The Insiders’ Case For A Stock Market Mini-Crash

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The trade only works if everyone is lulled into staying on the long side until it's too late.

Let's try a thought experiment: suppose we're players in the stock market, Wall Street insiders with real leverage and connections to the Fed. You know, the kind of player who can reverse a decline in the S&P 500 with an order (executed through a proxy) for thousands of call options on the SPX.

Retail participants tend to forget we make money on both the long and short side. The small-fry who provide liquidity always assume a sharp decline in equities is a terrible thing because "everybody is losing their gains," and this general belief is pushed by the mainstream financial media: unfailingly chirpy news anchors' expressions and voices darken when reporting the rare drop in stocks: horrible, horrible, horrible, a drop means we all lose, I'm sad reporting this.

The players are laughing at this play-acting and the gullibility of the audience: insiders make huge gains when they engineer a sharp decline. It's not that difficult to manipulate the market when volume and volatility are low, especially in an age where quant-bot trading machines are programmed to follow trends.

It's also easy to hype stocks publicly while selling (distributing) your shares at the top to unwary punters who believe the PR (the Fed has your back, thanks to the Fed's quantitative easing (QE), the market will never go down, etc.).

But pushing the melt-up higher gets more difficult when the market gets heavy. Markets get heavy when participation thins (i.e. fewer stocks are leading the advance), speculative sectors are rolling over as the crowd of greater fools shrinks and volume on up days keeps declining.

When the markets get heavy, the easy-profits trade is get short and engineer a sharp decline. Nudging a heavy market into a free-fall has a number of advantages to players, other than the gratifying profits from being short equities and long volatility.


1. The Fed needs a decline to "prove" it isn't pushing markets higher, further enriching the already obscenely rich. A thoroughly corrupted Congress is finally awakening to the public rage over the Federal Reserve's blatant enrichment of the few at the expense of the many, and as a result, the Fed has a serious PR problem: Janet Yellen may be a lot of things, but a believable actress isn't one of them. Her performance claiming the Fed acts only on behalf of widows, orphans, Mom, apple pie and the merchants lining Main Street was laughably inauthentic.

A sharp decline would demonstrate that the Fed isn't controlling the market to enrich the insiders–even though a sharp decline would only benefit the insiders who engineered the drop. Heh. No need to be churlish about it. Where's your sense of humor?

2. A mini-crash would panic the herd into selling, enabling insiders to scoop up shares on sale. This is of course the classic insider play: unload enough shares to blow off all the sell stops (i.e. orders to sell if price drops to specified level), which extends the decline and reinforces the panic-selling.

3. Never give a sucker an even break. After two years without a meaningful correction and complacency at multi-year highs, how much profit is there left in pushing an increasingly heavy market up another few percentage points? The big money is in engineering a decline that catches the crowd by surprise and doesn't allow the traders a chance to board the short-bus before it roars out of the station.

Many traders are confident the market will broadcast a technical signal that will give them a chance to get on the short bus with the insiders. How likely is this? If we're engineering a decline, why would we spoil the trade by letting a bunch of peasants get on board? With every quant-bot programmed to recognize all the usual technical signals and systems, why telegraph the trade?

As legendary stock trader/manipulator Jesse Livermore observed, the market will take the fewest possible number of participants along for the ride, and expecting the market to issue a "go short now for easy profits" signal would violate this rule: if everybody shifts from the long side to the short side, the trade is no longer profitable.

The trade only works if everyone is lulled into staying on the long side until it's too late. Traders seem to be waiting for another standard-issue decline in September/October that would set up yet another standard-issue Santa Claus rally. Will it really be this easy to book profits in the second half? When everybody expects the same thing to unfold, it's just another form of complacency.

Complacency–and the confidence that you can beat a confidence game by following what everybody else is following–is dangerous.




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Why We Should Decriminalize Prostitution

“Former Sex Worker Maggie McNeill on Why We Should
Decriminalize Prostitution.” Produced by Alexis Garcia. Shot by
Garcia and Zach Weissmueller. Music by Lee Maddeford.

About 30 minutes.

The original release date was July 14, 2014 and the
original writeup is below.

“There is a very common form of rhetoric that’s used against us
… that sex work isn’t work. That it’s a dodge. That it’s a scam.
That it’s a form of exploitation,” says Maggie McNeill, a former
sex worker turned activist who blogs at The Honest
Courtesan. 

“We still pretend that there’s a magical mumbo jumbo taboo
energy about sex that makes it different from all other human
activities.”

McNeill sat down with Reason TV’s Thaddeus Russell for a
wide-ranging interview where she responds to the feminist critique
of sex work, explains why research on trafficking may not be
reliable, and says why prostitution should be decriminalized.

“The problem is that there are already laws for these things,”
states McNeill. “We have a name for sex being inflicted on a woman
against her will. We call it rape. We have a name for taking
someone and holding them prisoner somewhere. We call that
abduction. … Why do we need [prostitution] to be laid on top of
all these other things that already are crimes?” 

Produced by Alexis Garcia. Shot by Garcia and Zach Weissmueller.
Music by Lee Maddeford. 

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President Obama Defends Israel, Condemns Hamas, Sends Kerry To Egypt To Fix It

President Obama and Israeli Prime Minister Netanyahu spoke on the phone today; The White House just released the clarifying statement of next steps…

 

Readout of the President’s Call with Prime Minister Netanyahu of Israel

President Obama and Prime Minister Netanyahu spoke again this morning by phone, their second call in three days to discuss the situation in Gaza.  The President discussed Israel’s ongoing military operation, reiterated the United States’ condemnation of attacks by Hamas against Israel, and reaffirmed Israel’s right to defend itself.

 

The President also raised serious concern about the growing number of casualties, including increasing Palestinian civilian deaths in Gaza and the loss of Israeli soldiers.

 

President Obama informed the Prime Minister that Secretary of State John Kerry will soon travel to Cairo to seek an immediate cessation of hostilities based on a return to the November 2012 ceasefire agreement. The President underscored that the United States will work closely with Israel and regional partners on implementing an immediate ceasefire, and stressed the need to protect civilians—in Gaza and in Israel.

And all done in time for a late tee-off…




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These post-workout turkey sliders are about to get smashed into that egg yolk waiting on the side. Killer glute session today. Now time to grub…

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“I Was Absolutely Shocked At What I Read,” Congressman Calls For Release Of Secret 9/11 Documents

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

Late last year, I published a post titled: Two Congressmen Push for Release of 28-Page Document Showing Saudi Involvement in 9/11. Here’s an excerpt from the piece:

Since terrorists attacked the United States on Sept. 11, 2001, victims’ loved ones, injured survivors, and members of the media have all tried without much success to discover the true nature of the relationship between the 19 hijackers – 15 of them Saudi nationals – and the Saudi Arabian government. Many news organizations reported that some of the terrorists were linked to the Saudi royals and that they even may have received financial support from them as well as from several mysterious, moneyed Saudi men living in San Diego.

 

Saudi Arabia has repeatedly denied any connection, and neither President George W. Bush nor President Obama has been forthcoming on this issue.

 

But earlier this year, Reps. Walter B. Jones, R-N.C., and Stephen Lynch, D-Mass., were given access to the 28 redacted pages of the Joint Intelligence Committee Inquiry (JICI) of 9/11 issued in late 2002, which have been thought to hold some answers about the Saudi connection to the attack.

 

“I was absolutely shocked by what I read,” Jones told International Business Times. “What was so surprising was that those whom we thought we could trust really disappointed me. I cannot go into it any more than that. I had to sign an oath that what I read had to remain confidential. But the information I read disappointed me greatly.”

 

The public may soon also get to see these secret documents. Last week, Jones and Lynch introduced a resolution that urges President Obama to declassify the 28 pages, which were originally classified by President George W. Bush. It has never been fully explained why the pages were blacked out, but President Bush stated in 2003 that releasing the pages would violate national security.

Naturally, the so-called “most transparent Administration in history” hasn’t declassified anything, but that didn’t stop Rep. Thomas Massie, R-KY from reading them. What he saw was so incredibly disturbing he called a press conference to talk about it. This is what he had to say:

That’s three members of Congress that I know of who have come out shell-shocked upon reading this document. So why can’t the American public see it?

Screen Shot 2014-07-15 at 2.45.07 PM




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The 2 Charts That Have BofA Worried About A “Greater Correction” In Stocks

While the S&P500 rebounded sharply on Friday, BofAML’s Macneil Curry warns evidence continues to say that this is a very late stage advance from which a greater correction is forthcoming. The recent deterioration in breadth (52wk highs failing to keep track with price), the negative seasonal period and divergences between the broader indexes say that risk/reward is skewing to the downside. Bottom Line: “The S&P 500 is vulnerable.”

 

Via BofAML’s Macneil Curry,

The S&P500 is vulnerable

While the trend in the S&P500 is still higher, with potential for a near term push towards 2000; this is a very late stage advance from which we look for a medium term correction. 1944 (the June-26 low) is key. Below here confirms a top and turn…

 

The 2 charts he is most concerned about…

Breadth…

 

The bearish divergence for new 52-week highs from last May points to fewer and fewer new 52-week highs as the S&P 500 has continued to rally to new all-time highs. This suggests weaker internals.

The divergence in new 52-week highs from last May is a sign of a maturing rally from late 2012.

 

and Seasonals… 


With President Obama in his second
term, 2014 is an incumbent mid-term.2014 is following the incumbent midterm year YTD through June. The pattern calls for a June/July peak ahead of a pullback into September. This has the potential to support large and mega caps relative to small caps.

 

Going back to 1928, July is the strongest month of the year with an average return of 1.52% and is up 57% of the time.

However, June was up 1.9% and July returns tend to fizzle, not sizzle, after an up June. When the month of June is up, July is up only 51% of the time and has an average return of 0.48%. This is well below average for July and a below the average monthly return for all months of 0.59%.




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OECD Fears Middle Class Civil Unrest Is Coming

Submitted by Martin Armstrong of Armstrong Economics blog,

tax it

This idea that we live in a world where government cares about us is just the biggest propaganda ever. Everyone one will only pursue their own self-interest. The OECD has interesting come out and warned that if governments are unable to stop the transfer of wealth to a small financial elite, the displeasure of the dispossessed middle class could easily turn and go against the prevailing governmental systems. The OECD has claimed to have discovered the existence of a veritable “lumpenproletariat” in the supposedly rich Germany. Even though the systems attempt to provide citizens with bread and circuses in the traditional Roman style to keep them quiet, such  tactics they warn may have now become obsolete after the ultimate circus is over – the World Cup.

The problem with all of these studies is the look at class warfare and not at the consumption of government. They do not follow the breadcrumbs. What if you take everything from the elites? Who will start businesses to create jobs? Who will be left to take as government pensions keep ticking away. In Germany, it has now surpassed 50% of the average persons labor goes to taxes.
 
There are a host of books coming out all about just taxing the rich more ignoring reducing the cost of government. The German bestseller “The plunder of the world” presents just another socialist agenda arguing that the rich get richer even in times of crisis, while the consequences of a crisis are always carried by the lower-income groups and the middle class. It fails to explain that the rich get richer from investment, not wage income. This is an argument to effective tax investment substantially to even out the disparity? But who then creates the jobs that produce anything? Is it that those who invest unfairly make money when the others pay too much in taxes and do not invest? Anyone who thinks that these books are real must be insane. If you think for one second raising the taxes on the rich will mean your taxes will decline – good luck. In Germany, Tax Freedom Day has passed the 50% and even in Canada it is now June 9, 2014. In the United States it is April 21st for 2014.
 
In France, the magazine Challenges has determined that the richest Frenchmen saw their assets in 2013 rise by 15% since they benefit from the profits in foreign companies. There is no discussion that government consumes too much – EVER!
 
German Debt Int%
 

The consequences of unequal distribution of wealth in the world is becoming the tipping point argued and funded by governments to blame the rich – never government. Nobody seems to be doing the math that if you confiscate all that wealth you end up with communism with taxation and government just keeps growing until it consumes everything. We borrow with no intent of paying anything back and that about 70% of the national debts is all interest that built no schools, reduced nobody’s tax bills, and did nothing for the middle class. This is fairly consistent in all major countries. Governments are trying to push interest rates exceptionally lower to reduce their deficits exploiting the middle class creating a disincentive to save even for retirement when it pays next to nothing.

The OECD is now warning like Picketty that a growing gap between rich and poor will erupt into revolution – not that government is taxing too much. According to the words of the OECD Secretary General Jose Angel Gurria, the problem since the global financial and economic crisis has exacerbated massive. “In the first three years of crisis, inequality increased more than in the twelve years before, “he told the Business Week”. On average across OECD countries, the top 10% of the population now earn 9.5 times as much as the lowest 10% but fail to explain this is from investment. Inequality has grown by 35% because stock markets are rising to escape from the craziness of government. The higher they rise, the greater the disparity.

The OECD claims this is clearly felt in the USA more so than Europe omitting the fact that the disparity comes from investment not wages. They they compare that to Europe claiming there is no welfare state in Europe so somehow this is implied to be better. The OECD then highlights supposedly rich Germany as a dangerous development with a rising disparity stating this is “namely that it is a lumpenproletariat, a very poorly trained and poorly paid part of the Arbeiterschich.

The argument now is the middle class civil unrest they know is coming is simply because they have not confiscated the wealth of the investors they call the financial elites. So if you invest and make any money, you are the new financial elites – sorry it is anyone who now invests. Michael Maier’s The plunder of the world is another book released to justify plundering the financial elites without actually identifying who they are. Sorry – it is you.




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Four Issues for the Week Ahead

There are four key, but interrelated issues that will shape the investment climate in the coming days:  

 

1.  Will geopolitical issues drive the capital markets?

2.  Will US bond yields continue to decline?

3.  Is the euro area economy beginning to contract again?

4.  Is the dollar breaking out–to the upside against the euro and sterling and the downside against the yen?

 

The downing of the Malaysian commercial plane over the Ukraine last week represents both an escalation of conflict as well increasing the pressure on Putin to bring the insurgents to heel.  The tragedy of both the incident and the immediate aftermath may very well prove to be a turning point of sorts in the broader crisis.  Russia is likely to find itself more isolated.  Russian capital markets are vulnerable, but officials there have incentives and plenty of resources to conceal the extent of the impact. 

 

It could harden Europe’s attitude and presage a new round of sanctions. Despite the cynics’ dismissal of the strategy, this type of sanctions regime is relatively new, and the asymmetries of exposures and threat perceptions make coordination difficult.  Nevertheless, the long-game strategy is raising the cost of Russia’s behavior.  

 

Since the Russia’s invasion of Crimea, we have taken a contrarian stance, arguing that a country having to use military force to secure an asset that already posses is a reflection of weakness not strength.   Isn’t this a more robust political assessment than thinking a bully is really strong?  Isn’t that truer to our personal experience as well? 

 

The enhanced capability of Hamas to strike a major Israeli city with rockets represents a new and dangerous escalation of the unconventional war.   Gaza itself is among the most densely populated places on earth.   Israel’s massive aerial assault and ground invasion can only lead to more tragedy.  

 

Israeli markets appear largely unperturbed by the latest developments.  The dollar recorded four-year lows against the shekel on July 15.  It was was not confirmed by technical indicators, setting up what technicians call a bullish (dollar) divergence.  The stock market lost about 0.7% last week, but remains well within the trading range that has been carved over of the past three months.  The rally in Q1 morphed into a consolidative phase.  Israel’s 10-year benchmark bond yields 2.80%.  It fell by a little more than 3 bp last week and is down almost 4.5 bp over the past month.  

 

Negotiations over Iran’s nuclear program were also emerging as a potential factor as the deadline was approaching with little chance of a successful conclusion.  At nearly the last minute, the negotiations have been extended four months to November 20.  It seems reasonable to suspect a new brinkmanship experience awaits.  Among the many wild cards here, the US mid-term election can also change the US reaction function.  

 

In the foreign exchange market, geopolitical tensions often seem to spur yen appreciation.  Indeed, in recent days, the dollar retested the lower end of its five-month range near JPY101.  The euro fell to nearly six-month lows against the yen.  However, this does not mean people are buying yen, which is what the safe haven concept implies.  Instead, we think yen’s strength may be more a function of short-covering.  This hypothesis is supported by the speculative positioning in the futures market.  

 

At the end of last year, the gross short yen position in the futures market was at a six-year high of 158k contracts.  As of July 15, it stood at a little more than 71k contracts, falling 6.2k contracts in the latest weekly reporting period.  The gross longs contracts fell by almost 3k contracts.  With 8.4k gross long yen contracts, the speculative position is the smallest since November 2012.  

 

The real safe haven still is the US T-bill market.  Yields are depressed.  The three-month bill offers a single basis point in the annualized yield.  The six-month yields 5 bp and the one-year bill yields 8 bp.  

 

The US 10-year bond yield fell more than 7 bp last week.  It finished the week below 2.50%.  The resilience of the US Treasury market in the face of the Fed’s continuing tapering continues to be arguably one of the biggest surprises for investors this year.  It refutes arguments that no one wants to buy Treasuries but the Fed.  It defies once again the arguments that warn that the central bank is falling behind the curve of inflationary expectations.

 

Yields have not sustained any meaningful traction despite the mounting evidence that the contraction in Q1 was a fluke of sorts.  Growth in Q2 appears to be tracking something north of 3%, and the early look at the start of Q3 suggests more of the same.  This is not to deny that the housing sector continues to disappoint as was seen with the 9.3% plunge in housing starts.  This week’s sales numbers should be better.  Existing home sales are expected to build on the 4.9% gain in May while any weakness in existing home sales will be seen in the context of the out-sized 18.6% gain in May.

 

The June CPI figures on July 22 will be closely followed by the bond market.  The consensus expects a 0.3% and 0.2% increase in the headline and core rates respectively.  The core rate has risen 0.7% cumulative in the three months through May.  This is twice the pace for the prior three-month period (December-February).  On a year-over-year basis, the headline and core have converged near 2%.  

 

The Fed’s preferred measure of inflation, the core deflator of personal consumption expenditures, tends to run below the CPI measure of inflation.  It makes it difficult then to cite the CPI figures to argue that inflation is overshooting.   In addition, Fed officials are well aware that there have been many “false positives” or inflation scares since the economic recovery began five years ago.  From Fed’s point of view the economy appears to have sufficient slack, even if it cannot be measured very precisely, to allow for the current strategy of gradually slowing the asset purchases to continue. 

 

The recent report that showed that industrial output fell 1.1% in May was a shocker.  It more than offset the April gain of 0.7% (revised from 0.8%).  German industrial output tumbled 1.8% unexpectedly in May.  Sentiment surveys have warned of a deteriorating outlook.  The German locomotive does not appear strong enough now to pull the euro area with it.  It would be helpful if a couple of other countries, like France and Italy, were pulling their weight. 

 

The flash PMI readings will likely confirm the loss of German economic momentum at the start of Q3.  For its part, France is likely to post the third consecutive aggregate PMI below the 50 boom/bust level in July.

 

At the end of the week, the ECB reports money supply and lending data for June.  The lending data may be more interesting, though it is too early to see much impact from the rate cuts early that month, including the negative deposit rate.    

 

The dollar flirted with levels that would potentially signal a breakout of the recent ranges last week:  $1.35 and $1.70 for the euro and sterling respectively and the JPY101.  The $1.70 level for sterling is not as important as the euro and yen levels.  Sterling’s technical position is weaker than the other two currencies, and market positioning is still heavily long. 

 

The UK will be the first of the high income countries to report Q2 GDP at the end of the week.   The consensus calls for a 0.8% quarterly expansion, matching Q1’s pace.   It will be the sixth consecutive quarterly expansion.  Over the past five quarters, GDP has averaged 0.7%. 

 

The strength of the UK economy is ultimately behind why many are bullish sterling.  The Bank of England will lead the tightening cycle, with the euro area and Japan, not still on the previous cycle.  The rise in June retail sales, which will likely be reported on July 24 after May’s (fluke?) decline, may see short-term players begin to anticipate a robust GDP figure.  This warns that barring a significant surprise, sterling’s low may be reached in the first part of the week. 

 

The $54 bln deal announced before the weekend by AbbVie for Ireland’s Shire is a timely reminder of what has been behind the resilience of the euro.  For a number of reasons, the euro area is recording a substantial current account surplus, and dollar-based investors are featured buyers of plant and production (direct investment) and portfolios of distressed assets, among other financial assets (portfolio investment).

 

Although we retain a constructive outlook for the dollar, we are not convinced this is what we are anticipating.  We are more inclined to see the $1.3470 weekly trend line hold and for the euro to remain range-bound a bit longer. 

 

 

The same is true for the dollar against the yen.  We see the dollar  still confined to the JPY101-JPY103 trading range.  The June trade figures and the latest inflation read is unlikely to change that  Given the recent inter-market relationships, we think the US Treasury market may be more important than the equity market.  That said, it appears the major equity markets can advance in the week ahead.




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