Always consider hidden risks
SP500 Behavior: Getting Into the Junkyard Phase ?
September 28  ​( From FRED, McKinsey, TradingView , FACSET,Globe and Mail, Bloomberg, AlhambraPartners, Financial Sense, CPB )
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The Situation

We did have since the last financial crisis, multi factors helping the economy but
moslty the Financials Assets as QE ( Quantitative Easing ) was implemented in
​November 2008 by the Federal Reserve.

It did inject tons of liquidity into the system, bring the interest rates lower, compressed
​corporate bond spreads​. Also it kept the US Dollar on the cheap side.

But we may be witnessing a reversal of all those factors here​​ and it may have
​tremendous unintended consequences.

I will show you charts to prove that that we are getting Into the Junkyard Phase...

Louis Pateur
"Chance favors the prepared mind."

SP500 Behavior: Getting Into the Junkyard Phase ?  $SPY #Trading #investing #spy #SP500 #macrotrend

US Dollar

​​The US Dollar has reached levels not seen since September 2003 ( see chart below - amber line ) and start to be a huge drag on Foreign Profits of US Corporations:

SP500, US Dollar and Foreign Profits : A Concern ?

Will S&P 500 Companies With Higher Global Exposure See Lower Earnings Growth in Q3?

Debt and (not much) deleveraging

In fact, according to a McKinsey Publication, debt growth have outpaced economic growth since 2007 but more importantly that we reached total debt as percentage of GDP of 286%. We are more leverage now than we were at the 2007/2008 financial crisis.​​

One of the most unintended consequence was that US corporations did borrow tons of money by issuing corporate bonds to buyback their own shares. Getting High on Their Own Supply.

In fact, according to the Federal Reserves data, US corporations have 1.61 times more debt at the end of Q2 2015 compare to Q4 2007.

Corporate Bond Yield at Crossroads​​​​

​So one of the most releveraging process from US corporations since the financial crisis have been to sell bonds to buy back their own shares.​​ And it is getting into non sense as Spending on Buybacks Exceeds Free Cash Flow for first time since October 2009 for SP500 corporations according to FACSET.

​​But we will see that it will start to slow tremendously as corporate spreads in the US have widened tremendously and bring effective yield to a more expensive leveraging process to do those buybacks as shown by the chart below.

From the Globe and Mail (WSJ): Why stock bulls should be worried about bond spreads
​In the three times when the extra yield bond investors’ demand over Treasuries has climbed as much as it has since May (2015), the Standard & Poor’s 500 Index has lost an average of 18 per cent, according to data compiled by Bloomberg since 1996 that excludes recession years.

Also: Where Junk Might Cross The Line


Liquidity drying up

Very few realize that we are into a post QE ( ​​quantitative easing ) phase which in fact is retrieving liquidity into the world financial system.

Read: Fed s Stealth Tightening: Unintended Consequences for Stocks ?

Forget the Sept. '15 Fed Tightening – There Has Been a Stealth Tightening Since Sept. '14


​​Not only the Federal Reserve ending QE​​ have started the Reverse QE trend, but the timing of it is scary as world economy is slowing as shown by the chart below which shows the year over year growth in world merchandise trade from CPB.

And all that stealth tightening process in the USA happening when China economy slowing down and then bring a deceleration of its monetary agregates. By broadening our Monetary Agregates by including the China Central Bank Reserves excluding Gold and Total US Treasury Bonds Securities held by the Federal Reserve all of them compare to the Mighty SP500 on a year over year basis in %, it becomes more obvious... ​( See Chart Below )





​​So for me, things are obvious:
​1) US Dollar strenght will be a drag on growth and mostly earnings for US corporations
2)​ The system ( economy and companies ) are more levelrage now than in 2007, so we become more sensitive for interest rate move
3) ​So the first factor is that Buybacks having less and less impact on the overall maket trend. In fact, Corporations that Buybacks their shares started to underperform the whole market since April 2015.
4) Liquidity is drying up quickly on a world basis not only in the US - a kind of Reverse QE just started

​​​​We are in the process of a deleveraging phase. Unless Central Banks add to the existing liquidity, I fear that Financials Assets who did quite good when QE was implemented suffer tremendously in terms of performance going forward.

And finally, market participants will start to realize sooner than later that a new valuation process is needed for the SP500 and we need to lower our expectations accordingly...​​

US Dollar Index  - DXY ( Weekly Candles )
Year Over Year in %
​St. Louis Adjusted Monetary Base (BASE) Billions$ ( Blue / Left Scale )
Total Reserves excluding Gold for China ​ ( Red / Left Scale )
​US Treasury Bonds Securities held by the Federal Reserve ( Green / Right Scale )
SP500 Index ( Orange / Left Scale )​