Diary of a Financier

Bull v. Bear

In Capital Markets on Mon 3 Jun 2013 at 16:30

As promised, it’s time for another edition of Bull v. Bear…


  1. Cycle of Psychology- As I said back in March, “You’ll recognize [Excitement] as the rubber stamp on this cyclical bull market once SPX hits all time highs (proximately). The follow though–transcendence from Excitement to Thrill–should occur this year too, when the market bumps & runs higher at an even steeper pitch.” The steeper pitch has been achieved, and we’ve reached the Thrill stage, which means momentum will govern this market hereafter.
  2. Bank lending- Bank loan officer survey- C&I lending (2013q1)My ace-in-the-hole for 2013, more liberal credit extension to the real economy continues to gain steam, with the Q1 restrospective report showing improvement across-the-board. Of particular note, I highlighted the looser lending standards and cheaper cost of capital becoming available to small & middle market businesses in the Commercial & Industrial space.
  3. Apple ($AAPL)- I’m bullish the name and therefore own AAPL. We know how pervasive an AAPL rally can be, given the ability to tow the market higher despite poor breadth. The chart has me poised for such leadership.
  4. Technicals- The daily chart pattern and indicators are not reminiscent of a market top; in fact, they’re bullish. The primary pattern is a classic bull flag. Further, resilient weekly bear divergence has been reversed–an occurrence that launched the fruitful momentum phase (i.e. Thrill) in the last cyclical bull market circa 2006q4.Inventories & Inventory/Sales Ratio (2013.05)
  5. Inventories- Flows are still very low, leaving a lot of room for upside, especially since the inventory/sales ratio has just started showing its first signs of revival since the 2008/9 crisis’ boom/bust.


  1. 2007 SPX Analogue- While I’m still struggling to trust this latest guide to the market–mostly due to inconsistancies between the daily indicators–the weekly comparison of 2007 vs 13 is particularly precise, and it warns that 2013’s major correction (~11% drawdown) should arrive sometime this week.NYSE net margin balances (2013.05)
  2. Margin debt/balances- NYSE real (inflation adjusted) margin debt is challenging 2007’s alltime highs, while nominal records have already been surpassed. More alarmingly, net margin credit balances (deficits) have far exceeded 2007/11 pre-correction level and are now nearing the Tech Bubble’s alltime low (-$105B vs -$130B in 2000).
  3. SPX EPS growth- Earnings growth has been a sham with a full 60% of EPS growth attributable to buybacks (“paper/accounting growth”) vs only 40% due to organic growth. This manifests the critical flaw at the heart of QE, a broken transmission mechanism responsible for the bifurcated recovery, with divergences between Main Street & Wall Street, small & big business, not to mention the economy & the stock market. [Such “unforseen,” unintended consequences fester until they’ve compounded over the long term, but myopic policymakers couldn’t care less about their legacy or sustainability.]
  4. Railtraffic/PMI- Railroads’ unseasonal resilience had shown early promise of a pickup in activity, but a recent reversal in carloads’ weekly gains combine with weak May ISM/PMIs has put everything into perspective, reminding investors how slow and fragile the economy remains. In addition, the outsized contributions from the domestic energy E&P revival are moderating as the law of large numbers saddles y/y petroleum  traffic growth rates, which are still high, but not accelerating.  Shortly, this could all prove to be white noise–especially the railtraffic outlier–but the PMI report really contorted investors’ sentiment.
  5. Inter-asset divergences- SPX decoupled from everything in May, and the divergences are wide enough that a recoupling must occur in the near term. This time is not different: equity investors have gotten ahead of themselves again.


I didn’t bring the recent bond pullback into this discussion because a Fed tapering is not imminent–no matter what the FOMC, Jon Hilsenrath, or MSM say. The economy just isn’t healthy enough yet. Growth, inflation, and unemployment have not even come close to attaining the explicit goals set by the Fed. Plus, Chairman Ben Bernanke has repeatedly pledged that he’d adhere to the standard of his fanatically transparent Fed; they will broadcast an early warning, and they won’t taper overnight a la 1994. That said, there will be blood. Someone, somewhere in the system will eat losses, and this latest bounce in Treasury rates can attest: interest rate swaps, an institutional hedging mechanism, were very reactionary, suggesting that even the smart money can be swimming naked at times. By dropping words-of-the-day, like “tapering,” the Fed both tests the marketplace’s preparedness and talks down surging asset values. High grade technicals (like $AGG) are bearish, so I still don’t want exposure to high duration.  But, I want to be clear: outflows from fixed income will be attributable to sentiment–specifically fear–not actuality. Let the media get excited, but realize what’s really going on here.

Overall, I see a tale of two timeframes: a bearish short term and a bullish intermediate. You might ask, ‘Why the call for a short term correction; why here & now?’  Well, aside from the analogue, I’m compelled by the combination of historically overextended margin balances and SPX’s stubborn divergence from other assets.  Alone, either could continue to the heavens; but combine, they mutually buttress a house of cards.  The former seems to have perpetuated the massive arb spread resulting from the latter correlation collapse.  Most of the bullish bullet points are long term oriented, while the bearish require a mere short term realignment of factors–a “recoupling” to close the perception vs reality gap, allowing us to move onward and upward.


  1. […] we have to look at interest rate swap markets, which I’ve mentioned previously (I, II, III) as a critical indicator for the orderliness of the unwind from this 30+ year […]

  2. […] truthfully relying on the pure technicals, combine with bullish intermediate macro and fundamental appraisals, to lead me forward. In isolation, those technicals are not necessarily bearish–though not […]

  3. […] with net credit deficits also near record levels. Given the market’s leveraged status, it makes sense that something as anticipated as a outward shift in the yield curve would cascade into a […]

  4. […] SPX EPS are at an alltime high though. EPS have arrived at this precipice with a full 60% of growth attributable to buybacks vs only 40% to organic growth. Further, net margins are at historically high levels, […]


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