Tuesday, January 12, 2016

There Is a Lot More Downside Coming.....BIG BANKS ARE VERY NERVOUS!

There Is a Lot More Downside Coming

It's been a brutal start to 2016 in the markets. But the chart below is setting up, there's a lot more pain on the way.

The S&P is headed toward the 1,570 level, which would be an "extremely normal and realistic" 26% correction from the top. Or another 20% from where it stands now at a minimum.

We are on the verge of one of those rare instances where stocks and bonds fall together. Given the magnitude of the decline in stocks worldwide and sharpness of the move, the yield curve should have flattened a lot more. Either Treasuries are not confirming the decline, and we bounce in equities, or we are entering the worst of all worlds where stocks and bonds fall hard together. It is worth asking why the 10-year Treasury yield isn't down more given on-going commodity pressure (deflationary) and falling stocks (deflationary).

Is it a crash, a correction, or are we on the verge of capitulation in stocks? I believe these are the wrong questions. The question is are we entering a crash, correction or capitulation in stocks and bonds together.

Rabobank: "Everyone Rational Wants To Sell, While Everyone Official Has Been Told To Buy"

BofA Admits "Panic Is Building"; Asks "How Bad Could This Get?"

With analysts cutting estimates at an accelerating rate, increasing China risks and no apparent floor for oil prices, we remain cautious on our near term outlook for stocks.

J.P. Morgan Chase has turned its back on the stock market: For the first time in seven years, the investment bank is urging investors to sell stocks on any bounce. We fear that the incoming fourth-quarter reporting season won't be able to provide much reassurance for stocks.

RBS has advised clients: "Sell everything except high-quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small."

When we see the country starting to pay down its escalating debt, it will be safe to buy stocks. Until then, we are in a bear market that will humble a lot of people.

UBS Warns Of "Record Spikes In Volatility" 

"We would be surprised that in this highly leveraged world, in combination with a structural decline in market liquidity, a 7-year cycle decline would just be mild. We think it's actually just the other way around and in this context we see last year's rise in volatility as just the start of a period with exceptionally high volatility where we wouldn't be surprised to see record spikes in volatility over the next 12 to 17 months."

If we look into the macro world we are obviously living in a world of extremes. We have record debt in the Emerging Market complex, in Europe, in Japan and in the US; with margin debt in the US at record levels, M&A hitting record levels, record ETF holdings in corporate bonds, record auto loans in the US, and the list continues.

We would be surprised that in this highly leveraged world, in combination with a structural decline in market liquidity, a 7-year cycle decline would just be mild.

Last year we argued that we generally see all these divergences as a leading indicator for an important top in global equities. 12 months later we are in the next phase of the global rolling over process, where we see more and more markets having already fallen into a bear market, and where on the other hand we can clearly say that without a new momentum impulse coming from the fundamental world the air for the remaining outperformer markets will get increasingly thin.

Financial markets are broken but have been propped up by immense artificial central bank activity. The coming decline is inevitable in fast-expanding economies that play fast and loose with credit/debt and leverage.

There is a lot more downside coming......!!!!!!

Handing over the fate of the world economy and capital markets to a closed room of career economists... what could possibly go wrong?

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