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British schools across the UK are on lock-down after threats of terrorist attacks against children were received. Around 12 institutions in London, Devon, Cornwall and Durham have received the threat.

In a statement, the Metropolitan Police said “the Met has received a number of reports relating to malicious communications sent to schools across London on Wednesday, 28 March. These are currently being treated as hoaxes. There is no evidence to suggest that this is terror-related.”

Early reports of parents rushing to schools to collect their children have emerged, while some schools are said to have implemented extra security measures, some blocking gates and pulling down shutters, according to RT.

One parent said to the Plymouth Herald a caretaker from Marlborough primary school came out and told parents there was a terrorist threat, saying children would be “hit with a car.”

Some schools are asking parents to pick up their children from 2:30pm in case the threat is credible. Others have said they do not believe there is any reason to close early, doubting the veracity of the threat.

 

BREAKING: West Midlands Police are investigating after emails were sent to a number schools making threats.
A spokesperson from West Midlands Police, said: pic.twitter.com/CVIoBaIl0O

— Birmingham Updates (@BhamUpdates) March 28, 2018

 

A spokesperson for Devon and Cornwall Police said: “We are aware of a series of malicious communications to schools in Devon and Cornwall as well as across the country.”

“Enquiries continue to establish the facts and forces are working together to investigate who is responsible. Police take hoaxes extremely seriously. They divert police resources and cause disruption and alarm to the public.”

Cambridgeshire Police also issued a statement, saying: “Enquiries are being carried out to establish the facts and forces are working together, along with the National Crime Agency, to investigate who is responsible.”

The police said the emails contained a warning that at 3:15 pm a car would drive into as many students as possible. The driver would also be armed, according to the threatening email, and would shoot any student trying to get away.

On Police advice and contrary to media reports the pupils will be dismissed at the usual time (3pm). @gmpolice have confirmed any threat to the school is a hoax.

— Deanery High School (@deaneryhigh) March 28, 2018

 

The threats follow bomb scares at schools in Hertfordshire last week that were deemed to be a hoax. Some of the threatening emails originated in the US. They ultimately lead to the evacuation of thousands of children.

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Authored by Jan Bauer via SafeHaven.com,

Steven Seagal – actor, Zen master, musician, director, martial arts instructor and now crypto ambassador – has reportedly walked away from the Bitcoiin project, along with its anonymous founders, after closing out an ICO that may or may not have raised its targeted $75 million.

No one knows, really, and that seems to be a recurring problem with ICOs, highlighting the danger of celebrity-sponsored coins that seem exciting but offer no protection from potential fraud.

image courtesy of CoinTelegraph

Seagal may have been the face of the alt coin, but the founders remain masked.

(Click to enlarge)

Rolled out in January this year, Bitcoiin and Bitcoiin2Gen set out to raise $75 million during its initial coin offering (ICO), which was scheduled to wrap up on 30 March until the plug was pulled a week early, with both Seagal and the mysterious founders exiting, according to Cointelegraph.

No one knows how much they raised, but their website suggests they hit their mark. The problem is, there no way to verify that.

(Click to enlarge)

The founders claim that they have withdrawn their association with the company to help establish total decentralization, explaining that Bitcoiin will become an anonymous cryptocurrency controlled by no one, with a new CEO appointed to lead the website.  

Before pulling the plug, they thanked all of their supporters.

“As Bitcoiin goes through the conversion phase from token to mineable coin we wish to advise that Bitcoiin will join the likes of the original Bitcoin and become a truly open source. Therefore a big thank you to the Founders and to our Brand Ambassador whom we wish all the best in their future endeavors. However, from this point on Bitcoiin will function within its ecosystem and become a genuinely anonymous cryptocurrency with no individual or individuals having control over the entity!”

And Seagal has remained tight-lipped.

So Seagal ostensibly helped give birth to Bitcoiin, and now it’s time to set it free to grown independently. But many will wonder whether this is practical crypto parenting, or a trip down Ponzi scheme lane.

Following his appointment as the coin’s brand ambassador, the U.S. Securities and Exchange Commission (SEC) ruled that “Steven Seagal has to ensure that the Bitcoiin investments are appropriate and in compliance with federal and state securities laws.”

The SEC hasn’t been at all keen on celebrity involvement in promoting cryptocurrencies, issuing earlier warnings about ICOs with celebrity ambassadors.

In recent months, celebrities such as actors Jamie Foxx and William Shatner, boxer Floyd Mayweather and hotel heiress Paris Hilton, among others, have publicly endorsed several projects ahead of their respective token sales.

(Click to enlarge)

U.S. regulators targeted Bitcoin and Steven Seagal earlier this month, following a March 7th securities fraud cease and desist order issued by New Jersey. Shortly afterwards, Tennessee followed suit with its own investor warning.

BehindMLM, a blog that tracks marketing schemes, claims that Bitcoiin is essentially a Ponzi scheme that will end in disaster, much like Bitconnect.

“B2G will likely follow the trajectory of other altcoin Ponzi schemes. A flurry of initial trading will see the value briefly pump, before reality sets in and B2G plummets to $0,” BehindMLM wrote.

Bitconnect currently faces a mounting series of lawsuits and regulatory action following its quick rise and fall as one of the most notorious crypto exit scams.  

Over the past few months, the SEC has hinted at a crackdown on ICOs. The SEC has recently reiterated its earlier position that many “tokens” sold in ICOs are in fact securities and must be treated as such and register with the regulatory body.

ICO proceeds have surged, from $96.3 million in 2016 to little under $4 billion last year. More than 180 new ICOs are scheduled to launch in 2018 and they’ve already flown past regulatory radar.  

The SEC’s crypto statements have become increasingly vehement as the dangers of fraud compound daily. Last month, the agency reportedly sent subpoenas to dozens of tech companies and individuals involved in cryptocurrency.

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WTI/RBOB extended losses following API’s surprisingly large crude build (not helped by risk-off and dollar’s spike), but jumped initially after DOE reported a smaller-than-API crude build of 1.64mm. WTI prices shrugged off the fact that US Crude production hit a new record high.

 

API

• Crude +5.321mm (+850k exp)

• Cushing +1.655mm (+1mm exp)

• Gasoline -5.799mm

• Distillates -2.23mm

DOE

• Crude +1.64mm (+850k exp)

• Cushing +1.804mm  (+1mm exp) – biggest since March 2017

• Gasoline -3.47mm

• Distillates -2.09mm

This is the 4th weekly crude build in the last 5 weeks (but less than API), However, Cushing saw its biggest restocking since March 2017…

 

Fears are building again of a renewed glut in crude as oil prices head for their longest losing streak in a month…

 

Of course, US crude production remains a key swing factor, and rose once again last week to a new record high…

 

WTI/RBOB prices were sliding into the DOE data but bounced after crude’s inventory build was less than expected…

Inventory data is driving prices, said Tamas Varga, an analyst at PVM Oil Associates in London. “Refinery maintenance is in full swing,” causing “big builds in crude-oil stocks and big draws in products,” he said.

The front of the WTI forward curve was pushing toward contango this morning ahead of the expected build in oil inventories at the storage hub in Cushing…

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Via Global Macro Monitor,

We have had lots of requests to update our JFK-Trump S&P500 analog.  Here you go.

The Kennedy-Trump S&P500 analog is tracking, on a directional basis, relatively well, with the Trump S&P now 3.56 percent below the JFK S&P, 347 trading days after election day.  Not a surprise with today’s lightening speed market.    The Trump S&P is running about two weeks ahead of the JFK S&P.

We have also included below a daily and monthly roadmap if you buy into the analog (below).  By “buy in” we do not mean that the analog tracks on a daily basis — the main criticism of the doubters –  but the direction and time-space are relatively similar.   Both markets priced Goldilocks but ran into a short-term Frankenstein.

Note the downdrafts and the increase in volatility in April and May, with a bottom at the end of June, a rally into August, and the retest of the low in October, coinciding with a missile crisis.

Rare Volatility Shock In February

We discovered this analog by crunching 70 years of data looking for similar volatility shocks to the one that hit the stock market in early February.  We found three:

1) 1955: Ike’s heart attack; 

2) 1962:  the “Kennedy slide” or JFK bear market; and

3) 1987:  the “crash” bear market, which lasted only 38 days.

We threw out Ike’s heart attack as it was not a prelude to a bear market.  The S&P500 recovered shortly after the sharp Monday sell-off after President Eisenhower had a heart attack on the 8th hole at Cherry Hills Country Club the prior Saturday afternoon.  

Why The Analog Works

We believe this analog is working for the following reasons:

1. Tracks a political cycle after the election of a new president;

2. Both S&P’s had similar big moves in a relatively short period after election day: JFK – 30.1 percent, 285 days; Trump – 34.8 percent, 306 days.

3. Both bull moves were led by tech stocks, which resulted in extreme valuations: JFK – TI  and Polaroid (see Zweig comments below);  Trump – FANG.

4. Both markets have similar domestic and geopolitical headlines:  Steel, nukes, and increased cold war/Russia/China tensions;

5. Both have a similar macro story – inflation concerns morphing into a growth scare.

The most important, in our opinion,  is #2 – the percentage move and time frame.

Bear markets always follow bull markets and the bigger the prior move in a compressed time frame, the harder the fall.  Bear markets look for catalysts to sell, but the underlying vulnerability remains — valuation and longer-term overbought conditions.

Expecting A Few Flash Crashes

We are also expecting a few flash crashes during the next few months.

We came across the following piece, a real nugget, by the great Jason Zweig, who wrote in his WSJ article,  Back To The Future: Lessons From The Forgotten ‘Flash Crash’ Of 1962,  in 2010:

Money quotes:

…“The stock market careened downward yesterday,” reported The Wall Street Journal on May 29, 1962, “leaving traders shaken and exhausted.” The Dow Jones Industrial Average fell 5.7% that day, down 34.95, the second-largest point decline then on record.

…the “market break” of 1962 came after a run-up in the market that had led many investors into complacency. In 1961, stocks had risen 27%, with leading technology stocks like Texas Instruments and Polaroid trading at up to 115 times earnings.

Then, without warning, stocks “broke.”

…In this year’s crash, many trades, especially in exchange-traded funds, went off at prices wildly different from the orders investors had placed. Likewise, in 1962, “some orders were executed at prices substantially different from those which prevailed when the order was entered,” an investigative report by the Securities and Exchange Commission noted the following year.

Some high-frequency traders, which use powerful computers to make markets in stocks, stopped trading in this year’s flash crash at the very moments when the market needed liquidity most urgently.

In 1962, high-frequency trading didn’t exist, but “specialists” did. By law, specialists were obligated to try to maintain a fair and orderly market for each stock on the floor of the exchange. However, concluded the SEC’s report, “At no time during the day did the specialist intervene in sufficient volume to slow the rapid deterioration of the market in IBM.”

…Traumatized investors bombarded the White House with complaints  and pleas for help. And they voted with their feet, in what the SEC called a “general public disenchantment with the market.” As households slashed their purchases of stocks, 8% of stockbrokers left the business throughout 1962, and “the pinch was felt” even by giant firms like Merrill Lynch, whose net earnings fell by half from the year before.  – Jason Zweig, WSJ, May 29, 2010

BTFFD

During the next few months, our investment accounts will only be buying the French Dip.  That is Buy The F**king French Dip (BTFFD).

Stay tuned.

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Headlines proclaim housing ‘fixed’ as pending home sales jumped 3.1% MoM in Feb (better than expected 2.0% gain), rebounding from a downwardly revised January collapse of 5.0%.

 

Bloomberg notes that while the month-over-month gain shows demand for housing is still getting support from steady hiring, the market is facing several headwinds. Buyers are up against a persistent shortage of affordable listings to choose from, property prices continue to climb, and mortgage costs are rising. What’s more, the Realtors group expects winter weather to weigh on demand in the Northeast.

However, on a non-adjusted basis, home sales are down 4.4% YoY.

“The expanding economy and healthy job market are generating sizeable homebuyer demand, but the miniscule number of listings on the market and its adverse effect on affordability are squeezing buyers and suppressing overall activity,” Lawrence Yun, NAR’s chief economist, said in a statement.

“Homeowners are already staying in their homes at an all-time high before selling and any situation where they remain put even longer only exacerbates the nation’s inventory crunch,” he said.

The NAR’s 2017 Profile of Home Buyers and Sellers showed the median tenure a homeowner stayed in their house before selling was 10 years, the highest in records back to 1981.

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In a testament to the sprawling confusion that has erupted in the aftermath of the recent market swoon (and correction), the past 2 days have seen a veritable cornucopia of rhetorical question by an analyst community that has few answers but a lot of unknowns.

Just yesterday we discussed a new report by Bank of America’s derivative strategists, asking “what if a new bear market has begun.” This morning, it’s Bloomberg macro commentator Richard Breslow who notes that the $64 trillion question asked around trading desks everywhere today is “do you think we will look back on this period and realize this was the turning point.“

While Breslow does not give an answer, he shares a list of items that traders need to consider when deciding what to do next: the things investors and traders will have to keep an eye on include i) central banks and what they do next; ii) soaring LIBOR and the collapse in FX-hedged TSY yields; iii) Geopolitical risk, and how to hedge it; iv) positioning and crowded trades and v) the impact of regulation on markets.

Adding all of this together leads to another word, “change”, something that traders of this generation may have forgotten how to adapt to in a time when central banks used to eliminate all downside risks.  Is this time different?

Breslow’s full note below:

Embrace Change as a Strategy, Not Just a Tactic

The first question I was asked this morning after, “Did you remember your umbrella?” was, “Do you think we will look back on this period and realize this was the turning point?” It’s an interesting question. I was initially tempted to reply that time will tell, but upon further reflection decided to avoid getting whacked with said umbrella and give some thought to what was being asked.

Usually when people ask this sort of thing they are simply wondering whether it’s time to fade a trend. It’s a roundabout way of asking what to do. In this case, however, its implications are so much greater than merely some tradable moment. We are really asking has the world changed. And the speculation about that causes so much emotion that it’s hard to even have the discussion. Especially in a world where even the most adamantly felt conviction trades have life cycles subject to alteration based on a couple days of price action.

Was it only a couple of weeks ago that we were writing about money flowing back into hedge funds as investors are betting on a strong 2018 performance? To be fair, this is partially in a response to concerns that real-money managers may struggle. They’ve broadly hinted at this themselves. But for hedge funds to outperform they will need to put the “hedge” concept back into hedge fund. And that is something they have been punished for attempting since the beginning of the quantitative easing experiment. How they do during this roiling period will be a defining moment for the industry.

• One thing that you need to resolve in your own mind is just how reliable are the assurances that central bank rate and balance-sheet normalization will go smoothly. “Smoothly” is a poorly chosen euphemism for “without any pain”. The answer is that it’s unlikely, which is not to say it may or may not go OK or doesn’t have to be done even if it gets a little rocky. Cue the discussion of reaction functions and ignore any claims that central banks are apolitical.
• Short rates are going up. Libor is higher for the 36th day in a row. And you can be sure this is playing havoc with a broad subsection of quantitative models. Crowding out hasn’t even started in any meaningful way. And all of the Fed’s friends are itching to talk about when they can talk about getting started.
• Another biggie to consider is whether geopolitics will once again begin to have lasting impacts on markets. The answer to that is brinkmanship in a deeply unhappy world is a dangerous even if calculated policy where one side thinks it’s a tactic and it looks like strategy to everyone else. Especially when you get more than one superpower involved. How do you handicap this? With hedges. Not by thinking you can be all-in or out as the news ebbs and flows.
• Another change to consider is that during QE it didn’t really matter when you got in on a trade. Rising tides and all that. “Crowded” just meant having congenial company. In a higher-volatility, less wealth- effect driven world it’s become far more important to be as early or alone as possible. This is going to require fortitude that may be hard for many to summon.
• Lastly, for this short list, consider that regulation can be a dirty word for some and a saving grace to others. Some is by choice and some by necessity. Events in the large cap tech world could have long-term ramifications that change all sorts of attitudes and policies. And these may or may not be industry specific.

People, especially investors, are often highly averse to change. look around and ask yourself whether some change might not be a good thing indeed. You just need to prepare for it.

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All the FANG-style stocks are notably lower at the open with AMZN crashing over 6%.

FANGMAN (plus TSLA) stocks are all plunging… (MSFT is the best performer for now)…

 

This has smashed the FANG stocks below a two-year trendline…

And broken below the 100-day moving average…

 

 

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A fatal crash earlier this month that left a Tesla Model X smouldering on the shoulder of the southbound lane of Highway 101 in Mountain View has hammered Tesla shares to their lowest level in a year while pushing the yield on its debt above 7% (though an ill-timed Moody’s downgrade also had something to do with that).

Once again, Tesla finds itself in the crosshairs of the National Transportation Safety Board. It’s last brush with the federal regulator ended without incident – the agency ruled that a fatal Florida crash was the result of driver error, and that Tesla’s controversial autopilot software (which has been implicated in several fatal accidents) was not at fault.

But as two teams from the NTSB sift through the evidence gathered from the fiery crash site, Tesla said in a blog post published Tuesday night that it hasn’t been able to analyze any of the data collected from the scene – and therefore doesn’t yet know what caused the crash – because the car was so badly damaged, as Bloomberg pointed out.

The company hasn’t been able to retrieve the vehicle’s logs and is working with authorities to access them. Tesla has disclosed whether the driver had engaged Tesla’s partially autonomous driving system, known as Autopilot, when the crash occurred.

Interest in the effectiveness of self-driving technologies is elevated thanks to a deadly Uber Technologies Inc. accident that happened days earlier involving an autonomous car and a woman who was crossing the street with her bicycle. That accident is believed to be the first fatality involving an autonomous vehicle.

Tesla owners have driven the same highway stretch with Autopilot engaged about 85,000 times since the system was introduced, and no accidents have been reported that the company is aware of, the carmaker said. The NTSB is investigating whether autopilot was involved in the crash and is also looking into techniques for safely removing smouldering battery components from electric vehicles.

Tesla said its battery packs are designed so that when a fire occurs, it spreads slowly so people have more time to exit the car. “That appears to be what happened here as we understand there were no occupants still in the Model X by the time the fire could have presented a risk,” Tesla said.

The post also showed photos of the concrete divider that the Model X hit. In days prior to the crash, a long metal barrier that extended out of the concrete divider, a barrier meant to absorb the impact of a crash before a driver hit concrete, had been present – but was removed some time before the fatal crash.

“The reason this crash was so severe is that the crash attenuator, a highway safety barrier which is designed to reduce the impact into a concrete lane divider, had either been removed or crushed in a prior accident without being replaced,” the post said.

A Tesla driver was killed in a Florida accident in 2016 when his vehicle, which was in Autopilot mode, failed to detect a truck cutting across his path. The NTSB also investigated that accident, and concluded that the driver should have been monitoring the car’s progress as the system indicates.

But Tesla’s problems aren’t limited to the crash investigation. Like the Cambridge Analytica scandal and its impact on Facebook, this crash has merely served to draw attention to Tesla’s chronic inability to hit its production goals. Musk is well behind on the company’s delivery targets for its Model 3 – what was supposed to be the crossover vehicle to bring electric vehicles to the middle-income market. Since its inception, Tesla has burned cash at an alarming rate, and if the business doesn’t find a way

John Thompson of Vistas Capital Management told MarketWatch that, unless Elon Musk “pulls a rabbit out of his hat” the company could be bankrupt within four months.

Thompson sense the core of the problem for Musk. That his company’s lofty share price has been built almost entirely on marketing – “the narrative”, as Thompson describes it.

But there’s only so much failure shareholders can countenance before even the gullible start asking questions.

“Companies eventually have to make a profit, and I don’t ever see that happening here.””This is one of the worst income statements I’ve ever seen and between the story and the financials, the financials will win out in this case.”

Meanwhile, Musk is up to his usual tricks – promising to delete Tesla’s and SpaceX’s Facebook pages in a reply to a random user, allowing him to deflect attention from Tesla’s troubles while simultaneously taking a shot at one of his chief rivals.

Shareholders are abandoning the stock…

And bond yields do not bode well for stocks…

Stormy weather in Muskville once again.

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Yesterday’s bloodbath in markets – after such exuberance on Monday – is set to continue if historical precedents are anything to go by. Nomura’s cross-asset-strategy chief Charlie McElligott notes that yesterday’s equities pain via a brutal factor-unwind resembles one of the most violent performance drawdowns in recent history – that of Jan / Feb 2016 – and seemingly “idiosyncratic risk” is now turning more “systemic” in crowded Tech “data” plays as “death-by-paper-cut” now becoming a longer-term regulatory overhang of their core “data commodity.”

Worrying words indeed. McElligott first breaks down just what happened yesterday – and where the real “cataclysmic” pain was felt – before moving on to ‘what happens next’?

SUMMARY

• The -4.1 z-score move in “Cash / Assets” factor – the best performing factor strategy of the past 2 years – speaks to likely forced capitulation / book blowouts, similar to what we experienced back in Feb 2016 as “equities market-neutral” performance was crushed in a violently-short period of time

• “Cash / Assets” is important because it is a pure proxy of the “Growth over Value” theme which has been the dominant reality of the post-GFC period and has accelerated in the past two years to look a lot like “Momentum” factor

• The analogs of similarly extreme prior drawdowns in “Cash / Assets” (again effectively a “Growth over Value” AND expression in its current-form) give us both “good” and “bad” forward-looking news

  • The “good” – said prior “extreme drawdowns” with this particular “Growth over Value” proxy ( “Cash / Assets” factor) have seen mean-reversion HIGHER at the SPX level on average from a 1w to 3m basis

  • The “bad” – “Cash / Assets” factor typically continues to underperform primarily due to the outperformance of the “short” leg from here (“defensives”)

• This then is an equities performance risk because “Cash / Assets” is effectively “Momentum” long-short and thus, mirrors general Equities Hedge Fund Long-Short positioning

• Further squeeze in the “short leg” of “Cash Assets” too squeezes the “short leg” of “Momentum” via the broad equities fund underweight / short in the “duration-sensitives” like REITs and Utilities

• This in turn only puts MORE pressure on the March CPI print to “come through” and hit the expected uptick off the back of the “Telco Service” roll-off mathematical boost, likely putting rates / USTs back under pressure

• Otherwise, further rates rally / short-squeeze will only perpetuate the pain being felt across equities underweights / short-books

OVERNIGHT:

The Bund / UST “flight to safety” rally and “seeming” short squeeze is further extended as yesterday’s equities-centric risk-unwind (un-packed in gory-detail below) chops ‘risk’ asset price-action overnight.  Blocks buys in RX earlier which printed at session highs set-up the next level for Bunds looks to be a retest of Dec ’17 contract highs, while TY too clears the 38.2% retrace of the YTD selloff move (121-18 is 50% next level).  Our rates team notes big real money demand overnight and “BIG” receiving flows in the 5Y through 15Y sector.

UST 30Y yields at 3.01 should act as a reminder to investors that YES, ‘long duration’ still works as a “risk off” hedge into this current softer economic growth backdrop, as opposed to the inadequate state of “duration as a hedge” back during the Feb vol spike.  That scenario was driven by the very contrary acceleration in “growth” economic data—especially wage- and inflation- kind–that in turn dictated the fixed-income selloff that drove the behavior which didn’t allow USTs to work as a hedge.  This time truly IS different, it seems…at least until the potential for March CPI headline to hit at 2.4% and the “bear raid” on fixed-income will take another “go” at USTs.

To this point, 3m $LIBOR sets +0.6, and despite the insane rally in fixed-income yday (front ED$ a 2.3 standard deviation move relative to 1Y returns), Darren Shames astutely notes that ED open interest STILL barely budged (Whites +36k/ Reds -3k/ Greens +46k/Blues -3.8k).  High conviction from the ‘bearish / paying rates’ crowd, indeed.

Not surprisingly, “growth-y” and tech-heavy Asian equities markets were hit hard overnight, although in pretty ‘sane’ fashion—TOPIX -1.0%, Nikkei -1.3%, HIS -2.3%, SHCOMP -1.4%, KOSPI -1.3%.  USD is only marginally firmer against G10, as the lower UST yields act to drag the currency down despite the “risk-off” nature of the recent trade.  Nonetheless, both Industrial Metals (iron ore -1.1%, copper -0.8%) and Crude (WTI -1.0% after last night’s surprise API inventory build at 6x’s the expected estimate—jarring the recent ‘demand-driven’ bounce theme) are both struggling and also feeding into the lower nominal- and ‘real-‘ yield dynamic that we currently see.

Spooz currently working their way back to overnight session highs with a Shire Pharma bid and a Walgreen’s earnings beat / raise.  But the damage of yesterday will loom for an extended period of time, I’d imagine.

COMMENTARY:

Let’s skip right to the chase: the behavior within particular recent factor- and thematic- “winners” within the US equities space yesterday was so violent / so “tail” that the scale of the drawdown was reminiscent of the brutal market-neutral quant factor unwind period of Jan / Feb 2016.  For the unitiated, that particular episode of whiplash forced a number of heavily-leveraged “platform books” to liquidate around the Street,in turn destroying performance for many over the balance of that particular year, despite an almost immediate “snapback higher” in both relevant factors and broad SPX over the following weeks.

Yesterday was particularly stunning because it occurred with “Cash / Assets” factor–the “biggest factor winner” since July of 2016–which also happens to be the period marking the “cyclical lows” in UST yields before the past nearly two years of grinding higher.  In fact, Nomura’s “Cash / Asset” factor made 5 year lows on June 27th 2016, four days before UST 10Y yields made all-time lows on June 30th, 2016 (point-being, “quant factors” are just another tool to “see” shifts in the fundamental and macro landscape potentially sooner than other traditional methods).

The key here is this, as noted by our phenomenal Quant Strat Joe Mezrich in a piece from mid-February: “Amid the rise in interest rates since July 2016, sectors with high cash/total assets and low debt/equity—tech, financials (ex-banks) and industrials—have also outperformed, while sectors with the opposite characteristics—telecom, utilities, real estate and staples—have underperformed.”  So to me, this factor is an almost “pure” proxy of “Growth vs Value,” which has probably been the biggest theme within the entire equities since the GFC.

“CASH / ASSETS” AS A PURE EXPRESSION OF “GROWTH VS VALUE”:

Source: Bloomberg

Amidst all the ongoing questions with Tech / Growth “crowding,” the potentially massive regulatory implications of these “New Tech” companies–whose “revenue commodity” is data in the midst of this current #deletefacebook panic—is just simply enormous.  So extremely crowded conditions are met with now “large and slow-moving” regulatory overhang due to seemingly “idiosyncratic risk,” which perversely has now apparently turned into “systemic risk” for the “data” space (see Axios piece today noting a White House acceleration of negativity around Tech universe—both on tax and regulatory).

On top of the ongoing and ugly Facebook situation, you then incredibly “pile-on” with yesterday “short sale” report on Twitter (a stock +47% last year and what had been +33% YTD through Monday’s close) being “most exposed” to a similarly murky “data exposure” scenario, and then the “pure idiosyncratics” of mega-“high flyer” graphics-chip maker NVDA’s -7.8% 1d move (but +26% YTD through Monday’s close) after its involvement in the Uber car crash – while too TSLA (a stock +46% last year) slumped 8.2% yesterday as investors also question their own recent fatal car crash….you simply have the makings for one of the most “freak” blow-ups I’ve seen in my 17 years in the business.

Source: Bloomberg

Many of these companies, as shown by 1Y and YTD returns, are clear “Momentum” longs.  Many of these same companies are clear “Growth” longs.  The two biggest “drags” within the aforementioned and critical “Cash / Assets” factor long blowup yesterday?  TWTR -12.0% and NVDA -7.8%.  Third worst?  ADBE -6.6%, a huge “CLOUD DATA” player.  Fifth worst?  ANET, a “CLOUD DATA” player -6.4% on the day.  I could go on.

NOMURA ‘CASH / ASSETS’ FACTOR LARGEST LAGGARD % MOVERS YDAY—‘LIGHTS OUT’:

Source: Bloomberg

A HISTORY LESSON:

This is where it gets “familiar,” and not in the “good” way.  “Cash / Assets” market-neutral factor experienced a brutal -2.9% absolute move yesterday, which relative to the absurdly high Sharpe of this factor strategy over the last year was an even more amazing -4.1 z-score move.  That is CATACLYSMIC.

Source: Bloomberg

The last time we saw moves that extreme in this pure “Growth” factor expression?  February 5th, 2016—which was the day that still super-crowded “CLOUD DATA” play Tableau Software (ticker ‘DATA’ is the most meta-ironic thing I think I’ve ever seen in my life BTW) absolutely blew the market-neutral buyside to smithereens, as the stock traded -49.4% after a relatively benign “miss” caused a knock-on effect across the “cloud” theme which was an “ultra long” across tech books and growth funds around the Street.

Let’s take a trip down memory lane.  The investor masses by-and-large were set-up “long growth” in equities (Tech, Fins, Energy) / short fixed-income to start the year 2016, after the Fed had just begun their hiking-cycle the month prior in Dec ’15 on the basis of “economic escape velocity.”  Higher rates from “real economic growth” was about to begin, and it was time to get long the stuff that responds in this sort of expansion, against paying rates / short USTs.

However, we immediately saw a BRUTAL mean-reversion / pension fund rebalancing trade to start ’16 as the “deflation scare” absolutely NUKED Tech, Financials and Crude / the Energy space while the “bearish / paying rates” set-up saw “bond proxy” defensives RIP HIGHER as USTs rallied.  The crowded  “growth” trade was absolutely defenestrated then, against a whalloping fixed-income / duration / “low vol” rally…

January 2016 % return:

• SPY -5.0%
• QQQ -6.9%
• SMH -6.7%
• KRE -12.6%
• KBE -12.6%
• XLF -8.9%
• XLE -3.5%
• XLP +0.5%
• XLU +4.9%
• UST +6.6%
• TLT +5.6%
• EDV +8.4%

With this already brutal backdrop in January forcing multi-manager platform team blowouts and book unwinds across this heavily-leveraged equity market-neutral universe (“tight stop” risk management), the Tableau print at the start of February was the straw that broke the strategy’s back, “daisy-chaining” capitulation everywhere.  That lone stock blow-up sent the entire HFR Equities Market Neutral Index -3% in one day!

Source: Bloomberg

What’s the punchline?

 Some people really got hurt yesterday—in a BAD way.  When the buyside goes that quiet…you know things went “wrong.”

WHAT HAVE PRIOR BLOW-UPS IN THIS FACTOR MEANT FOR FUTURE RETURNS?

So to be fair, the positioning-angle of this current iteration of the “secular growth” trade has “only’ been this extreme for the past few years—meaning that analogs of prior blow-ups in “Cash / Assets” are not “apples to apples” per se.  But it still matters because this type of volatility, forced “stop-outs” and book capitulations only further weigh on my recent talking point since February, being the “damaged psyche” of risk- / equities- investors, who have been conditioned to ‘buy the dip’ time and time again to their benefit over the past 5+ years.  Now, there is a HARSH re-training occurring, as we’ve clearly transitioned to a TRADER’S MARKET from an EASY-CARRY / HIGH SHARPE / ‘SET IT AND FORGET IT’ one.

The daily stop-outs and drawdowns are also becoming too much for the institutional set, as almost every other day since the start of February, we see “shorts / underweights” outperforming “longs / overweights.”  GROSS-DOWN, again(and FWIW, I think at least part of the reason a lot of this isn’t being expressed purely in Prime Broker data is because so much of the hedging is done via Futures right now, and that data is sitting at Clearing Brokers):

Source: Bloomberg

The issue here is that there is “spill-over” into popular macro and systematic positioning as well:

Source: Bloomberg

So how about the good news first at the SPX-level, which is where cross-asset / macro is going to care.  The analogs dating-back to 2010 of prior extreme drawdowns with this particular “Growth over Value” proxy / theme (that being the “Cash / Assets” factor I’ve concentrated on above) have seen mean-reversion (HIGHER) at the SPX level—take a look at the following data run by my colleague Eric Passmore last night:

Source: Nomura

Now for the bad news—“Cash / Assets” factor typically continues to underperformprimarily due to the outperformance of the “short” leg from here (the “long” basket of “Growth” holds positive with a 60% ‘hit rate’ 2w out and a 50% hit rate 1m out).

So what’s in that “short leg” of the “Cash / Asset” basket which per the analog continues to squeeze painful higher and sap the returns of your ‘long’ leg?

All of the “Value” long stuff, the defensives / duration-sensitives / bond-proxies that nobody owns and frankly makes up the majority of the “Momentum” short as well—i.e. strategies that are running a “mirror” of “Momentum” long-short (broad equities HF long-short) are likely in for more downside chop over the coming month. 

Source: Bloomberg

“CASH / ASSETS” LOOKS A LOT LIKE “MOMENTUM” BECAUSE OF THE “GROWTH VS VALUE” ATTRIBUTES:

Source: Bloomberg

ANALOGS SHOW THAT ‘CASH / ASSETS’ CONTINUES TO STRUGGLE OVER THE NEXT 1M AS THE ‘SHORT’ LEG (REITs, UTES) SQUEEZES HIGHER:

 

Source: Nomura

Below are the case-by-case prior returns since 2010:

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