everybody is bullish, join the party.

Bottomline: Fading this action and sentiment is the most contrarian thing anyone can do here and for that reason it can also be the most dangerous. I have no illusions about that.

Folks are piling in long at the technically most disconnected market ever since the 2000 Nasdaq bubble. But that doesn’t mean it will stop here.

Are there any issues with the bull case here other than technical disconnects and divergences that don’t matter?

Well, here’s a few considerations I wanted to share:

This chart doesn’t tell us we can’t go higher. We can. But it suggests something disturbing and I’ve made reference to it in the past, but the overlay with the 10 year gives additional context: It could be argued that these waves of bullish action were driven by one primary factor: Cheap money. Artificial low rates and debt.

Furthermore it could be argued that the bearish break on $SPX in 2008 was never technically repaired. Yes massively higher prices as a result of over $20 trillion in central bank intervention, zero rates and a global explosion in debt levels to the tune of above $145 trillion in the non financial sector. All made possible by cheap money:

So the big question is simply this: What if that down trend in the 10 year yield bursts above its trend line for the first time since 1987?

Monday, November 20, 2017



We have written many times about the fact... and it is a fact... that the Swiss National Bank has effectively become both the nation’s central bank and one of the largest, if not indeed the very largest, hedge funds in the world. The process began several years ago when the SNB swore that it would do what it could and using what methods were available to it to weaken the Swiss franc relative to the EUR and to the US dollar. It has succeeded, until recently, creating Swiss francs out of the thinnest of air, and selling those Francs vs. the EUR and the dollar, and then taking those EURs and dollars to buy European and US equities and debt securities.


The SNB’s balance sheet is a CHf 813 billion (and given that the CHf and the US dollar are effectively at parity one with the other that CHf 813 billion is the same as $813 billion) and this is very nearly 125% of the Swiss GDP. By comparison, the Fed’s balance sheet of $4.5 trillion is but 25% of the US GDP. In other words, if the Fed is taken to task for being expansionary, the SNB is truly explosive!


Of the CHf 813 billion on the Bank’s balance sheet, 760 billion of it is the form of securities, of which 90 billion are in equities. The other 670 billion are held in EUR and US debt securities.


Thus far this has been a huge, stunning, almost unimaginable profit for the SNB and theoretically for the people of Switzerland. However, the problem is that the SNB will have enormous difficulty in liquidating this massive portfolio, for once the news leaks out that the Bank is selling the bids will disappear; the CHf will soar in price while debt and equity markets melt away.


What the SNB has done here is stunning; some have even called it nearly “criminal” in nature. We suggest that there is nothing at all criminal in what the SNB’s leaders have done and that they are well within their legal guidelines; however, what they have done is optically and philosophically wrong and very badly so. This is QE gone very badly wrong, rivaled only by the same actions taken by the Bank of Japan that openly deals in the forex, debt and equity markets in Tokyo, buying ETFs on a very regular basis and becoming one of Japan’s largest public shareholders. This is central banking gone very, very badly awry. It will be stopped when equity prices collapse.



The SNB owns about $80 billion in US stocks today (June, 2017) and a guesstimated $20 billion or so in European stocks (this guess comes from my friend Grant Williams, so I will go with it).


They have bought roughly $17 billion worth of US stocks so far this year. And they have no formula; they are just trying to manage their currency.


Think about this for a moment: They have about $10,000 in US stocks on their books for every man, woman, and child in Switzerland, not to mention who knows how much in other assorted assets, all in the effort to keep a lid on what is still one of the most expensive currencies in the world.


Switzerland is now the eighth-largest public holder of US stocks. And apparently they are concentrating on the largest of the large-cap stocks. The own 19 million shares of Apple (as of March 31). That is roughly 3% of the current market.

I’m in Switzerland as you read this, so I am personally experiencing the reality of currency strength. Have you ever paid $12 for a Diet Coke? (Seriously!) No wonder the SNB is worried about the valuation of their currency.

I will be speaking at a conference in Lugano on Monday. The conference sponsors have asked me to give them three questions to ask the attendees during my speech. One of those questions is, do you think the Swiss National Bank will eventually hold $1 trillion in assets? And do you agree with that policy? I will be asking some of the larger asset managers what they will do and how they will react. Hedging? How do you do that in that environment?

Gartman is right: How can the SNB sell? The Swiss franc would levitate almost instantly, which is the one thing they are desperate to avoid. As long as people keep trying to convert their money into Swiss francs (at -0.75 basis points!), the natural direction for the franc will be up unless the SNB continues to intervene in foreign markets. My bet is that they will do so – and that this will not end well. Or maybe they’ll get lucky and their even more massive bond portfolio will offset their losses.