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Insiders Are Selling Stocks. Are You Going to Be the One Left Holding the Bag?

Written by Lu Wang via Bloomberg

A category of investors who correctly picked the market’s bottom in December is retreating from U.S. stocks.

The number of corporate executives and officers selling shares of their own companies has doubled since December while buying dwindled. Last month, insider sellers outpaced buyers by a ratio of 5-to-1, the most in two years, data compiled by the Washington Service showed.

The pickup in selling comes after stocks rebounded from the fourth-quarter sell-off, lifting the S&P 500 as much as 19 percent from its December low. While analysts have warned about reading too much into insider selling because factors other than valuations can influence the action, a similar spike in January 2018 coincided with the market’s peak.

“At a price that’s much higher, people are taking the opportunity to diversify their holdings,” said Andrew Hopkins, head of equity research at Wilmington Trust Co. “Typically in the C suite, people get allocated stocks as part of their compensation” at the start of a year, he added. “It would seem to me that you’d see some of automatic selling going on.”

Company executives were one of the few groups daring enough to go bargain hunting during the market rout in late 2018. In December, they scooped up shares at the fastest pace in eight years as stocks dropped to the brink of a bear market.

Now, they’re backing away. More than 2,600 insiders dumped shares last month, up from 1,360 in December. At the same time, only about 540 executives bought, less than half the number seen two months ago.

The retreat is occurring against a backdrop of market weakness. Stocks have fallen in all but one session since Feb. 25 as concern over the global economy resurfaced. The S&P 500 slipped 0.6 percent as of 11:15 a.m. in New York, as data showed U.S. hiring was the weakest in more than a year while wage gains were the fastest of the expansion.

Selling by insiders also whipped up in early 2018. The S&P 500 peaked at a record on Jan. 26 of last year to what was then a record, before plunging into a correction the following month.

Read the full article at Bloomberg: Insiders Who Nailed the Market Bottom Are Now Rushing to Sell Stocks | Bloomberg

$10 Trillion in Bonds Are Losing Money

Written by Cecile Gutscher via Bloomberg

The stockpile of global bonds with below-zero yields just hit $10 trillion — intensifying the conundrum for investors hungry for returns while fretting the brewing economic slowdown.

A Bloomberg index tracking negative-yielding debt has reached the highest level since September 2017 as 10-year bunds trade in negative territory and the U.S. yield curve flashes recession warnings.

With central banks in dovish mode, money managers face increasing pressure to reprise the yield-chasing mentality synonymous with quantitative easing, according to Gary Kirk, a founding partner at London-based TwentyFour Asset Management with $19 billion overall.

“This obviously tempts those investors holding cash to move along the maturity curve — or down the rating curve — to seek yield, which is once again becoming a scarce commodity,” he said. “It’s a classic late-cycle conundrum.”

Kirk is “resisting the temptation” to snap up longer-dated credit obligations that could succumb to defaults in a downturn and prefers duration bets in interest-rate markets.

Fight for Yield

Fund flows underscore the lust for yield in the low-rate, lowflation climate. Investors in the week through March 20 parked $6.6 billion into investment-grade funds, $3.2 billion into high-yield bonds and $1.2 billion into emerging-market debt, according to a Bank of America Corp. note citing EPFR data.

“The extraordinary abrupt end to central bank hiking cycle + Fed paranoia of credit event is uber-bullish credit & uber-bearish volatility,” strategists including Michael Hartnett wrote.

While negative yields on paper suggest that investors lose money just by holding the obligations, bond buyers could also be looking at price gains if growth stalls and inflation stays low. But along the way, risk assets may be entering the danger zone.

“We’ve never seen monetary easing so long, so broad, so big,” said Brian Singer, head of dynamic allocation strategies at William Blair, a Chicago-based fund manager that oversees $70 billion overall. “What’s happened after every significant period of accommodation is a reckoning. This time the bubble is lower-rated credit and illiquid private assets.”

You can find the article on Bloomberg: The $10 Trillion Pool of Negative Debt Is a Late-Cycle Reckoning | Bloomberg

Downside Risk Dwarfs Upside Reward

Written by Lance Roberts via Real Investment Advice

I recently received the following email: “Are we going to hit new highs you think, or is this a setup for the real correction?”

The answer is “yes” to both parts.

Thank you for reading. See you next week.

You still here?

Fine, let me explain then.

The “price” of the financial markets are ultimately driven by one thing and one thing only: “expectations.”

Yes, fundamentals, valuations, interest rates, etc. all play an important role, but it is ultimately “expectations” of “the herd” which moves prices. Currently, valuations on stocks are at the second highest level on record, but “expectations” are that a continued “low interest rate environment” can support economic growth allowing stocks to “grow” into their valuations.

This is why Wall Street begin using “forward operating earnings,” which are complete nonsense, to justify high valuations and, you guessed it, “expectations.” (Operating earnings are essentially “made up” earnings without any of the “bad stuff” included.)

For more on this valuation read a recent article we wrote on the topic titled Price to Forecasted Hope.

The problem, historically speaking, is when those “expectations” are disappointing as shown below.  There are three important things worth pointing out:

  1. The top panel is GAAP earnings (what companies REALLY earn) and nominal GDP.
  2. The black vertical line is when the markets begin to “sniff out” something is not quite right.
  3. The red bars are when “expectations” are disappointed.

While “expectations” were indeed disappointing in 2015-2016, the long-term rising trend line was never violated. Secondly, the current warning signal (black vertical line) is in place, but “expectations” have not yet been disappointed.

As I discussed yesterday, one of the biggest problems facing investors is that many have never recovered from the previous two bear markets. While “this time may seem different,” the reality is such is probably not the case.

Read the full article at Real Investment Advice: Technically Speaking: Are We Going To New Highs? | Real Investment Advice

Yellen: “Global Central Banks Need One More Crisis Tool”

Authored by Jesse Colombo via Real Investment Advice

In a speech in Hong Kong this week, former Fed chair Janet Yellen stated that “global central banks don’t have adequate crisis tools.” According to that logic, she believes that launching additional multi-trillion dollar rounds of quantitative easing and cutting interest rates into negative territory – two aggressive and controversial monetary tools that are currently available – are simply not enough. Yellen’s comments this week echo comments that she made in September 2016 when she was still Fed chair:

The Federal Reserve might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said on Thursday.

Speaking via video conference with bankers in Kansas City, Yellen said the issue was not a pressing one right now and pointed out the U.S. central bank is currently barred by law from buying corporate assets.

But the Fed’s current toolkit might be insufficient in a downturn if it were to “reach the limits in terms of purchasing safe assets like longer-term government bonds.”

“It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions,” she said, adding that buying equities and corporate bonds could have costs and benefits.

If the Federal Reserve is ever allowed to buy stocks and corporate bonds, it will create an extremely dangerous situation in which investors, speculators, and business leaders will feel that they can take virtually unlimited risk and will still be backed by the Fed. This phenomenon is known as a moral hazard or the Fed Put. As I discussed in a piece last week called “Why The Fed Keeps Propping Up The Market,” the Fed has already created an unprecedented moral hazard by stepping in to prop up the stock market every time it has tumbled in the past decade (see the chart below). If the Fed can buy stocks and corporate bonds, it will compound moral hazard on top of more moral hazard – moral hazard squared, basically. The result will likely be a stock market bubble that is more extreme and dangerous than any other stock market bubble in history.

If the Fed changes its policy to allow the purchasing of stocks and corporate bonds, it will likely further encourage the growth of the U.S. corporate debt bubble that I have been warning about. To summarize, ultra-low bond yields over the past decade have encouraged a corporate borrowing bubble that has also been funding the stock buyback boom. As a result, total outstanding U.S. corporate debt has increased by $3 trillion or 45% since the last peak in 2008:

U.S. corporate debt is now at an all-time high of over 46% of GDP, which is even worse than the levels reached during the dot-com bubble and mid-2000s housing bubble. If the Fed is able to purchase stocks and corporate bonds, corporate debt may grow to an even higher proportion of the GDP before the bubble bursts.

As a result of the Fed’s stimulative monetary policy and frequent market interventions in the past decade, the S&P 500 rose much faster than earnings and is now at 1929-like valuations, as the chart below shows. If the Fed is able to purchase stocks and corporate bonds, valuations may hit late-1990s dot-com bubble levels or even higher before the bubble bursts. Of course, the more the bubble inflates, the harder it’s going to ultimately crash.

Why is the Fed becoming increasingly desperate for new monetary policy tools to use in the next recession or crisis? It’s because the record federal debt load severely limits the government’s ability to use fiscal stimulus like it did during the Great Recession:

It’s very likely that the Fed will dramatically expand the range of monetary tools it can use. While these tools – or simply the threat to use them – may calm the fears of investors for a time and support the continued inflation of the stock market bubble, they will encourage risk to build up to such a high level that will eventually overwhelm the Fed’s ability to control it, which is when the ultimate crash will occur.

Hedge Fund: Sell Stocks, Buy Gold Is the “Trade of the Century”

Written by Sarah Ponczek via Bloomberg

One of last year’s best-performing hedge funds says the “trade of the century” is to buy gold and sell stocks as risk assets are due for another meltdown.

It’s only a matter of time until the bearish bet pays off big, according to Crescat Capital LLC. While the Denver-based firm has only about $50 million under management, it has a history of outperforming the S&P 500 Index — with its Global Macro Fund returning 41 percent last year alone. Now the investment company says it’s ready to capitalize on an end of the economic cycle as indicators warn that a recession is imminent in the coming quarters.

The consensus is pointing to a recession in 2020 or 2021, Tavi Costa, a global macro analyst at Crescat, said by phone. “We think it’s a lot closer than that and we have a number of macro timing indicators that we look at.”

Going long gold in yuan terms and shorting global equities currently explains three-quarters of the hedge fund’s strategy. While the firm uses the MSCI World Index in models to visualize the trade, it goes a bit deeper with its short position, selecting individual stocks and exchange-traded funds to bet against.

Among the warning signs, Crescat cites corporate insiders who are currently selling stocks hand over fist — indicating a potential stock bubble burst. In early 2017, those investors heavily sold shares while the S&P 500 continued climbing. That happened again in 2018. With the smart money selling once again, “the third time should be the charm for the stubborn U.S. market,” Crescat wrote to clients over the weekend.

U.S. economic data is deteriorating and inversions remain across the Treasury yield curve, the hedge fund pointed out. Measuring multiple yield spreads across the curve from Fed Funds to 30-year Treasury bonds, Crescat found that almost 45 percent of the curve is inverted.

“The last two times the credit markets had such a high distortion, asset bubbles began to fall apart shortly thereafter,” Crescat wrote.

You can read the full article at Bloomberg: Buy Gold, Sell Stocks Is the ‘Trade of Century’ Says One Hedge Fund | Bloomberg

Your Pension Can Be Bought Out Against Your Wish

Written by Lydia DePillis via CNN

Traditional pensions are disappearing in America, and the federal government just made it easier for employers to get rid of them.

With no fanfare in early March, the Treasury Department issued a notice that allows employers to buy out current retirees from their pensions with a one-time lump sum payment. The decision reverses Obama-era guidance, issued in 2015, that had effectively banned the practice after officials determined that lump-sum payments often shortchanged seniors.

Now, advocates for the elderly worry that millions of people receiving monthly pension checks could be at risk.

“Permitting plans — for their own financial benefit — to replace joint and survivor or other annuities with lump-sum payments will reduce the retirement security of both workers and their spouses,” AARP Legislative Counsel David Certner said.

Since the 1980s, employers have shifted away from offering defined-benefit pensions, which provide a guaranteed monthly income for as long as someone lives in retirement. Instead, employers now favor 401(k) accounts, a finite pot of money that becomes available at age 59.5.

Pensions, which are insured by the federal Pension Benefit Guaranty Corporation in case employers go bankrupt, still cover 26.2 million people across 23,400 single-employer plans. But that number has been shrinking faster than it would naturally as companies close their plans to new hires.

Here’s why: Pensions are big liabilities for companies, which Wall Street ratings agencies don’t like. To remain solvent, pension funds depend on their investments in bonds, stocks and other securities, but recent swings in financial markets serve as a reminder that positive returns are not a sure thing. Pensions are also expensive to maintain. The premiums the PBGC charges per covered employee have more than doubled over the past decade as part of a budget gimmick to fill other government revenue holes.

“Healthy companies throw up their hands and say, ‘why do we bother?'” said Annette Guarisco, president of the ERISA Industry Committee, which represents large employers around regulation of employee benefits. “Because companies are now competing with other companies that don’t offer these benefits to their workers, it becomes a cost that they have to question whether they have the ability to maintain.”

Read the full article on CNN: It just became easier for employers to dump retirees’ pensions | CNN

All Markets Work in Cycles

Written by Lance Roberts via ZeroHedge

In this past weekend’s newsletter, [Real Investment Advice] noted the issues of similarities between the current market environment and previous market peaks in the past. To wit:

“It isn’t just the economy that is reminiscent of the 2007 landscape. As noted above, the markets also reflect the same. Here are a couple of charts worth reminding you of.

“Notice that at the peaks of both previous bull markets, the market corrected, broke important support levels and then rallied to new highs leading investors to believe the bull market was intact. However, the weekly ‘sell signal’ never confirmed that rally as the ‘unseen bear market’ had already started.””

“Currently, relative strength as measured by RSI on a weekly basis has continued to deteriorate. Not only was such deterioration a hallmark of the market topping process in 2007, but also in 2000.”

“The problem of suggesting that we have once again evolved into a “Goldilocks economy” is that such an environment of slower growth is not conducive to supporting corporate profit growth at a level to justify high valuations.”

My friend and colleague Doug Kass penned an important note about the current market backdrop on Monday:

“‘Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits-a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.’ – John Maynard Keynes

“The markets, confounding many, have vaulted higher from the Christmas Eve lows with nary a selloff.

“This morning, let’s briefly explore the catalysts to the advance and consider what might follow:

  1. Liquidity (and financial conditions) have improved, as Central Bankers, to some degree, have reversed their tightening policies. Interest rates and inflationary expectations have moved lower than expected, providing hope for an elongated economic cycle that has already been a decade in duration and appeared to be “long in the tooth.”
  2. Market structure (and the dominance of price following products and strategies like ETFs, CTAs and Risk Parity and Volatility Trending/Targeting) exacerbated the trend lower into late-December. The breadth thrust and reversal in price momentum contributed to the post-Christmas rally. As I have previously noted, in an investment world dominated by the aforementioned products that worship at the altar of price momentum – ‘buyers live higher and sellers live lower.’ This phenomenon has exaggerated market moves and has created an air of artificiality and absence of price discovery (on both the upside and the downside).
  3. Corporate buybacks – abetted by tax reform introduced 15 months ago – provided another reason for a strong backdrop for higher stock prices.
  4. As a result of the above factors (and others) animal spirits rose and valuations expanded.

“These four conditions have offset the deceleration in the rate of global economic growth and U.S. corporate profit growth.”

Read the full article on ZeroHedge: Market Cycles Signal Imminent “Collision Between Reality & Widespread Fantasy” | ZeroHedge

The Fed Cannot Fix Credit Exhaustion

Written by Hugh Smith via ZeroHedge

Thus will end the central banks’ bombastic hubris and the public’s faith in central banks’ godlike powers.

Having fixed the liquidity crisis of 2008-09 and kept a perversely unequal “recovery” staggering forward for a decade, central banks now believe there is no crisis they can’t defeat: Liquidity crisis? Flood the global financial system with liquidity. Interest rates above zero? Create trillions out of thin air and use the “free money” to buy bonds. Mortgage and housing markets shaky? Create another trillion and use it buy up mortgages.

And so on. Every economic-financial crisis can be fixed by creating trillions of out thin air, except the one we’re entering–the exhaustion of credit. Central banks, like generals, always prepare to fight the last war and believe their preparation insures their victory.

China’s central bank created over $1 trillion in January alone to flood China’s faltering credit system with new credit-currency. Pouring new trillions into the financial system has always restarted the credit system, triggering renewed borrowing and lending that then powered yet another cycle of heedless consumption and mal-investment–oops, I meant development.

The elixir of new central bank money isn’t working as intended, and this failure is now eroding trust in the central bank’s fixes. Central banks can issue new credit to the private sector and it can can buy bonds, empty flats and mortgages, but no central bank can force over-indebted borrowers to borrow more or force wary lenders to lend to uncreditworthy borrowers.

Let’s be honest: the entire global “recovery” since 2009 has been fueled by soaring debt. The output of more debt is declining, that is, every additional dollar of debt is no longer generating much in the way of positive returns. As with any stimulant, increasing the stimulant leads to diminishing returns.

Then there’s the issue of debt saturation and debt exhaustion: those who are creditworthy no longer want to borrow more and those who are not creditworthy cannot borrow more, unless lenders want to eat the losses of default a few months after they issue the new loan.

The evidence is plain enough: defaults of student loans and auto loans are already at monumental levels, and the recession hasn’t even started. Zero-percent financing for vehicles is a thing of the past, and those borrowers with average credit ratings are paying 6% or more for a new vehicle loan.

To read the full article, visit ZeroHedge: The Coming Crisis The Fed Can’t Fix: Credit Exhaustion | ZeroHedge

The Crystal Ball—Inflation, Stocks, and Gold

Written by David Becker via FX Empire

A stable dollar, lower production costs and a neutral Fed should keep gold prices buoyed.

Are you considering an investment in gold? Gold has always been viewed as an asset that you can use to diversify your portfolio. When stock prices tumbled during the beginning of the great recession, gold prices rallied. Did you know that when the S&P 500 dropped 50% between December of 2007 and April of 2009, gold prices rallied 10%?

The question is whether we are currently at an inflection point where it is prudent to purchase gold. What is clear is that the US economy has experienced nearly 10-years of growth and Europe and Asia are experiencing declining growth prospects. The dollar is stable, inflation remains low, and yields are declining. Gold producers appear to be bullish and cutting production costs. With all of these factors as a backdrop, is it time to buy gold?

Are gold prices likely to increase or decrease?

Gold is viewed as both a commodity and a currency. It is defined as a precious metal, along with silver, platinum, and palladium. Some view gold as a hard asset that increases in value as inflation rises. Others view gold as a currency, that is quoted versus the US dollar. The reality is that gold is both. As a currency, it is viewed as a safe haven especially when other currencies become less attractive.

Since gold is quoted in US dollars, it generally declines in value when the US dollar becomes more attractive. The reason this occurs is that when the dollar rises in value gold prices become more expensive in other currencies.

For example, if the US dollar increased by 5% versus the yen, it would require 5% more yen to purchase the same amount of gold as it did prior to the rise in the value of the US dollar. To compensate for this rise in the value of the greenback, gold prices will slide.

So, to determine the value of gold, you need to have a handle on the value of the dollar. Since hitting a trough in early 2018, the dollar index has rebounded approximately 10%. As the dollar increased in value, gold prices have moved sideways, first moving lower in early 2018 and then rising back to the level where it started that year.

Read the full article at FX Empire: Will Inflation Buoy Gold Prices While the Federal Reserve Is On Hold? | FX Empire

Is the Global Financial Reset Possible?

Via Shotgun Economics

For anyone who does even a modicum of research, the 2008 financial crash was not just a cyclical ‘bump’ in the credit cycle, but an actual death event for the entire financial system. And this is primarily why central banks like the Fed, ECB, and BOJ have had to constantly fund their ‘life support patient’ with endless amounts of QE, Zero percent Interest Rates, and even Negative Rates.

In fact despite the reality of tens of trillions of dollars printed and monetized by the central banks over the past seven years in both the U.S. and in Europe, most banks remain underfunded, and pretty much insolvent if they had to administer true accounting practices.

Since around 2013, Asian and Eurasian economies such as Russia, China, India, and even Kyrgyzstan have been preparing for a post Petrodollar world, and one no longer controlled by the Western central banks. And even in Europe, nations such as Germany, Austria, and the Netherlands have all done the unprecedented move of recalling their gold reserves back from the U.S. into their own vaults.

But while those who pay attention to the alternative financial media have heard numerous times that we are preparing for a great ‘Global Financial and Currency Reset’, only trickles of information has come from leaders on the reality of this paradigm shift.

Until now?

On June 21 the head of the UK’s central bank (Bank of England) gave a speech in which he emphasized that the global financial system is moving rapidly towards a ‘New World Order’, which in this case is political speak for the global currency reset.

The race is definitely on as to who will be dictating the terms of the reset.

Everybody has their eyes on China and Russia, thinking they join forces to form the dominance in the global economy to push out the dollar and elevate China to world reserve currency status, or elevate a combination of China and Russia to world reserve currency status with a gold and/or silver backing in this new monetary system, perhaps even with a return to gold and silver via a Chinese Gold-backed Yuan and a Russian Silver Ruble.

Well, it’s not only the East that is actively working on the global reset.

England seems to frantically be in the race as well.

Yesterday, Bank of England Governor Mark Carney gave a speech, and it wall basically all about the coming reset.

That phrase that we all can’t stand – the “new world order”.

Yup.  It’s coming.

Its a very long, super boring speech, but I’ve read between the lines, and I want to show you some of the thing he has said, so that you can come to your own conclusions as to what is going on.

To me, it speaks to the end of the dollar dominated world and the coming reset and re-ordering of the global monetary system.

Read the full article at Shotgun Economics: Central banker lets slip that Global Financial Reset is underway as government’s prepare for collapse of current system | Shotgun Economics