Monday (final at closing bell) MarketCast
 

Daily action - lots of nervousness after JP Morgan discussed loan-loss reserve conditions (increased moderately but perhaps insufficiently). And they're not in the worst spot of major banks involved with energy or related funding. All that's happening is a return to recognition that nothing changed other than we got the bounce in the market; for which many apparently forgot to sell the rally. 
 

This evening the futures are off just a couple handles; Asia is starting mildly off a bit; and there is a bit of focus on the revelation that China has set-up not just mobile missile batteries on the artificial islands, but added radar stations. Next, you will likely hear what a source claims happened today: Chinese jet fighters being deployed to the 'atols' or islands. If confirmed that sure douses the claim that it's for fishing, respecting navigation, or even for 'helicopter' use. The West has given China every opportunity to tone-down their adventure; but they have not taken it; and in fact if this is true, then it's likely considered an 'escalation'. 

There was another big Oil and Gasoline API inventory build reported late today as well. This may put additional downward pressure on WTI in the morning. If so, it will be hard to 'cap' the brewing S&P sell-off. Stay tuned. 
 

For our part; we backed-away from any protective stop yesterday and Tuesday in-anticipation of the move running out-of-steam. It did, whether it's just oil or a JPM discussion; or the geopolitical backdrop (mostly Oil, but everything plays a role). We simply hold short for now; with no changes; and it's quite possible we have seen the end of the rebound just about where we desired it, with multiple short-term zigs-and-zags looming, but likely part of a process headed lower. 
 

Wednesday could be a down-up-down session; even threatening the 1900 S&P futures level, if all goes well from a bearish perspective.

Prior highlights follow:     

The anatomy of a 'bear market rally' - often conforms to just what we've seen these past couple weeks; as very little changed other than jawboning from most central bankers; and rationalizations from pundits, while fundamentals actually have continued deteriorating; although the 'shock' of bad news is blunted a bit. 
 

Quantitative anatomy applied to this market, expects funds to flow back in likely by magic; just because the bond crisis in Europe and Chinese debt issues were sidetracked by 'assurances' (and little else); which was pretty obvious based on the way bankers and officials viewed everything since the 'too cute' S&P low on the edge of an 1800 breakdown less than two weeks ago. Nothing changed but the mood, and we grant that 'perception' means a lot at crucial technical spots.
 

That's essentially what happened here; perhaps 'only' airlines benefited by the low Jet-A fuel prices; especially if they weren't stuck in 'hedges' at higher costs (some like Delta, rarely hedge, where others like Southwest, almost always do). In such an environment, a Delta that pays current fuel prices; increases profits of course; but better lock-in these prices with a hedge, perhaps going forward. 

What would be the problem going forward? Well purely for airlines, load factors (passenger seat miles and occupancy) and sluggish forward bookings. So they reduce flight frequency or substitute smaller aircraft (sorry that means still fully loaded flights with less comfort; although service seems to have improved with better food transatlantic; while airlines like Spirit remain shunned by everyone it seems but bargain hunters who often find it's not such a bargain for the angst, and legendary flight delays). Transports have rallied back to a key breakdown point technically, and therefore are not a bullish signal at the moment. But there are vocal pundits arguing to buy them, rather than lighten-up on the rally. OK. 
 

What you don't have in this market is a 'seminal' event to turn-back the move. It occurred (as I've noted before) and got some legs (never said it wouldn't; taking the view that any double-bottom has to be respected temporarily, even if phony and manufactured by an oil-cut deal that didn't exist; though now seems closer.

What's not closer is earnings recovery or better global trade overall. That says that the level of (most) S&P sectors are also still (or again) excessively priced; more so by virtue of this snap-back that took the edge off an oversold condition. Also closer is month-end, which 'can' sustain markets a bit; as can the coming G20 Meeting (Friday) which might be a key opportunity for major nations trying something that sidesteps resumption of 'competitive devaluation' currency wars (or tries too). At the moment the softer Euro and Pound (about even on the last poll as to Brits desiring to leave -Brexit- or stay in the EU; statistical error +/-2% by the way) have firmed the Dollar; which is actually not supportive of higher oil either. But there's more.
 

There is a situation where Oil advances (we want to see it higher as you know) but is not a market plus; and that's if it's a geopolitical / military conflagration or attack that spikes crude. This takes us to the 'risk' of open confrontation in the Middle East, that goes beyond anything seen (recently at least). Russia and the U.S. have agreed on a ceasefire to go into effect; but the terror groups are sure not involved (nor is the sentiment for that given the blast last night in Damascus incidentally). The White House says 'bumps in the road'; we'd say 'craters' are more like it, and you're unlikely to see it take hold, as is broadly contemplated. 

The level of cooperation may be something else: Russia may be 'in theory' now trying to show a willingness to 'stand-down' with their bombing campaign, as a piece of this story isn't adequately covered by the Western press. That's what is a reputed build-up between Saudi Arabia (joined by Turkey) intended to invade Syria to stop the defeat of the so-called rebels (many of whom are suspected of being subsidized by the Saudi's, and that might even include ISIS formerly and no doubt al Qaeda); hence the curious allegiances of various rebel groups that may be against Assad; but tend to shoot at each other or become allied (aside the Kurds, or are more autonomous, and supported by the U.S. but that really has angered the Turks). 
 

One report claims the Saudi's have 300,000 troops ready to invade Syria; from the South West (toward Damascus and Jordan); coincident with Turkey doing it into the Northwest of Syria, to relieve Aleppo. First of all Turkey is already firing artillery into Syria and attacking the Kurds (risking US Special Forces therefore who may be accompanying Kurdish forces). It's all complex (like nothing before of course); but Russia and the U.S. might just disengage 'slightly' so as to look like they're not provoking the massive intrusion. First of all I doubt Saudi Arabia could field 300,000 troops given their fight in Yemen and internal security issue due to the Shiite population in the oil-loading regions along the Gulf. Second, it is obvious Turkey is a NATO member and any clash with Russia would draw-in the United States presumably. Moscow and Washington rightfully fear this. 
 

The U.S. should be limiting the use of American jets and tanks sold to Saudi; at the same time as we've heard nothing about restricting their use to defense not offense. Clearly the Turks and Saudi's dread the idea of a Shiite Crescent from the Persian Gulf to the Med; which is what the fall of Aleppo might imply. Just a simple reason I mention all this: it matters, it's not clearly explained in the news generally; and while perhaps it's avoided, there are clear market implications. I should also note that 'if' Turkey invades Syria, NATO would not automatically, contrary to some reports, be required to join-in. They invoked Article 5 already; and Germany deployed Patriot missiles to Eastern Turkey. But the provisions of the Charter relate to 'a member being attacked'. So if Turkey attacks, there is a way for NATO to avoid being dragged in; hence it wouldn't immediately become an a Middle East 'Cuban Missile Crisis'; and perhaps to denote the solo nature of anything Turkey or Saudi Arabia do; hence the US and Russia 'stand-down' for the moment starting late this week (if something doesn't blow-up first). 
 

In sum: there is the possibility of colliding events that influence markets and of course disturb the so-called status quo. One is financial that Wall Street wants, which is more injections of capital into the system one way or another. That the arguments for 2% inflation and so on have no meaning or correlation with U.S. growth is another point; as the reality is the Fed needs the inflation so debts are paid with depreciated Greenbacks. The alternative is NIRP, but it's devastating in ways we discussed some days back; and to the bankers themselves. Ideas of compound portfolio erosion with negative rates goes along with the 'cashless society' argument, which isn't aimed so much at the underground economy as it strives to get digital control on the citizenry; essentially forcing them to invest or take negative rates and fees. These are actually heretical monetary concepts; in a sense taking selfish advantage of an obvious transition to a digital world. 

On a technical level the market is in resistance right now; and can falter sooner or later, as we'll explore more. 

Called a 'wedge' during flight - a flock of swans (black or otherwise) every so often need to rest, or feed, so essentially they're fueled for their journey's next leg. When in flight a glance upward at the 'bevy' (another term for flying swans) won't easily discern which are the boy swans (cobs) and which the girls (pens).

So it is with the current day-to-day debate about the bull vs. bear short-term; at the same time a reasonable observer would accept that the 'flight' is underway; and that it began as we contended, via the launch around last year's 'migration' away from excessive price levels, sustained by waning Fed support and all the buybacks that artificially perpetuated impressions of better growth or earnings, as in realty were already deteriorating while many ignored substantiating facts.
 

That's true now as well; whether looking at the European bank problems (by no means resolved; just jawboning out there to ease mass concern developing); of course looking at China (where everything seemingly quieted down; but nothing has changed to ease their debt problems or slowing economic growth pace); or for that matter the Middle East (where risk of conflict between Russia & Turkey is far underestimated by most observers; even though it really is sort of lunacy).

Another Byte of Apple

That's also the case with respect to politicians getting involved in trying to stick Apple in the eye; even though most (we suspect Apple's view too) seriously do desire providing the FBI with any information as can be gleaned from a secured County Government owned iPhone, used by it's deceased terrorist employee. I mention that because this is a complex case we suspected could backfire on a favorable 'initial' press statement by Apple, especially if they later capitulated in a way that reduced confidence in everything stored on an iPhone being secure.

It matters to everyone; including our enemies (corporate not just political), and has not been elevated to a level that is really healthy in one respect: it denotes the extent to which our 'technocrat' society has become digitally-dependent. By the quirky nature of what brought this long-simmering (since Snowden mostly) issue to the front-burner, and the unanimity of desire to uncover terror plots and understand more than the particular issue; we'll finally find out whether security 'trumps' privacy; or whether the ability of Apple to create 'real' encryption got to a point where potentially even legal warrants can't exhume data, without maybe it appears (emphasis on the 'maybe') opening a Pandora's Box comprising our 'real' or 'grander' National Security, and hence more cyber-warfare concerns.
 

Yes the rhetoric got that carried away Friday, and at least it's better understood that this apparently was never so simple as the White House put it; just extract the information from one phone used by a terrorist. Seems like (given technical ability) Apple was (and has in the past) done just that. The compelling order ofFriday focuses on the urgency of the one phone; but the demand is still for the ability to access more than that (hence the backdoor key concern), which would take more than a short-term to reverse engineer (essentially). That's sort of the impression the 'hurry-up' aspect generates; as what seems like an effort to try to push-aside the bigger picture of what has legal and practical complications. 
 

In a sense, while we'd like the data on that phone (if any, incidentally) to be in the FBI hands 'right this minute', we think that (given the ability of China, maybe Russia or one day even ISIS if they still exist) compromising our infrastructure, electric, water and all, is worth a Judicial discussion about this (not knee-jerk reactions like 'The Donald' had; notwithstanding superficial sympathies his very emotional reaction reflect of first-blush common sense). I revert to my view just yesterday: compromise. FBI gets the info of this or future devices; no backdoor broad key; but has an agreement from Apple to dedicate engineers to comply in the future to Court orders or proper Federal Warrants to assist decryption or access. In-turn; Apple (and more important customers and future business app developments like IBM's) may be able to preserve the ecosystem's integrity. 

It's a very big deal when you expand the universe of thought to the ecosystem and access. And (for which we should be pleased) it reveals how 'open' and so easily accessible to hacking, almost all other systems and software must be; in a way that they either automatically provided data, or were so easy to hack the FBI could do so easily without any assistance. Funny how you never hear the simple reality that having a relatively closed ecosystem helps this a lot. (Apple's approach dating to a Unix basis of the Mac Operating System; isn't the same as IOS, but as most 'apps' are constructed using Apple SDK's, they are in fact more stable and less vulnerable, by design, to intrusion. When discovered to be otherwise, Apple forces them to redesign, fix, or kicks them out. This constrains hacking; and is why Government 'could' prohibit messaging from auto-deletion; probably a more important aspect that all this discussion about a single device.)
 

One more thing, speaking of messaging: this coming week is Mobile World in a slightly warmer part of Europe this year, Barcelona. Last year there was rancor as 'cellular carriers' faced-off with Facebook's Zuckerberg over lost revenue in the telco sector due to 'free' messaging on FB Messenger or similar 'apps'. He argued they would get more customers based on expanded Facebook service. 

Well not exactly; this has always been free on a computer (or WiFi zone) for all services (recent years has seen texting unlimited and included in bundles by at least all major cellular providers). So, given that even poor kids or very elderly (a segment disinclined to pay for cellular much less texting) can do so with FB or Skype or other services, there's really no argument by the telco's against FB as they bundle text, BUT there is a calling to attention of the limited 'audit' that exists of encrypted or vanishing app's, which goes way beyond 'sexting' or any of the other uses kids have for those products. This is why it seems Apple has to decode 'that' phone, whether it's lose-lose for them; or win-win (if as part of a compromise they might prohibit any vanishing non-recoverable message apps .. or voice calls that cannot be traced when there's entirely legal justification). I thought this would be political and backfire; but while that's perhaps true; there is now a National (if not global) conversation about privacy, and that's good. It's almost a sequel to Snowden, in terms of provoking intelligent controversy. 
 

Back to the swans: this is a wedge within the flight; it's about to be over, and that's whether the refueling allows the flock to resume in the general direction of the trend sooner or a bit later. Much of this centers around banks and hedge funds. The latter are falling apart (some); and tighter credit conditions in Asia, and Europe, can spill-over into U.S. banks. If not you wouldn't hear Deutsche Bank having to buy-back stock, or Jamie Dimond supporting JPM shares. 

The banks now talk about exposure being minimal. Derivatives and credit type issues are still facing Energy and other sectors. It differs from 2008 but there's an indirection association by virtual of a fractional banking system. In Germany there is the largest derivative book in history; and goes even beyond what we'd discussed for ages; their unique position in rebuilding the former East Germany as well as loans to Russia; not just former captive nations. 

In the case of other banks; they are more directly tied to the ramifications of the Chinese ending hoarding; and the ongoing commodity crunch that rotated from sector-to-sector for years, reaching energy this past year. Yields would not be a continuing erosion if these trends had changed; and that continues debunking a lot of the central banks spin (not just our Fed) about recovery or growth rates.
 

An unintended 'collusion' - fuels the market rise; for reasons we've outlined. To wit; a combination of short-covering, higher oil prices, and what I'd described as just a 'planted' seed (phony oil-cut story out of the UAE last week) occurring  right at the crucial threat to break the S&P 1800 level. As likely intended, that of course created a 'double bottom formation' that indeed while hollow, was critical as occurring not only on the edge of another heavy break risk; but recognized as capable of a sharp rally; simply because it was at a last-ditch threshold and if held had the capacity to provoke (not so much spark) a sharp rally.
 

That rally of course was visible as on a dubious basis, so given what really was and is going on in the world, was not widely embraced (still isn't). It did ease an oversold condition; and (also not likely coincidentally) combined with a more important stimulant (reduced 'bond' fear in Europe, combined with a Deutsche Bank rebound that may be exhausting, but is not the point,) which is that liquidity issues were tabled for the moment. Also that softened sovereign sales playing a role in US selling, at least temporarily); allowing the rebound we had. 



As to Iran, their very smug approach is a sort of stick-it to producers as much as possible while hoping others curtail production levels, as they've not agreed to do. Saudi Arabia probably thought they put Tehran on the spot; the inverse is more likely. I think the point here is there is no oil deal; but you have an oil rebound. You do not have any 'real' move to reduce oil production.
 

In-essence: fueling equities, is primarily a massive short-squeeze, and might very well be the best rally of the year's first Quarter; though it definitely takes an edge of 'panic', which is also what European central banks (Chinese too) very clearly desired going into this week. There was an unfolding global sell-off.

For the U.S., it's seasonally typical; but not technically typical (because 'natural' washout price discovery was clearly interrupted by the oil story 'inserted' last Thursday right as prices were at the edge of an abyss risking a drive off a cliff right into 'no-man's-land'). That means just as many trading desks were caught off-guard by the market plunging from the initial 2016 'brick-wall'; others were miffed that a suspicious (and non-existent) news story stopped a spill after they had finally (and belatedly) recognized a bearish liquidation tone to markets. 
 

As examples of how views collided but inadvertently colluded; you had firms like JP Morgan warning of a big plunge last week (just before announced that Jamie Dimond was buying shares equal to a year's pay); while Morgan Stanley was calling for risk of a short-squeeze. Ironically both were correct; even we indicated one shouldn't be short (for trading or scalping) ahead of a Fed Capitol Hill testimony; although ironically Chair Yellen's worsened the market's status, only to have it rescued initially by the planted oil story; and then by having the New York Fed President (Bill Dudley) follow-up Friday with assurances that the possibility of NIRP (Negative Interest Rate Policy) would be only given unseen 'extraordinary' conditions, that he didn't expect. 
 

Why summarize all this now? Because basic concerns haven't changed; at the same time the psychology was interrupted; and then a seemingly financial orchestration chimed-in to support everything in terms of intent. Not surprising; as everyone at that point knew what the concerns where. 
 

In sum: you got bears essentially colluding with the bulls to fuel the move, with a question pending: will money managers who were truly struggling with their fully-invested and sometimes leveraged stances throughout 2015 and doing little or nothing during months of distribution, or ahead of New Year's, use this rebound move as a 'gift' to allow cut backs?