Even the Government Knows the Stock Market Is a Huge Bubble

Last month, we reported on a Bank of America survey that indicated the mainstream has started to acknowledge that the stock market is a big, fat, ugly bubble.
The latest fund-manager survey by Bank of America Merrill Lynch found that a record 48% of investors say the US stock market is overvalued. Meanwhile, 16% of investors say they are taking on above-normal risk. BoA chief investment strategist Michael Hartnett called this ‘an indicator of irrational exuberance.’
Now, even the government has taken notice, acknowledging asset prices are floating in dangerous bubble territory.
The Office of Financial Research (OFR) recently released its 2017 Annual Report. According to its analysis, market risk is flashing red, with stock market valuations at historic highs based on several metrics.

This post was published at Schiffgold on DECEMBER 28, 2017.

11 Of 19 Bear Market Indicators Have Now Been Triggered: BofA

Two weeks ago, Bank of America tripped recession-watcher alarms, when it announced out that one of its surest bear-market indicators, one which has never had a false negative, had just been triggered. As we said at the time, according to BofA’s Savita Subramanian in November the S&P 500’s three-month earnings estimate revision ratio (ERR) fell for the fourth consecutive month to 0.99 (from 1.03), indicating that for the first time in seven months, there were more negative than positive earnings revisions, needless to say a major negative inflection point in the recent surge in profits.
Why was this significant? Becase as BofA explained, the three-month S&P 500 ERR has been used by the bank as one of its 19 key “bear market signposts”, and with the one-month ERR falling below 1.0 for the second time in six months, this marks the trigger for the 11th bear market signpost. BofA’s ERR rule is triggered when, over a six-month window, all of the following criteria are met: 1) the one-month ERR falls from above 1.0 to below 1.0; 2) the one-month ERR is below 1.0 for two or more months; and 3) the three-month ERR falls below 1.1 for at least one month. Incidentally, the hit rate of the “ERR” bear market indicator, meaning its historical accuracy in predicting a bear market is 100%, the only question is how long it takes. The last time this trigger was set was mid-2003, and here is the punchline from Bank of America:

This post was published at Zero Hedge on Dec 21, 2017.

Bank Of America: “This Is A Sign Of Irrational Exuberance”

Two weeks ago, when discussing a recent Albert Edwards piece, we said that the word that has come to define the new normal better than all others, is “paradox“, as in nothing makes sense, or rather everything makes sense if one only flips logic and reason 180 degrees. A “paradox” was on full display in the latest Bank of America Fund Managers Survey which found that once again, the percentage of respondents saying equities are overvalued hit a new record high of 45%; and yet the average cash levels continue to fall as one professional after another – whose year end bonus depends on whether they outperform the market – rush to allocate funds to equities, which most now agree are an asset bubble.
And while we call this “paradox”, Bank of America has another, more familiar name for the phenomenon: “this is a sign of ‘irrational exuberance’.”

This post was published at Zero Hedge on Dec 19, 2017.

Jim Kunstler: “You Can See Where This Has Been Going…”

Lately, fund flow data has all the credibility of a NYT presidential poll two days before the Trump defeats Hillary. On one hand, you have Lipper reporting that investors pulled $16.2bn from U. S.-based equity funds in the past week, the largest withdrawals since December 2016. The same Lipper also reported that taxable-bond mutual funds and ETFs recorded $1.2bn in outflows, with U. S.-based high-yield junk bond funds posting outflows of $922 million. On the other hand, you have EPFR which looking at the same data, and the same time interval, concluded that there was $8.7bn inflows into equities, of which total flows into the US amounted to $7.8bn, the largest in 26 weeks.
How does any of this make sense? We are not sure, although it may be that while Lipper ignores ETF flows, EPFR includes these. Indeed, when breaking down the latest flow data, which still does not foot with the Lipper numbers, Bank of America notes that the $8.7bn in equity inflows is the result of a $31.4bn in ETF inflows – the second largest on record – offset by $22.7bn in mutual fund outflows, the 4th largest on record.
When looking at this staggering divergence, BofA’s Michael Hartnett put it best:
Passive hubris, active humiliation: 2nd largest week of inflows ($31.4bn) ever into equity ETFs vs 4th largest week ever of outflows from equity mutual funds (Chart 1)

This post was published at Zero Hedge on Dec 15, 2017.

Bank Of America: “This Is The First Sign That A Bubble Has Arrived”

Lately, fund flow data has all the credibility of a NYT presidential poll two days before the Trump defeats Hillary. On one hand, you have Lipper reporting that investors pulled $16.2bn from U. S.-based equity funds in the past week, the largest withdrawals since December 2016. The same Lipper also reported that taxable-bond mutual funds and ETFs recorded $1.2bn in outflows, with U. S.-based high-yield junk bond funds posting outflows of $922 million. On the other hand, you have EPFR which looking at the same data, and the same time interval, concluded that there was $8.7bn inflows into equities, of which total flows into the US amounted to $7.8bn, the largest in 26 weeks.
How does any of this make sense? We are not sure, although it may be that while Lipper ignores ETF flows, EPFR includes these. Indeed, when breaking down the latest flow data, which still does not foot with the Lipper numbers, Bank of America notes that the $8.7bn in equity inflows is the result of a $31.4bn in ETF inflows – the second largest on record – offset by $22.7bn in mutual fund outflows, the 4th largest on record.
When looking at this staggering divergence, BofA’s Michael Hartnett put it best:
Passive hubris, active humiliation: 2nd largest week of inflows ($31.4bn) ever into equity ETFs vs 4th largest week ever of outflows from equity mutual funds (Chart 1)

This post was published at Zero Hedge on Dec 15, 2017.

Attention Derivatives Traders: Here Are “The Top 17 Themes To Remember From 2017”

Last week, as part of its must read 2018 Outlook piece, Bank of America’s derivatives team pointed out two particularly notable things: the first was BofA’s version of the (central-bank mediated) “feedback loop” diagram that keeps volatility record low and grinding even lower, as selling of vol has become a self-reinforcing dynamic, in which lower VIX begets more vol-selling by “yield-starved investors”, leading to even lower VIX as the shock that can reset the feedback loop is no longer possible, and thus the strike price on the Fed’s put can not be put to a market test, which also results in even greater market fragility and assured central bank interventions…

… and a chart suggesting that the market generally broke some time in 2014, when the “behavior of volatility entirely changed, with volatility shocks retracing at record speed. Investors no longer fear shocks, but love them, as it is an opportunity to predictably generate alpha.”

This post was published at Zero Hedge on Dec 12, 2017.

Bank of America: “We’ve Seen This Movie Before: It Ends With A Recession”

In a merciful transition from Wall Street’s endless daily discussions and more often than not- monologues – of why vol is record low, and why a financial cataclysm will ensue once vol finally surges, lately the main topic preoccupying financial strategists has been the yield curve’s ongoing collapse – with the 2s10s sliding and trading at levels last seen in April 2015, and with curve inversion predicted by BMO to take place as soon as March 2018. And, according to at least one other metric, the yield curve should already be some -25bps inverted. This is shown in the following chart from Bank of America which lays out the correlation between the US unemployment rate and the 2s10s curve, and which suggests that the latter should be 80 bps lower, or some 25 basis points in negative territory.
Here is some additional context from BofA’s head of securitization Chris Flanagan, who views “the recent sharp flattening of the yield curve, which has seen the 2y10y spread go from 80 bps to almost 50 bps since late October, as the natural course of events at this stage of the economic cycle. Unemployment is low, and probably headed lower, and the Fed is intent on raising rates to stave off future inflation; we’ve seen this movie before and it typically ends with a flat or inverted yield curve. Based on history (and gravity), we think the most likely path forward is that the 2y10y spread reaches zero or inverts sometime over the next year or so and that recession of some kind follows in 2020 or 2021. (Given that the curve has flattened 30 bps in just over a month, projecting an additional 50 bps flattening over the next year is not really too bold.) Of course, much can happen along the way to change that outcome, but for now that seems to us to be the most likely course of events to us.”
Here Flanagan openly disagrees with the BofA’s “house call” of a steepening yield curve, and explains why:

This post was published at Zero Hedge on Dec 10, 2017.

One Of Bank of America’s “Guaranteed Bear Market” Indicators Was Just Triggered

It is undisputed that the last 2 quarters have demonstrated an impressive jump in corporate earnings growth, if mostly due to a beneficial base effect from plunging 2016 earnings which pushed them below levels reached in 2014. And naturally, this rebound has been more than priced into a market which has seen substantial multiple expansion since the Trump election to boot. But what is much more important for the market is what corporate earnings look like in the future, and it is here that Bank of America has just raised a very troubling red flag.
According to BofA’s Savita Subramanian, in November the S&P 500’s three-month earnings estimate revision ratio (ERR) fell for the fourth consecutive month to 0.99 (from 1.03), indicating that for the first time in seven months, there were more negative than positive earnings revisions, needless to say a major negative inflection point in the recent surge in profits. The bank’s more volatile one-month ERR also weakened to 0.94 (from 1.16).

This post was published at Zero Hedge on Dec 7, 2017.

The Moment The Market Broke: “The Behavior Of Volatility Changed Entirely In 2014”

Earlier today we showed a remarkable chart – and assertion – from Bank of America: “In every major market shock since the 2013 Taper Tantrum, central banks have stepped in (even if verbally) to protect markets. Following the Brexit vote, markets no longer needed to hear from CBs as they rebounded so quickly that CBs didn’t need to respond.” As a result, buy-the-dip has a become a self-fulfilling put.

This post was published at Zero Hedge on Dec 6, 2017.

UK Trader Fined 60,000 Pounds For Outsmarting Algos

Yet another UK trader is being punished by overzealous regulators for an accomplishment that should instead have earned him accolades: Outsmarting the machines.
In a case that echoes some of the circumstances surrounding the scapegoating of former UK-based trader Nav Sarao, former Bank of America Merrill Lynch bond trader Paul Walter has been fined 60,000 pounds by the FCA for a practice that regulators call ‘algo baiting’.
Algorithm baiting is similar to spoofing – a practice that has been banned by stock-market regulators as those markets have embraced high-frequency trading practices that have broken markets and made them more vulnerable to this type of manipulation. But fixed income markets, like the Dutch loan market Walter is accused of manipulating, have been slower to embrace HFT-type trading. Because of this delay, Walter is a pioneer. Using BrokerTec, a popular fixed-income trading platform, Walter would place a bunch of bids for a given bond, triggering trend-following algos to follow suit. Then he would quickly cancel the bids. Here’s a more complete explanation per the Financial Times.
Mr Walter entered bids for Dutch state loans that pushed up their price. Then, when other algorithmic trades followed him in response and raised their bids, Mr Walter sold to them and cancelled his quote. This happened 11 times between July and August 2014 while he was working for the bank, the FCA said, while on one occasion he did the opposite. He netted a total of 22,000 profit from this ‘algo baiting’.

This post was published at Zero Hedge on Nov 23, 2017.

Bank Of America Analyst: A ‘Flash Crash’ In Early 2018 ‘Seems Quite Likely’

Is the stock market bubble about to burst? I know that I have been touching on this theme over and over and over again in recent weeks, but I can’t help it. Red flags are popping up all over the place, and the last time so many respected experts were warning about an imminent stock market crash was just before the last major financial crisis. Of course nobody can guarantee that global central banks won’t find a way to prolong this bubble just a little bit longer, but at this point they are all removing the artificial support from the markets in coordinated fashion. Without that artificial support, it is inevitable that financial markets will experience a correction, and the only real question is what the exact timing will be.
For example, Bank of America’s Michael Hartnett originally thought that the coming correction would come a bit sooner, but now he is warning of a ‘flash crash’ during the first half of 2018…
Having predicted back in July that the ‘most dangerous moment for markets will come in 3 or 4 months’, i.e., now, BofA’s Michael Hartnett was – in retrospect – wrong (unless of course the S&P plunges in the next few days). However, having stuck to his underlying logic – which was as sound then as it is now – Hartnett has not given up on his ‘bad cop’ forecast (not to be mistaken with the S&P target to be unveiled shortly by BofA’s equity team and which will probably be around 2,800), and in a note released overnight, the Chief Investment Strategist not only once again dares to time his market peak forecast, which he now thinks will take place in the first half of 2018, but goes so far as to predict that there will be a flash crash ‘a la 1987/1994/1998’ in just a few months.

This post was published at The Economic Collapse Blog on November 20th, 2017.

How Tax Reform Can Still Blow Up: A Side-By-Side Comparison Of The House And Senate Tax Plans

To much fanfare, mostly out of president Trump, on Thursday the House passed their version of the tax bill 227-205 along party lines, with 13 Republicans opposing. The passage of the House bill was met with muted market reaction. The Senate version of the tax reform is currently going through the Senate Finance Committee for additional amendments and should be ready for a full floor debate in a few weeks. While some, like Goldman, give corporate tax cuts (if not broad tax reform), an 80% chance of eventually becoming law in the first quarter of 2018, others like UBS and various prominent skeptics, do not see the House and Senate plans coherently merging into a survivable proposal.
Indeed, while momentum seemingly is building for the tax plan, some prominent analysts believe there are several issues down the road that could trip up or even stall a comprehensive tax plan from passing the Congress, the chief of which is how to combine the House and Senate plans into one viable bill.
How are the two plans different?
Below we present a side by side comparison of the two plans from Bank of America, which notes that the House and the Senate are likely to pass different tax plans with areas of disagreement (see table below). This means that the two chambers will need to form a conference committee to hash out the differences. There are three major friction points:
the repeal of the state and local tax deductions (SALT), capping mortgage interest deductions and the delay in the corporate tax cut. The House seems strongly opposed to fully repealing SALT and delaying the corporate tax cuts and the Senate could push back on changing the mortgage interest deductions. Finding compromise on these issues without disturbing other parts of the plan while keeping the price tag under the $1.5tn over 10 years could be challenging.

This post was published at Zero Hedge on Nov 17, 2017.

Stock Market Bubble Floating on Currents of ‘Irrational Exuberance’

Last week, Peter Schiff did an interview on The Street and talked about the US stock market, saying, ‘Well, the bubble keeps getting bigger.’ We’ve been talking about this ballooning bubble for months. After a while, it’s easy to blow us off as pessimistic contrarians who just don’t get it. But amazingly, large numbers of investors also believe the stock market is way overvalued.
But they keep buying anyway.
Bank of America called it ‘irrational exuberance.’
The latest fund-manager survey by Bank of America Merrill Lynch found that a record 48% of investors say the US stock market is overvalued. Meanwhile, 16% of investors say they are taking on above-normal risk. That’s also a record, eclipsing risk-taking during both the dot-com and housing bubbles.

This post was published at Schiffgold on NOVEMBER 15, 2017.

Bank Of America: “This Is A Clear Sign Of Irrational Exuberance”

The latest monthly Fund Manager Survey by Bank of America confirmed what recent market actions have already demonstrated, namely that, as BofA Chief Investment Strategist Michael Hartnett explained, there is a “big market conviction in Goldilocks leading to capitulation into risk assets” while at the same time sending Fund managers’ cash levels to a 4-year low, and pushing “risk-taking” to a new all-time high, surpassing both the dot com and the 2007 bubbles.
BofA’s takeaways from the survey, which polled a total of 206 panelists with $610 billion in AUM, will not come as a surprise to those who have been following this survey in recent months, and which reaffirms that while investors intimately realize how bubbly assets have become, they have no choice but to buy them.
The latest survey highlights:
It’s still all about FAANG froth: the biggest market conviction is in Goldilocks (+ price action in FAANG/BAT, Bitcoin) resulting in bull capitulation; A stunning chart shows that risk-taking among Fund Managers hit an all time high in the lastest period…

This post was published at Zero Hedge on Nov 14, 2017.