It increasingly looks like the bull market in stocks is over

Via Business Insider

Click to visit the TBP Store for Great TBP Merchandise

• It’s looking more and more like the top tick for stocks was recorded on January 26, says David Rosenberg, the chief economist at Gluskin Sheff.
• Rosenberg expands on this and 12 other thoughts on the current market environment.

1. The bull market is over. This doesn’t mean we won’t be getting tradable rallies along the way. But it does look increasingly as though we saw the highs on January 26th for the cycle.

All three of the major indices are down in three of the past four weeks. The degree of volatility is symptomatic only of a market in transition. I mean — nine of the past eleven sessions have seen the S&P 500 swing up or down 1% or more. So far this year, the number of such intensely volatile days already has tripled what we experienced in 2017. And the fact that the Dow has now posted two individual periods in the same year of 10%+ declines says the same thing — declines like these back-to-back are more like hallmarks of bear, not bull, markets. New lows have outnumbered new highs for 12 of the past 13 sessions — so you be the judge of what the internals are suggesting right now.

-----------------------------------------------------
It is my sincere desire to provide readers of this site with the best unbiased information available, and a forum where it can be discussed openly, as our Founders intended. But it is not easy nor inexpensive to do so, especially when those who wish to prevent us from making the truth known, attack us without mercy on all fronts on a daily basis. So each time you visit the site, I would ask that you consider the value that you receive and have received from The Burning Platform and the community of which you are a vital part. I can't do it all alone, and I need your help and support to keep it alive. Please consider contributing an amount commensurate to the value that you receive from this site and community, or even by becoming a sustaining supporter through periodic contributions. [Burning Platform LLC - PO Box 1520 Kulpsville, PA 19443] or Paypal

-----------------------------------------------------
To donate via Stripe, click here.
-----------------------------------------------------
Use promo code ILMF2, and save up to 66% on all MyPillow purchases. (The Burning Platform benefits when you use this promo code.)

And yet the bulls are undeterred (as if we are supposed to get excited, from a contrary standpoint, just because the National Association of Active Managers survey of average portfolio manager exposures to the stock market has gone to 55.6 from an average of 71 in the first quarter).

Friday’s action is a case in point. Selling on higher volume and if you were watching what happened the three prior days, the buying was on weak volume. All major 11 sectors closed the week in the red.

I mentioned last week that we have already seen evidence in the earnings season that companies that beat are seeing their stocks sell off. Classic case of there still being too much optimism priced in at current levels, even after the turbulence of late. And Spotify’s shaky debut is another hallmark of a changed investing landscape — the shares began trading on Tuesday at $165.90 and closed the week at $147.92. This is not at all characteristic of bull-market behavior.

2. The US economy is back to stall-speed growth. The only reason why the Atlanta Fed is still at 2.3% real GDP growth for Q1 is because its GDPNow model uses soft survey data as an input. Macroeconomic Advisers’ most recent estimate is a much more realistic 1.5% — not far off where we are at the moment.

3. Three famous phrases that investors did not want to hear on Friday:

“I’m not saying there won’t be a little pain:” President Trump.

It sounds as though the White House cares little of the stock market in the name of protecting Main ‎Street. Investors are doing the prudent thing by de-risking and ignoring the shills and promoters on bubblevision.

“But there is the potential for a trade war:” Treasury Secretary Steven Mnuchin.

Poor guy. Like his dollar comments in Davos last January, another case of foot-in-mouth disease. And in stark contrast to all the soothing comments from Larry Kudlow that there would be no trade war. Now that we know it’s on the table, as in a war, there is no reason for the S&P 500 to be trading a full point above the long-run norm of the forward P/E, at 16x. A move to the mean of 15x, or perhaps below the mean, in this period of heightened ‎uncertainty, would seem to be in order.

“The labor market has been strong, and my colleagues and I…expect it to remain strong…in fact, monthly inflation readings have been firmer over the past several months, and the 12-month change should move up notably…:” Fed Chairman Jerome Powell.

It’s as if the new head of the Fed is no longer going be pursuing policy with an eye on his Bloomberg terminal — as he spoke with no dovish tones. Well, this was precisely the time when the major averages took another turn lower (the S&P 500 was down 2.6% at 2:39 p.m.).

4. Fund flows are turning negative. For the third week in a row, investors yanked money out of US-based equity mutual funds — $10 billion last week alone and $38 billion year-to-date‎ even with the regrettable massive injection at the January highs. European funds are witnessing a similar fate — four weeks of net outflows in a row ($2.4 billion last week). So where is the money going? Well, interestingly, EM equity funds with fifteen straight weeks of net buying activity (more than $1 billion last week and $43 billion in the first quarter which is huge…more than double the norm!). This is an accident waiting to happen since EM is sensitive to shifts in global liquidity, commodity markets and heightened trade tensions.

Do investors in this space realize that EM stocks are already down 9% from the January peak? In other words — take some chips off the table while you still can. The money also is going into short-term bond funds which posted their first net inflow last week at $1.1 billion. This is wise and at the same time at odds with the complacency being directed towards risky EM assets at the current time.

5. What is new this year that is causing all this corrective activity and volatility in the markets? Well, keep in mind that last year we spent much of the year with ‘animal spirits’ following the US election, followed by tax reform and tons of deregulation. Roughly half the equity rally in 2017 was pure multiple expansion. All along, we had someone leading the Fed who was a long-time dove and who the markets have known and been comfortable with for years. Janet Yellen presided over the third most robust stock market era of all time, and let it be known that she would spike the punch bowl until every investor showed up to the party.

This year, we saw tax reform all of a sudden become not just tax cuts but government spending increases — so what was a $500 billion deficit soon becomes $1 trillion. Tax cuts and ‘dereg’ were already priced in, but what wasn’t were the anti-business measures such as launching trade wars and openly criticizing companies like Amazon, so Putin-like personal in nature, mostly because Jeff Bezos owns the Washington Post. And we have a new and untested Fed, and Jay Powell and his voting FOMC membership seem to have a less dovish tilt than what the markets got to enjoy in 2017. In fact, soon-to-be New York Fed President John Williams said that three or four rate hikes would be in “the right direction” in a Friday sermon…markets are barely priced for two. So three or four moves are bound to be taken as a negative surprise for all who don’t at least have some exposure to floating-rate-notes.

6. The direct economic costs of the US-Chinese trade war are quite small. At most, a 0.2% hit to US real GDP growth and that is in an all-out war. China has reduced its export dependency over time but is still far more exposed and a worst case scenario lops 1% off growth there, no less than 0.5%. President Trump is wrong, by the way — there are no winners in a trade war, just varying degree of losing. China stands to lose more on a direct basis, but keep in mind that the indirect effects, via tightening financial conditions, will dampen global growth with negative feedback loops.

Go back to the Asian crisis in 1997-98 — the U.S. economy zipped right through until the Summer of ’98 when it morphed into a freeze-up in the credit markets and a near-20% slump in equities. Confidence is so important. Now, I doubt that China dumps its cache of US Treasuries which would force the PBOC to incur losses on its balance sheet. But China could choose to boycott the Treasury auctions which are set to double in size as the budget deficit balloons. And while China is running out of room in its tariff retaliation, since it imports $131 billion from the USA and exports more than $506 billion, it could end up impinging on U.S. corporations with direct investment activity on the mainland. Notice which stocks got hammered the most on Friday — Boeing down 3.1%, Deere down 3.9% and Caterpillar down 3.5%.

The weekend WSJ editorial (Punishing America First) put it best:

“That’s the problem with protectionism. The other side can strike back, and businesses and markets don’t know when the politicians will decide to stop pounding their chests…The basic economic problem with trade protectionism is that it is a political intervention that distorts markets. One political intervention leads to another, and the cumulative consequence is higher prices, less investment and slower economic growth…The Republican tax reform and deregulation have put the economy on a faster growth path, but Mr. Trump’s restrictions on trade, and on immigration amid a labor shortage, are threats to that progress. China’s trade abuses need to be addressed, but Mr. Trump’s tariffs first strategy risks punishing America first. He — and we — had better hope Mr. Xi is willing to bargain.”

7. The global economy was cooling off even prior to the recent round of global trade tensions. The Eurozone economic surprise index is down to two-year lows and the recent PMIs there, and in China, have turned down from their lofty levels. Germany has posted some very soft economic numbers of late. Aggregate hours worked in the USA softened from nearly a 3% annual rate in Q4 of last year to 2% in Q1 of this year. Roughly 75% of the tax-induced income growth this year has gone into savings, not spending. Commodities are starting to peel off, reversing last year’s uptrend, with the likes of copper and coal down 5% this year (iron ore and aluminum are off closer to 10%). This is a telltale sign of slower global growth ahead at a time when the U.S. stock market, in particular, entered 2018 pricing in yet another year of strong synchronized growth. That is now in the rear-view mirror.

8. I should add that if there is a market that never fully bought into the escape-velocity view of the US economy, it was the FX market. Whoever would have thought that Making America Great Again would involve five straight quarters of US dollar depreciation, down almost 8% in the past twelve months.

9. One added challenge to the stock market is that we are no longer getting the meltdown in bond yields that end up triggering a relative buy signal for equities. Despite the sharp slump in all the major averages, and the softer-than-expected payroll report, the best the 10-year T-note yield could do was dip 5 basis points to 2.78% on Friday. It is still well at the high end of the 2.00%-2.95% band since Labor Day and now caught in a very tight range. Bonds don’t seem to like all the tariff talk much either, because while it is anti-growth, is also provides a boost to cost-push inflation pressures.

10. There is this complacency I continue to see and hear about there being no financial imbalances this cycle. I have no clue where that comes from. As Guggenheim’s Scott Minerd pointed out in a CNBC interview, corporate debt ratios have risen to unsustainably high levels and there is a very active debt refinancing calendar coming in the next four years and likely at higher interest rates. Even accounting for cash on balance sheets, business leverage ratios are at elevated levels. This was part of SocGen’s Albert Edwards interview in Barron’s where he cited unprecedented debt/EBITDA ratios as a classic debt bubble that poses a major cloud over the economic outlook.

11. Household balance sheets are less pristine than is commonly perceived as well, and I’m not talking about residential mortgages. Lightning does not strike twice, cycle to cycle, but bubbles always develop after so many years of easy money policies that the Fed pursued. The elephant in the room this time are subprime auto loans, where outstanding debt totals $300 billion. The delinquency rate on this debt is approaching 10%, the highest it has been since the economy was gingerly coming out of recession and rife with double-dip risks in 2010.

We already have seen two subprime auto lenders shut down just in the past month — Summit Financial Corp. (Florida-based) and Spring Tree Lending (Atlanta-based auto lender). A private equity-backed firm, Pelican Auto Finance, just finished winding down too. If you recall, it was tiny subprime mortgage lenders in the last bubble like Ownit Mortgage and Sebring Capital Partners that proved to be early canaries in the coalmine — it wasn’t long thereafter that New Century Financial closed its doors (and even then, so many investors were in denial). Good article on this on Bloomberg News — Smaller U.S. Subprime Auto Lenders Are Folding as Losses Pile.

12. The USA isn’t alone when it comes to serious excesses in several areas of the credit markets. The situation is equally, if not more, acute in Canada, both with respect to corporate and household balance sheets. As for the latter, the Saturday Globe & Mail was all over this file and the numbers are rather shocking.

As was the case in the USA at the peak of the last mortgage bubble over a decade ago, the Big Six banks last year extended net new HELOC credit to the tune of $14.4 billion, taking outstanding levels to an all-time high of $207 billion — up 7.5%. We have reached a state where Canadians were permitted to tap their home equity in such a fashion that 40% of total non-mortgage household debt is now accounted for by home-equity lines of credit.

This leaves consumers hugely vulnerable to any further rise in short-term interest rates, not to mention declining home prices considering that nearly 60% of HELOCs are from GTA residents (and nationwide, 20% of Canadians have access to this type of credit — those who have it tend to use it, and the average balance is $70,000).

All this means what? It means the Canadian economy is more vulnerable to higher rates, either via BoC tightening (if Poloz et al feel compelled to resist any incipient cyclical price pressures, should they intensify) or imported from the USA as the Fed continues to take its foot off the gas pedal. This makes any intermittent rallies in the Canadian dollar, whether induced by short-covering or a pickup in the energy sector, as rallies you should rent, but not own.

13. It looks like NAFTA talks are showing signs of improvement. But looks can be deceiving. There is a sense that the Trump team wants a deal announced to deflect attention away from what is happening in the trade skirmish with China. The President, the story goes, is looking for success now on NAFTA to show the world that he can cut a deal. So the Trump team has watered down its aggressive stance on automobiles regarding content rules. There is also thought that the White House needs something by the end of May since a revised NAFTA would have to be approved by Congress. Not just that, but May 1st is the deadline for the exemptions for Canada and Mexico which hinge on a successful tentative NAFTA deal.

So Prime Minister Justin Trudeau jubilantly stated last week that we are seeing a “very productive moment” which is a big change in tone, and very likely an exaggeration. Linking auto content rules to wages is hardly good news for Mexico, which is likely to see a new ultra-nationalist government at the election on July 1st. Even if there is an agreement in principle, the lag between that and ultimate three-way passage of a new trade deal could still take years. Recall that Canada and Europe signed an agreement in principle for its deal in the Fall of 2013 but did not get passed for four years — and not before being derailed. As far as Canada is concerned, there is still a lot of tough bargaining ahead — U.S. government procurement programs, Canadian supply management in the dairy and poultry farming sectors, the U.S. demands to reopen NAFTA every five years and to eliminate the dispute-resolution mechanisms.

So maybe, as the Saturday Globe & Mail concludes, “Canada and Mexico are more than willing to give Mr. Trump a symbolic win next week.” But I wouldn’t be doing anything more than treating any positive CAD reaction as a trade. Diverging monetary and fiscal policies coupled with the fact that, while the U.S. economy is having difficulty generating any recurring acceleration, it looks like Canadian real GDP growth will be no better than a 1.5% annual rate in Q1 for the third quarter in a row. A stall-speed economy like that typically is not aligned with an appreciating currency.