Navigating Through Prickly Markets?

Karen Brettell of Reuters reports, Dollar jumps as rising wages stoke inflation expectations:
The dollar jumped to more than two-month highs against the yen and seven-week highs against the euro on Friday after the government’s jobs report for September showed rising wages.

Average hourly earnings increased 12 cents or 0.5 percent in September after rising 0.2 percent in August. The gains came as nonfarm payrolls fell by 33,000 jobs last month after Hurricanes Harvey and Irma left displaced workers temporarily unemployed and delayed hiring.

“I think most people realized going in that the headline numbers would be distorted because of the storms, but the surprise was the average hourly earnings,” said Win Thin, head of emerging markets currency strategy at Brown Brothers Harriman in New York.

“This is the missing piece in the Fed’s puzzle,” Thin added. “I think the dollar rally is back on track and should continue next week.”

The greenback jumped as high as 113.41 yen, the highest since July 14. The euro fell to as low as $1.167, the lowest since Aug. 17.

Improving U.S. data along with the prospect of U.S. tax cuts and the likelihood that the Federal Reserve will raise interest rates in December have boosted the U.S. currency in recent weeks.

Interest rate futures traders are now pricing in a 93 percent likelihood of a December rate hike, up from 84 percent on Thursday, according to the CME Group’s FedWatch Tool.
It's TGIF Friday which means I get to sit back and just write about markets and you get a glimpse into my beautifully distorted mind to gain some understanding of these markets.

To be honest, I was happy looking at markets this morning following the release of US jobs numbers and wasn't in the mood to blog, but this tweet from Men's Health Magazine on penis enhancement horror stories inspired me to write something on these prickly markets (it's Friday, I'm in a prickly mood, bear with me) .

Now, for all you "big, swinging dicks" on Wall Street wasting your money on penis pumps, penile enhancement surgeries, pills, weights and other nonsense hoping your new nickname will one day be "tripod," I have bad news for you, be happy with what you've got between your legs and if you're not, go schedule an appointment with my 86-year old father who is still a practicing clinical psychiatrist and he will adjust your medication and try to knock some sense into you.

For the rest of you who are comfortable with their genitalia and are happy it's working just fine, read on and I will try to make some sense of these prickly markets before your portfolio becomes so distorted, it too ends up being a horror story.

First, Zero Hedge did a good job going over the September "hurricane" payrolls this morning so I'm not going to bother going over it here. Hurricanes or no hurricanes, there is no question the US economy is slowing as there were significant downward revisions to the previous months' data.

But everyone was honing in on average hourly earnings. Assuming the numbers on the wage data weren't fabricated (I also have my doubts), average hourly earnings rose by 0.5% M/M and on an annual basis, the increase was 2.9%, well above the 2.5% expected, and the highest since the financial crisis (click on charts):

Initially, stocks (SPY) and bonds (TLT) sold off until everyone came back to their senses and realized inflation is in freefall all over the world, there is no sustained wage inflation, and the Fed will only exacerbate deflation headed for the US if it continues removing stimulus and hiking rates.

Add to this all these speculators who were shorting Treasuries like crazy and probably covered their shorts, which explains why US long bond prices (TLT) snapped back fast after the morning dip (click on image):

One other thing to keep in mind, the recent appreciation of the US dollar (UUP), if sustained, will lower US import prices and lower inflation expectations going forward.

All the macro algos out there have the same model, bond yields go up, bullish for the US dollar. It's beyond stupid and I'll explain why. Real rates are what count most and as inflation expectations continue to drop in Europe and Japan and elsewhere as their economies slow, you will see the US dollar gain relative to other currencies despite the drop in US bond yields even if the Fed doesn't proceed with its rate hike in December (never say never but I doubt Janet in Wonderland will balk from hiking unless stocks plunge).

If we get an all out crisis, everyone in the world will seek refuge in US Treasuries (TLT) which is also bullish for the greenback (UUP).

I know it's hard to understand all these moving macro parts but I haven't changed my macro mind since I wrote my comment on why you all need to prepare for the worst bear market ever in late September.

Importantly, despite all the hoopla of tax cuts and spending on infrastructure, I still maintain my top three macro conviction trades going forward:
  1. Load up on US long bonds (TLT) while you still can before deflation strikes the US. This remains my top macro trade on a risk-adjusted basis.
  2. A couple of months ago I said it's time to start nibbling on the US dollar (UUP) and it continued to decline but I think the worst is behind us, and if a crisis strikes, everyone will want US assets, especially Treasuries. I'm particularly bearish on the Canadian dollar (FXC) and would use its appreciation this year to load up on US long bonds (TLT).
  3. My third macro conviction trade is to underweight/ short oil (USO), energy (XLE) and metals and mining (XME) as the global economy slows. Sell commodity indexes and currencies too.
Oil prices are getting slammed on Friday and I foresee a lot more pain ahead as it becomes much clearer the US and global economy are slowing.

You're going to read a lot of articles on the US tax plan putting reflation trade back on investors' radar, but pay no attention to this nonsense. The reflation trade is dead, finito, kaputo, R.I.P.!

Never mind Ken Griffin's warning on inflation, he and the Maestro are wrong on bonds and so are plenty of other bond bears which are going to get crushed shorting the hell out of Treasuries.

But it's not just inflation that is dead. The pricing of risk is dead as credit spreads collapse to post-crisis lows as stock market 'greed' nears 1998 highs.

Just look at this 5-year weekly chart of the iShares iBoxx $ High Yield Corp Bond ETF (HYG):

Where's the fear? Every trader will tell you this is a BULLISH weekly breakout, and it portends well for all risk assets, including emerging market stocks (EEM) and bonds (EMB).

The hunt for yield is reaching epic proportions forcing Canadian pensions to pile on leverage as they compete with LBOs who are also piling on the leverage (click on chart):

More leverage is a red flag at this stage of the bull market. Things are even getting frothy in the private debt market where hedge funds are piling in.

How out of whack are things getting? Joe Wiesenthal tweeted about some biotech company that just changed its name to "Riot Blockchain", and now the stock is surging (click on image):

You can't make this stuff up. If this isn't the madness of crowds, I don't know what is. But the masses are hungry, starving, they are willing to bet it all to chase a quick buck.

Check out shares of Mannkind (MNKD) this week, rocketing up three straight sessions on very heavy volume before taking a mini breather on Friday (click on image):

INSANE! Cure for diabetes? Revolutionary treatment? Buy, buy, BUY, this is it, the winning lotto ticket we've all been waiting for.

Don't get me wrong, there are a lot of great biotech companies out there, some have truly innovative pipelines, some have doubled, tripled, quintupled and some will continue doing well because they are going to report great news.

But I check out markets every day and I also see insanity at work and I really fear for retail investors who don't have a clue of what they're doing.

For example, while biotech shares (XBI) have had an incredible run since I called their bottom right before the US elections, you've got to be very careful here even if we make new 5-year highs (click on image):

You need to be extra careful in these prickly markets, really, really careful, especially if they continue melting up.

Did you get that last part? Nothing goes up forever and when it stalls and reverses, watch out, BOOM!!!, a lot of you momo/ algo chasers are going to get your head handed to you.

"Ah, Leo, come on, stop being so bearish, I work for Renaissance Technologies, I have a PhD in mathematics and astrophysics, I'm smarter than these markets and even Euler himself" (I can see Euler rolling over in his grave).

I know, you're all hedge fund quant superstars taking over the world, big, swinging astrophysicists who can program the holy grail of every flash crash market second, but you too will have your day of reckoning when deflation strikes the US. That will be a very painful lesson in humility.

On that note, stay away from penile enhancement surgeries and gimmicks, eat your spinach and beets and enjoy your weekend. Those of you who enjoy reading my market insights can track some of my thoughts on stocktwits but I have to be honest, I can't post it all there or on Twitter.

I want to thank those of you who take the time to support this blog through your financial donations and subscriptions and welcome those of you who want to donate via PayPal on the top right-hand side under my picture. If you want to reach me, feel free to email me at

Below, a bullish take on why the bull market is just getting started from Ciovacco Capital's Short Takes. Take the time to watch this interesting clip but I must warn you, I'm not biting and preparing for the worst bear market ever. Also, someone should tell these chaps the volatility trap is inflating market bubbles and the silence of the VIX won't last forever.

This doesn't mean there aren't going to be opportunities to trade in these markets. There will always be stock-specific trades, I even have a list of stocks I track closely every day and can sort out which ones are doing well and are worth a closer look to risk capital (click on image):

But I warn you, trading and navigating through these prickly markets takes a lot of intestinal fortitude. Most of you are better off just following my lead, putting all or a huge chunk of your money in US long bonds (TLT) even if markets continue melting up.

I know, it's tough, even for me who loves trading and might get back into it, but when it hits the fan, only US long bonds will save your portfolio from being pricked and suffering catastrophic losses.

Bottom line: As you navigate through prickly markets, be careful, downside risks are mounting, don't get pricked when you least expect it.