#$lqd

Here are some of the most noteworthy highs and lows from across the markets for Friday, March 20, 2020.

These are but a few of the highs and lows resulting from another historic week in the markets.

Several categories of lows this week...some are just flat-out hitting decade or all-time lows...

Corporate Bond ETF $LQD Hitting 10-Year Low (unadjusted)

High Yield Bond ETF $HYG Hitting 11-Year Lows (unadjusted)

Euro Banks Hitting All-Time Lows $EUFN $SX7P

Other markets are testing former breakout highs...

$SOX Semiconductor Index Testing Former Highs From 2000

German $DAX Testing Former Highs From 2000-2008

Brazilian Bovespa Testing Former Highs From 2008-2010

And many other markets are testing key long-term bull market Fibonacci lines (...several after trading at all-time highs just a month ago)...

Value Line Geometric Composite: “Median Stock” Testing 61.8% Fib Retracement Of 2009-2018 Rally

$BKX Bank Index Testing 61.8% Fib Retracement Of 2009-2018 Rally

$HGX Housing Index Testing 61.8% Fib Retracement Of 2009-2020 Rally

MSCI $EAFE Index Testing 61.8% Fib Retracement Of 2009-2018 Rally

Europe $STOXX50 Index Testing 61.8% Fib Retracement Of 2009-2015 Rally

UK $FTSE-100 Testing 61.8% Fib Retracement Of 2003-2018 Rally

Australian $ASX-200 Testing 61.8% Fib Retracement Of 2009-2020 Rally

Canadian $TSX Testing 61.8% Fib Retracement Of 2009-2020 Rally

If you’d like to see these charts as they come out in real-time, follow us on Twitter and StockTwits. And if you’re interested in the daily “all-access” version of all our charts and research, please check out our site, The Lyons Share. You can follow our risk-managed investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading! Due to current market volatility, The Lyons Share has set Annual Memberships at 33% OFF, indefinitely.

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The corporate bond market may be at a key technical juncture.

Though stock indices are within spitting distance of all-time highs, it isn’t just the equity investors that have been happy of late. Corporate bondholders have also been enjoying a nice run lately, in particular over the past 6 weeks (following much suggestion, I might add, of that possibility on our part). Unlike the major stock averages which don’t appear to have much resistance between current prices and all-time highs, however, bonds may find the going a little bit tougher at the present juncture.

At least that is one argument based on the of a popular corporate bond ETF, the iShares Investment Grade Corporate Bond ETF (LQD). As we showed in a recent edition of #TrendlineWednesday on our Twitter stream, the LQD (on an unadjusted basis) recently tested the Down trendline stemming from its 2016 top and connecting the December 2017 top. The fund was summarily rejected -- but is now testing the trendline once again.

So will LQD be rejected gain -- or can it “take over” this potential resistance and resume its uptrend? It remains to be seen, but expect this juncture to be a crucial one for the corporate bond market.

What do we expect to unfold? In a Premium Post at The Lyons Share, we take a deeper dive into the chart of LQD, identifying a few more technical components that may be key in determining the outcome in this market.

Want to get a head’s up on our next move in the bond market? We invite you to check out The Lyons Share, a daily “all-access” pass to our research and investment moves. Given what may be a critical year for financial markets, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

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As Wall Street herds, one bold economist stands out. (Image: Geograph.org.uk)

On September 21, the Fed is gonna do it. They’re gonna hike rates, say a few bold economists.

The US economy is adding jobs at a rate that’s “just enough” for most members of the Fed’s Federal Open Market Committee (FOMC) to vote for a rate hike this month, Goldman Sachs’ Jan Hatzius argued.

During the global financial crisis, the Federal Reserve loosened monetary policy and lowered interest rates aggressively in its effort to stimulate the tumbling economy. By December 2008, the Fed had cut its benchmark rate to a target range of 0-0.25%, effectively lending money for free. After watching the economy grow for seven years, the Fed lifted its target range to 0.25%-0.50% in December 2015.

Since December, the Fed has been on hold.  And the world of policymakers, economists and investors have been left to speculate what the Fed may or may not be thinking.

But the jobs report was disappointing

For most traders and economists, the odds of a September rate hike actually fell after Friday’s disappointing US jobs report. According to futures market data tracked by Bloomberg, the probability of the Fed hiking rates at its Sept. 21 meeting fell to just 22% from 34% before the jobs report.

The US economy added just 151,000 payrolls in August, which was less than the 180,000 expected by economists. This was down from the 275,000 added in July.

“The soft August employment report seemed to take the September 20-21 meeting off the table and the Fed probably does not want to hike at its November 1-2 meeting, as it comes right on top of the election, but as long as job growth doesn’t slow further, the Fed should be ready to pull the trigger on December 14,” Bank of America Merrill Lynch’s Ethan Harris said. His language and rationale reflects the current consensus.

One month’s disappointment doesn’t reflect the trend

Sure, August’s pace of job gains were down from July. And notably, they fell below expectations. But ultimately, the only folks who should be disappointed by numbers are the economists who set those expectations.

“Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Federal Reserve Chair Janet Yellen said at last month’s Kansas City Fed Economic Policy Symposium in Jackson Hole, Wyoming.

That’s among the hawkish things members of the Fed have said that have a small minority of economists thinking that the Fed is feeling pretty good about the health of the US economy.

“Growth in nonfarm payrolls was weaker than consensus estimates at +151k, but above the pace Fed officials typically consider sufficient to hold the unemployment rate steady over time—the so called ‘breakeven rate,'” Goldman’s Hatzius said. “We therefore see this report as just enough for a large majority of officials to support a September rate increase. We have therefore raised our subjective odds of a hike this month to 55% from 40%.”

Barclays Michael Gapen smooths out the monthly number by looking at job gains from a rolling 3-month perspective.

Job gains are trending up, not down. (Image: Barclays)

“In light of the rebound in employment since mid-year and with the three-month moving average of employment at 232k in August, we believe recession risks are low and, given Fed Chair Janet Yellen’s remarks at Jackson Hole, we believe the Fed will look through the somewhat soft August employment number and raise the policy rate in September,” Gapen said.

The balance of the year comes with lots of potential catalysts for market volatility, including the US presidential election in November. Then again, when it comes to risk and uncertainty, there’s always something.

Will the Fed hike rates on September 21? We’ll find in two and a half weeks.

– Sam Ro is managing editor at Yahoo Finance. Read more:

What it means to be ‘hawkish’ and ‘dovish’ on monetary policy

Warren Buffett has a simple explanation for why economic growth has been weak

Bullishness in the derivatives market has hit a 3-year high

Don’t be fooled by the calm in the markets

Just over a year ago, Dr. John Hussman introduced a new way to value the broad stock market, total market cap of non financial U.S. corporations relative to their “gross value added.” Essentially, it’s a more efficient version of the Buffett Yardstick which measures the total market cap of the U.S. stock market relative to GDP which is basically a price-to-sales ratio.

Hussman’s version is more efficient because it incorporates foreign revenues earned by domestic corporations. The major criticism of the Buffett yardstick is that it does not. (The greater efficiency of Hussman’s Market Cap to GVA measure is borne out in its greater negative correlation to future returns.) Currently, this measure shows stocks were only more highly valued than they are today back during the height of the dotcom mania.

One thing that has bothered me about Hussman’s measure, though, is that it doesn’t account for corporate debt levels. From an investment standpoint, I believe it is impossible to accurately value the equity of a company without also measuring the amount of leverage being employed in the business. By extension, the same should be true for the broad equity market, as well.

While the market cap of U.S. stocks has soared over the past seven years, companies have increasingly issued new debt in order to buy back stock. In fact, total nonfinancial debt relative to GVA has been hitting new all-time highs for quite some time now. In other words, nonfinancial corporations have never been more highly leveraged than they are today.

This process of swapping debt for equity by borrowing to buyback stock effectively reduces market cap while adding debt to their balance sheets. This is not reflected in the Hussman chart.

When we add debt into the equation we can account for this important dynamic. What we get is essentially an “enterprise value” to sales measure. It’s a subtle change but an important one. After the rally in stocks over the past several months and the massive corporate debt issuance over that same period, U.S. total nonfinancial corporate enterprise value relative to sales is hitting new multi-year highs.

It has now nearly matched its peak from the dotcom mania. And if that earlier time is widely accepted as a textbook financial bubble, what should we call the current market environment? Or if you’re of more of a statistical mind, I would point out that the current level is currently beyond two standard deviations of its long-term average, precisely how Jeremy Grantham defines the term, “financial bubble.”

[Photo Credit: jimmy brown, Flickr]

By Rupert Hargreaves                         

The credit cycle has turned, and fundamental risks are material, that’s according to Morgan Stanley’s July 1 report on the credit sector.

Back in October 2015, Morgan Stanley published a detailed research report on the state of the US credit market and credit cycle. At the time the bank came to the conclusion that credit risks were increasing, and investors should take a cautious view of the high-yield sector and wider financial markets in general.

Sell This Credit Rally: Morgan Stanley

Ten months on and according to Morgan Stanley’s research, conditions in the US credit markets have only deteriorated. The high-yield bond default rate has increased to 6.61% on par with the level two years before defaults peaked in the 2001 credit cycle. This level is also on par with the level one year before defaults topped out in the 1991 and 2009 credit bubbles. The peak high-yield default rates in these last three credit cycles were between 11% and 16%, as shown in the chart below.

Still, it’s fair to say that things are different this time around defaults in the 2008/2009 credit cycle were kept under control with the Federal Reserve’s aggressive monetary policy response. As a result, in terms of cumulative defaults, the 2008 cycle was less severe than the 1989 and 1999 corrections. The highest five-year cumulative default rate in each of these periods was 23%, 31%, and 29% respectively.

Is There A US Corporate Credit Bubble? Yes Says UBS

Morgan Stanley: Credit risks are rising

This time around the Fed does not have the same tools to address slowing growth available to it, having used up almost all of its policy ammunition in subsequent rounds of QE. Nonetheless, yields around the world remained depressed on global growth concerns and loose monetary policy initiatives from other central banks around the world. The European Central Bank’s corporate bond purchasing program has depressed yields on not only European corporate bonds but also high-yield US bonds as investors are forced to look overseas for yield.

American Credit Card Debt In America To Hit One trillion By 2017 ...

It could be argued that these easy money policies are now having a detrimental effect on the credit markets. Granted, at first glance, credit quality may look to have improved as CCC issuance has dropped all the way to 3.5% of total high-yield supply, but leverage remains elevated across the board. For example, at the 2007 credit market peak, the average leveraged ratio of high-yield issuers was 3.6, compared to 4.5 today. Investment-grade gross leverage was 1.8 times in 2007 compared to 2.3 times today.

Corporate Credit Fundamentals Are Deteriorating: HSBC

However, as Morgan Stanley goes on to report other leveraged metrics aren’t so concerning. LBO transaction volumes were only $186 billion at the top of this cycle, compared to $434 billion in 2007, consumer credit growth peaked at 4.3% in this bull market compared to 16.9% in the last. M&A/LBO issuance peaked at 55% of total high-yield/loan supply in this cycle, compared to 74% in 2008. C&I loan growth peaked at 15.2% (currently 9.2%), compared to 18.3% in early 2008 and 16.1% in late 1998. And LTM high-yield/loan new issuance accounted for 40.3% of the outstanding high-yield/loan market this time (currently 16.6), compared to 52.4% in 2007.

High-Yield & Bank Loan - Summer Headwinds In Leveraged Credit ...

Put simply, there are signs that the credit cycle is turning although the data isn’t as supportive as it has been in the past. Morgan Stanley isn’t buying the optimistic argument:

“We do not think these ‘lower cycle risk’ data points mean default potential is not material – just that the problems are always different each time around, and the signals can change from one cycle to the next. This time, the US consumer and the financial system are in much better shape, but in our view, the non-financial corporate universe is not.” – Morgan Stanley on the turning credit cycle.

[Photo Credit: Nick Nguyen , Flickr]

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By Rupert Hargreaves

As central banks run out of conventional monetary policy tools to stimulate economic growth, economists are now speculating that in a last-ditch attempt to stimulate growth, central banks will turn to helicopter money drops in the near future, some “experts predict”.

It’s widely believed that Japan will be the first country to adopt this policy as it runs out of options.

Negative Yields May Be A Result Of Market Structure, Not Central Banks

So what is this Helicopter money that everyone is talking about?

Analysts at Jefferies weighed in on this topic in a recent research note Titled ‘ Japan: An Equity Investor’s Guide To Helicopter Money,’ the report lays out why Jefferies believes Japan is closer to introducing helicopter money than the consensus indicates and the analysts pick out the asset classes they believe are set to benefit from the policy the most.

Helicopter money in Japan: A guide

James Grant: The Next Thing Might Be Helicopter Money

Japan is running out of options. The Bank of Japan is close to the practical limits of its Japanese Government Bond purchase programme and will soon be forced to taper bond buying (by the end of 2017 the BoJ will earn around 50% of JGBs outstanding). Meanwhile, the negative interest rate policy, introduced earlier this year, doesn’t seem to be working the way it was initially intended to. The combination of these two factors will force the BoJ to seek other routes to stimulate growth. Although the BoJ could accelerate buying of asset classes, there are worries over diminishing returns (by prefecture debt or even ABS). Negative interest rates on deposits is a policy that is deeply unpopular amongst banks and seems to have been ill thought out, therefore it’s unlikely this policy will yield the desired results.

Macquarie Calls On Central Banks For Help; Stifel Says No Hike Until 2017

So, the BoJ may be left with no options but to engage in helicopter drops. The route Jefferies believes the bank is most likely to take is ‘debt restructuring’ to zero coupon bonds (up to ¥3 trillion by Jefferies’ estimate). The most important aspect here is that the debt will never be repaid, nor is there any interest to be paid on debt removing any concerns that taxes may be increased to pay for deficit and easing the burden on government finances, which should also work as a fiscal stimulus. 23% of government tax receipts are used to service debt at present, without this burden the government would be able to pass through consumer and corporate tax cuts.

Citigroup Calls For Helicopter Money Drops Across Globe

It’s important to note that any helicopter drops from the BoJ must be accompanied by fiscal stimulus. The newly created funds should be spent on Japanese goods and services, not overseas products. Indeed, Jefferies highlights that the, “important distinction of helicopter money compared to QE or conventional deficit financing is that it is a combination of extreme monetary easing and fiscal relaxation.” With helicopter money the increase in money supply is seen as irreversible, unlike QE where the easing programme is designed to take place over a period and will eventually be wound down.

Central Banks are Pretending They Don’t See Mountains of Debt

As a result, one of the main issues with the helicopter approach is the accounting treatment for the increase in money supply, given the lack of asset purchases. This is where Jefferies’ zero coupon perpetual could come in handy. To balance the books central banks will need to create either a perpetual bond or negative equity. Negative equity will raise question marks over the central bank’s ability to maintain a currencies purchasing power. Therefore, have a perpetual bond could be preferable. Other options open to the BoJ could include:

Perpetual bonds redeemable at the option of the government

Zero-coupon bonds

Bonds with no periodic interest repayments

Some zero-coupon bonds linked to inflation

Director zero interest loans to banks who pass the rates directly to customers

Money sent directly to the bank account of the consumer

Money sent directly to the government accounts to finance defence, infrastructure and consumer spending

HSBC's Stephen King Outlines "Economic Nightmare"

However, to make these policies work effectively the government would have to introduce a number of protectionist policies to guarantee the fiscal stimulus worked to full effect. Capital controls would have to be implemented, import tariffs applied and a ‘Buy Japan’ campaign undertaken and immigration controls would have to be introduced.

Helicopter money would also render the BoJ’s negative interest rate policy redundant. In this scenario, banks and insurance stocks would do well. In fact, if the BoJ does choose to undertake helicopter policies, then equities across the board will do well and the yield curve should steepen as inflation expectations rise.

Guest post by Matt Hall. 

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Mat Hall is the author of the new memoir-manifesto, Odds On: The Making of an Evidence-Based Investor and President and Co-Founder of Hill Investment Group – he talks about why it’s a great time to be an investor.  Below he discusses in simple terms how investors, novice and veteran alike, should not think about winning a few hands but rather how to own the whole casino.

Josh Brooks: Investing Versus Speculating

Returning from the brink of disaster can have a funny effect on you In the space of a few years, I had fought a potentially fatal illness and run smack into the worst financial crisis since the Great Depression, all while trying to start a business And yet, when those challenges receded around the start of 2010, I didn’t feel battered or drained; I felt exhilarated!

Seth Klarman Quote On Investing Versus Speculation

Some of this excitement came from the fact that I now knew I had found my calling. Guiding clients through the emotional minefields of 2007 and 2008 had brought everything into focus. I finally had the sense of purpose that I’d been looking for since I had graduated from college and innocently plunged into the financial services business. I was equipped with an investment philosophy built on logic and science, and I understood what investors needed in order to manage their emotions. That one-two punch meant I could do what I had always hoped to do: Help people improve their lives via the evidence-based investing movement, which continues to find ways to stack the odds in investors’ favor.

Speculation versus investment. It's all a matter of semantics

To understand the success, let’s use a gambling metaphor. Investing the old-fashioned way is like walking into a casino and placing your chips on red at the roulette wheel, or sitting down at the blackjack table expecting to get 21. You’ll win sometimes. You might even win big on occasion. But in the end, slowly and painfully, the house wins. The odds are simply against the individual gambler. The free drinks, the cheering crowds at the craps table, the flashing lights of a slot machine paying out, the crisp-suited dealers and fabulous showgirls—they’re all there to distract you from the math, which doesn’t lie.

Market data doesn’t lie either. So a crucial decision needs to be made by investors–not to try to win a few hands—but rather to own the casino. Evidence-based, diversified investing strategy allows investors to capture the growth of global capitalism. Whether the ball lands on the red or the black, we make sure that we own the house, so to speak.

What Is the Difference between Investing and Speculation?

Casino owners look for ways to push games like roulette and keno, which offer some of the best odds for the house. In my firm, we do something similar with our investment portfolios. We tilt our holdings toward certain types of investments that have historically provided higher returns than others. How do we find them? Not through guesswork or instinct or so-called fundamental analysis.

We rely on the evidence from some of the most respected institutions and brilliant researchers, which shows how different classes of investments tend to perform over decades.

Am I Investing Or Speculating...?

We’ve set a pretty high bar to make sure that we don’t chase some tantalizing new theory that doesn’t pan out—and you shouldn’t either. Our investment decisions are rooted in a crystal clear understanding that the premium we’re after truly exists—and can be captured cost effectively. My mantra goes like this: A premium must be persistent, pervasive, and liquid. If it doesn’t meet all three criteria, we ignore it.

Commodity Futures, China's Next Casino And Game Of Thrones

Persistent means we need to see long-term evidence that it works. Ten or even 20 years of data aren’t enough to convince us that a premium exists. Anything more than 30 or 40 years starts to get  interesting, but if we can see evidence going back 80 years, that’s reliable.

Jack Bogle on Diversified Portfolios vs Speculation

Pervasive means the premium has to exist across geographic regions or asset groups. It can’t be an isolated phenomenon in the US markets or in some other corner of the world. We have to see the same pattern repeated for very long periods of time across the global markets.

Liquid means that we can actually capture the premium by trading basic instruments like stocks and bonds. We want to be able to gain exposure to these premiums through simple trades that make it easy (and cheap) to get in and out of positions when we create and rebalance portfolios.

I’m confident in this current strategy, because I know that all the premiums we target meet our three criteria. I also know that we can probably do better in the future. Researchers in the evidence-based investment community continue to explore new frontiers and learn more about the financial markets—making today an incredibly exciting time to be an investor.

Investing Versus Flipping

Sometimes, I get so excited about all this that I worry I’m coming on too strong, that people might confuse my passion for a sales pitch. When that feeling arises, I remind myself that my colleagues and I are not pretending to have it all figured out. We just follow the evidence to where it leads us. When we do that, the best way to invest becomes obvious. There’s nothing to sell.

This content is an excerpt from Chapter 16 of Odds On: The Making of an Evidence-Based Investor.

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Are Corporate Defaults a Growing Problem? – U.S. corporations have defaulted on approximately $50B in debt so far this year, and the number of insolvent companies is rising fast – the fastest pace since 2009 in fact. There have been a total of 46 defaults (including the latest 5 in just one week). The largest share of these defaults are attributed to the Energy and Mining Sectors which have taken a hit from persistently low oil prices and the softening of global demand for commodities. The Mining Sector contributes to less than 2% of the U.S. value added as of Q3 2015. If you excluded metals and energy from the default picture, you would find that U.S. High Yield default rate by the end of 2016 is expected to be in the 1.5%-2% band – lower than the non-recessionary average of 2.2%, as suggested by a March report from Fitch. On the other hand, sectors occupying a larger slice of the economy, such as real estate, are experiencing gradual but steady recovery – largely due to firming domestic fundamentals.

FREE Download – Zacks Economic Outlook: April, 2016

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.