FINANCIAL ICEBERG
Always consider hidden risks
MARKET INSIGHT
Bears at the Gate ?
Aug 20 ( From Money News, WarrenBuffet Tracker, Stockcharts, WorldBank )
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The Situation


On June 19, in a statement after a two-day meeting, the Federal Reserve said it will keep buying $85 billion a month in Treasury bonds and mortgage-backed securities until the labor market improves substantially, echoing its statements since last fall.

​​But this time, the Fed invoke the What-If Scenario: at the press conference, Mr. Bernanke said that if the economy unfolds as the Fed expects—and he emphasized the "if" it would reduce later this year the size of its purchases of Treasury and mortgage-backed bonds.

That was the first sign of a turnaround in stocks....​​

The other signs are the sensitivity to interest rates, the economy, market flows and sentiment and​​ earnings estimates for the SP500.


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“Be fearful when others are greedy and be greedy when others are fearful.”

Warren Buffet 
Market Reaction to the What-If Scenario a la Bernanke

​​The sell-off in stocks, bonds and commodities that rippled around the globe after Bernanke's remarks looks to some like the dawn of a new period of volatile, disorderly trade - a stark change from the calm that prevailed since the Fed began its most recent bond-buying program last autumn.

Indeed, the bond market is at the epicenter of the financial market earthquake that Bernanke unleashed. Benchmark yields, which Fed easing had driven to record lows, surged to near two-year highs.

To add to the volatility, the Asian Markets were already in a correction phase and was amplified when the market realized that the Chinese economy was going to slow more than they thought...

On the chart below, you can see that the US Treasury of maturity of 10 years, yield rose by more than 100 basis points since may 2013...​
World Economy Slowing


​​Global industrial production growth decelerated to an annualized pace of 2.3 percent (3m/3m, saar) in the three months to May from 2.8 and 2.5 percent in April and March respectively.

​​Nonetheless, performance across economies have diverged, with industrial production growth in high-income countries actually strengthening, albeit from weak levels (i.e. from 1.2% in March to 2.2% in May), in contrast with the weakening of activity among developing economies (from 5.3% in March to 2.4% in May) as shown by the chart ...
How Sensitive we are to Interest Rates: A Scary Picture ?

​​​In several economies, and especially in the advanced ones, low interest rates spark an explosion of credit borrowing.

​​​​The financial system’s massive holdings of government bonds leave it exposed to a spike in yields. While the large public financing
needs have been fully absorbed by the market thus far, the willingness of market participants to continue to do so at low yields is contingent on sustaining confidence in long-term fiscal sustainability and growth, and on corporate and household savings trends.

Sensitivity to a rise in interest rates have more than triple on average compare to 1994 for the G7 countries. And this is only Government bonds excluding Central Banks. I do not want even to figure out what s the result if we add Corporate debt and Consumer debt. Worrisome indeed !​​

That Leverage in the system is unprecedent in history...​

Read the details​​
Global Export Volumes Slowing Too

​​Available April data shows the slow down in export growth observed in Q1 2013 persisted into Q2 2013.

​​The deceleration is broad based, however unlike developing countries where export growth remains positive, in high-income economies it contracted in April.

​​With the exception of the Latin America region, the deceleration in export growth was broad-based across developing regions.

​​Available export orders indicators suggest that the weakness in exports will persist through June as shown by the chart...
Market Flows and Sentiment


Market Sentiment of Retail Investors


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As shown by the chart on the right, the Sentiment among US Retail Investors are quite upbeat...​​​​

​​Usually Retail Investors are the laggards and always pay the top price in the stock market...
Market Flows


​​Interestingly, while retail investors have been buyers of the U.S. stock market, institutional investors have been heavy sellers as shown in the chart ...


​​Despite the strong stock market rally over the last three months, a handful of billionaires are quietly dumping their American stocks . . . and fast.
Earnings Estimates SP500


Earnings revisions have been​​ constantly being revised downward as shown by the chart on the left...

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Conclusion

​​It seems to me that all the factors are there for a perfect storm: World demand slowing, commodity prices weakening and  financial system extremely leveraged.

If we add, China s economy slowing more than anticipated, ​​US Retaill Investors sentiment very bullish, Professionals starting to sell and earnings estimates going forward on a decline, we can ask ourselves, have we already seen the top of the stock market ?
Bears at the Gate ? $SPY, $SPX, $ES_F, $BONDS, $ZN_F, $TNX