A Technical History Of Market Melt-Ups

Authored by Vincent Delaurd via INTL-FCStone,

Melt-Up, FOMO, and Other Climaxes – A Technical History of Good Times

Bottom Line:

  • Many strategists are calling for a year-end melt-up: I believe it already happened
  • There have been 76 melt-ups since 1900: the current one is already the second longest on record
  • Stocks have achieved a Sharpe ratio of 4.5 this past year – better than 99.7% of the times since 1900
  • There is little sidelines cash and leverage levels are high • A re-allocation from bonds into equities could push the market higher
  • I’d rather bet on higher rates than on a continuation of this over-extended bull run

Warren Buffett famously joked that “bull markets are like sex. It feels best just before it ends”. Based on my sometimes-unlucky experience of sex and bull markets, I would add another commonality: the climax is sometimes reached before every participant realized that the party had even started.

Market pundits have pumped the notion of a year-end melt-up with quasi sexual frenzy lately. This report will make the sobering case that the melt-up already happened. Defining a melt-up as the combination of new all time-highs and 20% + year-over-year gains, I documented 76 such explosions since 1900. The median melt-up lasted 45 days. The longest and greatest of these jubilations lasted a glorious 320 days. The current climax has lasted 311 days, and counting.   This remarkably resilient market Nirvana also featured a 1-year Sharpe ratio of 4.5, enough to break the heart, mind, and soul of the most seasoned hedge fund manager.  

Racy jokes aside, I do not want to join the bears which have broken their claws on the back of this soaring bull. Melt-ups alone do not portend future losses: the S&P 500 index has gained an average 6.8% in the year following the 76 prior meltups. Also, bond investors have poured about $10 trillion into bond funds since 2009, and almost nothing into equity funds.  Even a small re-allocation could propel the stock market into an unprecedented jubilee. 

But I’d much rather play the melt-up game by betting on rising rates, rather than a continuation of this overextended and overvalued equity bull market.

A melt-up is a subjective affair.

What If the Melt-Up Already Happened?

"Melt-up" seems like one of the most overused expression in market commentary these days. Yet, very few analysts bother to define what they mean by the term. The first step to analyze a phenomenon is to define it properly, so here is my suggested definition of a melt-up:

  • A 20 % year-over-year gain – or about double the normal market gain
  • New all-time highs: melt-ups are born out of optimistic sentiment getting more extreme. Bounces from corrections, no matter how large, do not qualify.

Hence, the start of a melt-event is met when these two conditions (a new ATH on year-over-year gains of 20% or more) are met. It lasts for as long as the market remains above its 6-month moving average. I measured the gain as the maximum price appreciation between the start and the end of the event. Using this definition, there have been 77 melt-ups since 1900. The S&P 500 index spent a total of 16 years in meltup mode, or about 14% of its time. This reflects the extraordinary performance of U.S. stocks, which have returned an annualized total return of 8.1% this past century.

What Could Make the Melt-up Last Longer?

Historical precedents clearly suggest that the melt-up is already behind us. But as the French say, “comparaison n’est pas raison”, and maybe it is different this time. In the short-term, only three factors can push a bull market higher:

1. More money coming into the market

 

2. Investors taking in more leverage

 

3. Investors rotating money from other asset classes

Let’s start with #1, sidelines cash. As bulls never tire of repeating, this is “the most hated bull market ever”. It may be so, but there are a lot of fully-invested bears out there. A decade of financial repression has turned cash into trash. Money market funds assets account for just 17% of the assets of long-term funds, a historical low. Similarly, the cash balance of equity mutual funds is at an all-time low 3.3%. Hence, there is not much sidelines cash left to push stocks higher.

How about leverage? Perma-bears love to point that margin debt has risen to a record $550 billion, up from $381 billion at the July 2007 peak. I believe that this statistic is misleading: asset prices are also much higher today, which would allow for higher absolute levels of leverage. Scaling margin debt by market capitalization adjusts for this bias. Margin debt accounts for 2.2% of U.S. stocks’ market cap, slightly above the long-term average.

Then again, margin debt may not be the best measure of leverage these days. Day-traders may use margin debt in their eTrade accounts, but the big boys have better ways to lever up. According a recent and excellent presentation of Fasanara Capital, U.S. corporate debt sored to $5.8 trillion in 2016, almost doubling in five years. Nearly 70% of the new debt issued in Europe and U.S. is “cov-lite” as investors are happy to pile into any instrument that offers a positive yield. Caveat emptor, as the Romans used to say.

The only prospect for significant inflows into the equity market would come from the bond market. According to the Fed’s latest Flow of Funds Report, bond mutual funds took in almost $10 trillion since January 2009, while equity funds have taken less than $1.1 trillion. Hence, it is theoretically possible that an accelerating economy, coupled with a more hawkish Fed and a progressive tightening of global central banks’ liquidity faucets, could convince investors to rotate from bonds into equities. 

It is hard to estimate the impact of such a rotation on stocks’ valuations. Over the short-term, more money flowing into the stock market would be bullish. However, equities would eventually be impacted by higher rates – low interest rates and “TINA” have been the main justification for sky-high multiples. I doubt that the S&P 500 index would trade for 22 times earnings if bond yields normalized.

Hence, it is probably safer to play the “great rotation” by betting on higher rates than hoping for an extension of this stretched bull market. As I argued in “the Other, Bigger, ETF Bubble”, bonds are still much more overpriced than equities. At these valuations, I’d much rather be a bond bear than a stock market bull. 

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Navy Investigating 2 SEAL Team 6 Members Over Green Beret’s Death

Many questions about the circumstances surrounding the death of Sergeant La David Johnson remain unanswered, but in a surprising Sunday-afternoon bombshell, the New York Times reported that Navy criminal authorities are investigating whether two members of the Navy’s elite Seal Team 6 strangled to death an Army Green beret on assignment in Mali in June.

The report – which comes completely out of the blue considering Melger’s death wasn’t widely reported when it happened – appears poised to compete with Special Counsel Robert Mueller’s purported indictments for space in the coming week’s crowded news cycle.

Staff Sgt. Logan J Melgar, a 34-year-old veteran of two deployments to Afghanistan, was found dead on June 4 in the embassy housing he shared in the Malian capital, Bamako, with several other Special Operations forces assigned to the West African nation to help with training and counterterrorism missions.

 

The soldier’s superiors in Stuttgart, Germany, almost immediately suspected foul play, and dispatched an investigating officer to the scene within 24 hour, military officials said. Agents from the Army’s Criminal Investigation Command spent months on the case before handing it off last month to the Naval Criminal Investigative Service.

 

No one has been charged in Sergeant Melgar’s death, which the military medical examiner ruled to be a homicide – strangulation, according to the autopsy results. The two Navy SEALs, who have not been identified, were flown out of Mali soon after the episode and were placed on administrative leave.

The two SEALs, who were not named, were reportedly housemates of Melgar. Neither the Army nor the military’s Africa Command issued a statement about Sergeant Melgar’s death, even after investigators changed their characterization of the SEALs suspected involvement from “witness” to “persons of interest,” meaning they were trying to determine what the commandos knew about the crime and if they were involved.

The uncertainty has left soldiers in the tight-knit Green Beret community in a state of suspicion as investigators explored whether the killing might’ve been a household dispute gone horribly awry – or whether Melgar stumbled on to some illicit activity and was killed to prevent him from informing on his peers.

While the Times’ report certainly leaves more questions and answers, one thing is clear: The investigation isn’t connected to the deaths of Johnson and three other green berets earlier this month in Niger.

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“Both Cannot Be Right” – The Yield Curve’s Ominous Message: Something Is Very Broken

Two weeks ago, Deutsche Bank’s credit analyst Aleksandar Kocic explained that with the yield curve becoming increasingly flatter, the Fed has roughly two more rate hikes left before it loses control as the curve first flattens completely and eventually inverts, a precursor to virtually every historical recession. As the DB strategist explained, given where long rates are the “Fed appears overly hawkish – it has only two more hikes to go and, for volatility and risk premia to reprice higher, the gap has to widen. As it appears unlikely that the Fed will be cutting rates any time soon, the gap could widen only if the Long rates sell off.”

The problem – as observed here virtually every day for the past year – is that long rates have refused to sell off, and while they did move modestly higher last week in the US, other developed nations have seen even more flattening to compensate for the move in the US.

Fast forward to this weekend when Macquarie analyst Viktor Shvets picks up where Kocic left off, and points out that investors’ expectation of tax cuts and potentially deeper regulatory changes, combined with evidence that global reflationary cycle remains robust, have firmed Fed’s tightening expectations and moved US 10Y yields above its recent 2.2%-2.4% range. However, there was no corresponding move in either Bunds (down 10 bps to 0.4%) or JGBs, thus widening real yield differential against Bunds to ~150bps (vs. 125bps in Aug’17 and 100bps in Oct’16) and against JGB’s to ~65 bps (vs. ~50bps two months ago). “Not surprisingly, this led to at least partial reversion of recent DXY depreciation.”

The bigger problem is that despite some notable rates moves last week, these have been confined to the front end, which means that even as probability of the Fed’s tightening increased and the short end of the curve responded, the long end has not moved much, and hence the US yield curves continued to flatten.

Currently, the 2s10s is trading at 82bps (since ’08 it has almost never been below 80bps), compared to ~90-95 bps in Jul ’17 and 130bps in Dec ’16. The further out on the curve that one goes, the greater the flattening, with the 2s30s now at 133bps vs over 200bps in Dec ’16. There were also no material change in the inflationary break-even rates or expectations.

Here’s why this is a big problem. As Shvets lays it out for the nth time, in a conventionally recovering economy, tightening by CBs should move the entire curve up, indicating strengthening confidence and rising expectations. However, it is clear that while the short-end is responding to growing probability of tightening, the long end is assuming that rising rates instead of stimulating growth and confidence, would increase the chances of much more disinflationary outcomes further down the road. In fact, the more the Fed has tightened, the more the curve has flattened.

From a practical standpoint this means that while the short end is assuming that mixture of rate rises and liquidity withdrawal would result in higher cost of capital, the intermediate and long end of the curve assume that neither supply nor demand for capital can withstand higher cost of capital. And as we, Deutsche Bank, Bank of America and many others have pounded the table previously, and now so does Macquarie, “Both cannot be right. Flattening yield curves imply less liquidity and higher probability that consumption and investment would fall and savings rise.”

Adding to the confusion, the curve has flattened even as financial conditions remain abundantly, generously loose. An emerging paradox here is that even though CBs have signaled that over the next 12 months liquidity flows
would fall by more than 50% (vs US$2 trillion injected this year) and liquidity might turn negative by the start of 2019 as BofA once again warned last week

 

… financial stress indicators remain at the easiest ever levels. This is true whether we look at St Louis Financial Stress Index…

… high yield, TED or OIS spreads. This validates, at least superficially, what Shvets claimed before, namely that “we are living in a world without risks“.

The declining risks amidst rising cost of money and potentially falling liquidity is only possible if private sector productivity is improving. Unfortunately, we do not see evidence to support it.

So what does all of the above mean? Well, as Kocic warned two weeks ago, and as Shvets explained now, unless the entire curve starts shifting up, it appears that we are still in a world where CBs cannot tighten or withdraw liquidity. This in turn leads to another circular problem: the longer the Fed avoids the moment of reintroducing risks, the greater the eventual crash will be, i.e. the Fed’s “nightmare scenario.” Or, as Shvetz puts it:

“There is of course a policy concern that persistence of low volatilities and high valuations are raising financial stability risks. While these concerns are legitimate, we can’t see how price discoveries or volatilities can be re-introduced, without a risk of significant asset value contractions that would bring forward economic volatilities that CBs are trying to avoid.” 

In other words, for all the talk and posturing of tighter conditions and future rate hikes, Shvets believes that “central banks remain slaves of the system, and a pleasant Kondratieff autumn is likely to endure.” The alternative is the Fed losing control – something which is not allowed to happen, and is why stocks continue to hit all time highs – ushering in the very unpleasant “Kondratieff winter.”

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“Worse Than Tulips…” And Other Enduring Misconceptions About Crypto Assets

Via CoinDesk.com,

Chris Burniske is a cofounder of Placeholder Ventures in New York and former blockchain products lead at ARK Investment Management LLC. Jack Tatar is an angel investor and advisor to startups. In this opinion piece, adapted from their book Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond, they explain what mainstream financial commentators still don't understand about the space – even if the markets are starting to get it.

*  *  *

This has been a breakout year for crypto assets, but not so long ago we were thickly in "blockchain, not bitcoin" season.

When we began work on our book, the consensus play seemed to be stripping the native assets out of blockchains and privatizing these originally open networks.

With the book, we set out to make a stand for public blockchains as the more important innovation, to confront the misguided (and persistent) claim that crypto assets are elaborate scams, and to reassure macroeconomists that not all crypto assets are currencies.

Bitcoin, not blockchain

One of the main motivations for writing the book was to emphasize the value of the native assets that incentivize a distributed set of actors to provision a digital good or service with no central operator, i.e. crypto assets.

Given the recent boom in interest around crypto assets, it seems counterintuitive that much of 2014, 2015 and 2016 were dominated by the idea that blockchain technology was important, while crypto assets could be forgotten and little would be lost.

The term distributed ledger technology (DLT) became popularized to convey this concept, effectively washing those pursuing DLT-strategies clean of association with bitcoin. Many in the financial services industry were all too eager to forget that bitcoin was the mother of blockchain technology.

Fall 2015 was when the frenzy around private blockchains really began, with Blythe Masters and Digital Asset Holdings featured on the cover of Bloomberg Magazine, and the Economist running a front cover piece called "The Trust Machine."

The combination of Masters, Bloomberg, and the Economist led to a spike in interest in blockchain technology that set off a sustained climb in global Google search volumes for "blockchain." In the two weeks between Oct. 18 and Nov. 1, 2015, just after Bloomberg and the Economist published their articles, global Google search volumes for 'blockchain' grew 70 percent.

We find ourselves on the flip side of Jamie Dimon’s reasoning: we believe the majority of private blockchains and DLT implementations will become the CompuServes and AOLs of the cryptoasset movement.

Time and again through the history of information technology, open has won out over closed, public has won out over private. This is not to say there isn’t a place for closed and private, but rather that the impact such systems have on the world consistently pales in comparison to the change brought about by open and public systems.

As we write in the book,

"We see many DLT solutions as band-aids to the coming disruption. While DLT will help streamline existing processes — which will help profit margins in the short term — for the most part these solutions operate within what will become increasingly outdated business models."

Baby boomer biases

Famously, Nout Wellink, former president of the Dutch Central Bank, said of bitcoin, "This is worse than the tulip mania… At least then you got a tulip [at the end], now you get nothing."

image courtesy of CoinTelegraph

Nout displays a type of anti-crypto asset bias many baby boomers suffer from: if these things have no physical form, how could they possibly have value?

To start, such a mindset then raises the same question of much of our world, which is increasingly based upon things that have only digital representations and amass massive amounts of value.

For example, the market caps of Twitter, Facebook and Google are largely based on 100% digital services – certainly, those services produce cash flows, but cash is paid in exchange for a digital service, implying a purely digital service can have value.

To sate the skeptical, in our book we provide a deep dive into methodologies for valuing bitcoin, and explain how the methodologies can be put to use for crypto assets more broadly.

One of our favorite explorations was working to quantify the contributions of developers, which we don’t think we nailed, but hopefully provided a basis for future work and exploration. Below is one of the developer graphs, showing the frequency of activity based on code repository points and the number of days a crypto asset project has been in the works.

In addition to explaining how crypto assets have a very real form of value, we spend two chapters exploring the most famous market disasters across all kinds of asset classes, including John Law and the Mississippi Company that brought France to its knees, the cornering of the gold market by Jay Gould, and different forms of this time is different thinking.

We spend a significant chunk of time exploring the history of financial speculation to highlight that all asset classes go through growing pains, and we should expect the same of crypto assets.

We may have new bad actors in the crypto markets, but they are playing old tricks.

Why so many?

A question asked by many new to the industry is, why do we need more than 100 currencies? Can’t we do with just a handful? And if these things intend to be currencies, why are they so volatile?

For that reason, we titled the book Crypto assets, and not Cryptocurrencies, and we explain our thinking as follows:

Historically, crypto assets have most commonly been referred to as cryptocurrencies, which we think confuses new users and constrains the conversation on the future of these assets. We would not classify the majority of crypto assets as currencies, but rather most are either digital commodities (crypto commodities), provisioning raw digital resources, or digital tokens (crypto tokens), provisioning finished digital goods and services.

A currency fulfills three well-defined purposes: to serve as a means of exchange, store of value, and unit of account. However, the form of currency itself often has little inherent value. For example, the paper bills in people’s wallets have about as little value as the paper in their printer. Instead, they have the illusion of value, which if shared widely enough by society and endorsed by the government, allows these monetary bills to be used to buy goods and services, to store value for later purchases, and to serve as a metric to price the value of other things.

Meanwhile, commodities are wide-ranging and most commonly thought of as raw material building blocks that serve as inputs into finished products. For example, oil, wheat, and copper are all common commodities. However, to assume that a commodity must be physical ignores the overarching “offline to online” transition occurring in every sector of the economy.

In an increasingly digital world, it only makes sense that we have digital commodities, such as compute power, storage capacity, and network bandwidth. While compute, storage and bandwidth are not yet widely referred to as commodities, they are building blocks that are arguably just as important as our physical commodities, and when provisioned via a blockchain network, they are most clearly defined as crypto commodities.

Beyond cryptocurrencies and crypto commodities – and also provisioned via blockchain networks – are “finished-product” digital goods and services like media, social networks, games, and more, which are orchestrated by crypto tokens. Just as in the physical world, where currencies and commodities fuel an economy to create finished goods and services, so too in the digital world the infrastructures provided by cryptocurrencies and crypto commodities are coming together to support the aforementioned finished-product digital goods and services.

Crypto tokens are in the earliest stage of development, and will likely be the last to gain traction as they require a robust cryptocurrency and crypto commodity infrastructure to be built before they can reliably function.

The markets catch up

We wrote Cryptoassets to cut against the grain of thinking that claimed bitcoin and its digital siblings were a niche movement, and instead to emphasize to investors that this represents the greatest opportunity for investors and entrepreneurs since the Web.

In the midst of writing, the markets came to the same realization, taking the aggregate network value of crypto assets up roughly 15-fold, and doing much of the convincing for us.

Nonetheless, we hope the book serves as a useful guide to the uninitiated, an explainer for befuddled financial professionals, and a reflection on the wild ride it’s been for the crypto OGs.

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Details Of “Suspicious” Manafort Wire Transfers Leaked From FBI Probe

As speculation mounts that Paul Manafort might be the target of the sealed indictments reportedly approved by Special Counsel Robert Mueller’s grand jury, Buzzfeed is reporting new details of Mueller’s probe into Manafort, seemingly a hint that he will in fact be one of, if not the only, target taken into custody tomorrow.

The FBI's investigation of Donald Trump's former campaign manager, Paul Manafort, includes a keen focus on a series of suspicious wire transfers in which offshore companies linked to Manafort moved more than $3 million all over the globe between 2012 and 2013.Much of the money came into the United States.

 

These transactions — which have not been previously reported — drew the attention of federal law enforcement officials as far back as 2012, when they began to examine wire transfers to determine if Manafort hid money from tax authorities or helped the Ukrainian regime close to Russian President Vladimir Putin launder some of the millions it plundered through corrupt dealings.

 

The new revelations come as special counsel Robert Mueller’s investigation is tightening, with reports that an indictment may already have been issued. It is not known if Manafort has been indicted, or if he ever will be. Manafort has been the subject of multiple law enforcement and congressional inquiries. A spokesperson for Manafort would not comment for this story about the investigation or any of the specific transactions, but Manafort has previously denied wrongdoing.

 

Manafort took charge of Trump’s campaign in May 2016 and was forced to resign just three months later, amid intense media scrutiny of his ties to the notoriously corrupt former Ukrainian President Viktor Yanukovych, who was supported by the Kremlin. A political operative for decades, the 68-year-old Manafort has worked for Republicans such as Presidents Ronald Reagan and George H. W. Bush, as well as for foreign leaders such as former Philippines President Ferdinand Marcos.

To be sure, the subject or subjects of the indictment have not been revealed – and leaking any more details from the grand jury room would only serve to further erode Mueller’s credibility.

And it’s important to Manafort is only one of a handful of Trump associates to face scrutiny in the probe – that group also includes President Trump’s son-in-law Jared Kushner and former National Security Advisor Michael Flynn. But the probe into Manafort has been subject to an unusual number of leaks, including reports that his home had been raided by the FBI over the summer, and that Mueller had been looking into his tax records in search of a ‘check the box’ violation.

Adding to this, Roger Stone reportedly testified that Mueller’s team had  informed Manafort that he should expect to be indicted.

As Buzzfeed pointed out, Manafort is reportedly also being investigated for money laundering by federal prosecutors in New York City, but there have been no formal charges from that probe. The FBI searched his home during a pre-dawn raid this summer, reportedly as part of Mueller’s probe. Manafort has consistently maintained his innocence.

Mueller is reportedly examining at least 13 wire transfers that occurred between 2012 and 2013. The transfers were flagged by Treasury officials as suspicious, which triggered an FBI investigation that – tellingly – never led to charges. It’s unknown how that investigation was resolved.

Now, BuzzFeed News has learned that investigators have been scrutinizing at least 13 wire transfers between 2012 and 2013. The transfers were first flagged by American financial institutions, which are required by law to tell an office within the Treasury Department about any transactions they deem suspicious. Such “suspicious activity reports” do not prove wrongdoing. Federal law requires financial institutions to file reports on cash transactions that exceed $10,000 in a single day, even if those transactions seem otherwise legitimate. Banks are also required to file the reports whenever they suspect money laundering or other financial crimes.

 

Bank officers flagged unusual behavior among five offshore companies that authorities say are associated with Manafort: Global Endeavour Inc., Lucicle Consultants Ltd., and three others that appear to have no current contact information.

 

Law enforcement sources say the companies sent funds in round-dollar amounts without explanation of what the money was to be used for. The countries where these transactions originated — notably Cyprus and the Caribbean nation of St. Vincent and the Grenadines — are notorious for money laundering. Federal law enforcement officials said they saw evidence of “layering,” the process by which the origin of money is obscured behind many layers of companies. Much of the money ended up in the US, sent to American home improvement contractors, a hedge fund, and even a car dealership.

 

Manafort’s suspicious financial transactions were first flagged by Treasury officials as far back as 2012 and forwarded to the FBI’s International Corruption Unit and the Department of Justice for further investigation in 2013 and 2014, a former Treasury official who worked on the matter told BuzzFeed News. The extent of Manafort’s suspicious transactions was so vast, said this former official, that law enforcement agents drafted a series of “intelligence reports” about Manafort’s financial dealings. Two law enforcement officials who worked on the case say that they found red flags in his banking records going back as far as 2004, and that the transactions in question totaled many millions of dollars.

Buzzfeed later implies that Manafort helped Viktor Yanukovich – who is suspected to be the ultimate source of the payments, which were presumably made in exchange for Manafort’s consulting work – loot Ukraine’s public Treasury.

BuzzFeed News has learned specific details about 13 of the wire transfers, all of which took place between 2012 and 2013. At least four of the transfers originated with Manafort’s company Global Endeavour, a political consulting firm based in St. Vincent and the Grenadines. Global Endeavour was hired by Yanukovych to consult and lobby on his behalf. Ousted after the 2014 Euromaidan Revolution, Yanukovych lives in exile in Russia and is accused of treason by Ukrainian authorities; the country’s general prosecutor said Yanukovych’s embezzlement of state funds was so egregious it resembled a “mafia structure.”

 

Wire transfers flagged as suspicious show that during the waning months of Yanukovych’s presidency, Global Endeavour sent more than $750,000 out of Ukraine. None of these transactions have been previously reported.

 

In November and December of 2013, for example, the company transferred almost $53,000 to Konstantin Kilimnik, a Kiev-based political operator. It’s not known what the money was for. A federal law enforcement official described Kilimnik as a linguist trained by the Russian army and about whom the US has gathered intelligence. He reportedly attended a military school some experts believe to be a training ground for Russian spies.

 

Kilimnik worked with Manafort for more than a decade, and the Washington Post reported that Manafort emailed his old partner in 2016 to offer “private briefings” to a Russian billionaire close to President Vladimir Putin.

 

Kilimnik declined to comment when reached Saturday by BuzzFeed News.

 

In September 2013, Global Endeavour transferred $500,000 that would ultimately end up back in Manafort’s control. First it went to a hedge fund in Florida, Aegis Holdings LLC, that is controlled by Marc Baldinger, a broker who in 2014 was suspended for 18 months for engaging in deals his financial institution didn’t know about. Baldinger’s brother, Bruce, is a real estate attorney who has worked with Manafort for about a decade.

While the wire transfers Buzzfeed reported on mostly involved Manafort’s Global Endeavor lobbying company, the FBI is also reportedly examining suspicious wire transfers involving other companies.

In addition to transactions involving Global Endeavour, there were wire transfers, never before reported, flagged as suspicious involving other companies. There were three by the Cyprus-based Lucicle Consultants — which has “strong ties” to Manafort, according to federal law enforcement sources — in March and April 2012. The company transferred a total of about $2.5 million, some of it directly to accounts controlled by Manafort. No contact information for Lucicle or any of its officers could be found.

Given that leaking Manafort as the target would be too damaging, is this leak Mueller’s way of taunting the former Trump campaign executive before indictments are handed down?

Or are these just more trivial details about Manafort receiving payment for his lobbying work?

What do you think?

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In The Markets… “It’s All About The Magic”

Authored by Sven Henrich via NorthmanTrader.com,

It’s all about the magic.

Firstly, following up on the Liquidity Wave: Mario Draghi followed through on his primary mission and did not upset markets. Indeed Super Mario gave the $DAX virtually all of its price gains for October:

Magic.

Just so we’re still clear who’s running the price discovery show in global markets:

Magic.

You do realize that Mario Draghi’s term is ending in 2019. Which means he will have never raised rates once during his entire tenure. He came, he saw, and he was easy. And stayed easy. And then went on to cushy speaking engagements. Magic.

Next in the line of magic: Tech.

Tech flew to new highs on Friday on the heels of earnings reports and markets celebrated Jeff Bezos becoming the richest man in the world with a $90B net worth.

Magic. Cause it was all done with a shrinking earnings picture:

Operating income cut in half and net income 23% of what it was last year. But hey, disruption and destruction of the entire retail space as we’ve seen 6,700 store closings already in 2017.

So one company kills the margins for everyone else, has an operating margin of virtually zero itself, but hey, magic:

Indeed the real magic is in market cap expansion. It is true the tech monopolies are killing it in terms of growth and market share, but the market cap expansion that comes with it is awe inspiring.

Someone ran the math:

AMZN now has a market cap of $528B with a PEG ratio of 4.77. But it’s not about valuation and it’s clearly not about earnings. It’s about magic.

So tech screamed to new highs on Friday.

Watch the magic:

New Highs vs New Lows on Nasdaq:

$NDX stock above their 50MA:

I take it you noticed that sinking feeling.

But it’s not only tech, it extends to the entire market:

$SPX:

$NYA:

Indeed the new highs on Friday?

Came on a negative $NYMO:

The entire new highs picture since September has come on lower and lower $NYMO readings.

Check recent cumulative advance/decline:

New highs on running cumulative negative advance/decline issues.

And all of this of course is reflective of a long standing trend in equal weight that just fell off the cliff:

But hey. Time for tax cuts, the top 1% are suffering:

Convincing voters that these folks need tax cuts so that they themselves may fare better may indeed be a true magic act.

But that’s what everyone is waiting for I’m presuming. After all this would be the reason why investors are fully long positioned per the Rydex bull/bear ratio, now at 0.05:

With valuations in the 99th percentile of history:

And planning to add more and more and more:

Yes, everybody loves magic. Just remember magic levitation may simply be a cheap trick with someone pulling on a string:

Next week we will get to see another magic show: The FOMC will tell us why they can’t raise rates again and we will find out who Janet Yellen’s replacement will be.

 

I’m sure it will be magical.

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‘Trump Dossier’ Firm Will Turn Over Banking Records To House Intel Committee

Earlier this week, Speaker Paul Ryan offhandedly revealed that the FBI had agreed to hand over documents related to the infamous Trump dossier to the House Intelligence Committee, marking a victory for Chairman Devin Nunes, who had been pushing the DOJ to release the documents for month. And last night, Fox News reported another victory for Nunes in his push to determine how the dossier – which was funded by the DNC and Clinton campaign and contains allegations that have been widely debunked – factored into the bureau’s decision to open an investigation into possible collusion between the Trump campaign and Russia.

Fusion GPS co-founder Glenn Simpson

After the owners of Fusion GPS – the opposition research firm hired by a lawyer for the Clinton campaign to scrutinize Trump’s foreign business dealings – refused to answer questions two weeks ago during a Congressional hearing, the company has reportedly agreed to turn over its bank records to Nunes after initially trying to block it.

The House Intelligence Committee said Saturday it has struck a deal to gain access to bank records from Fusion GPS, the firm behind the salacious anti-Trump dossier. The company had recently attempted to block the committee’s subpoena for its banking records.

 

“The parties have reached an agreement related to the House Intelligence Committee's subpoena for Fusion GPS's bank records that will secure the Committee's access to the records necessary for its investigation,” the intelligence committee said in a statement released Saturday.

As Fox pointed out, Nunes has been trying for months to investigate the dossier, which claimed the Russian government had compromising material with which it could blackmail Trump. The dossier was turned over to the FBI during the summer of 2016 and was also widely circulated among Washington journalists before it was published by CNN and Buzzfeed early this year.

Last week, it emerged that Fusion GPS had been retained last year by Marc E. Elias, an attorney representing the DNC and the Clinton campaign, to conduct opposition research on Trump. The firm contracted British spy Christopher Steele, who assembled the dossier.

On Friday evening, it was revealed that the opposition research project was initially backed by the conservative Washington Free Beacon website.

House Intelligence Committee Chairman Devin Nunes, R-Calif., had issued a subpoena on Oct. 4 for Fusion GPS’ TD Bank records. Fusion’s lawyers responded by issuing a "temporary restraining order and preliminary injunction" to block the release of those records, arguing the release would them “their rights to free speech and expressive association as guaranteed by the First Amendment to the Constitution."

While it’s now public knowledge that the Democrats funded the dossier, details like how much they paid for the document and how much they knew about Steele’s work or the quality of his claims remain a mystery. However, the firm’s banking records could shed some light on these matters.  

In other words…

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Manhattan Office Bubble Fizzles Without Big Chinese Buyers

Authored by Wolf Richter via WolfStreet.com,

Sales volume in Q3 plunges 67% from a year ago.

Manhattan, the biggest most expensive trophy market in the US for commercial real estate, used to be particularly appealing to exuberant foreign investors, such as Chinese conglomerates. But in the third quarter, sales volume of large office properties (minimum $5 million and 50,000 sq. ft.) plunged 67% year-over-year to $991 million, the lowest in five years. It was down 90% from the peak in Q1 2015.

“Q3 2017 might signal a return to normalcy for the highly sought-after Manhattan market,” the report by Yardi Systems’ Commercial Café commented.

This chart shows the dollar sales volume of large office properties. The $991 million in Q3 is rounded up to $1 billion:

The number of closed deals plunged 40% to just six transactions, according to Commercial Café. That’d down 71% from the peak in Q1 2015:

The average price per square foot fell 19% year-over-year and is down 32% from the peak in Q1 2016, but is up from Q1 2017 and about flat with Q3 2015.

As this chart shows, the average price per square foot varies based on a number of factors, including seasonality, but with a trend since the peak in Q1 2016 that doesn’t look promising:

The largest deal was the $465-million sale of 375 Hudson, a 19-story, 1 million-square-foot Class A property, acquired by Trinity Real Estate, the real estate arm of Trinity Church (51% stake), Norges Bank (48% stake), and Hines Interests (1% stake).

What’s sorely missing? The big transactions at inflated prices by Chinese buyers, such as the $2.2 billion purchase in May of 245 Park Avenue by the Chinese conglomerate HNA Group that had boosted Q2 sales. The deal was more than twice the size of the six transactions in Q3 combined. At $1,282 per square foot, it was also “among the highest price-per-pound for this type of asset” ever recorded in Manhattan, as it has been described. Those trophy purchases by Chinese conglomerates really moved the needle.

But now the large Chinese conglomerates that had considered the Manhattan office market their trophy hunting grounds were absent.

This absence follows the crackdown by China’s State Council on cross-border transactions. Its guidelines spell out what Chinese companies can and cannot acquire overseas to “promote healthy growth of overseas investment and prevent risks,” as the guidelines said.

Some transactions are still desirable according to the guidelines, with a big emphasis on China’s “Belt and Road Initiative” in Central Asia and on companies that “take the lead to export China’s superior technology and equipment, upgrade the nation’s research and manufacturing ability, and make up the shortage of energy and resources through prudent cooperation in oil, gas and other resources.”

Other overseas investments will be “restricted,” including “real estate,” “hotels,” and “entertainment.”

So here we go. Over the past few years, and building up into a powerful crescendo that culminated just a few months ago, Chinese conglomerates have been buying up whatever they could get their hands on with precariously borrowed money. But now they’re being reined in by Chinese authorities who are worried about the soaring debt levels of those conglomerates and about their acquisitions at inflated prices and about a financial crisis that these debt levels could trigger when they go bad. And trophy markets, such as Manhattan, are among the first to feel the effects.

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“The World’s Largest Sovereign Wealth Fund Is Investing With No Valuation Model”

There are several quotable observations in Eric Peters’ latest Weekend Notes, in which the One River Asset Management CIO looks at last week’s melt-up euphoria in markets…

Hope all goes well… Abe wins landslide, Nikkei soars to 21yr high. Xi Jinping is named in China’s constitution, cementing his place alongside Mao, equities jump. House Republicans pass $4trln budget resolution, lifting hopes for a $1.5tlrn tax cut/reform. Despite devastating hurricanes, US Q3 GDP expands 3%, S&P 500 hits record high. VIX 9.80. Biggest Nasdaq 100 daily gain in 2yrs. Bezos becomes world’s richest man, +$10bln on Friday to a $93bln net worth. Such a stunning rise, a synchronized global triumph, unrecognizable from the 2008 cataclysm that produced so many waves.

…. muses on Albert Einstein’s philosophy of happiness, observes the dilemma facing Elon Musk when it comes to auto sales in China, but most notable is his take on modern capital allocation and investing by the $14 trillion pool of 401(k)s and IRAs, which he calls “the world’s largest sovereign wealth fund”, and which finds itself forced to invest in such assets as Tajikistan and Iraqi bonds because the traditional framework preached by the MPT is no longer applicable, and as a result “the largest SWF on earth is investing with no valuation model but for the rear-view mirror.”

Here is the full excerpt:

Fallujah

 

“It’s a monolith,” he said. “It essentially operates as a single investor, like a sovereign wealth fund,” he continued.

 

“In fact, the US 401k and IRA savings is collectively the world’s largest SWF.” From the 1978 creation of the 401k, that pool has grown to $14trln. The early adopters were baby boomers, and their holdings dwarf all others; a combination of decades of contributions and capital gains.

 

“The firms that help Americans invest their retirement savings use the same models. They all utilize the same inputs, and produce the same outputs.”

 

“Walk into Schwab, or any competitor, and ask for your target asset allocation,” he said. “You’ll discover that the dominant input is your age. It’s a robo-advisor style of investing.”

 

The older you become the more bonds you should own relative to stocks. “They boast thousands of portfolio simulations, stress tests.” They explain how the methodology is scientifically proven and based on Modern Portfolio Theory.

 

“But MPT requires that you build a robust framework for estimating future asset class returns and correlations. And they have no such framework.”

 

“Without a robust framework for estimating future returns, these 401 advisors turn to the past to estimate future returns,” he explained.

 

“Do you want to know why money is flowing into emerging market bond funds?” And I nodded. “Because the machine tells retirees that they return 13% a year.”

 

Grandpa tucked a little Tajikistan into his portfolio last month (10yr bonds auctioned at 7.12%).

 

Grandma loaded up on Fallujah (Iraq auction yielded 6.75%).

 

“The largest SWF on earth is investing with no valuation model but for the rear-view mirror.”

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Bitcoin Just Spiked Back Above $6000

It's 9am in San Francisco (and 5pm in Barcelona), so it's time to panic-buy some crypto-currency…

Bitcoin just surged over $200, back over $6000.

 

For now the catalyst is unclear. However, amid increasing tensions folowing Spain's impositin of Article 155, as CryptoCoinsNews.com reports, Catalonia, which is fighting for independence from Spain, is considering an e-residency program similar to the one in Estonia. Catalonia is also considering adopting its own digital token or cryptocurrency.

The Government of Catalonia, the Generalitat de Catalunya, has sent representatives to Estonia to learn about the e-residency program, which offers a government-issued digital identity card that provides a way to operate a location-independent business online.

Dani Marco, the director of SmartCatalonia, an official Catalan agency, said the Estonians built a model of economic development from scratch. Marco appears to be heading Catalonia’s e-residency initiative.

Catalonia continues to move forward with plans to create an economy separate from Spain, according to El Pais, Spain’s leading newspaper. Estonia’s e-residency program serves as Catalonia’s model and could emulate an Estonian proposal to issue national blockchain based tokens.

E-Residency Benefits

El Pais reported that Catalonia is interested in Estonia’s e-residency program since the program has no borders. The e-residency program has attracted more than 20,000 entrepreneurs from 143 countries since 2014, including 336 from Spain.

El Pais further reported that Catalonia has the largest number of entrepreneurs and those working with virtual currencies in Spain.

Vitalik Buterin Weighs In

Blockchain experts in Catalonia have sought help from Vitalik Buterin, Ethereum’s founder, according to El Pais. Vitalik advised the Catalonians to create an ICO to offer a currency that would work in tandem with the financing of a business project for the virtual residence program. The e-residency ecosystem could create an economic community independent of a central bank.

Estonia recently proposed “Estcoin,” a national cryptocurrency. If the country follows through on this plan, it would be the first national government to launch an ICO.

Kaspar Korjus, managing director for Estonia’s e-residency program, posted a Medium blog in August claiming Estonia could offer Estcoins to residents. The coins could be managed by the Republic of Estonia, but accessed by anyone through the e-residency program. The program would launch an ICO to offer the coins.

Korjus also said the ability to start a location independent company is the main factor driving the growth of the e-residency program.

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