Month: October 2018

Roughly 18 months after Fidelity investments started allowing customers to interface their Coinbase accounts with Fidelity’s platform, the company – which started mining bitcoin at a small profit during the 2017 boom – revealed on Monday that it had launched a separate company, Fidelity Digital Asset Services, that would handle cryptocurrency custody and trade execution for institutional investors.

For now at least, FDAS’ services are only accessible by institutions like hedge funds, endowments, and family offices. However, such a monumental vote of confidence in crypto by a member of the financial establishment could revive traders’ hopes that the long-awaited flood of institutional money could soon arrive to reinflate the prices of the largest cryptos. The company was reportedly developed out of the Fidelity Center for Applied Technology, or FCAT as employees call it.

“Our goal is to make digitally-native assets, such as bitcoin, more accessible to investors,” Fidelity Investments Chairman and CEO Abigail Johnson said in a press release. “We expect to continue investing and experimenting, over the long-term, with ways to make this emerging asset class easier for our clients to understand and use.”

While crypto prices spiked overnight, the news, which broke Monday afternoon, had little impact on the price of bitcoin and other top cryptos, which have fallen into a sustained slump since peaking at all-time highs late last year. 

Long-term crypto bulls like Mike Novogratz were quick to applaud Fidelity for being “ahead of the pack” with its foray into crypto, and that others would soon follow.

Fidelity’s head of crypto said the company decided to launch the business because it saw a “need” for institutional trade-execution services in the crypto space.

“We saw that there were certain things institutions needed that only a firm like Fidelity could provide,” Jessop told CNBC, adding that it already works with 13,000 institutional clients. “We’ve got some technology that we’ve repurposed from other parts of Fidelity — we can leverage all of the resources of a big organization.”

The new company, which has about 100 employees, will be headquartered in Boston.

Perhaps the most important service being offered by the company is crypto custody, which has so far stymied institutions from holding crypto directly. Because of the ease with which crypto can be stolen by hackers, the need for a secure custody bank to hold on to institutions’ crypto had, until now, gone unmet. Fidelity said cybersecurity would be a top priority for the new company.

According to Fidelity, it already has a “pipeline” of customers, per BBG. 

“Most institutions want to deal with another institution,” Tom Jessop, who is heading the unit, said a telephone interview. “We understand institutional finance.”

The firm has a “robust pipeline of customers,” said Jessop, who was previously president of Chain Inc., which offers blockchain technology to financial companies. There are more than 370 crypto funds managing as much as $10 billion in assets, according to Autonomous Research — still just a drop in the bucket in the investment universe.

But Fidelity will soon need to grapple with a handful of other high-profile entrants into the crypto custody market, including Nomura, Goldman Sachs and Northern Trust.

The new company will handle custody, or how to safely store digital assets. Crypto companies Coinbase, Gemini (run by the Winklevoss twins), BitGo, Ledger and ItBit are among those already working on similar solutions. Japanese bank Nomura also announced plans in May to offer crypto custody, and Goldman Sachs and Northern Trust are reportedly exploring custodial services. But until now, there’s been a noticeable lack of a big U.S.-based incumbent like Fidelity officially entering the space.

Part of the risk in cryptocurrency investing, which experts say has largely barred institutions from embracing them, is how to prevent these digital assets from being hacked. As of the end of June, $1.6 billion in cryptocurrency had been stolen from clients, according to CoinDesk’s 2018 State of Blockchain Report.

Fidelity will use “cold storage”, a technique whereby coins are held on an air-gapped hard drive, to secure coins in its custody.

Fidelity has a long history of dealing with enterprise security, as well as public and private key cryptography to make sure it isn’t part of that statistic. Its custody solution will involve vaulted “cold storage,” which involves taking the cryptocurrency offline, and multi-level physical and cyber controls, among other security protocols that have been created leveraging Fidelity’s security principles from other parts of the business.

“You might look at the crypto world and say ‘wow is this a new thing’ but we’ve been managing key materials for a long time,” Jessop said. “We took our learnings in how to run enterprise security, then through our exploration of bitcoin and some of the people we’ve hired, quickly developed some of the crypto native expertise and federated the two those things.”

As CNBC pointed out, college endowments have led the institutional push into crypto funds, with endowments at Yale, Harvard and several other top schools owning exposure to at least one crypto fund.

While this is undoubtedly a vote of confidence in the crypto market, it’s worth noting that the launch of crypto futures late last year was supposed to bring a flood of institutional money into bitcoin and other crypto. But so far, whatever impact they have had has done little to keep the price elevated.

Galaxy’s Mike Novogratz noted, after the announcement, that a Bitcoin price move “awaits institutions getting in” and sees a “big price move in Bitcoin in Q1/Q2.”

via RSS https://ift.tt/2AbgGy3 Tyler Durden

While we wait to see if vol-targeting funds suffer another late-day meltdown and liquidate in the last hour of cash trading into the higher vol regime, stocks have stabilized (following another sharp overnight selloff driven by China, where stocks tumbled to a fresh 4 year low) largely thanks to a collapse in rates vol as unchanged 10Y rates provide a pillar of stability for equities. That said, as Nomura’s Charlie McElligott writes in his latest daily piece, the S&P remain susceptible to the previously noted “gamma-gravity” resulting from massive S&P open interest with 2750 and 2800 strikes (the S&P is trading inbetween these two levels at last check, just above 2,760).

Meanwhile, despite last week’s late rebound, systematic selling continued on Friday and into Monday with another -$7.8 billion of notional SPX selling, with Nomura calculating that CTA Trend positioning in the S&P is now just +35.9% Long from Friday’s +45% and a far cry from the +100% Max Long from two weeks back.

So with the systematic purge largely in the rearview mirror (even if Barclays still expects some substantial leftover selling from the slower-vol funds), and with factor chasers and hedge funds having largely completed their rotation – with substantial P&L losses – out of “momentum” as crowded multi-year legacy “long Growth, short Value” positions blew up on Wednesday – McElligott writes that he remains “of the view that there remains real scope for a tactical Q4 risk-rally” for the following 5 reasons:

1. positioning is much cleaner now that this “wash out” has occurred, especially with so much “short” added over the past two weeks (“fodder to squeeze”);
2. the return of the “corporate buyback” in coming weeks;
3. the “low bars” being created by “negative EPS revision” trend;
4. inverted VIX curve as contrarian “bullish signal”; and
5. typical Q4 seasonality, especially off the back of the mid-term U.S. election cycle +++ analog studies

Yet even as traders look beyond the near term, wondering whether the S&P breaks out below or above the “gamma gravity” well of 2750-2800, they are starting to turn their attention to the longer-term, where storm clouds are gathering.

Specifically, as McElligott writes, a funny thing happened with that whole “extending the end-cycle into 2021” phenomenon seen just two weeks ago from investors (and discussed in “This Is Telling Us Something Powerful About The Market’s Sentiment”), as the “accelerating angst” from the post-Powell presser “Fed is going to hike until something breaks” worldview has quickly overridden the recently “hot” U.S. data.

As shown in the chart below, McElligott notes that “we are now again “only” pricing-in 52bps of hikes for 2019 vs 60bps just two weeks ago—and all “short” of the Fed’s 75bps projections, as the buy-side is consensually skeptical of the Fed being able to implement tighter policy without slowing the “real economy.”

Why is this latest reversal important? Because that is the qualitative “psyche-shift” McElligott has been warning about for much of the summer:

investor psychology is transitioning from a “we are growing faster than we are tightening” view (risk-POSITIVE environment experienced majority of 2018) to the dreaded “we are tightening ourselves into a slow-down” (the risk-NEGATIVE / “Fed Policy Error” outlook), where markets “pull-forward” their end-of-cycle timing expectations   

Meanwhile, recent comments from Powell, i.e. his willingness to “…go past neutral” and run outright restrictive monetary policy – have not helped, as the Fed’s increasing “data-dependence” means an “asymmetric bias to react to positive data more than negative data”, i.e. the risk of “too good” U.S. data means risk of FOMC “over-tightening” (it is hardly a surprise that investors are eagerly looking forward to this Wednesday’s FOMC minutes for further validation of this downside risk).

This is why the Nomura cross-asset quant says that he remains “on plan for the early-to-mid 2019 risk-off trade, as per my original “Two Speed Year” thesis—I believe the Fed will likely only “get in” two / three more hikes before a “vigilante” market likely forces Fed to “pause”—and by then, that’s the market’s “signal” to de-risk as it “sniffs-out a slowdown.”

This bearish thesis also converges with the outlook of Stifel analyst Barry Bannister, who one month ago wrote that just two more rate hikes would put the central bank above the neutral rate: The Fed’s long-term projection of its policy rate has risen from 2.8% at the end of 2017 to 2.9% in June. The September rate hike followed Bannister’s note, so as of this moment just one more hike would be sufficient to push the fed funds rate beyond neutral. And, as shown in the chart below, every time the Fed hiked beyond the neutral rate, a bear market has inevitably followed.

Echoing this point, last week UBS calculated that financial conditions have tightened significantly, delivering the equivalent of 25bp Fed hike in October, and 80bps, or over Fed 3 hikes, since February, after years of unexpectedly loose financial conditions in which the market stoically ignored the Fed’s rate hikes.

Commenting on this, McElligott notes that as per his “Financial Conditions Tightening Tantrum” phase 2, the attributes are everywhere across U.S. Equities as “late-cycle canaries” are being crushed and the market “sniffs the slowdown” via tighter financial conditions, listing the following stark examples:

• S&P Autos -30.7% from Jan highs
• S&P Homebuilders -34.3% since Jan highs
• S&P Semis / Equip -14.5% from Jun highs
• S&P Regional Banks -14.6% from Jun highs

Finally, in a tangent on an asset class that the Nomura strategist is increasingly warming up on, McElligott continues to see the risk of explosive upside for gold – an asset which was a “placeholder short” for the past year, with Friday’s CFTC data showing a new record “Net Short” spec position,and which is now approaching the point of “capitulatory/forced-buying” from within the “price-insensitive” systematic community.

So if the short squeeze finally kicks in, how much gold buying could one expect, and above what price? The answer: a lot, and the threshold price is anything above $1,228.

The CTA Trend model currently shows that a Gold close above $1228 / oz today (currently near the “strike zone”) would trigger VERY substantial covering flows—taking the current legacy “Max -100% Short” to just “-12% Short” to the tune of ~$39B of buying

Could this be the fateful moment – one where stocks continue sliding as gold finally soars – that so many precious metal fans have been patiently waiting for every since gold peaked back in 2011?

via RSS https://ift.tt/2PzVIOp Tyler Durden

Authored by Nicholas Colas via DataTrekResearch.com,

A day late and a dollar short. That’s pretty much how we feel about Friday’s choppy rally. As we outlined last week, the typical bounce after a 4% decline (like Wednesday’s) usually comes in the next trading session. Not two days later. And, the average snap back rally is 1.7%. Not the 1.4% bounce we saw Friday.

Still, there were aspects of Friday’s advance to like:

• A close near the highs of the day, although down from the open. We attribute that wrinkle to retail investor buying (see the Data section below) as that cohort tends to cluster their orders early in the trading day. So while technical analysts don’t like a close lower than an open, we’ll give Friday a pass on that count.

• Stability in EAFE (developed Europe, Asia, Far East) equities, which closed the US trading session essentially unchanged (+0.4%).

• A strong rally in Emerging Market stocks, +2.9% on the day.

• Market leadership from large cap Tech stocks, +3.2% on the day (and 30% of its entire YTD gain of 10.8%).

Most of what we’ve read from the Street this weekend points to confidence that the worst of the selloff has passed. The anchor to this argument is the ferocity of Wednesday’s move, something that often signals a near term low. Since we remain positive on US stocks, we’d really like to believe this.

In the end, however, one indicator gives us pause more than any other: Treasury/TIPS breakeven inflation rates. A few numbers to frame the discussion:

• The difference in pricing between plain vanilla 5-year Treasuries and inflation-protected notes with the same maturity implies a forward US inflation rate of 1.99%. While higher than the start of 2018 (1.86%), it is still well below May’s peal of 2.16%.

• Go out to 10-year Treasuries/TIPS, and the current pricing implies future inflation of 2.12%. Again, this is higher than the start of the year (1.96%) but not a new high. That was set in May at 2.18%.

These statistics fundamentally challenge the notion that US yields are rising because of expectations for higher future inflation. If that were the case, TIPS spreads would be breaking out to the upside. But they clearly are not. Something else is going on.

We touched on this conundrum a few days ago, but it merits further attention. If inflation expectations were rising modestly, this would be a net positive for US stocks. Remember that revenue expectations for next year are at just 5%; a bump to inflation would help. Yes, there would be a lot of concern over margin pressures. But you only need to scan the S&P performance data from 1970-1979 to see that inflation doesn’t kill equity market returns. US stocks rose 78% in that decade.

So if it isn’t inflation expectations, what IS pushing US interest rates higher? Three possibilities (not mutually exclusive) fall to hand:

#1. The Federal Reserve is slowly reducing the size of its balance sheet rather than keeping it stable. This process started off slowly in 2018, with the Fed shrinking its holdings by an average $23 billion/month from January to June. In Q3 2018, that pace quickened to an average of $43 billion/month. Pulling that much liquidity out of the financial system may be pushing Treasury rates higher. Moreover, the Fed seems to have no intention of changing its current glide path.

#2. The US government will run a +$1 trillion deficit for the next 12 months, and likely for a lot longer than that. Yes, this is old news. And no, the US can’t “go bankrupt” as long as it pays its Treasury debt interest and principal in dollars. But it does seem fair for markets to ask for a better coupon in return for funding a country with an aging population and a 4-5% budget deficit/GDP ratio.

#3. A de-globalizing, tariff feuding world still owns a lot of US Treasuries, and America needs them to keep buying (because of Point #2). According to the most recent Treasury data, China and Japan still own over $1 trillion each of US sovereign debt. Hong Kong owns more than Saudi Arabia ($194 billion vs. $167 billion). As a whole, major foreign holders of US Treasuries currently own $6,252 billion and this is essentially unchanged from a year ago ($6,230 billion). In contrast, total debt has risen by close to $1 billion. And rates have risen…

Summing up: we worry the whole narrative about inflation expectations driving US rates higher is wrong. TIPS spreads would be rising if this were the right explanation. Instead, other factors are at play. And unlike inflation expectations, these might shift markets more quickly and without the reassuring message of “faster economic growth means higher inflation, but don’t worry too much about it.”

Our message: there’s still plenty to like about US stocks, but with rates holding the market’s attention we think there is still more volatility to come.

via RSS https://ift.tt/2ykMPBN Tyler Durden

Though investors realized early this year that the 2017 holiday season would be its last as a functioning company, Sears’ bankruptcy filing has kicked off a wave of nostalgia for the company that, more than any other, pioneered the department store as a concept. During the American post-war golden age, Sears’ dominance of the retail landscape was symbolized by Chicago’s Sears Tower, which was once the tallest building in the world.

Sears Chairman (and formerly CEO) Eddie Lampert

Asked to comment on the bankruptcy filing Monday morning, President Trump said the demise of Sears was “very, very sad,” adding that, when he was young, Sears Roebuck (as the company was once known) “was a big deal.”

President Trump says “it’s a shame” that Sears is declaring bankruptcy.

“Somebody that is of my generation, Sears Roebuck was a big deal, so it’s very sad to see … Sears has been dying for many years. It’s been obviously improperly run for many years” https://t.co/NoI8egFqxX pic.twitter.com/XFkZH8oknE

— This Week (@ThisWeekABC) October 15, 2018

The president added that some of the company’s “great sites” would be “put to good use” (though Sears’ most valuable real-estate holdings were spun off into a REIT called Seritage back in 2015). In a press release issued Monday morning, Seritage affirmed that it wouldn’t endure much of a hit to revenues from the Sears bankruptcy as “70% of its revenue” comes from “diversified, non-Sears tenants.”

“All of our capital investment, leasing and development activity over the last three years is unlocking substantial value, and has significantly diversified our income stream with approximately 70% of our signed leased income now coming from diversified, non-Sears tenants,” said Benjamin Schall, President and Chief Executive Officer.

“We have $1 billion of cash and committed capital under our Term Loan facility, which provides us the funds to complete all of our on-going redevelopment projects and cover reductions in cash flow that may result from the potential disruption in Sears income. The completion of our redevelopment projects brings our signed leased income on-line and will replace any potential lost income from Sears Holdings.”

Though he could easily have seized on the failure of Sears as an opportunity to attack China or Amazon for helping to undercut its business model and destroy American jobs (there are still 90,000 Sears employees whose future employment is now in jeopardy thanks to the bankruptcy filing), Trump said the company had been declining “for years” and that it had been “improperly run” for years.

“Sears has been dying for many years, it has obviously been improperly run for many years, and it’s a shame.”

It’s worth noting that (now former) Sears CEO Eddie Lampert, who will stay on as chairman of Sears Holdings, is a former Yale roommate of Treasury Secretary Steven Mnuchin.

Beyond Trump, Sears bankruptcy filing has prompted a wave of Sears nostalgia, as news organizations like the New York Times publish timelines of the company’s 125-year history, replete with old-timey photographs from Sears stores and catalogues:

The Sears Roebuck Building in 1933 at the Century of Progress International Exposition in Chicago.

Women’s hats in a 1907 Sears Roebuck catalog.

The Entry Department at Sears headquarters where orders were entered on tickets for the company’s merchandise department.

Sears opened its first retail store in 1925 in Chicago.

A view of the Chicago skyline.

Customers gathered outside a store in Wilkes-Barre, PA.

If you’re looking for a detailed history on the rise and fall of Sears, the New York Times published one that can be viewed here.

via RSS https://ift.tt/2NICMv2 Tyler Durden

Authored by Michael Kern via Crypto Insider,

Bitcoin miners have become energy hunters, scouring the world for cheap electricity. When most people think about bitcoin mining operations, they imagine hydro-powered warehouses in Canada or the Sichuan Mountains, but what about the oil capital of the United States? What if it were possible to turn otherwise-wasted natural gas into bitcoin?

Texas’ Natural Gas Problem

Growing up in Texas, oil wells were a part of life. Oil prices were high, and we had a ton of it. In my quiet college town, they were everywhere. We even made national headlines as the first city in the country to try and ban fracking (And lost, obviously).

Then came the slump. From 2015-2017, oil fell from over $115 per barrel to under $35. And it wasn’t just the roughnecks and drill-hands that were affected. The drop devastated entire communities in the Lone Star State. It created ghost towns, bankruptcies and worse.

But now, the boom is back.

High oil prices have led to a renaissance in Texas’ Permian Basin. It has become a money machine, churning out six-figure incomes to any able-bodied person willing to put in the long hours and hard manual labor required to pull oil from the ground. The cash is so good, in fact, that drillers are literally burning potential profits.

You see, when oil is pumped. the process creates natural gas as a byproduct. And the lack of infrastructure, in addition to a global gas glut, has made it economically difficult to move or even use the resource. In this scenario, drillers have only two options – reduce production or burn the gas. I’m sure you can guess what they are choosing.

The process of burning the excess fuel is called flaring. And it has both an environmental and economic impact. Wall Street Journal estimates that over $1 million worth of natural gas is being flared every day, producing greenhouse gases equivalent to approximately 2 million cars, and that’s just in the Permian. Others estimate the numbers could be much greater worldwide. And though permits are required, they are rarely denied. Why would they be? Crude oil production has been a boon to the regional and national economy.

But what if there was a third option? One that would allow drillers to ‘have their gas and use it too.’

Turning Gas Into Bitcoin

Bitcoin’s energy consumption has been covered immensely from every side of the debate. Generally, so the argument goes, bitcoin miners’ carbon footprint is growing exponentially. Though there have been significant efforts made to reduce the environmental toll, from solar farms to hydro-plants, Bitcoin can’t seem to escape this negative stigma.

Some of the most interesting initiatives, however, are those literally turning waste into bitcoin. And the oil industry is ripe for potential in this regard.

Bernstein analysts led by Jean Ann Salisbury noted that the Permian Basin could produce an “astounding 25 bcfd of wet gas [per day] to 2025, which will mostly be treated as a byproduct based on oil price and possibly even flared! What could producers do instead with this free gas?”

Indeed, that’s the million-dollar question.

And unfortunately, it has yet to be answered. In their review, the analysts concluded that, because of increasing mining difficulty, Bitcoin prices would need to be much higher to remain profitable, stating “We make money only if the average price over 15 years is $18,788.”

But that’s not the end of the story. There’s still a problem that needs a solution.

Flare Mining

Oil prices are continuing to climb, and regulators are once again beginning to weigh the true cost of flaring as rig counts rise and the shale boom kicks into overdrive.

The bottlenecks are inevitable, and if regulators do begin to crack down on natural gas flaring, oil production in Texas could slow drastically.

For drillers, there’s a clear a and present risk in investing in infrastructure to support bitcoin mining, but it’s something that they’re used to. And while the 15-year average needs to hit $18,000 to remain profitable, they’re already losing potential profits by burning natural gas. So, what’s a driller to do?

One company, in particular, is offering a unique plug-and-play solution to this issue. With the understanding that the current path is unsustainable, Flare Mining has built a portable flare gas capture and processing unit which allows drillers to easily turn otherwise wasted gas into bitcoin.

The FlarePods come equipped with everything needed to process excess natural gas, turning it into energy to power mining rigs. Additionally, the pods feature a satellite internet connection which will allow drillers even in the most remote locations to remain connected.

While the FlarePods provide a glimmer of hope for oil producers looking to cut back on their losses, or even profit on their excess gas, there’s still a long way to go before such solutions become commonplace in land of crude oil cowboys.

via RSS https://ift.tt/2CfTUq6 Tyler Durden

After hinting for months that the FBI was not forthcoming with federal surveillance court judges when they made their case to spy on the Trump campaign, Texas Rep. John Ratcliffe (R) said on Sunday that the agency is holding evidence which “directly refutes” its premise for launching the probe, reports the Daily Caller‘s Chuck Ross. 

Texas Rep. John Ratcliffe provided Sunday the clearest picture to date of what the FBI allegedly withheld from the surveillance court.

Ratcliffe suggested that the FBI failed to include evidence regarding former Trump campaign adviser George Papadopoulos, in an interview with Fox News.

Ratcliffe noted that the FBI opened its investigation on July 31, 2016, after receiving information from the Australian government about a conversation that Papadopoulos had on May 10, 2016, with Alexander Downer, the top Australian diplomat to the U.K. –Daily Caller

While Australia’s Alexander Downer claimed that Papadopoulos revealed Russia had “dirt” on Hillary Clinton, Ratcliffe – who sits on the House Judiciary Committee – suggested on Sunday that the FBI and DOJ possess information which directly contradicts that account. 

“Hypothetically, if the Department of Justice and the FBI have another piece of evidence that directly refutes that, that directly contradicts that, what you would expect is for the Department of Justice to present both sides of the coin to the Foreign Intelligence Surveillance Court to evaluate the weight and sufficiency of that evidence,” Ratcliffe said, adding: “Instead, what happened here was Department of Justice and FBI officials in the Obama administration in October of 2016 only presented to the court the evidence that made the government’s case to get a warrant to spy on a Trump campaign associate.” 

The FBI referred to Papadopoulos in a Foreign Intelligence Surveillance Act (FISA) warrant application – however what has been released to the public is so heavily redacted that it’s unclear why he is mentioned. 

As The Hill‘s John Solomon notes, based on Congressional testimony by former FBI General Counsel James Baker – the DOJ / FBI redactions aren’t hiding national security issues – only embarrassment. 

Other GOP lawmakers have suggested that evidence exists which would exonerate Papadopoulos – who pleaded guilty to lying to the FBI about his contacts with Maltese professor (and self-professed member of the Clinton Foundation), Joseph Mifsud.

Ratcliffe suggested that declassifying DOJ / FBI documents related to the matter “would corroborate” his claims about Papadopoulos. 

Republicans have pressed President Trump to declassify the documents, which include 21 pages from a June 2016 FISA application against Page. House Intelligence Committee Chairman Devin Nunes has said that the FBI failed to provide “exculpatory evidence” in the FISA applications. He has also said that Americans will be “shocked” by the information behind the FISA redactions. –Daily Caller

President Trump issued an order to declassify the documents on September 17, but then walked it back – announcing that the DOJ would be allowed to review the documents first after two foreign allies asked him to keep them classified. 

“My opinion is that declassifying them would not expose any national security information, would not expose any sources and methods,” said Ratcliffe. “It would expose certain folks at the Obama Justice Department and FBI and their actions taken to conceal material faces from the Foreign Intelligence Surveillance Court.”

via RSS https://ift.tt/2QTrAOo Tyler Durden