Cape Fear? S&P Peak PEG ratio At All-time High, Shiller CAPE Ratio At Second All-time High As Dow Pierces 26K Mark

Yes, the stock market is on a roll with the Dow recently piercing the 26,000 mark. And the S&P500 index has pierced the 2,800 mark. Of course, the massive Federal Reserve intervention (along with other global central banks) has certainly thrown gas on the fire.

spxfed

Looking at price levels alone is not meaningful. So, let’s look at two stock market adjusted indices.

First, there is the S&P Peak PEG ratio.  It is a price to peak-earnings multiple, adjusted for long-run trend growth. It is at the all-time high.

Peak-PEG-Ratio

Second, we have Bob Shiller’s CAPE (Cyclically Adjusted Price-Earnings) ratio that is now at the second highest peak (after the Dot,com bubble) and above the notorious Black Tuesday of 1929.

capefear

But it is not just the stock market that may be overheated. How about home prices … again?

cs20fed.png

And if we adjust home price growth by hourly earnings by the majority of the population, we see that home prices YoY are growing 3 times faster than hourly earnings YoY.

fhfawages

This might help explain why The Fed is so timid about unwinding its balance sheet.

sonh011818

Did someone mention fear?

5T48AkV.png

Advertisements

Core Inflation Rises 0.3% MoM In December, 1.8% YoY, Owners’ Equivalent Rent of Dwelling Rises 3.1% YoY (Fed Still Can’t Generate Inflation)

I remember when Federal Reserve Chair Janet Yellen said that inflation is just around the corner. It must be a really long street.

Consumer price indices for December are out and CPI MoM rose 0.1%, but Ex Food and Energy it rose 0.3%. CPI Ex Food and Energy YoY rose 1.8% from 1.7% in November.

eco011218.png

Despite its wishes to generate inflation with zero interest rate policies and QE, inflation remains stubbornly low (below 2%). Core PCE Prices YoY is even worse at 1.50%.

inffed

Of course, home prices are growing at 6.6% YoY, over 4 times core inflation (PCE). 

fhfapoyoy.png

Although imputed rent growth YoY is only 2x core inflation (PCE).

rentddd

So, home prices and imputed rent of dwellings are both rising at multiples of the core inflation rate … and wages.

Hopefully Yellen’s replacement can do better in terms of slowing down bubbles. But I doubt it.

yellenbubbles

China Weighs Slowing or Halting Purchases of U.S. Treasuries – Escape From New York (Fed)?

This Bloomberg News title sounds like something John Carpenter would have created, as in Escape From New York (Fed). 

 

Officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, according to people familiar with the matter. Benchmark bonds reversed earlier gains on the news, with the yield on 10-year Treasuries climbing for a fifth day.

China holds the world’s largest foreign-exchange reserves, at $3.1 trillion, and regularly assesses its strategy for investing them. It isn’t clear whether the recommendations of the officials have been adopted. The market for U.S. government bonds is becoming less attractive relative to other assets, and trade tensions with the U.S. may provide a reason to slow or stop buying American debt, the thinking of these officials goes, according to the people, who asked not to be named as they aren’t allowed to discuss the matter publicly. China’s State Administration of Foreign Exchange didn’t immediately reply to a fax seeking comment on the matter.

“With markets already dealing with supply indigestion, headlines regarding potentially lower Chinese demand for Treasuries are renewing bearish dynamics,” said Michael Leister, a strategist at Commerzbank AG. “Today’s headlines will underscore concerns that the fading global quantitative-easing bid will trigger lasting upside pressure on developed-market yields.”

The Chinese officials didn’t specify why trade tensions would spur a cutback in Treasuries purchases, though foreign holdings of U.S. securities have sometimes been a geopolitical football in the past. The strategies discussed in the review don’t concern daily purchases and sales, said the people. The officials recommended that the nation closely watch factors such as the outlook for supply of U.S. government debt, along with political developments including trade disputes between the world’s two biggest economies when deciding whether to cut some Treasury holdings, the people said.

The yield on 10-year Treasuries was four basis points higher at 2.59 percent as of 12:16 p.m. in London, reversing a decline to 2.54 percent earlier Wednesday. The rate on comparable bunds was one basis point higher at 0.53 percent.

lt10

Any reduction in Chinese purchases would come just as the U.S. prepares to boost its supply of debt.  The Treasury Department said in its most recent quarterly refunding announcement in November that borrowing needs will increase as the Federal Reserve reduces its balance sheet and as fiscal deficits look set to widen.

“It’s a complicated chess game as with everything the Chinese do,” said Charles Wyplosz, a professor of international economics at the Graduate Institute of International and Development Studies in Geneva. “For years they have been bothered by the fact that they are so heavily invested in one particular class of U.S. bonds, so it’s just a question of time before would try to diversify.”

Some investors said that the market could take the China news in its stride considering the nation’s net purchases of Treasuries have already slowed “significantly.”

“If China ceases to be a net purchaser of U.S. Treasuries, this is unlikely to have a significant impact on the overall yield curve unless China divests a large share of its total holdings in a short time period,” said Rajiv Biswas, Singapore-based chief Asia-Pacific economist at IHS Markit.

Yields were already climbing this week amid expectations the improving global economy will boost inflation pressures round the world, just as major central banks scale back their asset purchases.

Markets are also braced for a deluge of debt supply this week. The U.S. is scheduled to reopen $20 billion of 10-year debt later today, followed by $12 billion of 30-year bonds on Thursday. Germany sold 4.03 billion euros of 0.5 percent 10-year bonds on Wednesday with syndications in Italy and Portugal to follow.

Yes, China is the largest holder of US Treasuries AFTER the New York Federal Reserve, followed by Japan and Ireland.

 

treasholdings

But since 2012,  both China and Japan has slowly decreased their holdings of US Treasuries while the New York Fed has greatly increased their position (better known as QE3).

tholdchna

Yes, the Chinese government is comtemplating an Escape from the New York (Fed) in the face of rising interest rate and trade squabbles with Washington DC. We shall see if it is bluff by China or not.

513XYaaXzoL._SY445_

Chapter 11 Filings Soar, C&I Lending Growth Stalls (Unpeaceful, Uneasy Feeling)

Real GDP growth is above 3%, unemployment rate is near 4%, and other economic indicators are flashing green. Yet, I have an unpeaceful, uneasy feeling.

Chapter 11 (bankruptcy) filings are rising and are back to Great Recession levels.

Source: https://www.abi.org/ and http://www.uscourts.gov/statistics-reports/caseload-statistics-data-tables

Another indicator, commercial and industrial lending from commercial banks, is approaching a flat stall. Even real estate lending is slowing again YoY.

Throw in our Federal government debt of over $20 trillion and skyrocketing consumer debt,

So, The Federal Reserve was wildly successful in terms of lowering interest rates and encouraging the Federal government and households to gorge on debt. Wait, households are responsible for the Federal debt!

Perhaps we are already gone!

Are Shopping Malls In WORSE Shape Than Previously Thought? (70% of Malls Suffer Decline in Tennants)

It is no secret that store closings have increased, some caused by on-line shopping like  Amazon,

2018.01.08 - Mall 2

or the failed wage recovery after The Great Recession (aka, the WORSE wage recovery following a recession in recent history).

wagesgrowthfed

Now Green Street Advisory has a study on Mall Turnovers and it is grim.

Across the 950 malls studied, over two-thirds saw a net decrease in the number of national tenants. While ‘A’ malls performed relatively well, they have not fully escaped the closures due to some retailers shuttering all their locations regardless of mall quality. Furthermore, most top-quality centers already have more of the national retailers as tenants, limiting their ability to find other national tenants to replace those that leave. Conversely, many lower-quality centers are seeing significant changes in their ability to retain and attract national retailers despite already housing fewer national retailers on average than ‘A’ malls. This trend demonstrates the challenge that many malls are now facing as they fill vacancies with more local and regional tenants.

In conclusion, the key takeaway is that it’s hard to assess what real estate is worth in the retail sector today. In-line tenant activity can provide a window into individual mall health. The Advisory & Consulting group’s analysis concludes that ~70% of malls have suffered a recent decline in the number of national tenants. Understanding which malls are most at risk in a timely fashion is key to anticipating possible “death spirals,” where malls can lose as much as 90% of their value (much more than other property types).

And yes, even “A” space is seeing negative tenant change, so it is no longer just fringe malls in depressed areas that are having problems.

2018.01.08 - Mall 3.JPG

This will definitely put a dent into CMBS prices if the mall operators can’t replace the declining tennant rolls. That is, can mall operators repurpose vacant space (like having George Mason University offer classes in malls to eleviate their space constraint on Fairfax campus)?

Repurposing will likely be with local tenants and not national tenants.

2018.01.08 - Mall 1

img_0727-3.jpg

 

Big Bubbles! House Price Bubbles and Financial Stress (The Do Ho Financial Market)

Yes, we live in a “Do Ho” economy where bubbles (and not tiny ones) are pervasive. 

Look at the YoY growth in the all-transactions index from FHFA for US house prices compared to the St Louis Fed Financial Stress Index.

bubblwes.png

When the financial stress index is low (less than zero), we see BIG home price bubbles.

Of course, home price bubbles occur when YoY changes in home prices outpace household earnings growth YoY.

homepricewages.png

If Don Ho were still alive, he could redo tiny bubbles as BIG bubbles.

61vrN7rnJqL._SY300_

 

Addicted To Gov: VIX and TYVIX Volatility Have Been Suppressed By The Fed (And Aren’t Increasing YET With Rates Increasing And “Unwinding”)

In 2008, The Federal Reserve embarked on their infamous quantitative easing (QE) program, that together with their Zero-interest rate program (ZIRP) has suppressed both stock market volality (VIX) and Treasury note volatility (TYVIX).

(Bloomberg) It’s pretty simple: in three decades since the Cboe Volatility Index was invented, 2017 will go down as the least exciting year for stocks on record. There are three trading days left and the VIX’s average level has been 11.11, about 10 percent lower than the next-closest year.

It’s tempting to say nobody thinks it will last, but that would be to ignore the walls of money that remain stacked up in bets that it will. Going just by the sliver represented by listed securities, about $2.4 billion is in the short volatility trade as of this month, the most on record. Hundreds of billions more are betting against beta in things like volatility futures.

Still, that doesn’t mean investors are ignoring the possibility of a resurgence, or at least a reversion to the mean. Here’s a look at volatility positioning as it stands now.

Surging Cost of Protection Against VIX Upside

Nervousness about next year is visible in the relative cost of betting on an increase in volatility, which has surged to a peak compared with wagers on a decline. (The spread is based on three-month VIX skew in data compiled by Bloomberg.) Someone, somewhere is spending money to capitalize on a rebound in the gauge.

bettingonvol

But it’s the furthest thing from a one-way bet. The global short volatility trade currently has more than $2 trillion in various strategies, according to an October report by Christopher Cole, the founder of Artemis Capital Advisers hedge fund. He compared the strategy of betting that volatility, already near record lows, will fall even further, to a snake “blind to the fact that it is devouring its own body.”

Reptilian autosarcophagy aside, as of December 2017, betting against volatility has been the trade that worked. An analysis on the ETF.com website Tuesday said that seven of the 20 worst-performing exchange-traded securities this year were long VIX and other volatility measures.

Investors see a 74 percent probability that equity price swings will widen next year as the current levels of volatility are “unsustainable,” according to asurvey of 229 investors representing $6 trillion in managed assets conducted by Absolute Strategy Research. The VIX rose for a second day to 10.25 on Tuesday after hanging below 10 for about 20 percent of the time this year.

Record Number of Investors See Stocks as Overvalued
Between rising corporate profits, a pick-up in global growth and laudable message-management by central banks, volatility has had few catalysts. But as the S&P 500 Index has reached 62 all-time highs this year, a record number of investors see stocks as overvalued, according to a Bank of America Merrill Lynch survey last month.
Perhaps as a result, smart-beta exchange-traded funds purporting to offer a haven from chaos have taken in more than $3.5 billion in 2017.

bvol

Anyone in a short-volatility position should be aware that when the end comes, it usually comes fast.

“Look at what happened in January 2016, a drop of more than 5 percent in the S&P — and a spike in volatility — came out of the blue,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. “When vol goes up, it moves quickly, making it hard to exit when you’re short volatility in a significant amount.”

Earnings Dispersion and Volatility Pick-Up
For Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, the death knell for dormant volatility next year will come from less benign global macro conditions. A more challenging global growth environment, the Federal Reserve tightening coupled with the tax uncertainty will lead to a wider dispersion in economic data and earnings data, resulting in more volatility.

vol18

Another hint that the low VIX doesn’t bespeak a dumbfounded unanimity is the volatility curve.

In a blog post last month, New York Federal Reserve economists pointed out that investors are paying noticeably more to hedge against price swings a year from now than for shorter-term volatility. Their analysis found that the difference between one-month implied volatility and one-year was about three times as steep as it normally is.

Ah, but what the New York Fed’s blog is not discussing is the impact that The Federal Reserve had on both stock and bond volatility due to their zero-interest rate policies (ZIRP) and quantitative easing (QE) 10-year programs.

volsuppfed.png

But as The Fed has started raising their target rate (4 times in a little over a year compared to once in 8 years under Obama) and unwinding their T-notes and T-bonds, we have yet to see a rebound (or mean reversion) in stock and bond volatility.

somavix

The lack of mean reversion in volatility is largely because The Fed is SLOWLY raising rates and unwinding their $4.4 trillion balance sheet. What happens when The Fed REALLY starts raising rates to some long-term average (and shrinks their balance sheet to something like only $1 trillion)? By NOT being more “speedy” about withdrawing their tenacles in financial markets, The Fed is actually perpetuating low-zero volatility.

Did zero-interest rate policies get replaced with zero-volatility policies?

You might as well face it, you’re addicted to gov. And risk mispricing.

yellensinging