Category: zerohedge

Authored by Simon Black via SovereignMan.com,

On October 19, 1987, the Dow experienced its biggest one-day percentage loss in history – plunging 22.6%.

It was “Black Monday.” The selloff was so fast and so severe, nothing else even comes close.

The second worst percentage loss for the Dow was October 28, 1929 (also Black Monday) when the exchange fell 12.82%. It fell another 11.73% the next day (you guessed it… “Black Tuesday”). Then the Great Depression hit.

A lot of people blame portfolio insurance for the market drop in 1987.

Portfolio insurance was a popular product for large, institutional investors. It would “hedge” portfolios by selling short S&P 500 futures (which profit when the market falls) when stocks fall… the idea was, gains from selling the S&P futures would offset losses from falling stock prices.

If stocks fell more, the big investors would sell more futures.

The problem with portfolio insurance is it was programmatic. And when the losses inevitably came, it created a feedback loop. Selling begot selling.

But what initially ignited that selling back in 1987?

Matt Maley is a former Salomon Brothers executive who was on the trading floor for Black Monday. He shared his thoughts with CNBC last year to mark the 30th anniversary of the event.

Maley reminded us of the popularity of another strategy in those days – merger arbitrage. This was the time of Gordon Gekko, when corporate raiders would borrow tons of money – typically via high-yield bonds – to buy other firms.

Merger arbitrage is simply buying shares of the takeover candidate and shorting shares of the acquiring firm. It’s a speculative strategy that tries to capture the spread between the time the deal is announced and when it (hopefully) closes.

The merger arb guys were already on edge because interest rates had been rising, making risky takeover deals even harder to complete.

Then, out of nowhere, the House Ways and Means Committee introduced a takeover-tax bill on the evening of October 13 that, simply put, would repeal lots of tax breaks related to M&A activity.

The next day, Wednesday, shares of the takeover stocks plummeted and caught the already edgy traders off guard.

The selling continued through Friday. Margin calls were triggered, forcing investors to sell even more.

Then came Black Monday.

After a turbulent week, mutual funds were facing massive redemptions. They were forced to start selling stock along with the merger arb guys… only in much larger size.

The plummeting stock market triggered portfolio insurance to step in and start selling tons of futures short, which only worsened the selloff.

That scared individual investors, who redeemed even more mutual fund shares.

It was the feedback loop from hell.

The point is… an unexpected bill from congress helped to push an already nervous market over the edge.

And that brings us to today…

Earlier this month, the market dropped a very speedy 10% from its all-time high.

The selloff occurred because higher-than-expected wage growth stoked inflation fears. Higher inflation means the Fed may have to raise interest rates sooner than expected. All else equal, higher interest rates mean lower stock prices.

And this panicked selling was based only on the fear of higher interest rates.

To be fair, this market has gone nowhere but up since 2010. And volatility has scraped along the bottom that entire time. People have been lulled into this false sense of security that the stock market is a safe place that guarantees healthy returns.

In short, the market doesn’t know what to do with negative inputs today… much less some really bad news.

And, just like in 1987, there is a massive amount of programmatic trading taking place. Only today, brokers don’t have to pick up the phone to place a sell order when a certain price level is breached.

Instead, we have supercomputers that trade at lightning fast speeds and process market information almost instantaneously. The automatic selling – or buying, for that matter – happens quickly. The feedback loop has sped up exponentially.

That’s paired with more and more money that has flowed into backward-looking strategies that only work during times of low to no volatility. But, as we saw earlier this month, these strategies are utterly useless when the environment changes.

Take volatility targeting for example… it’s when portfolio managers change allocations based on volatility. Coming into the recent shock, with volatility near record lows, these funds were as long as they could possibly be.

That strategy had worked great for years as the market steadily rose higher.

But when the selloff started on February 5, the VIX jumped 116% in one day (the largest move ever). And the volatility targeting crowd ran for cover, selling potentially hundreds of billions of dollars in equities.

People have also been betting outright against volatility, which again, has been a profitable strategy for years. The VelocityShares Daily Inverse VIX Short-Term ETN (XIV), which moves inversely to the VIX, was one of the most popular tools for this.

But, when the VIX jumped 116% in a day, that fund lost about 95% of its value. Then XIV announced it would liquidate (the fund had $1.8 billion at its peak). Investors were wiped out.

And it wasn’t just individual investors using this strategy… Even pension funds and sovereign wealth funds were getting in on the action as a way to generate income, which is totally absurd. These are supposed to be the safest and most conservative investors around.

In addition to all of this money chasing volatility-linked strategies, we’ve also seen a massive amount of money flow into passive strategies (which buy indexes regardless of price or value)… a lot of that money has been in the form of exchange-traded funds (ETFs).

But trillions of dollars are now deployed in this value-agnostic strategy, which means people are allocating capital simply because the trend is up. More than that, it’s in the form of highly liquid ETFs… so these investors, who don’t have high conviction in the first place, can quickly dump their position when the tides turn.

Finally, there’s more than $300 billion managed by trend-following hedge funds. And their computers sell furiously on the way down.

So all of this money has been invested on the premise that volatility won’t return to the market. The Volatility Index (VIX) had its biggest one-day move ever this month and investors panicked.

But that’s just a taste of what’s to come. Imagine the selling we’ll see when there’s actually bad news.

*  *  *

And to continue learning how to safely grow your wealth, I encourage you to download our free Perfect Plan B Guide.

via Zero Hedge http://ift.tt/2EMbEaQ Tyler Durden

A thought…

Citi summed the last few days up well… and ominously…

“Bear markets open on the highs and close on the lows. This is particularly the case when derivative products need to rebalance in a relatively narrow window near the end of the day“

And what happened again?

Nasdaq just suffered a 4-day losing streak – its longest since Nov 2016.

 

Pretty clear what the machines had in mind today – run The Dow up to hunt the pre-FOMC stops… but there was no momo…

 

FANG stocks faded today and AAPL is unch on the week…

 

China is back from its New Year celebration (China stocks gained – playing catch up), and The Dollar dropped for the first since they left…

 

Zooming in, it’s clear the machines were testing yesterday’s post-FOMC Minutes plunge lows…

 

European stocks suffered a death cross today as European Economic crashed into the red…

This week the Euro Area Economic Surprise Index (ESI) turned negative for the first time since September 2016. Negative surprises in soft data (e.g. PMIs) have contributed to most of the decline which ended the longest positive streak for the index.

High yield bonds continue to slide…

 

And HY Spreads are starting to blow out again relative to VIX…

 

Treasuries were bid today with the belly outperforming the tails…

 

10Y Yields drifted lower…

 

On a side note, while the world is watching 10Y Yields, 30Y yields are in a very interesting region of congestion…

 

Commodities were all higher as the dollar dropped…

 

The Energy complex ripped higher today (on DOE data) after some early weakness…

 

Crypto tumbled again today…leaving Bitcoin unchanged for the month…

 

As Bitcoin broke below $10k, catching down to Nasdaq…

 

Oh, and if you’re wodndering what started this morning’s panic-buying… simple…

BREAKING pic.twitter.com/65U7W8P16F

— Rudolf E. Havenstein (@RudyHavenstein) February 22, 2018

via Zero Hedge http://ift.tt/2EKmrX5 Tyler Durden

They say the “top 1%” runs America, so why not just join them?

According to the IRS’ just released Statistics of Income Bulletin (Winter 2018 edition) the price of admission to the table that runs the country, is just under half a million: $480,930 in Adjusted Gross Income to be precise, and 1.4 million Americans belonged to this elite club in 2015, the most recent available year. Incidentally, in 2009 just after the financial crash, $351,968 would have sufficed to join the “1%.”

But what if merely the 1% is too pedestrian? What if 0.1%, or 0.01% or even 0.001% is more your style? Or maybe you swing the other way, and choose to mingle out with the “top 50%”?

Well, to join the most financially exclusive group tracked by the IRS, the so called “Top 0.001 percent” you need to earn no less than $59,380,503, something which only 1,412 American taxpayers achieved…

These numbers have been rising over the past decade, although predictably they dipped in 2009 when the US financial system was on the verge of collapse.

Here is the full breakdown of respective “percentage” cutoffs by AGI, together with how many Americans earned that income in 2015:

• Top 50 percent: $39,275 and 70.602 million
• Top 4 percent: $218,911 and 5.647 million
• Top 3 percent: $253,979 and 4.236 million
• Top 2 percent: $316,913 and 2.824 million
• Top 1 percent: $480,390 and 1.412 million
• Top 0.1 percent: $2,220,264 and 141,205
• Top 0.01 percent: $11,930,649 and 14,120
• Top 0.001 percent: $59,380,503 and 1,412

Some other interesting observations from the latest IRS bulletin:

In 2015, the adjusted gross income threshold for the top 50% of all individual income tax returns was $39,275. These taxpayers accounted for 88.7 percent of total AGI and paid 97.2 percent of total income tax.

Demonstrating the uneven distribution of tax payment, consider next that the top 1% of tax returns accounted for 20.7% of total AGI and paid 39.0% of total income tax.

Narrowing this down further, top 0.01 percent of tax returns had an AGI of $11,930,649 or more, accounted for 4.9% of total AGI in the US and paid 8.7% of total income tax, while the pinnacle of wealth – those 0.001 percent of Americans who earned more than $59,380,503 – accounted for 2.1% of total AGI and paid 3.5% of total income tax.

In other words, 1,412 Americans – granted the absolute richest – paid 3.5% of America’s total tax bill.

Some other observations from Bloomberg’s Joe Mysak, who notes that it’s a pretty safe bet that all those in the ultra wealthy strata held at least some tax-free muni bonds.

In 2015, Americans received $57 billion of tax-fee interest, according to the IRS. Just about half of that interest went to 1.2 million filers who earned $250,000 and more.

What’s disturbing about the data is that the number of investors claiming tax-exempt interest — the municipal market’s constituency, if you will, is falling, after reaching a peak of almost 6.5 million in 2008. With corners of Congress perennially threatening to chip away at bondholders’ tax break, munis are asset class in need of a champion. Maybe it’ll be one of those one percenters.

The answer to this is simple: with the stock market has generated far greater artificial returns than muni bonds for years, even when net of taxes, why “risk” putting your money in the safest of investments?

Finally, for those who have just one question: how to enter the elite ranks of the top 0.001%, or even 1%, remember the Fed made it so very easy for you: just Buy The Fucking Dip every single time, and pray to the Fed that the centrally-planned monster they have created – and bizarrely still call the “market” – survives one more day.

 

via Zero Hedge http://ift.tt/2CcIAMj Tyler Durden

Law-abiding California citizens may well face a real-life “purge” if President Trump’s disgust with the Sanctuary State’s liberal leaders is acted upon.

The Hill reports that President Trump said Thursday that he was thinking of pulling federal immigration enforcement officers from California over the state’s sanctuary policies.

“Frankly it’s a disgrace, the sanctuary city situation,” Trump said at a high-level White House meeting on school safety, according to pool reports.

Trump discussed the idea of pulling ICE out of California, but said “in two months they would be begging for us to come back,” according to Mark Knoller of CBS News.

“And you know what? I’m thinking about doing it,” Trump added.

Acting ICE Director Thomas Homan in January warned California should “hold on tight” for more ICE operations in the state.

But on Wednesday, Homan said the agency doesn’t conduct raids, but rather “targeted enforcement operations.”

“We don’t go into neighborhoods, knock on a bunch of doors looking for people different than us. Every person we arrest, we know exactly who we’re going to arrest, we know exactly where we’re going to arrest them,” Homan said on Fox News.

The Hill also noted that Trump complimented Attorney General Jeff Sessions – a frequent target of the president’s criticism over his recusal on the Russia investigation – on his handling of gang violence.

“You’re doing a great job on the gangs,” said Trump.

Of course, there is at least one California resident who will welcome the removal if ICE… Nancy Pelosi’s grandson?

Pelosi said in a Wednesday floor speech that her grandson wished for his birthday that he had “brown skin” and “brown eyes” like his Hispanic friend Antonio…

“He’s Irish, English, whatever, whatever, and Italian,” Pelosi said of her grandson. “And when he had his sixth birthday, he had a very close friend whose name is Antonio, he’s from Guatemala, and he has beautiful tan skin and beautiful brown eyes and the rest.”

“This was such a proud day for me because when my grandson blew out the candles on his cake, they said, ‘did you make a wish?’” Pelosi recalled. “He said, ‘I wish I had brown skin and brown eyes like Antonio.’”

“So beautiful, so beautiful. The beauty is in the mix — the face of the future for our country is all American and that has many versions,” Pelosi concluded.

via Zero Hedge http://ift.tt/2Cfbn2M Tyler Durden

Authored by David Stockman via Contra Corner blog,

If you don’t think the stock market is a giant accident waiting to happen, just consider the two most crucial developments—-soaring stocks and soaring deficits— since November 7, 2016.

First, on the lunacy side of the equation, the S&P 500 was up 35% at its 2873 peak on January 26, and now the dip-buyers, chart-readers and robo-machines are trying mightily to retest that level after the short-lived 10% correction at the turn of the month.

But here’s the thing. The pre-Trump market at 2130 on the S&P 500 was already trading at a nosebleed 22.4X LTM earnings of $94.55 as of Q4 2016. Consistent with the pig-through-the-python profits mini-cycle of the last four years, which flows from the parallel commodity/industrial/trade cycle, LTM earnings for Q4 2017 have now come in at $106.84 per share.

Down on Wall Street they are calling this gain a 13% Y/Y earnings rebound that justifies rising stock prices, and even buying the dip at current levels. To the contrary, we think the whole earnings growth narrative is nothing more than mullet bait; it snatches a one-year delta from the underlying trend and macro-context and thereby generates an utterly misleading conclusion.

The truth is, S&P 500 earnings are now back to where they were 39 months ago when they posted at $105.96 for the September 2014 LTM period. We’d call an $0.88 gain over more than three years a rounding error, not a sign of resurgent profits.

We’d also call the implied LTM multiple of 26.9X at the recent 2873 top just plain crazy. That’s because the current business expansion at 104 months is over and done for all practical purposes: The post-1950 average is just 61 months and the historic record is 119 months under the far more propitious circumstances of the 1990s.

In that cyclical context, the historic record leaves little doubt about the foolishness of pricing the stock market at peak PE multiples during the final innings of the business cycle.

For instance, in September 2007, the S&P 500 stood at 1530, where it was valued at 19.4X LTM earnings. At that point the business cycle was 70 months old, and the Great Recession technically incepted 3 months later in December 2007.

The foolishness of the so-called “goldilocks market” in the fall of 2007, therefore, is not hard to dispute: Within 18 months, recessionary earnings had collapsed by 90% and the S&P 500 had lost 55% of its pre-recession peak value.

The story at the March 2000 dotcom peak is even more telling. At that point, the longest business expansion in history was in month #109, and the S&P 500 was trading at 29.4X LTM earnings. During the next two years, of course, earnings fell by 50% and the S&P index dropped by 47%.

Moreover, there is a further dimension of the cyclical trend story that is even more crucial. Back at the peak of the dotcom cycle in 2000, the 10-year peak-to-peak earnings growth rate had been 9.5% per annum—-providing at least a modicum of justification for current stock prices.

Likewise, at the June 2007 peak, the 7-year peak-to-peak earnings growth rate had been 6.8%. By contrast, the 1o-year peak-to-peak growth rate during the current cycle computes to just 2.3% per annum.

In other words, we are now at nearly the same cycle duration as in March 2000 (month #104 vs. #109) and at the almost the same insane PE multiple (26.9X  vs. 29.4X), but these current unsustainable valuations are coming off a dramatically weaker performance trend. In fact, the current 10-year earnings growth rate of 2.3% is just one-fourth of that recorded during the tech boom of the 1990s.

So it would be fair to say that the Trump Trade is already way over its skis, and that’s before we consider the “Trump” element of the equation. That is to say, the self-proclaimed King of Debt has now panicked Imperial Washington into an utterly lunatic fiscal binge at the very tail end of the business cycle, which will result in a 6% of GDP or higher borrowing rate.

That represents the exact opposite of the relatively benign conditions which prevailed when the market was last at these valuation extremes exactly 18 year ago.

In fact, as shown in the chart below the Federal budget was generating a 2.3% of GDP surplus during Q1 2000, and the public debt at 57% of GDP had actually declined considerably from 64% in the mid-1990s.

In other words, Washington had used the great (but unsustainable) tech boom to get its fiscal house in a semblance of order. By contrast, the most polite way to characterize policy during the so-called expansion of the Bernanke-Yellen era is that Washington looked a gift horse in the mouth and then blew its head off.

The 10% of GDP deficits during the Great Recession caused the public debt to swell from 63% of GDP in Q4 2007 to 83% by the bottom in mid-2009. But as the blue line in the chart makes clear, a combination of the tepid GDP and associated revenue rebound and profligate spending policy meant that the deficit made a lower low at negative 3.0% of GDP before heading south once again.

Stated differently, compared to a 3% of GDP surplus at the 2000 peak and a 1.1% of GDP deficit in 2007, Washington kept running rivers of red ink through the entire nine-year expansion—with deficits now soaring before the next recession has technically even commenced.

Thus, not shown in the chart below is the fact that the deficit during this year (FY 2018) will hit $1 trillion and 5% of GDP and $1.2 trillion and just under 6% of GDP in the year ahead (FY 2019). Moreover, the signature of the King of Debt and a desperate Congressional GOP is all over those baleful prospects.

To wit, the inherited deficit for FY 2019 was $700 billion or 3.5% of GDP and reflected the permanent deep deficit policy adopted by bipartisan consensus after the debt ceiling crisis of 2011. That ill-advised policy alone meant that through the entire expansion cycle the public debt ratio continued to rise—unlike in the two prior cycles shown below—thereby reaching 103% of GDP.

But another $300 billion (including additional interest) has now been added to the annual red ink by the asinine Trump/GOP tax cuts; and on top of that has come a further $200 billion owing to the bipartisan spending spree for defense, domestic appropriations, border control, disaster relief and ObamaCare premium bailouts that have already been enacted or are pending near term action.

Accordingly, the public debt will likely reach $22.5 trillion and 110% of GDP by the end of FY 2019, and, as we have shown repeatedly, it is off to the races from there. Even without another recession through the end of FY 2028—-which implies the absurdity of a 20-year rececssion free span—the projected cumulative ten-year deficit now totals $15 trillion, which would take the public debt to $35 trillion and 140% of GDP  by the end of the period.

In this context, what we meant by the “gift horse” is quite simple: That beneficent financial creature temporarily resided in the Eccles Building and by virtue of $3.5 trillion of bond buying after the crisis, it permitted the fiscal eruption displayed in the orange line above to be absorbed with minimal short-term fall-out on both main street and Wall Street.

That is, there was no “crowding out” of business and household spending because the Big Fat Thumb of the Fed and other central banks kept interest rates drastically suppressed; and Wall Street was in clover, too, owing to rock-bottom cap rates (i.e. nosebleed PEs) and the massive outbreak of financial engineering in the corporate C-suite financed by a record explosion of cheap corporate debt.

Alas, the end of the Bubble Finance road is nigh because the gift h0rse has been put out to pasture. Based on today’s Fed minutes, there can be no doubt that the delusional Keynesians who occupy the FOMC will remain resolutely on the path of interest rate normalization and balance sheet shrinkage (QT). They are determined to have dry powder when the next recession comes knocking on the door of the Eccles Building, yet fail to see that the current “full-employment” economy is not all that.

In tomorrow’s post we will elaborate on the striking implications of the chart below. It shows the true state of the US economy and why the current narrative about resurgent growth is just another false positive.

To wit, the gross output of the US economy has grown by just 2.4% per annum since the pre-crisis peak in Q4 2007, and manufacturing output by only 0.84% per annum. And these figures are in nominal dollars!

More importantly, the cyclical undulations under those punk trends have been almost entirely a function of the global commodity/industrial/trade cycle. Yet the latter is once again turning south now that the coronation of Mr. Xi is complete and the Red Ponzi is again attempting to tame its $40 trillion credit monster.

So what comes next is not reflation and booming profits as reflected in the current Wall Street hockey sticks, but the” yield shock” which is now baked into the cake. With the other major central banks exiting QE or moving toward the sidelines, there is nothing to stop the law of supply and demand from having its way with bond prices in the quarters ahead.

After all, in the US alone there will be $1.8 trillion to be absorbed in the bond pits during FY 2019, reflecting $1.2 trillion of new US Treasury issuance and $600 billion of existing bonds to be dumped by the Fed.

As we demonstrated last week, even a 10-year benchmark UST at a 3.75% yield—-which after today’s mini-shock is well within sight—- will cost the S&P 500 around $40 per share in higher pre-tax interest payments. Not only is that not “priced-in” to the Wall Street hockey sticks, but neither is its correlate.

To wit, the C-suites of corporate America are going to be having a real bad hair day when the carry cost of all the debt they have issued to fund stock buybacks and other financial engineering plays begins to bite them in the rear. Not only will that mean earnings’ disappointments, but it is also likely to shut-down the real buy-the-dips engine that lays beneath Wall Street’s nine-year bubble.

That, of course, is debt-financed stock buybacks. As shown below, debt issuance has matched buybacks on on a dollar for dollar basis since 2009. Thanks to the King of Debt and the complete fiscal betrayal of the Congressional GOP, however, that’s about to change. Big time.

There is no need to speculate about what happens when the artificial prop of stock buybacks is yanked out from under today’s bubblicious markets. The crony capitalist fools who have been running GE as a stock buyback machine for more than three decades, have now left nothing to the imagination.

So this time is very different than the last time that end-of-the-cycle PE multiples hit the high 20s. Back n the year 2000, the Fed had a $500 billion balance sheet and plenty of headroom to temporarily monetize the public debt with nearly reckless abandon. And there was also a 2.3% of GDP fiscal surplus, which minimized UST pressures on the bond pits.

Not now. Not with a $4.4 trillion Fed balance sheet going into an unprecedented shrinkage phase and the public debt heading for $35 trillion.

Self-evidently, a monetary/fiscal collision of biblical proportions is now rumbling down the pike. That’s what makes this time so very different and in such a very not good way.

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During last night’s “unscripted” CNN Town Hall on gun control, NRA spokeswoman Dana Loesch was given the courtesy of expressing her opinion in the spirit of mutual respect. Well, almost.

During a question by Stoneman Douglas student Emma Gonzalez, the attendees screamed and heckled her, calling Loesch “a murderer,” as CNN moderator Jake Tapper kept quiet.

Gonzales’ prepared statement, which CNN *may or may not have* approved, or given her:

Alright. Dana Loesch, I want to know that we will support your two children in the way that you will not. The shooter at our school obtained weapons that he used on us legally. Do you believe that it should be harder to obtain the semi-automatic and weapons, and the modifications for these weapons to make them fully automatic like bump stocks?

First, Loesch responded by encouraging young people to speak up: “I don’t think that anyone should deny you your voice or deny you your position because you are young” which however quickly drew booing from the crowd.

She continued: “I don’t believe that this insane monster should have ever been able to obtain a firearm. Ever” and said “I do not think that he should have gotten his hands on any kind of weapon.”

As the angry crowd grew louder, Loesch twice interjected “let me answer the question” adding “you can shout me down when I’m finished, but let me answer Emma’s question,” to which someone shouted “You’re a murderer!” 

Loesch’s attempt to discuss strengthening background checks drew even more cries of “Murderer!”

LOESCH: We had three lawmakers on this stage and only one of them hinted at reinforcing the background check system. It is only as good as the records submitted to it. Only one of them even got anywhere close to mentioning that. We have to have more than 38 states submit records. That’s number one. 

HECKLER #1: Murderer! 

HECKLER #2: You’re a murderer!

HECKLER #3: Murderer!

LOESCH: Number two, we have to develop better protocol to follow up on red flags. This individual — this monster carrying bullets to school, carrying knifes to school, assaulting students, assaulting his parents, 39 visits in the past year. That should never have been allowed to get that far[.]

(h/t Chris Houck)

The next day, speaking at CPAC on Thursday, Loesch said she wouldn’t have been able to exit the town hall without her security detail.

“I had to have a security detail to get out,” said Loesch. “I wouldn’t be able to exit that if I didn’t have a private security detail. There were people rushing the stage and screaming burn her. And I came there to talk solutions and I still am going to continue that conversation on solutions as the NRA has been doing since before I was alive.”

Loesch then pointed out an odd inconsistency, noting that the people who call Trump a tyrant are the same people who want the president to confiscate weapons.

“The government can’t keep you safe and some people want us to give up our firearms and rely solely upon the protection of the same government that’s already failed us numerous times to keep us safe. And then they also call Trump a tyrant but they say they want the president to also confiscate our firearms? Try to figure that one out,” Loesch said.

“I want to make this super obvious point,” Loesch said. “The government has proven that they cannot keep you safe. And yet, some people want all of us to disarm. You heard that town hall last night. They cheered the confiscation of firearms. And it was over 5,000 people.”

via Zero Hedge http://ift.tt/2sK2PNn Tyler Durden

After yesterday’s late-day 500-point collapse in The Dow, many are wondering it “it” is really over or not?

And there are signs that the bounce of the last week or so is that of a dead-cat, rather than a resurrected phoenix.

As BMO Nesbitt Burns’ Russ Visch explains:

In technical analysis parlance, a “breadth thrust” is a day in which the market’s “internals” (advances:declines, up volume:down volume, total volume) are so heavily-skewed towards the buyers it looks like market participants are stampeding back into stocks.

They tend to occur shortly after a major sell-off and are a highly reliable signal that a sustainable new uptrend has taken hold. i.e. — an “everybody back in sustainable new uptrend has taken hold. i.e. — an “everybody back in the pool!” moment that reflects a bullish sea change in investor sentiment.

However, as Visch points out, despite the amazing rebound in equities over the last week or so, none of the days qualify as a true breadth thrust.

In fact, it’s not even close.

That could change any day of course but if it doesn’t, be open to the possibility that we come back to re-test last week’s lows to some degree in the next week or two.

Visch warns that the worst case would be a dip back to 15,000 for the S&P/TSX Composite and 2575 or so for the S&P 500…

He’s not alone in watching the breadth signal for all-clear signs.

Bloomberg notes that Stephen Suttmeier of Bank of America Corp. said the market experienced three days this month where 90 percent of total stocks and exchange volume were down, and he’s now waiting for its opposite. It would “help confirm a meaningful low,” he said.

And Chris Verrone at Strategas Research Partners said “panicked buying” has occurred after almost all major meltdowns during this bull market. Breadth readings spiked above 90 percent twice amid the summer swoon in 2015, and showed similar pattern after the selloff in early 2016.

“We would still contend that putting in a good low is a process and the likelihood of some additional drama in front of us is high,” Verrone wrote in a research note.

Additionally, Bloomberg reports that Ned Davis, of his namesake research firm, draws the parallel between today and 1987, and warns investors to watch out for a repeat of that October, when an initial bounce failed to take hold and then snowballed into a bear market.

“It was that rally that was the big clue an ‘accident’ could happen, and that is what I would watch in the days ahead,” Davis wrote in a note earlier this month.

via Zero Hedge http://ift.tt/2sK0v97 Tyler Durden

Just hours after President Trump angrily declared on Twitter that he never suggested that “teachers with guns” would be an appropriate deterrent to stop school shootings (before launching into a tirade about why doing precisely that would be a sensible solution), the president has proposed that the “20% or so” of teachers who agree to keep weapons should receive “a little bit of a bonus.”

“You can’t hire enough security guards, but you could have concealed [carry weapons] on the teachers,” Trump said, according to a pool report cited by the Daily Beast.

“You won’t have these shootings because these people are cowards. They’re not going to walk into a school if 20% of the teachers have guns. And what I would recommend doing is, the people who do carry, you give them a little bit of a bonus.”

Trump added that leaving schools “gun free” makes them too vulnerable to school shootings like the one that left 17 students of Marjorie Douglas Tillman high school in Parkland, Fla. dead and more than a dozen injured.

 

Per pool, Trump said gun-free zones make it like “going in for the ice cream” for school shooters.

— Tarini Parti (@tparti) February 22, 2018

 

Trump added that he would want teachers to go through “rigorous training” to “harden our sites.” He also said that “people like to blame” the NRA and said he supported age restrictions for long-gun purchases, saying “it should all be 21” – referring to the age a person needs to be before they can purchase a gun. Trump claimed that the NRA – who he said are good people who want the best for the country – would go along with this…

The NRA presently opposes tightening age restrictions for gun buyers…

Watch Trump’s remarks in full below:

via Zero Hedge http://ift.tt/2EJZXBy Tyler Durden

While stocks are having second thoughts this morning as euphoria appears to have returned to markets for the time being, yesterday’s abrupt reversal in the S&P to the FOMC Minutes revealed that for many, the era of goldilocks may be ending ending. This morning, none other than Japan’s largest life insurer, Nippon Life Insurance, confirmed as much, saying that it will sell Japanese shares when they rise further, as the rally in risk assets driven by expectations of a “Goldilocks” scenario continuing is nearing an end, its chief investment officer told Reuters on Thursday.

Nippon CIO, Hiroshi Ozeki also said that the insurer expects the dollar to soften further against the yen but it is ready to buy the U.S. currency when it falls below 105 yen.

Agreeing with Nomura, which last week said  that investors will have another chance to buy lower, Ozeki said that although global shares have bounced back in the past week or so, Nippon Life expects risk assets will be pummeled again.

But his most notably observation was that the era of “Goldilocks” is on its last breath: the CIO said market expectations of a scenario that is neither too hot nor too cold are based on the assumption of three “moderations”: moderate economic growth, moderate inflation and a moderate rise in asset prices.

“When any of those three disappear, there will be market corrections,” he said. ”Since Abenomics began (in 2012), our stance on Japanese stocks has been to ‘buy-on-dips’.

“But with their valuations at lofty levels” he said “we are no longer increasing our stock portfolio.“

Instead “As the end of Goldilocks markets approaches, we have to prepare ourself for tumbles in share prices,” he said.

Separately, FX traders who frontrun Japan’s insurance fund purchases will be happy to know that while Nippon Life expects the dollar could fall further against the yen, the insurer is now ready to buy dollars below 105 yen, Ozeki said as the greenback is “approaching levels in line with its fair value in purchasing power parity terms.”

Back to equity markets, Ozeki said that while the company does not expect a major market crash yet, he expects a real test for markets to come when the combined balance sheet of the world’s three biggest central banks – the Federal Reserve, the European Central Bank and the Bank of Japan – start to shrink.

Of course, as of this moment while the Fed started to trim its balance sheet, the ECB and the BOJ are still gobbling up bonds. But that is expected to change by early 2019 when all three central banks are expected to start withdrawing liquidity from the market.

Finally, Ozeki opined on what he believes is the biggest bubble: “everybody is trying to see if any bubbles are formed anywhere…I would think government bonds are the most expensive and what comes next will be a burst of the government bond bubble, even if not right away” he added.

Which, for his native Japan, where the 10Y yields below 0.1% only due to the constant intervention of the BOJ, will be a very big problem.

via Zero Hedge http://ift.tt/2HFVDW4 Tyler Durden

Authored by James Rickards via The Daily Reckoning,

Turkey is a beautiful country with a rich history including Greek, Roman and Muslim influences that make it one of the most fascinating places on Earth. It is literally a bridge between East and West: The mile-long Bosporus Bridge just north of Istanbul connects Europe and Asia across the Bosporus Strait.

Turkey has been a magnet for direct foreign investment from abroad and dollar-denominated loans by international banks to local enterprises. This investment enthusiasm is understandable given Turkey’s well-educated population of 83 million and its rank as the 17th-largest economy in the world, with a GDP of just under $1 trillion.

The flood of bank lending and direct foreign investment has given rise to another flood of hot-money portfolio investors in Turkish stocks chasing high returns with cheap dollar funding in a variation of the global carry trade. So-called emerging-market (EM) funds offered by Morgan Stanley, Goldman Sachs and others are stuffed full of Turkish stocks and bonds.

Your correspondent in central Istanbul, Turkey, on the site of the ancient Hippodrome, where chariot races were still held in late antiquity. In my many visits there since 1996, I have observed Turkey’s shift from a firmly secular society to one dominated by religious and authoritarian rule. As Turkey turns its back on Western society, it still relies on Western institutions to deal with potential debt, currency and reserve crises. Turkey’s new alienation from the West may mean that Western help will not be available in a future financial crisis.

But there’s a dark side to this seeming success story. Turkey’s external dollar-denominated debt is so large that a combination of rising U.S. dollar interest rates and a slowing global economy could quickly turn Turkey from model EM to the canary in the coal mine of the next great global debt crisis.

The risk of a major debt crisis beginning in Turkey is heightened by the rise of Turkey’s President Recep Tayyip Erdoğan as an autocratic strongman in the mold of Argentina’s Juan Perón and other populist nationalists who have ruined strong economies.

Begin with a look at the Turkish debt situation. Turkey’s debt is huge, one of the highest debt burdens of any EM. Turkey owes $450 billion to foreign creditors, of which $276 billion is denominated in hard currency, mostly dollars and euros. The remainder of $174 billion is denominated in Turkey’s local currency, the lira.

Both kinds of debt are problematic. The lira debt is a growing burden because lira interest rates have skyrocketed from 6% to 12% in the past five years.

The foreign currency debt is problematic for two reasons. The first is that the lira has devalued from 1.75 to 3.89 to the dollar since 2013, which increases the amount of lira needed by local companies to repay their external debt. The second reason is that U.S. and euro interest rates are starting to rise, which also makes the external debt burden more difficult to service.

Turkey’s hard currency reserve position is adequate for the moment, with about 100% coverage of foreign debt. The problem is not an immediate debt crisis but the likelihood that foreign credit could dry up or reserves could drain quickly, leading to a tipping point and a rapid loss of confidence.

Unfortunately, there are numerous economic and geopolitical catalysts for such a loss of confidence. The principal catalyst is a sharp deterioration in Turkey’s relations with the West and increasing links between Turkey and Russia that could lead to a crisis.

Recent polls show that 68% of Turkish citizens believe that Turkey’s alliance with Europe and the U.S. is breaking down. The same poll shows 71.5% of Turkish citizens believe that Turkey should enter into an economic, political and security alliance with Russia.

Another irritant is the widespread belief in Turkey that the U.S. played a role in the attempted military coup d’état against President Erdoğan in July 2016. This suspicion is heightened by the fact that the U.S. refuses to extradite Erdoğan’s political enemy, Fethullah Gülen, who lives in exile in Pennsylvania.

Erdoğan alleges that Gülen tried to force him from office in 2013 based on false charges — what Erdoğan called a “judicial coup.” The combined impact of a so-called judicial coup and an actual military coup attempt have led to profound distrust between the U.S. and Turkey.

The U.S. court system is also currently hearing a trial in which a Turkish-Iranian gold dealer, Reza Zarrab, has turned state’s witness and is providing testimony involving bribes and kickbacks by the Erdoğan government.

The U.S. government’s main charge is that Turkey helped both Russia and Iran avoid U.S. government economic sanctions. A newly passed Russian sanctions bill would impose severe penalties on Turkey if it goes ahead with a proposed purchase of Russian anti-aircraft systems.

A more serious point of contention between the U.S. and Turkey involves the role of the Kurds in Syria. From Turkey’s perspective, the Kurds are a separatist movement that threatens the territorial integrity of Turkey. The most extreme Kurds are pushing for an independent Kurdistan that would include parts of present-day Turkey, Syria, Iraq and Iran.

From the U.S. perspective, the Kurds are a potent fighting force who have been instrumental in the decimation of ISIS and are now playing a key role in support of Syrian freedom fighters opposing the regime of Syrian President Bashar al-Assad. The Kurds are bitter enemies of Turkey and good friends with the U.S.

Another confrontation between the U.S. and Turkey is emerging over the status of Qatar. Saudi Arabia economically isolated and physically blockaded Qatar because of its support for terrorists and Islamic radicals. The U.S. has tried to mitigate this conflict but on balance supports the Saudi position.

Turkey has come to the aid of Qatar with both financial support and a military presence. A war between Saudi Arabia and Qatar would, in effect, be a proxy war between the U.S. and Turkey, two erstwhile NATO allies.

In short, U.S.-Turkish relations are at their lowest point since the breakup of the Ottoman Empire in 1922.

This deterioration in relations has important economic implications. If Turkey were to find itself in financial distress — a highly likely outcome in the near future — the usual place to turn for a financial lifeline is the IMF. However, the U.S. and its Western allies, especially Germany, have effective veto power over IMF bailouts.

The U.S. might demand conditions on any IMF assistance to Turkey in the form of compliance with Russia sanctions. Turkey would likely reject such conditions leading to an impasse on the subject of IMF aid.

With geopolitical tensions rising and the U.S. aggressively tightening monetary policy, what are the prospects for the Turkish lira and Turkish markets in the months ahead?

The single most important trend is Turkey’s growing isolation from the West at the same time that Turkey’s external debt burden spirals out of control.

The geopolitical issues noted above — involving Syria, Qatar, the Kurds, Russia and Iran — could lead to a sharp break in U.S.-Turkey relations and Turkey’s departure from NATO.

President Erdoğan is strong-willed but also defiant and stubborn in the face of what he regards as the infringement on Turkey’s sovereignty by the U.S. and Europe.

Far from negotiating with the IMF in the event of distress, Erdoğan could easily impose capital controls, which would effectively be a default on all external debt and lock all equity investments in place with no ability to cash out for dollars. Turkish stock and bond markets would plunge at best or cease to function at worst.

The situation in Turkey is uncomfortably close to the situations that arose in Thailand in 1997 and Russia in 1998 in which both countries closed their capital accounts after attracting billions of dollars in foreign loans and investment. Those Thai and Russian defaults precipitated one of the most acute and dangerous liquidity crises in world history.

Just the existence of these geopolitical fault lines and potential financial defaults is enough to slow down new investment and loan rollovers in ways that make a credit crisis in Turkey even more likely.

via Zero Hedge http://ift.tt/2oiA8SR Tyler Durden