THE CURRENT NARRATIVE ON STOCKS REACHED DANGEROUS LEVELS

The markets cheered and climbed higher despite the potential of more interest rate hikes int he future. First, the PMI data came in at 54.2 vs expectations of 53.9. Then came the Housing Market Index which came in at 70 vs expectations of 63.

The we have another USD10B of gold futures contract being dumped into the market due to the rising USD. This caused gold to break the USD1,150 support line and as a result silver plummeted by a whopping 5%! Since election, total gold futures contracts sold have exceeded the global production many times over.

But first let's look at the PMI data. Zerohedge published an interesting comparison between the PMI data which is a survey of Purchasing Managers (soft data) vs the hard data which is the Industrial Production (see chart below). Notice how completely out of sync the two sets of data are. It is the Industrial Production data that gives better guidance of the Q4 GDP.

Source: Zerhedge

Next we have the Housing Index which is a measure of the confidence (soft data) in the housing market. But let's look at what is actually happening. The Purchase Mortgage Index and Refinance Mortgage Index fell -4.0% and -4.0% respectively vs the week earlier. Yes, the builders are confident but the buyers are showing signs of fear of higher mortgage rates.

And if you remember the chart I posted a few days ago on home ownership which is in multi decades low.

So the Housing Market confidence could be somewhat misplaced as rates are expected to soar going forward. Today, Wells Fargo's 30 year mortgage rate is 4.25%.

For refinancing, the rate is 4.625% and this has got Freddie Mac (a national mortgage giant) alarmed (see chart for refinancing). The number of refinancing has dropped more than 50% (from 8.3M to 4.0M).

Source; Zerohedge

The amount of US Treasury sold by foreign central banks on a rolling 12 month period surpassed USD403B a new record by itself (see chart). The previous record was USD375B. 

This is a sure sign that US government will have to pay higher interest for its US Treasuries going forward which swell its extremely high deficit.

Source Zerohedge

The Fed targets 1.25% interest by 2017. Assuming the US government debt remains at USD20T (which will never happen due to annual deficit of USD600B), the increase in 1% interest means that interest payment will increase correspondingly by USD200B a year which it needs to borrow by issuing new US Treasuries.

We have not even counted the impact of further tax breaks as proposed by Trump.

On top of that, non financial corporations outstanding debt stands at USD5.7T. This 1% increase will result in a debt service cost of USD57B a year which will eat into the earnings. On top of that, the strong USD will weaken earnings further.

So the markets continue to ignore the weakening fundamentals, the impact of interest rate hikes and strong USD in earnings and the bond carnage which put the risks at very dangerous levels.

It pays to be careful now more than ever as the curretn narrative ons tocks has reached dangerous levels

The above is just my opinion.