Ishares Core Short-Term US Bond In Strong Uptrend

The Ishares Core Short-Term US Bond ETF is in a strong uptrend as large players continue to buy short term bonds.

A large amount of money is going into fixed-income exchange-traded funds in the first half of 2017, easily beating 2016’s record inflows. Traders are betting that the Federal Reserve will hike rates before the end of the year. Bond traders are front-running rate hikes in short term bonds in a bet that there will be another rate hike this year and up to three in 2018.

The Ishares Core Short-Term US Bond ETF Chart

Ishares Core Short-Term US Bond ETF

ISTB has a decent setup pattern. The rising large players volume shows big players are positioning in short term bonds. The rising Twiggs Money Flow shows traders are accumulating on pullbacks. Prices have been consolidating lately. There is a resistance zone just above the current price starting at $50.45. Right above this resistance zone may be a good entry point. There is a support zone below the current price at $50.38, a stop order could be placed below this zone.

The stock screener I used to find ISTB is the one I created for GuerillaStockTrading readers on Chartmill, under the Shared Screens tab, called GST Positive Divergence. I did a video on using Chartmill to find catalysts here.

Price of Copper Retakes Key Level as Global Economy Improves

Doctor Copper is signaling an improved outlook for the global economy as the price of copper has retaken the key $2.86 level.

China is the world’s largest importer of copper using more than three million tonnes a year. In an attempt to improve the environment, China is proposing a copper import ban. China’s copper industry is accelerating copper imports to build stocks ahead of the 2018 deadline. You can read more about China’s proposed copper ban here.

September copper futures trading on the Comex market in New York moved higher as the likely impact of new regulations in China spark another round of heavy buying in the US and Shanghai. Last Thursday more than 3 billion pounds of copper changed hands and the price jumped to $3.048 a pound ($6,720 per tonne) which is the highest in nearly three years. December copper hit $3.07 a pound. Analysts at DoubleView think copper is in a long overdue bullish cyclical move which predicts the next boom for the global economy is underway.

Price of Copper

Price of copper

Whether its a global economy thing or a China thing or even both, one thing is clear: The price of copper has confirmed the break above the key $2.86 level this month.

Federal Reserve Will Push Price of Copper Back Down

The problem I have with the Doctor Copper is signaling a global bull market thesis is the Federal Reserve. The Federal Reserve is hiking rates and that ALWAYS slows down the economy and thus the demand for copper. I talked about this on the Saturday show back in June here. Please make sure you review my commentary on the Saturday show before going long copper. You may also want to use this stop limit order strategy to trade copper.

As for me, I’m not swing trading copper as its too dangerous and I see safer opportunities with higher yields elsewhere.

If you have any thoughts on Doctor Copper, leave your comment below.

High Yield Debt Surges Higher Which Favors the Bulls

Following high yield debt is an excellent way to time market swings. A high yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade. These bonds have a higher risk of default and so they pay a higher yield than better quality bonds. Bonds rated below BBB− are called speculative grade bonds, or “junk” bonds, and fall into the category of high yield debt.

Recessions increase the possibility of default in speculative-grade bonds.

The number of companies issuing high yield debt is abnormally high for August. What is happening is that investors are anticipating higher rates from the Federal Reserve and so the higher yields of safer investment grade bonds start to come into greater competition with junk bonds. It’s the crowding out effect.

Tesla and other debt heavy corporations are front-running the crowding out effect by issuing as much junk bonds as they can before more interest rate hikes occur. You can read about rising junk bond issuance here.

Recently we have seen some government bonds downgraded to junk bond status like what’s happened recently in Illinois.

You have to be careful not to equate junk bonds in foreign countries with those issued in the US. In emerging markets like China and Vietnam, bonds have become increasingly important as financing options because access to traditional bank credits is limited, especially if borrowers are non-state corporations.

High Yield Debt Chart

Junk bonds act as a barometer for risk on versus risk off. In a risk on environment, investors chase after maximum yield and so they buy high yield debt. Junk bond investors are not too worried about a recession or default on their junk bonds. In a risk off environment, investors sell out of high yield debt and move to safer, lower yielding assets.

When non-investment-grade bonds spike up or down, the S&P 500 has a tendency to follow within 3 to 5 days.

high yield debt

Last week the high yield debt chart (HYG) spiked higher which is a bullish signal for the S&P 500 over the next 3 to 5 day period.

Corporate Bond Yields Spread Falling… Another Bullish Indicator

Corporate bond yields spreads are falling which suggests there is a low default risk. Using Fred and Moody’s we can chart the spread between lowest investment grade (Baa) and equivalent 10-year Treasury yields.

Corporate Bond Yields Spread Chart

Corporate bond spreads are at there lowest point since 2008. This suggests that markets are pricing in a very low risk of default which is bullish for the economy.

BAA Corporate Bond Yield

Corporate Yield of a Moody’s Graded Bond. For instance, a Seasoned AAA Corporate Bond of 30 Year is the yield return of bonds graded AAA by Moody’s with a maturity of 30 years. Bonds less than specified timetables are dropped along with bonds with redemption and rating risks.

Moody’s BAA corporate bond yields are instruments based on bonds with maturities of 20 years and above. For instance, a seasoned BAA corporate bond of 30 Year is the yield return of bonds graded BAA by Moody’s with a maturity of 30 years. Bonds less than the specified timetables are dropped along with bonds with redemption and rating risks.

The credit ratings of AAA and BAA are the two ends of the ratings spectrum for investment-grade corporate bonds as provided by the Moody’s rating agency. The yield difference between bonds with these ratings has historically indicated whether the economy was in a period of recession or expansion.

The credit-rating agencies Moody’s and Standard & Poor’s provide credit ratings on bond issuers and their bonds to give investors an idea of the investment reliability of the bonds, concerning the payment of interest and principal. AAA is the highest bond rating and indicates the safest bonds for investors. Bonds rated below BAA — BBB from Standard & Poor’s — are considered to be non-investment grade. That makes the BAA rating the lowest investment grade rating. The lower the credit rating, the higher the yield a bond will pay.

The corporate bond yields spread chart above shows riskier BAA rated bonds (lowest investment grade rating), versus 10-year Treasury yields. In periods of higher default risk, the plot rises. The plot falls in periods of lower default risk.

U.S. Treasury yields are falling because of low inflation. With inflation so low, the Federal Reserve will likely not raise interest rates again until 2018. Remember, the main reason the Fed raises interest rates is to combat inflation in an over-heated economy. Clearly we do not have that.

Tax cuts and a $1 trillion infrastructure spending program would push inflation higher.

With Congress failing to repeal and replace ObamaCare, it is pushing the Trump Administration’s tax cuts and infrastructure jobs program out further. Inflation is staying low for longer as a result.

The Federal Reserve now is in a position where they do not need to raise rates to combat inflation. As a result, the Fed funds futures rate has dropped and is now showing about a 40 percent chance of a rate hike in December 2017.

Next week when the Fed meets, we could get clarification on when they will begin unwinding their $4.5 trillion balance sheet.

If you have an opinion on what the drop in corporate bond spreads means, please add your comment below.

United States Economy Teetering On Collapse

The United States economy is teetering, despite what the stock and job markets are saying. The US economy is consumption-centric. Growth in the current recovery has focused on three sectors that have fed through to consumption in its various forms: autos, energy, and financial services.

The scariest set of financial indicators to emerge in decades reveals what is crushing the dreams of record numbers of young, middle-class and older Americans.

While nationwide unemployment is down to 4.3 percent, policy experts and economists are warning of disturbing signals in the economy.

As any industry veteran can tell you, those on the sell-side are the second-to-last to surrender to a downturn in economic activity. A 401K Advisor or money manager will not produce negative forecasts when their most important objective is keeping its customers completely invested in risky assets.

United States Economy

The Citi Surprise Index shows a big disconnect between the economy and Wall Street.

The disconnect will not last for long as the chart above shows. Either the economy improves a lot over a short period of time, else the stock market comes plunging down to earth. It’s easier for the stock market to come down than it is for the Federal Reserve and republicans to somehow get this economy going, a feat that has remained elusive for the last 8 years.

Debt is what has kept the United States economy going for the last 8 years. Debt placed a floor under and then helped commercial property reach for the skies. Debt kept dying retailers alive. Debt also caused back-to-back years of record car sales.

Salaries for the typical American worker have hardly grown for decades, well-paid middle-class jobs are disappearing, and lots of the new jobs are from the low-wage service sector.

Consumers are being crushed by high healthcare costs and it partially explains why the American population grew at a small 0.7 percent this past year, the lowest rise since the Great Depression. As Russ Zalatimo of HudsonPoint Capital said, the tendency around recessionary times is that the birth date really drops like we are now seeing.

Bank of America Merrill Lynch stated autos are headed for a “decisive downturn” that will trough in 2021 at about a 13-million-unit annualized rate, down from last year’s blistering record 17.6 million. A week earlier, Morgan Stanley, whose numbers aren’t quite as grim, also reduced its revenue forecast, recognizing that the best days of this cycle have come and gone.

With the Trump White House scrambling to advance different measures to fuel economic growth – tax reform, infrastructure spending, maintaining jobs from fleeing abroad, some analysts say more radical steps are desperately needed.

Manufacturing isn’t just dead, say analysts. But it’s no longer dominated by smokestacks and rudimentary assembly. There are about 360,000 jobs in US manufacturing that are vacant and not being filled and companies are saying, “We need people to fill them.”

Meanwhile, retailers are currently choking on their debt as profit margins implode. Restaurants today employ 10.6 million individuals.

According to the Tax Policy Center, Trump’s tax reform could cause overall tax cuts of $6.2 trillion over the next ten years.

Losses on securities backed by automobile loans are piling up even as the unemployment rate has hit 4.3 percent, the lowest since 2001.

Additional evidence that the United States economy is teetering is becoming more and more apparent in credit card delinquencies. Experian reported that the domestic bank card default rate climbed to 3.53 percent in May, a four-year high. There are even nascent signs that families have started to struggle to make their mortgage payments.

Fed Rate Hikes Are More About Slowing GDP Than Improving GDP

The pitch by the Federal Reserve is that GDP is growing which is why they are hiking rates. The Fed has said that rate hikes are representative of their belief that economic growth is picking up and so really, rate hikes are something that is bullish for the economy and GDP going forward.

If you believe that, I know a guy who has an original picture of Jesus Christ in a piece of brick that he’d like to sell you for just $9,999.99.

The mainstream financial media is running with Yellen’s story as if it’s based in reality.

You can’t afford to be so gullible if you have your scarce dollars invested in the stock market.

Here’s a reality check chart that shows, everytime, that rising rates are more indicative of a falling GDP than of a rising GDP.

Two Problems With US Retail Sales

The US retail sales report was released today and there are two big problems that traders and investors need to know about.

US Retail Sales, Where’s the Recovery?

According to the Federal Reserve the retail apocalypse was supposed to be transitory. We were told that retail sales were going to improve in Q2 after the unusually weak first quarter. We can conclusively say that US retail is not improving this quarter.

Sales Totally Missed Estimates

The consensus was for a 0.1% increase in retail sales. The actual number came in at -0.3%. That’s a big miss for this indicator.

Department stores fell -1%, autos fell -0.2% percent, restaurants dropped -0.1%, and electronics & appliances stores are down -2.8%.

US Retail

Never in the history of Fed rate hikes have they raised rates into an economy that was this weak. Trust me folks, I’ve lived through every rate hike since the 1970s and I have never seen something like this. Rate hikes always happen during a rapidly expanding economy when everyone is raising prices and consumers keep paying those prices because there’s so much money in the economy. That’s the 180 degree opposite of what we currently have in the economy right now.

Bear Market Coming If Trump Agenda Does Not Move Forward

A bear market is coming if President Trump’s agenda does not move forward quickly. I have been saying for months now that the Federal Reserve is hiking rates not because we are in a strong economy that needs cooling off but instead to save pension fund holders and others who depend on the income generated from bond yields.

The Trump rally ended back in March. That was the turning point when the markets started pricing in the reality that President Trump was being blocked even on a common-sense travel ban from radical Muslim countries that support terrorists and that generally dislike America. If a common-sense travel ban can’t even get put in place, how does Trump’s economic agenda have any hope?

Bear Market Coming As Economy Slows

We are six months into Trump’s presidency and we have no clear plan for raising the debt ceiling when the government runs out of money in August. We have no big comprehensive corporate tax reform yet. We have no tax cuts for working Americans yet. We have no repatriation of trillions of overseas dollars yet. We have no massive infrastructure plan to boost the economy yet. Meanwhile, the Federal Reserve continues to hike rates.

The chart below shows the effects of rate hikes on commercial and industrial loans.

The arrows mark the three rate hikes since the end of the Great Recession. When the Fed hikes rates next week, we could have commercial and industrial loans drop below the zero line and signal a contraction for the first time since the Great Recession.

Today, there’s a greater chance that a bear market will happen than not happen because of trend logic. Trend logic is the idea that a trend will continue until it actually ends. Assume continuation of the previous trend until proven otherwise. The Federal Reserve is on a rate hike up-trend. Commercial and industrial loans are in a downtrend. Assuming these trends continue, the yield curve will go flat or inverted within the next few months. The only thing that will stop this gloomy scenario from taking place is if one of those trends change.

The only thing capable of preventing the next bear market is if Trump’s economic agenda moves forward on tax cuts and infrastructure spending, or if the Federal Reserve does not raise rates in June. Since I see neither of these outcomes happening right now, rather than assume a magical trend change appearing from out of nowhere, it’s better to assume continuation of the previous trends until proven otherwise.

Peter Schiff gave an excellent speech at Cambridge House recently about the deteriorating US economy, check it out:

Saturday Night Show: Janet Yellen Rate Hike While Pension Plans Going Broke

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A weekly Saturday financial show that attempts to predict market direction for the week ahead by looking at a variety of fundamental and technical charts. This week’s show features commentary on Janet Yellen and the Federal Reserve’s strange timing of a rate hike, how Obama Administration diverted FNMA money and investors dividends into Affordable Care Act to keep it solvent, and the collapsing pension funds across America.