• Weekly Comments for October 3, 2016

    Last week saw very strange market activity, as the Deutsche Bank related rumors and counter-rumors almost eclipsed the traditional end of quarter reverse repo activities.



    The Euro followed the same rumors and news, while the Swiss franc seems to indicate that confidence in the Euro is starting to erode. (The down arrow is bigger than the up arrow on the SF compared with the Euro. Also, note that the general trend of the Green line for the Euro is down while the same line for the SF is up.)





    The British Pound seems to be attracting money. This is probably linked to the possibility that Frankfurt with an ailing DB could not easily take over from London after Brexit. This also tells me that the Brits will be inclined to delay a Brexit official decision until the DB time bomb explodes.



    A look at the S&P500 for the past few days shows that there was a large money outflow (down pink arrows) on Thursday, with a price bounce that was basically not bought by large players (first leg of the Blue arrows). On Friday, despite a reverse repo operation that added about 130 B$ for window dressing, buying was not as strong as the selling of the previous day.





    Moreover, the last five minutes of trading saw a very wide based dump as all the algos were getting out of their newly purchased positions.



    This tells us that algos used specific news items, oversold conditions and the knowledge of the reverse repo operations in order to book a quick day trading profit. There is nothing else to conclude about the activities of the past two days, and drawing conclusions regarding the sustainability of the price recovery is pure speculation.

    If DB's issues are real, they will resurface next week with a vengeance and central banks will have a hard time to contain markets without a co-ordinated move... Let's not forget that the Reverse Repo money will have to leave starting Monday.

    The VIX may also be telling a similar story:



    Excess Reserves

    However, much money remains available in Excess Reserves to push equities higher. We can see that in the last S&P500 push that occurred between September 13 and September 21 (after the FOMC meeting), about 200B$ were pulled out of excess reserves to buy oversold equities. We should expect a similar move on the next dip, but for now, the money outflow seems stable. (This data is published only twice a month and as such is difficult to use as a forward looking instrument. Excess reserve is money managed by the TBTF banks, which can turn their algos on and off at any time when deciding to move money in or out.)





    Shares Buybacks


    Below is a link to an interesting fact sheet document about corporate buybacks.

    http://www.factset.com/buyback

    Here is a March 21 analysis from Wolfstreet that updated an earlier version of the same document. This has not prevented the S&P500 from climbing another 8% since publication.

    http://wolfstreet.com/2016/03/21/sha...ng-turn-toxic/

    This tells us that corporate buybacks are probably not a good tool to use, because buybacks occur as a reaction to economic environment and do not by themselves cause a change in such an environment. Buybacks almost certainly will aggravate the next equities pullback, but will probably not be the root cause for such a pullback.

    We can see below that in the past Quarter (Q2,) the intensity of buybacks has dropped. This looks similar to a drop in early 2008, but the big difference is that this time, during Q2 the S&P500 was still pushing higher, fueled by Japanese NIRP.



    The figure below compares the TTM (Trailing 12 Months) earnings to the debt levels of US corporations. We can see that prior to the 2008 crash, buybacks had been rapidly increasing, fueled by increasing debt. Note that in 2007 the levels of corporate debt increased far quicker than earnings.

    In today's environment, even though we see earnings slowly falling and debt levels slowly rising, we are still far from the extreme levels of 2007. This is due to the very low interest rates. In reality, if we prolonged the Green and the Purple lines, we would be able to see that it could take between five and ten years before they meet. Yes, there is still room for this bubble to run!



    What about NIRP Refugees?

    We can see below that with Japanese and German 10Y rates still negative, there is still a natural tendency for money to move into US assets.





    However, the Yen is also telling us that if DB related negative news headlines continue to surface next week, the Yen will move higher against the US$ and this will be another reason for US equities to weaken.



    Conclusions:

    Equities markets are not easy to forecast. Last week's wide moves are telling us that market participants are shaken and doubt has emerged regarding the ability of European governments to tackle a Brexit outcome, the Italian referendum, the DB problems and the immigrant situation, just to name a few issues. I doubt very much that Japanese pension funds will push more money into US assets until the Presidential elections are over.

    This leaves us one question: what will push equities prices higher? Maybe companies earnings and guidance, but the trend is down...

    Most puzzling to me is that despite such an uncertain environment, gold plunged on Friday. Maybe just a standard reaction to a stronger Euro/US$?

    Comments 4 Comments
    1. Harry's Avatar
      Hi Pascal,

      Have you changed your MA for the CTick from 1200 minutes and if so, why?

      I am plotting a 1200 minute MA of CTick in Tradestation and the Friday close tick readings are above the 1200 MA whereas the figure you show above has it below? Our CTick shapes look the same, just the MA lines are off.

      Thanks,
      Harry
    1. Pascal's Avatar
      Quote Originally Posted by Harry View Post
      Hi Pascal,

      Have you changed your MA for the CTick from 1200 minutes and if so, why?

      I am plotting a 1200 minute MA of CTick in Tradestation and the Friday close tick readings are above the 1200 MA whereas the figure you show above has it below? Our CTick shapes look the same, just the MA lines are off.

      Thanks,
      Harry
      No, nothing has changed.
      The Cumulative Tick calculated using end of day minute data also looks similar.


      Pascal

      Attachment 37996
    1. Harry's Avatar
      Thanks, I wonder why our 1200 min MA's are different?
    1. Pascal's Avatar
      Quote Originally Posted by Harry View Post
      Thanks, I wonder why our 1200 min MA's are different?
      The primary suspect is some unexpected interruption if the dataflow.

      I attach my CTick minute data


      Pascal