Deja Vu All Over Again? Subprime MBS Demand "Oversubscribed" And S&P Says Risk Is "Contained"

The stock market is at record highs and people with FICO scores as low as 500 are once again happily obtaining mortgages. Not only that, but these mortgages are once again being securitized and are in demand by yield chasers.

All of the elements that are necessary for the 2008 subprime crisis to repeat itself are starting to fall back into place. Aside from the fact that we have inflated bubbles across basically all asset classes for the most part, not the least of which is evident in the stock market, the Financial Times reported today that not only are subprime mortgage backed securities becoming prominent again, but that the chase for yield was what fueling demand:

Issuance of securities backed by riskier US mortgages roughly doubled in the first quarter from a year earlier, as investors lapped up assets blamed for bringing the global financial system to the brink of collapse a decade ago. Home loans to people with scratches and dents in their credit histories dwindled to almost nothing in the aftermath of the crisis, as litigation-weary lenders retreated to patch up their balance sheets.

But over the past couple of years a group of specialist firms has begun to bring the loans back, navigating a dense web of new rules drawn up to protect borrowers and investors in the $9.3tn US home-loan market. Last year saw issuance of $4.1bn of securities backed by loans that would have been called "subprime" before the last financial crisis, according to figures from Inside Mortgage Finance, with the pace picking up in the latter half of the year. The momentum has continued into 2018, with deals worth $1.3bn in the first quarter — twice the $666m issued in the same period a year earlier.

Our central banks have done such a great job of getting us out of our last crisis that the recovery has prompted a mortgage originators and real estate investors to basically do the same exact thingthat they were doing 2006 to 2007. After all, mortgage levels are already almost back to 2008 levels.

(Source)

If that wasn't disturbing enough, the hedge fund partner that FT quotes in the article says that the subprime market has "a lot of room to grow" as if it were some type of new emerging market generating productivity, and not just a carbon copy repeat of exactly what happen nearly 10 years ago.

"The market is . . . starting from such a small base that it has a lot of room to grow," said Jamshed Engineer, a partner at Axonic Capital, a New York hedge fund with more than $2bn in assets under management.

"[Investors] are definitely chasing yields. Whenever these deals come out, for the most part, they are oversubscribed."

The Financial Times article tries to couch the fact that all hell could be breaking loose yet again at some point soon by citing Dodd Frank reforms that we reported in March are already past the Senate. The key provisions of the rollback are:

• Relaxes a host of reporting requirements for small - medium banks, and to a smaller extent, large banks
• Eliminates a reporting requirement introduced by Dodd-Frank designed to avoid discriminatory lending
• Relaxes stress testing requirements intended to show how banks would survive another financial crisis
• Raises the threshold for banks which are not subject to enhanced liquidity requirements, stress tests, and enhanced risk management, from $50 billion to $250 billion - exempting several institutions which could pose systemic risks down the road.
• Allows megabanks such as Citi to count municipal bonds as "highly liquid assets" that could be used towards the "liquidity coverage ratio," - assets which can be quickly liquidated during a crisis. 
• Calls for a report on the risks and benefits of algorithmic trading within 18 months

Despite the fact that the FT states that 500 FICO scores are getting approved for mortgages, S&P, one of the willfully ignorant and blind rating agencies that missed the subprime crisis thinks that everything is going to be fine:

"The risk is contained, in our view," said Mr Saha.

For the way that our Federal Reserve has addressed the problems of 2007 or 2008, these are the end results that they deserve, but the American people ultimately do not.

How Many Trillions In Debt Are Linked To Soaring LIBOR?

Over the past month as Libor continued its relentless upward creep and is now higher for 37 consecutive sessions, the longest streak of advances since November 2005, and rising to 2.3118% while blowing out the Libor-OIS spread to a crisis-like 59bps, a cottage industry has developed to explain what is behind the dramatic move in Libor, and which - as we noted 2 weeks ago - can be roughly summarized as follows:

• an increase in short-term bond (T-bill) issuance
• rising outflow pressures on dollar deposits in the US owing to rising short-term rates
• repatriation to cope with US Tax Cuts and Jobs Act (TCJA) and new trade policies, and concerns on dollar liquidity outside the US
• risk premium for uncertainty of US monetary policy
• recently elevated credit spreads (CDS) of banks
• demand for funds in preparation for market stress

To be sure, we have commented extensively on what may (or may not) be behind the Libor blow out: if as many claim, the move is a benign technicality and a temporary imbalance in money market supply and demand, largely a function of tax reform (including the Base Erosion Anti-Abuse Tax) or alternatively of the $300BN surge in T-Bill supply in the past month, the Libor move should start fading. If it doesn't, it will be time to get nervous.

But no matter what the reason is behind the Libor move, the reality is that financial conditions are far tighter as a result of the sharp move higher in short-term rates in general, and Libor in particular, which for at least a few more years, remains the benchmark rate referenced by trillions in fixed income instruments.

Which brings us to a logical follow up question: ignoring the reasons behind the move, how does a higher Libor rate spread throughout the financial system, and related to that, how much notional debt is at risk of paying far higher interest expense, if only temporarily, resulting in even tighter financial conditions.

For the answer, we look at the various ways that Libor, and short-term rates in general "channel" into the economy. Here, as JPMorgan explains, the key driver is and always has been monetary policy, which controls short-term rates, which affect the economy via various channels and pahtways. Below we list those channels along with a brief description:

1. Direct interest rate channel. Investment decisions, whether business investment spending or residential investment in housing, should depend on the socalled user cost of capital, of which the interest rate is one determinant.
2. Tobin's q. Interest rates affect asset prices, including equity prices. When financial markets increase their valuation of corporate assets, corporations have an incentive to invest in more of those assets by boosting capital spending.
3. Consumption wealth effects. Asset prices affect not only the decision to invest, but also the decision to consume. An increase in house or equity prices historically has lowered saving rates and boosted consumer spending.
4. Consumption intertemporal substitution effects. The trade-off between consuming today versus consuming in the future should be governed in part by the rate of interest that households earn when they forgo consuming today.
5. Exchange rates. The competitiveness of firms that operate in global markets is influenced by the international value of the dollar, which in turn depends on the domestic-foreign interest rate differential.
6. Bank capital channel. Banks' willingness to lend will depend, in part, on their capital positions. This, in turn, will be a function of the prices of assets on their balance sheet, which are influenced by the level of interest rates.
7. Balance sheet channel. The ability of households and businesses to borrow will also depend on the health of their own balance sheets, as the assets on those sheets serve as collateral for lenders.

It is worth noting that for five of the seven channels (2, 3, 5, 6, and 7) the effect of interest rates on the economy is mediated through their effect on asset prices, where the asset can be real estate, corporate equities, or foreign exchange.

For concreteness, JPMorgan urges to focus on the case study of equities: what is the appropriate interest rate to discount the stream of dividends when considering the value of a corporate claim: fed funds, Libor, or Treasury rates? Theory does not offer much immediate guidance. However, theory is clear that it should be a very long-dated interest rate.

For very long-dated interest rates that are benchmarked off Libor, i.e., interest rate swaps, there is little impact of the recent widening in Libor-OIS. For example, interest rates on 10-year swaps are currently slightly below the comparable

rate on 10-year Treasuries, and the spread between the two does not appear to be affected by the movement in the shortdated Libor-OIS spread.

No matter which longer-term interest rate we look at, the recent dislocations in shorter-dated interest rates don't seem to matter much for longer rates, at least not yet. In principle then, these dislocations shouldn't affect asset prices, which is usually an important channel through which policy affects the economy.

TO be sure, as of this moment, neither real estate prices nor the value of foreign currency appear to be suffering from a rise in the domestic discount rate, and it is this apparent dislocation that has puzzled so many, and while equity prices have been volatile, none of the recent volatility has been attributed to LIBOR by the analyst community.

This then leaves two relevant channels of monetary policy:

• (1) the direct interest rate channel, and
• (4) the consumption intertemporal substitution channel.

Regarding the first, JPM notes that the relevant hurdle rate for capital expenditures—whether financed internally or externally—should be longer-term interest rates, as capital goods are long-lived by nature. Recognizing this, we are forced back to the earlier point: longer-term interest rates have been unaffected by the widening in the front-end LIBOR-OIS spread.

Finally, turning to the consumption intertemporal substitution channel, the relevant interest rate is the rate available to household savers. Most measures of nationwide deposit or money market rates show little flow-through from higher LIBOR rates to higher rates available to mom-and-pop savers - unfortunately for mom-and-pop - so one shouldn't expect this channel to be particularly powerful right now.

Last, but certainly not least, the one channel that usually isn't enumerated in monetary theory but is especially important in practical reality and is referenced in ordinary conversation is the interest expense channel.

In the aggregate, interest expense equals interest income; someone's higher debt payment is someone else's higher interest receipt. Of course, if the spending propensity of the interest payer is higher than the interest receiver, things won't net out to a zero.

Moreover, deposit and money market rates haven't moved in sympathy with LIBOR. To quantify the maximum potential importance of this channel, JPMorgan shows the following table laying out the total amount of nonfinancial borrowers' obligations linked to LIBOR.

According to this data, a 35bp widening in the LIBOR-OIS spread could raise the business sector interest burden by $21 billion. Whether or not that modest amount in monetary tightening is enough to "break" the market remains to be seen.

Finally, for ordinary households, the increase in debt service costs as a result of the 3M Libor spike will mostly come through adjustable rate mortgages. The recent increase in LIBOR-OIS has added about $5 billion to the annual interest expense of households, or about 0.04% of the recent level of household consumption outlays, which is sufficient nominal to not generate a crisis; if it does, there is something very broken with the "recovering" US economy.

Stocks Are About to Rally, NOT Collapse (That Comes Later)

Sentiment is a strange thing.

Investors are human beings. And human beings are irrational, particularly when it comes to money related issues. The notion that the market, as a collection of irrational people, is somehow rational is ludicrous. 

With that in mind, sentiment can be a powerful tool for timing market turns. If sentiment changes, but price doesn't confirm the shift, then you know you're near a turn.

Case in point, two weeks ago I noted to Private Wealth Advisory subscribers that investors were insanely bullish despite the fact the S&P 500 was nearly 5% of its previous peak of a month ago!

At that time I noted that this indicated we were very close to a short-term TOP and that stocks would soon crater.

Fast forward a week and stocks did indeed crater, falling to retest the February lows.

Which brings us to today. Sentiment is once again at EXTREME levels with investors 100% certain stocks are about to crash. Everywhere I look I see talk of a bear market starting.

This is happening at a time when stocks are actually HIGHER than they were in February.

Which tells me stocks are about to rally in a big way. I believe we're about to have a final blow off top for this bull market with stocks going to new all-time highs.

At that point, THE top will be in.

Why Aren't US Bond Investors Panicking?

Economists may warn that the combination of Trump's protectionism, big tax cuts, and uncontrolled government borrowing, coming at a time when the US economy is already near full employment, will ultimately fuel inflationary pressure. But financial markets simply do not believe this message.

As US President Donald Trump ratchets up his trade war with China and the Federal Reserve Board increases US interest rates, the prospects for the world economy and financial markets, so bright just a few months ago, appear to be darkening. Stock markets around the world have fallen back toward their February lows, business confidence has weakened in Europe and much of Asia, and policymakers worldwide are making nervous noises. Are these events the beginning of the end of the global economic expansion, or is the recent market turbulence just a false alarm?

Last month, were highlighted three indicators – the oil price, long-term US interest rates, and the dollar's exchange rate – suggesting that global conditions would remain benign. Economists may warn that the combination of Trump's protectionism, big tax cuts, and uncontrolled government borrowing, coming at a time when the US economy is already near full employment, will ultimately fuel inflationary pressure. But financial markets simply do not believe this message. And since the financial turbulence of early February, the message from the biggest and most important financial market – for US government bonds – has become even more reassuring.

Despite the Fed's decision to raise short-term interest rates, and to signal more rate hikes than expected for 2019, interest rates on US ten-year bonds have fallen to levels well below their February peak. Thirty-year interest rates are now below their 2017 peak of around 3.25%. These interest-rate movements imply that bond investors are less worried today about inflation and economic overheating than they were before Trump's tax cuts, protectionist measures, and the shift from budget consolidation to aggressive fiscal expansion.

The fact that bond investors seem unworried about inflation or overheating does not mean that Trump's protectionism and fiscal profligacy are harmless. Financial markets are sometimes catastrophically wrong, as they were before the 2007-08 financial crisis. But the US bond market is more than just an indicator of financial opinion. The long-term interest rates set in bond markets have so much impact on business conditions that changes in investors' views can influence economic reality almost as much as vice versa.

At present, investors' views and economic reality are completely at odds. Long-term interest rates of around 3% come nowhere near pricing in the Fed's inflation target of 2% plus the real economic growth of 2-3% that was likely to be achieved even before the Trump administration's big fiscal stimulus. In fact, both economic analysis and decades of past experience suggest that long-term interest rates tend to fluctuate around the rate of nominal GDP growth. This rule of thumb implies 30-year rates in the 4-5% range. And if Trump's efforts to boost economic growth toward 4% were taken seriously, long-term interest rates should logically rise to 6% or above.

Sooner or later, the gap between bond yields and nominal GDP growth will presumably close. Either growth will weaken dramatically, as implied by bond-market expectations, or interest rates will rise dramatically, because bond-market expectations turn out to be completely wrong.

And yet neither of these things will necessarily happen in the next year or two. GDP growth is unlikely to weaken, given the big fiscal stimulus, very high business confidence, and strong growth in personal incomes resulting from rapid job growth.

But what about bond yields? If the US economy continues growing as expected, is it not inevitable that long-term interest rates will surge to much higher levels, knocking the highly leveraged US, and ultimately the entire world economy, off its current path of strong and stable growth?

This seems unlikely, at least in the year ahead, for several related reasons. First and foremost, the belief in a "new normal" of anemic growth and low inflation is deeply embedded among investors and central bankers. After spending the decade since the financial crisis obsessing about secular stagnation and falling prices, investors and Federal Reserve officials will require many months or even years of consistent and incontrovertible evidence of inflation and higher growth to be convinced that deflationary conditions have genuinely reversed.

Even when investors accept the intellectual case for much higher bond yields, regulatory impositions on banks and pension funds, together with quantitative easing in Japan and Europe and other forms of financial repression, will ensure continuing demand for government bonds at prices far above any reasonable estimate of fundamental values.

The distorted pricing cause by regulatory pressures is amplified by a kind of conditioned response among bond investors. As inflation and interest rates have fallen steadily over the past 30 years, bond investors have been consistently rewarded for treating every temporary uptick in interest rates as a buying opportunity. This experience has created a Pavlovian reflex to "buy on dips" that can be broken only by many months or perhaps even years of negative experience. This reflex has been strongly apparent in the past two months. Whenever stock markets have fallen sharply, as they did in early February and again after Trump announced his trade sanctions on China, the bond-buying instinct became irresistible, bond prices rallied, and the resulting reductions in long-term interest rates stabilized stock markets.

At some point, the bond market's Pavlovian behavior will stop, and long-term interest rates will move much higher. But until this happens, investors' unshakable belief that low inflation is a permanent feature of economic reality will allow the US government to pursue increasingly inflationary policies. And the bizarrely low long-term interest rates set by complacent bond markets will provide a safety net for global financial markets – at least until complacency proves to be unsustainable.

How to Play the Final Blow Off Top

As I noted stocks still have some life in them.

Calling the precise top of a bubble is all but impossible. This is particularly true when you have a White House that openly admits it views stocks as a "report card."

Rarely does the one being graded have the ability to manipulate the results of his or her "report card." In this case, the White House does.

Having said that, my current blueprint for what's to come is as follows:

1) The Tertiary Bubbles burst (has already happened).

2) The Secondary Bubbles burst (coming later this year likely during the summer).

3) The Primary Bubbles burst (late 2018/ early 2019).

The Tertiary Bubbles were bubbles based on specific investing strategies in stocks (as opposed to stocks themselves). I'm talking about "shorting volatility" and "risk parity" fund strategies. 

That bubble blew up in February, erasing years' worth of gains in a matter of days.

Investors, still crazy about risk, were willing to see this as a "mulligan" and piled back into stocks (the Secondary Bubble). Given how bullish sentiment remains, I believe we've going to see a final push higher for a "blow off top" in stocks running into this summer.

This "blow off top" is based on the breakout above the long-term channel that has determined the stock market's price action since the 2009 low. Investors, emboldened by this development, will push stocks to a final parabolic move higher.

At that point, THE top will be in.

The Fed Panicking: Yield Curve Tumbles To Fresh 11-Year Lows

Despite the stock market's Amazon-bounce gains, US Treasury yields are lower and the yield curve flatter once again - tumbling to its flattest since Oct 2007.

Deja vu all over again...

10Y Yields are holding below 2.80%...

And the yield curve has crashed to fresh flats not seen since Oct 2007...

The entire curve is rolling over...

As a reminder, Bloomberg notes that according to the minutes of the Federal Open Market Committee's Jan. 30-31 meeting, the most recent for which minutes are available, showed that some policy makers thought it important "to monitor the effects of policy firming on the slope of the yield curve," noting the strong association between curve inversions and recessions.

Which confirms what The San Francisco Fed warned...  about the flattening of the yield curve...

"[it] is a strikingly accurate predictor of future economic activity.

Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve.

Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession."

Furthermore, as the two Fed authors explain below, the recent decline in the Treasury curve is sending recession probabilities notably higher.

Uneven Economy & The Hidden Depression

Are we in a depression?

The question seems absurd.

There has been GDP growth since 2009 and some mild inflation to go with it. In fact, this is the second longest economic expansion on record.

As Robert Shiller said over the weekend (though in the context of warning against complacency), "[i]f the economy manages to expand for 16 more months, the United States will have set a record."Unemployment is the lowest in history, nothing like the 17% we had by a U.S. Bureau of Labor Statistics estimate a decade after the stock market crash in 1929 and the average of 18% in the 1930s. House prices have come screaming back across the nation. The stock market has increased by more than 15% annually beginning in 2009. And even middle-class wages have shown signs of picking up lately.

Depression-Era Demographics In Some Exurbs

And yet, even overlooking the opioid epidemic and the 42 million Americans on food stamps (happily down from nearly 48 million in 2013), there are disturbing signs around the country that all is not well.

For example, a recent article in the New York Times by Robert Gebeloff focusing on Hunterdon County in New Jersey shows that many suburban and exurban Northeast and Midwest counties have stopped booming. More people are dying than being born or moving in through immigration or migration. Hunterdon County, 60 miles from New York City, is the sixth richest county nationally with a median household income is over $100,000. But young people are having fewer children, and the recession-stalled migration patterns are only resuming in certain parts of the country. According to Geberloff,"Some of the once-fastest-growing counties in the United States are growing no more, and nationwide, the birthrate has dropped to levels not seen since the Great Depression." Since a recent peak in 2007, lifetime births per woman in the U.S. is down 16%.

Because deaths are outnumbering births in so many outer-ring counties,flummoxing demographers waiting for a trend reversal, migration is crucial. But lower immigration puts stress on Northeastern suburban counties losing population to the South and West. And while more people living in cities may lower long-distance commuting and urban decay, "population stagnation in places that had been growing will most likely bring its own sets of problems, including pressures on real estate values and eventual shrinking of political representation."

While births have declined, migration within the U.S. has resumed to pre-recession levels. However, the trend is toward Florida, Texas, and Arizona, which have all seen population inflows. Rural parts of the country have been struggling with these demographic problems for a while now, but Gebeloff's article shows that they are hitting what have been much more well-off areas now. In Hunterdon County, a 460-acre Merck campus sits abandoned, and enrollment in some school districts is down 20%.

Patio Man Still Thrives

But if outer ring Northeastern suburbs are in jeopardy, that's not the situation everywhere. In 2002, when it looked like exurbia or life in what he called "Sprinkler Cities" was the future, David Brooks wrote a column for the Weekly Standard called "Patio Man and the Sprawl People" partly about how urban types were annexing old line, inner ring suburbs, while more traditional suburbanites were claiming the outer rings where they could enjoy peaceful patios, happy kids, slender friends and "the massive barbecue grill towering over it all."

Now, it seems, the outer rings are struggling mightily, but perhaps only in the Northeast and Midwest. In other words, Brooks's 2002 analysis somehow holds up today.  This is how he described the trend in defending suburbia, or the movement from old suburbia to new suburbia — "The truth, of course, is that suburbia is not a retreat from gritty American life, it is American life. Already, suburbanites make up about half of the country's population (while city people make up 28 percent and rural folk make up the rest), and American gets more suburban every year." And they make up 53% of America now, according to Jed Kolko in a post for the statistically oriented news site, FiveThirtyEight. Moreover, in a 2017 post, Kolko wrote, "The suburbanization of America marches on," as he noted the fast growth of Southern and Western metro areas, including Cap Coral-Fort Myers, FL, Provo-Orem, UT, and Austin-Round Rock, TX. Kolko also highlighted educated rural areas and the Pacific Northwest as growing regions. Those include Olympia and Spokane in Washington and Eugene and Salem in Oregon. Boise also made his list for growth of metro areas with 250,000 or more people.

The big population losers, unsurprisingly, have been rural areas. And while the "urban revival" is real, according to Kolko, it has mostly been for rich, educated people, in particular hyperurban neighborhoods rather than broad-based return to city living. Patio Man continues to thrive – just not in Hunterdon County, New Jersey.

Overall, the country is hardly in a depression, but things are grimmer than many think in some surprising places.

Goldman Slashes iPhone Sales Estimates Due To "Demand Deterioration"

Two months after the Nikkei reported that Apple will halve its production target for the iPhone X in the three-month period from January from over 40 million units to around 20 million, in light of slower-than-expected sales in the year-end holiday shopping season in key markets such as Europe, the U.S. and China, and after JPM similarly warned that production of Apple's flagship phone would plunge of 50%, "even larger than the decline of the iPhone 8/8+" and noted that the "weakness will continue in 1H18 as high-end smartphones are clearly hitting a plateau this year"...

... this morning Goldman joined the Apple skeptics when the bank's analyst Rod Hall wrote that demand expectations for March and June quarters are already weak but early Q1 demand indicates "even lower actual numbers than consensus is modeling" and as a result, he is trimming his replacement rate expectations in response to what has been weak replacement consumer behavior this cycle.

Below is the gist of the note:

We reduce our replacement rate assumption for FY'18 by ~2pp to 33% from 35% earlier due to weaker than expected demand for the iPhone X. We have cut our Chinese replacement rate by 3pp to 19% for FY18 and also reduced our ex. China replacement rate by 1pp to 38%. Further, we cut FY'19 and FY'20 replacement rates by 1pp each to 32% and 29% respectively. We note that our assumptions for FY19 could prove conservative if larger format devices drive a better cycle in China this coming December quarter though we believe that data so far suggests that a more cautious approach is prudent.

We now forecast the overall replacement rate to drop by 7pp over the three years from FY'17-FY'20 similar to what we calculate occurred from FY'14-FY'17. This may appear overly conservative on its face but we point out that replacement cycles in emerging markets where iPhone base growth is highest tend to be materially lower than in developed markets where most Apple analysts reside.

In light of this, Hall cut his iPhone sales estimates for the March and June quarters by 1.7 million and 3.2 million units to 53 million and 40.3 million units respectively.

He also cut his 2019, 2020 iPhone revenue and net income forecasts: Goldman now sees revenues decrease by 2.4% and 2.7% to $256.6bn and $272.5bn for FY'18 and FY'19 respectively; the company's revised revenue estimates for FY'18 and FY'19 are 2.2% and 0.4% below consensus, while its net income estimate for FY'18 is 2.2% below consensus and for FY'19 is 1.2% ahead.

On a shipment and ASP basis, Goldman cut its FY'18, FY'19 and FY'20 iPhone shipments forecasts by 3.5%, 4.0%

and 1.8% to 217.3m, 223.8m and 223.4m units respectively - below consensus estimates of 221.3m, 226.8m and 238.3m units. However, the bank's ASP estimates for FY'19 and FY'20 are 1.6% and 4.0% ahead of consensus "due to proprietary bottom up modeling" that suggests consensus continues to underestimate the impact of a mix shift toward higher priced phones "even as we now assume that Apple reduces prices somewhat in the high end."

Hall warned that AAPL will have "material channel inventory" to clear in June in order to prepare for rollout of new products this fall, and has modeled just 1MM units of inventory build into the June quarter.

Unleashed, the Goldman analyst also reduced his ASP estimate for the June quarter by 2.3% due to above-average forecast inventory burn of 6.0 million units.

There was some good news: the Goldman analyst said that while replacement rates continue to decline in our model, the growing installed base provides support for the Y/Y growth in replacement shipments. We estimate that the primary installed base, made up of only first-hand iPhone owners, stands at 631m units in FQ1'18 and is growing strongly at 12% Y/Y.

Goldman's conclusion:

iPhone demand expectations for March and June are already weak but we believe that early CQ1 demand indications suggest even lower actual numbers than consensus is modeling. We are slightly reducing our March unit expectation and make a larger reduction in our June quarter unit and ASP forecast. We now model 1m units of inventory build into June which is atypical. This leaves Apple with material channel inventory to clear in June to prepare for the launch of new products this Fall. We also are trimming our replacement rate expectations looking forward in response to what has been weak replacement consumer behavior this cycle. We reduce our March and June QTR units by 1.7m and 3.2m to 53.0m and 40.3m units respectively. Due to an above average forecast inventory burn of 6.0m units in the June QTR we are also reducing our ASP forecast for that QTR by 2.3%. Looking forward we are also reducing replacement rate expectations which brings our FY19 and FY20 unit forecasts down by 4.0% and 1.8% respectively to 224m and 223m units.

Finally, Hall also cut his Neutral-rated Apple price target by $2 to $159, the second lowest on the Street, which has a median PT $195. Apple stock was modestly lower on the news.

Fwd: Trader: "The Probability Of 10Y Yields Collapsing Is Much Higher Than Most Realize"

One day after he correctly warned that equities have not yet bottomed - just hours before the Dow Jones tumbled from up over 200 to down over 400 points at one point as the tech sector imploded - this morning former Lehman trader and current Bloomberg macro commentator Mark Cudmore issues another warning, this time about Treasuries, which he thinks may be poised for a sharp spike higher as yields tumble. He explains why in his latest Macro View column below:

Treasuries Jump May Be the Start of Something Bigger: Macro View

The probability of Treasury 10-year yields collapsing is much higher than most investors seem to realize. The readjustment in pricing may be just getting started.

It's not going to take too much for serious discussion to begin over the possibility the Fed's hiking cycle may be at an end, or near an end, already.

This doesn't even need to become the base case for yields to slump, it just needs to become a plausible- enough outcome for the market to squeeze out the large speculative short position in Treasuries.

The building blocks for this narrative are already in place. Thursday's PCE inflation data may provide the required catalyst.

Financial conditions have tightened considerably in the last two months. Libor spreads have widened significantly -- because of structural issues -- but that still acts as effective policy tightening.

Trade, politics and commodities are all going to start weighing on the growth outlook. The slump in equities may soon be significant enough to be a concern for the Fed because of the impact on consumer sentiment, which has remained a bright spot in U.S. data, and the wealth effect.

As the manufacturing center for so much that the U.S. consumes, China's PPI has had an excellent correlation with U.S. CPI in recent years. The former is still trending down after both measures peaked in February 2017. The March data for both is due April 11. Given how industrial metals and agricultural prices have slumped this month, there are strong reasons to expect China PPI to slide again.

The technical break lower in yields was made Tuesday. Fundamentals are supportive of the move. Positioning is offside and therefore any related corrective adjustment will quickly add downside momentum to yields.

Tomorrow brings February's PCE data, supposedly one of the Fed's preferred inflation measures. The consensus forecast is for the core number to climb to 1.6% year-on-year. That paltry rate of inflation would still be the highest since since March last year.

A miss of just 0.1 of a percentage point and investors will start considering the possibility that inflation may already have peaked, and hence perhaps so has the Fed's rate-hiking cycle. That would put the cat amongst the short Treasury pigeons (positions).Trader: "The Probability Of 10Y Yields Collapsing Is Much Higher Than Most Realize"

One day after he correctly warned that equities have not yet bottomed - just hours before the Dow Jones tumbled from up over 200 to down over 400 points at one point as the tech sector imploded - this morning former Lehman trader and current Bloomberg macro commentator Mark Cudmore issues another warning, this time about Treasuries, which he thinks may be poised for a sharp spike higher as yields tumble. He explains why in his latest Macro View column below:

Treasuries Jump May Be the Start of Something Bigger: Macro View

The probability of Treasury 10-year yields collapsing is much higher than most investors seem to realize. The readjustment in pricing may be just getting started.

It's not going to take too much for serious discussion to begin over the possibility the Fed's hiking cycle may be at an end, or near an end, already.

This doesn't even need to become the base case for yields to slump, it just needs to become a plausible- enough outcome for the market to squeeze out the large speculative short position in Treasuries.

The building blocks for this narrative are already in place. Thursday's PCE inflation data may provide the required catalyst.

Financial conditions have tightened considerably in the last two months. Libor spreads have widened significantly -- because of structural issues -- but that still acts as effective policy tightening.

Trade, politics and commodities are all going to start weighing on the growth outlook. The slump in equities may soon be significant enough to be a concern for the Fed because of the impact on consumer sentiment, which has remained a bright spot in U.S. data, and the wealth effect.

As the manufacturing center for so much that the U.S. consumes, China's PPI has had an excellent correlation with U.S. CPI in recent years. The former is still trending down after both measures peaked in February 2017. The March data for both is due April 11. Given how industrial metals and agricultural prices have slumped this month, there are strong reasons to expect China PPI to slide again.

The technical break lower in yields was made Tuesday. Fundamentals are supportive of the move. Positioning is offside and therefore any related corrective adjustment will quickly add downside momentum to yields.

Tomorrow brings February's PCE data, supposedly one of the Fed's preferred inflation measures. The consensus forecast is for the core number to climb to 1.6% year-on-year. That paltry rate of inflation would still be the highest since since March last year.

A miss of just 0.1 of a percentage point and investors will start considering the possibility that inflation may already have peaked, and hence perhaps so has the Fed's rate-hiking cycle. That would put the cat amongst the short Treasury pigeons (positions).Trader: "The Probability Of 10Y Yields Collapsing Is Much Higher Than Most Realize"

One day after he correctly warned that equities have not yet bottomed - just hours before the Dow Jones tumbled from up over 200 to down over 400 points at one point as the tech sector imploded - this morning former Lehman trader and current Bloomberg macro commentator Mark Cudmore issues another warning, this time about Treasuries, which he thinks may be poised for a sharp spike higher as yields tumble. He explains why in his latest Macro View column below:

Treasuries Jump May Be the Start of Something Bigger: Macro View

The probability of Treasury 10-year yields collapsing is much higher than most investors seem to realize. The readjustment in pricing may be just getting started.

It's not going to take too much for serious discussion to begin over the possibility the Fed's hiking cycle may be at an end, or near an end, already.

This doesn't even need to become the base case for yields to slump, it just needs to become a plausible- enough outcome for the market to squeeze out the large speculative short position in Treasuries.

The building blocks for this narrative are already in place. Thursday's PCE inflation data may provide the required catalyst.

Financial conditions have tightened considerably in the last two months. Libor spreads have widened significantly -- because of structural issues -- but that still acts as effective policy tightening.

Trade, politics and commodities are all going to start weighing on the growth outlook. The slump in equities may soon be significant enough to be a concern for the Fed because of the impact on consumer sentiment, which has remained a bright spot in U.S. data, and the wealth effect.

As the manufacturing center for so much that the U.S. consumes, China's PPI has had an excellent correlation with U.S. CPI in recent years. The former is still trending down after both measures peaked in February 2017. The March data for both is due April 11. Given how industrial metals and agricultural prices have slumped this month, there are strong reasons to expect China PPI to slide again.

The technical break lower in yields was made Tuesday. Fundamentals are supportive of the move. Positioning is offside and therefore any related corrective adjustment will quickly add downside momentum to yields.

Tomorrow brings February's PCE data, supposedly one of the Fed's preferred inflation measures. The consensus forecast is for the core number to climb to 1.6% year-on-year. That paltry rate of inflation would still be the highest since since March last year.

A miss of just 0.1 of a percentage point and investors will start considering the possibility that inflation may already have peaked, and hence perhaps so has the Fed's rate-hiking cycle. That would put the cat amongst the short Treasury pigeons (positions).Trader: "The Probability Of 10Y Yields Collapsing Is Much Higher Than Most Realize"

One day after he correctly warned that equities have not yet bottomed - just hours before the Dow Jones tumbled from up over 200 to down over 400 points at one point as the tech sector imploded - this morning former Lehman trader and current Bloomberg macro commentator Mark Cudmore issues another warning, this time about Treasuries, which he thinks may be poised for a sharp spike higher as yields tumble. He explains why in his latest Macro View column below:

Treasuries Jump May Be the Start of Something Bigger: Macro View

The probability of Treasury 10-year yields collapsing is much higher than most investors seem to realize. The readjustment in pricing may be just getting started.

It's not going to take too much for serious discussion to begin over the possibility the Fed's hiking cycle may be at an end, or near an end, already.

This doesn't even need to become the base case for yields to slump, it just needs to become a plausible- enough outcome for the market to squeeze out the large speculative short position in Treasuries.

The building blocks for this narrative are already in place. Thursday's PCE inflation data may provide the required catalyst.

Financial conditions have tightened considerably in the last two months. Libor spreads have widened significantly -- because of structural issues -- but that still acts as effective policy tightening.

Trade, politics and commodities are all going to start weighing on the growth outlook. The slump in equities may soon be significant enough to be a concern for the Fed because of the impact on consumer sentiment, which has remained a bright spot in U.S. data, and the wealth effect.

As the manufacturing center for so much that the U.S. consumes, China's PPI has had an excellent correlation with U.S. CPI in recent years. The former is still trending down after both measures peaked in February 2017. The March data for both is due April 11. Given how industrial metals and agricultural prices have slumped this month, there are strong reasons to expect China PPI to slide again.

The technical break lower in yields was made Tuesday. Fundamentals are supportive of the move. Positioning is offside and therefore any related corrective adjustment will quickly add downside momentum to yields.

Tomorrow brings February's PCE data, supposedly one of the Fed's preferred inflation measures. The consensus forecast is for the core number to climb to 1.6% year-on-year. That paltry rate of inflation would still be the highest since since March last year.

A miss of just 0.1 of a percentage point and investors will start considering the possibility that inflation may already have peaked, and hence perhaps so has the Fed's rate-hiking cycle. That would put the cat amongst the short Treasury pigeons (positions).Trader: "The Probability Of 10Y Yields Collapsing Is Much Higher Than Most Realize"

One day after he correctly warned that equities have not yet bottomed - just hours before the Dow Jones tumbled from up over 200 to down over 400 points at one point as the tech sector imploded - this morning former Lehman trader and current Bloomberg macro commentator Mark Cudmore issues another warning, this time about Treasuries, which he thinks may be poised for a sharp spike higher as yields tumble. He explains why in his latest Macro View column below:

Treasuries Jump May Be the Start of Something Bigger: Macro View

The probability of Treasury 10-year yields collapsing is much higher than most investors seem to realize. The readjustment in pricing may be just getting started.

It's not going to take too much for serious discussion to begin over the possibility the Fed's hiking cycle may be at an end, or near an end, already.

This doesn't even need to become the base case for yields to slump, it just needs to become a plausible- enough outcome for the market to squeeze out the large speculative short position in Treasuries.

The building blocks for this narrative are already in place. Thursday's PCE inflation data may provide the required catalyst.

Financial conditions have tightened considerably in the last two months. Libor spreads have widened significantly -- because of structural issues -- but that still acts as effective policy tightening.

Trade, politics and commodities are all going to start weighing on the growth outlook. The slump in equities may soon be significant enough to be a concern for the Fed because of the impact on consumer sentiment, which has remained a bright spot in U.S. data, and the wealth effect.

As the manufacturing center for so much that the U.S. consumes, China's PPI has had an excellent correlation with U.S. CPI in recent years. The former is still trending down after both measures peaked in February 2017. The March data for both is due April 11. Given how industrial metals and agricultural prices have slumped this month, there are strong reasons to expect China PPI to slide again.

The technical break lower in yields was made Tuesday. Fundamentals are supportive of the move. Positioning is offside and therefore any related corrective adjustment will quickly add downside momentum to yields.

Tomorrow brings February's PCE data, supposedly one of the Fed's preferred inflation measures. The consensus forecast is for the core number to climb to 1.6% year-on-year. That paltry rate of inflation would still be the highest since since March last year.

A miss of just 0.1 of a percentage point and investors will start considering the possibility that inflation may already have peaked, and hence perhaps so has the Fed's rate-hiking cycle. That would put the cat amongst the short Treasury pigeons (positions).Trader: "The Probability Of 10Y Yields Collapsing Is Much Higher Than Most Realize"

One day after he correctly warned that equities have not yet bottomed - just hours before the Dow Jones tumbled from up over 200 to down over 400 points at one point as the tech sector imploded - this morning former Lehman trader and current Bloomberg macro commentator Mark Cudmore issues another warning, this time about Treasuries, which he thinks may be poised for a sharp spike higher as yields tumble. He explains why in his latest Macro View column below:

Treasuries Jump May Be the Start of Something Bigger: Macro View

The probability of Treasury 10-year yields collapsing is much higher than most investors seem to realize. The readjustment in pricing may be just getting started.

It's not going to take too much for serious discussion to begin over the possibility the Fed's hiking cycle may be at an end, or near an end, already.

This doesn't even need to become the base case for yields to slump, it just needs to become a plausible- enough outcome for the market to squeeze out the large speculative short position in Treasuries.

The building blocks for this narrative are already in place. Thursday's PCE inflation data may provide the required catalyst.

Financial conditions have tightened considerably in the last two months. Libor spreads have widened significantly -- because of structural issues -- but that still acts as effective policy tightening.

Trade, politics and commodities are all going to start weighing on the growth outlook. The slump in equities may soon be significant enough to be a concern for the Fed because of the impact on consumer sentiment, which has remained a bright spot in U.S. data, and the wealth effect.

As the manufacturing center for so much that the U.S. consumes, China's PPI has had an excellent correlation with U.S. CPI in recent years. The former is still trending down after both measures peaked in February 2017. The March data for both is due April 11. Given how industrial metals and agricultural prices have slumped this month, there are strong reasons to expect China PPI to slide again.

The technical break lower in yields was made Tuesday. Fundamentals are supportive of the move. Positioning is offside and therefore any related corrective adjustment will quickly add downside momentum to yields.

Tomorrow brings February's PCE data, supposedly one of the Fed's preferred inflation measures. The consensus forecast is for the core number to climb to 1.6% year-on-year. That paltry rate of inflation would still be the highest since since March last year.

A miss of just 0.1 of a percentage point and investors will start considering the possibility that inflation may already have peaked, and hence perhaps so has the Fed's rate-hiking cycle. That would put the cat amongst the short Treasury pigeons (positions).Trader: "The Probability Of 10Y Yields Collapsing Is Much Higher Than Most Realize"

One day after he correctly warned that equities have not yet bottomed - just hours before the Dow Jones tumbled from up over 200 to down over 400 points at one point as the tech sector imploded - this morning former Lehman trader and current Bloomberg macro commentator Mark Cudmore issues another warning, this time about Treasuries, which he thinks may be poised for a sharp spike higher as yields tumble. He explains why in his latest Macro View column below:

Treasuries Jump May Be the Start of Something Bigger: Macro View

The probability of Treasury 10-year yields collapsing is much higher than most investors seem to realize. The readjustment in pricing may be just getting started.

It's not going to take too much for serious discussion to begin over the possibility the Fed's hiking cycle may be at an end, or near an end, already.

This doesn't even need to become the base case for yields to slump, it just needs to become a plausible- enough outcome for the market to squeeze out the large speculative short position in Treasuries.

The building blocks for this narrative are already in place. Thursday's PCE inflation data may provide the required catalyst.

Financial conditions have tightened considerably in the last two months. Libor spreads have widened significantly -- because of structural issues -- but that still acts as effective policy tightening.

Trade, politics and commodities are all going to start weighing on the growth outlook. The slump in equities may soon be significant enough to be a concern for the Fed because of the impact on consumer sentiment, which has remained a bright spot in U.S. data, and the wealth effect.

As the manufacturing center for so much that the U.S. consumes, China's PPI has had an excellent correlation with U.S. CPI in recent years. The former is still trending down after both measures peaked in February 2017. The March data for both is due April 11. Given how industrial metals and agricultural prices have slumped this month, there are strong reasons to expect China PPI to slide again.

The technical break lower in yields was made Tuesday. Fundamentals are supportive of the move. Positioning is offside and therefore any related corrective adjustment will quickly add downside momentum to yields.

Tomorrow brings February's PCE data, supposedly one of the Fed's preferred inflation measures. The consensus forecast is for the core number to climb to 1.6% year-on-year. That paltry rate of inflation would still be the highest since since March last year.

A miss of just 0.1 of a percentage point and investors will start considering the possibility that inflation may already have peaked, and hence perhaps so has the Fed's rate-hiking cycle. That would put the cat amongst the short Treasury pigeons (positions).Trader: "The Probability Of 10Y Yields Collapsing Is Much Higher Than Most Realize"

One day after he correctly warned that equities have not yet bottomed - just hours before the Dow Jones tumbled from up over 200 to down over 400 points at one point as the tech sector imploded - this morning former Lehman trader and current Bloomberg macro commentator Mark Cudmore issues another warning, this time about Treasuries, which he thinks may be poised for a sharp spike higher as yields tumble. He explains why in his latest Macro View column below:

Treasuries Jump May Be the Start of Something Bigger: Macro View

The probability of Treasury 10-year yields collapsing is much higher than most investors seem to realize. The readjustment in pricing may be just getting started.

It's not going to take too much for serious discussion to begin over the possibility the Fed's hiking cycle may be at an end, or near an end, already.

This doesn't even need to become the base case for yields to slump, it just needs to become a plausible- enough outcome for the market to squeeze out the large speculative short position in Treasuries.

The building blocks for this narrative are already in place. Thursday's PCE inflation data may provide the required catalyst.

Financial conditions have tightened considerably in the last two months. Libor spreads have widened significantly -- because of structural issues -- but that still acts as effective policy tightening.

Trade, politics and commodities are all going to start weighing on the growth outlook. The slump in equities may soon be significant enough to be a concern for the Fed because of the impact on consumer sentiment, which has remained a bright spot in U.S. data, and the wealth effect.

As the manufacturing center for so much that the U.S. consumes, China's PPI has had an excellent correlation with U.S. CPI in recent years. The former is still trending down after both measures peaked in February 2017. The March data for both is due April 11. Given how industrial metals and agricultural prices have slumped this month, there are strong reasons to expect China PPI to slide again.

The technical break lower in yields was made Tuesday. Fundamentals are supportive of the move. Positioning is offside and therefore any related corrective adjustment will quickly add downside momentum to yields.

Tomorrow brings February's PCE data, supposedly one of the Fed's preferred inflation measures. The consensus forecast is for the core number to climb to 1.6% year-on-year. That paltry rate of inflation would still be the highest since since March last year.

A miss of just 0.1 of a percentage point and investors will start considering the possibility that inflation may already have peaked, and hence perhaps so has the Fed's rate-hiking cycle. That would put the cat amongst the short Treasury pigeons (positions).