Yield Has Become a Compulsion

By: Bob Hoye | Fri, May 23, 2014
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The following is part of Pivotal Events that was published for our subscribers May 15, 2014.

Signs Of The Times

"For almost two years the money rolled in. Then, last month, it stopped. Ninety-five consecutive weeks of inflows to US funds investing in leveraged loans came to an abrupt halt."

- Financial Times, May 6

"Junk-rated companies are paying up to borrow in the loan market as investors yank more than $900 million from funds that buy the debt."

- Bloomberg, May 6

"Fannie Mae Soft Peddles $4 Billion Mistakes"

- Housing Wire, May 9

The mistakes were due to "control deficiencies".

"Inflation is becoming a question of when not if."

- CNBC, May 11

Obviously, the pundit has not noticed the "inflation" has been in stocks and lowergrade bonds.

"The world seems to disappoint him."

- President Obama's biographer on May 6

It does a lot to explain his unlimited ambition.

Stock Markets

In October the S&P generated a "Springboard" signal, within the uptrend. The latest surge is an "Upthrust", which is not the opposite to the "Springboard". A failed upthrust can be followed by a significant decline.

Why failure?

Credit conditions, that had been partying for a few years, have been deteriorating since January and broke down a week and a half ago.

Using the JNK/TLT, the "rebound" in spreads lasted until Monday and it only took four days to erase the gain. What's more, today set new lows for spreads.

Spread-widening led the highs in stock market sentiment and momentum peaks in February-March. Leadership, as set by the NDX, peaked in early March at 3738. The initial decline was to 3414 that took out the low of February.

The rebound made it to 3625 on Tuesday, where there is resistance at the 50-Day ma.

Financials stocks (BKX and XBD) have not been acting well. Both set highs in March and the drop since Tuesday has taken out the 200-Day ma. Not healthy.

Senior stock indexes made new highs as well as headlines, essentially on the news that Russia's ambitions in Eastern Ukraine seems to have been met. On this, our view has been that the cyclical peak for this market will not be determined by great political events - even very concerning ones.

Bad news from Ukraine should not have been the item to seriously turn the stock market down. Perhaps the good political news is in and "natural" market forces can run for a while.

We have been looking for a significant turning point in the late-April into May window. We have also had a target for the S&P at 1885, "or thereabouts".

Tuesday's high was 1902, which sets its "Upthrust".

Threats for the failure are described above and it is worth mentioning (again) that the May- June window often turns speculative financial markets down.

For this possible seasonal turning point it essential to have a speculative surge. This is evident in both stock and bond markets.

Credit Markets

The march to yield has become a compulsion.

JNK continues to advance, reaching 76 on the Weekly RSI. With some swings, the overbought has lasted since March.

Investment-grade corporates (LQD) has reached a Weekly RSI of 74; the highest since 2012.

Emerging bonds (EMB) have made it above 70 for the first time since 2012. These are rather bold RSIs.

Over in Europe, the Spanish Ten-Year has been registering the Downside Exhaustion for three consecutive weeks. The yield has declined to 2.85% last week and at 3.02% today it has broken above resistance at 2.98%.

The Greek bond yield declined to 5.85% in early April and has increased to 6.30%. Rising through 6.45% would set the reversal. Today's jump to 6.84% has accomplished this with vigour.

The Russian bond has been marching to the tune of its own balalaika. The yield has been rising since April 2013 when the low of 6.53% was set. Going into the Crimean "adventure", the yield had increased to 8.03% in January, before the crisis started. This surged to 9.70% at the end of April, as the crisis completed.

Russian bonds crashed with the collapse of the 2007 Bubble and then the yield declined to 6.93% in February 2010. Essentially, the yield has been increasing for four years as those in Europe have been declining.

The global bond market has been saying that Russian finances have been deteriorating. Deteriorating enough to suggest that Putin has little room for serious aggression aimed at other countries it borders with.

Our view was that he would grab the seaport, and our hopes were that the move would be limited to that.

From the 9.70% level reached with the crisis, the Russian bond declined to 8.95% earlier in the month. This seemed to be getting in line with the seasonal decline in most yields. It has been in a narrow trading range for a week and rising above 9.05% would turn the yield up. Above 9.40% would get interesting.

Let's take a look at spreads.

JNK/TLT soared to a price and momentum high at the end of December and has stairstepped down since. At the first of the month, the February low of .367 was taken out. After bouncing to .373 last week, the ratio is now at .362%. This is a serious breakdown in spreads and in so many words - setting new "wides" for the move.

Over in long-dated treasuries, the bond future made it to our target of 136. That was last week and our view was that the best was likely in for the move.

The price rise is not overbought and there could be few points more in the rally. The next leg up is underway today.


Back in November we outlined the probability of a big "Rotation" whereby the dismal commodities and resource sectors could: (1) bottom and (2) rally and (3) perhaps out to around March.

The low for the CRB was 272 in early January and the high was 312 in April, accomplishing the most overbought since the cyclical peak in 2011. The initial decline was to 304 last week and the rebound made it to 308 yesterday.

Last week, we noted that when the "inflation" in financial assets broke it would take most commodities down.

Base metals (GYX) have kept back by inappropriately positioned "investors" in China. The first rally was from 320 in December to 362 in January and the next low was 321 in March. The next rally took the index to 353 yesterday.

It is down almost 2% today and our conclusion is that the best for this year is in the market.

Grains (GKX) slumped to 340 at the end of December and rallied 426 at the end of April. It was a strong rally, reaching the highest Weekly RSI since the cyclical peak in March 2011.

From Tuesday's close of 414 the index has dropped to 406, threatening the 50-Day ma. Taking out 404 sets the downtrend. It is down almost 1% to 405 today.

Crude oil rallied from 91.24 in January to 105 in March and in April. This was against our target of 105, with 112 possible. Last week we noted that the recovery from correction low of 98.77 was close to the end of a favourable seasonal move.

The rebound high was yesterday's 102.65 and it is off 70 cents today.

Last week's conclusion was that a significant correction was possible.

The general conclusion was that most commodities were vulnerable to (1) mounting credit concerns and (2) a firming dollar.

The "(3)"?

Could be the discovery of a weakening US economy. Our view has been that the business expansion out of 2009 would be weak tick and that most economic reports would be positive until the bull market for stocks and lower-grade bonds completed.

The latter remains to be seen.

There is an imaginary commodity that we have been watching for a few months. "Carbon Emissions" set a big high at 17.23 in March 2011 and then with most commodities suffered a bear market. Although an unreal item, it must have seemed real to participants on the decline to 3.11 in April 2013.

The rally made it to 7.24 in February and the subsequent low was 4.42 in March. The rebound was to 5.77 in April. At 5.33 yesterday, it has plunged 7 percent to 4.80 today.

"Lilac Moment?"

Often in the financial literature, there are mentions of markets "blossoming" or "fading". And then in the spring of 2009 it was "Green Shoots".

In Vancouver, one of the confirming signs of spring is that the purple lilacs bloom, as do the white ones a week later. Further confirmation.

The high on the S&P was in the between the two, which could be ominous.


Link to May 16, 2014 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/05/gathering-financial-storm-on-the-horizon/



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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