What We're Reading

“Low volatility could be ‘the quiet before the storm,’” Nobel laureate Robert Shiller told CNBC last week, adding: “I lie awake worrying.” Over the past 20 years, the CBOE Volatility Index (VIX) has closed below 10 on only 21 days, 13 of which have been in the past two months. The current streak of 270-plus days without a 5% drawdown in any of the major U.S. indices is the longest since 1996. Meanwhile, U.S. equity values continue to diverge from earnings — Schiller’s Cyclically Adjusted PE Ratio (CAPE) has only been higher two times in market history: 1929 and 2000.

In December of 1996, Greenspan was clearly beginning to worry about the economic fallout of a bursting asset bubble. Back then he had a front row seat and, in fact, a strong hand in creating the dotcom bubble, whether he admits it or not. He was so worried about the consequences of “irrational exuberance” that he declared these concerns “must be an integral part of the development of monetary policy.” And this was before he had even witnessed any of the actual economic consequences we have now lived with for two decades. Clearly, his worries were well founded but he wasn’t quite worried enough.

The financial well-being of entire generations has been permanently damaged. Think of the Baby Boomers whose retirement dreams turned to nightmares through two stock market crashes in less than a decade. Think of the Generation Xers whose dreams were shattered by the housing bubble and the mortgage crisis. As a group these latter folks, even though they are now entering their peak earnings year

The chart above tracks the broad stock market against the spread of lowest-rated investment-grade corporate bond yields. They normally track each other very closely as they both reflect broad investor risk appetites.

When investors are hungry for risk stock prices move higher and corporate spreads get narrower. When risk aversion takes over, however, stock prices fall and spreads widen.

Another reason they closely track each other is corporations’ ability to access credit is very closely tied to the overall demand for equities. When it’s very cheap for companies to borrow, it’s very easy for them to fund stock buybacks and acquisitions of other companies.

Certainly, these two factors have been very important to the bull market of the past six years or so. Ray Dalio recently said he estimates that buybacks and M&A have roughly amounted to 70% of the total demand for equities.

As spreads widen, it becomes more expensive for companies to borrow and thus more difficult to fund stock bu

Investors may wade into unknown territory next month as the Federal Reserve readies the first rate hike in nearly a decade amid a corporate earnings recession.

S&P 500 earnings are on track to close their first reporting season of negative growth since the Great Recession and estimates call for sub-zero growth in the current quarter as well.

Even if the trend reverses next year, as expected, a Fed rate hike in December could mark an unprecedented conflict between a tightening cycle starting at the same time as earnings fall into recession.

"We can't think of any instances when the Fed was hiking during an (earnings) recession," said Joseph Zidle, portfolio strategist at Richard Bernstein Advisors in New York.

"In the last six months one can point at a lot of different things. But if you think about fundamentals, falling corporate profits and the threat of rising rates" are behind the market stalling, Zidle said.

With more than 90 percent of S&P 500 components having reported, S&P 500 e

I see no reason why not to stick with Shanghai at this point.  They're behind us at in terms of supporting their economy and it's not an easy ride (as Ben Bernanke will attest). 

According to BusinessInsider, a bunch of data about the state of China's economy came out Tuesday night, and altogether it told us one thing — nothing the government has been doing to save its economy from falling deeper into a slowdown is working.

Since November, China has cut benchmark interest rates three times, including once Saturday. It has also loosened mortgage policies to prop up the housing market.

But none of it's enough. Especially when you look at the data from Tuesday night.

Lets walk through the scariest stuff:

• M0 growth, or just the cold, hard cash floating around the economy, fell to 3.2% from 6.7%.
• Total social financing, a number that measures loans and all credit and debt in the country, fell by 32% since the same time last year and 11% from the previous month.
• And worst of all, fixed-ass

The majority of sector ETFs closed their week below their 50d with energy having filled the gap.....and found sellers waiting there.

SPX itself found sellers at $2100 (clearly we weren't the only ones selling) which is 17x earnings.  More and more are accepting reality that earnings have dropped the most in six years and the Fed (with no QE) will most likely begin to slowly raise interest rates in September.  Don't believe me, just ask Barclays.

• US dollar found buyers at the 10week sma, prior support.  Yes, they're taking profits.  Will it continue?  It's nonetheless weighing on U.S. earnings.
• China allowed further stocks to be shorted and talked of tightening margin lending.  They hit the sell button.
• Utilities are being held by their 50d - won't raise much if rates are going up.
• Transports are being held by their 20d bu the 50d is just overhead; waiting.
• For months money has been flowing into overseas markets searching for yield.
• Not to Greece though (although Putin le

Although US equities are overbought on short term (daily) time frames, long live Japan equities after BoJ announced they will ramp up more of theiir own QE last Friday.  Will Abenomics work?  Who knows, but it's easy to see where money is flowing. 

Just when the (last few remaining) bears were enjoying some market wide liquidation, China apparently launched some stealth QE of their own reversing AUD/JPY and sending markets plowing over weak bears.  From Bloomberg:

• CHINA’S PBOC STARTS 500B YUAN SLF TODAY, SINA.COM SAYS
• PBOC PROVIDES 500B YUAN LIQUIDITY TO CHINA’S TOP 5 BANKS: SINA
• PBOC PROVIDES 100B YUAN TO EACH BANK TODAY, TOMORROW WITH DURATION OF 3 MONTHS: SINA

According to Government Sachs

"This amount is roughly the same as a 50 bps cut to RRR for the whole banking system on a static basis.  Still, such an easing would be consistent with our expectation that (1) monetary policy will loosened amid the drastic slowdown in activity growth and falling inflation, and (2) full scale RRR and interest rate cuts are unlikely because they would be viewed as aggressive stimulus."

Toss in a little hint dropping from the Wall Street Journal's Fed-whisperer Jon Hilsenrath that that the "considerable period" language will

With market participants so concerned over the effects of if/when Bernanke takes his foot off of the QE gas pedal, here comes DB and BusinessInsider to remind us of historical market moves when rates were raised.  Based on monthly historical charts, you will notice a few 10-20% corrections however nothing earth shattering.  The markets found a floor based on true economic demand and continued their uptrend. 

As it stands, JPM believes the Fed will not being to taper until their December meeting unless labor improvements continue as they have the last six months; at which point then they look to the September meeting as the most obvious time (after Jackson Hole).  

Still, we need to forever bear in mind that markets are forward looking.  With Summer doldrums and money managers prepping for their getaways in the Hamptons, one has to wonder just when markets will begin to bake in a tapering of bond purchases at the very least.  Many eyes are also already watching the 10yr for signs of r

The following from CalculatedRisk with my notes added as an afterthought:

Short answer: it is very unlikely that the Fed will increase the Fed funds rate this year. There are a series of steps the Fed will most likely take before raising rates¹: • First the Fed needs to complete the $600 billion “QE2” large-scale asset purchase program. This is currently scheduled to be completed at the end of June, however, to “promote a smooth transition in markets”, it is possible the Fed will decide to "gradually slow the pace" of the purchases like they did with QE1 (quoted text from QE1 related FOMC statements). If the program is extended and purchases tapered off (but the size remains at $600 billion), this will probably be announced at the conclusion of the two day FOMC meeting in late April and the program will probably then be completed in August. • Next the Fed will end the reinvestment of maturing MBS and Treasury Securities. This could be concurrent with the end of QE2, or the Fed might wa