TIME WILL TELL

The S&P 500 has its own built in indicators at various times. Back in the Internet boom days, tech stocks made up a significant percentage of the index. Here’s another chart you want to keep an eye on, the energy weighting of the S&P 500.

As you can see back in 1998 when oil traded at $10 a barrel it was barely 6% of the index where it trended sideways for some time. Again, in 2008 a similar pattern developed. No single indicator is perfect, but we can tell you both times when it made up almost three times the percentage of the index from where it is today, hardly anyone thought much about selling.The opposite pattern holds true for the low percentages of the index. We don't know how low it can go and neither does anyone else. No doubt you'll hear many warnings about value traps; they do exist. We don't deny that.

 
Around that time we attended a conference where television guru Lawrence Kudlow was all puffed up about the low energy and gold prices, indirectly pointing out gold was dead in its mine shaft. Gold was a little above $200 an ounce at the time. In late 2002 gold started on its nearly 15-year bull market run. At the beginning of this century oil was an MSM value trap. So was gold.

May the force be with you is a popular saying these days. That should be abstract enough not to offend anyone's beliefs or disbeliefs. Some of us were fortunate enough at the time to get trapped in the profit value of the two. Believe us it was difficult to enjoy with MSM lined up so solidly on the other side of that trade for all those years. But as they say: If it doesn't kill you, it makes you stronger.

Some people will tell you it was the market forces that topped gold out. Others harbor a different tale. High gold prices typically translate into failing confidence in fiat paper. Everybody needs an easy, available villain. For the climate change crowd it's energy, human or otherwise. For central bankers it's any and all threats to their printing presses.

Time will have its own tale about those printing presses.

cnbc.com/applications/cnbc.com/resources/files/2015/12/16/

OVERNIGHT

Though everyone knows this is a short week for U.S. markets, Japanese stocks ended the year up a little over 9% over night. The rise topped a 7.1% gain in 2014, the WSJ reported as a weak yen helped Japanese exporters.

China was the best performing Asian market in 2015 with Japan not far behind on the list of best performing. Once again energy prices impacted markets as of late it's been almost a daily yo-yo based on what energy does, up or down. Australia's ASX 200, after nine straight up days, faded 0.1% to close at 5315 and change. But energy and materials were both down.

PENDING HOME SALES

Here's one of those unexpected events and it isn't even 2016 yet. Note too the point that "rising home prices and limited new homes for sale." You got rising prices and limited supply. Sounds a bit inflationary. Given that wages have been flat almost as long as the flat earth theory prevailed before Magellen set sail, affordability is a big factor now that regulators have passed another asinine set of lending rules.

Today the NAR released the Pending Home Sales Index, a measure of expected sales on existing homes. The Econoday Consensus Estimate was for a 0.5% rise in a range of 0.0 to 2.4%.

No economist got the sign correct. The index unexpectedly declined 0.9% month-over-month, well below even the lowest economist's estimate. More:

You should also note not one economists got it correct.

globaleconomicanalysis.blogspot.com/2015/12/pending-home-sales-decline-09-well.

ORGANIZED POCKET PICKERS

If anyone still believes that anything isn't possible, they have some surprises ahead.

A front page story today in the WSJ headlines: "U.S. SPYING NABS ALLIES." It's almost a comical read about how paranoid everyone is today among even global official ranks. We know governments spy on their citizens and we know the world is an increasingly unstable place. Spying is an old occupation, perhaps dating back to the one of the world's oldest, prostitution. We also  know that when citizens raise the issue they're labeled fear mongers and paranoids. And that's not new either.

But here's a story about something many people thought would never happened, holding senior debt holders and eventually depositors responsible for bad banking management. It's called bank bail-ins.
zerohedge.com/news/2015-12-30/bail-ins-are-back-portugal-slaps-senior-bank-bondholders-2-billion-loss.

We called this article: "Organized Pocket Pickers," but it was a toss up between that and "Coming to Your Local Bank Soon." As we noted in financialspuds.blogspot.com/2015/12/pocketing-gains, there is little that bankers and bureaucrats won't do to deflect blame and saddle responsibility on the unsuspecting.

Taking the hit will be institutional investors who bought minimum lots of €100,000. 
When BES was bailed out, senior bondholders and depositors were protected while junior debtholders and anyone stuck with the equity were, well, screwed. As was the case with Banif, if Portugal had waited until the new year dawned, uninsured depositors would have been at risk in any attempt to shore up Novo’s books ahead of a plan to restart the auction process. Ultimately, someone had to pay to make this "good" bank turned bad "good" again.
Here's a look at what happened to Novo Banco 2017s in the wake of the announcement:

And for those wondering just which institutional investors are holding those, here's a list (note that Allianz and BlackRock are right at the top):


“This measure was needed to ensure that the losses from Banco Espirito Santo are absorbed firstly by shareholders and creditors and not by the financial system and taxpayers,” the Bank of Portugal said, in a statement. 
Novo Banco initially said the shortfall identified by the ECB last month would be addressed "with a plan that would include selling assets." Here's what The Bank of Portugal said when the stress test was concluded:

As announced by Banco de Portugal on 15 September, the Board of Directors of Novo Banco has already been empowered to present a plan to strengthen its solvency and implement strategic reorganisation. The plan will include measures to address the shortfall within an appropriate time frame. Amongst others, those measures included the following, to be implemented in the short term with the support of Banco de Portugal and Fundo de Resolução:

• Sale of Novo Banco’s shareholding in GNB Vida - Companhia de Seguros, S.A.;
• Sale of other shareholdings which are perceived to be non-core for the bank’s business.

In other words, the idea was to sell "assets" in order to fill the gap on the way to selling the bank itself. Well, someone apparently determined that it would be more efficient to simply force bondholders to fund a capital injection. As WSJ notes, the move represents the first time senior bondholders are on the hook for a banking bailout in the country.
But no one should be worried - well, no one except all of the institutional investors who just got wiped out - because Portugal swears this is the last time capital will have to be injected in Novo Banco. In other words, the sale process will be smooth sailing from here.
Of course the fact that the bank resorted to a bail-in rather than individual asset sales seems to suggest otherwise. As does this:


Keep your eyes soon.peeled. It might just be hour pocket that gets picked. Coming to your local bank soon, believe it or not.

THE DOLLAR IN 2016?

If you're a technician or just wondering about the strong dollar and how long it can stay strong, you might find this of interest from cnbc.com/2015/12/29/this-could-change-a-lot-of-playbooks-in-2016-strategist.

As 2015 comes to an end, many on Wall Street are placing their bets on what could happen in the markets next year. But according to one strategist, an unforeseen collapse in the dollar index could not only send ripples across the entire market, but "change a lot of playbooks for 2016."

"Everyone seems to be on the same side of the boat when it comes to the dollar, thinking that long term it's going to go higher," Matt Maley told CNBC's "Futures Now" on Tuesday. He noted that with an improving U.S. economy and Federal Reserve tightening — while many other central banks are easing — the bull case can easily be made for the dollar. "But a lot of people forget that the high in the dollar was actually way back in March."

The dollar index has traded in a sideways range for much of 2015, seeing returns of more than 8 percent year to date, with much of those gains having occurred in the first three months of the year. The index hit a closing high of 100.18 in March and retested that level earlier this month, forming what Maley, managing director and equity strategist at Miller Tabak, said could be a double top.
 
"The last three times the dollar made a double top has been followed by a significant or even major sell-off," he said. 

According to Maley, the dollar completed a similar pattern in January 2002, and saw a 33 percent decline in the three years to follow. It happened again in November 2005, where it fell 23 percent in the following two years and most recently in June 2010, seeing a nearly 20 percent decline in the following year, he said. 

"We're still a ways away from confirming that a double top has indeed been formed," he noted. "But it could change a lot of playbooks for 2016 if that happens."

POCKETING GAINS

In business there 's the sage advice always give more than you promise. It's advice that the nation's banks hardly ever follow.

Here is the classic case you see all the time, especially in banking: Promise much more than you give. Most of the big banks particularly those with the most credit card holders screwed up their balance sheets leading into the last recession on their own, only to wheedle and whine for taxpayers via government to ride to their economic rescue.

You'll also notice here, "some big clients."
.wsj.com/articles/j-p-morgan-to-increase-deposit-rates-for-some-big-clients-in-january

Hours after the Fed’s decision earlier this month, the largest U.S. banks announced increases in the prime rate, a reference rate for a variety of loans including credit-card debt. But most banks didn’t make any corresponding hikes to the interest they pay to depositors. The moves signaled that at least for now most banks hoped to pocket the gains from the Fed’s move.

Net interest margins, or the difference between what banks pay for deposits and what they earn on loans and investments, have been squeezed in recent years by low interest rates.

That last part about being squeezed should apply in spades to depositors and their high credit card rates that never really declined proportionately to the drop in interest rates they received on their checking and savings accounts.

“They’re so compressed there’s no question they’ll keep the majority if not all of [the benefits of the first rate hike],” said Lance Pan, director of research at Capital Advisors Group Inc., an investment advisory firm.

J.P. Morgan’s deposit-rate increase will affect most institutional clients and the size of the increases will vary, the person said. They will apply to “operating” deposits, which are deemed stickier and less likely to be withdrawn in a crisis.

Representatives for Bank of America Corp., Wells Fargo & Co. andCitigroup Inc. said there has been no change to deposit rates at the banks. A representative for Goldman Sachs Group Inc. had no immediate comment, while one for Morgan Stanley declined to comment.

The Fed’s decision this month to lift its benchmark interest rate by a quarter percentage point marked the end of an era that had pinched banks’ lending profits. Lenders anticipate that higher rates will provide an immediate boost to lending income, while also possibly helping loan demand.

In a rising rate environment, deposit-rate increases typically lag behind increases in loan rates, which is why banks can make more money when rates go up. Vining Sparks analyst Marty Mosby estimates that large U.S. banks will raise rates on interest-bearing deposits by less than 0.1 percentage point in the wake of the Fed’s move. Meanwhile, the prime lending rate quickly rose to 3.5% from 3.25% after the Fed announcement.

In the brokerage business this would be called front running. In Washington and on Wall Street it known as banking as usual.

BLACK SWANS

Here's an interesting read related to our earlier post, financialspuds.blogspot.com, The Bottom Line, from MarketWatch, marketwatch.com/story/5-black-swans-that-could-rock-markets-in-2016-2015-12-29 about the unexpected.

LONDON (MarketWatch) — There are lots of things we more or less know will happen in 2016. The Federal Reserve will make lots of speeches about how it will raise interest several times, then leave them where they are. An oil company or two will go bust. Greece will go to the brink of leaving the euro, then get bailed out at the last moment.

All of that can just about be taken for granted as investors contemplate the 12 months ahead.

But what are the potential black swans — that is, events that no one has reckoned on yet, but which could rock the markets in the next 12 months? Most years one or two come along. Very few people saw that the oil price would crash so spectacularly this year, or that China would embark on share-buying frenzy only to see it collapse. 2016 will not be any different.

BLOCKING AND TACKLING

An important basic lesson of investing is: If you wait until everyone is all in or all the so-called data is known, you've pretty much guaranteed yourself missing most of the profitable move, assuming there is one.

If we had to describe one main characteristic of the Yellen-led Fed, this would be it. She is a wait and seer, a convert of caution. Now caution is hardly a bad thing so far as it goes. But like speculation or margin or anything else it can be taken too far, become paralyzing. True, you might save yourself some face and criticism on the way to the forum.

But leadership has as much do with uncertainty and risk as it has to do with caution. In Argentina, for example, the new guy has been praised so far for being bold and swift. That so far is important, make no mistake. And it can change, but that's what good leaders do, deal with change not contemplate it like an academic professor of philosophy or economics.

Harry S. Truman's famous gesture about looking for a one-armed economist is about philosophizing, contemplating. Good dinner fare. That's about it. An old professor of mine use to say: "Sin is a luxury." Only those who can afford to engage in it do. The same side of that coin is: people get away with as much as we allow them.

This is part of what we call the Trump Traction. He wants to hold feet to the flame. That's about as scary as it gets. You can quarrel with his so-called stridency, but fancy words or fancy formations, when the play gets called it's still about blocking and tackling. In our view, Yellen has done a lot of substituting but precious little blocking and tackling.

So as 2016 presses on us we will see how prescient not only the Fed but global central bankers in general are.

OVERNIGHT

Some say the coming cold weather spell hiked oil prices today and together with the uptick in the U.S. market, Asian shares rallied overnight. European shares also showed some strength.

The WSJ reported: Markets in Asia rose Wednesday as a recovery in oil prices lifted energy shares. Australia’s S&P/ASX 200 was up 0.6%, while Hong Kong’s Hang Seng Index and the Shanghai Composite Index were flat.

Japan’s Nikkei Stock Average gained 0.5%. South Korea’s Kospi was down 0.2%.
Shares in Australia were up for the ninth straight session with the energy sector up 1%.
In Singapore, Noble Group Ltd. ’s stock fell 4.6% after Moody’s Investors Service slashed the commodities firm’s credit rating to junk status. It was another blow for the firm, which has struggled this year amid allegations of accounting irregularities and a slump in commodities prices. Shares have plunged 64% this year.

U.S. stocks rose Tuesday, as investors bought shares of some of the year’s biggest decliners, including energy stocks. Brent crude oil prices are down more than 30% for the year, but gained 2.4% on Monday in the U.S.

Volatility has been the name of game here in recent weeks following the turmoil in commodities and later the high yield bond market scares. Global downturn fears continue to cast a shadow as does the Fed's recent rate hike.

Volatility is related to uncertainty and uncertainty of late has been about the only certain thing investors have been seeing. In the U.S. it's a short week and a light one.

 

2016 Bottom Line

 
 As 2015 rolls to a quiet close in the market, once again investors learned another lesson.

It's not an absolute, but nonetheless it's a lesson. Conventional wisdom or so-called expert advice was wrong for the most part. The S&P 500, according to many, was suppose to gain around 9% in 2015, oil prices were supposed to rebound, to name just two ideas popular at the beginning of this year. Instead, as neatly everyone now knows, oil went South taking natural gas prices with it.

The loss of jobs in the industry was recently touted by the Dallas Federal Reserve Bank at 70,000. Those are mostly high paying jobs, not the burger flipper or retail ones the Fed and politicians love to rave about. Ones hardly ever gets mentioned by the media is all the ancillary workers who feed off those high paying jobs.

This is not to suggest conventional wisdom is always incorrect. But there's something to be said for doing your own work and, even more significant, learning to trust it. The fallout from lower energy prices didn't end with just sinking share prices. It spilled over into corporate suites.

The second oil company executive--thanks much to activist billionaire hedge fund investor Carl Icahn--stepped down recently. This time it was Freeport McMoran (FCX) Chairman James R. Moffett. Freeport made in 2013 what many consider an ill-advised oil and gas acquisition just ahead of the collapse in oil prices. Earlier another oil executive in a company Icahn had taken a big position took his benefits and chauffeured off into the retirement sunset.

The company is heavy into mining and copper and other metals that similarly have, like a group of orphans, felt the pangs of rejection in a global slowdown. Commodities are expected to continue this trend next year. That's the conventional outlook and it's difficult to see any big silver linings in those clouds. The key word there is difficult. It's difficult to make money in the market despite all those advertisements splashing and popping up daily on the Internet.

We know what happened to gold; it's public enemy number one of the Federal Reserve and other central banks when it comes to pumping fiat air into a sickly economy. That much is a given. Competitors are unwelcome. A strong dollar is suppose to be a sign of confidence. Like any good preacher at the Sunday morning pulpit, the Fed wants to restore faith and belief. Some would call it indoctrination of the masses. With the succor of its allies in MSM it's a repetitive game. Get use to it.

One thing you learn in medical research is as soon as someone produces a study saying this is that, it won't be long before another study hits the public saying that is this, not really confusing when you understand the term motive. Even in capital punishment cases, the court seeks to know the motive.      Wall Street is much the same.
Find the motive and the culprits won't be far behind.

We have no idea what the market holds for 2016, but one thing we do know for sure, somehting unexpected and unpredicted will happen. And just maybe, depending on where you're placing your chips, a lot of unexpecteds that will bring a smile to your face and your bottom line.

ECONOMIC PC

 
Debt has to be serviced. One way to service it is growth. Another way is by borrowing, creating in the process more debt.

If you keep borrowing to service that debt you create a huge imbalance that often gets spelled bankruptcy. But we live in a world where many essentially bankrupt firms are not allowed to take the fall. It's a lot like today's prevailing and now rampant PC. Little Johnnie can't really play center field, but he gets a trophy anyway.

In fact, today everyone gets a trophy for participation. There's a commercial about it where a father and his son are leaving the playing field when the father looks at the trophy and discovers it's for participation at which point he erases participation and scratches in "winner."

What's ironic about this is, though many will claim foul, the father gets it. From our vantage point, the father to his credit,wants himself and his son to be judged by their performance, their merits. His son did more than participate; he contributed. He could play center field. He deserves something more than participated. That's the deeper symbolism as we read it.

Some call this participation nonsense equal outcomes. Others correcting imbalances. But imbalances are as natural as nature itself. When you work with professional athletes you quickly realize some are more gifted than others, even at this level. For some the gift is natural; for others the gift is owing to hard work or working harder. The how-bad-do-you-want it syndrome.

If your son hit two home runs, singled twice and made the catch of the game, he deserves and earned more than recognition for participation. Calling him a winner doesn't in any way diminish any of the other players. Nor is it selfish. The only thing selfish is those who want to level the field so that mass mediocrity is the standard of day.

Political correctness and it's adherents want desperately to abolish that syndrome. That's about outcomes. Nobody outshines anyone, irrespective. What many don't understand is bailing out firms that deserve and should be allowed to fail, much like the Fed did last time around with too-big to fail banks, is a form of PC. Economic PC.

There is nothing level about that playing field. In fact, it is quite punitive. It punishes those who play by the rules.

IN THE OIL PATCH

From Bloomberg, oil bankruptcies are up in the quarter to levels last seen in 2009. Employment in the industry has taken the hit. According to Bloomberg, citing the FRBD report, 70,000 jobs disappeared since the industry peaked in October 2014.

Bankruptcies among oil and gas companies have reached quarterly levels last seen in the Great Recession, according to the Federal Reserve Bank of Dallas. At least nine U.S. oil and gas companies that accounted for more than $2 billion in debt have filed for bankruptcy in the fourth quarter, the bank said Wednesday in its energy economic update for the final three months of the year.

 Meanwhile, some believe, citing a Goldman Sachs report earlier this year, that oil will have to fall below $20 a barrel to meaningfully affect supply significantly to change the current glut on the market. If that happens expect more bankruptcies. 

Some corners of the energy world dismissed Goldman Sachs’ prediction earlier this year that crude oil prices might fall below $30 per barrel. But no longer. The investment bank reiterated its belief that oil prices may need to fall to $20 per barrel in order to force a significant volume of supply off the market, and such a scenario is no longer seen as a remote possibility. U.S. oil production has only declined moderately thus far, down about 300,000-500,000 barrels per day since peaking at 9.6 million barrels per day (mb/d) in April 2015. But with so many drillers barely hanging on, everyone is still pumping as much oil as possible in order to keep the lights on, delaying the inevitable adjustment in supply. “This rebalancing is far from achieved,” Goldman concluded this week.

The investment bank says that only prices plummeting to $20 per barrel will force a much greater volume of oil offline, a necessary development to balance oil markets. That would be extremely painful for individual drillers and for the economies (local, state and national) that depend on oil revenues, but without such a severe drop in prices, the oil markets could endure a more damaging prospect – a protracted supply overhang, which could end up being much worse for all those concerned. For now, the world is still producing somewhere around 1.5 mb/d more than it needs. 

Capital markets have shunned some of the most indebted drillers, but access to finance remains open for investment-grade oil drillers. In this context, unless oil prices drop another $10 to $15 per barrel, Goldman says, the necessary contraction may not take place quick enough.

oilprice.com/Energy/Energy-General/Will-Goldman-Be-Right-After-All.