viernes, 22 de enero de 2016

viernes, enero 22, 2016

Up and Down Wall Street

Without Fed’s Juice, Market Suffers Withdrawal Pains

Without that good old central-bank medicine, the stock market is suffering withdrawal pains.

By Randall W. Forsyth
Habitual watchers of financial cable channels can’t have avoided the endless repetition of advertisements for a 21st-century fountain of youth for middle-aged and older males who comprise the bulk of their viewership. You know the ones, with images of preternaturally ripped septuagenarians showing off their six-pack abs, alongside grainy photos of their naturally paunchy selves before their midlife (or later) crises spurred them to seek this magic potion.

What’s left out of the pitch is that the concoction includes stuff like steroids and human growth hormone, as CBS’s 60 Minutes detailed almost a decade ago in an exposé of the outfit (whose name doesn’t bear repeating, on the notion that any publicity is good publicity), but that evidently has faded from memory. HGH can spur growth of undetected cancer cells, including prostate cancer in men over 50, the broadcast noted. Even so, some of the users of the therapy said they would rather retain the virility artificially derived from these substances, even if it meant a few less years.

Maybe it’s my imagination, but the frequency of these ads seems to be increasing as the stock market decline has gathered pace. As viewers’ portfolios flag, perhaps their physical attributes have done the same. So, there may be increased interest in performance-enhancing substances to cure the latter.

For the markets, there’s an analogous malady. The juice that the Federal Reserve had provided is being withdrawn, and the symptoms of going off the stuff are becoming apparent. The U.S. stock market is off to its worst start of any year on record and the Dow industrials are on track to suffer their worst month since February 2009—just before the ultimate lows in the financial crisis were reached the following month.

The S&P 500 shed another 2.2% last week, putting its price decline at a hair over 8% since the turn of the year. More to the point, in the past three weeks, the big-cap U.S. benchmark is down 8.8%, the worst such span since the three weeks that ended Oct. 24, 2008, in the darkest days of the financial crisis. Even harder-hit has been the Nasdaq Composite, off 11.09% in the past three weeks. That three-week stretch dates to just after the most recent meeting of the Federal Open Market Committee on Dec. 15 and 16.

The key culprits for the 2016 stock swoon can be summed up in the three factors that have beset the markets in recent months: China, crude oil, and the related plunge in the high-yield bond market. All of these are related to monetary policies of the relevant central banks.

On a day-to-day and moment-to-moment basis, the moves in crude call the tune for other markets to an unprecedented degree. David Rosenberg, the chief economist and strategist for Gluskin Sheff, writes that “everything is now correlated to the oil price—the correlations have shifted so dramatically it is almost scary.”

High-yield bonds have had an 85% correlation with crude in the past year, up from about 23% previously. And the S&P 500, which used to have a near-zero correlation with oil prices, is up to around 50%.

Closer to Rosenberg’s perch in Toronto, the Canadian dollar’s correlation has increased to 92% from 80% 10 years ago, while the Toronto stock exchange is 82% tied to oil, versus just 30% a decade ago. (Which also was long before Apple (ticker: AAPL) introduced the first iPhone, back when Canada-based BlackBerry (BBRY) still owned the smartphone market, but that’s another story.)

Bank-stock analysts have to employ energy experts on their team, which Rosenberg calls “surreal.” Perhaps, but Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC) noted their exposure to energy loans in their fourth-quarter earnings, with negative consequences for their stock prices.

The sensitivity of stocks, especially financials and high-yield bonds, to oil has only increased as crude has plummeted to levels once thought impossible. Crude—both the U.S. marker, West Texas, and the global benchmark, Brent—crashed through the $30 barrier last week. The lower the price goes and the longer it stays there, the greater the existential threat to many highly leveraged producers, indicated by their debt trading at distress levels of 50 cents on the dollar and less in some cases.
 
But the decline has intensified since the Fed made its much-heralded initial increase in short-term interest rates in December. And from the standpoint of U.S. equity investors, they’re down about $2.1 trillion since the start of the year, according to Wilshire Associates’ sums.
That qualifies as withdrawal pains.

EVEN BEFORE FRIDAY’S 2%-PLUS slide in the major averages—which could have been worse, with the Dow Jones Industrial Average off as much as 537 before ending down 391 at just under the 16,000 mark—the signs of debt strains were apparent. And not just in the high-yield bond market, where energy-related issues hit a record 17.43% yield late last week, topping the 17.05% peak at the worst of the financial crisis on Dec. 5, 2008, my colleague Amey Stone reports on Barrons.com’s Income Investing blog.

Investment-grade corporate bond spreads (the extra yield over government securities to compensate for corporates’ risk) have hit levels seen only during or after recessions, writes Michael Darda, chief economist and strategist at MKM Partners. By the time corporate spreads—a key barometer of investors’ perception of the economy—widened to current levels in 1937, a recession was already six months old.

Economic historians know 1937 as the year the Fed mistakenly tightened policy, aborting the recovery that began with its policy easing in 1933, and beginning the second leg down in the Great Depression. The decline of the monetary base (currency plus bank reserves) from September 2014 to this month parallels that of the drop in January 1936 to December 1937.
The spread between Baa corporates and Treasuries also has increased in parallel fashion.

Market forecasts of inflation also have fallen as the Fed stopped expanding its balance sheet and the monetary base in late 2014, writes Darda. Based on the spread between yields on Treasury notes and TIPS (Treasury Inflation Protected Securities), the market’s five-year inflation forecast has slumped to a new low of 1.71%, according to the St. Louis Fed Website.
That decline has been in tandem with oil prices as well. (TIPS’ inflation adjustment is based on the consumer price index, which reflects energy costs.)

What’s also striking is the decline in garden-variety Treasury note yields since the Fed hiked its rate targets.

The benchmark 10-year yield dipped under the 2% mark Friday in the flight to quality, down from 2.3% near the end of December. The two-year note, which represents expectations about future Fed rate hikes, is down to 0.85% from 1.1% ahead of the turn of the year.

Those declines have come in the face of heavy sales by Chinese monetary authorities to prop up the yuan. David Goldman, head of Americas research for Reorient brokerage in Hong Kong, estimates Treasury yields are 20 basis points (two-tenths of a percentage point) higher as a result of liquidations by Chinese authorities to defend their currency. While those efforts have been successful, the withdrawal of yuan liquidity has added to downward pressures on the Chinese stock market.

NOT ONLY HAVE INFLATION EXPECTATIONS fallen, along with oil prices and, in turn, the stock market, so have the odds that the Fed will follow up its initial rate hike any time soon.
A move at the Jan. 26 and 27 FOMC meeting never was in the cards and now the probability for a hike at the March 15 and 16 confab is just 24%, based on the federal-funds futures market, down from over 50% at the end of December.
 
Odds of another rate hike only get over 50% by Sept. 20 and 21 and are under 50% for any further boosts later in the year—notwithstanding statements by Fed officials that four increases remain likely in 2016. As a result, stocks and other risk markets have to cope without the insurance policy provided by the Fed since Alan Greenspan’s day, that the central bank will come to their rescue. That is, unless things get a lot worse.

As for the stock market, Louise Yamada, who heads the technical advisory firm bearing her name, said after Friday’s retreat that while interim bounces are possible, she thinks we are in a cyclical bear market. The market is at the phase where “the best go last,” she adds, noting the breakdown in financial, technology, and biotech stocks.

The cyclical bear market would be in the context of a structural “albeit Fed-induced” bull market that began in 2013 with the market’s break above 2007 and 2000 highs, she wrote to clients earlier this month. An eventual retreat of 23% from the highs to the 2013 breakout level would be completely normal in that case, she added Friday.

Adding to the nervousness at week’s end was a three-day weekend that could hold unpleasant surprises from abroad, notably China, while U.S. markets are shuttered for the Martin Luther King holiday. Don’t expect a return to normalcy when the U.S. comes back to work Tuesday.

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