Category: zerohedge

Authored by Nick Cunningham of Oilprice.com,

Now nearly a week removed from the OPEC+ agreement, confidence in the efficacy of the deal is becoming shaky.

Immediately after OPEC+ announced cuts of 1.2 million barrels per day (mb/d), a flurry of reports from oil analysts and investment banks congratulated the group on a job well done. After all, the 1.2 mb/d figure was larger than the market had anticipated.

However, reality is beginning to set in. First, the cuts might not be realized in January, despite the promise. Russia indicated that it was going to slow walk the cuts, phasing in an initial 50,000 to 60,000 bpd in reductions in January. This is significant because Russia is the main actor in the non-OPEC cohort. The non-OPEC group is expected to slash output by 400,000 bpd, but if Russia is only going to do its part gradually over the next few months, the non-OPEC cuts might not reach the promised levels anytime soon. Moreover, because there are no country-specific allotments, it will be hard to hold any producer accountable.

That undermines confidence in the deal.

“Compared to early last week, the outcome was rather disappointing, the whole process wasn’t convincing, and it’s still uncertain whether they will actually cut,” ABN Amro senior energy economist Hans van Cleef told Bloomberg.

While oil traders are suddenly doubting the integrity of the deal, even if OPEC+ were to adhere to its promised cuts, it still might not be enough. That’s because there are other factors that could leave the market oversupplied. Cracks in the global economy are growing, demand is showing signs of strain, and supply continues to rise.

The EIA just issued its latest Short-Term Energy Outlook, and the agency still expects significant production growth from U.S. shale despite the downturn in prices. The EIA lowered its forecasted 2019 WTI prices by $10 per barrel from its previous report, yet it kept its supply forecast unchanged – it still thinks that U.S. oil production will rise from 10.9 mb/d in 2018 to 12.1 mb/d in 2019, despite the significant downward revision in prices.

In other words, U.S. shale production may not be slowed by the recent downturn in prices in any dramatic way, and at the same time, with its production cut agreement, OPEC+ reassured shale executives that it wouldn’t let prices fall any lower.

“The US is not only the world’s largest oil producer at present, but will also remain the leading marginal producer in future,” Commerzbank said in a note.

According to Rystad Energy, OPEC+ would need to cut an additional 700,000 bpd in order to balance the market and bring Brent back up to $70 per barrel.

“The  OPEC+ agreement predictably came up short of what Rystad Energy argued would be required to fully balance the market in 2019,” Bjornar Tonhaugen, Rystad Energy head of oil market research, said in a statement.

“The agreed production cuts will not be enough to ensure sustained and immediate recovery in oil prices. The muted market reaction seen thus far comes as no surprise to us.”

Rystad says that the cuts agreed to in Vienna provide a “soft floor” beneath oil prices for now, and the group can still succeed if it extends the cuts through the end of 2019. The OPEC+ coalition is set to evaluate the progress of the cuts in April and might decide to extend the cuts in June if they feel the market needs more time.

“Most likely, OPEC will be forced to conduct production management sporadically over the next few years, unless US shale supply grows even faster than we currently expect. OPEC members have their work cut out for them in the years to come,” Rystad’s Tonhaugen said.

The supply surplus could still be eliminated by unplanned outages. Libya just lost 400,000 bpd because of encroaching militias, according to the National Oil Corp. Venezuela and Iran are also set to continue to lose output, while Nigeria remains a risk. These events are impossible to predict, and they could quickly erase any supply overhang.

For now, though, the oil market is not convinced that the OPEC+ cuts will be sufficient to significantly increase oil prices, despite the initial euphoria surrounding the Vienna agreement.

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Sometimes, in fact quite often, the shortest posts are also the most informative. So we hope that the following three succinct lessons that Bank of America’s Chief Investment Strategist said he learned in 2018, are sufficiently self-explanatory to also be educational.

What we learned in 2018…

1. That central banks trump everything…when global liquidity peaked in Q1, markets peaked
2. That we remain in a deflationary world which cannot handle a 10-year Treasury yield above 3%
3. That investors have no satisfactory answers to the existential questions of “If not stocks, what?”, “If not tech, what?”, “If not the US dollar, what?”

Here is one bonus lesson for those eager to trade the his market:

• Sell-the-rip: we wait for Profits & Policy (interest rates) to reset to secular stagnation reality.

And finally, a problem with extra difficulty, which is causing most investors to “lose the plot”:

• It is rare for combo of such capitulation out of risk, capitulation into US dollar & Fed dovishness not to spark rally; only reason it would not is fear of “credit event” & “policy impotence.”

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Just about a decade after Bernard Madoff was exposed as running the biggest Ponzi scheme in history – and at a time where it feels like his successor could possibly be lingering right around the corner – the flight to recoup lost principal from his fund is carrying on and making significant headway.

Irving Picard, a New York lawyer who has been working on the liquidation of Madoff’s firm in bankruptcy court, has recovered about 70% of approved claims totaling about $13.3 billion. According to a report, he is recovering principle for investors by suing those who profited from Madoff, whether they knew about his scheme or not. He’s targeting billions more and is defying the norm: ponzi scheme recoveries generally only average 5% to 30% – and most investors are left with nothing.

Kathy Bazoian Phelps, a bankruptcy lawyer at Diamond McCarthy LLP in Los Angeles told Bloomberg: “That kind of recovery is extraordinary and atypical.”

The Madoff fraud wiped out about $19 billion that investors had “invested” with him since the 1970s. From there, it posted $45 billion in fake profits until his scheme blew up as a result of the global financial crisis in 2008. About 4800 client accounts were affected when Madoff was exposed and, as a result, he is currently serving a 150 year prison sentence. His wife was allowed to keep $2.5 million after his plea deal.

Matthew L. Schwartz, a former federal prosecutor said: “This was the biggest, longest-running and one of the more complex frauds of all times, so it’s not surprising that it’s taking a very long time to be dealt with. [Picard] has really returned unexpected amounts of money to victims.”

Picard has distributed about $11.3 billion of the $13.3 billion he’s recovered with the rest being held in reserve while the case continues to play out in courts. Eventually, the entire fund will be paid to victims. He distributes the money in chunks of several hundred million dollars at a time.

Picard’s lawyers continue to try to revive up to 80 lawsuits where he’s seeking an additional $4 billion. The suits had been thrown out two years ago, after a court found that the money was outside the trustee’s jurisdiction.

“It’s the biggest missing piece of the puzzle,” Stephen Harbeck, the chief executive officer of Securities Investor Protection Corp, told Bloomberg.

The trustee’s firm and the third-parties associated with it have been paid $1.67 billion over the last 10 years by the SIPC, not from customer funds. They have also extended a half a million dollar line of credit to victims who have been waiting for claims to be paid.

If Picard wins the cases he’s currently trying to revive, he will have brought the total recovery for victims to 91% of all lost principle – a result that is nothing short of astounding and a result that Picard called “aspirational”.

Those who have received money back, like former Food Network personality Daphne Brogdon, owe him a debt of gratitude and have been extremely thankful for his efforts.

She said: “We’re very, very grateful and thankful. I know it’s been 10 years, but it’s still so fresh for me. Sometimes I get a compliment on an outfit and I say, ‘Yeah, I bought that when I was rich.’ Now I shop at Marshalls.”

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Authored by James Howard Kunstler via Kunstler.com,

Sleepwalkers Awoke!

Andrew Sullivan called it “the Great Awokening” in a shrewd New York Magazine column this week. He refers, off course, to earlier episodes of American religious hysteria, namely the Great Awakening of the 1730s that featured the Rev. Jonathan Edwards raining sulfur and brimstone down on guilt-wracked New Englanders, and then the Second Awakening of the the early 1800s that spun off innumerable Protestant sects, cults, and utopian experiments. I like the term “Wokesterism” because the “ism” part acknowledges that the current hysteria makes a religion out of politics.

Sullivan’s theory is that Wokesterism is an improvised replacement for sclerotic American Christianity, to fill the vacuum of entropic meaninglessness that pervades life in the republic these days. He says:

And so we’re mistaken if we believe that the collapse of Christianity in America has led to a decline in religion. It has merely led to religious impulses being expressed by political cults. Like almost all new cultish impulses, they see no boundary between politics and their religion.

Wokesterism eerily mirrors many of the harsher practices of the most severe American Protestantism. It offers its own original sin, “white privilege,” from which there is neither redemption nor hope of redemption – like the old Presbyterian hell for babies who have come into this world drenched in sin. No amount of abject apology will avail for heretics to Wokesterism.

The principal aims of Wokesterism are coercion of others, persecution, and punishment of the guilty (the un-Woke). Most importantly, it requires the suspension of individual conscience in order to promote unthinking, robotic obedience and mob justice. That helps explain the disgraceful blindness of the Wokester Left, especially the educated elites who work in the news media, the computer tech sector, and other “creative class” vocations.

One thing that Sullivan leaves out is the necessity for the Devil. That role is filled by Mr. Trump. His sinister cargo of belief, countering the Wokefullness of unicorns and rainbows, is the dark theology of MAGA, and Mr. Trump’s followers are the imps, demons, incubi and succubi of deplorable fly-over land. Wokesters will spare no effort to vanquish all this wickedness, and even lying and cheating in the service of that end is considered fair play. Hence the arrant and epic dishonesty of The New York Times.

Interesting case in point: Yesterday’s developments in the General Flynn court case are not even present in this morning’s Times. I speak of the action on the bench of Federal Judge Emmet Sullivan. It’s been brought to his attention that the scurrilous entrapment of Gen. Flynn by Woke FBI managers entailed departures from normal, lawful procedure. Gen. Flynn was interrogated in January of 2017, and the FBI account of the interview was not written (supposedly) until August off that year. The reason that reports and memoranda must be written ASAP after an interview is for the obvious reason that much important fact may be forgotten or misremembered if not documented right away.

There is actually reason to believe that earlier versions of the report exist (or did exist), and they were trashed or buried when the main interrogator-of-Flynn, Peter Strzok, was cashiered from Robert Mueller’s team in July 2017. Judge Sullivan has demanded that the FBI produce those earlier docs by today (Friday) at 3:00 pm. It will be interesting to see if the FBI complies… or not. There is also a fair chance that Judge Sullivan will throw out Gen. Flynn’s conviction based on prosecutorial misconduct.

In the event, we could see the awesome downfall of the Archangel Mueller, and the unravelling of Wokester dreams of defeating the Devil via the Mueller inquisition. It will certainly be an embarrassment to the ardent Wokesters of the news media, who have shilled for this campaign for over two years. The General Flynn business is not the only thread unwinding in the giant tapestry of Wokester narrative. As in other epic persecutions, like the Jacobin Reign of Terror in 1790s France, and Mao Zedong’s Cultural Revolution of the 1960s, the tables are turning. The inquisitors, prosecutors, and executioners are going too face charges themselves, and harsh punishment is not out of the question.

The defeat of Wokesterism would be a very salutary outcome for a nation that has so badly lost its bearings to the worst of human instincts: religious persecution. It could be a fatal blow to the Democratic Party, which will have to find an alternative reason for its existence than Devil-and-Demon hunting. The Devil hunters themselves could be in the dock in 2019, answering for their actual crimes against American citizens and the public interest. Even the sainted Holy Mother of Wokesterism, the Archangel Hillary, may find herself wingless in a witness chair, answering how all that schwag from Russian banksters happened to end up in her foundation’s cookie jar.

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While the S&P is flirting with unchanged territory on the year, for hedge funds 2018 was a year they would all rather forget ever happened: not only is the HFRX hedge fund index down 6.3% YTD, its worst annual performance since Q3, 2011, but as of today it is at the year lows, confirming that hedge funds “hedge” only in name.

Furthermore, as we discussed yesterday, the investing public appears to have lost its fascination with the 2 and 20 business model, and as Hedge Fund Research calculated, in 2018 there were the fewest hedge-fund launches since 2000…

… while poor performance and growing redemptions have forced dozens of marquee names to either shutter or convert to family offices, with the list below summarizing some of the most popular managers who have thrown in the towel in 2018 or decided to return outside money and only manage cash for “friends and family” (and their own, of course).

And yet, paradoxically, despite a truly abysmal track record, where the average hedge fund is not only down for the year but badly underperforming its benchmark for the 8th year in a row, hedge fund employees of all stripes, from junior analysts to portfolio managers, have something in common this year: unmitigated optimism in the form, or as Bloomberg puts it, “they’re all expecting fatter paychecks.”

Despite an industry beset with lagging performance, an investor exodus and closures, hedge fund professionals expect a median compensation of $520,000 in 2018, a 16% increase from last year’s $450,000, Bloomberg reports citing a survey by executive search firm Odyssey Search Partners, which polled 500 respondents from September through November.

Here’s the breakdown: the top tier – i.e., partners, portfolio managers and other senior staff – predict a more modest increase in comparison to their junior counterparts. They see a median compensation of $950,000, up nearly 10% even though most of them have failed to deliver on their only job requirement: outperform the market. And naturally, since this group’s compensation is the most tied to performance, that makes this optimism especially perplexing.

As for junior analysts, many of whom have been made obsolete in a market in which fundamental analysis is irrelevant, and where algos, robots, HFTs and various other machines call the shots, they expect average comp to rise 18% from $275,000 to $325,000.

Don’t tell them but they will all be disappointed.

Another ironic finding: most hedge fund employees said in the survey that they are still bullish overall on their industry, which is also ironic in light of the now daily news of one or more hedge funds shuttering for good. Which may be why their confidence is muted: this time last year they expected a 39% bonus increase versus 21% this year, according to the survey. They’ll be lucky to get 0%.

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S&P Financials are now down 20.3% from their highs – officially entering a bear market as they fall to the lowest since September 2017…

The S&P Bank index is extending losses, now down 24% from its 2018 highs and at its lowest since September 2017.

As suddenly a collapsing yield curve matters…

And the world’s most systemically important banks have erased all post-Trump gains…

 

And if you are banking (forgive the pun) on those “fortress balance sheet” US banks, as BMO’s Brad Wishak notes, price and time are playing a familiar hand in US bank stocks…

 

 

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Listening to the crypto bulls of yesteryear continue to defend their case for new new all-time highs, despite a growing mountain of evidence to suggest that last year’s rally was spurred by the blind greed of gullible marginal buyers (not to mention outright manipulation), one can’t help but feel a twinge of pity for Mike Novogratz and Wall Street’s original crypto uber-bull, Fundstrat’s Tom Lee.

Lee achieved rock star status thanks to his prescient calls for a stunning rally in bitcoin months before crypto went parabolic. But as prices plunged this year, he has carried on with his appearances on CNBC and in the financial press, making the structural bull case for bitcoin to anybody who is still willing to listen. We imagine most of Lee’s audience is in the same boat as he is: Refusing to let go in the face of heavy losses, according to Bloomberg.

Apparently ignoring the fact that bitcoin has crashed through every support level so far with little regard for financial models projecting fair value at $6,000 (or $5,000 or $4,000), Lee has published another categorically bullish research note explaining why his model suggests that bitcoin’s true “fair value” is somewhere between $13,800 and $14,800.

Bitcoin’s present value “doesn’t make sense”, Lee argues, because, working backwards, one would expect the number of “active” crypto wallets to fall to 17 million from 50 million. Ergo, since the number of crypto wallets hasn’t declined, the “fair value” level of crypto must be much higher than it is currently (though how Lee justifies the wallet metric as anything other than an arbitrary benchmark remains a mystery).

“Fair value is significantly higher than the current price of Bitcoin,” he wrote.

“In fact, working backwards, to solve for the current price of Bitcoin, this implies crypto wallets should fall to 17 million from 50 million currently.”

This latest call comes after Lee lowered his year-end projection for bitcoin from $25,000 to $15,000.

According to Lee’s calculations, bitcoin wallets climb to around 7% of the total number of VISA account holders (some 4.5 billion) BTC could be worth $150,000.

“Hence, the risk/reward is still strong,” Lee said.

“Given the steep discounts of [bitcoin] to our fair value models, the excessive bearish sentiment about fundamentals does not seem warranted.”

But we don’t have to tell you that bitcoin at $150,000 – with the fundamentals being what they are – seems ridiculous on its face. Which makes us wonder: What is it about the number of active wallets that justifies using it as a basis for this valuation model?

However, in an interview with CNBC this week, the best-known bitcoin bull exhibited some frustration in his forecasts for crypto prices:

“Given we are so close to year-end, we are not providing any updates to near-term price objectives – read this as, we are tired of people asking us about target prices,”

Finally, we note that this year’s utter collapse is not that unusual; throughout its ten-year history, bitcoin has bounced from boom to bust to boom to bust. If this latest boom and bust has taught us anything, it’s that conventional financial modeling doesn’t work for crypto.

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Authored by Mike Shedlock via MishTalk,

Over 25% of those searching for an apartment in 2018 were looking for something “cheap”. A close second was “studio“.

The Rent Cafe 2018 Year End Rent Report shows rents hold strong at year end.

What most caught my eye, however, was an interactive graphic that lets you hover over a phrase to see how often perspective renters included that word or phrase in a search.

Search Results

• Cheap apartments: 25.14%

• Studios: 23.88%

• One-, two- and three-bedroom apartments follow in that order, with 10.48%, 9.46% and 7.5% of all rental-related searches, respectively.

• Luxury apartments also saw significant interest among renters this year, accounting for 7% of searches.

• Those wanting a pool or gym turned up in 0.33% and 0.06% respectively

Cheap Is On My Mind

Studio is another sign that cheap is on renter’s minds.

Admittedly there is some overlap between cheap and studios while there isn’t between One-, two- and three-bedroom apartments. However, there is likely some overlap between studio and one-bedroom.

GPS Searches

The infographic only listed amenities but here’s another interesting factoid: Online activity has migrated to GPS-enabled mobile devices. One third of the keywords people searched for in 2018 included the words ‘near me.’

Cheap – Near Me

This is what people want: Cheap, near them.

Everything else other than number of bedrooms doesn’t factor in until final comparisons.

National Average Rent

Other Take-Aways

• The national average apartment rent ends the year with a strong 3.1% y-o-y increase, having reached $1,419, $42 above what renters were paying this time last year, according to Yardi Matrix.

• As of the end of the year and throughout 2018, rents have seen the most fluctuation in small cities, with double-digit percentage increases in Odessa, TX, Midland, TX, and Reno, NV.

• Queens, NY has been the only large market with stagnating rents, and only two small cities, Baton Rouge, LA and College Station, TX have seen significant decreases.

Cheap is In

In case you haven’t figured it out, cheap is in.

Don’t count on those looking for “cheap” to be looking to buy homes until this economic bubble collapses.

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With US markets going into full-fledged convulsions thanks to disheartening economic data out of China, a looming government shutdown, renewed fears about a “no deal” Brexit and Dow component JNJ’s worst day in 16 years, strategists can add one more disconcerting development to their list of woes. Citing a “top secret” intelligence report, NBC News said Friday that the US suspects that North Korea is still evading US sanctions by secretly transferring oil at sea.

While this isn’t exactly news – the US back in September reportedly formed an international posse to crack down on these illegal oil sales – it certainly doesn’t bode well for the stalled planning for a second summit between President Trump and North Korean leader Kim Jong Un. It also raises questions about North Korea’s intentions as doubts persist about Pyongyang’s commitment to denuclearization. Negotiations hit an impasse over the summer as Pyongyang insisted that the US commit to a gradual schedule of removal for its economic sanctions, while Washington has insisted that the North must completely denuclearize first – something few intelligence analysts expect it to do.

Specifically, the intel report examined how the North has changed up its tactics and moved these transfers out of the East China Sea and into “more logistically challenging waters to the North and South” as the US-led posse – Australia, Britain, Canada, France, Japan, South Korea and New Zealand are also participating – has made the transfers more difficult by its presence alone (they typically don’t try to board or detain ships caught in the act, instead allowing them to flee). The Koreans are also using smaller ships to evade detection. The US has been monitoring the smuggling activity since October 2017, when it began surveillance flights after both the UN and the US ramped up sanctions that summer following the most intense phase of the North Korean nuclear- and missile-testing crisis.

The North Koreans are also resorting to smaller vessels to avoid recognition by the coalition’s warships and surveillance aircraft, the officials said. The assessment found that while attempts to transfer oil have not decreased, the coalition presence has forced North Korea out of the East China Sea and into more logistically challenging areas to the north and south. That shift could ultimately affect the pace and number of the ship-to-ship transfers, raising the cost of smuggling for North Korea, according to the three U.S. officials.

A U.S. defense official said the U.S. began surveillance flights over the East China Sea to disrupt these illicit transfers on Oct. 19, 2017. Since then, the U.S. has conducted more than 300 surveillance flights. Allied nations began flights on April 30 of this year, and have flown more than 200 surveillance flights to date.

Since October 2017, there have been 30 instances when smugglers halted ship-to-ship transfers when observed by coalition naval forces at sea, according to a U.S. defense official.

The U.S. Pacific Command assessment, labeled “Top Secret,” found that the presence of warships and surveillance aircraft deployed by an eight-nation coalition since September has forced North Korea to adjust its tactics at sea, including transferring oil further away from the Korean Peninsula and often in other countries’ territorial waters.

What’s almost worse than the smuggling itself is the fact that the North Korean ships participating in the transfers apparently have never heard of the phrase “act natural”, as ships have repeatedly been observed to drop whatever they were doing and flee after spotting Western monitors. 

“What’s equally as powerful as boarding a ship is taking a picture of the hull, getting information about the ship involved in the illegal activity, and that allows you to get to the insurers, the networks, the people financing the operation, and so we’ve been successful with a camera as much as we would be if we were to proceed to boardings.”

Before the posse was formed in September, incidences of North Korean smuggling (often abetted by China and Russia) had been on the rise.

A leaked report by U.N. sanctions experts in August, based on U.S. intelligence, found the number of transfers surging, with vessels turning off the transponders that show a ship’s geographic location. Between January and May, North Korean ships made 89 deliveries of refined petroleum to the country’s ports, U.N. Ambassador Nikki Haley said in July.

Which brings us the bigger issue here: Despite opting to support tighter UN sanctions against North Korea last year, China and Russia have continued to supply North Korea with badly needed oil. Some of the ships that have been tracked by US monitors have helped move North Korean coal to Russian ports. Though the intelligence analysts say their surveillance regime has helped them crack down on the support networks for these ships – like insurers and Western companies that need to abide by the sanctions.

When confronted about their complicity in the sanctions violations, Russia and China have insisted that they abide by the UN rules. Yet analysts say evidence of their deception is easy to see. Monitors of energy prices in North Korea show that the increased sanctions have had virtually no impact. Meaning that the sanctions impressed upon North Korea by President Trump have had virtually no effect.

Analysts and firms that track North Korean shipping data say there are numerous signs that the regime continues to use deception to move coal out of North Korean ports for sale and to obtain oil through ship-to-ship transfers at sea.

“I think they’re certainly trying to keep apace with the sanctions regime,” said Lucas Kuo, an analyst at C4ADS, a non-profit research organization that uses data to track illicit networks.

Two ships identified in a report by a U.N. panel earlier this year for smuggling coal to Russian ports, the Sky Angel and the Sky Lady, continue to operate and recently made port visits to Japan — even obtaining insurance paperwork, according to maritime and shipping sites.

The Sky Angel pulled into the Japanese port of Muroran in July, and Sky Lady made a port of call at Tomakomai on Tuesday.

“The fact that they’re still able to acquire this insurance at least raises some questions,” Kuo said.

And if Korean energy products have managed to slip through the sanctions so easily, what does that say about other Korean exports, like seafood?

The upshot here is that while we’re sure Trump will largely disregard these findings as he seeks a major diplomatic “win” by becoming the president who opens up North Korea, we’ll likely be hearing more soon about how these violations are Russia’s and China’s fault.

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Two months ago, to the chagrin of a generation of traders, Morgan Stanley made a dismal observation: Price action in 2018 has shown that ‘buy the dip’ is on its way out.  To wit, buying the S&P 500 after a down week was a profitable strategy from 2005 through 2017, and buying these dips fueled most of the post-crisis S&P 500 gains (relative to buying after the market rallied).  But in 2018 ‘buying the dip’ has been a negative return strategy for the first time in 13 years.  In other words, “buying the fucking dip” is no longer the winning strategy it had been for years (even if buying the most shorted hedge fund names still is a stable generator of alpha).

However, a more concerning observation is that while BTFD may no longer work, it has been replaced with an even more troubling trend for market bulls: Selling The Fucking Rip, or as it is also known, STFR.

This selling of rallies has been especially obvious for the past two weeks as traders have observed ongoing intra- US session asset-allocation trades out of the S&P and into TY, with simultaneous volume spikes / blocks trading in ESH9 (selling) and THY9 (buying) at a number of points throughout the day, but usually after the European close, and toward the end of the trading day.

“SELL THE RIPS” IN SPOOZ BECOMING THE NORM

So what is behind this pernicious, for bulls if quite welcome for bears, pattern?

Here, Nomura’s Charlie McElligott has some thoughts and in his morning note reminds clients that he had previously highlighted a similar potential observation YTD between the inverse relationship of UST stripping activity (buying US fixed-income) and the SMART index (end of day US Equities flows being sold)—which indicates a similar trend with pension fund de-risking throughout 2018, as their funding ratios sit at post GFC highs.

In other words, one possible culprit is pension funds who have decided that the market may have peaked, and are taking advantage of the recent selldown in fixed income, to reallocate back from stocks and into bonds, locking in less risky funding ratios.

And, as McElligott concludes, this equities de-risking/outflow corroborates what we touched upon this morning, namely this week’s EPFR fund flows data which showed an astounding -$27.7B outflow for US Equities (Institutional, Retail, Active and Passive combined), the second worst weekly redemption of the past 1Y period.

Meanwhile, the equity weakness is being coupled with surprising strong bid for US Treasuries, further confirmation of an intraday Pension reallocation trade.

According to McElligott, the price-action in the long-end of late indicates “that we potentially are seeing “real money” players back involved for the first-time in awhile, “toe-dipping” again in adding / receiving as the global slowdown story picks-up steam amidst growing 2019 / 2020 recession belief”, a hypothesis which is further validated by the sharp rebound in direct bidders in recent auctions and especially yesterday’s 30Y which we have documented extensively, as the “buyers-strike” in long duration auctions seems to have ended.

This Treasury bid could include large overseas pensions (which are less sensitive to hedge costs than say Lifers), Risk-Parity (as previously-stated, our QIS RP model estimated the risk-parity universe as a large buyer of both USTs and JGBs over the past month and a half) and potentially, resumption of long-end buying from “official” overseas sources as well (with market speculation that there could be an implicit agreement / gesture coming out of the G20 trade truce arrangement), McElligott notes.

One tangent to note: the bid has been more evident in futures and derivatives (as they are “off-balance sheet” expressions into a liquidity constrained YE reality), which is reflected in the fresh record dealer holdings of USTs and which the Nomura strategist notes has made made futures super rich to cash, creating arb opportunities in the cash/futures basis as the calendar is about to flip.

Finally, as to who or what is the real reason behind these inexplicable bouts of “selling the rip”, whoever it is the biggest threat to the market is that once the pattern manifests itself enough times, it becomes a self-fulfilling prophecy at which point it’s not a question of who started it – as everyone will be doing it – but rather at what point does the Fed step in to stop it.

 

 

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