Another Short-Squeeze Sends S&P Over 3,100 For First Time Ever
Perhaps on the heels of hopes that Trump will say something about the China trade deal (of course he will), US equity indices ripped out of the gate as markets opened this morning as the insta-BTFD army of algos squeezed shorts once again…
Sending the S&P 500 above 3,100 for the first time ever…
Some 100 members of an American Mormon community in northern Mexico, nine of whom – women, children, toddlers – were massacred a week ago on a lonely stretch of highway, just crossed over into Arizona.
Other family members who have lived there for decades will follow.
The atrocity was the work of one of the cartels battling for control of the drug traffic into the United States.
In Mexico’s Sinaloa state in October, an arrest of Ovidio Guzman Lopez, son of “El Chapo,” who sits in a New York prison, brought a military-style cartel attack on the state capital, Culiacan, followed by a surrender to the cartel gunmen by national guard and army troops, and a release of the captive.
“Is Mexico a failed state?” asks The Washington Times. Its editorial describes “Another Blood-Soaked Year in Mexico” where 17,000 people were murdered by July and the 2019 death toll is expected to reach 32,000.
USA Today reports: “Through August of the current fiscal year, the Border Patrol apprehended 457,871 migrants arriving as ‘family units’ … a 406% increase compared to the 90,554 family unit apprehensions during the same period the previous year. Migrant families from Guatemala, Honduras and El Salvador made up almost 92% of the total.”
With cartel battles escalating into a war that Mexico City has no stomach for fighting, and a record number of migrants from Central America crossing Mexico to flood into the USA, what is the Democratic Party’s policy for halting the rising tide?
Democrats are moving toward an “open door” policy on the U.S. border, an open borders embrace of any and all who wish to come.
America, apparently, does not belong to those who live here and love the country. America belongs to anyone who chooses to come. America belongs to the world.
Consider Bernie Sanders’ immigration proposal, outlined the week of the massacre of Mormon women and children.
On Day One, President Sanders would declare a moratorium on deportations and offer a “swift pathway to citizenship” for all illegal migrants who have been here for five years.
Bernie would break up ICE.
Border-jumping would cease to be a crime and become a civil offense like jaywalking.
The “Muslim ban” would be abolished.
President Sanders would back sanctuary cities that refuse to work with U.S. law enforcement.
Asylum seekers would not have to wait in Mexico as their claims were processed but would be welcomed into the USA.
Family separations would end.
Trump’s wall, which Bernie calls “racist,” would be history.
The administration’s treatment of illegal immigration “as a criminal and national security matter is inhuman, impractical and must end.”
Migrants who enter illegally would qualify for federal health care and the same social welfare benefits as U.S. citizens.
Immigrant officials say Sanders’ proposals would create an irresistible magnet for millions of migrants from all over the world to stampede into the USA.
The Nation magazine calls Sanders’ plan “one of the boldest immigration plans any major politician has put forward in years, and comes amid a campaign season that has seen a major shift to the left among Democratic candidates on immigration.
“With calls for a total moratorium on deportations, abolishing ICE and providing a path to citizenship for undocumented migration, the plan serves as a road map for what a fair and just immigration can be.”
From another standpoint, Sanders’ proposal is a surrender to the reality that a leftist regime lacks the conviction or will to stop an endless stream of people from migrating here.
Americans troubled over what is happening on the Syrian-Turkish border, or Ukrainian-Crimean border, might take a closer look at what will happen at our own border, and to our own country, if Democrats win the presidency and throw open the doors to unrestricted immigration.
The federal budget, already running trillion-dollar deficits, and state budgets, too, will see huge increases in the cost of social programs, without the commensurate income tax revenues to pay for them.
Even at present levels, illegal immigration is bringing in millions of people without the work, education or language skills to compete and assimilate rapidly in a first world, Western economy.
These migrants pay virtually no income taxes, yet, would qualify for the same benefits as U.S. citizens. The inevitable result: another run-up in an annual deficit already running $1 trillion in the red.
Politically, so massive a migration of peoples who, once they become citizens, vote 70%-90% Democratic means an end of the GOP as a truly national party.
If we open the borders, how do we stop the drugs from coming in? How do we stop the cartels from following MS-13, which is already here?
Socially, this country is as splintered as it has been since the 1960s.
Will a barrage of migrants add to its diversity, or deepen the ethnic, racial and cultural divides that are turning us into two, three, many Americas?
Chilean Peso Collapses To 800/USD – Blowing Through Record Lows
The Chilean peso extended a four-day losing streak on Tuesday, sinking by the most in eight years, to a new record low at 800/USD.
Source: Bloomberg
Bearish market sentiment, political chaos, and a national strike intended to ratchet up pressure on the government…
Source: Bloomberg
However, Bloomberg reports that Citigroup believes that the Chilean peso is not yet at a stage where BCCh would intervene.
The central bank last stepped into market in 2009, when CLP’s real effective exchange rate was ~9% weaker than the current level (REER was about 3% weaker in 2014-15 vs now and the bank didn’t intervene back then).
Citi adds that Chile’s low growth, low inflation environment means country can afford weaker currency without much discomfort.
But, according to Eurasia, President Ivan Duque’s low political capital “heightens social risks as discontent with the administration will probably increase adherence to a national protest” planned for Nov 21.
I’m intrigued by recent moves in CLOs – Collateralised Loan Obligations. They have been one of the strongest performing sectors of the bond markets for many years. Smart investors realised pooled corporate credit investments spread the risk across a wide range of borrowers, and following the 2008 Global Financial Crisis there were surprisingly few corporate defaults. In fact, as rates tumbled lower investment grade and junk debt performed strongly – making CLOs even more attractive. CLOs are now a $750 bln global market.
But the CLO sausage factory needs constantly fed with new debt to keep churning out new product… Therein lies danger…
Most of the loans making up CLOs are junk leveraged loans – the AAA tranches get paid the interest and principal first and face the lowest risk, while profits go to the CLO equity holders. The theory is simple – although a few loans might go bust in a pool, the others will cover the losses. Have you heard that thinking before?
If you are thinking sub-prime.. give yourself a pat on the back.
Source: Bloomberg
Suddenly there a host of doomsters warning of imminent crisis in CLOs. Bloomberg says Norinchuckin Bank has exited a large part of its CLO book following new financial regulations and greater regulator scrutiny. The Bank of Japan warned its bank charges about ratings and prices of CLOs being vulnerable to substantial falls if market conditions change. Japanese banks are said to hold 15% of the CLO market. Norinchuckin has been one of the largest players in the market – some estimates say it accounts for nearly 10% of the total market!
There has been plenty of anecdotal evidence the quality of loans made to heavily indebted sub-investment grade companies has fallen. The private equity owners of companies that issue the bulk of the highly leverage loans that make up CLOs have been using ultra-low interest rates to lever up companies to higher and higher levels, spurred on by demand for more and more CLOS! They’ve also been cutting covenant protections – making it simpler to finance more debt, effectively raising the credit risk of each loan, and leaving the end investors even more exposed.
A number of investors have exited the market, concerned that highly levered, covenant lite issuers could see a far greater default rate than before in the event interest rates rise. They’re looking at some deals at the “Whoosh” end of the CLO market where the managers are willing to take greater risks as reminiscent of the Sub-Prime Mortgage crisis where Residential Mortgage Back bonds comprised loans to individuals who were very unlikely to ever be able to pay them back.
On the other hand, a great article in WSJ this morning quotes on CLO buyer as seeing recent price slides as: “we’ve been increasing our double-B allocation in the last month”, spotting the recent sell off in CLO prices may be an opportunity.
Huawei Gives Employees Mega Bonus For Resisting Trump
Huawei Technologies announced Tuesday on social media that employees will receive bonuses as a thank you for helping it cope with US sanctions and blacklisting by the Trump administration.
The Huawei announcement said 90,000 employees could receive up to $3,100 each.
“In 2019, the company and all employees were, and are, facing extraordinarily external challenges,” said an internal email to staff members, first obtained by the Nikkei Asian Review. “Upon approval by the company’s president, a special dedication award will be paid.”
The announcement informed employees that the bonus would be equivalent to their October salary.
More significant bonuses are expected for employees in chip production, research and development, and manufacturing-related jobs.
Huawei, which is one of the world’s largest 5G equipment and smartphone makers, had to quickly overhaul its product line with domestic chips to reduce reliance on US ones.
The company has a workforce of roughly 190,000 spread across 170 countries and over $105 billion of annual revenues.
The Trump administration has labeled Huawei a national security threat, accusing it of allowing the Chinese government to use backdoors to spy on customers.
The US crackdown on Huawei via economic war, such as sanctions and blacklisting, has so far cost the company $10 billion in sales this year.
Huawei founder and CEO Ren Zhengfei recently spoke with The Wall Street Journal about the deteriorating relations with the US and denied the allegations that it spies on its customers or any government.
Zhengfei said, “we have virtually no business dealings in the US” since the blacklisting.
He said Huawei was a major buyer of US chips before it was blacklisted. Sales figures showed the company bought $11 billion of chips from US suppliers in 2018. The blacklisting forced Huawei to rely on domestic chips.
Zhengfei said: “We can survive very well without the US. The China-U.S. trade talks are not something I’m concerned with.”
The Trump administration has spent at least 18 months spreading Sinophobia across the world, in the attempt to bankrupt Huawei.
Department of Justice Inspector General Michael Horowitz’s much anticipated report on his investigation into the FBI’s probe into President Trump’s campaign is expected to be made public before Thanksgiving and the outcome is alleged to contain several criminal referrals, according to sources who spoke with SaraACarter.com.
Horowitz’s investigation on the bureau’s probe into the now debunked theory that Trump colluded with Russia in the 2016 presidential election will more than likely result in the declassification of documents – requested by senior Republican lawmakers for more than several years. These are the same documents President Trump turned over to Attorney General William Barr in May, giving him ‘full and complete authority” to declassify.
Those documents will contain several classified pages of the Foreign Intelligence Surveillance Act on former Trump campaign advisor Carter Page, exculpatory evidence that was withheld from the Foreign Intelligence Surveillance Court, the so-called ‘Gang of Eight’ folder (which contained exculpatory information), as well as the email chain between FBI investigators in the Russia probe and then-FBI Director James Comey.Those emails also include discussions with lawyers in the DOJ’s national security division. As previously reported, the email chains will contain information that prove the FBI knew prior to obtaining a warrant to spy on Page that former British spy Christopher Steele’s information in his infamous dossier on Trump could not be proven.
It is also expected to reveal that the FBI knew that Steele was leaking to the media but then used those media reports are separate evidence in their request for a FISA warrant, known as circular intelligence reporting. Circular reporting is when a law enforcement official uses false confirmation by making a piece of information appear to come from multiple independent sources.
Horowitz’s report is also going to contain evidence that the FBI handled Hillary Clinton’s campaign differently than that of President Trump’s campaign. It will reveal that she had received a detailed debriefing from the FBI on foreign attempts to make contact with her campaign. It will reveal the deep bias and animus those FBI officials had toward the Trump campaign.
It is the most highly anticipated Horowitz report during the Trump administration’s tenure. Why? Because for more than three years the American people have not had closure or resolution to what exactly warranted the FBI investigation to spy on a presidential campaign, or for that matter on the President.
It will also weaken House Intelligence Committee Chairman Adam Schiff’s current impeachment probe into Trump, as it will prove that his previous statements in support of the FBI’s FISA into Page was based solely on his biased against Trump. This bias, say Republican officials, continues with his push to impeach the President.
“If it’s strong and comes out soon, the IG report will do some real damage to the Democrats’ impeachment charade. It would show that Resistance bureaucrats really are conspiring to take down Trump,” said a House Republican source.
“It would also fatally undermine the credibility of Schiff, who argued vehemently that there were no FISA abuses—it will mean that, as Intel Committee Chairman, he’s ignoring severe abuses for purely political purposes.”
Those political purposes lead to the most important question lingering in Horowitz’s investigation:
Did senior officials within the FBI and U.S. intelligence apparatus weaponize the system for political purposes against a candidate for the presidency and did they continue to do so after Trump had been elected?
Unlike Horowitz’s other reports, this investigation, which focuses on the machinations of the FBI’s initial beginnings of the probe, is sure to bring with it a wave of new information that the public may not be aware of and the bureau’s connections to the intelligence communities role in its initial investigation.
The players: former FBI Director James Comey, former Deputy Director of the FBI Andrew McCabe, former Special Agent Peter Strzok, along with Strzok’s paramour FBI lawyer Lisa Page, are among some of the cast of characters in Horowitz’s report. Others, like former CIA Director John Brennan, former Director of National Intelligence James Clapper and DOJ official Bruce Ohr may also play a part in his investigation. However, Horowitz has been careful not to let anything leak – not even the day he plans to release the report, which we now know was completed in mid-September and being reviewed for classification purposes with the FBI and DOJ.
Here’s what to expect: According to several sources the report will be ‘damning’ and will allegedly contain criminal referrals on former FBI officials. The report will apparently have at least two criminal referrals, said two sources, with knowledge. One of those criminal referrals is expected to be Comey. However, the Inspector General’s office has not been
Those referrals allegedly will be made based on information and evidence obtained by the Inspector General and may very well have been the reason Justice Department Attorney General William Barr and Connecticut prosecutor John Durham opened a criminal probe into the FBI’s investigation into the President.
Some information has already been made public. In a recent interview with Fox New’s Martha McCallum Sen. Lindsey Graham, who has spoken with Barr, said “I think his report is going to be stunning. I think it is going to be damning. I think it’s going to prove that the system got off the rails and we need corrective action.”
As chairman of the Senate Judiciary Committee, Graham, told McCallum his committee will be examining the FBI’s use of a FISA warrant on Page, alongside the current investigation being conducted separately by Durham.
He must.
The question as to what extent the senior intelligence and federal law enforcement officials weaponized the most trusted institutions in our nation should be answered and made public for the American people.
If senior government officials broke the law and abused the system then they must be held accountable and there should never be any question of a two-tiered justice system in our nation.
Hong Kong Police Warn City On Brink Of ‘Total Breakdown’
After nearly six months of protests in Hong Kong, the weekend demonstrations – which more closely resemble street skirmishes between black-clad protesters and the cops – have grown increasingly violent, people are being seriously wounded and even killed on both sides. And this week, protesters have apparently committed to another escalation: they’ve taken to the streets to disrupt HK’s public transportation during Monday and Tuesday, forcing businesses to close and schools to cancel.
Hong Kong policed warned on Tuesday that the city is now “on the brink of total collapse” after a second straight day of violence and chaos. The MTR, Hong Kong’s subway network, closed several stations and reduced the frequency of trains to cope with the demonstrations.
Some commuters were forced to walk along rail tracks to the next stop to catch a train to work. A senior police superintendent insisted that the ‘rioters’ – a term used pejoratively to describe the protesters – were pushing “our society” toward a breakdown.
“Over the past two days, our society has been pushed to the brink of a total breakdown as rioters went on a rampage,” Kong Wing-cheung, a senior police superintendent, said in a press conference.
Hong Kong Chief Executive Carrie Lam accused protesters on Tuesday of trying to “paralyze” the city. She accused demonstrators of being “extremely selfish” and said she hoped all universities in Hong Kong would encourage students not to participate in the violence.
Of course, the violence has gone both ways. Lam was speaking one day after police shot a protester and a man was set on fire in some of the most dramatic violence to arise from the protests. Lam added that the city planned to hold local elections on Nov. 24, the first test of public sentiment since the pro-democracy protests began five months ago.
“On the whole, we will try our very best to ensure the election will continue in a safe and orderly manner,” Lam said.
But the vote is bound to be controversial. Already, one protest leader has been barred from participating, and a number of other pro-democracy candidates have been targeted by violence. According to the FT, at least eight attacks on pro-democracy political figures have occurred, while at least one pro-establishment lawmaker has also been stabbed.
Even the US, which once openly encouraged the pro-democracy demonstrations, has changed its rhetoric, and is now pushing for a return to peace in Hong Kong.
Morgan Ortagus, a US State Department spokeswoman, said Washington was standing by with “grave concern” and that the polarization “underscored” the need for dialogue between the government, protesters and other members of the public.
“We condemn violence on all sides, extend our sympathies to victims of violence regardless of their political inclinations, and call for all parties – police and protesters – to exercise restraint,” Ms Ortagus said.
Meanwhile, more alarming footage of the clashes has emerged, including this video, which was taken at a distance:
Hundreds have been arrested on Monday and Tuesday. And as police regroup to prepare for another day of unrest, Beijing is being closer and closer to the brink. How long can Hong Kong’s economy support daily, commerce-disrupting unrest? Soon, the authorities will have no choice but to call in the heavies from the mainland.
As long as central banks create and distribute trillions in conscience-free credit to conscience-free financiers and corporations, the incentives for sociopathy only increase.
“Sociopath” is a word we now encounter regularly in the mainstream media, but what does it mean?Here is a list of 16 traits, many of which are visible in lionized corporate and political leaders and entrepreneurs.
One key trait is a lack of moral responsibility or conscience; the sociopath feels no remorse if he/she takes advantage of people or exploits them.
Sociopaths are masters of superficial charm, intelligence and confidence, and adept at massaging or misrepresenting reality up to and including outright lying to persuade others or get their way.
Like all psychological syndromes (manic depression, autism, bipolar disorder, etc.), there is a wide spectrum of sociopathological traits, some of which may offer some adaptive benefits (and hence their continued presence in the human genome). In other words, an individual can have a few of the traits in greater or lesser proportions.
Thus the modern BBC Sherlock Holmes (played by Benedict Cumberbatch) describes himself as a “high-functioning sociopath” (though many contest this diagnosis of the original Holmes in Arthur Conan Doyle’s stories).
Anyone who has read Walter Isaacson’s biography of Steve Jobs can readily see manifestations of sociopathy in Jobs: his famous “reality distortion field,” his refusal to accept that he’d fathered a daughter, his lack of empathy, his wild emotional swings (from verbal abuse to weeping), his dietary extremes, his charm, so quickly turned on or off, his uneven parenting, and so on. His obsessive-compulsive behavior was also on full display. Yet Jobs is lauded and even worshiped as a genius and unparalleled entrepreneur. Was this the result of his sociopathological traits, or something that arose despite them?
The ledger of costs and benefits of Jobs’ output is weighted by the global benefits of the products he shepherded to market and the hundreds of billions of dollars in sales and net worth he generated for investors while the head of Apple. Though narcissistic in many ways (with the resulting negative effects on many of his intimates), Jobs was clearly focused on creating “insanely great” products that would benefit customers and users. Despite his sociopathological traits, there is no evidence he set out to deceive anyone with the objective of exploiting their good will or belief in his vision to skim billions of dollars from unwary investors.
But the ledgers of others manifesting sociopathy are far less beneficial, as the billions of dollars they generated were in essence a form of fraud.
The rise and fall of WeWork is a recent textbook example of sociopathy reaping enormous financial gains for the sociopaths without creating any actual value. There are plenty of media accounts of the founders’ excesses (including the goal of becoming the world’s first trillionaire), some of which we might have expected to raise flags in venture capitalists, board members, etc., but these traits were overlooked in the rush for all involved to garner billions of dollars in fees and net worth when WeWork went public.
This example (among many) illustrates that sociopathy is incentivized in our socio-political-economic system, and sociopathic “winners” are lionized as epitomes of ambitious success. (The entire charade of the stock market rising due to Federal Reserve-enabled stock buybacks is an institutionalized example of sociopathy.)
Correspondent Tom D. recently summarized the core dynamic and consequence of this systemic incentivization of sociopathy:
I’ve been a successful business owner, but I’m not a sociopath–I deliver value to my customers, my investors, and I don’t move forward if I see anyone being substantially hurt by my actions.
My peers and I look at organizations such as WeWorks, see the rewards reaped by the sociopathic leaders, and realize we are at a constitutional disadvantage working within such a system.
I could never conceive of taking a $700-900m payday at the expense of investors for whom I’ve generated no value whatsoever.
I simply could not do it.
If ‘out-sociopathing’ the sociopaths is what it takes to ‘succeed’ in todays business climate– I’ll fail.
So I don’t try.
From the sociopath’s standpoint, that’s probably a feature not a bug–one that helps keep effective competition out of the marketplace.
I wonder how much of civilizational decline is simply due to good people accepting their lot and opting out.
If the system incentivizes conscience-free sociopaths more than it incentivizes those creating real value, the system will eventually fall into the equivalent of Gresham’s law (“bad money drives out good money”): the con-men and fraudsters will drive out entrepreneurs with a conscience who create real value for customers, investors and society at large.
If we look at recent IPOs and compare them to the Apple IPO, it seems we’ve already reached that point. Apple went public as a highly profitable company. Uber, Lyft, Beyond Meat and WeWork (if their IPO fraud hadn’t been revealed) are all unprofitable, in some cases losing billions of dollars with little prospect for eventual profits.
Venture capital folks explain this by noting that the flood of central bank credit-money-creation has generated trillions of dollars of liquid capital seeking “the next big thing” that will “disrupt” existing models and therefore generate billions in profits.
This pinpoints one key source of the incentivization of sociopaths: central banks’ creation of trillions of dollars of conscience-free capital seeking a quick profit anywhere on the planet, by any means available.
Conscience-free capital is an easy mark for a conscience-free sociopath. It’s a marriage made in heaven, a perfect match.
Those with a conscience are essentially squeezed out of the system. The choice is binary: either play and lose or opt out.
I’ve written about “opting out” since 2009, since it was one of the few options available to commoners in the final decline of the Western Roman Empire. If we feel we’re at a systemic disadvantage, i.e. the system is rigged against us, opting out makes much more sense than sacrificing oneself in a fruitless battle to stay alive in a system that incentivizes amoral sociopaths.
If we consider what generates outsized success in our rapidly changing economy, we find a variety of factors supporting “winner take most” asymmetric gains. As economist Michael Spence has observed, those who develop new business models earn outsized gains because new forms of capital and labor that are scarce create the most value.
Many of these new business models disintermediate existing models, obsoleting entire layers of middlemen and management.
Netflix is a good example: the move from mailing CDs to streaming content obsoleted cable companies. Now Disney is disrupting Netflix by launching its own streaming service at $6.99 a month, offering content that cable subscribers had to pay $60+ a month to access via a “premium” cable add-on, most of which they didn’t even use.
In contrast, WeWork sold itself as a “tech innovator” when in fact it was simply a commercial real estate packager, leasing large spaces and chopping them up into small spaces with common areas and a few services.
How does our system incentivize sociopathy? By focusing exclusively on short-term gains reaped from IPOs (initial public offerings) and by blindly seeking “the next disruptor that will generate billions,” the system is easy prey for charming sociopaths who can tell a good (if not quite truthful) story.
The amoral sociopath with the story attracts amoral sociopaths in venture capital, banking and politics, as these fields are all focused on short-term, outsized, quickly skimmed gains, regardless of the consequences to investors or society at large.
What would change this incentivization of sociopathy? Ending the Federal Reserve’s delivery of trillions of dollars in conscience-free capital to sociopaths and limiting the VC-IPO flim-flam machine would be a start, but given Wall Street’s dependence on these profits and the millions the Street gives to political campaigns, this is politically unfeasible. Any such regulation that reaches Congress will be watered down or larded with loopholes.
There may be no way to excise the incentives for sociopathy, because the incentives all favor the sociopaths’ most fertile ground: the Federal Reserve’s money spigot of nearly free money for the most sociopathological financiers and corporations; amoral, conscience-free greed; the worship of short-term gains, regardless of consequences, and the extreme profitability of rigged games and The Big Con PR (“we’re only evil when it’s profitable, which is, well, all the time”.)
As long as central banks create and distribute trillions in conscience-free credit to conscience-free financiers and corporations, the incentives for sociopathy only increase, and the incentives for everyone else to opt out increase proportionately.
What happens next? The dead wood of sociopathy is ignited by a random lightning strike, and the entire financial system (and the economy it feeds) burns to the ground in an uncontrollable conflagration of blowback, consequence and karma.
Mass Chemical Attack On School In China Leaves 54 Injured, Mostly Children
What’s being reported as a mass chemical attack on children happened Monday afternoon at a school in southwest China. The horrific incident injured fifty-one children and three teachers at a kindergarten in Kaiyuan city, Yunnan province, state media reported Tuesday.
A 23-year old man, now in custody, reportedly scaled a wall to get into the school and then sprayed a corrosive chemical on the students and teachers. Xinhua news described that he used a “caustic soda” — a reference to sodium hydroxide, which is an industrial chemical commonly used in the manufacture of household products.
File image via Millennium Post.
Xinhua further said at least two of the children are in “serious” condition after exposure to the chemical substance, which can severely burn the eyes, skin and respiratory tract. Local police characterized attacker’s motive as being driven by “revenge on society”.
CNN summarized injuries that can result from sodium hydroxide exposure as follows:
According to the United States’ Centers for Disease Control and Prevention, exposure to caustic soda can irritate or burn the eyes and skin, provoke an allergic reaction, or even cause temporary hair loss.
Police said the suspect was detained about an hour after the attack, whose name was only given as Kong.
Caustic Soda, or Sodium Hydroxide is considered “highly corrosive” to the touch, produces extreme heat when it interacts with water or moisture in the air, and can cause “severe eye, skin, and respiratory tract burns”.
Over the past three years there’s been a number of strange mass casualty incidents involving adults going on rampages at schools, among the most tragic being a knife-wielding man killing nine students and injuring twelve in 2018. The man was later executed for the heinous attack in the middle school in China’s Shaanxi Province.
Kaiyuan Dongcheng Kindergarten in China, site of the chemical attack, via The Daily Mail.
And in another 2018 attack, a woman stabbed at least 14 children at a kindergarten in the central city of Chongqing. The prior year, in 2017, a man entered a kindergarten and wounded 11 students with a knife.
This latest attack is somewhat unprecedented, however, given the man used a chemical spray on the victims. Police said an investigation is still ongoing, according to local reports.
In this past weekend’s newsletter, I discussed the rather severe extensions of the market above both the longer-term bullish trend and the 200-dma. To wit:
“Currently, it will likely pay to remain patient as we head into the end of the year. With a big chunk of earnings season now behind us, and economic data looking weak heading into Q4, the market has gotten a bit ahead of itself over the last few weeks.
On a short-term basis, the market is now more than 6% above its 200-dma. These more extreme price extensions tend to denote short-term tops to the market, and waiting for a pull-back to add exposures has been prudent..”
But it isn’t just the more extreme advance of the market over the past 5-weeks which has us a bit concerned in the short-term, but a series of other indications which typically suggest short- to intermediate-terms corrections in the market.
Not surprisingly, whenever I discuss the potential of a market correction, it is almost always perceived as being “bearish.” Therefore, by extension, such must mean I am either all in cash or shorting the market. In either case, it is assumed I “missed out” on the previous advance.
If you have been reading our work for long, you already know we have remained primarily invested in the markets, but hedge our risk with fixed income and cash, despite our “bearish” views. I am reminded of something famed Morgan Stanley strategist Gerard Minack said once:
“The funny thing is there is a disconnect between what investors are saying and what they are doing. No one thinks all the problems the global financial crisis revealed have been healed. But when you have an equity rally like you’ve seen for the past four or five years, then everybody has had to participate to some extent.
What you’ve had are fully invested bears.”
While the mainstream media continues to misalign individual’s expectations by chastising them for “not beating the market,” which is actually impossible to do, the job of a portfolio manager is to participate in the markets with a preference toward capital preservation. This is an important point:
“It is the destruction of capital during market declines that have the greatest impact on long-term portfolio performance.”
It is from that view, as a portfolio manager, the idea of “fully invested bears” defines the reality of the markets that we live with today. Despite this understanding, the markets are overly bullish, extended, and overvalued and portfolio managers must stay invested or suffer potential “career risk” for underperformance. What the Federal Reserve’s ongoing interventions have done is push portfolio managers to chase performance despite concerns of potential capital loss.
Managing portfolios for both risk adjusted returns while protecting capital is a delicate balance. Each week in the Real Investment Report(click here for free weekly e-delivery) we discuss the risks and challenges of the current market environment and report on how we are adjusting our exposures to the market over time.
In this past weekend’s missive, we discussed how to “play” the latest round of the Fed’s QE program, along with what sectors and markets tend to perform the best.
However, I wanted to share a few charts which suggests that being patient currently, will likely yield a much better entry point for investors in the not-so-distant future.
Overbought And Extended
By the majority of measures that we track from momentum, to price, and deviation, the market’s sharp advance has pushed the totality of those indicators back to overbought.
Historically, when all of the indicators are suggesting the market has likely encompassed the majority of its price advance, a correction to reverse those conditions is often not far away. Regardless of the timing of that correction, it is unlikely there is much upside remaining in the current advance, and taking on additional equity exposure at these levels will likely yield a poor result.
Overly Complacent
The post-Fed rate cut and QE driven advance in the market has also pushed investors back to levels of extreme complacency.
Such extremely low levels of volatility, combined with investors piling into record “short positions” on the VIX, provides all the “fuel” necessary for a fairly sharp 3-5% correction given the proper catalyst.
Given that investors are “all in,” as discussed last week, there is plenty of room for investors to get forced out of holdings and push markets lower over the next few weeks. However, it isn’t just individual investors that are “all in,” but professionals as well.
Eurodollar Sends A Warning
Eurodollar positioning is also sending a major warning. (“Eurodollar” refers to U.S. dollar-denominated deposits at foreign banks, or at the overseas branches of American banks.)
When the ECB launched QE following the 2016 selloff, foreign banks liquidated Eurodollar deposits as it was deemed less risky to hold foreign denominated deposits. Currently, that view has reversed sharply as the global economy slows, and foreign banks are “hedging” their risk by flooding money into U.S. dollar denominated deposits. Historically, when you have an extremely sharp reversal in Eurodollars, it has preceded more troubling market events.
With Eurodollar deposits at record levels, do foreign banks know something we don’t?
Earnings Vs. Profits
The deviation between corporate GAAP earnings and corporate profits is currently at record levels. It is also entirely unsustainable. Either corporate profits will catch up with earnings, or vice-versa. Historically, profits have never caught up with earnings, it is always the other way around.
Expectations for corporate earnings going forward are still way to elevated, and with corporate share buybacks slowing, this leaves lots of room for disappointment.
Deviation
I have written many times in the past that the financial markets are not immune to the laws of physics.
There is a simple rule for markets:
“What goes up, must, and will, eventually comes down.”
The example I use most often is the resemblance to “stretching a rubber-band.” Stock prices are tied to their long-term trend which acts as a gravitational pull. When prices deviate too far from the long-term trend they will eventually, and inevitably, “revert to the mean.”
Currently, the market is not only more than 6% above its 200-dma, as shown in the opening of this missive, but is currently more than 15% above its 3-year moving average.
More importantly, the market is currently extremely deviated above it long-term bullish trend. During this entire decade-long bull market advance, the trendline is retested with some regularity from such extreme extensions.
Sentiment
Lastly, is sentiment. When sentiment is heavily skewed toward those willing to “buy,” prices can rise rapidly and seemingly “climb a wall of worry.” However, the problem comes when that sentiment begins to change and those willing to “buy” disappear.
This “vacuum” of buyers leads to rapid reductions in prices as sellers are forced to lower their price to complete a transaction. The problem is magnified when prices decline rapidly. When sellers panic, and are willing to sell “at any price,” the buyers that remain gain almost absolute control over the price they will pay. This “lack of liquidity” for sellers leads to rapid and sharp declines in price, which further exacerbates the problem and escalates until “sellers” are exhausted.
As we discussed just recently, consumer and investor confidence are both closely tied and are extremely elevated. However, CEO confidence is pushing record lows. A quick look at history shows this level of disparity is not unusual around market peaks and recessionary onsets.
Another way to analyze confidence data is to look at the consumer expectations index minus the current situation index in the consumer confidence report.
This measure also is signaling a correction/recession is coming. The differential between expectations and the current situation, as you can see below, is worse than the last cycle, and only slightly higher than prior to the “dot.com” crash. Recessions start after this indicator bottoms, which has already started happening.
Currently, the bottoming process, and potential turn higher, which signals a recession and bear market, appears to be in process.
None of this should be surprising as we head into 2020. With near-record low levels of unemployment and jobless claims, combined with record high levels of sentiment, job openings, and record asset prices, it seems to be just about as“good as it can get.”
Does this mean the current bull market is over?
No.
However, it does suggest the “risk” to investors is currently to the downside, and some caution with respect to equity-based exposure should be considered.
What Are We Doing About It?
Given the fact that the short, intermediate, and long-term indicators have all aligned, the risk of running portfolios without a hedge is no longer optimal.As such, we added an “inverse” S&P 500 position to all of our portfolios late yesterday afternoon.
While none of the charts above necessarily mean the next “great bear market” is coming, they do suggest a modest correction is likely. The reason we hedge against declines is that one day, and we never know when, a modest correction will turn into a more significant decline.
Remaining fully invested in the financial markets without a thorough understanding of your “risk exposure” will likely not have the desirable end result you have been promised. All of the charts above have linkages to each other, and when one breaks, they all break.
So pay attention to the details.
As I stated above, my job, like every portfolio manager, is to participate when markets are rising. However, it is also my job to keep a measured approach to capital preservation.
SO, why shouldn’t you show these charts to the bulls?
