OVERNIGHT

We said the market in Hong Kong would reopen Thursday after the recent holiday and that we said expect it to selloff. Well, here's a report from the WSJ on overnight activity there.

Stocks in Hong Kong fell sharply on Thureday,catching up with deep regional sell offs, as the market reopened after an extended LunarHoliday on Thursday. The benchmark Hang Seng Index market was recently down 4% at 18526.03, near lows for the section. The Hand Send China Enterprises Index of Chinese firms trading in Hong Kong plunged 4.8% at 7665.74, below a key level of 8000. Markets in mainland China will reopen on Monday. Elsewhere, South Korea's KOSPI was off 2.9% and Australia's S&P ASX 200 was up 0.5% after a choppy morning.

The  Japanese market was closed for a holiday Thursday, most likely saving investors from further market trauma. Federal a reserve Chair Janet Yellen spoke before Congress today. The Fed had little credibility before she spoke and she said nothing to change the situation. Reuters reported that gold, bonds and the yen rallied against the dollar as investors continue to seek higher, safer ground.

The dollar hit a 15 month low against the yen and gold breeched a critical resistance point, closing above 1200 as investors see these assets-- the yen, bonds and gold--the acceptable ports in this storm.

CLOSING IN

As we just posted in, Room At The Inn, the walls are closing in on central bankers. Now we have this interesting read, "The Fed doesn't have a clue," from ZeroHedge.com.

"The Fed doesn't have a clue!" - I allege that not only because the Fed appears to admit as much (more on that in a bit), but also because my own analysis leads to no other conclusion. With Fed communication in what we believe is disarray, we expect the market to continue to cascade lower - think what happened in 2000. What are investors to do, and when will we reach bottom?

To understand what's unfolding we need to understand how the Fed is looking at the markets, and how the markets are looking at the Fed.
The Fed and the Markets
In our analysis, policies at the Federal Reserve Open Market Committee (FOMC) are driven by what the Fed Chair deems most important. At the risk of oversimplification, and to zoom in on what I believe is relevant in the context of this discussion, former Fed Chair Alan Greenspan put a heavy emphasis on the 'wealth effect;' in many speeches, both during and after his tenure at the Fed, he indicated that rising asset prices would be beneficial to investment and economic growth. His successor Ben Bernanke went as far as mentioning in FOMC Minutes rising equity prices as a beneficial side effect of quantitative easing (QE). Bernanke's framework, though, was indirect: he considered himself a student of the Great Depression, arguing that monetary accommodation shouldn't be removed too early when faced with a credit bust, as doing so might unleash deflationary forces once again. QE, of course, 'printed money' to buy Treasuries and Mortgage Backed Securities (MBS), i.e. intentionally sought to increase their prices (I take the liberty to call QE the printing of money because, amongst others, Bernanke himself has referred to QE as such; no physical money is printed, but it's created 'out of thin air' through accounting entries at the Fed).
This prelude is necessary to understand Janet Yellen, a labor economist. I am not aware of labor economists focusing on equity prices. Neither am I aware that labor economists use forward inflation expectations as a gauge to predict labor markets. Sure enough, any FOMC member is likely to look at various indicators of inflation in the course of their job, but for a labor economist, it may merely be yet another data point. The reason I say this is because, during Bernanke's tenure, when inflation expectations dipped towards the 2% threshold, he would talk about the need for QE (the chart shows a measure of longer term inflation expectations):


 To understand what's unfolding we need to understand how the Fed is looking at the markets, and how the markets are looking at the Fed.
The Fed and the Markets
In our analysis, policies at the Federal Reserve Open Market Committee (FOMC) are driven by what the Fed Chair deems most important. At the risk of oversimplification, and to zoom in on what I believe is relevant in the context of this discussion, former Fed Chair Alan Greenspan put a heavy emphasis on the 'wealth effect;' in many speeches, both during and after his tenure at the Fed, he indicated that rising asset prices would be beneficial to investment and economic growth. His successor Ben Bernanke went as far as mentioning in FOMC Minutes rising equity prices as a beneficial side effect of quantitative easing (QE). Bernanke's framework, though, was indirect: he considered himself a student of the Great Depression, arguing that monetary accommodation shouldn't be removed too early when faced with a credit bust, as doing so might unleash deflationary forces once again. QE, of course, 'printed money' to buy Treasuries and Mortgage Backed Securities (MBS), i.e. intentionally sought to increase their prices (I take the liberty to call QE the printing of money because, amongst others, Bernanke himself has referred to QE as such; no physical money is printed, but it's created 'out of thin air' through accounting entries at the Fed).
This prelude is necessary to understand Janet Yellen, a labor economist. I am not aware of labor economists focusing on equity prices. Neither am I aware that labor economists use forward inflation expectations as a gauge to predict labor markets. Sure enough, any FOMC member is likely to look at various indicators of inflation in the course of their job, but for a labor economist, it may merely be yet another data point. The reason I say this is because, during Bernanke's tenure, when inflation expectations dipped towards the 2% threshold, he would talk about the need for QE (the chart shows a measure of longer term inflation expectations): More:
zerohedge.com/news/2016-02-10/buyers-remorse-axel-merk-warns-fed-doesnt-have-clue 

ROOM AT THE INN

The flight to safer ground owing in part to negative zero interest rates is starting to bite the Japanese economy where none of us want to be bitten--in the pocket book.

For those willing to detour for a moment from their linear penchant of thinking that means the Japanese economy. Anyone who's been paying even a modicum of attention knows the yen, like it's nation's well-known symbol, has been rising.

Japanese exports just got more expensive and so did the Japanese tourism business, among other things. Measured against the dollar it's now reached a level, 115 yesterday, of strength not seen since 2014 as the flight to higher ground threatens the best laid plain plans of Japanese central bankers and bureaucrats.

Japan is an island. Islands by definition depend on outside sources for survival. Corporate earnings are at stake here and that means less possibility for higher wages and more consumer spending. As they say: No good deed goes unpunished. Nor does any lousy, ill-conceived bureaucratic calculation.

The headwinds facing negative interest rates are well-known, but ironically the list seems to grow with each passing day. Real wages in Japan last year were down for the fourth straight year. And what so far was suppose to be a positive from negative rates has turned out to be anything but.

The shorts who were expecting a weaker yen should be covering about now, pushing the currency even  higher up the currency totem pole. One Japanese economist was quoted recently as saying that BOJ Governor Haruhiko Kuroda's "is starting to lose his divine powers."

There's still room at the inn. We'll soon know more about some other central bankers checking in there.

THEY CALL THEM JUNIOR

They call them junior for a reason.

Monday was a bad day for European banks, and Tuesday didn't get any better, a bad day that spilled over into financial sectors elsewhere. Some called it a rout. Others the truth coming home. One official even denied protecting bank profits was his job. Here's that official's initials, Mario Draghi.

Many of those banks have names and they're just not the little guys. Deutsche Bank, the German behemoth, saw it shares drop nearly 10%, France's BNP Paribas and Italy's UniCredit all shed more than 5%. The usual reasons for Monday's gloomy outlook, as the WSJ noted, "...don't cut it as an explanation for the 20% drop in bank shares this year. Those factors have been around for a while."
What factors are that--slow growth and plunging energy prices?

Insurance costs money. In bad times it cost more, like all those seemingly insignificant traffic tickets you got last year. To insurers you represent instability, risk; that causes premiums to go up. Junior bonds are lower down the corporate debt food chain. When their prices head south, the costs of insuring them head north. At some point the trip north becomes too expensive, not worth the cost.

They're called junior for a reason. It's spelled risk. But there's an irony here, one that only bureaucrats and regulators could conjure up. Those low rated junior bonds can count as capital to meet certain reserve requirements, not the highest quality of capital however. When wipe out time rolls around these are among the first to go.

The bottom line here, one seemingly those central banking touts never seem to get, is negative interest rates are a two-way thoroughfare and can cause as much financial havoc as they do of hoped for recovery. As European bank stocks continue their selloff, concern spreads. Overall European bank stocks are down 27% so far this year with Deutsche down nearly 40%. And so too is the debt instruments created by restrictive regulations that might sound good when being dreamed up but in the real world carry serious unforeseen risks.

Like a bad case of measles the contagion is spreading. American banks are also down 18%, nearing that 20% marker some call a bear market. Banks and those who regulate them are like lemmings. If these risky junior debts are sitting on the balance sheet of one bank, it's certainly sitting there on others.

Correlation: Investor panic.

OVERNIGHT

It was another bad day for Asian stocks Wednesday as investors took their lead for the second straight session from concerns about the health of global banks. European banks in particular have been under siege and this wasn't lost on investors as they headed for safer harbors like the yen which approached a 15-month high versus the dollar, Reuters reported.

The Nikkei suffered another down day, falling to a 16 month low. It is now off 10% since the BOJ sprung it's most recent negative interest rate surprise on the market. The news from Australia wasn't any better where stocks hit a 2-1/2 year low. It's a market that's in bear territory

We've written before about negative interest rates being a two-way street, causing as much havoc as they bring recovery. That seems to be the case with the banking selloff. The oil and slow growth memes are not new, so something else is afoot scaring investors.

The WSJ reported that Japan’s benchmark 10-year government-bond yields turned slightly positive Wednesday, after falling into the negative territory for the first time Tuesday. Markets in Hong Kong and South Korea reopen Thursday following a holiday, while mainland Chinese markets are closed for the week.

So look for those two days to bring possibly more volatility, something investors don't really need or want at the moment.

HE'S BUYING

David Samra might not be a name you are familiar with, but with his track record you might want to note what he has to say. Here an article from Bloomberg.

David Samra, awarded for his stock-picking during and after the 2008 financial crisis, says he’s buying again.

Samra, who oversees about $20 billion for Artisan Partners, says now’s the time for a steady hand and no emotion as concern intensifies about the slowdown in China and the sliding price of oil. The winner of Morningstar Inc. international stock manager rankings in 2008 and 2013 says he’s sticking to his investment approach: finding undervalued shares with strong balance sheets.

“We welcome these types of markets,” Samra said in a phone interview from San Francisco on Monday. “We weren’t happy to see the potential social and economic disruption that happened during the financial crisis. It causes a lot of human misery. You’re not existentially happy about what’s going on. On the other hand, that turned out to be a market opportunity.”

bloomberg.com/news/articles/2016-02-09/the-20-billion-manager-who-won-after-the-crisis-is-buying-again

I

OTHER VOICES

"This is not a trader's market," Gundlach said. "It is a freight train that you want to stay in sync with. There's too much order and belief in markets in spite of big losses."

He said equities are in a bear market, with the Nasdaq down 18.3 percent from its highs and "many, many, many stocks down over 25 percent from their highs." On Monday, the Dow Jones industrials average was down more than 200 points.

These are some of the remarks bond guru Jeffery Gundlach, the billionaire leader of DoubleLine Capital, made yesterday about the current economic trend investors are trying to muddle through. Calling it a freight train that you don't want to get out of sync with, in our view, is the ultimate contrarian point that the Fed and their MSM cheerleaders have been on the wrong track and most probably still are, something investors will be seeking to find out tomorrow when we get more Fed speak.

.reuters.com/article/us-doubleline-gundlach

PALLID EARNINGS

As we pointed out recently cost cutting is the new meme in corporate suits. Not new by any means especially in times like these, it's a part smoke and mirrors tactic to dress up the blemishes. Here's an example from  247wallst.com/consumer-products/2016/02/09/coca-cola-earnings-top-estimates-on-cost-cutting

Coca-Cola Co. (NYSE: KO) reported fourth-quarter and full-year 2015 results before markets opened Tuesday. For the quarter, the soft-drink maker posted adjusted diluted earnings per share (EPS) of $0.38 on revenues of $10 billion. In the same period a year ago, the company reported EPS of $0.44 on revenues of $10.9 billion. Fourth-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.37 and $9.91 billion in revenues.

For the full year, Coca-Cola posted EPS of $2.00 and revenues of $44.29 billion, compared with 2014 EPS of $2.04 and revenues of $46 billion. Analysts were looking for EPS of $1.99 and revenues of $44.36 billion.

You can expect more of these Wall Street gems as earnings continue to show their pallid faces. Coke has its problems to be sure and the latest commercial about the attractiveness of small containers tells you about one. The strong dollar is another.

ECONOMIC FACE LIFTS

With all the talk about recession making its way through the financial media, here's interesting read.

businessinsider.com/philly-fed-state-coincident-indexes-latest-maps-2016-2?

Noting information from the Philadelphia Federal Reserve, it's a record dating to 2005 with monthly maps showing the status of each state's economic condition. If the article has a weakness it's the constant MSM ploy of pointing out things might not be sterling but they are not as ugly as they were a few years back. Neither is the gal down the street who recently had a facelift.

This is just more of the my-kid-is-the-smartest-one-in-the-dumbest-row-at-his-school stuff media loves to purvey. Back in the darkest days of this downturn the official unemployed numbers were way too low. And it's just as likely the numbers suggesting how well we are now doing are way too high.

Under estimating the bad and over estimating the good is a systemic government disease endemic to all governments. Face lifts are not the sole province of surgeons.

A HOLIDAY WEEK MEETS FEAR

There's greed and there's fear. Fear is suppose to have a 2:1 motivating factor over greed. But those are relative ratios and fear once unleashed causes stampedes.

Here's a Reuter's account of what happened overnight in a holiday-limited week in Asia.

Asian share markets were scorched on Tuesday as stability concerns put a torch to European bank stocks and sent investors stampeding to only the safest of safe haven assets.
As fear overwhelmed greed, yields on longer-term Japanese bonds hit zero for the first time ever, the yen surged to a 15-month peak and gold reached its most precious since June.
Japanese Finance Minister Taro Aso felt moved enough to warn the yen's rise was "rough", something of an understatement as the Nikkei nosedived 4.9 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1 percent, and would have been lower if not for holidays in many centres.
 
"Sentiment towards risk assets remained extremely bearish and price action reflected a market that may be capitulating," said Jo Masters, a senior economist at ANZ.

All of which magnified the stakes for Federal Reserve Chair Janet Yellen's testimony this week.
"She needs to come across as optimistic without being too hawkish and cautious without being negative," said Masters. "Hawkishness or dovishness could easily exacerbate the current sell-off, tightening financial conditions further."

We recently wrote about those European banks in financialspuds.blogspot.com/2016/01/upset people. 

The 'fear factor' in markets has morphed from being about an emerging market hard-landing and collapsing oil prices to being about the extent of the slowdown in the developed world and the ability of central banks to reflate asset values yet again," said analysts at Citi in a note.
The Bank of Japan's recent shift to negative rates has fuelled concerns that ever-more exotic monetary policy is rapidly reaching the point of diminishing returns.

Yet murmurings about the risk of recession in the United Sates has also led investors to wager the Federal Reserve will have to slow, or suspend altogether, plans to normalise rates.

 As noted below the yield on the 10-year Japan government bond dropped below zero for the first time ever, proving once again an old saying it ain't over until it's over.

Getty Images

Yields on Japan's benchmark 10-year government bond fell below zero for the first time, as investors clamored for safe-haven assets in the wake of a global market rout. 

The yield on the 10-year Japan government bond (JGB) dropped as low as negative 0.007 percent. The fall came on the heels of a global stock market sell-off overnight that likely spurred safe haven flows back into Japan. Bond prices move inversely to yields. 

The U.S. five-year Treasury yield also fell to around 1.1112 percent in Asia trading hours, its lowest since June 2013, when markets convulsed during the taper tantrum after the U.S. Federal Reserve first broached the idea that it would taper its quantitative easing program. The U.S. 10-year Treasury yield fell as low as levels around 1.6947 percent, a more than one-year low, on Tuesday.

The 10-year JGB's move to negative territory yield also follows the Bank of Japan's (BOJ) move to a negative interest rate policy, which can make the return on JGBs, even at a negative yields, as well as the possibility of further price rises, comparatively more attractive. 

cnbc.com/2016/02/08/yield-on-10-year-japan-government-bond-jgb-hits-zero-for-first-time.