JP Morgan reaffirmed their Buy rating on Live Nation Entertainment today. JP Morgan is one of the best analyst firms on Wall Street as evidenced by their often accurate stock ratings. All traders should take note of JP Morgan's ratings on various stocks. I'm not a high enough net-worth individual and so I don't have access to the actual JP Morgan research report but it's not hard to guess what they like about Live Nation Entertainment.
David Stockman contra corner man, was interviewed by Boom Bust where he warned of the enormous storm coming that will slam into Wall Street. My notes from the interview are below.
I think the odds by the day are raising that we’re going to truly have a government shutdown. Expect the mother of all debt ceiling crisis. The market is utterly unprepared and it really is the black swan event that’s about ready to take Wall Street by surprise.
They have not even started on the budget resolution for 2018. Because you will need reconciliation to pass any tax bill, without a budget resolution, there’s no tax bill.
We’re likely to have a downturn, likely sooner than later, and the market is dramatically overpriced. I’d say sixteen times earnings given all the headwinds.
The Fed is now finally going to start to shrink its balance sheet and not simply a small bit but by $2 trillion within the next a couple of years. The S&P 500 could drop -1,600 points with that all staring us in the face. There is an enormous air pocket between the dream that prevails on Wall Street and the reality of the economy.
Without a clean bill, you are having an enormous fight over what is quid-pro-quo to raise the debt ceiling. That isn’t going to end easily. It is likely to end in a complete breakdown like we saw in 2011. They’re not going to have the ability to deal with it.
We are in the midst of the biggest political train mess in modern history. We still have no stimulus, no tax bill or infrastructure. I am sure they would like to pass something but they don’t have the consensus to do so.
The market today is trading at 25 times S&P 500 earnings that would be $100 a share of earnings for the period ending in March. That represents a tiny growth from $85 a share back in June of 2007, some ten years ago. We’re about 1.2% earnings growth over the last decade. Why would you pay 25 times earnings to get one percent increase after a tepid expansion of 100 months that is close to the end of its life because of Fed rate hikes?
David Stockman contra corner man has made a name for himself by always being the contrarian to whatever is the current market consensus. Rather than be a straight up contrarian and get your timing wrong, the better way is to just watch the yield curve. When the yield curve goes completely flat or inverted, we will be months away from the next recession. Until then, keep your eyes on the catalysts that could bring the market down sooner like the subprime auto loan mess and the debt ceiling, but run with the Bulls.
Below is the full interview of David Stockman contra corner man and Boom Bust from RT News:
A government shutdown is coming straight at us like a freight-train and Congress better do something fast. David Stockman told CNBC (link above) that in this government where the system is determined to unseat President Trump, it’s unlikely that both parties will come together to raise the debt ceiling.
Government Shutdown Coming Fast
The first estimate was that the government would run out of money by November but lower than expected tax receipts have pushed that date up to August. August is just 7 weeks away.
All these baseless accusations about Russia are coming from both Establishment Democrats and Republicans who are using the mainstream media to try and impeach President Trump. If the government can waste this much time on something so absurd, they are, quite frankly, all a bunch of morons.
It feels like we’re more of a primitive tribe than we are a powerful constitutional government.
David Stockman told CNBC, “I don’t know what Wall Street is smoking. They ought to be getting out of the casino while it’s still safe.”
Both the Fed and Wall Street analysts are forecasting a 3% GDP growth rate for Q3. After yesterday’s release of many economic reports, I would put the GDP growth rate for Q3 at 1.5% at most. Let’s look at yesterday’s economic releases on the charts.
The NY Empire manufacturing index came in at -2%. That number is -84.53% lower than a year ago.
All the major components of the Empire manufacturing index are contracting.
The Philly Fed survey beat, coming in at 12.8 which is an increase of 455.6% from a year ago.
However, employment is still contracting.
Industrial production fell by -1.1 percent for the 12th straight month of contraction.
The Daily Shot makes the observation that the improvement early this summer was in part helped by utilities cranking on all cylinders to keep the air conditioners around the country running. As that contribution subsidies, we are back to the downtrend from the Spring.
Here is the manufacturing component of the US industrial production (year-over-year).
US retail sales fell in August and are continuing to slow.
Inventory growth continues to slow just like retail sales.
Most of the charts above, I went back five years on the data. Let’s look at what the S&P 500 has done over the last five years and compare performance.
The S&P 500 is up nearly +90% over the last five years while the U.S. economy fundamentals have deteriorated over that same time frame. Folks, that’s the Federal Reserve’s monetary policy propping up the stock market and creating a huge bubble in securities.
I’ve been warning you about the seasonal lie from the Fed and Wall Street analysts that the second half of 2016 was going to strengthen. In fact, I removed the GDPNow forecast graphic from the sidebar of the GuerillaStockTrading blog because it proved itself to be just another market manipulation tool from the Fed that I wrote about here.
Last week’s Institute for Supply Management (ISM) report exposed the seasonal lie that the second half of 2016 would be stronger than the first with one chart.
Readings below 50 indicate contraction. The ISM Manufacturing PMI, New Orders, Backlog of Orders, Production, and Employment are all contracting! Boom! That blows up the second half of 2016 will be stronger than the first half for those that are watching. Shame on the Fed and Wall Street for fooling us with that claim last year. Shame on you if you fall for it again this year.
The U.S. government is pulling out all the stops on the idea that consumers are strengthening, and that GDP will surge higher in the second half of 2016.
Below is the latest Real Personal Consumption Expenditures released on Monday.
Personal income also continues to grow…
Growing real personal consumption and income has led to an upward revision in Q3 GDP…
If the economy is going to strengthen by so much in Q3, why hasn’t the Fed raised interest rates? A whopping six years after the Great Recession supposedly ended, why are rates still at emergency low levels?
Traders have been lied to for so many years by the U.S. government, the Federal Reserve, and Wall Street, nobody knows what to believe anymore. For example, every year Wall Street analysts and the Federal Reserve do a rain dance in the mainstream media to the tune that the economy will strengthen in the second half of the year. It has not happened.
We have five consecutive quarters of falling earnings. How can the economy be strengthening when sales and hence earnings are falling for most S&P 500 companies?
There is so much dishonesty going on about the fundamentals of the U.S. economy that I prefer to weight my analysis more on technicals. Fundamentals are what the “smart money” is saying. Technicals are what the “smart money” is doing.
Deutsche Bank may be on the verge of collapse. Last week Deutsche Bank reported Q2 2016 earnings of 20 million euros which is a 98% drop in earnings year-over-year.
In 2015, Deutsche Bank announced its first full year of loss since the 2008 recession.
Deutsche Bank’s stock is down -60% over the last year meaning that the bank is close to collapse.
Deutsche Bank’s shares now trade for two-thirds less than their tangible book value, a steeper discount than even during the depths of the financial crisis.
Beyond Germany, few stock traders care if Deutsche Bank collapses. The problem with Deutsche Bank collapsing is its enormous derivatives portfolio valued at 42 trillion euros! To put in perspective, the entire EU (all 28 member states) has an estimated GDP value of 14.3 trillion. Deutsche Bank’s 42 trillion euro derivatives portfolio is about three times the size of the entire EU!
One might think that with such a high exposure to the derivatives market, Deutsche Bank would have already collapsed. The reason Deutsche Bank has not collapsed is because of something called netting. For every derivative position Deutsche Bank holds, they hold another position in the opposite direction, so they roughly cancel each other out. At least that’s what Deutsche Bank is reporting that they are doing. Whether that is true or not remains to be seen. Why would anyone hedge their longs with shorts in a 1:1 ratio? You would never make any money from trading, and you would slowly lose on slippage. The OCC tracks netting on U.S. banks and does, in fact, show that even with netting, net current credit exposure (NCCE) has been rising rapidly since 2014.
When Deutsche Bank collapses, it is going to be the explosion heard around the world, and it will be a disaster many times greater than the collapse of Lehman Brothers in 2008.
US Derivatives Exposure
The big U.S. banks have higher exposures to derivatives than Deutsche Bank. As of June 30, 2016, below are U.S. banks with the largest derivative exposures.
Citigroup has amassed the largest stockpile of interest-rate swaps as they bet on central bank rate changes.
Five U.S. banks hold 93% of all derivatives: Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America, and Morgan Stanley. The total value of these derivatives is $247 trillion (notional).
Morgan Stanley has $31 trillion in derivatives with $1.6 trillion (notional) in credit derivatives. What is scary is that Morgan Stanley is back to speculating in the same credit derivatives market that took down AIG in 2008. I don’t think Morgan Stanley necessarily wants to speculate in credit derivatives but with revenue flat the last few years, they may be getting more desperate to prop up their stock price. Morgan Stanley’s stock is down more than -25% over the last year.
Most traders in the U.S. don’t care about Morgan Stanley’s risky credit derivatives portfolio, but they should. Morgan Stanley has more than 15,770 retail brokers managing $404 billion of other people’s money (mom and pop savings, retirees, pensions, retirement accounts, etc.cause). Morgan Stanley’s risky credit derivatives position poses a huge threat to the investing community in my opinion.
Banks and Financial Firms Will Not Disclose Information Until It’s Too Late
If you are waiting for banks and financial firms to disclose risks and even how much they were bailed out from the last time they made risky credit derivative bets, don’t.
To survive the 2007-2009 Wall Street crash, Morgan Stanley received an injection of $9 billion from the Japanese bank, Mitsubishi UFJ Financial Group; a $10 billion injection from the U.S. government and over $2 trillion in secret, cumulative, below-market-rate loans from the Federal Reserve. According to data obtained by Bloomberg News following a multi-year court battle to obtain the information from the Federal Reserve, Morgan Stanley’s one-day secret outstanding loans from the Fed peaked at $107.3 billion on September 29, 2008.
The public would have never known about these secret loans shoring up Wall Street’s reckless conduct and hubris and obscene bonuses except for the court battle of Bloomberg News and legislation secured by Senator Bernie Sanders of Vermont requiring a Fed accounting.
Credit Derivatives Exposure On the Rise In the US
The Office of the Comptroller of the Currency reports some scary facts in their most recent quarterly OCC report.
– Insured U.S. commercial banks and savings associations reported trading revenue of $5.8 billion in the first quarter of 2016… $1.9 billion lower (24.9 percent) than a year earlier. [In my opinion, when trading revenues are down, trading divisions take on more risks in a desperate attempt to meet quotas like buying riskier credit derivatives as the data points below confirm].
– Credit exposure from derivatives increased in the first quarter of 2016. Net current credit exposure (NCCE) increased $65.1 billion, or 16.5 percent, to $460.1 billion.
– Notional derivatives increased $12.0 trillion, or 6.6 percent, to $192.9 trillion.
– Derivative contracts remained concentrated in interest rate products, which represented 76.3 percent of total derivative notional amounts.
Measuring credit exposure in derivative contracts involves identifying those contracts where a bank would lose value if the counterparty to a contract defaulted. The total of all contracts with positive value (i.e., derivative receivables) to the bank is the gross positive fair value (GPFV) and represents an initial measurement of credit exposure. The total of all contracts with negative value (i.e., derivative payables) to the bank is the gross negative fair value (GNFV) and represents a measurement of the exposure the bank poses to its counterparties.
GPFV increased by $0.8 trillion (26.6 percent) in the first quarter of 2016 to $3.8 trillion, driven by a 29.9 percent increase in receivables from interest rate and FX contracts. Because interest rate contracts make up 76.2 percent of total notional derivative contracts, changes in interest rates drive credit exposure in derivative portfolios. Declines in interest rates tend to increase exposure. This effect has increased in recent years, as the maturity profile of interest rate derivatives has increased, making credit exposure more sensitive to changes in longer-term rates.
Credit risk exposure increased a whopping 26.6% in Q1 2016. Much of that increased credit risk exposure is coming from bets on Federal Reserve rate hikes. If interest rates go up, credit risk exposure in derivative positions goes down. If interest rates go down, credit risk exposure goes up. In other words, most of the bets in the derivatives market are on interest rates rising. Better hope Janet Yellen doesn’t have to lower interest rates!
Credit Default Swaps Dwarf All Other Forms of Derivatives
Credit default swaps dwarf any other form of credit derivative trading.
The notional amount for the 54 insured U.S. commercial banks and savings associations that sold credit protection (i.e., assumed credit risk) was $3.6 trillion, up $206.4 billion (6.0 percent) from the fourth quarter of 2015. The notional amount for the 50 banks that purchased credit protection (i.e., hedged credit risk) was $3.8 trillion, $224.9 billion higher (6.3 percent) than in
the fourth quarter of 2015.
It is interesting that many people are reporting having received a letter from their credit card company informing them that their interest rate is going up from 19.9% to 25% in August 2016. Some people have even reported receiving credit limit increase letters too. How kind of these bankers to go long credit default swaps while raising your credit limit and interest rate to insane levels at the same time.
Folks derivatives are dark financial products that cause excessive risk taking that ultimately leads to disaster. I have little doubt that the next global financial crisis will, at its core, once again involve speculative derivatives betting.
The second-biggest US mall owner General Growth Properties defaulted last month when a $144 million loan on a property came due. The default by General Growth Properties could be a sign of troubles to come.
[graphiq id=”koC9fbUh0X3″ title=”General Growth Properties Inc. (GGP)” width=”440″ height=”553″ url=”https://w.graphiq.com/w/koC9fbUh0X3″ link=”http://listings.findthecompany.com/l/31679019/General-Growth-Properties-Inc-in-Chicago-IL” link_text=”General Growth Properties Inc. (GGP) | FindTheCompany” ]
A staggering $47.5 billion of loans backed by retail properties are set to mature over the next 18 months.
Fewer people are shopping in malls and instead chasing cheaper bargains online. Massive job cuts are planned across the retail sector as a result of slumping sales. We have poor earnings forecasts from retailers like Macy’s and Nordstrom, plus bankruptcy filings by chains such as Aeropostale and Sports Authority. With big retailers in a slump, how commercial property owners will have enough money to make their mortgage payments is a mystery.
Insurance companies and banks that are eager to issue loans on high-end shopping complexes aren’t as willing to take a chance on a shaky mall. That pushes borrowers toward Wall Street firms that underwrite loans to sell to investors as commercial-mortgage-backed securities.
Investors that hold mortgage-backed securities could be in for bad times ahead unless the Federal Reserve comes to the rescue and starts buying toxic commercial-mortgage-backed securities.
In a sign of how bad things are for commercial mortgages, the U.S. Small Business Administration (SBA) has recently announced the restart of the SBA “504” loan refinance program. The program expired in 2012 after refinancing more than $5 billion in small business commercial mortgages following the Great Recession. No, I’m not making this up. An emergency finance program that was last used during the Great Recession just started up again on June 24, 2016!
The way a 504 loan works is that the lender finances 50% of a transaction while an SBA-approved Certified Development Company finances 40%, and the borrower is required to pay a 10% down payment.
Starwood Capital Group is planning to dump $1.2 billion worth of properties while they still can.
Many commercial landlords are choosing to walk away and stick the lender with the property. The message is clear: lenders beware. If a mall is not accretive to the REIT, they just walk away from it.
REIT Investors Have No Clue That Something Wicked Is Coming
REIT investors have no clue that loan defaults are coming at them full speed ahead. Worse, REIT investors have no clue that a flat or inverted yield curve will crash REIT markets.
Below is a chart showing all time popularity of REITs as investors pile in. I overlayed the yield curve in early 2007. Notice how a flat or inverted yield curve crashed REITs because REITs borrow money short term, loan it out long term, and make profits off the spread.
The current yield curve is normal but it’s flattening quickly as REITs profit margins are squeezed.