Tag: finance

Nearly nine months after Politico first reported that interest payments stemming from nearly $70 billion in frozen assets formerly belonging to the regime of deceased Libyan dictator Muammar Gaddafi had been paid to opaque accounts belonging to the Libyan Investment Authority, UN investigators are finally looking into where the money went. At last count, RT reported that interest payments generated by the assets had reached $5.7 billion. According to public broadcaster RTBF, which cited anonymous sources familiar with the money flows, the money may have gone to accounts controlled by Libyan militia groups that have been accused of human rights abuses. 

Back in 2011, as NATO bombs were falling over Tripoli, the United Nations voted to sanction Libya and freeze all assets belonging to the Gaddafi regime that were being held abroad. As Politico explained, the regime had spread its capital across Europe and North America, investing in companies as diverse as the Italian bank UniCredit to the British publisher Pearson. But Brussels-based Euroclear, which had custody of four of the regime-linked accounts, chose not to halt the interest payments flowing out of those accounts. That’s because in the EU, where national governments were charged with enforcing the sanctions, it was decided that only the assets themselves would be frozen, not the interest payments stemming from those assets.

Instead, capital continued to flow from these assets into accounts controlled by the Libyan Investment Authority, a nebulous quasi-state affiliated organization that controlled the seized assets when Gaddafi was still in power. These interest payments stemmed from stock dividends, bond coupon payments and other sources of revenue. So far, Belgian authorities have denied any responsibility for allowing the loophole in the sanctions regime. Belgian Foreign Minister Didier Reynders told reporters on Tuesday that he wasn’t involved in the decision to unblock interest on deposits.

“This [decision to unblock funds] is the responsibility of the Finance Ministry. I have not headed it since December 6, 2011, and have not made any decisions on this matter,” Reynders said. Instead, he pointed the finger at former Finance Minister Steven Vanackere, whom he said was in charge when the ministry granted permission to unfreeze the interest payments.

Meanwhile, the UN is also investigating the disappearance of billions of dollars that are believed to have been embezzled from the Gaddafi accounts, according to Belgian MP Georges Gilkinet.

“UN documents confirm that Belgium failed to comply with a UN resolution on freezing Libyan assets,” Gilkinet told RTBF, adding that he had only received fragmentary information from Belgian authorities. The politician said it is necessary “to clarify the situation, which may lead to a big scandal, because hundreds of millions of euros were sent to unknown individuals in Libya.”

As Politico Europe exposed in an investigation published back in February, interest payments from frozen accounts linked to Gaddafi had been flowing to bank accounts in Bahrain and Luxembourg in recent years, in apparent contravention of an EU order stipulating that the former Libyan dictator’s wealth was to be held in trust for the Libyan people to access once the country, still riven by conflict years after then-US Secretary of State Hillary Clinton helped toppled Gaddafi’s regime by pushing for a NATO-led intervention that helped rebels topple his regime.

Since then, Libya has fractured into separate fiefdoms ruled by competing warlords. A UN-recognized government still rules in Tripoli, while a rival administration has seized power in the eastern port of Tobruk, across the country, Islamist insurgencies also contribute to the instability.

While Gaddafi’s wealth is meant to be held in trust for the Libyan people until the war-shattered country stabilizes, interest payments flowed from frozen accounts in Brussels to bank accounts in Luxembourg and Bahrain over recent years.

The LIA’s finances remain murky, and the only aspect of this situation that is clear is that the interest payments are going to someone. But the individual or individuals who ultimately control the disparate LIA accounts remain a mystery. Though we’d be willing to wager that, whatever the money is being used for, it has nothing to do with the welfare of the Libyan people.

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Via DataTrekResearch.com,

Ten years ago today (October 31st) someone going by the name Satoshi Nakamoto published a paper titled “Bitcoin: A Peer to Peer Electronic Cash System”. 

The system he or she outlined went live a few months later, on January 3rd 2009. The basic idea was simplicity itself: create a monetary system that doesn’t require a trusted third party intermediary like a bank. Technology – common software running on thousands of unrelated computers around the world – alone would power the public’s trust.

In the last 10 years, bitcoin has been through multiple booms and busts but it is still with us. And since anniversaries are times to look both at the past, present and future, we have a list of 7 points that do just that.

#1. Bitcoin’s current market cap is $110 billion, and the crypto currency ecosystem it spawned is worth $203 billion. For reference:

• Bitcoin is worth more than much older entities like Goldman Sachs ($83 billion, founded in 1869) or Morgan Stanley ($78 billion, founded in 1935).

• Its market cap is still just 9% of all the $100 bills in circulation ($1,252 billion) or 17% of all 100 – 500 euro notes outstanding.

#2. Bitcoin’s rapid price increase in 2016-2017 created a whole industry of other crypto currencies, and there are now just over 2,000 products listed on industry database Coinmarketcap, trading in 15,000 markets around the world. Thirteen other crypto currencies have market caps over $1 billion. All that said, bitcoin remains the industry’s gorilla with 54% of total market value.

#3. Bitcoin’s appeal is global, with top Google search traffic over the last year coming from South Africa, the Netherlands, Slovenia, Australia and Ghana. No surprise, but current global search trends are a shadow of their late December peaks, down 92% and still heading lower.

Bitcoin’s utility in countries where the banking system or even government are less than stable is something that crypto currencies’ first-world critics usually miss. They tend to assume that everyone has ready access to a stable local currency guided by a responsible central bank with legal protections against the arbitrary seizure of personal property. Spoiler alert: they don’t.

#4. There are 29.7 million bitcoin wallets in existence, a tiny fraction of the estimated 2.5 billion smartphone users in the world. That’s the most important statistic to understand both the opportunity and problem with crypto currencies just now. Mobile payments are the future – that’s easy enough to see –and bitcoin is mobile-ready. But right now virtually all global mobile money transfers hook up to the traditional banking system. For bitcoin and other cryptos to gain real traction, they need to offer great convenience/utility than dollar, euro, or yen-based payments.

#5. Bitcoin and cryptos generally are deep in a technological “winter” at the moment. After the boom/bust cycle of 2017-2018, that is natural enough. The current setup is much like US tech stocks in 2000-2005, which took half a decade to stabilize after the dot com bubble burst. Yes, Amazon traded for $10 back then, but so did a lot of other busted dot coms that ended up going to zero. Same goes for many of the 2,000 cryptos just now.

#6. While hard to quantify, everyone we know in the crypto space agrees there is a lot of intellectual horsepower at work trying to find the “next big thing” in the space. Blockchain technology – the decentralized underpinnings of bitcoin – is getting traction at big banks like JP Morgan in proprietary software development. But finding the right consumer use cases with a crypto currency and growing that business has proved elusive.

#7. Looking out over the next 10 years for bitcoin and crypto currencies, we see the following:

• Like the 2000 – 2005 experience for US Tech stocks, many of the current class of cryptos will disappear.

• The killer app in crypto has yet to be developed, but it will come and likely target emerging markets. It will build in volatility caps and offer some sort of interest-like component to stabilize day-to-day prices.

• Bitcoin will rally again, likely during the next global recession. Remember when it started: in the teeth of the last global financial crisis. While the US banking system is sounder than in 2008, the jury is out on the rest of the world. In a severe economic downturn, bitcoin should do well again.

Bottom line: Bitcoin starts its second decade in a similar position to 10 years ago – a clever technology looking for a home.

While it has now well and truly entered the mainstream consciousness, there are still concerns that it has longevity, and could ultimately fail. Even Wences Casares, widely known as bitcoin’s “Patient Zero” for his role in spurring interest in crypto in Silicon Valley, expressed worries about its future.

“It may work, it might not work,” he told Bloomberg on Monday. “We are in the equivalent of 1992 for the internet.”

While we don’t yet think it is a “buy” based on Google Trend and wallet growth analysis, it is still worth watching.

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The youngest brother of Saudi Arabia’s King Salman has returned from self-imposed exile to “challenge” Crown Prince Mohammed bin Salman (MbS) “or find someone who can,” reports the Middle East Eye.

Prince Ahmad bin Abdulaziz is reportedly hoping to oust his 33-year-old nephew in the wake of an allegedly state-sanctioned murder of journalist Jamal Khashoggi. MbS has virtual control over Saudi Arabia after a June 2017 shakeup in which King Salman removed Muhammad bin Nayef as heir apparent. 

The septuagenarian prince, an open critic of bin Salman (MBS), has travelled with security guarantees given by US and UK officials.

“He and others in the family have realised that MBS has become toxic,” a Saudi source close to Prince Ahmad told Middle East Eye.

“The prince wants to play a role to make these changes, which means either he himself will play a major role in any new arrangement or to help to choose an alternative to MBS.” –Middle East Eye

Prince Ahmad has reportedly been meeting with other members of the Saudi royal family living outside the kingdom, along with “figures inside the kingdom” who have encouraged him to usurp his nephew. According to MEE, “there are three senior princes who support Prince Ahmad’s move,” who remain unnamed to protect their security. 

According to Saudi dissident Prince Khalid Bin Farhan Al Saud, he expects a coup to be orchestrated against King Salman and MbS, as reported by the Middle East Monitor, which reports that a coup is “imminent.” 

“The coming period will witness a coup against the king and the crown prince,” said Prince Khalid while commenting on the Khashoggi murder. 

Khashoggi, a 59-year-old Washington Post journalist who had criticized the Crown Prince, was murdered on October 2 after entering the Saudi consulate in Istanbul to obtain paperwork ahead of his upcoming wedding. His body has not been found, but is believed to have been dismembered after he was reportedly choked to death. 

Prince Ahmed bin Abdulaziz, 76, has been living in the UK for several years after serving as Saudi Arabia’s deputy minister of interior between 1975 – 2012, and briefly as minister of interior in 2012. Ahmed was seen as a potential candidate to succeed King Salman in the early 2000’s, however he was sidelined in March 2014 amid one of several shakeups within the House of Saud. 

On November 4, 2017 bin Salman began arresting as many as 500 Saudi princes, government ministers and businessmen – detaining them in the Ritz-Carlton hotel in Riyadh. Private jets were grounded to prevent people from fleeing, while over 2,000 domestic bank accounts and other assets were frozen as the government targeted up to $800 billion in wealth that was reportedly “linked to corruption.” 

Prince Ahmad was protected from the purge, as MbS was unable to touch any sons of King Abdulaziz, founder of the modern Saudi state. 

Standoff with Turkey

As MEE notes, Prince Ahmad’s return comes amid a tense standoff between Saudi Arabia and Turkey following the Khashoggi murder. Turkish authorities have demanded to know what happened to the journalist’s body and have requested audio of the execuiton rumored to exist. 

In a thinly veiled attack on the crown prince, Turkish President Recep Tayyip Erdogan on Tuesday accused the Saudis of protecting the person responsible for the murder.

“A game to save somebody lies beneath this,” Erdogan told reporters following a speech in parliament on Tuesday. “We won’t leave Khashoggi’s murder behind.”

The Turkish president, who outlined some of the investigation into Khashoggi’s murder in an address last week, has promised to reveal more details about the killing but has so far refrained from doing so. –Middle East Eye

Despite Saudi chief prosecutor Saud al-Mojeb and Istanbul’s chief prosecutor Ifran Fidan meeting twice over the last several days, no progress has been reported. 

The Saudis, meanwhile, continue to refuse Turkish investigators access to a well located at the home of the consul-general which lies 500 meters from the consulate. 

So far 18 suspects have been arrested in the murder, 15 of whom were members of a death squad reportedly sent to kill Khashoggi. MbS, meanwhile, has denied any knowledge of the operation which reportedly included five members of his personal security detail – three of whom have accompanied the Crown Prince on high-profile trips to Washington, London and Paris. 

Prince Ahmad’s opposition to MbS

The exiled prince has challenged his nephew at least three times, according to MEE. 

First, in the summer of 2017, when the king’s brother was one of three members of the Allegiance Council, a body of senior royals tasked with choosing the succession, to oppose bin Salman’s appointment as crown prince.

Prince Ahmed pointedly did not give an oath of allegiance to his nephew when he was made King Salman’s heir.

Second, when Prince Ahmad and King Salman’s brother, Abdelrahman bin Abdulaziz, died last year. Only two pictures were hung at the reception given by Prince Ahmad, that of King Abdulaziz and the current monarch. The crown prince’s portrait was notably missing.

Third, last month, when Prince Ahmad approached Yemeni and Bahraini protesters outside his London home who were calling the al-Sauds a criminal family.

The brother of Saudi Arabia’s King Salman was heckled outside his residence in London.

So he confronted protesters telling them to blame King Salman and the Saudi Crown Prince instead pic.twitter.com/IzSY3tMs1Q

— Middle East Eye (@MiddleEastEye) September 4, 2018

Ahmad told the hecklers that the Saudi royal family as a whole is not responsible for the war in Yemen – just the king and crown prince. 

“They are responsible for crimes in Yemen. Tell Mohammed bin Salman to stop the war,” Ahmad told them in Arabic. 

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One week ago, with roughly half of earnings season in the books, FactSet and Bank of America revealed an ominous statistic about the jumpiness (or perhaps “peak earnings”) of the market: in a curious twist, companies that had reported positive earnings surprises for Q3 2018 were punished by the market, with their stock price decreasing by -0.5% two days before the earnings release through two days after the earnings. Meanwhile, and as one would expect, companies that reported negative earnings surprises for Q3 2018 have an average price decrease of -3.5% two days before the earnings release through two days after the earnings.

While the market penalizing companies for earnings misses is hardly a surprise, the lack of reward for EPS & sales beats is typically a later-stage bull market signal according to BofA strategist Savita Subramanian who wrote that “this suggests that the good news is priced in.” Putting these market reactions in context, the only time when the market had a sub-1% relative surprise reaction for beats was in both 1Q00 and 4Q07.

Now, Goldman’s derivatives strategist Katherine Fogerty points out another curious statistic about the bifurcation between single name and index vol: in the latest indication of just how nervous traders are about corporate earnings, with just over half of the S&P having reported results as of last Friday, the average stock moved +/-4.5%, marking the highest earnings move since the Financial Crisis (Q3 2009).

Of note, this is not due to overall market volatility because while the S&P500 was down just 2% during October 2009 (vs -7% October 2018), the average level of the VIX was 61%, substantially higher than 19% this month.

When broken out by sector, communications (comprised of Internet, Media, and Telecom stocks) exhibited the least ties to macro volatility on earnings and the largest absolute moves: the average stock in this sector realized a +/-7.0% move on earnings this quarter. After adjusting for sector performance, Goldman calculates a Residual Earnings Move of +/-6.3%. This is 2.1% higher than the average move these stocks have realized on prior earnings reports (2006 – present).

Goldman’s latest observations echo the analysis made by another member of the firm’s derivatives team, when on Tuesday strategist John Marshall showed that while fear has risen sharply at the single stock level “as put-call skew is now in-line with the levels following the February sell-off”, suggesting that investors fear gap-moves lower in single stocks over the next three months, the same thing is not true at the index (S&P500) level, where the put-call skew has declined since early October, “implying that investors aren’t seeing as much potential for a sharp sell-off from this new lower level in equities.”

Underscoring the single-name “paranoia” discussed above, Marshall further notes that while index put-call skew remains higher than single stock skew on an absolute basis, “such a large divergence between these two measures is unusual.” This divergence is shown in the chart below:

Discussing recent conversations with investors, Marshall says that this spread in the vol world is is indicative of a divergences in near-term sentiment: “Macro investors we speak with seem focused on picking a bottom in the SPX which is oversold relative to other asset classes” while at the same time, “micro investors seem increasingly risk-averse following big earnings-day moves.”

Whatever the reason, the increase in earnings-day moves over the past two years, discussed here most recently in August, is continuing this quarter.

* * *

So now that a clear pattern has emerged, how does one trade it? According to Goldman, the winning strategies going into earnings have been buying puts and strangles, while avoiding calls:

• Given the overall challenging tape, buying the closest out of the money one month listed put 5 days ahead of earnings and closing the day after produced an average return of 107%. This is the highest profit for this strategy since the Financial Crisis.
• Another trade that has fared well is buying the closest listed one month straddle 5 days ahead of earnings and closing the day after. Post crisis record earnings moves have helped drive an average return of 35% for this strategy, which isolates volatility.
• Given the 7% drawdown in the S&P500, buying calls has been extremely challenging. In fact, buying the closest out of the money call 5 days ahead of earnings and closing the day after has produced a loss of 36% on average. All figures exclude transaction costs.

One obvious counter to the above is now that it has been publicized, the trade will no longer work. Whether or not that means that single stock volatility will also collapse now that everyone rushes to hedge it (while pushing index vol higher as hedges are pulled) remains to be seen.

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Texas landowners along the US-Mexico border have reportedly been told this week by the US Border Patrol to expect a possible influx of “armed civilians” on their property as a Central American migrant caravan makes its way towards the United States, reports AP. 

The Associated Press reported that these civilians say they intend to support the National Guard and Border Patrol to prevent the illegal migrants from crossing into the U.S.

But some see the move as a negative, arguing that the armed civilians’ presence would add even more tension should there be a confrontation.

Three activists told the AP they were going to the border or organizing others, and groups on Facebook have posted warnings about the caravan. One said it was “imperative that we have boots on the ground.” Another wrote: “WAR! SECURE THE BORDER NOW!” –Associated Press

Texas Minuteman militia president Shannon McGauley told AP that the group has members stationed at three points throughout the state’s border, and expects 25-100 more arriving in coming days. 

Militia border patrols are nothing new, as civilians will typically alert border patrol to apprehend trespassers. 

On Wednesday, President Trump issued a new warning about the caravan and its “very tough fighters and people,” tweeting: “The Caravans are made up of some very tough fighters and people. Fought back hard and viciously against Mexico at Northern Border before breaking through. Mexican soldiers hurt, were unable, or unwilling to stop Caravan. Should stop them before they reach our Border, but won’t!”

The Caravans are made up of some very tough fighters and people. Fought back hard and viciously against Mexico at Northern Border before breaking through. Mexican soldiers hurt, were unable, or unwilling to stop Caravan. Should stop them before they reach our Border, but won’t!

— Donald J. Trump (@realDonaldTrump) October 31, 2018

Trump then reiterated that the US military “is being mobilized at the Southern Border” with “Many more troops coming.” 

“TURN AROUND!” he added:  

Our military is being mobilized at the Southern Border. Many more troops coming. We will NOT let these Caravans, which are also made up of some very bad thugs and gang members, into the U.S. Our Border is sacred, must come in legally. TURN AROUND!

— Donald J. Trump (@realDonaldTrump) October 31, 2018

The caravan, which is now estimated at 4,000 people after many have turned around or accepted asylum in Mexico, is currently around 1,000 miles south of the US border and estimated to arrive in around a week thanks to organizations which have been aiding the Central Americans, including a reported organized busing operation. 

As Fox News report on Tuesday showed, migrants traveling with the caravan are being loaded on to chartered buses and transported to the next stop on the trail to the US, having refused Mexico’s offer of asylum, shelter and jobs should they opt to stay in the country. Fox News reporter Griff Jenkins revealed that multiple professional buses have lined up to board the migrants, as footage from the report showed.

Meanwhile, President Trump told Fox News on Monday that the migrants are “wasting their time” and said “they are not coming in,” adding that the US would build giant tent cities to house migrants who made it over the border, as opposed to the longstanding policy of “catch and release” by which migrants were assigned court dates and allowed to leave – typically never to be seen again. 

“If they applied for asylum, we’re going to hold them until such time as their trial takes place,” Trump told the Fox News host. 

“Where? We have the facilities?” she asked.

“We’re going to put up – we’re going to build tent cities,” Trump responded. “We’re going to put tents up all over the place. We’re not going to build structures and spend all of this, you know, hundreds of millions of dollars — we’re going to have tents.“

“They’re going to be very nice,” he added.

.@POTUS on facilities for asylum seekers: “We’re going to build tent cities. We’re going to put tents up all over the place.” @IngrahamAngle pic.twitter.com/fL3ALkNbz4

— Fox News (@FoxNews) October 30, 2018

At this rate the migrants are scheduled for a showdown right around midterms.

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“Happy Days are here again,” is the clear message from asset-gatherers and commission-rakers across the financial media space (as well as President Trump) as shocktober ends with a flourish of rebalancing exuberance prompting the goldfish-like memories of the trading community to forget the carnage of the last 20 trading days.

Former fund manager and FX trader Richard Breslow remarks that “I couldn’t help giggling on my way to work this morning,” as he reflects on the market and the media’s reaction to this dead cat bounce…

Via Bloomberg,

…not because global equity markets were all up. It was after reading reports from a number of commentators, who spent a good portion of the last few weeks asking what is going on with asset prices and settling on no definitive reason, that the worst is over and this time we should be looking for the moment to buy.

Brave words with ‘other peoples money’ as there were the obligatory hedges that the exact timing is left to the reader. Just in case there may be more bad news first. I couldn’t quite wade through the “logic” but it seemed to be some amalgamation of, all the bad news is priced in using a misreading of the Efficient Markets Hypothesis, a desire to make a random call based on the calendar turning in the hope of being a punditariat hero, or, more likely, a continuing belief that monetary policy makers can and will provide.

Whether they’re proven right remains to be seen, but it’s too early to make that call with any credibility. Especially given the obvious effects of month-end rebalancing and the upcoming midterm elections. The way traders have been faring over the last month makes it feel like the coin flips being made have a payout less than 50/50. Which probably means the statistical theories of Thomas Bayes is an invaluable read when trying to rebuild portfolios for the coming month.

I remember an amusing conversation with someone when thinking about whether to embrace the bad things are over declarations. It went, “Why are you following the advice of someone who has been consistently wrong? Because he is a smart guy who is due for a winner.” Many a hedge fund limited partner has regretted adopting that attitude when investing in a relaunch.

The economic news in Asia presented one disappointment after another. China’s manufacturing PMI fell to almost a two-year low. And the sub-indices offered no relief. South Korea’s industrial production was downright ugly as was that of Japan. And the equity markets didn’t care a whit. That might tell you something when deciding how definitively the all-clear has been signaled. At his post-policy meeting press conference BOJ Governor Haruhiko Kuroda talked about downside risks. Japanese CPI forecasts were lowered, consumer confidence was a miss and inflationary expectations rose thanks to the coming consumption tax hike.

In Europe, the theme of the day has been all of our problems have been solved. I’ve heard that one before.

Equities bouncing is a good thing, even if it won’t salvage anyone’s October. I still maintain that 2720 in the SPX is a very interesting technical pivot to watch. Of more interest to me, rather than debating whether or not to catch the falling equity knife, is contemplating what the dollar touching a new year-to-date high and sings of life in Treasury yields mean.

Especially for emerging markets. And then ask yourself why their stocks are rising so much on the day.

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UK Brexit Secretary Raab says a deal is expected by November 21st (in a letter to Hilary Benn, chairman of U.K. Parliament’s Brexit select committee):

“I would be happy to give evidence to the Committee when a deal is finalized, and currently expect 21 November to be suitable”

It seems the algos are buying this one…

 

We will see how long this lasts – three weeks is a long time in European politics.

As Brexit negotiations really start to heat up towards the business end of the procress, Statista has made a timeline of the key dates and events that lay ahead for the UK and EU as they attempt to move towards the planned end of the transition phase on December 31, 2020.

You will find more infographics at Statista

Full letter below:

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Treasury Secretary Steven Mnuchin is about to surpass Timothy Geithner’s achievement of selling a record amount of notes and bonds as he seeks to finance America’s soaring budget deficit.

According to the latest quarterly refunding statement, the US Treasury is about to sell a record amount of debt, surpassing levels seen both in the aftermath of the Great Depression and the Global Financial Crisis.

On Wednesday, the US Treasury Borrowing Advisory Committee unveiled that it will increase the amount of debt to be sold at the upcoming quarterly refunding auctions to $83 billion from $78 billion three months earlier. This will be the fourth straight quarter of increasing refunding auction sizes and is driven by the soaring US deficit shortfall, which in 2018 hit $779 billion the highest since 2012, as well as the Fed’s ongoing balance sheet shrinkage.

Here are the details of the TBAC’s proposal:

• Auctions for 2-, 3- and 5-year notes will increase by $1 billion in both of the next two months; last quarter Treasury implemented increases in all three months
  • As a result, the size of 2-, 3-, and 5-year note auctions will increase by $2 billion, respectively, by the end of January. 
• Auctions for 7-, 10-, 30-year notes to be raised by $1 billion in November and then kept steady through January
• Auctions for 2-year floating-rate note will rise by $1 billion in November
• Auctions for TIPS will see various changes with total tips issuance rising $20 billion-$30 billion in 2019, however there will be no TIPS supply changes over next three months; a new CUSIP 5-year will be added to the TIPS calendar, with the new security to be introduced October 2019

In total, the Treasury will sell $83 billion in long-term debt next week – consisting of $37BN in 3 Year notes, $27BN in 10 Year notes and $19BN in 30 Year notes, versus $78 billion in August’s refunding week sales.

Meanwhile, as noted on Monday, the net amount of new cash raised by the Treasury this quarter is expected to be $425 billion, a slight reduction from the $440 billion forecast made by the Treasury in July.

Notably, Bloomberg notes that the debt issuance at this quarterly refunding will surpass the previous record of $81 billion set by former Treasury Secretary Timothy Geithner in 2009 when the U.S. was issuing record amounts of debt to fund its recovery from the Great Recession. Of course, this time borrowing is surging as the economy hums along at a 3.5% annual growth rate and unemployment is near a half-century low, a paradox which many are confident will end up making the next recession that much worse as the US will have little fiscal dry powder.

While the announcement came in line with expectations, it helped push 10Y yields to a session high of 3.16% before the move faded back to 3.14%, almost unchanged on the day as Treasury vol remains non-existent.

As Bloomberg notes, the Treasury release may draw more attention to rising federal deficits less than a week before midterm elections: Trump, who is expected to sell $1.3 trillion in total Treasury debt this calendar year, had often criticized Barack Obama for running up the budget deficit, and in 2012 recommended banning lawmakers from reelection if Congress couldn’t balance the budget.

Meanwhile, between the Fed’s quantitative tightening and Trump’s deficit-busting policies which has sent the US debt soaring, some say it is only a matter of time before debt buyers of US paper boycott the relentless increase in issuance with demands for far higher interest; for now Treasury Secretary Steven Mnuchin has dismissed any such worries.

“The market has handled the supply very well,” Mnuchin said earlier this month, adding that demand for U.S. government bonds remains strong.

For now, perhaps, but recall that the US Treasury is on track to sell $1.34 trillion in new debt this year, more than double the amount sold in 2017. As such, it’s only a matter of time before bond buyers hit the reset button and start demanding far higher interest rates, unless of course the US economy slumps into a recession when the calculus will be dramatically revised as there is a great rotation out of stocks into bonds, offset by an even greater increase in the net supply of US paper.

Finally, putting all of the above in context, the US Treasury paid over half a trillion dollar just to fund interest on all this debt. This number is set to explode higher in the coming years.

 

via RSS https://www.zerohedge.com/news/2018-10-31/treasury-announces-record-debt-sale-upcoming-refunding-auction Tyler Durden

Authored by Lance Roberts via RealInvestmentAdvice.com,

“Brophy: I got it. I got it. I got it. 

[thump] 

Brophy: I ain’t got it.” – Mel Brooks, High Anxiety

Arriving at Los Angeles International Airport, Dr. Richard Thorndyke has several odd encounters (such as a flasher impersonating a police officer, and a passing bus with a full orchestra playing inside it). Dr. Thorndyke remarks:

“What a dramatic airport!”

He is taken by his driver, Brophy, to the Psycho-Neurotic Institute for the Very, Very Nervous, where he has been hired as a replacement for Dr. Ashley, who died mysteriously. Brophy has a condition of nervousness, and he takes pictures when he gets nervous. Upon his arrival, Thorndyke is greeted by the staff, Dr. Charles Montague, Dr. Philip Wentworth, and Nurse Charlotte Diesel. When he goes to his room, a large rock is thrown through the window, with a message of welcome from the violent ward.

During the movie, Thorndyke suffers from a neural disorder called “High Anxiety”, a mix of acrophobia and vertigo, and tries to overcome the infliction.

We Live In Mel Brook’s Crazy World Now

With an intraday move of almost 4% – the S&P futures fell by a remarkable 100 points from the day’s high to the day’s low. A large sell program at around 3:30 p.m. abruptly moved the market down by fifty handles in one of the largest sell programs I have ever seen hit the floor. (The day’s swing in the Dow Jones Industrial Average exceeded 900 points!)

The Spyders peaked at over $270 at around 10:10 a.m. and bottomed at under $260 (with 30 minutes left in the trading session). Spyders closed the day at $263.86.

Talk about High Anxiety!

As I write this morning’s missive the market volatility has continued. When I started writing this column, S&P futures were +18 and Nasdaq futures were +38 . They are now essentially flat, on no new news.

What Was Trump Thinking?

Since early 2018 I have warned that the return of The Orange Swan introduces more uncertainty – “Making economic uncertainty and market volatility great again.” #MUVGA I have and continue to caution that Trump’s behavior and his (hastily crafted) policy – conflated with politics – are now hurting the markets.

Case in point, futures rose early on Monday after the president said that he is going to make a great deal with China.

Then, in the middle of Monday’s volatile trading session (at around 2 p.m.), the president added fuel to the trade war with China with another threat to introduce more tariffs on the rest of China’s imports to the U.S.

As I wrote late in the day, Karen Finerman, on CNBC’s Fast Money, asked an interesting question – why did Trump bring up the Chinese tariff debate again?

After all he already has stated (as has Steve Mnuchin) that the stock market is a real-time judge of the administration’s economic policy and he must have known that his comments would be market unfriendly.

So, what was it?

Here are some possibilities:

1. He is doubling down and posturing against the Chinese (I doubt it because he has already been quite hawkish in his trade rhetoric).

2. Is the president simply oblivious and doesn’t care about the impact of his actions? (That’s hard to believe because we are so close to the important midterm elections).

3. Is he not focused? (I don’t know)

4. Was the statement part of a broader or more grand strategy? (I have no idea)

5. He just felt like saying it, wants to humiliate China and is appealing to his base. (No clue, here)

6. Is he playing chess while everyone else is playing checkers? (Doubtful)

7. Is he testing the market’s response to a ridiculous policy that he has no intention of implementing? (Again, I am clueless)

8. Is he overplaying his hand? (Clueless, Part Trois)

9. Is it simple arrogance and ignorance? (Clueless, Part Four)

10. Is he trying to change the narrative from the bomb mailings and the terrorist act in Pittsburgh? (You get the point by now!) 

I Have Warned About The Growing Risks of A “Flash Crash” in 2018

Back in December, 2017, I warned:

Surprise #9: Volatility Spikes, Causing a Major Flash Crash

“Though large daily drops in the markets are rare, the factors that could contribute to a quick drop have increased.

Investors have been concerned about the VIX for years, but the positioning has now moved to an extreme. Such positioning could accelerate a market drop as the chances of a flash crash have escalated.

Hyman Minsky has warned about the risks of becoming numb to the risks associated with a period of stability amid rising asset prices; it is not only inevitably followed by instability, it inevitably creates it.

In a world in which the chances of an external market shock are rising and at a time when volatility is cratering and stock prices never decline, the risks of a flash crash caused by the one-sided market positioning in VIX futures is increasing and are at a higher probability of occurring than at any time in history.” – Kass Diary, 15 Surprises for 2018

Kill The Quants Before They Kill Our Markets

Most observers are of the view that there is order in our markets today – that fundamentals and/or technicals are understandable and analyzable stars that shine above us and give us direction.

If you believe the market’s volatility is a function of the earnings reports, trade wars or interest rates concerns – I believe you are mistaken. Rather, this is the cruel cocktail consisting of the proliferation of ETFs and other quant strategies.

But, its not our “fathers’ market.” These factors used to be an important determinant to stock prices – they still are, but markets are now too frequently punctuated by the influence of ETF flows and risk parity leveraging or deleveraging.

As an example, it’s commonplace, in a market that moves by nearly 1000 DJIA points from high to low for bond markets to exhibit a “flight to quality”, for gold to rise and/or volatility to explode to the upside. None of this happened yesterday. There was no movement in bond yields lower (bond yields were up one basis points) nor a rise in the price of precious metals (gold fell). Credit spreads would also normally widen in the sort of volatility we saw on Monday – this, too, did not happen. And, importantly, volatility rose by a mere 50 cents.

I used the 3:30 p.m. “woosh lower” to add to my trading long rentals. It was not an easy tactic as markets were in a scary free-fall (a likely occurrence that I predicted previously in my Surprise List 10 months ago).

Tactical Approach to an Anxiety-Driven and Machine/Algo Influenced Market 

Throughout 2018 I have been looking at a projected S&P range of approximately 2550-2800. (In September we overshot the top end of my range by about 120 S&P points.) 

My “fair market value” calculation has been about 2500 and my pessimistic case has circled around the 2400 level.

I have been consistent with my forecasts – and I continue to basically have the same range projection (2550-2775), “intrinsic value” of (2500) and pessimistic case (2400). 

There are numerous reasons to be cautious today – a changing and more problematic market structure, a monetary pivot, trade rhetoric/wars, ambiguous global economic growth, political (The Orange Swan) and geopolitical uncertainties, etc. The market is still “a full on Monet”.

The new regime of volatility is now another bona fide reason to sit on the sidelines.

All these factors, I have argued, cap the market’s upside to levels much lower than believed by the consensus.

Nevertheless I am sticking with my process and trying to trade unemotionally and let the market’s wild moves work to my advantage. (In days like yesterday it was tough to divorce myself from the volatility in order to reach for opportunity – but I purchased the late afternoon “woosh” based on the move to the lower end based on my projected the 3-6 month trading range of 2550-2775 and what the current price provided in terms of reward v. risk. (At around 3:30 p.m. S&P cash traded at about 2598 – within 50 handles from the estimated low of the range).

Unlike many talking heads I do not confidently make these projections – as I recognize that the plethora of fundamental outcomes as well as the dangers of a changing market structure (in which too many are on the same side of the bullish boat and an increasingly large amount of traders/investors worship at the altar of price momentum).

The global stock markets are damaged (non U.S. markets led this decline which, in many stocks, are already in bear market territory) – it’s still “a full on Monet!”

“It’s like a painting, see. From far away it’s okay, but up close it’s a big ol’ mess.” 

I am still of the view that we made important tops in late January, 2018 and in September, 2018 – and that tops are processes, not events.

But, when anxiety and fear are elevated, trading opportunities abound.

Bottom Line 

I started Monday on an optimistic note, “The Case For an Oversold, Contra Trend and Playable Rally Higher Increases in Probability” – and, on cue S&P futures rose by over 30 handles in the early going:

The last thirty minutes of trading on Friday bears witness to the disproportionate role of passive strategies (ETFs and risk parity and other quant strategies that worship at the altar of price momentum – and exaggerate short term market movement – in which the Dow Jones Industrial Average moved up and down in excess of 400 points.

This unnatural backdrop – which showed a sharp drop in the last few minutes – was likely artificial and provided yet another short term trading opportunity.

As I have been harping on, the market is dynamic and we, or at least I, have to unemotionally and opportunistically trade in order to deliver superior investment returns. The machines and algos should be taken advantage of. (I covered my (SPY)  short on Friday at very nice prices and for a quick, few hours, +$4 to $5 gain.)

Though I have little idea how long it will last, there are several factors that may contribute to higher stocks in the next few weeks:

* As the Reporting Period (for 3Q2018 earnings) Matures, Buybacks Will Soon Be Back

* Investor Sentiment Is Dismal: The CNN Fear & Greed Indicator is at an ‘extreme fear’ level.

* Many talking heads in the media, formerly bullish, are now fearful.

* An Oversold Market: Several market Indices are 2-3 Standard Deviations Below 50 Day Moving Averages.

* The End of Mutual Funds’ Fiscal Year: Loss taking may soon be over as the month and fiscal year end on Wednesday.

As previously mentioned, I (unemotionally) purchased the “woosh” lower on Monday and I am temporarily net long based on my calculation of upside reward v. downside risk.

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Hours after the Washington Post published an anonymously sourced story claiming that Saudi Arabia is still refusing to cooperate with Turkish investigators looking into the murder of insider-turned-dissident Jamal Khashoggi, Istanbul’s head prosecutor has delivered a statement revealing more incriminating details about the circumstances surrounding the journalist’s murder at the hands of a 15-man “hit squad” inside the Kingdom’s Istanbul consulate. 

In a revelation that supports the theory, advanced by a steady stream of leaks to Western and Turkish media from the prosecutor’s office, that Khashoggi’s murder was a premeditated act ordered by senior intelligence officials and possibly Crown Prince Mohammad bin Salman himself, Istanbul’s head prosecutor said Wednesday that Khashoggi was strangled to death as soon as he entered the consulate in a murder that was likely pre-planned. His body was then “cut into pieces” and presumably smuggled it out of the consulate.

From the statement: Turkey asked for the extradition of the suspects arrested in Saudi Arabia and the whereabouts of Khashoggi’s body. No response from the Saudi side.

Finally, adds that the talks with the top Saudi prosecutor were not productive. pic.twitter.com/DUyDvtJPK9

— Yunus Emre Oruç (@defusertt) October 31, 2018

Notably, the statement from the Turkish prosecutor comes shortly after his Saudi counterpart, Saud al-Mojeb, left the country after a meeting between the two. The Saudis have largely stonewalled the inquiry into Khashoggi’s disappearance and killing. After denying any involvement, the kingdom admitted earlier this month that Khashoggi was, in fact, murdered inside the embassy, something the kingdom has officially said was the result of a “botched interrogation,” the Saudis pledged “full cooperation” with their Turkish counterparts. But that promise was apparently less-than-sincere. The Saudi prosecutor has since flirted with possibility of changing his story yet again to suggest that the murder was “premeditated” by the low-level operatives who carried it out.

This is only the latest leak in recent days suggesting that the Saudis have been less than cooperative. According to one pro-government columnist on Wednesday, al-Mojeb seemed more interested in learning what Turkey knew than in getting to the bottom of what happened to Khashoggi. In a statement released by

Here’s WaPo with more:

Since the prosecutor, Saud al-Mojeb, arrived in Turkey on Monday, “Saudi officials seemed primarily interested in finding out what evidence the Turkish authorities had against the perpetrators” in Khashoggi’s killing, said the official, who requested anonymity to discuss private law enforcement contacts.

“We did not get the impression that they were keen on genuinely cooperating with the investigation,” the official said of the Saudi delegation.

The Saudis have rebuffed demands expressed by prosecutors and President Erdogan himself that the kingdom disclose where Khashoggi’s body was buried, or the name of the “local cooperator” whom the Saudis claim the killers worked with to dispose of Khashoggi’s remains. Turkey has also requested the extradition of the 18 Saudi nationals who were arrested by the kingdom in connection with the murder. But while the international pressure has inspired Germany to suspend arms exports to Saudi Arabia, and US lawmakers have continued to push for some kind of punitive action despite President Trump’s obvious reluctance, the fallout from the scandal has been relatively muted. And as the international outrage subsides, many epect MbS will ultimately use this as one more excuse to consolidate power in Riyadh. Though the Turks still have an ace up their sleeve: The rumored audio recording of Khashoggi’s murder which has been widely cited in the press, but never released to the public. And while the Turks reportedly played it for CIA Director Gina Haspel, their plans for the record remain unclear.

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