The MOST Important Fundamental: The Global Shortage of Safe Assets

Let’s talk about this tweet from the very astute Mark Dow.

Asset shortages are something I’ve been writing about for the past 3-years now (Collective members can find a report I put together on it back in early 2018 titled “A Persistent Bid”).

They’ve been the primary driver of this bull market, which is now the longest in history. And they’re going to keep driving this market much higher — likely until the perma-bears have ripped the last strands of their hair out.

That’s why it’s important to understand the dynamics behind what I refer to as “the real fundamentals of the market”. It’s a key concept that very few pay attention to let alone understand.

There are two components to this asset shortage bit (1) which has to do with “safe assets” such as developed market government bonds and (2) other financial assets such as equity and credit. In today’s post, we’re going to talk about the former and in a future post, we’ll cover the latter.

So what does a shortage of safe assets mean?

Well, in its most basic sense it refers to an imbalance between supply and demand. Supply and demand are, after all, what drives the market over the long-term.

And a “safe asset shortage” just means that there is more demand for safe assets (ie, government bonds) than there is a supply of them.

Here’s why that is and what it means for both safe and risk assets going forward.

Classic economic theory states that capital should flow from rich countries to poor countries. But, like much of economic theory, this isn’t how things actually work.

What we mostly see is the reverse. Capital flowing from less well off countries into richer one —  the US being a primary recipient of these flows.

The IMF noted why this is in a recent paper writing that an “economy’s ability to produce output is only imperfectly linked to its ability to generate financial assets.” This means that most countries grow faster than they financially deepen (ie, increase their ability to absorb that growing wealth/money).

The chart below illustrates the point.

As emerging markets increase in size, their domestic financial markets lag behindtheir financial assets grow at roughly half the rate of GDP. With a limited domestic pool of securities, EM savers end up having to invest the majority of their wealth abroad.

From that same report, the IMF writes that “improved macroeconomic fundamentals have raised the demand for financial assets. Rising income per capita in EMs, pension reforms in Latin America, increasing commodity prices in the Middle East and Africa, and limited consumption growth in East Asia have contributed to an increasing supply of domestic savings in EMs that needs to be invested.”

Let me translate. As emerging markets mature, their ability to generate credit and grow their money stock rises exponentially. Since EM financial markets can’t soak up this ballooning money stock, it means that an increasing amount of it has to flow to the US; which has the deepest financial markets in the world.

This raises the demand for US assets.

Here’s what a current real-world example of this looks like.

A few months ago, the Financial Times published an article this week titled “Why Taiwan poses a threat to the US bond market”. Here’s a few excerpts from the piece with emphasis by me:

Taiwan may be small, but the island has emerged as a financial superpower thanks to the thriftiness of local savers and an eye-watering current account surplus of about 15 percent of gross domestic product. The country now has the second-largest financial system in the world, relative to gross domestic product. And its life insurance industry is the biggest, with assets-to-GDP of 145 per cent, according to JPMorgan.

The local economy is not big enough to accommodate these enormous sums, so Taiwanese financial institutions have funneled a whopping $1.2tn abroad. Other countries have large overseas stashes of money, but largely in the form of central bank reserves or sovereign wealth funds. Taiwan is anomalous both in terms of the size relative to its economy, and that this pool of money consists of private, rather than public savings.

The money has been invested conservatively, largely in US government and corporate bonds with high credit ratings.

Apparently, Taiwanese insurers hold over 14% of US corporate debt… That. is. absolutely. insane. Not to mention, a large portion of these holdings are unhedged — meaning, their insurers are taking on large amounts of FX risk. Brad Sester, from the Council of Foreign Relations, has written extensively on this topic for those of you interested in really diving in, it’s fascinating stuff (here’s a link). But I digress…

Taiwan is just one example amongst many.

Rick Rieder, the CIO of Blackrock, pointed out in a recent twitter thread (link here) that “Due to the demographic revolution in pension, insurance, and central bank assets, there is roughly 3x as much capital that needs to be invested today as was the case in the early-2000s”.

Rieder goes on to note that though the widening US budget deficit (read, rising Treasury issuance) has helped meet some of this increased demand, it’s still not enough. He concludes by saying “This dynamic has resulted in a dramatic supply/demand imbalance for yielding assets, which is likely to persist for many years, and can be clearly witnessed in the impressive capital flows into income in recent years”.

Another Financial Times article cited a study done by Oxford Economics who calculates that “the supply of these assets [safe DM government debt] will grow by $1.7tn annually over the coming five years — with a $1.2tn issuance of bonds to fund the US budget deficit the largest driver. But demand for these assets is estimated to grow more rapidly, creating a $400bn annual shortfall and indicating that government bond yields are set to remain low.”

Due to regulations and asset matching needs from insurers and banks, the large buyers of these safe assets are mostly price-insensitive. They have to buy US Treasuries and other DM government debt. And with QE over the last number of years and tight fiscal spending out of Europe (read: low issuance) there’s just not much of the stuff to buy… which is one reason why global yields are so low.

And though the rising US deficit is helping somewhat to fix this imbalance, it’s still far from being enough.

What does this all mean from a practical standpoint to us traders and investors?


The safe asset shortage is helping to keep yields pinned low. Low yields are good for risk assets and the economy in general. They help ease financial conditions and keep the gears of the economy and financial markets well oiled — not to mention they’re a critical input to DCF calculations and perhaps even more importantly, investor psychology.

Stocks and bonds compete for capital.  Higher yields attract flows which then puts the pinch on stocks. Stocks sell-off, bonds get bid, yields fall, and capital eventually flows back to stocks until bonds sell-off to the point where bonds once again become more attractive on a relative basis and the process repeats, ad Infinium.

The global shortage in safe assets is hamstringing this back and forth process somewhat. It’s putting a lid on yields which just makes risk assets, such as stocks, that much more attractive.

That is what Mark is talking about when he says “the valuation metrics everyone has been harping on for the past 10 years are totally and utterly irrelevant”.

Fundamentals matter but people are focusing on the wrong ones.

It’s the supply and demand for assets that drive the long-term cycles in financial markets. Today we talked about the safe asset component of this equation. In a follow-up piece, we’ll discuss net share issuance relative to the global money stock, and what this means for the market.

Stay tuned.

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My Three Stock Picks For The 2020 MO Stock Picking Competition


Before I get to my three picks I want to remind all fellow Collective members that our 2020 Stock Picking Competition officially kicks off next Monday. The deadline to get your three picks in is by end of day Friday. If you want to play just shoot me an email at or post your picks to the Comm Center and tag me and I’ll throw them on the board.

The only rules are that the picks have to be stocks (no futures, options, FX). ETFs are allowed as long as they aren’t levered. That’s it. There are no liquidity or country requirements. And the rules of the game are simple: the Operator who’s basket of three stocks (all equally weighted) sees the highest return from Jan 13th through the close of December 31st, 2020, will win.

We haven’t figured out what the prize will be yet but we’ll come up with something good. Maybe some MO swag and an expensive bottle of scotch, not to mention all the bragging rights.

That’s it… Looking forward to seeing your picks!

Now it’s time for me to share my three dark horses. Let me give you fair warning. Two, if not all three of my picks will probably make you dry heave once you see the companies that I’m backing.

I’m fine with that. In fact, that’s the kind of response I’m going for.

Here’s the criteria I used for my selection.

  1. The stocks had to be companies that I’m not already holding for no other reason than I just wanted to make this game a bit more fun. And with the hope that I’d find some new interesting plays (which I think I accomplished).
  2. I wanted picks with crazy asymmetry. Stocks that have the potential to at least double if not 3x or more within 12-months time. I’m playing for keeps here. Either I’m winning this thing or taking a distant last place and eating large helpings of humble pie.
  3. To accomplish the above I needed to find stocks that were either totally and utterly hated or completely and absolutely forgotten, dismissed and disregarded. Preferably, they would have a low float (small supply = higher potential for sharp runs) and a reasonable catalyst for positive change on the near horizon. If they had a really large technical base from which to launch from, even better.

I sifted through hundreds of stocks. My initial list after my first pass through using technicals and a few key fundamental criteria gave me a stack of about 45 tickers. I then dug through the fundamentals for each one of these and was able to kick out the total garbage companies leaving me a solid group of eight stocks.

From this list, I read through transcripts and assigned ratings for technicals and fundies and most importantly, gave a grade to the company’s positive skewness — remember, this isn’t about picking the stock most probable to have a good year but rather about finding three stocks that have the most potential to have an insanely good year (ie, massive convexity).

With that said, I think I accomplished my aims. Now, whether or not they’ll perform or break their legs right out of the gate is to be seen. Either way, I’m excited about the picks. And with that, let’s dive in…

Leju Holdings (LEJU)

If you were to ask someone what was one of the riskiest areas in the global market, they’d very well may say “the Chinese property market”, and rightfully so. Legendary short-seller, Jim Chanos, calls it “the MOST important asset in the world” and not because he thinks it’s a great value.

So, why then did I pick Leju Holdings; a US-listed Chinese ADR that calls itself the leading “online-to-offline (O2O) real estate services provider in China”? Well, I told you I wanted downright disgusting stocks, didn’t I? But, like many things in life, sometimes you have to peer beneath the surface to find that there’s more than what initially meets the eye.

Here’s what I like about LEJU. And why I think it could easily be a 5x’r or more if, of course, it doesn’t end up being a total fraud — I mean, you never really know with these Chinese ADRs.

First off, the chart.

The stock has spent most of its time in a perpetual downtrend since it listed in 2014 after hitting an initial high of $18 a share. At one point, the stock was down over 94% from its all-time highs. For the last three years though it’s been trading in a tight consolidation range.

This is an excellent base… The stock has done nothing for three years. Those who are still sitting in this thing are likely strong hands if they’re willing to hang on through years of… nothing.

(click images to enlarge)


What exactly does LEJU do?

You can think of LEJU as a Chinese version of Zillow (ZW). In fact, the two have partnered together (link here). The company has a market cap of $330m, a small float, holds hardly any debt, carries roughly half its market cap in cash, is expected to do $670m in revenues this year which makes for top-line growth of 45% — nearly doubling last years growth rate of 27%. It has positive earnings growing at over 40% YoY, and is trading for approximately half times sales.

CEO Yinyu He, says the slowdown in the property market over the last two years has in-fact been beneficial to their business because instead of developers/owners holding onto units in hopes of price appreciation they’re being forced to move inventory which makes for greater demand for LEJU’s services.

This stock has smooth sailing until $3.50 where it’ll hit some technical resistance. I think it punches straight through that roof and goes to $5+.

Centrus Energy Corp (LEU)

LEU is a US-based supplier of nuclear fuel and services to the nuclear power industry, both in the US and internationally.

The company has a $62m market cap, only 9m shares outstanding with just 4.5m floated (high insider ownership). Management expects to finish out FY2019 with total revenues in the range of $205-230m putting the midrange estimate at low double-digit growth YoY — marking the company’s first year of positive top-line growth in seven years.

The chart makes my mouth water…

The stock is down over 99% from its all-time highs hit way back in 07′. It’s been trading sideways for roughly 6-years and is just now making an attempt to break out of this range and doing so with strong volume.

Management expects to return to profitability this year — they just put in their first profitable quarter in a loooong time.

They recently lowered their LT debt from $247m to $74.3m (a reduction of more than 70%) and extended the remaining maturity all the way out to 2027.

Lastly, LEU recently signed a contract with the DOE to demonstrate the production of high-assay low-enriched uranium or HALEU. If successful, this would mark the first-ever commercial production of this advanced nuclear fuel which one day could be used in advanced next-gen nuclear reactors.

Dan Poneman, LEU’s chief executive, was deputy of the DEO from 09’-14’, so he’s well connected to get these types of deals done.

I’m uber-bullish on uranium’s long-term prospects. Governments are starting to go raving mad for “green” energy. And there’s no feasible future where we lower our carbon footprint without nuclear making up a LARGE part of our baseload energy supply.

Oh… and here’s a screenshot of the Q&A from their last call. Not a single analyst following this one… Totally under the radar.

Deutsche Bank (DB)

No 2020 contrarian stock list would be complete without the perma-bears absolutely favorite whipping boy, Deutsche Bank.

Somehow this company seems to find a way to be at the bottom of every money-laundering and trading scandal in town. Plus, their business has pretty much been stuck in the dumps ever since the GFC.

So why am I adding DB to my stock trio?

Two reasons… (1) DB has fallen over 90% from its 07’ highs. This stock has already passed through the five stages of investor grief and is now totally written off. I think the market has WAY overdone it and think DB is set for a massive rerating (2) all European banks have been in the pooper, largely due to Europe’s anemic economy and… this is is important… the ECB’s negative interest rate policy. One of my big macro thematics this year is that we see further rate convergence between the US and DM/European countries (meaning, US rates will hold steady to lower while other DM rates converge up). This trend is going to rocket boost European banks.

This chart shows that US banks are trading at ALL-TIME highs relative to their European counterparts (yellow line).

Fiscal policy is coming to the EU in the near future. This will not only boost domestic growth but also raise rates and steepen the curve — which is good for a bank’s net interest margin (NIM). Also, I think at some point this year Christine Lagarde looks at Sweden, who just ended their 5-year experiment with the mind-numbingly stupid experiment that has been negative rates, and sees that their economy is doing fine, in fact, better without NIRP and soon follows in their footsteps.

DB’s chart looks great. The stock just broke out of a 6-month bottoming wedge and has clear skies to $15.

DB’s new CEO, Christian Sewing, is doing and saying all the right things and the company is making good progress on their long-term “plan of transformation”.

I think all the bad news and then some is baked into this sauerbraten. It’s time for this turd to shine.

So there you have it. These are my three stocks to ride for the year. If you like ’em, have questions, or think I’ve completely lost my noodles,  just respond and tell me so. I love hearing your feedback. Also, shoot me your picks. I’m excited to see what stocks y’all are amped about.

Oh… and I’ve also added these picks to my book. I’m putting my money where my mouth is. Details for the trades that I executed this morning are below.

Symbol: LEJU Holdings (LEJU)
Size: 100 bps
Entry: $2.40
Risk Point: $2.00
Target: $6+

Symbol: Centrus Energy Corp (LEU)
Size: 100 bps
Entry: $6.69
Risk Point: $4.81
Target: $14+

Symbol: Deutsche Bank (DB)
Size: 100 bps
Entry: $8.45
Risk Point: $7.55
Target: $15+

Your Macro Operator,


Your Monday Dirty Dozen [CHART PACK]


…the poker world is so competitive that if you don’t fully capitalize on every advantage, you’re not going to survive. I absolutely understood that concept by the time I got down to the options floor. I learned more about options trading strategy by playing poker than I did in all my college economics courses combined.  ~ Jeff Yass


Good morning!

In this week’s Dirty Dozen [CHART PACK] we question whether our bearish bonds stance is still valid. We then dive into what falling yields could mean for other areas of the market and go through some charts of gold, silver, and emerging markets. Let’s dive in…

***click charts to enlarge***

  1. December’s ISM Manufacturing data printed its lowest number in 10-years, remaining in contractionary territory for the fifth straight month. New orders, Production index, and Employment all made new or near cycle lows (the production index squeaked in a slightly lower low in Jan of 16’).

There’s a number of reasons to believe that we’ll soon see this data reverse. For example, Markit’s PMI — which is of higher fidelity — has already bottomed and is trending higher. Also, a number of regional Fed survey data is showing a rosier outlook. Plus, this month was the last month in which the survey was conducted before the tentative trade deal was reached. I’m not expecting a hockey stick rebound like we saw in 16’ but we should see a bottom be put in soon.


  1. Treasury yields tend to follow the trends in the ISM. This makes sense as a growing economy (rising ISM) usually drives investors to sell bonds and move further out the risk curve and vice-versa. Considering this, the current divergence between the two is interesting.


  1. It’s possible that the bond market is expecting a swift rebound in the ISM or that it’s just been lagging in response and we should expect higher bonds / lower yields in the weeks ahead. This monthly chart of bond futures ($ZB_F) shows bonds recently put in a micro double-bottom and closed at their highs for December.


  1. I’ve been bearish on bonds the last few months. One of the reasons why was due to what the metals market was saying with the copper/gold ratio leading yields higher. But this ratio has collapsed in the last few weeks and is on the verge of signaling a new trend lower.


  1. Another thing that makes me question the continued validity of my bearish bonds stance is how well they’ve held up considering the market’s low volatility grind higher. When something doesn’t sell-off when you expect it to then that’s a signal in and of itself.

This reluctance of yields to move higher (bonds lower) has been a major tailwind for stocks since stocks and bonds compete for capital and higher yields make bonds more attractive on a relative basis.


  1. These low yields have been keeping financial conditions extremely loose.


  1. And falling real yields have been driving gold higher (real yields is inverted).


  1. This monthly chart of gold shows that it’s making an attempt to break out of its 5-month consolidation zone by breaching the $1,550-1,600 area. A significant level that has rejected it twice before.


  1. Falling real yields and rising gold typically go hand in hand with relative outperformance from emerging market stocks. The chart below shows the 5-year change of gold and SPX vs. EEM indices.


  1. The gold/silver ratio remains extremely elevated. Historically this is bullish for future returns in precious metals, especially silver.


  1. This monthly chart of silver (SI_F) shows the metal trying to break out of its 5-month long bull flag.


  1. When looking at miners I care about technicals over everything else since the space is primarily driven by narratives and sentiment. There’s a number of great looking technical setups in gold and silver miners at the moment. Here’s a chart of Silvercrest Metals (SILV) on a weekly basis.


Your Monday Dirty Dozen [CHART PACK]


For eighteen years I followed the sea, took what it offered. It has brought me shipwreck and success, sorrow, danger, and unutterable happiness. ~ Henry de Monfreid


Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the total returns ytd for the major asset classes, then we discuss why stocks performed as well as they did, followed by further talk on stretched sentiment, note some strange action in fund flows, and point out a few good looking chart setups in the gold mining and E&P space. Let’s dive in…

  1. Only two more days left in the trading year. Here’s the report card on the total returns per asset class via BofAML. What a difference a year makes… In 18’ cash was the top performer at 1.8% while every other asset outside of US Treasuries was down on the year. This year, everything was positive with stocks turning in a blockbuster performance with the SPX returning over 30%.

  1. What’s interesting though is that cash — the lowest returning asset this year — happened to be the asset class that investors loved most. Over half-a-trillion dollars flowed into cash this year while investors sold over $160bn net of equities (chart via BofAML).

  1. Why did stocks perform so well this year? Well, investors were expecting the GFC Redux and positioned accordingly but economic armageddon never came. This chart from State Street shows how fund manager’s confidence in equities hit an all-time low in Dec 18’ (over 2 SDs below its 3yr rolling average).

  1. This yearly chart of the SPX going back to 1970 shows the market is about to close on the high for the year, as well as the decade. Newton’s First Law reigns in markets and momentum tends to beget further momentum. This bodes well for next year as the S&P averages an annual return of 11.2% following a year in which it returns over 20% (according to MW).

  1. But more short and intermediate terms of sentiment and positioning suggest we’re likely to see some profit-taking (read: volatility) in the near-term. NDR’s Daily Trading Sentiment Composite shows excessive optimism (chart via @WillieDelwiche).

  1. And Sentiment Trader’s “Core Indicators” are also showing widespread FOMO with 55% of them reading extreme optimism which is the highest level in 15-years.

  1. In addition, January and February tend to be some of the weakest seasonal periods for stocks in the year (chart via Equity Clock).

  1. This great chart from @allstarcharts shows the Europe 600 Index is breaking out to all-time highs, past a resistance level that has rejected it four other times over the last 20+ years. This is important for a number of reasons (1) it’s very bullish for global equities and European equities, obviously and (2) FX markets are driven by speculative flows. Spec flows chase expected total returns. An outperforming European market would be bullish the euro and thus bearish the US dollar (euro makes up roughly 60% trade-weighted dollar basket) (h/t @TihoBrkan).

  1. Most of the charts in the oil and gas space still look like flaming turds. But… there’s a few that have recently broken out of nice technical setups. One of them is GPRK which I recently mentioned here. Another one is Vaalco Energy (EGY). It has zero debt, positive FCF, good assets, strong management, and is selling for dirt-cheap. Chart below is a weekly.

  1. I’ve been expecting more of a pullback in gold and think we may still get one — though I’m bullish longer-term on the yellow metal. With that said, there are too many good looking charts in the miner space to ignore. This weekly chart of Harmony Gold (HMY) is a beaut…

  1. This caught my eye. According to BofAML US equity funds and ETFs saw their largest weekly outflow of the year last week while investors piled into fixed income. I’m not sure how to square this with the sentiment data but it’s definitely strange.

  1. Investors have been moving back into Emerging Markets with 9 out of the last 10 weeks seeing positive inflows into dedicated EM funds. This is a stark change from earlier in the year when investors were selling their EM holdings at a quick clip. This chart from MS shows GEM Fund Managers’ current weighting relative to the MSCI EM index. Malaysia, China, and Taiwan are some of the most underweighted countries which happen to be the charts I’m most bullish on going into 2020. Check out the Malaysia (EWM) chart, it recently broke out of the descending wedge I’ve been pointing out over the last couple of months.


Your Monday Dirty Dozen [CHART PACK]


Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. ~ George Soros

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the year-to-date returns for major markets, take a step back and review some big-picture macro indicators, talk about the extremes we’re now seeing in bullish sentiment and positioning, and then look at gamma and what they may mean for markets. Let’s dive in…

  1. A year ago this week nearly the entire world was predicting a crushing recession and 08’ style bear market — we were not part of this crowd but were instead saying a major bottom was in. But, I admit, even we didn’t expect the year to turn out as strong as it did. I mean who would have thought a year ago that all stock markets around the world would not only finish the year in green but put in large double-digit gains. Markets are funny like that… The graph below is from KoyFin.

  1. This should be a quiet week for markets with the holidays and all so I thought we’d look at some bigger picture charts to see what 2020 might bring. This smoothed recession probabilities indicator is “a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales.” It’s currently giving its highest reading this cycle but is still well below the level that indicates we’re near recession — meaning, not a major warning but something to keep an eye on. You can find more information on it here.

  1. Heavy Truck Sales, which is one of the critical leading macro indicators I track, just had its worst month-over-month drop this cycle. I suspect this is the result of the weak industrial and energy sector and tightening lending standards in the space.

  1. I’ve noted the weak LEI over the last few months, which is another troubling development. Inflation-adjusted retail sales are still positive though weakening. The consumer has been a critical driver of this recovery so how tight they are with their wallets will continue to be important in 2020. The labor market is still strong though trend growth is weakening. And financial conditions continue to run very easy which is bullish for risk assets.

  1. This chart from NDR and CMG Wealth gives another look at how favorable credit conditions remain.

  1. The underlying technicals of the market are strong but it has become overbought and overloved. Many of our sentiment indicators are at their highest levels since early 18’.

  1. Put/Call 3dma is now 2-Stdev from its average and the SPX’s RSI is in overbought territory.

  1. The NAAIM Stock Exposure Index is at its highest level since June of 18’.

  1. And Extreme Exposure is at its highest level since January 18’ and above the threshold that has consistently preceded turning points in the past.

  1. This chart from Sentiment Trader shows that Gamma Exposure (the sensitivity of option contracts to movements in the SPX) is at historically high levels. They noted that “if the S&P moves +1%, there is a potential 8 billion shares coming to market to push prices lower. That’s the most ever when averaged over the past 3 sessions.”

  1. Here’s a table from them showing the historical market returns following a Gamma exposure / NYSE Volume ratio of over 2.

  1. I tweeted about gold this last week (link here). Its price is at an inflection point, up near its upper channel line and 50dma. My bias is that it soon breaks much lower from here but we may see a false bull trap first with a breakout above the upper channel line. Keep an eye on this one.

Your Monday Dirty Dozen [CHART PACK]


You’d be surprised when you’re put right on the ball and you’ve got to do something and everybody’s looking at you going, OK, what’s going to happen? You put yourself there on the firing line — give me a blindfold and a last cigarette and let’s go. And you’d be surprised by how much comes out of you before you die.  ~ Keith Richards

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the technical picture for the SPX, go through some stats that show this bull is gonna keep running, talk about the latest data that suggests the global economy has troughed, and finish with some single stock setups we’re looking at. Let’s dive in…

  1. The following chart and text are from Al Brooks. “The monthly S&P500 Emini futures chart finally broke above the top of its 13-year bull channel on Thursday. The breakout is small so far, but there are many days left to the month.

I had been saying for a couple months that the breakout was likely. But I also have been saying that there is only a 25% chance of a successful breakout above the top of a bull channel. By that, I mean an acceleration up into a stronger bull trend. The most dramatic example was the monthly chart in 1995. That breakout above a bull channel led to a huge bull trend.

In 75% of cases, there is a reversal down back into the channel within about 5 bars. An example of a reversal from a failed bull breakout above a bull channel happened in January 2018 on the weekly chart. The Emini eventually sold off 20% and went sideways for almost 2 years.

Five bars on the monthly chart is almost half a year. Therefore, the Emini could continue up for several more months before reversing down.”

  1. After nearly 2-years of trading sideways, the NYSE took out Jan 18’s highs. @RyanDetrick points out that the market’s future returns after hitting new all-time highs following a year or more of sideways action tend to be pretty good, writing “Since 1980, higher 6 months later 7 of 8 and higher 12 months later every time.” The path of least resistance is still clearly up for equities…

  1. This chart from NDR via RW Bairds 2020 Economic & Stock Market Outlook” shows that 67% of stock markets around the globe are trading above their 200-day moving averages. The strongest bull markets are driven by widespread participation (h/t @TN).

  1. I wrote a bit about the developing bull case for Japanese equities back in September (link here). Veteran chart technician, Peter Brandt, seems to agree. This chart of his shows the Nikkei 225 with quarterly candles. The market is attempting to break out of a 30-year range.

  1. A big reason for the bullish global technical backdrop is that the world didn’t end like most were predicting at the start of the year. While people were screaming about an impending recession we were pointing out how the data wasn’t that bad, and in fact, was indicating that the worst was behind us. One of these charts was the OECD Global CLI. Well, it just turned up for the first time since early 2018 (top orange line).

  1. This graph from Sentiment Trader shows the S&P’s returns after the OECD CLI turns up for the first time in over 1.5 years. STRONG ACROSS THE BOARD. Man, it’s gotta be rough being a perma-bear in this environment…

  1. Oh… and the Global PMI is also inflecting higher.

  1. In light of this positive backdrop here are a few stocks I’m looking at with nice setups. Here’s the dating tech company Match (MTCH). It’s spent the last year trading down to its 200-day moving average (blue line) where itssince found support.

  1. Chinese coffee retailer Luckin Coffee (LK) is forming a nice bull flag after exploding out of its post listing range. The company has triple-digit revenue growth, the CEO and Chairman own roughly 40% of the company, and there’s an extremely high short float (read: lost of fuel for a rip higher).

  1. Shipper Euronav (EURN) is also bull flagging after a strong impulse move out of its base (chart is a weekly).

  1. Clarksons lays out the DEEP value case for EURN below (h/t @joeriwestland).

  1. This great chart from @MacroCharts shows what 2020 could bring for EM. To get there though we need to see the dollar break. And while it’s been trading weak as of late, it’s still holding above key technical levels which means odds still favor up/sideways action for now.

Your Monday Dirty Dozen [CHART PACK]


He whom the ancients called an expert in battle gained victory where victory was easily gained. Thus the battle of the expert is never an exceptional victory, nor does it win him reputation for wisdom or credit for courage. His victories in battle are unerring. Unerring means that he acts where victory is certain, and conquers an enemy that has already lost. ~ Sun-Tzu, The Art of War

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the near-term technical picture for the SPX and then we analyze the valuation hurdle coming for the US market, followed by a look at multiples around the world and then we make the bull case for Europe. Plus more…

  1. Last week was an interesting one for the SPX price action-wise. Let’s start with the daily chart below. Monday, the SPX broke below its 8-week tight bull channel (red highlight) after breaking above the upper trendline of its larger 6-month bull channel (green highlight) creating a bull trap false breakout, only to selloff down to the top of its even larger 22-month broadening top trendline (shown on weekly chart below) before reversing and ripping higher, back above the 6-month bull channel trendline right up against the bottom line of its micro bull channel, and ending positive on the week.

  1. Here’s the SPX chart on a weekly basis. See how we sold off last week down to the upper line of the larger 22-month consolidation zone. And then bulls aggressively took back control and ripped the market higher into the close for the week.

I admit I was expecting more follow-through from this move in order to reset the indications of short-term complacent sentiment and positioning that I’m seeing. And, though we may still get another leg down this week, the odds are now back in favor of a continuation of the bull trend. Action like this represents incredible strength in demand — this is not the type of tape you want to aggressively short. And when you combine this with the fact we’re moving into one of the most favorable periods of seasonality and nearly the entire fund manager space, who has grossly lagged the market year-to-date, will likely be chasing hard into the end of the year… well, the next few weeks should be fun.

  1. Looking further out though into 2020 the SPX is going to be fighting some decently strong headwinds in the form of stretched valuations absent a visible driver of earnings growth. The below chart from Goldman Sachs shows the year-to-date rally has been almost entirely driven by valuations rerating higher. Over the longer-term, this is unsustainable — especially in the US where valuations are already high. Either earnings growth will need to pick up materially or equities will hit a wall.

  1. The SPX’s forward PE is back over 18 and nearing the cycle highs it reached back in Jan 18’.

  1. The world as a whole isn’t as dear, though it’s not exactly cheap either. The MSCI World index currently trades for 16.1x next year’s earnings. The blue line shows that global earnings growth has essentially been flat for 18-months and counting.

  1. Some markets are trading much cheaper than others. A few of my favorites at the moment (based on technicals, macro, and value) are Malaysia (EWM), Russia (RSX), and Chile (ECH).

  1. Last month I pointed out how the MSCI Chile ETF (ECH) had sold down to an area of significant long-term support. A level that had marked major bottoms in the past. The chart below is a weekly and shows that ECH completed a double bottom pattern after finishing the week strong on a bullish reversal candle.

  1. We’ve been talking quite a bit lately about the vol compression regime that G10 dollar pairs are in and how compression regimes like these tend to lead to expansionary ones (ie, major trends). Well, currencies are driven by speculative flows and spec flows chase relative total returns. The reason why the dollar continues to perform well is because the US continues to perform well on a relative basis.

I’m watching Europe and the EURUSD closely though because if investors are starting to return to the continent after a long hiatus then this could have big implications for the USD. A big positive for this trend is net equity supply, which has gone into reverse and is now shrinking. Remember, buybacks have been the primary driver of the US equity market over the last couple of years (chart from Goldman Sachs).

  1. And not only are European company’s showing increasingly positive earnings beats over the last 2-quarters but earnings momentum there is starting to beat the US for the first time in a LONG while (chart via UBS).

  1. Economic growth seems to be stabilizing (chart via MS).

  1. This chart from Goldman Sachs shows that the aggregate 10-year rolling average of sales growth has been steadily declining for the last 7-years — at least until very recently.

  1. Congrats everybody, we did it! Global debt has surpassed the $255trn mark for the first time ever. Remember, absolutely none of this matters because… MMT ***strong sarcasm voice***.

Your Monday Dirty Dozen [CHART PACK]


If you would be a real seeker after truth, it is necessary that at least once in your life you doubt, as far as possible, all things. ~ Rene Descartes

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at a few indicators that are raising the odds of a US recession over the coming year, then we check out the technical picture on the SPX, discuss the case for a short-term pullback/consolidation, and see where the broader path of least resistance lies… Oh, and we also check up on shipping amongst a couple of other things…

  1. A favorite recession indicator of mine, the Philadelphia Fed Coincident State Index, printed a new cycle low this last month. This doesn’t guarantee a recession is on the horizon — you can see that the indicator has hit these levels before in the past, only to rebound mid-cycle. It does mean though, that the indicator is at a critical inflection point and needs to materially improve in the coming months or the odds of a recession next year rise substantially.

  1. The Conference Board LEI, another high-fidelity leading indicator, also put up weak numbers. The indicator declined for its third straight month and is close to turning negative on a year-over-year basis. The LEI has effectively signaled all eight recessions since its inception in 1959. It peaks on average 10.5 months before a recession starts. Like the indicator above, the clock is now ticking. We need to see a rebound or expect late 2020 to be a rough ride — the graph below the chart shows the S&P’s average returns per the YoY trend in the LEI.

  1. The SPX is taking a bit of a breather printing a weekly Doji candle following 6 strong consecutive bull candles. It’s now bumping up against its upper 6-month bull channel trend line.

  1. Trends don’t move in straight lines but are rather comprised of impulsive thrusts followed by corrective retraces/consolidation points as supply and demand work to form another base. The daily chart below of the SPX shows that the market broke below its month + long bull channel after getting rejected by its larger 6-month upper bull channel trend line. Typically, after a large move like this, we should expect a couple of weeks of sideways or downwards price action due to profit-taking and emboldened bears.

  1. There are numerous signs that the market is entering a short corrective phase. The chart below shows the percent of stocks that have triggered MACD sell-signals within the last 10-days is at levels that have coincided with previous short-term tops.

  1. Breadth has also deteriorated a good deal. There are now more stocks trading below their 20-day moving average than above. The NYSE’s new highs-new lows 10-day moving average has declined considerably and our Zweig Advance/Decline Breadth indicator has turned negative.

  1. Another concerning data point is the widening in high-yield credit spreads. Generally speaking, financial conditions are still broadly loose and much of this deterioration is being driven by the struggling energy sector. But, if this trend continues, there’s the chance we begin to see some spillover effects.

  1. But there a number of reasons to not expect a significant correction. And, considering the positive seasonality of the period we’re moving into, it’s very possible that last week’s small dip was all the breather we needed. The Put/Call (10dma) ratio jumped on the little sell-off mid-week, showing fear is ever-present in this market.

  1. This great chart from @MacroCharts shows that fund managers remain extremely under-positioned. I would not be surprised if we see a FOMO driven end of year rally as under-performing managers try to play catch up to the market.

  1. The bull market in shipping is kicking into gear. Charter rates are spiking as the end of year nears, sidelined refinery capacity comes back online, and IMO 2020 comes into effect. Click here to read my write-up on shipping’s bull case. My favorites in the space are STNG, LPG, TNK, and INSW.

  1. Goldman Sachs’ Financial Conditions Index growth impulse is expected to turn positive in the coming months thus providing a tail-wind for GDP growth in 2020.

  1. China has been tightly — relatively speaking — managing its credit spigot. Goldman Sachs China Domestic Macro-Policy Proxy shows that the CCP is only marginally providing stimulus to the economy. China’s tight fiscal and monetary policy continues to be a drag on emerging markets and a negative on global inflation.

Your Monday Dirty Dozen [CHART PACK]


Grave dancing is an art that has many potential benefits. But one must be careful while prancing around not to fall into the open pit and join the cadaver. There is often a thin line between the dancer and the danced upon. ~ Sam Zell

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at signs of slowing growth here in the US along with data pointing to a rebound elsewhere. Plus, we take a look at where the money is flowing, check-in on sentiment, discuss a potential major bottom in a LatAm country, see what’s going on in Japan and point out the massive compression regime in major FX pairs, and more…

  1. The Atlanta Fed’s GDP Now Forecast is pointing to a big dip in 4th quarter GDP. This is a noisy indicator but my other indicators are saying the same. US growth is slowing…

  1. That’s okay though, we’ve been expecting lower GDP growth and believe it should bottom in the 4th quarter before turning up slightly. When you hear the bears wailing about the lower prints just remember this from Druckenmiller, “The best environment for stocks is a very dull, slow economy that the Federal Reserve is trying to get going.”

  1. Citi’s Economic Surprise Index (CESI) just turned negative for the US. This should help keep yields in the US from rising too much. Which, of course, is supportive of equities. The only two large countries seeing positive surprises at the moment are Canada and Japan — more on one of these in a moment.

  1. This chart from BofAML showing PMI New Orders / Inventory Ratio for the US, China, Europe, and Japan suggests we’re about to see the global manufacturing PMI turn up in a big way.

  1. The new smells of “risk-on” in the air are driving fund managers to divert more and more of their funds from crowded and expensive US stocks into its much cheaper counterparts (chart via BofaML).

  1. And there’s LOTS of fuel for a run higher in stocks. BofAML notes in a recent report that “for every $100 of redemptions from equity funds YTD, $15 of buying in past 3 weeks”.

  1. Despite this rally to new all-time highs in the major indices, the bullish sentiment isn’t as bullish as one might think. BofAML’s Bull & Bear Indicator is in buy territory showing a modicum of bearishness present in the market still.

  1. Below is a chart of the MSCI Chile country ETF (ECH). Chilean stocks have been punished over concerns regarding violent protests in the country and what it may mean for the country’s politics going forward. This monthly chart below of ECH shows that the ETF sold off down to its decade-long support line, one that it’s tested three other times in the past, before reversing back up. We’ll have to see if it can hold onto its gains going into month’s end.

  1. This table from Sentiment Trader shows the few other times that Chile’s IPSA Index has rallied more than 10% in 2 days. They point out that “such strong rallies are rare, with the last 3 signals occurring near multi-year bottoms.” Keep an eye on this one…

  1. Back in early September, I pointed out the bullish technical setup in the Japanese Nikkei and also noted a number of the fundamental tailwinds the country is currently benefiting from (link here). The Nikkei has since broken out, advancing close to 15% over the last two months. There are a number of reasons of why Japanese stocks are doing so well, one of these is simple: earnings are surprising to the upside after a long stretch of negative disappointments (chart via MS).

  1. And even more importantly, buybacks in Japan are breaking records this year. Seems like all the work of US activist fund managers cajoling Japanese boards to be more shareholder-friendly is starting to pay off (chart via MS).

  1. This one is a twofer. Back at the beginning of this year the MO team and I began harping on the incredibly compressed volatility regimes we were seeing across the major macro instruments (precious metals, bonds, FX majors). Here’s a link to one of our pieces on the subject “There’s a BIG Macro Move Brewing in Markets”. We’ve since seen precious metals (gold and silver) break out and move into a vol expansion regime, and then bonds soon followed suit.

Now we’re just waiting on the very last shoe to drop: FX. And in particular, the major DXY pairs. These two charts from DB show volatility for the major G10 pairs is at its most compressed EVER… EURUSD is about to put in back-to-back years of its lowest vol in history… Markets are like rubber bands.  Compression regimes, like the one we’re currently in, mean there’s a lot of stored up energy (the rubber band has been twisted tight). Well, this band is about to snap. Stay on your toes…

Trading Politics – Part 1


Tyler here.  This month I started a video series called Trading Politics over on our partner youtube channel Fallible.  The first video introduces the most popular political prediction market in the United States, PredictIt. In the past we’ve used the prediction markets on PredictIt to help us position our portfolio during key election events.  The […]