Keep Your Seatbelt Fastened – Another Round Of Panic In Stocks Is Likely

On the heels of the Nikkei plunging 8.5 percent in the past two trading sessions, a legend in the business is telling people to keep their seat belts fastened because another round of panic in stocks is likely.

The piece below refers to the “Taper Tantrum.” The term “Taper Tantrum” refers to the surge in US treasury yields (global government bond yields as well), in summer of 2013 when then-Fed Chairman Ben Bernanke put a spotlight on the wind down of Fed asset purchases (tapering off QE).

Here is a portion of today’s note from legend Art Cashin: Of Canaries, Mine Shafts And Other Warning Signals – Brian Reynolds hangs his hat at New Albion Partners and follows the stock market with a bit of a different perspective. For years, Brian has maintained that U.S. pensions are so underfunded and desperate for yield in a ZIRP environment that they change their risks profiles. They hire hedge funds who then lever their money into equities.

Brian’s thesis has allowed him to make some great market calls in the last couple years. Monday, however, Brian sent a somewhat cautionary note to clients. Here’s what he wrote:

In this morning’s column we highlighted the surge in our insurance company CDS index up to the 112 basis point area. We wrote “The most worrisome thing we are looking at in the near term is insurance company credit derivatives.”

Since we published this morning, the surge in that index has worsened to 131 basis points. But, because these are illiquid, lightly traded instruments, the surge is even more pronounced than our index would indicate. So, we are running charts of the CDSs of MET and PRU to illustrate what is happening.

In our December 18 column titled “Post-Fed Insurance”, we noted that insurance company credit derivatives were benign despite all the macro worries about credit and the fact that they are major owners of corporate bonds. We wrote that “…insurance company credit derivatives are now the cheapest form of protection against a crisis”.

In our earlier column today we wrote “This is the most negative thing for the near-term stock market that we see, as it tells us that bearish macro investors are now beginning to deploy capital”. They have now deployed more of it. We said this move was like the Taper Tantrum, but we hadn’t seen this type of action in three years, so it was worth noting. It is now bigger than the Taper Tantrum, and is somewhere between the 2012 London Whale saga and the U.S. 2011 downgrade in magnitude.

We concluded this morning that our metrics had deteriorated to the point where another round of panic in stocks is somewhat more likely than not.

Our short-term metrics are worse now.

King World News – Keep Your Seatbelt Fastened – Another Round Of Panic In Stocks Is Likely Overnight And Overseas – Tokyo got slammed, down over 5% but a good chunk of that is thought to be “catch- up”. Europe began a bit more stable but has resumed selling as the session wore on. Oil moves back below $30 on signs of more inventory growth. U.S. futures suggest we may be headed for a retest of the Monday lows.

Consensus – Banks on three continents getting whacked. Lots of chatter on Fed memo that suggests it may lack legal authority to go negative on rates. Watch crude and CDS on banks and insurers. Keep your seatbelt fastened and stay wary, alert and very, very nimble.

KWN
February 10,2016