Tag: finance

It’s no secret that in a perplexing reversal of his traditional skepticism (one which likely involved a tap on the shoulder or two as part of his recent promotion), JPM’s head quant Marko Kolanovic turned decidedly bullish this year (going so far as to blame a recent selloff not on fundamental reasons but a “severe snowstorm“), and predicting a favorable outcome at every opportunity.

Today was no different, and in his later commentary on “markets and volatility” while still bullish, Kolanovic observed that things haven’t turned out quite as expected, with the S&P down 1.5% YTD despite the strongest earnings season since 2011. So whose fault is it now that reality refuses to comply with the quant “wizard’s” predictions? Apparently, it’s the “upside down” market that is to blame, to wit:

Equity up and volatility up would not be the only “upside down” market pattern this year. Many established patterns at least partially reversed:

• bond-equity correlation (something we warned about),
• strong earnings were often sold and poor earnings rallied (position de-risking and covering of shorts),
• correlation and volatility spiked during earnings seasons,
• defensive sectors outperformed on the upside and value outperformed on the downside, and so on.

Many of these are a result of the transition from monetary to fiscal stimulus in the US, deleveraging of convex strategies (such as volatility selling, targeting), and rotations out of crowded positions in bond proxy and growth segments (we underweight bond proxies and tech last year).

And while so far the “upside down” market has wreaked havoc on expert predictions, Kolanvic is hopeful that a “Constanza market” should eventually help him – and other bulls – out (emphasis on the word “hopeful”).

In this (so far, chaotic) year – we also witnessed significant US equity fund outflows during the period supposed to be the strongest seasonal part of the year. If the “upside down” market patterns continue, the “sell in May and go away” prescription (that reflects a reversion of inflows early in the year) may turn into “buy in May” this year.

Actually, those hoping this is the case, may want to curb your enthusiasm there, because the the “abnormal market” has already struck here, and as Ryak Detrick reminds us, the S&P 500 has been higher in May each of the past 5 years. As such a real “upside down” market would be one which goes back to normal, and suffers a steep plunge in the coming months.

Before we get carried away with ‘Sell in May and Go Away’, just remember that the S&P 500 has been higher in May each of the past 5 years.

— Ryan Detrick, CMT (@RyanDetrick) April 29, 2018

What else? Well there is Kolanovic’s hope that systematic investors will step in and start buying:

Systematic investors thoroughly de-risked by selling ~$300bn of equities this year. If volatility can stay contained and the market can make modest gains, systematic investors would re-risk. For instance, three-month price momentum is more likely to turn positive in early May (three months since the February crash), which could result in buying of up to ~$50bn by trend followers. Volatility-sensitive investors would be slower to re-risk at ~$10bn per week, but this could accelerate if volatility declines more substantially. In addition, buybacks are expected to pick up activity after individual companies announce earnings, and may add up to ~$20bn of inflows per week at its peak.

There is just one problem with this theory too, because as Morgan Stanley reported yesterday, there is nobody left to buy stocks, something we have seen for much of earnings season when companies reported earnings only to tumble as marginal holders sold instead of bought. To wit:

Very simply HFs remain very crowded in the same positions (i.e. Tech) and there are fewer marginal buyers left.  The MS PB Content team has noted that HF gross exposures remain elevated, and from conversations with investors this positioning was driven by optimism over 1Q data.

And some more details from Morgan Stanley’s own competing, and far more skeptical than its JPM peers, quant team:

• Retail has been selling (passive funds saw the biggest outflows since 2009 over the last 3 months, see charts below) and likely remain on the sidelines due to the increase in volatility
• Likewise systematic investors are unlikely about to buy too strongly as volatility remains elevated
• HFs have hung on to their positions over the last few months as they have benefited from a positive ‘performance cushion’ with the average fund up 1 to 2% YTD per the MS PB Content team.  But recent returns of the MS Momentum baskets suggests performance is struggling (MSZZMOMO for fundamental-like sector-biased / MS00MOMO for quant-like sector neutral – see chart below).  And MS Equity Strategist Mike Wilson has written about the lack of leadership in US equities (see Leadership in Transition; Buy Energy and Fins; Sell Semis and Retail, April 23 2018) which could challenge consensus positions further (see chart below).
• Corporates will start to re-enter the market as earnings season draws to a close, but these flows argue more for less downside than explosive upside as buybacks are a drip not a flood
• Asset managers and more macro-focused investors could provide some demand but their flows have been choppy  (selling in Feb and March has turned to very modest buying in the last week) and they remain a wild card

So with the quasi mea culpa out of the way, what happens next? Here Kolanovic reverts back to recently, and strangely, permabullish self, and writes that the 5 key sources of risk…

1. reduction of monetary accommodation in the US;
2. high equity positioning particularly in systematic strategies;
3. unsustainably low level of market volatility last year, and
4. elevated valuations in sectors such as low volatility and growth.
5. liquidity and liquidity disruptions may be a hallmark of the next market crisis. Where do we stand with these risks?

…are now “lower than they were when we highlighted them at the end of last year”, and explains:

Positioning was reduced (e.g. volatility targeting strategies are likely near the lows of equity allocation, retail holding of short volatility assets were decimated), and volatility reset higher, thus reducing the risk of a sudden shock and
deleveraging. Equity valuations came down substantially given the record increase of earnings. For instance, S&P  500 next 12-month P/E currently at ~16x is slightly below both the historical average and median, which is by definition is not expensive (note that using old tax rates in estimating valuation, i.e. using trailing earnings, is not relevant). While most of these risks declined, a new risk emerged in March related to policies from the US administration.

Kolanovic concludes by focusing on some of the biggest remaining risk overhangs, including central banks, liquidity and political risks, all of which as presented in a “alleged fact-spin” pair, to wit:

Central Bank Balance Sheet Risk: Likely Overstated

Investors have recently been worried about the Fed’s balance sheet reduction and its imminent impact on equities. The premise is that required demand for bonds will come at the expense of equity allocations. By the end of this year, the Fed’s balance sheet is expected to contract by ~$325bn. We first note that the ECB and BOJ balance sheets are expected to increase by ~$525bn over the same time period, and that speculators already amassed ~$170bn of short bond futures positions. So a meaningful demand may come from carry trades and covering of speculative shorts. Second, we note that some of the downward price adjustment in equities already happened in relation to the rates shock (namely ~$200bn of equity selling from volatility and rate-equity sensitive funds). If there is a residual imbalance in bond-equity flows, it is likely to be absorbed by other equity inflows (for example, just one S&P 500 company, AAPL, is expected to add ~$200bn of buybacks).

Spin: “If balance sheet contraction fears are behind the recent selloff, then the pullback is largely exaggerated: a ~10% pullback in equities (and 5% pullback in bonds) would imply that the market already priced-in half of the G4 balance sheet being unwound, while in fact, G4 balance sheets are still expanding in aggregate. A potential policy mistake by the Fed is still one of the largest risks facing the economy long-term, but we think that in the near/medium term, risk of Fed-induced recession is relatively low.”

Liquidity: Risks of Market “Uberization”

We have noted in the past that a combination of computerized sellers, and computerized market makers poses a threat to equity price stability. As volatility increases, systematic investors have to sell, and at the same time market depth as provided by electronic market makers quickly disappears. For instance, S&P 500 futures market depth dropped over 90% during the February selloff. What is the reason for such a dramatic drop in liquidity? The most important driver is likely the increase of volatility (e.g. VIX), given that many market making algos (as well as business models) were calibrated during the years of low volatility. As these programs don’t have an obligation to make markets and are optimized for profits, they likely adjust quotes and reduce size in order to maximize their own Sharpe ratio. Other factors likely played a role as well: the increase in short-term rates (e.g. LIBOR), increase of exchange margin requirements, index fund outflows, and risk capital being diverted towards cryptocurrency market making. Full electronification of the market making industry has never been tested in a recession environment. Given that financial markets are a critical part of the economy’s infrastructure, perhaps more attention should be paid to the risks posed by the Uberization of financial markets. The analogy between market making and Uberization is as follows: when there are normal market conditions, the amount of liquidity (cars available) is more than needed and market transaction costs (fare) is low, thus benefiting market participants. However, when there is a volatility shock (heavy traffic, weather) liquidity quickly disappears (i.e. fares can surge to unreasonable levels.

Spin: “Human market makers (the analogy of regulated taxi services or public transport) were to a large extent dismantled over the past decade, so there is hardly any alternative liquidity back-up. These risks previously manifested themselves as ‘flash crashes’ in single stocks and indices. However, equally damaging for investor  confidence are what we see now as ‘slow moving crashes’ that can last several hours as was the case recently with some large stocks and market segments (e.g. Caterpillar ~11% intraday drop on April 24th).”

Political Risks: Is the worst behind us?

The market sell-off in February was almost entirely driven by de-risking of systematic strategies at a time when futures liquidity collapsed. As such we called for a rebound and quick price reversion. After the Nasdaq reached new all-time highs, the worst of the technical impact was behind us and it looked like the best of fundamentals was still ahead of us (earnings season and the full impact of tax reform). Then came the flurry of market destabilizing headlines related to the US administration. In a short period of time, there were announcements related to Steel and Aluminum tariffs, NAFTA, a trade war with China, intervention in Syria and prospects of further escalation, Amazon and Facebook, Rusal sanctions, the Iran deal, etc. These headlines (often tweets) dealt a blow to the confidence of US markets and businesses. For instance, when it comes to trade, damage (as measured by the market  capitalization erased) was likely 1-2 orders of magnitude higher than the value of the tariffs themselves. The administration that was perceived as pro-business and a tailwind for markets since the end of 2016 started being perceived by many investors as a headwind and a source of risk.

Spin: “We think that these risks are likely to moderate and that the worst is behind us. While still a destabilizing factor, risks can be walked back by the administration or undone by new deals. On the other hand, positives such as tax reform will stay, and cannot be undone regardless of e.g. the outcome of mid-term elections and related political changes.”

* * *

So to summarize Kolanovic, ignore the “upside down” market which has refused to comply with all bullish predictions so far, and instead focus on the spin to the three major outstanding risk factors. Ok, fine, at some point “Gandalf” will be right, or maybe he has truly lost his touch and is on his way to becoming another Gartman. The jury is still out, although we should have an relatively clear answer in the next few months.

As for the traders, perhaps the best course of action is to just ignore what experts are predicting, not just Marko but all his peers, and instead just keep doing the opposite of what Gartman predicts: so far this year, that particular strategy has had a 92% hit rate, making Gartman the single most important “factor” in the stock market.

via RSS https://ift.tt/2I0baTF Tyler Durden

Just days after it began trading, WeWork’s freshly minted $702 million bond issue is crashing as the massively over-subscribed junk bond issue sees dramatic buyer’s remorse…

The high yield bond sold for par last week and is now trading with a 95 handle, which, as Bloomberg reports, stands in sharp contrast to the outsized orders the company saw when it marketed its debt in primary markets last week.

The company had initially sought to issue $500 million of the securities, but decided to upsize once the orders came pouring in, a person with knowledge of the situation said. The seemingly odd-lot number of $702 million was chosen in part because the company considered it a lucky number, another person said.

WeWork’s deal underscored the risks investors have been willing to take in the new-issue market as they struggle to find high-yielding assets. The office-space leasing company joined a wave of high-flying cash-burning firms that have managed to recently tap debt markets, like Uber Technologies Inc. and Netflix Inc.

The bond was the most active in the U.S. high-yield market on Monday, Trace data show.

While Bloomberg puts this down to simply “buyer’s remorse” – we suspect it has more to do with the company’s financials actually being exposed to the cold light of day.

What is WeWork’s EBITDA? Simple – whatever you want it to be (via ‘community’ adjustments)…

And Wolf Richter broke down all the details of the farcical bond issue last week…

Fitch, which rates the bonds three notches into junk (BB-), pointed out that WeWork already has existing debt consisting of a $650 million revolving credit facility and $500 million letter of credit reimbursement facility.

WeWork also has $5 billion in lease payments due over the next five years, not including any additional leases it will sign during its global expansion drive:

2018: $706 million
2019: $984 million
2020: $1.1 billion
2021: $1.1 billion
2022: $1.1 billion

Another $13 billion in lease payments come due in the years after 2022, according to Bloomberg. That’s some real money that a money-losing company must somehow obtain.

These are 10-year or 20-year office leases. They’re a fixed expense that doesn’t decline when business drops off. As such, they pose a special risk: WeWork’s customers rent their space on much shorter terms, even month-to-month. When things get tough, they can just ride off into the sunset after their short-term leases expire, leaving WeWork to sit on expensive and vacant office space with stale craft brew on tap at the lounge.

…

Investors in junk bonds of such cash-burning unicorns take only slightly less risk than late-stage equity investors, but have zero upside. All they get is the yield for however long the company manages to pay the coupon, and if they’re lucky, they get their money back when the bonds mature. That’s the best-case scenario. There is no upside.

Read more here…

Of course, WeWork is not the first to burn greedy HY investors looking for a high yield with no risk…

Netflix is sliding…

Tesla has tumbled since issuing debt…

And PetSmart has collapsed…

And then of course – there’s the Norwegian Wild West junk markets…

via RSS https://ift.tt/2w1Hrol Tyler Durden

Forget being ‘Amazon-ed’, Match was just ‘Zuck-ed’ as the CEO announced that Facebook is rolling out a new dating feature.

Match is now down almost 20% – it’s largest drop ever – as investors question the dating-app’s viability in the face of an opt-in Facebook feature designed around dating and building long-term relationships on its social platform.

“This is going to be for building real, long-term relationships — not just hook-ups,”

Besides, who knows you better than Facebook?

via RSS https://ift.tt/2rbPLw0 Tyler Durden

Every month this year we have said it couldn’t possibly get any worse for David Einhorn’s Greenlight, and the very next month we are proven wrong.

Recall, last month we reported that Einhorn’s main hedge fund fell another 1.9% in March, extending its loss this year to 14%, which we said that while superficially was not that bad (as it outperformed the S&P’s 2.5% March drop), that would hardly enthuse Greenlight’s long-suffering LPs who have been patiently waiting for Einhorn to have another home run, and which failed to happen despite the March tech bust, which Einhorn was expecting with his “short basket”.

“In other words”, we said “David will be sending another letter to his clients explaining why this all “must be frustrating to you.”

One month later there is no letter yet, but the deterioration continues, and according to Bloomberg, Greenlight Capital fell another 1.1% in April, extending the total loss this year to a stunning 14.9% just four months into the year.

In a letter to investors sent out in early April, Einhorn said that he had encountered the perfect storm in the market, where he lost money on both his longs, which slumped, and his shorts, which spiked, resulting in a roughly 14% loss in the first quarter. As we reported a month ago, Einhorn’s, 20 biggest long positions fell 5.6%, and his 20 largest shorts fell 5.5%.

Fast forward to today, when Einhorn reiterated his disappointment this morning on a conference call for Greenlight Capital Re, the Cayman Islands-based reinsurer where he is chairman. He repeated that Greenlight’s gains from his Micron long Tesla short did little to offset broader losses, led by an investment in General Motors and a short against Netflix. GM dropped 11.3% in the first quarter, while Netflix surged 54%.

Quoted by Bloomberg, Einhorn said that “the quarterly result was one of our worst. Despite a good earnings season for our portfolio, in which most of our largest positions recorded fundamentals that were consistent with our investment thesis, we managed to lose a bit of money on most positions with no material winners to offset the losses.”

As Bloomberg adds, on Monday Greenlight Re reported a loss per share for the first quarter of $3.85, and a net investment loss of $145.2 million in the first three months of the year on the back of the portfolio’s poor performance.

Einhorn reiterated the bear thesis against Netflix, saying that while the company managed to pull in more subscribers than expected after spending on marketing, technology and development, free cash flow is deteriorating.

“In our view, Netflix has shown an ability to turn cash into subscribers, but not the ability to turn subscribers into cash,” he said.

The problem is that by now none of this is new information to anyone, so absent the “growthy” story cracking, expect even more pain from Greenlight, until one of two things happens: the market starts trading rationally again, and tech names – i.e., the Greenlight short basket – finally blow up, or Greenlight’s LPs decide they have had enough and flood the fund with redemption requests. Considering that the Fed will soon be forced to contemplate QE4 as the current tightening cycle comes to an end, we have a sinking – for Einhorn – feeling, which one will come first…

via RSS https://ift.tt/2HHfCY4 Tyler Durden

Authored by Lance Roberts via RealInvestmentAdvice.com,

In this past weekend’s missive, I quoted Jeffrey Hirsch, editor of the “StockTrader’s Almanac,” on the entrance of the market into the “seasonally weak” 6-month period for stocks.

“May officially marks the beginning of the ‘Worst Six Months’ for the DJIA and S&P. To wit: ‘Sell in May and go away.’ May has been a tricky month over the years, a well-deserved reputation following the May 6, 2010 ‘flash crash’ and the old ‘May/June disaster area’ from 1965 to 1984. Since 1950, midterm-year Mays rank poorly, #9 DJIA and NASDAQ, #10 S&P 500 and Russell 2000, #8 for Russell 1000. Losses range from 0.1% by Russell 1000 to 1.9% for Russell 2000.

For the near term over the next several weeks the rally may have some legs. But as we get into the summer doldrums and the midterm election campaign battlefront becomes more engaged, we expect the market to soften further during the weakest two-quarter stretch in the 4-year cycle.”

Here is the history of a $10,000 investment.

Despite the weight of evidence to the contrary, the “ever bullishly biased” commentators quickly point out there were many years where the “selling in May” would have left you behind in performance.

But again, the evidence is quite clear.

Nonetheless, as we kick off the month of May, the commentary remains optimistic as earnings have been coming in above already high expectations due to the reduction in corporate tax rates and outstanding float. With the economy still expanding, unemployment rates near lows and consumer confidence near highs – what’s not to love?

From portfolio management viewpoint, it is the disconnect between the “good news” and recent market action that has my full attention.

Warning Signs

While there are many suggesting the recent correction is just a healthy consolidation process within an ongoing “bull market,” which so far it has proved to be, there is a difference between today and previous corrections following the “financial crisis.”

First, The Federal Reserve was still reinvesting proceeds from the bloated $4 Trillion balance sheet, which provided for intermittent pops of liquidity into the financial market. The liquidity is now “running on empty” at a time where interest rates and inflationary pressures are rising.

Secondly, despite all of the good news from the earnings front, as I stated previously, the surge in the market from July of 2017 had already incorporated those expectations. With current prices expecting things to get even better, such may not be the case as the benefit from tax cuts will begin to fade in Q3 as noted next.

“But even if we give Wall Street the benefit of the doubt, and assume their predictions will be correct for the first time in human history, stock prices have already priced in twice the rate of EPS growth.”

Third, as Doug Kass quoted yesterday from Morgan Stanley:

“Our experience tells us that these leaderless periods typically occur during important transitions in the market. So what is that transition today and how can we harness it to make money? Sticking with our original thesis for 2018, we think the market is digesting the fact that the tax cut last year has created a lower quality increase in US earnings growth that almost guarantees a peak rate of change by 3Q. Furthermore, the second order effects of said tax cuts are not all positive.

Specifically, while an increase in capital spending and wages creates a revenue opportunity for some, it also creates higher costs for most. The net result is lower margins, particularly since the tax benefit is 100 percent ‘below the line.’ Now, with the pricing mechanism for every long duration asset- 10-year Treasury yields-rising beyond 3 percent, we have yet another headwind for risk assets.

Perhaps most importantly for US equity indices, these higher rates are calling into question the leadership of the big tech platform companies-the stocks that may have benefited from the QE era of negative real interest rates more than any area of the market. When capital is free, growth is scarce, and the discount rate is negative in real terms, market participants reward business models that can use that capital to grow. Dividends and returns on that capital today are less important with the discount rate so low. But, with real interest rates rising toward 1 percent, that reward structure may be getting challenged…2018 will mark an important cyclical top for US and global equities, led by a deterioration in credit. Narrowness of breadth and a lack of leadership suggest that this topping process is in the works and will ultimately lead to a fully defensive posture in the market later this year”.

Fourth, rising interest rates are a problem. While in the short-term the economy, and the markets (due to momentum), can SEEM TO DEFY the laws of gravity, ultimately they act as a “brake” on economic activity. This is particularly an issue when tax cuts have boosted bottom line earnings per share for corporations, but higher rates, oil prices, and tariffs will begin to lessen that benefit. This not only applies to corporations, but to already cash-strapped consumers which have seen their tax cut vanish through higher health care, food and energy costs.

Fifth, It is important to remember that US markets are not an “island.” What happens in global financial markets will ultimately impact the U.S. The chart below shows the S&P 500 as compared to the MSCI Emerging Markets and Developed International indices. I have highlighted previous peaks and subsequent bear markets as noted by the sell signals in the lower panel. Currently, the weakness in the international markets is being dismissed by investors, but it most likely should not be.

Lack Of Low Hanging Fruit

As we head into the “seasonally weak” period of the year, it may well provide an opportunity for more seasoned and tactical traders. However, for longer-term investors, like me, there is a lack of “low hanging fruit” to harvest particularly given the current backdrop.

The failure of the markets to rally on Monday continues to reinforce the overhead resistance. As shown below, with confirmed weekly “sell” signals in place, it has historically been a good idea to be a bit more “risk adverse.”  More importantly, the market currently remains below its previous bullish trend line, and moving averages, which keeps downward pressure on asset prices currently.

With price action still confirming relative weakness, and the recent rally primarily focused in the largest capitalization based companies, the action remains more reminiscent of a market topping process than the beginning of a new leg of the bull market. As shown in the last chart below, the current “topping process,” when combined with underlying “sell signals,” is very different than the action witnessed in 2011 or 2015. (I will argue the decline that began in 2015 would have likely been substantially larger had it not been for global coordinated Central Bank interventions.)

While I am not suggesting that the market is on the precipice of the next “financial crisis,” I am suggesting that the current market dynamics are not as stable as they were following the correction in 2011 or in 2015. This is particularly the case given the threat of a “tightening” of monetary policy.

The challenge for investors over the next several months will be the navigation of the “seasonally weak” period of the year against a backdrop of warning signals. Importantly, while the “always bullish” media tends to dismiss warning signs as “just being bearish,” historically such unheeded warnings have been detrimental. It is my suspicion this time will likely not be much different.

via RSS https://ift.tt/2Fxu2Ux Tyler Durden

Not that there was much doubt who was behind it, but two days after “enemy” warplanes attacked a Syrian military base near Hama on Sunday, killing at least 11 Iranians and dozens of others, and nobody had yet “claimed responsibility” the attack, US officials told NBC that it was indeed Israeli F-15 fighter jets that struck the base, NBC News reported.

Wow! Video of a huge explosion just now in #Salhab in #Hama, reasons still unknown pic.twitter.com/AfWYRAzosT

— Danny Makki (@Dannymakkisyria) April 29, 2018

Ominously, the officials said Israel appears to be preparing for open warfare with Iran and is seeking U.S. help and support.

“On the list of the potentials for most likely live hostility around the world, the battle between Israel and Iran in Syria is at the top of the list right now,” said one senior U.S. official.

The tree US officials told NBC that Israeli F-15s hit Hama after Iran delivered weapons to a base that houses Iran’s 47th Brigade, including surface-to-air missiles. In addition to killing two dozen troops, including officers, the strike wounded three dozen others. The report adds that the U.S. officials believe the shipments are intended for Iranian ground forces that would attack Israel.

Meanwhile, as we reported yesterday, the Syrian army said early on Monday that “enemy” rockets struck military bases belonging to Syrian President Bashar Assad’s regime. According to several outlets, the strikes targeted the 47th Brigade base in the southern Hama district, a military facility in northwestern Hama and a facility north of the Aleppo International Airport.

Meanwhile, Defense Minister Avigdor Lieberman said on Tuesday that Israel on Tuesday morning had four problems, one more than the day before: “Iran, Iran, Iran and hypocrisy.” The comment came one day after Israel PM Benjamin Netanyahu “revealed” a cache of documents the Mossad stole from Iran detailing the country’s nuclear program, which however critics said were i) old and ii) not indicative of Iran’s current plans.

“This is the same Iran that cracks down on freedom of expression and on minorities. The same Iran that tried to develop nuclear weapons and entered the [nuclear] deal for economic benefits,” Lieberman said.

“The same Iran is trying to hide its weapons while everyone ignores it. The state of Israel cannot ignore Iran’s threats, Iran, whose senior officials promise to wipe out Israel,” he said. “They are trying to harm us, and we’ll have a response.

Iran’s Defense Minister Amir Khatami threatened Israel on Tuesday, saying it should stop its “dangerous behavior” and vowing that the “Iranian response will be surprising and you will regret it.” Khatami’s remarks came Following Netanyahu’s speech which Khatami described as Israeli “provocative actions,” and two days after the strikes in Syria.

* * *

Meanwhile, in a potential hint at the upcoming conflict, Haaretz writes that two and a half weeks after the bombing in which seven members of Iran’s Revolutionary Guards were killed at the T4 base in Syria, Israel is bracing for an Iranian retaliation for the Syrian strikes (and if one isn’t forthcoming, well that’s what false flags are for).

As Haaretz writes, the Iranians’ response, despite their frequent threats of revenge, is being postponed, screwing up Iran’s war planning. It’s also possible that as time passes, Tehran is becoming more aware of the possible complex consequences of any action. Still, the working assumption of Israeli defense officials remains that such a response is highly probable.

The Iranians appear to have many options. Revenge could come on the Syrian border, from the Lebanese border via Hezbollah, directly from Iran by the launch of long-range missiles, or against an Israeli target abroad. In past decades Iran and Hezbollah took part, separately and together, in two attacks in Argentina, a suicide attack in Bulgaria and attempts to strike at Israeli diplomats and tourists in countries including India, Thailand and Azerbaijan.

In any case, Lebanon seems all but out of bounds until the country’s May 6 parliamentary elections, and amid Hezbollah’s fear of being portrayed as an Iranian puppet. The firing of missiles from Iran would exacerbate the claims about Tehran’s missile project a moment before a possible U.S. decision on May 12 to abandon the nuclear agreement. Also, a strike at a target far from the Middle East would require long preparation.

* * *

For now, an Israeli war with Iran in Syria is far from inevitable: the clash of intentions is clear: Iran is establishing itself militarily in Syria and Israel has declared that it will prevent that by force. The question, of course, is whether this unstable equilibrium will devolve into a lethal escalation, or if it will somehow be resolved through peaceful negotiation. Unfortunately, in the context of recent events, and the upcoming breakdown of the Iran nuclear deal, the former is looking like the most likely outcome.

via RSS https://ift.tt/2FycdVf Tyler Durden

Authored by Jan Bauer via SafeHaven.com,

The crypto market has been running on steroids, and like an adrenaline junkie, it risks seriously burning out or suffering a catastrophic heart attack.

In fact, the industry is evolving at such a breakneck speed that Morgan Stanley recently drew parallels between crypto and the Nasdaq prior to the Dotcom crash, saying the only difference is that the crypto market is evolving 15x faster.

Major Shakeout Looming

It’s a well-established fact that early-stage industries tend to be heavily fragmented before embarking on a consolidation phase as they mature. But things have been a lot more dramatic in cryptoland.

From just a few dozen cryptos a few years ago, the crypto industry now has a deluge of digital coins with the tally now approaching 2,000. 

The cryptocurrency industry is so heavily fragmented and littered with scams that a huge consolidation exercise is the only way to clean it up.

The DeadCoins websites lists nearly 800 cryptocurrencies that have been deceased, and the list keeps growing.

Explosive growth by ICOs gives you an idea of what is at stake here.

Through ICOs, startups design tokens which are sold in secondary markets via a crowdfunded model. All token sales are powered by blockchain technology. This novel fundraising mechanism has proven very popular, thanks to its key attractions including zero dilution for the owners, strong network effect and high returns. Indeed, ICOs are frequently oversubscribed and have already overtaken VCs as the preferred method for startups to raise equity.

Startups raised more than $5 billion through ICOs in 2017 by selling hundreds of coins in the digital bazaar, and industry experts see this ending in pain and tears for many investors.  

A worrying trend in the market is that a lot of money has been going into weak and unproven technologies that are likely to fail the test of time.

If you want to know how far investors are willing to go with their crypto investments, look no further than Dogecoin.

From 2013-2014, Dogecoin managed to carve a respectable niche in the crypto world as a currency mainly because rivals such as Bitcoin and Litecoin were considered serious assets. Every day, thousands of Dogecoins would zip around Reddit and Twitter. Dogecoin was able thrive for years despite receiving zero upgrades. That surprised even their founder, Jack Palmer.

With so much money being pumped into unproven cryptos, it might take years before self-regulation is able to weed out weak or worthless players.

Cloud Evolution Provides a Blueprint

The cloud industry gives you a good idea of how the crypto evolution might progress.

The cloud begun as a novel concept of remote server access. Once it achieved mainstream adoption, it sparked off an app-building mania very similar to the token mania we have been witnessing with ERC20 (Ethereum’s Token Standard Interface).

But once the cloud ecosystem became flooded with apps and tools, larger platforms created huge networks of native applications that enabled companies to adopt other successful tools via APIs.

Meanwhile, weaker technologies were gradually eclipsed while others were acquired by the titans.

Ethereum co-founder Vitalik Buterin has predicted that at least 90 percent of cryptocurrencies on built on the Ether blockchain will end up worthless. Another Ethereum co-founder, Charles Hoskinson, says the crypto market will first go through a  massive crash before proper consolidation begins in earnest.

via RSS https://ift.tt/2HEyEOJ Tyler Durden

First Deutsche, then BNP, and now it’s Goldman’s turn to pay the Fed a token fee for making billions in manipulating the FX market from 2008 to 2013.

The Department of Financial Service announced on Tuesday that Goldman had agreed to pay the Federal Reserve $54.75 million, and an identical fine to the New York financial regulator, to settle claims that the bank allowed its foreign exchange traders to wrongly share customer information with traders from other global banks and engage in questionable conduct.

Furthermore, it appears that Goldman was the latest bank to participate in infamous FX rigging “chatoorms” which its traders used to discuss their positions on currency trades away from regulatory scrutiny.

The violation announced today stems from an investigation by DFS determining that from 2008 to early 2013, Goldman engaged in unlawful, unsafe and unsound conduct by failing to implement effective controls over its foreign exchange business.

Oddly enough, these years roughly coincide with Tom Stolper’s reign as Goldman’s undisputed “FX Gartman” when it comes to trading recommendations as regular readers will recall. 

“The firm failed to detect and address its traders’ use of electronic chatrooms to communicate with competitors about trading positions,” the Fed said in a statement. The Fed said it was taking the action with the New York Department of Financial Services (NYDFS). Separately on Tuesday, Bloomberg reported that Goldman agreed to match the Fed’s fine to resolve the same allegations.

Having been caught manipulating the FX market, Goldman promised to do better and will “enhance internal controls and risk management” under the consent order. Translation: the rigging will continue, only this time no more chat rooms.

Full DFS press release below:

DFS FINES GOLDMAN SACHS $54.75 MILLION FOR UNSAFE AND UNSOUND CONDUCT IN ITS FOREIGN EXCHANGE TRADING BUSINESS

• Goldman Traders Improperly Shared Customer Information with Traders from Other Global Banks and Engaged in Questionable Conduct to Improperly Affect Foreign Exchange Prices
• Goldman Also Failed to Implement Effective Controls Over Its Foreign Exchange Business
• The Bank Will Submit to DFS Plans for Enhanced Internal Controls and Risk Management

Financial Services Superintendent Maria T. Vullo today announced that Goldman Sachs Group Inc., parent company of Goldman Sachs Bank USA, agreed to pay a $54,750,000 fine as part of a consent order with the New York State Department of Financial Services (DFS) for violating New York banking law, including improperly sharing customer information with other global banks, and other unlawful conduct that disadvantaged customers and potentially affected foreign exchange prices.  The violation announced today stems from an investigation by DFS determining that from 2008 to early 2013, Goldman engaged in unlawful, unsafe and unsound conduct by failing to implement effective controls over its foreign exchange business.  As part of the consent order, Goldman will submit to DFS written plans for enhanced internal controls and compliance risk management. DFS coordinated its enforcement action with the Federal Reserve Board and appreciates the Board’s cooperation.

“DFS’s investigation revealed that Certain Goldman traders exploited the company’s ineffective oversight of its foreign exchange business by improperly sharing customer information, which allowed the bank’s foreign exchange traders and others to violate New York State law over the course of several years,” said Superintendent Vullo.  “DFS recognizes the steps taken by the company to ensure compliance with applicable laws, in entering into today’s consent order and to the agreed reforms.”

The DFS investigation found that from 2008 to early 2013, Goldman foreign exchange traders participated in multi-party electronic chat rooms, where traders, sometimes using code names to discreetly share confidential customer information, discussed potentially coordinating trading activity and other efforts that could improperly affect currency prices or disadvantage customers.  This improper activity sought to enable banks and the involved traders to achieve higher profits from execution of foreign exchange trades, sometimes at customers’ expense.

The traders engaged in this improper activity despite both outside guidance and internal policies designed to prevent improper trading practices.  For example, Goldman Sachs had specific policies addressing its foreign exchange business in place as early as 2001, and which evolved over time.  However, escalation of compliance concerns did not always occur as required, allowing potentially improper trading activity to continue.

Although a senior member of Goldman Sachs’ Global Foreign Exchange Sales Division raised concerns about the sharing of customer information, there is no evidence the supervisor took any steps to escalate to Goldman Sachs’ compliance function any of these serious concerns.

Under the consent order, Goldman will submit to DFS:

• An enhanced written internal controls and compliance program acceptable to the Department to comply with applicable New York State and federal laws and regulations with respect to the bank’s foreign exchange trading business as it affects or pertains to the Bank or New York customers;
• A written plan acceptable to the Department to improve the bank’s compliance risk management program with regard to compliance by the bank with applicable New York and federal laws and regulations with respect to its foreign exchange business as it affects or pertains to the bank or New York customers; and
• An enhanced written internal audit program acceptable to the Department with respect to the Bank’s compliance with applicable New York and federal laws and regulations, as well as the Bank’s internal policies and procedures, in its foreign exchange trading business as it affects or pertains to the bank or New York customers.

via RSS https://ift.tt/2rd2MFW Tyler Durden

Facebook is sliding lower today, back to earnings night levels, after announcing the implementation of a ‘Clear History’ feature will allow users to delete information from their accounts and to turn off Facebook’s ability to store information associated with accounts going forward.

Via By Erin Egan, VP and Chief Privacy Officer

Getting Feedback On New Tools to Protect People’s Privacy

The past several weeks have made clear that people want more information about how Facebook works and the controls they have over their information. And today at F8 we’re sharing some of the first steps we’re taking to better protect people’s privacy.

We’re starting with a feature that addresses feedback we’ve heard consistently from people who use Facebook, privacy advocates and regulators: everyone should have more information and control over the data Facebook receives from other websites and apps that use our services.

Today, we’re announcing plans to build Clear History. This feature will enable you to see the websites and apps that send us information when you use them, delete this information from your account, and turn off our ability to store it associated with your account going forward. Apps and websites that use features such as the Like button or Facebook Analytics send us information to make their content and ads better. We also use this information to make your experience on Facebook better.

If you clear your history or use the new setting, we’ll remove identifying information so a history of the websites and apps you’ve used won’t be associated with your account. We’ll still provide apps and websites with aggregated analytics – for example, we can build reports when we’re sent this information so we can tell developer if their apps are more popular with men or women in a certain age group. We can do this without storing the information in a way that’s associated with your account, and as always, we don’t tell advertisers who you are.

It will take a few months to build Clear History. We’ll work with privacy advocates, academics, policymakers and regulators to get their input on our approach, including how we plan to remove identifying information and the rare cases where we need information for security purposes. We’ve already started a series of roundtables in cities around the world, and heard specific demands for controls like these at a session we held at our headquarters two weeks ago. We’re looking forward to doing more.

CEO Zuckerberg added that “This is an example of the kind of control we think you should have,”

In your web browser, you have a simple way to clear your cookies and history. The idea is a lot of sites need cookies to work, but you should still be able to flush your history whenever you want. We’re building a version of this for Facebook too. It will be a simple control to clear your browsing history on Facebook — what you’ve clicked on, websites you’ve visited, and so on.

We’re starting with something a lot of people have asked about recently: the information we see from websites and apps that use Facebook’s ads and analytics tools.

Once we roll out this update, you’ll be able to see information about the apps and websites you’ve interacted with, and you’ll be able to clear this information from your account. You’ll even be able to turn off having this information stored with your account.

To be clear, when you clear your cookies in your browser, it can make parts of your experience worse. You may have to sign back in to every website, and you may have to reconfigure things. The same will be true here. Your Facebook won’t be as good while it relearns your preferences.

But after going through our systems, this is an example of the kind of control we think you should have. It’s something privacy advocates have been asking for — and we will work with them to make sure we get it right.

One thing I learned from my experience testifying in Congress is that I didn’t have clear enough answers to some of the questions about data. We’re working to make sure these controls are clear, and we will have more to come soon.

For now the market is not impressed…

However, while Zuck and his crew attempt to recover from the exposure of their entire business model for what it is, NY Times reports that Facebook’s privacy changes have left developers steaming…

“Facebook threw us under the bus,” said Federico Treu, Cubeyou’s chief executive, who added that he intended to boycott a Facebook event for developers this week.

“Facebook became what it was because of us developers. Now they want to blame us for everything that has happened to them.”

…

Facebook’s relationship with its vast community of developers has reached a tense moment once more. Since news broke in late March that the political consulting firm Cambridge Analytica had improperly harvested the information of millions of Facebook users, the social network has made a series of changes to limit how much of its users’ information can be obtained by third parties. Those shifts have had an unintended domino effect on many of the companies and programmers that relied on Facebook’s spigot of data for their businesses.

Some, like Cubeyou, said they have been unfairly blocked from accessing Facebook users. Tinder, the dating app, discovered that its users were no longer able to log into the app using their Facebook accounts. Pod, a calendar syncing app, found that its users could no longer see Facebook events within their calendars. And Job Fusion, a jobs app that allowed users to see where their Facebook friends worked, announced that it was not longer able to offer its services within Facebook.

The fallout has cast a shadow over Facebook’s annual meeting with developers, which was scheduled to start today in San Jose, Calif.

The reference to “Clear History” – the movie that poked fun at tech firms from Tesla to Facebook – is not lost on us with the new FB feature…

via RSS https://ift.tt/2jlDWA5 Tyler Durden

One week ago we warned that a major USD short squeeze is taking place, and that it has the potential to get much worse for dollar bears. Today, Nomura’s X-asset guru Charlie Mcelligott explains that, in his view, the reason why the dollar has so dramatically reversed direction in the past two weeks, in the process recoupling with rate differentials, is because the “fake narrative” of “synchronized global growth” is finally over, and with it, the “hawkish central bank pivot” thesis is breaking-down as well

More, as excerpted in his latest note below:

DOLLAR BREAKS-OUT, AS RECOUPLING WITH RATE DIFFS BLEEDING LEGACY MACRO POSITIONING

• Heard this one before?  DXY through 200DMA overnight is escalating the “performance bleed” from consensual macro positioning with implicit “short USD” components
• With the “synchronized global growth” narrative now being capitulated against, the Dollar has recoupled with rates differentials, as US is again viewed as the world’s leading growth-story
• In conjunction with R.O.W.’s “slower growth” trend, we have seen the “hawkish central bank pivot” thesis break-down as well—BoC, BoE, BoJ are collectively “regressing” with increasingly “dovish” rhetoric, while PBoC takes outright “easing”- / stimulus- actions
• Nomura Quant Strategies CTA model showing the “Dollar reversal” phenomenon in “real-time,” as WoW we see “short USD” positioning expressions beginning to reverse / pivot in not just FX but Equities and Commodities as well
• EM equities longs then in a dangerous position, as TFF data shows the Asset Manager “net long” position @ +2.5 z-scores, while Leveraged funds too remain high @ +0.8 z-scores
• Despite Dollar’s move, “long Crude” trade continues to hold via geopol w/ Iran decertification looking certain…yet is largely “priced-in” as a “known unknown”
• Crude holding higher is critical for the larger “bearish rates” / “re-inflation” themes
• On top of Crude “fatiguing” here, fixed-income “bears” seeing additional near-term / tactical “reversal” risks as well:
  • US Treasury’s quarterly refunding statement out last night showed a monster reduction in financing needs to “just” $75B from the original Jan est of $176B (!) as cash balances came in much higher than expected post taxes
  • The return of overseas demand for USTs, not just from ‘unhedged’ buyers (Japanese lifers recent investment plan releases) but also the future potential to see ‘hedged’ buyers return IF USD were to further rally going-forward (not just yet though), as the ‘punitive’ cost of xccy decreases, allowing attractive relative yields to dictate purchases
• Reiterating best “USD upside break-out” hedges: EEM / MESA PS, Nikkei CS (note: the EURUSD PS has already ‘realized’)
• Despite lower SPX yesterday, many were surprised by the outperformance of “1Y Momentum” factor (+0.7%) and broad HF L/S (-0.1%) vs SPX -0.8% / NDX -0.8% / RTY -0.9% / RIY -0.8%
• Not just the +++ forward seasonality I’ve been noting recently for “Momentum”- and “Buyback”- LONGS coming down the pipe in the months ahead—because yesterday was driven by the underperformance of “Momentum Shorts”
• “Momentum” SHORTS were pressed hard yesterday and contributed a massive +1.2% from a market-neutral perspective (vs “1Y Momentum Longs” -0.5%)
• As a reminder, the month of May can continue to “chop,” but the massive (negative) seasonal for “Momentum Shorts” that begins in earnest starting in June and running through September sees an average -3.7% drawdown (“positive” contribution from short book) since 1984 / -4.9% average return since ’00 / -3.8% median return since ‘00

DOLLAR RALLY HAVING MAJOR CROSS-ASSET IMPACTS:

New day, same story: the USD break-out is further accelerating, with the DXY taking-out its 200DMA to the upside overnight, stronger against all G10 and the entire EM universe tracked by Bloomberg.  

Feel free to punch me, but I’ll say it again—consensual macro longs accumulated over the past year + period under the “weak USD” regime (as DXY traded -14.2% between Dec ’16 and Feb ’18 despite ongoing Fed hikes) in the form of “longs” in Euro, Yen, EM Eq / EMFX, Nasdaq, Crude, Gold, Industrial Metals are all at various and diverse stages of “adjusting” to this new Dollar dynamic. 

The issue is the same I’ve noted in prior weeks–the “synchronized global growth” narrative is now being capitulated against, and as such, the Dollar has recoupled with rates differentials because the US is again viewed as the world’s leading growth-story.  The flipside of this of course is the “slowing growth” trend in rest-of-world too has driven the resumption of the widening in rates differentials.  

EU/US REAL YIELDS DIFFERENTIALS AND EUR:

With the obviously slowing R.O.W. growth trend, the “hawkish central bank pivot” thesis is breaking-down as well: the BoC, BoE, BoJ are collectively “regressing” with increasingly “dovish” rhetoric, while the PBoC has recently taken outright “easing”- (RRR cuts) / stimulus- (tax cuts) action.

We continue to see this USD-positioning reversal develop “real-time” in the Nomura Quant Strategies CTA model, where the move higher in Dollar is having meaningful WoW impacts across macro-trend positions:

Gold from “max long” through “neutral” and now -10% “short” WoW

• EURUSD “max long” cut to +71%
• USDJPY “max short” cut to -71%
• USDSEK pivots to “max long” from -12% “short” last week
• USDCHF to “max long” from “neutral” last week
• Nikkei and Hang Seng “longs” jump from +33% to +62%
• Eurostoxx “max short” now being covered
• FTSE and CAC now both to “max long” from just +33% prior
• Copper now just +27% “long” from +43% last week
• Zinc now -10% “short” from +43% “long”

CRUDE/RATES

Despite the U.S. Dollar’s move, the “long Crude” trade continues to hold via geopolitics, w/ Iran decertification now looking utterly-certain after yesterday’s public dismemberment of Iran.  Yet, “decertification” of the Iran deal has already largely been “priced-in” as a “known unknown” over the past month +, with the Pompeo and Bolton additions to POTUS’ admin as well as the seemingly choreographed Trump tweet on OPEC and oil prices, which looked like a calculated effort to push the potential gas cost jump “blame” in front of Summer driving season elsewhere.  So is this ‘catalyst’ for Crude now tiring?

Today we are indeed seeing an almost “sell the news” in Crude on yesterday’s BiBi / Iran press conference, while the Dollar rally finally begins to hit as well.  A move lower in Crude is a very troubling dynamic for consensual macro positioning—both with regard to “bearish rates” and “re-inflation” themes.  To see the Dollar’s rally begin to crunch Crude is a problem if it were to gain ground.

Fixed-income bears are also seeing additional near-term tactical “reversal risks” as well after the recent run of weakness.  The US Treasury’s quarterly refunding statement out last night showed a massive reduction in Q2 financing needs to “just” $75B, which is down from the initial January Q2 estimate of $176B.  This estimate declined preciptiously as cash balances came in much higher than expected post taxes…and will again increase meaningfully in Q3…but some of that “deficit spending issuance” catalyst for the bears just lost its shine.

Another dynamic to keep an eye on going-forward will be the potential for a further USD squeeze to impact “hedged” buyers of USTs and possibly incentivize them to return to the mkt.  Recently with the release of Japanese Lifeco annual investment plans, we’ve seen numerous mentions that “unhedged” buyers are looking to increase their purchases of foreign bonds—obviously a (potentially) good sign for UST demand.

However, those investors who need to currency hedge their UST purchases have largely been absent from the UST market recently because of the punitive cost of said FX hedges (xccy) as the Dollar has been mired in its year + tailspin.  So despite the seeming optics of the rates differentials, the actual ‘take-home’ yield looks unattractive when adding back in the cost of the xccy, making EGBs and even JGB’s more attractive for respective foreign investors. 

Although currently we see USTs remaining still “unattractive” for these FX hedged investors, a sustained and further USD rally could stand to reverse this dynamic going-forward and in turn, create a new incremental buyer of USTs who has been absent from the market.  This is “one to watch.”

EQUITIES

Despite lower SPX yesterday, many were surprised by the outperformance of “1Y Momentum” factor (+0.7%) and thus, broad HF L/S (-0.1%), vs SPX -0.8% / NDX -0.8% / RTY -0.9% / RIY -0.8%.  This dynamic made the recent mentions of the +++ seasonality for “Momentum” (with the same for “Buybacks” as further ‘overlapping’ catalyst) look prescient.

But it’s not just the +++ forward seasonality I’ve been noting recently for “Momentum”- and “Buyback”- LONGS coming down the pipe in the months ahead—because yesterday was driven by the underperformance of “Momentum Shorts.” “Momentum” SHORTS were pressed hard yesterday and contributed a massive +1.2% from a market-neutral perspective (vs “1Y Momentum Longs” -0.5%).

As a reminder, the month of May can continue to “chop” for overall “Momentum” factor, but the massive (negative) seasonal for “Momentum Shorts” that begins in earnest starting in June and running through September sees an average -3.7% drawdown (“positive” contribution from short book) since 1984 / -4.9% average return since ’00 / -3.8% median return since ’00:

So the next logical question becomes “what currently screen as “1Y Momentum Shorts”?  Ask and ye shall receive…

Clearly, the “Energy” side of this “Momentum Short” seasonality trade (as well as the aforementioned Crude / re-inflation dynamic) stands in contrast to my larger “cyclical melt-up” thesis.  This is a real ‘short-term’ concern—HOWEVER, I do believe that ongoing trajectory of CPI / PPI / Prices Paid / Prices Received impact is having on future inflation expectations will continue in the medium-term and ‘win out’ vs this tactical seasonality ‘risk’ to the ongoing rally in inflation sensitive assets / plays / proxies.

via RSS https://ift.tt/2HGJMX9 Tyler Durden