04 Jun LIQUIDITY IS VIRTUALLY ABSENT
In 8 days oil has gone from a bull market to almost a bear market, defined as a 20% decline from its peak. [Crude is down almost 19%]
Long dated Treasury yields are falling at a faster pace than in the beginning of the 2008 financial crisis. Bloomberg writes the 10 year Treasury is near the most overbought territory since 1998. The last two time Treasuries were so overbought was December 7, 2018 and December 22, 200.
The NASDAQ is down over 10% in 30 days. FAANG was off 4.4% yesterday on antitrust concerns, the ninth largest drop on record.
New account openings at the largest discount brokerage firms, a source of monies that some believe that was supporting the indices, are down about 90% from the previous quarter according to Bloomberg.
And then there is equity volatility. Again quoting Bloomberg, during May the VIX has registered two extremes…one of calmness and one of fear, the only time in history that such levels were achieved in the same month.
Liquidity has all but evaporated in all markets, the result of regulatory fiat that focuses on speed and cost of execution versus liquidity and capitalization. Goldman writes a measure of liquidity for single stocks have fallen 64% since mind 2017.
Can I suggest this is a major reason for the massive movements in the markets, movements that to some may not coincide with underlying macroeconomic or security specific assumptions?
I have not commented recently about the impending regulatory onslaught on the largest technology/social media companies. In my view the onslaught could be comparable to the one the financials endued following the 2008-09 crisis.
One issue that is different however the amount of funds concentrated in these companies is vastly greater than the funds concentrated in the financials. I believe this concentration is a major reason yesterday’s drop in the NASDAQ while the other indices were essentially unchanged.
Several months ago I quoted the late founder of Vanguard prediction that a 50% stock and 50% bond account will be flat at best during the next ten years. Even though Bogle did not mention the last era of flat to down equity prices of 1968-1981, many believe he implied the next 10 years could be comparable to that 13 year era when returns were dominated by dividends/income and individual security analysis.
A major issue at hand is the S & P 500 only yields 1.98%. The 10 year yields 2.12%. In the former era, Treasuries were yielding about 5% and the S & P 500 yielded over 6%.
Many believe it is all but a certainty the economy is edging closer to a recession because of impending trade wars and the next direction in monetary policy will be down. Friday the all-inclusive employment report is released. How will the report be interpreted?
The release of May’s ISM indicated more weakness than strength as such fell to the lowest level since October 2016. The Index declined to 52.1 and any reading over 50 indicates expansion.& The ISM is down from a 14 year high reached in August. An argument can be made the decline was the result of inventories being worked off given other measures of strength of this tier I indicator.
What will happen today?
Last night the foreign markets were mixed. London was up 0.11%, Paris up 0.12% and Frankfurt up 0.84%. China was down 0.96%, Japan down 0.01% and Hang Sang down 0.49%.
The Dow should open nominally higher. The 10-year is off 7/32 to yield 2.10%.