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February
27
2018

"Money For Nothin'... And The Stocks For Free"
Sven Henrich

With apologies to the Dire Straights:

Now look at them yo-yo’s that’s the way you do it
You play the bull on the fin TV
That ain’t workin’ that’s the way you do it
Money for nothin’ and stocks for free

After 9 years of artificial liquidity drenching markets the same game continues in 2018: It’s raining money. Again. Still.

Last week we saw the standard script of the last 9 years unfold: Dovish talk by central bankers and artificial liquidity taking over markets. The latest avalanche of free money entering markets are of course buybacks courtesy of tax cuts which now are expected to reach $650B in 2018 announcements coming to $50B a month.

In many cases companies don’t know what to do with all that free cash, but to buy back their own shares. Warren Buffet pretty much spelled it out this weekend and today:

“A large portion of our gain did not come from anything we accomplished at Berkshire,” Buffett wrote.

The firm’s most recent annual letter revealed the investment conglomerate’s net worth surged $65 billion in 2017, with $29 billion of that stemming from tax proceeds. That gain was realized in December, after the passage of the tax plan.

So he has a problem, knowing that stocks are expensive he’s having a hard time investing the cash so he’s opening the door to buy back his own shares over issuing more dividends. None of this creates jobs, jobs, jobs of course, but is a refection of the absurdity of the ill devised tax cuts that will continue to expand wealth inequality but will continue to produce a bid underneath markets until the bitter end.

Lest also not forget that the ECB keeps running QE at 30B Euro a month and overnight the BOJ’s Kuroda announced persistent monetary easing is needed while China injected 150b yuan in overnight liquidity as well and voila a sea of global green:

This has been the standard script over the past few years and no change to the program so far.

All the while retail keeps loading up leverage with over $642B in margin debt:

Retail money quote: “I was so bullish that I went all in,” said Mr. Diaz. he deposited $2,500 into his account to satisfy a margin call on Feb. 8″

Sounds prudent.

Right.

Cue record deficits for a non recession environment coming and you have the perfect recipe for a free money shower:

So party on while yields are retreating off of last week’s highs of 2.95% with the dollar dropping again. That is the correlation gamein play right now.

Markets showed last week that higher yields are not necessarily good for stocks despite all the public meme to the contrary. Even Goldman came out and suggested a 25% drop in markets coming if the 10 year gets to 4.5%. Nobody can know the real trigger point, but the debt/interest equation is pretty obvious and hence all this remains a concerning construct:

The cost of carry has already been rising significantly with the prime rate barely above the 2004 lows.

But hey, free money everywhere, consequence free. Or it is?

Know that accelerating buybacks are not necessarily indicative of positive future returns. After all we last saw an acceleration of buybacks right into the financial crisis:

All this reminds me of an old saying of mine: Just because they’re buying doesn’t mean they know what they’re doing.

But for now it’s raining money.

Welcome to NorthmanTrader is the trading name of Capital Traders Ltd. Our mission is to provide best in class market analysis incorporating both macro views and technical analysis to derive a favorable risk/reward trade direction for our subscribers. We are independent and our analysis is unbiased and not influenced by assets under management or monthly inflow considerations. In other words: We have no conflicts of interest and we call it as we see it.

Our lead market strategist, Sven Henrich, is a highly respected technical analyst of markets & the macro economic environment and has been a frequent contributor to CNBC and the Wall Street Journal’s MarketWatch. Sven is regarded as a “widely followed market watcher (CNBC)” and has been repeatedly highlighted as a key twitter account to follow by MarketWatch (2017 & 2016).

Sven Henrich is a former international business executive with a Bachelor of Science in Marketing and an M.B.A. and has spent over 20 years in the corporate world as an executive in international corporate development and operations management before discovering the joys and challenges of trading.

He has a passion for macro and technical analysis and a unique ability to delineate complex information and communicate them effectively and clearly to his clients.

 

 

 

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