November 16 Premarket Recap – The Fed Pause

A few more comments coming out about the Fed going to pause mode next year. What did I say over a year ago, when the yield of the 2 year was still in the 1%s about the yield of 3.10% and the huge significance of that, the likelihood then of a big FED PAUSE, and the yield reached 2.994% last week. It is backing off significantly for now. A Fed pause upcoming next year?

What have I been saying for years about the huge redistributive top, more forcefully the last few months, and again even more forcefully regarding corporate and especially junk bonds. Right on target with this one. What did I say again 5 days ago and now what is the “billionaire investor” Paul Tudor Jones saying? Is he reading my posts?

October 30:

I’ve done many discussions about my concerns about junk bonds, which set a 2 year low yesterday. They are in a huge redistribution area.”

My recent comments, warning, stressing the concerning situation about to unfold at the green arrow below. BTW, the fact that I and belatedly other people now on board about junk bonds, bearishness, possibility of a bounce:

“Three days out from the follow thru day top, now the window to start looking for the turn. Again with my previous comments last month, there will be more retesting of lows, no matter how it plays out. The volatility is the only thing which allows for the setups in the INDIVIDUAL stocks. Some bkos working, some not, last month none were working. Also, buy and hold is dead folks. Going forward in all markets. If you have not taken advantage of the opportunity, worked very hard since I started this website, to really develop your trading skills with all of my lessons, work, posts, teachings done here, I do not know how you will deal with what we have coming. It is the higher bond yields which is the “culprit” And I have discussed that a 100x at this point. And the corporate bonds are also in big trouble, along with munis, floating rate, and all bond derivatives. Junk bonds are very worrisome – very – LQD, JNK,”

Junk bonds are very worrisome – VERY – LQD, JNK,” 

 

Now here comes Paul worried about exactly what I have been saying, I ran the repost about the maturity wall upcoming in junk bonds, warning anyone who wants to listen to me. Are you listening to me? You think I like to have to keep REPEATING REPEATING REPEATING. And remember my comments recently about Treasuries vs corporates and the relative weakness of which one?:

Repost from last month:

Marketwatch has an article discusses the maturity wall coming up for junk bonds, that is also the same situation facing inv grade bonds and govt bonds:

“Issuers of high-yield bonds, who have become complacent in recent years thanks to their ability to borrow at low interest rates, may find themselves up against a “maturity wall” in 2019 and 2020 as bonds come due and interest rates rise.

Maturities for high-yield debt, sometimes referred to as ‘junk’, will ramp up to $104 billion in 2019 from $36 billion in 2018, according to Moody’s Investors Services. That sum will close to double to $182 billion in 2020.

For debt-laden companies who need to roll their bonds over when the principal payments come due, a sharp rise in borrowing costs could catch them ill-prepared.”

Now Paul shows up on CNBC:

Billionaire investor Paul Tudor Jones said Thursday that the world has loaded on too much debt which could bring trouble across asset classes.

“From a 50,000-feet viewpoint, we’re probably in a global debt bubble,” Jones said at the Greenwich Economic Forum in Connecticut. “Global debt to GDP is at an all-time high.”

“This is going to be a very challenging time for policymakers moving forward,” he said.

The hedge fund manager believes it is in the corporate bond market where the first signs of trouble will emerge. Data from S&P Global released earlier this year showed U.S. corporate debt hitting an all-time high, totaling $6.3 trillion. Global debt also hit a record high earlier in 2018, reaching $247 trillion.

“I think this time it’s going to be corporate credit and I think the breakdowns are something that we have to pay attention to in the last day or two,” he said. “And they’re really scary because, one thing about this credit bubble [is] we’ve had liquidity absolutely dry up in so many markets.”

“There probably will be some really scary moments with corporate credit,” he added.

Tax cut mistake?

Jones also said the Trump administration’s corporate tax cut from late last year could hurt investors down the road by causing the economy to overheat and the Federal Reserve to keep raising rates.

“Clearly the tax cut and the economic activity that has come from it has caused the Fed to raise rates,” he said. “That tax cut was promised before the Fed began hiking, President Trump was running for office, and rates were zero. Do you really think we would’ve had that kind of a tax cut if we knew where rates were going to be? I doubt we would have.”

The Fed has raised rates three times this year, with one more hike expected before year-end. Rapidly rising rates can sometimes spook equity investors because they make it more expensive for companies to borrow money and fund buybacks and expansion.

“Zero rates and negative rates encourage excess lending. That’s of course why we’re in such a perilous time,” he said adding stocks are probably in the 70th percentile of overvaluation.

 

 

From 12/21 referring to a post I did in June 2016 beautifully laying out – AHEAD OF TIME – how the massive bond top on the long end would unfold AND it did just that:

I have been running the 2 year note chart for years (below), warning people what is eventually coming for the whole yield curve – first 5, 10, then 30 year yields. Eventually. But as a trader, I also saw the potential setup in the longer-term yields for one more final low, in June of 2016, even tho I was extremely bearish on bonds, I recognized, ahead of time, the potential for a  spring setup, and that one more new low in yields:

From June 2016:

“As I have stated several times in my outlooks, I believe that the global sovereigns are putting in a yuuuuuge, massive, monstrous top in prices, another words, a bottom in yields, but that the shorter term yields will bottom first, followed by the longer term yields with a long lag. Please refer to the first two charts below, courtesy of Jeff Gundlach of Doubleline Capital. You can see the 2 year treasury yield bottomed in Oct 2011 with a yield of .15%, and the recent high was in Dec. at 1.1%. However, the 10 year didn’t bottom (at least so far) until July 2012 with a yield of 1.6% with the recent high being 3.05% in Jan. 2014. And the next 2 charts are the 5 year yield and the 30 year yield with the charts spanning ten years and showing what I believe is the massive bottom in yields. You can see the 5 year bottomed in July 2012, while the 30 year didn’t bottom (so far) until this past Jan. You can see the bottoming lag occurring from the 2 to the 30 years. And I said when referring to the bottoms “so far” because there’s still a good shot for both the 10 and 30 year yields to put in one more spike lower low bottom, (which I call a technical spring), as we get one more deflation scare. You can refer to previous outlooks for more details where I talked about that.”

12/21:

The bond market did just that, with the extremely bearish terminal shakeout on July 6, 2016.. Remember that 2 year note chart. You are looking at the 30 year down the road. So similar in power to that terminal shakeout, which I constantly refer to, in the stock market in March 2009. That, along with the 10 year accum in stocks, is what has kept me long-term bullish on stocks for 8 years running now.

But meantime as a trader I turned intermediate-term bullish on bonds, and bought, in December 2016. But that was intermediate-term, now bonds are all about shorting and covering, over and over (for now). I am very bearish, but did cover some of my March puts yesterday, the trade is up 100%+, and time for me to take some profits with TLT back into some support. When I do options, it’s often all or nothing, with no stops. I just try to wait until I’m really, really confident with the option trades. So you want to know why I’m basically bullish on everything out there? It’s my bearishness on bonds. We are looking at basically 1942 right now. Bonds yields were about to explode higher. The best way to play it is by being long just about everything else. But timing is everything, of course.

Discussed Shanghai multiple times and again recently:

Shanghai has not broken above and held, bko, a daily LHBL since the 3600 top, it tried at 2800, it is gearing up to try again, it would be a change of character.

And now on Friday in China, it closed the week above a LLBH for the first time since 3600. Pull up the chart if you’re interested.

Stopped myself out of the rest of CRNT at 4.19.

Yesterday I did a scratch put trade, in continuation of things I laid out in the previous SPY put post from the day before. If you want to study that, get my work flow thought process then with yesterday. One of the main things, I go into a trade with my parameters set – my stop loss set, my first point of taking out at least 1/2 position and I have a rigid “formula” discussed multiple times of accomplishing that with setting parameters, took a long time to hone it and it feeds right back into the trade setup itself – and then the goal of being able to set a scratch stop. That is the process. However, I will totally change my approach if I see things to NOT trying to meet that first goal, but to just getting out of the trade at scratch or with a small loss. That was how the Thursday put trade unfolded as I decided to get out as the SPY went to new highs, and used the little reaction back down to scratch:

NVDA new daily lows, big relative weakness, hurting all chip stocks, but INTC much different structure than NVDA, Many chip stocks look pretty good and putting in bottoming areas, NOT on a buy list for me but watching them to see if we start the angling up/accum/reaccum/phase 1 bko.

A few more comments coming out about the Fed going to pause mode next year. What did I say over a year ago, when the yield of the 2 year was still in the 1%s about the yield of 3.10% and the huge significance of that, the likelihood then of a big FED PAUSE, and the yield reached 2.994% last week. It is backing off significantly for now. A Fed pause upcoming next year?

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About traderscott 1110 Articles
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day. Scott returned to markets over fifteen years ago where he continues as an independent trader.

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