BOND SCARE - The Bearish Bond Trend Has Resumed

"The Bearish Bond Trend Has Resumed" 08-18-13 chief technical strategist MacNeill Curry, BoAML via ZH

From BofA:

After 5 weeks of range trading, US Treasury yields have resumed their bear trend. US 10yr yields target 2.951%/3.045% before greater signs of top emerge. Bulls need a break of 2.730% to invalidate the bearish potential.

While the above is nothing more than a few squiggly lines and their extrapolations, in the New fundamental-less Normal self-fulfilling prophecies (i.e., technicals) have a way of, well, self-fulfilling. The only problem with a blow out in yields to north of 3% is that not only does it kill any mythical housing recovery, it outright obliterates any hopes of a continuing GDP tail wind from the housing market, even from investors, speculators and flippers. We are confident we are not the only ones to notice that the APR on the 30 Year Fixed FHA from Wells just soared to over 6% - a level that has no place in an economy that is "growing" at 1.5%.

But before we lament the end of the great 30 Year bond market, we will simply recall that what is happening now is a carbon copy of what happened two years ago, when all it took for yields to plunge over 100 bps was a 20% drop in equities following the Great Debt Ceiling fight and the US downgrade.

Because there is nothing easier for Bernanke to do (in 15 minutes or less) than to enact a wholesale scramble out of stocks and right back into bonds, when he needs it.

Then only question is "when"?

BOND SCARE - Bonds (TLT) Break Important Support

Bonds (TLT) Break Important Support 08-16-13 Carl Swenlin, Decision Point

e use the 20+ Year T-Bonds ETF (TLT) as the surrogate for long bond timing. As of 5/20/2013 TLT is on a Trend Model NEUTRAL signal, which means that the model has been out of bonds but not short. The LT Trend Model, which informs our long-term outlook, is on a SELL signal as of 5/29/2013, so our long-term posture is bearish.

The weekly chart shows a support zone between 105 and 106, and TLT has violated that zone in a move that is becoming decisive. Note also that the PMO (Price Momentum Oscillator), which is used to estimate when prices have become overbought or oversold, has dropped below the bottom of the five-year PMO range. That range was established during a long-term rising price trend, and it will become irrelevant as the long-term trend turns down. In fact, if a down trend persists, over the next five years or more, the PMO range will shift downward from +7 to -1 to something like +1 to -5.

For the time being we are ignoring the possibility of a large head and shoulders pattern forming (the right shoulder being the only element remaining to complete the pattern); however, an extended bounce is not out of the question once the bears are fully committed.

CORPORATE SPENDING - Shrinking CAPEX, Expanding Buybacks and Dividends

What Corporations Spend Their Cash On 08-17-13 Zero Hedge

While bullish talking heads are quick to point out that corporate earnings have never been higher, they tend to get very quiet the second corporate cash flow generation is mentioned. The reason is simple: where non-GAAP earnings, much of which are vaporware such as exclusions and other adjustment involving addbacks for "non-recurring" events such as Cisco's now annual mass termination announcement are indeed at nosebleed levels, actual corporate cash generation is a shadow if its former self which peaked in 2007 and has never been retraced. We showed this a month ago.

The problem is that since corporations generate less cash, they also spend less cash. As the following chart confirms, corporate capital use which peaked at a little over $1.8 trillion in 2007 has yet to be surpassed.

But perhaps what is more interesting is what corporations spend their money on. As we have pointed out in the past (usually when lamenting the lack of CapEx spending), there are five things corporations spend money on: CapEx, R&D, Acquisitions, all of which fall into the "growth category", and Dividends and Buybacks, which are the opposite, and represent shareholder-friendly actions which take from a company's growth potential and distribute dividend, literally, here and now.

Here is the same chart as above, shown on a percentage of total basis.

There are two key observations here, both of which go the heart of what is ailing the US economy.

First, just like in 2006 and 2007, when activist shareholders and overeager management teams were scrambling to engage in buybacks and artificially boost earnings per share, so now the last bastion of corporate "growth" is using cash, usually in conjunction with leverage, to buy back one's own stock. Naturally, as can be seen on the chart above, shortly after peaking at 34% of total in 2007, buyback activity crashed following the Lehman bankruptcy as cash hoarding became the norm. Is there a causal link between buybacks, and especially levered buybacks, and systemic instability? Unclear, however the more leverage companies utilize to pretend they are growing, and the more cash is used for shareholder friendly activities, the less real growh potential there is.

Second, and a point we have belabored since early 2012: capex spending is plunging. According to Goldman estimates, in 2014, CapEx will only account for 33% of total cash use: the lowest proportion since Lehman, and represents an unmistakably declining trendline. Furthermore, declining CapEx spend tells us two things: corporations, who know their business better than most, are spending less on growing their business in an organic fashion because they realize there is simply not enough demand they need to satisfy. Which is why they prefer to spend corporate cash on M&A and other fast-IRR generating shareholder activities, such as buybacks and dividends.

Putting all this together confirms that the bleak picture of a second consecutive quarter of declining revenues will continue. Without a boost in capital spending, there can be no organic growth for the S&P500 and instead any and all "growth" will come at the expense of balance sheet fudging, as had been the case for the past 5 years. However, now that interest rates are once again rising, corporations will be far less willing to spend cash on levered buybacks since the interest of such activities will soon be prohibitive if not already. Which ironically leaves CapEx investment as the best option for CFOs. However, absent true economic growth and a pick up in end demand for corporate products and services, this cash will not be spent and corporate contraction will continue.

The biggest irony in all this, which goes without saying, is that all of this capital misallocation is the direct result of the Fed's actions: something we observed in April of last year, and which only now is starting to filter through the mainstream media. The paradox is that as long as the Fed is there, insuring there is no "capital market" risk, corporations will opt to grow on the back of the Fed's balance sheet instead of actually risking capital and venturing to grow organically. And with this behavior continuing for year after year, very soon the entire premise of top line and cash growth becomes meaningless.

Which leads us to the point #1: if the Fed is truly looking for the culprit of why the economy is not growing, why the consumer's disposable income is at multi-year lowers, why corporations are stuck in space and corporate revenues are in a "recession", it should look in the mirror. Because the biggest culprit why the Fed's actions are having the opposite effect of that disclosed, at least for popular consumption is, well, the Fed.

STANDARD OF LIVING - The Destruction Of America's Middle Class

The Destruction Of America's Middle Class (In Under Seven Minutes) via ZH

While hardly news to frequent visitors, especially those who recall the following list, anyone who needs a 7 minute refresher into why the US middle class is on collision course with extinction is urged to watch the following brief video which highlights all the salient facts such as:

• 76% of Americans live paycheck to paycheck
• 27% of American have no savings at all
• 46% of Americans have less than $800 in savings
• The conversion of America into a part-time working society and the country's second largest employer - a temp agency.
• The college trap and the student loan bubble
• And of course, foodstamps, foodstamps, foodstamps and the nearly 50 million poverty-level Americans who need them to survive

Why seven minutes? Because everyone knows that just like you can't get "six minute abs", so it is impossible to recap the doom of America's middle class in only six minutes (or, gasp, less).