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CREDIT - Junk Bond Funds Just Experienced A 6-Sigma Event

Junk Bond Funds Just Experienced A 6-Sigma Event 08-12-14 BI

High-yield bond mutual funds saw outflows total an eye-popping $7.1 billion last week.

"HY flowmageddon," said Goldman Sachs' Charles Himmelberg in a research note we saw via @lebullmarche. "This is the largest HY outflow on record – a 6-sigma event when flows are scaled by mutual fund assets under management!"

Sigma is another way of saying standard deviation. And the greater the number of standard deviations, the more unlikely the event.

A 6-sigma event is extremely rare. If you want to put a number to it, think 1 in 500 million. According to Business Insider quant reporter Andy Kiersz, it's like flipping a coin 29 times in a row and getting heads each time. It's like rolling a die 11 times in a row and getting 6 each time.

Gundlach stopped short of saying high-yield looked attractive. Himmelberg didn't.

"Our confidence in the buying opportunity in the face of retail selling stems from our belief that credit fundamentals remain supportive, while valuations are now more attractive," Himmelberg said. "Unlike the muni market (where institutional liquidity providers are few), the corporate market has a deep bench of investors who are responsive to value. This is one reason we have long argued that dislocations caused by retail selling present more opportunity than risk."

"[T]he U.S. high yield house is not burning down," said UBS's Matthew Mish. "The real panic will come with a more severe downturn in credit and economic fundamentals, which will likely trigger an exodus from non-institutional and crossover/tourists from U.S. high yield. That moment is unlikely to be a 2014 event."

This is not to say the outflows and price declines will end anytime soon.

"Given the outstanding concerns around rate, credit, and liquidity risks, some will simply choose to exit early – the tack some investors are clearly embracing," Mish said. "How far it extends is anyone's guess, but the run continues and the negative headlines seem unlikely to abate over the near term."

RISK-ON--OFF - High Yield CDS and ‘Risky’ Mentions in News Foreshadowed Equity Declines

It’s often said that if a mechanism for generating excess returns could be ex- pressed in terms of a process, someone would arbitrage it away.

However, the selloff that began on July 31 was well publicized as far as these things go. Many market protagonists ex- pressed concern well ahead of the selloff. A chart of the news word count “risky” along with the S&P 500 index shows this. Over the last year or more, spikes in mentions of the word in news articles are generally followed by declines in the S&P 500 index days later.

Additionally, the CDX HY index did a fine job of telegraphing the dip in the S&P 500 index — as it has on many other occasions. In fact, this very column featured the chart on July 30 before the onset of the fall.

Though these indicators do a poor job of predicting rallies, it’s worth noting Friday’s daily news word count of “risky” was 37, below its mean of 49 and far below its recent high on July 15 of about 200 . The high yield CDS index tightened 14 basis points, which was the amount it improved on for the week. The S&P 500, Dow Jones Industrial Average and Nas- daq indexes also finished in the green for the day and for the week.

PATTERNS - "Fiat Money" Supply Continues To Increase

A measure of money supply in the economy called FMQ (fiat money quantity) continues to increase .. Alasdair Macleod: "Whichever way we look at FMQ, it continues to expand at a frightening pace ..There is little sign of any such contraction. We can conclude from short-term market interest rates that the U.S. economy is going nowhere fast, contrary to this week’s GDP estimate, and that demand for credit continues to come from essentially financial activities. But given that GDP estimates turn out to be far too optimistic, what if the US economy stalls or even slumps? .. No matter which way the FED attempts to spin this, the so called 'taper' they are attempting is having little to no effect on the money supply. The chart shows that the endless expansion of the money supply will continue on and the value of its hardest working citizens, the savers, will continue to diminish."

LINK HERE to the Commentary

LINK HERE to the definition of FMQ

FINANCIAL REPRESSION - The World's Foremost Legal Power on the $700T Derivative SWAPS Market

WHO BETTER TO RUN THE IMF?

4245 LAWYERS WRITING GLOBAL SWAPS AGREEMENTS &

ANTI-TRUST LITIGATION (FOR THE PERPETRATORS)

FINANCIAL REPRESSION - Saved the Banks!

FINANCIAL REPRESSION

SAVED THE BANKS

BUT DEYSTROYED THE US MIDDLE CLASS

FINANCIAL REPRESSION

Accelerated the Decline of America

AMERICA Now A Two Class Society

"Haves & Have Nots"

& Maybe More Concerning

A Culture of

"SOCIAL DEPENDENCY"

FINANCIAL REPRESSION - "Enhanced Prudential Standards"

RETAIL CRE - WalMart Reduces Guidance - Again!

RETAIL CRE - 35,000Franchise Operators in Trouble

FLOWS: Liquidity, Credit and Debt

What’s Worrying The Fed? 07-31-14 Richard Duncan

Before I launch into this week’s topic, let me mention that at the bottom, you will find a link to a speech I made recently: How Capitalism Died & Where That Leaves Us. The production quality of this video is particularly good, so I hope you’ll watch it. But, before you do, let me tell you what the Fed’s worrying about these days.

Now that the Fed has announced that QE will end in October, the financial markets are very keen to know when it intends to begin increasing interest rates. This is a very sensitive subject, fraught with danger. When the Fed began increasing interest rates in 1994, it caused near panic in the bond market and a significant stock market selloff. So Janet Yellen and her colleagues on the Federal Open Market Committee, which sets interest rates, understand that they must weigh their words very carefully when discussing their intentions on this issue.

All they are saying at this stage is that “the current target range for the federal funds rate likely will be appropriate for a considerable period after the asset purchase program ends….” and “economic conditions may, for some time, warrant keeping the federal funds rate below levels that the Committee views as normal in the longer run.”

Decoded, that means they don’t plan to increase interest rates any time soon and that, even after they do begin, it is likely that rates will remain unusually low for a very long time.

The Fed is reluctant to even talk about raising interest rates because it understands that the economy remains very weak. While it is true that the unemployment rate has come down more quickly than anticipated (it is currently 6.1%), that headline number masks a great deal of weakness that still persists in the labor market. Nine and a half million people are unemployed and roughly that many more are underemployed or, in other words, working part-time jobs because that’s all they can get. Making matters worse, wages are stagnant. According to a recent Fed report, “Over the past five years, the various measures of nominal hourly compensation have increased roughly 2 percent per year, on average.” And that is before inflation. After inflation, wages have barely budged since 2009.

What’s really troubling the Fed, however, is a racking fear that the economy will start moving back into recession as soon as QE3 ends – just as it did after QE1 and QE2 came to an end. And, they are certainly right to be worried. The Fed has been driving economic growth by printing money and pushing up asset prices. That has worked, but asset prices are now overvalued and there’s a very real chance that they will slump again as soon as the Fed stops pumping new liquidity into the financial markets.

Therefore, like me, the Fed must consider any expectations concerning a near-term rise in interest rates as premature, if not entirely unrealistic. The economy has been very weak even with 0% interest rates and massive liquidity injections through Quantitative Easing. It is disturbing to imagine what would happen if interest rates actually started to rise.

OK, now, for a good overview of how we got into this mess and how things really stand, click on the following link to watch my speech:

http://www.richardduncaneconomics.com/watch-richard-duncans-speech-how-capitalism-died-where-that-leaves-us/