Month: September 2017

While intra-month the CBOE Volatility Index reached its highest since November, before plunging back to earth into the end of the month, VIX is still on track to post its lowest annual average on record.

Bloomberg notes that in the past decade, VIX gains in August were followed by September declines in all but one instance.

While VIX has collapsed so far this year, it may not last.

Though VIX ended up paring its August gain to 3.2% – a gauge tracking longer-term wagers posted its biggest increase since January 2016.

In fact, after last month’s 11 percent gain, the CBOE S&P 500 3-Month Volatility Index has reached its highest level relative to the VIX since Aug 2012's European credit crisis.

The September Federal Reserve gathering and debt-ceiling discussions are among events that could lead to increased market volatility at a time when the S&P 500 Index trades near a record high.

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Authored by Daniel Ruiz via Blinders Off blog,

Until this point, a lot of what I've shared with you is theoretically based on my knowledge and experience of used vehicle values and how I believe they affect new vehicle sales velocity. Today, I am going to share some some hard data that I've been researching with a great deal of effort.

I genuinely believe that used vehicle values have a very significant effect on new vehicle sales velocity. I have explained it on Twitter and on a previous blog post through the concept of trade cycles. Because of this, I am certain that used vehicle values can be used as a leading indicator for inventory management at the manufacturing level, at the retail dealer level and certainly as an investment tool. However, I humbly hold that current used vehicle value indexes sources are not good enough.

There is a very specific group of vehicles that can be monitored in order to better project results. The Manheim and NADA index both have too much noise in the data. For example, the Manheim Index has no model year restrictions and includes new vehicle price inflation in the calculations. NADA goes up to 8 model years. Both average the data over multiple months and include vehicles which, in my opinion, have little to no impact on new vehicle sales velocity. Therefore, I have decided to make my own index.

For now, I'm going to use Ford as an example please ignore the red residual line until later.

I have said numerous times that passenger vehicles are at a different points in the value cycle than trucks and SUVs.

This is common knowledge at this point, and most have placed their faith on trucks and SUVs. This includes manufacturers shifting production and rental car companies changing their fleet mix to the better performing SUV and truck sector. Most analyst are looking at fuel prices to mark the top of the SUV and truck market. Here's what they've missed:

Here's WHY this matters:

Now back to residuals. What I want to drive home, in simple terms, is that assuming no change in demand, supply precedes price changes. When used vehicle values underperform residual values, the return rate of leases goes up. The opposite is also true. Less vehicles returned means less auction volume supporting higher prices. More vehicles returned means more auction volume supporting lower prices. Look at the charts again and note the acceleration of used vehicle value declines when used vehicle values fall below residual values. So where do we stand today? You tell me if this looks supportive of higher used vehicle values:

You might wonder what will stabilize used vehicle values going forward. Consider this, a used vehicle is nothing more than a new vehicle transaction that drove off the dealer's lot.

The answer, years of declining new vehicle sales and we are just getting started.

If you feel that my insight might be a useful part of your investment decisions in the automotive sector, I offer phone consultations as well as in-person presentations through GLG.

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Shortly after North Korea conducted what’s believed to be its first successful test of a hydrogen bomb (and its sixth nuclear test in total), China’s Nuclear Safety Administration said on Sunday that it would begin emergency monitoring for radiation along its northeastern border with North Korea, according to Reuters.

The emergency response was set at “level 2,” the second-highest grade on a four-tier system, according to the Times of Japan. The NSA did not indicate whether any radiation had been detected.

“’At present, the automatic radiation monitoring stations in the provinces of Heilongjiang, Jilin, Liaoning and Shandong are functioning properly,’ Xinhua reported, citing the Ministry of Environmental Protection, which administers the safety agency.”

Earlier in the day, the presidents of China and Russia agreed to “appropriately deal with” North Korea’s sixth and most powerful nuclear test, according to the South China Morning Post. Beijing strongly condemned Pyongyang’s actions and threatened to work with the United Nation’s Security Council to add sanctions. The agreement came as Chinese President Xi Jinping met his Russian counterpart Vladimir Putin on Sunday night in Xiamen, Fujian province, ahead of Monday’s BRICS leaders’ summit, according to the SCMP.

The test late Sunday morning triggered a 6.3-magnitude quake followed by a 4.6-magnitude tremor, and was felt throughout northeastern China.

Here’s more from the SCMP:

“The Chinese government resolutely opposes and strongly condemns this,” the Chinese foreign ministry said after North Korea confirmed the test.

 

“We urge North Korea to recognise the determination of the international community to achieve a denuclearised Korean peninsula … and to return to the path of resolving conflicts through dialogue,” it said adding that China will continue to implement UN sanctions against Pyongyang in ‘comprehensive manner.’”

As one analyst who spoke with the SCMP suggested, the North may have timed its nuclear test to coincide with the BRICS conference that begins tomorrow in Xiamen. World leaders from some of the world’s largest emerging-market countries have traveled to China for the conference, and by testing the nuke Sunday, not only did the North overshadow the conference, which was supposed to be about economic issues, but it also provided world leaders with a first-hand look at its nuclear capabilities.

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Authored by Jonathan Turley via The Hill.com,

The University of California in Berkeley was again the scene of violence recently, as protesters claimed license to silence those with whom they disagree. Their fight against “fascism” took the form of not just stopping a speech, but assaulting those who came to hear it.

For those of us at universities and colleges, these counter-demonstrators, and in particular the masked antifa protesters, are a troubling and growing presence on our campuses. They have been assaulting people and blocking speeches for years with relatively little condemnation. They flourish in an environment where any criticism is denounced as being reflective of racist or fascist sentiments.

However, as the latest violence in Berkeley vividly demonstrates, there is no distinction between these protesters and the fascists they claim to be resisting. They are all fascists in their use of fear and violence to silence others. What is particularly chilling is how some academics have given this anti-speech mob legitimacy through pseudo-philosophical rationalizations.

At Berkeley and other universities, protesters have held up signs saying “F–k Free Speech” and have threatened to beat up anyone taking their pictures, including journalists. They seem blissfully ignorant of the contradiction in using fascistic tactics as anti-fascist protesters. After all, a leading definition of fascism is “a tendency toward or actual exercise of strong autocratic or dictatorial control.”

CNN recently interviewed antifa protesters who insist that violence is simply the language that their opponents understand. Leftist organizer Scott Crow endorsed illegal actions and said that antifa activists cover their faces to “avoid the ramifications of law enforcement.” Such violent logic is supported by some professors.

Last week, Clemson University Professor Bart Knijnenburg went on Facebook to call Trump supporters and Republicans “racist scum.” He added, “I admire anyone who stands up against white supremacy, violent or nonviolent. This needs to stop, by any means necessary. #PunchNazis.” He is not alone. Trinity College Professor Johnny Williams, who teaches classes on race, posted attacks on bigots and called on people to “let them f—–g die.”

These voices go beyond the troubling number of academics supporting speech codes and the curtailment of free speech. These are scholars who have embraced the antithesis of the life and values of academia. They justify violence to silence those who are deemed unworthy to be heard. Dartmouth Professor Mark Bray, the author of a book entitled “Antifa: The Anti-Fascist Handbook” is one of the chief enablers of these protesters. Bray defines antifa as “politics or an activity of social revolutionary self defense. It’s a pan-left radical politics uniting communists, socialists, anarchists and various different radical leftists together for the shared purpose of combating the far right.”

Bray speaks positively of the effort to supplant traditional views of free speech: “At the heart of the anti-fascist outlook is a rejection of the classical liberal phrase… that says I disapprove of what you say but I will defend to the death your right to say it.” He defines anti-fascists as “illiberal” who reject the notion that far right views deserve to “coexist” with opposing views.

Bray says that the protesters do not “see fascism or white supremacy as a view with which they disagree as a difference of opinion.” Their goal is not co-existence but “to end their politics.” Bray and other academics are liberating students from the confines of what they deem the false “allegiance to liberal democracy.” Once freed of the values of free speech and democratic values, violence becomes merely politics by other means.

When pushed, Bray’s rationalization for the antifa movement rapidly descends into intellectual gibberish:

“There is a certain political lens that – agree or disagree with the lens – there is an element of continuity in terms of the types of groups targeted. I don’t know of any Democratic Party events that have been ‘no platformed,’ or shut down by anti-fascists. So there is a political lens, people will quibble about what the lens is, who designs the lens, but I don’t think the slippery slope is actually, in practice, nearly as much of a concern as people imagine it would be.”

There does not have to be a “lens.” Indeed, that it is the principle of the “liberal democracy” so casually cast aside by Bray and his braying followers. While Bray insists that he is not in favor of violent protests or even free speech, he insists that there is a duty to stop those who threaten the existence of others and the antifa protests are a form of “community self defense.”

Ironically, Bray and others have come to use the intellectual freedom of our universities to advance the most anti-intellectual movement in our history. They are destroying the very academic institutions that have protected their extreme views. Just as the father of the atomic bomb, Robert Oppenheimer, said that “physicists have known sin,” the antifa movement is the sin of academia in abandoning our core values.

These protesters believe that history shows the dangers of free speech and the need to deny it to those who would misuse it. It is a familiar sentiment that “all the experience… accumulated through several decades teaches us… to deprive the reactionaries of the right to speak and let the people alone have that right.” Those were the words of another early anti-fascist, China's Communist Party leader Mao Zedong.

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Following this morning’s “scary movie” anecdote from One River CIO Eric Peters, below we present several vignettes from the weekly thoughts by the hedge fund manager on how to make money when everyone else is losing it… and vice versa, and how the Golden Gate bridge makes all the differnce in a world where everyone else is swimming across the Bay.

Golden Gates

“The only times I’ve ever really made money involved a certain type of disagreement with the market,” said the investor.

 

“A philosophical disagreement,” he continued, reflecting on so many cycles, so many set ups.

 

“I make money when I believe the world works a certain way and the consensus disagrees.” Memories of so many counterintuitive trends, over so many years, raced through my mind. “Because it’s a philosophical disagreement, the investors on the wrong side of the debate don’t concede, despite enduring big losses.”

 

“Most investors on the wrong side of a philosophical debate don’t just need to acknowledge the sustained price moves against them, and the financial losses, they must come to accept a new mental model of how the world works,” continued the investor.

 

“But to accept a new mental model inevitably requires them to give up on a whole lot of related beliefs.” And this prolongs what might otherwise be a quick stop loss.

 

Which drags out the entire process. Because intelligent people do not easily abandon their philosophies, mental models. 

 

“Can’t say I have a disagreement with the market right now,” admitted the investor, unsure how to make real money in today’s market.

 

“All my investments now are based on hopes for prices to return to particular levels that make more sense. But these are not things I have a particular edge in.” He sighed, looking out at Alcatraz, searching.

 

“I’ll never be the fastest runner, or swimmer. In a race across the Bay, I’ll only ever win if everyone else tries to swim and I just kind of look at the Golden Gate, wondering why no one else sees it, and walk across.”

And here is a bonus comment on a market that is just like Forrest Gump in so many different ways…

“Gump! What’s your sole purpose in this army?” screamed Drill Sergeant. “To do whatever you tell me, drill sergeant!” shouted Forrest.

 

“Goddamn it Gump! You’re a goddamn genius!” declared Drill Sergeant. “When I cut interest rates, print money, and tell you to buy assets, what do you do Gump?” asked Sergeant.

 

“I buy assets!” answered Forrest.

 

“This is the most outstanding answer I have ever heard. You must have a goddamn I.Q. of 160. You are goddamn gifted, Private Gump.” Forrest saluted.

 

“And when I hike, shrink my balance sheet…”

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In what we believe is a significant escalation and potentially a hint as to the president's thinking, President Trump said during a phone call with Japanese Prime Minister Shinzo Abe that the US remains committed to defending its territories and allies using all "diplomatic, conventional and – here's the big one – nuclear – capabilities at our disposal." This is the first time Trump has explicitly referenced possible involvement of nuclear weapons in a US response to its isolated antagonist, and also means that the two world leaders discussed the possibility of a nuclear response.

• TRUMP REAFFIRMS U.S. COMMITMENT TO DEFEND THE U.S. & ALLIES USING FULL RANGE OF DIPLOMATIC, CONVENTIONAL AND NUCLEAR CAPABILITIES: STATEMENT

The White House released a statement about what the two leaders discussed on the call. It’s available in full below:

JUST IN: White House issues statement on call between President Trump and Japan's Prime Minister Shinzo Abe http://pic.twitter.com/pc7w3v42y4

— NBC News (@NBCNews) September 3, 2017

The call was held to discuss how the two countries should respond to North Korea's sixth nuclear test – and possibly its first successful test of a hydrogen bomb. The test came after multiple provocations from the North over the past week, including two missile tests. Earlier, Defense Secretary James Mattis, using the couched language of international diplomacy, said any threat to the US or its territories would be met with a “massive military response.”

The full White House statement on the 6th North Korean nuclear test, as delivered by Mattis shortly after 3pm ET, is below:

"Any threat to the US or its territories including Guam or our allies will be met with a massive military response, a response both effective and overwhelming. Kim Jong Un should take heed in the United Nations' Security Council's unified voice. All members unanimously agreed on the threat North Korea poses and they remain unanimous in their commitment to the denuclearization of the Korean peninsula. We are not looking to the total annihilation of a country, namely North Korea, but as I said we have many options to do so."

China also strongly criticized the nuclear test, slamming Pyongyang for ignoring international condemnation of its atomic weapons program. North Korea "has ignored the international community's widespread opposition, again carrying out a nuclear test. China's government expresses resolute opposition and strong condemnation toward this," the foreign ministry said in a statement on its website.

"We strongly urge the DPRK (North Korea) to face the strong will of denuclearisation from the international community, earnestly abide by the relevant resolutions of the UN Security Council, stop taking mistaken actions which worsen the situation and are also not in line with its own interests, and effectively return to the track of solving the problem through dialogue," it added.

Finally, as several sellside desks have commented this afternoon, a sixth nuclear test by North Korea likely represents crossing a “red line” sufficient "to prompt China and Russia to support additional UN sanctions." And while China could impose more restrictions on oil exports to NK as part of future UN sanctions – as a reminder the UNSC is meeting tomorrow at 10am –  it is unclear if this means a complete embargo. It is also unclear whether more of the same, i.e., sanctions would be sufficient to change NK regime behavior. Finally, China will need to consider the risk that punitive sanctions end up destabilizing the NK regime, leading to a flood of refugees and other adverse consequences.

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Authored by Jakub Bozydar Wisniewski via The Mises Institute,

The greatest intellectual accomplishment of the laissez-faire liberal theorists was the recognition of the “hard” and “soft” institutions that are crucial prerequisites of productive accomplishment and material prosperity. The hard institutions include private property rights, market prices, and sound money. The soft institutions include those that reinforce values such as prudence, thrift, resourcefulness, innovative courage, and respect for success.

 

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In an echo of last week’s move following North Korea’s teating of missiles across Japan’s territory, futures markets are opening in a decidedly risk-off mannwr following North Korea’s “hydrogen bomb” test. Dow Futs down 100 points, Gold jumping and Treasury bonds bid

 

 

Of course, what happens next is anyone’s guess as last week saw the BTFDers panic-buy stocks to their best week in 10 months1

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As has become custom, shortly after North Korea engages in some provocative activity, in this case its first ever hyrdogen bomb test, South Korea has traditionally responded with its own military drill, and today was no difference, with Yonhap reporting “that South Korea’s military said Monday it conducted a combined live-fire exercise targeting North Korea’s nuclear test site.”

To be sure, it’s not exactly clear how a “drill” can “target” a foreign military site, but we’ll assume someone just used Google translate in this case.

As Yonhap adds, the training came in response to the North’s sixth nuclear test a day earlier, and involved the country’s Hyunmoo ballistic missile and the F-15K fighter jets.

In the drill, the Hyunmoo surface-to-surface missile and the F-15K’s long-range air-to-ground missile accurately hit designated targets in the East Sea, according to the Joint Chiefs of Staff (JCS).

 

The South’s military, in particular, said the range to the simulated targets were set in consideration of the North’s Punggye-ri nuclear test site in its northeastern province.

The Hyunmoo was unveiled for the first time one week ago, when South Korea released the following video clip showing the test-firing of the 500-kilometer-range ballistic missile.

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Submitted by Shant Movsesian and Rajan Dhall MSTA from fxdaily.co.uk

After another 'interesting' non farm payrolls report, we start the week on a quiet note as the US observes the Labour Day holiday and Canada day speaks for itself.  Plenty of volatility to expect thereafter though, as it is the ECB's turn to manage market expectations, which so far show little sign of moderating as EUR longs are keen to hold positioning into a much expected tapering signal.  

After the weaker US jobs report, which we will cover (briefly) later, we saw a well timed news report that the ECB are in no rush to make a decision next week and that plans for adjusting the APP may not be ready until December. There is no questioning the fact that the governing council want to temper the EUR rally, as they observed the 'FX overshoot' in their last meeting minutes.  Since then, the spot rate has been ramped up past 1.2000 but with limited hang time above here, and the US data induced return higher was stopped short of this psychological level before the news-wires hit.  Back under 1.1900, it looks to be another reluctance pullback, and one which now depends largely on the USD, as EUR proponents can only see one way for policy to go from here and do not seem to be too concerned as to where entry levels are!

We have however seen some moderation in EUR/GBP, where those looking for parity will have to wait a little longer.  Again, once we saw sentiment on the Pound turn in the wake of the last BoE meeting, it was one way traffic vs the EUR, but GBP resilience is developing once again – also to be covered lower down.  

As for US employment over August, it was a disappointing result, but much of the weakness attributed to seasonal factors were well communicated ahead of the release. So with the USD under pressure into the announcement, there was little fresh weakness to note, and USD/JPY and USD/CHF ended up on the day.  This also points to exhaustion in the bearish USD flow, which also saw mid curve yields basing out, and likely waiting for liquidity to improve – usually after US Labour day – before deciding on how much further to push the USD in the interim.  There are plenty of negatives one can cite for lower levels, but our focus is on value relative to time frame and these have clearly been stretched in recent weeks and months.  

Given the Fed's intent on sticking to the normalisation plan, balance sheet reduction is still expected to be announced later this month, but given its size, the details to date show they are merely scratching the surface, so rate hikes are what will add solid support to the USD.  As of yet, the odds for another 25bps onto the Fed funds rate this year remain near the recent lows, and currently fluctuate in the 25-35% range.  At this stage, and with more data to cover into year end, a move back to 50/50 is not unreasonable to believe, and this should be enough for the USD to at least correct a little more.  

Indeed, perhaps this what the ECB is banking on.  Certainly if the market has a little more conviction towards further Fed tightening this year, spreads can be held and the aggressive bid tone in EUR/USD will be relieved to some degree.  Pullbacks will find buyers again however, but depending on data levels and sentiment, the base from here could be anything from 1.1700 to 1.1450-1.1500.  

Ahead of the ECB meeting this week we get Q2 GDP out of Europe as a whole, with retail sales also out. In Germany, industrial production and trade stats will also be eyed, but the focus is on president Draghi's press conference on Thursday. 

Out of the US, there is little that can shake off the bearish bias on the greenback other than fresh news on tax reforms.  On Friday, chief economic adviser Cohn tried to revive some hopes by stating a lowering of corporate taxes would generate wage growth, but the market has had its 'fill' of talk.  Action required.  From the data, only Wednesday's ISM non manufacturing PMIs look to offer any possible drive to the greenback, with factory orders on Tuesday of modest interest and Thursday's productivity and labour costs overshadowed by ECB focus.  

North of the border, the BoC are also meeting next week to deliver their take and policy response on the Canadian economy.  Q2 GDP was measured at an annualised 4.5% to send the rate hawks into a frenzy, with some banks suggesting another 25bp move up this week.   We saw 1.2400 taken out after the potential base in front of this suggested a little move correction in USD/CAD, but 1.2000-1.2200 is the longer term target here and the release of the growth stats gave the market little reason to wait.  The BoC are likely to be little more cautious, and the majority, rather than consensus is for them to stand pat for now.  Some of the more recent data argues for a wait and see approach, and Jul trade data just ahead of the rate call and Aug payrolls on Friday will either see a test of the key support zone into 1.2300 (if we are still above here by Wednesday) or back above 1.2500 for some fresh consolidation. 

The AUD would have also faced similar prospects for fresh upside were it not for the strong component readings (construction work and CapEx) pointing to a strong GDP number on Tuesday, but forecasts are for a 0.8% rise in Q2 vs 0.3% for Q1.  This comes after we get the latest RBA rate decision, and while there is little or no expectation of a move on rates, Gov Lowe has been erring on the side of the next move being up.  We know how keen the market is to jump on soundbites, so communication will need to be calculated and measured unless they want to see the spot rate back above 0.8000 again.

AUD/NZD has already made good ground through 1.1000 now – above 1.1100 – but the first target at 1.1200 may be a good place to bank profits with the short term metrics looking overstretched ahead of the data and event risks in Oz. More data on Thursday just in case the markets haven't had enough, when we get the Aug AIG construction index, trade and retail sales both for Jul.  

Not much out of New Zealand other than the Fonterra Dairy auctions, which have offered little incentive to drive NZD trade one way or the other, but the currency has been at the bottom end of the G10 list in recent weeks, and could take a breather for now.  

In the UK, UK services PMI is the one to watch, and after a healthy manufacturing may have helped the Pound to stabilise, a rise here from 53.8 will also be welcome.  Industrial and manufacturing for Jul as well as trade of note for Friday.  Nothing fresh to look to from last week's Brexit talks as the UK-EU divide shows little sign of contracting any time soon, with not only the exit bill a point of contention but also EU citizens' rights.  We thought the latter could have seen some convergence in views at the very least.  Even so, the market looks to have developed some composure over the lengthy talks ahead, and as noted above, has recouped some ground against the EUR as the Cable rate has played catch up with the USD.  In the background, UK and German businesses have been allied in their appeals for a swift and fair negotiation, and this would and will swing the balance of sentiment towards the UK for now.  

Plenty of data out in Japan, headlined by the Q2 GDP readings early Thursday, but we need to see some real traction developing here as the BoJ stick with their inflation target of 2.0% despite calls to revise this in some way.  Foreign investments in Japanese stocks will be interesting given talk of attractive (relative) valuation levels.  

In China, trade data on Thursday is expected to see the surplus widen out again, but all eyes on the component import and export figures.  

Focus in Scandinavia is on the Riksbank meeting here we expect another no change call despite some of the strong data releases to date.  This should see some of their overly cautious rhetoric tempered to some degree and could prompt a break out in the NOK/SEK rate, but USD/SEK looks stretched on the downside.  Given the above risks to the single currency, EUR/SEK is already looking to retest the lows seen at the start of the year and this week the central bank may provide the catalyst to achieve this.  

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