Market Thoughts on CNY : Little Bo Peep, Don't Lose Your Sheep

Baa Baa Black Sheep
Have You Any Clue ?

Not really except that the bond market is a little stuck these days with  investors mostly shut out of the good stuff which are yielding next to nothing and a whole bunch of papers most investors would rather not buy at their current valuations, yet left without a choice.

As Citibank aptly puts it, pushing “more and more investors into positions they would ultimately rather not take”.

citi credit

Even in the banking arena, loans to sub prime borrowers are at the highest level since the 2008 crisis except they are called non-prime this time.


Given that central banks do not have profit accountability, it puts us all on different investment planes or different ball parks.

As meek as sheep is what the Hong Kong Chief Executive Leung would like his populace to emulate, no doubt echoing the minds of every single global leader, central banker and regulator out there.

And as meek as sheep markets will be into the lunar year of the Sheep, and doing all the right things in avoiding the scapeGoats.

What would a shepherd have the market flock do ?

Frankly, I think they are not sure themselves except they do not want asset prices to deflate too much or anytime soon, they do not want oil prices to go higher or lower (because they are not sure now if it is really good for the economy), they do not want credit shocks … in other words, they want to please…..

And markets are still Horsing around, believe me, because do not ask me what I think of what is happening in bond space ! I do not know.

In a world where Portuguese yields are now lower than the US, there is something not right.

portuguese yields under USSource : FT

And where “Bank of America Corp. keep plowing their burgeoning deposits into U.S. government and related debt — pushing the industry’s holdings past $2 trillion — instead of lending it all out.”

But AT&T manages to raise 20 year money in Europe for 2.5% and Nestle bonds trade at negative yield and all the decent companies are borrowing as long a tenor as they can get at the lowest positive spread.

The FOMC is the shepherd and Janet Yellen can be Little Bo Peep because without the US now which the world is reliant on just a single engine of growth now – the US and we have a potential Minsky moment every minute in the markets because Europe will embark on their QE programme next month which will fail miserably without the American anchor.

little bo peep

Back in 2013


From “legal creature of Congress” concerned with only the interest of the United States in 2013,  we have the First Time the Federal Reserve including the word “INTERNATIONAL” in their January 2015 statement.

International = China and Europe

At last night’s Humphrey Hawkins, “Ms. Yellen’s testimony highlights two key global worries: China and Europe. For China she cites the risk that the country’s rebalancing away from exports and investment could slow growth more than anticipated. For Europe, she says the recovery there remains slow and  inflation has fallen too low.”

And her assurances that we will not see a hike till June or after drove the S&P 500 to a new historic high, along with the Footsie broaching their previous high set in 1999 and the Nasdaq breaking 5,000.

This does not sound good to me, tying the fates of all to dear old Yellen, standing at 5’3″ like we are doing today, rallying away in strange ways and strange places. It just does not feel right.

From the Chinese astrological angle, we are lucky to have the piece we did on Janet Yellen last year by Dr Jin –

“The start of 2015 Yin Wood Sheep year contains her negative element wood, so the first half of the year, especially March might hold a few challenges for Yellen.”

I am not buying into the rally, not especially when we have the S&P 500 revenue projections to decline for the first time since Lehman and forward PEs’ are at their highest level since 2004.


 And Little Bo Peep did say last night that “price-to-earnings and price-to-sales ratios are somewhat elevated, suggesting some valuation pressures.”

Greenspan “the era of quantitative easing and zero-interest rate policies by the Fed… we really cannot exit this without some significant market event

Bernanke, however, thinks there will be no rate normalisation (i.e. 4% 10Y UST) in his lifetime.

Markets are just muddling through the only way they know best – on Faith, Hope and GREED.

With so much confidence in Little Bo Peep, all I can say is, Please Do Not Lose Your Sheep.