Tag: finance

If one is a central bank – such as the SNB and BOJ – life is easy: you just print as much money as you need out of thin air, and buy whatever you want, without regard for price. For those who are not central banks, having access to unlimited borrowed money may be the next best thing.

It now appears that the millennial-targeting brokerage Robinhood, which offers its users “free” online trades in exchange for quietly selling their orderflow to frontrunning HFTs, has a “glitch” that affords its users to experience just what being a central bank means, by allowing users to trade stocks with virtually infinite leverage, giving them access to what amounts to free money.

First discussed on Reddit’s WallStreetBets forum, the bug was called the “infinite money cheat code.”

As summarized by Bloomberg, here’s how the trade works: “Users of Robinhood Gold are selling covered calls using money borrowed from Robinhood. Nothing wrong with that. The problem arises when Robinhood incorrectly adds the value of those calls to the user’s own capital. And that means that the more money a user borrows, the more money Robinhood will lend them for future trading.”

In short, a feedback loop where the more one borrows, the more one can borrow. One can imagine how it ends.

In one case it ended when a user converted a $4,000 position into $1+ million in equity.

Another trader managed to turn his $2,000 deposit into $50,000 worth of purchasing power, which he used to buy Apple puts. Naturally, he then lost that money and posted a video of the wipe-out on YouTube.

When contacted by Bloomberg, Robinhood said it was “aware of the isolated situations and communicating directly with customers,” spokesperson Lavinia Chirico said in an email response to questions. Meanwhile, Reddit users had their own “version” of the official statement.

Robinhood Gold customers of the Menlo Park-based company are invited to “supercharge” their investing by paying $5 a month to trade on margin, or money borrowed from the company. In return, they get access to virtually unlimited funds.

Speaking to Bloomberg, Donald Langevoort, a law professor at Georgetown University, said that traders using the “infinite leverage” bug to supercharge their wagers could be held liable for the money and guilty of securities fraud: “If there’s an element of deceit, that you got this by exploiting a loophole in a system, I can see how that could become a securities fraud case,” Langevoort said. “The other possibility is just the basic common law of restitution. If you take advantage of someone’s mistake to line your own pockets, you need to pay them back.”

The question, of course, is how is it fraud if traders are merely taking advantage of a glitch that has been handed to them on a silver platter by the firm itself.

Ironically, in a world where 97% of retail traders end up losing money in the long run, giving them unlimited funds to lose means that Robinhood should probably change its name, as not only does it take from the poor and give to the rich, but it is now doing so at an infinite scale.

Update (1200ET): It appears Uber’s outlandish new target of achieving profitability by 2021 may have pleased desperate analysts but it did nothing for shareholders who have puked the ride-sharing app’s shares down 9% to a new record low.

From the immediate post-IPO highs of $47.65, Uber is now down 40%.

*  *  *

One quarter after Uber tumbled following its first report as a public company, Uber is plunging again, down 5%, after reporting a bigger than expected net loss.

For the third quarter, despite net revenue rising 23% Q/Q to $3.53 billion, and better than the estimated $3.39 billion, Uber reported a 3Q loss per share of 68c, bigger than the estimated loss of 63c, translating to a net loss of $1.162BN, 18% worse than the $986MM a year ago, if modestly better than the $1.45 billion expected.

Looking at the breakdown of the topline, Uber reported the following Q3 numbers:

• Gross Bookings $16.47 billion, up 29% Y/Y, and missing estimates of $16.70 billion. This is said to be the main reason why the stock is hurting after hours.

• Uber Eats bookings $3.66 billion, +8% Q/Q, up 73% Y/Y, and also below the estimate of $3.89 billion; in the aftermath of the recent disastrous earnings from GrubHub, investors will be especially worried about this business line.

• Ridesharing bookings $12.55 billion, +3% Q/Q, up 20% Y/Y, and slightly above the estimate of $12.51 billion

Looking ahead, Uber provided a glimmer of hope that the cash burn may moderate and the company “improved” its full year Adjusted EBITDA guidance by $250 million to a loss of $2.8-2.9 billion, from $2.9-$3.0 billion previously.

Alas, as Gene Munster of Loup Ventures writes, “The market doesn’t believe their full-year 2021 profitability timeline (which is slightly ahead of Lyft’s, expected Q4 2021). Results suggest, consistent with Lyft’s comments, that the promotional environment that harms both companies is becoming more rational.”

However, the biggest concern is that despite the sizable improvement in revenue, the company’s adjusted Ebitda loss of $585 million was still staggering, and while it was a modest 11% improvement quarterly, and better than the estimated EBITDA loss of $805.1 million, it was still 28% greater compared to a year ago.

Said otherwise, Uber is forced to provide even more subsidies to its drivers than in previous quarters, which means that even as revenue grows, losses refuse to turn to profits, as shown in the chart below which demonstrates just how sticky negative EBITDA has become. In short, the business refuses to scale.

And while Rides EBITDA was modestly better, the cash burn at Eats soared by 67%, from $189 to $316MM, as did the corporate overhead allocation, confirming that the Eats division is a major cash drain.

As Bloomberg summarizes, “Eats bookings, gross bookings and monthly active users were all below estimates” and while financial discipline is beginning to assert itself, “investors want those forward-looking estimates to keep going strong.” Alas, so far they are not. And as a result, the stock tumbled as much as 7.5% after hours before recovering some losses.

Which brings us to the right question as the stock tumbles just shy of its post-IPO low: when will the analysts covering the company shift from Buy to, well, reality.

Do any of them think it’s a sell now? pic.twitter.com/nztNWrkflZ

— Hipster (@Hipster_Trader) November 4, 2019

A 74-year-old spy who made headlines last year for infiltrating the 2016 Trump campaign was the source of disinformation that made its way to the Washington Post‘s David Ignatius regarding former National Security Adviser Michael Flynn, according to The Federalist.

Stefan Halper, who was paid over $1 million by the Obama administration – was enlisted by the FBI to befriend and spy on three members of the Trump campaign during the 2016 US election.

And according to a recent court filing by Flynn’s attorney, Sidney Powell, Halper, the CIA, the FBI, and a Defense official used Russian-born academic Svetlana Lokhova to smear Flynn by feeding Ignatius information suggesting she was a Russian honeypot.

38-year-old Svetlana Lokhova met Flynn at the February 2014 Cambridge dinner organized by Sir Richard Dearlove – a former head of MI6 who was launching an organization called the Cambridge Security Initiative, according to the BBC. Also part of the organizing group was Halper.

“General Flynn was the guest of honor and he sat on one side of the table in the middle. I sat on the opposite side of the table to Flynn next to Richard Dearlove because I was the only woman at dinner, and it’s a British custom that the only woman gets to sit next to the host,” Lokhova told Fox News, who added that she has never been alone with Flynn. On the contrary, the unplanned encounter was professional and mildly productive. 

Ignatius, meanwhile, has somewhat of a reputation for being a favored media mouthpiece for the ‘deep state’.

When @IgnatiusPost speaks, Langley’s 7th floor lips are moving. Zero disrespect, just a fact.

They are taking traitor Trump out now.

— John Schindler (@20committee) January 13, 2017

Via The Federalist:

In last week’s court filing, Powell highlighted how the CIA, FBI, Halper, and possibly James Baker used the unnamed and unaware Lokhova and the complicit Ignatius to destroy Flynn. This James Baker is not the one who worked under James Comey at the FBI, but a James Baker in the Department of Defense Office of National Assessment.

Powell wrote:

Stefan Halper is a known long-time operative for the CIA/FBI. He was paid exorbitant sums by the FBI/CIA/DOD through the Department of Defense Department’s Office of Net Assessment in 2016. His tasks seem to have included slandering Mr. Flynn with accusations of having an affair with a young professor (a British national of Russian descent) Flynn met at an official dinner at Cambridge University when he was head of DIA in 2014. Flynn has requested the records of Col. James Baker because he was Halper’s ‘handler’ in the Office of Net Assessment in the Pentagon, and ONA Director Baker regularly lunched with Washington Post Reporter David Ignatius. Baker is believed to be the person who illegally leaked the transcript of Mr. Flynn’s calls to Ignatius. The defense has requested the phone records of James Clapper to confirm his contacts with Washington Post reporter Ignatius—especially on January 10, 2017, when Clapper told Ignatius in words to the effect of ‘take the kill shot on Flynn.’ It cannot escape mention that the press has long had transcripts of the Kislyak calls that the government has denied to the defense.

Lokhova has known of Halper’s role in targeting Flynn since Halper was outed as a CIA and FBI informant in May 2018. She then sued Halper and several media outlets for defamation after they falsely repeated Halper’s lies that she was a Russian spy engaged in an intrigue with Flynn.

***

Lokhova detailed the smear campaign in April, suing Halper and several media outlets for defamation. She also detailed what happened in a massive Twitter thread which you can read by clicking one of the tweets below:

They have ‘interesting’ friends and sources. (2) pic.twitter.com/u9BQX9z25D

— Svetlana Lokhova (@RealSLokhova) April 7, 2019

Meanwhile, read the rest of The Federalist‘s report here.

At roughly the same time that China’s Xi Jinping was vowing to “open doors wider” to foreign firms, something he has done on countless times before but this time may really mean it as China desperately needs foreign capital now that its current account is finally set to drop below zero, the PBOC – which had stubbornly refused to follow the Fed’s rate cuts – unexpectedly cut the 1-year Medium-term Lending Facility (MLF) rate by a modest 5bp, the first such cut since February 2016…

… a move that as Goldman put it “surprised the market” even though the impact on liquidity “is roughly neutral”, which one would expect for such a modest cut.

As SocGen notes, this was the very first policy (interest) rate cut in this cycle. The cut, though small in magnitude, sends several big messages:

1. China’s central bank can see through supply-driven inflation if the economy needs help,
2. the cut is focused squarely on improving policy transmission and easing credit conditions for the real economy, but
3. the PBoC still has no appetite for aggressive easing

The cut prompted speculation that a cut could soon follow for China’s “new Libor” rate, i.e., the loan prime rate (LPR) which has been the major focus of the PBOC, even though, as Goldman concedes, short-term rates may have limited further downside in the near term.

Some more observations on today’s surprise cut via Goldman:

The PBOC lowered the 1-year MLF interest rate by a modest 5bp (the last time the PBOC adjusted MLF rates was in April 2018, raising the rates by 5bp). This actually surprised the market, as PBOC did not conduct targeted MLF in Q3 for the first time this year (typically it happens in the following month after each quarter ends) and left MLF rates unchanged recently.

The rate cut followed two weeks after the PBOC’s largest 3-day net repo injection since January.

However, as we noted in “China Just Injected The Most Liquidity Since January… And It’s Not Enough“, the injection failed to put a dent on repo rates, which had been trending up since late August.

As such, the MLP cut was somewhat telegraphed, even though once again the impact on systemwide liquidity was roughly neutral, with today’s CNY400BN MLF operation rolling over the matured loans of CNY403.5BN.

According to strategists, the main rationale for today’s cut is to guide LPR lower. As we pointed out on Oct 22, the response of effective lending rates to monetary policy in China has been surprisingly mild, due to factors such as lack of benchmark lending rates, higher risk aversion of banks and capital constraint. Furthermore, as we noted in August, one of the major measures taken by PBOC to improve monetary policy transmission was LPR reform, with Beijing encouraging banks to use LPR as the new benchmark rates. As such, Goldman wrotes, “if the PBOC can guide the LPR further down, this could be more effective in lowering funding costs than reducing the repo rate further.”

That said, the MLF rate is just one factor determining the LPR; other factors such as banks’ financing costs and risk premium also matter. For instance, the RRR cut in September, which lowered banks’ financing costs, was one factor behind the lower 1-year LPR (MLF rates had been unchanged). But the LPR was unchanged in October, as there was no major RRR cut, and repo rates even rose on average.

As such, today’s cut in MLF rate could help guide LPR lower as it indicates that the PBOC is concerned about liquidity, though the impact of this single cut on effective lending rate could be pretty limited. There would be another two batches of MLF to expire in December (4th and 16th), and as such the PBOC may lower the MLF rate by another 5-10bps to full impact the LPR. Finally, Goldman – which expects another 50bps in RRR cuts this year – notes that the PBOC could also continue to cut the RRR to release low-cost funding for banks, especially if China’s GDP dips ominously below 6%.

SocGen proposes an alternative explanation for today’s surprise cut: namely the PBOC is using it to slip in one easing move before the hurdles to easing rise significantly higher, i.e. over the next few months, as the headline CPI will likely surge further – possibly towards 6% – given the record pork supply shortage. And if the US and China manage to reach a “phase one” deal and the business sentiment stabilizes as a result, pauses on further RRR and rate cuts seem likely until CPI is able to resume a downward trend (expected in late 1Q20).

Pause or not, neither bank sees any chance of monetary tightening by the PBOC given the ongoing economic contraction, and the PBoC probably also intended for the surprise rate cut to dispel any lingering tightening scare, especially in light of the recent surge in bank failures and corporate defaults.

As the market prices out a dovish Fed, bonds and bullion have puked all the post-Powell gains as stocks melt-up continues…

The market is now pricing in just one rate-cut until the end of 2020…

Source: Bloomberg

And that has sparked panic-selling in gold…

And it’s not just gold, bond prices have plunged back below Powell lows…

Because investors seem convinced The Fed is done with its dovishness? Because it will just keep printing money every day to solve the ‘transitory’ liquidity issues?

Bitcoin Futures flash-crashed this morning – plunging $1000 in seconds on massive volume…

Source: Bloomberg

For Twitter analyst lowstrife meanwhile, the behavior was a “good example” of market manipulation.

“If you look at my original tweet, all the volume printed before the actual dump. But on the 1 minute chart it looks like it was part of the entire move. This is called painting the tape,” the account wrote.

The crash filled the gap to $8500 from last week…

Source: Bloomberg

“I cannot believe how crazy trading BTCUSD on the short term is right now. The gap on the CME has filled already. It’s thinly traded yes. But man, I’m highly suspicious of the price action across all the exchanges of late, more so than usual,” one trader summarized.

But spot bitcoin was far less affected…

Source: Bloomberg

And this just renews fears over broader manipulation, as CoinTelegraph’s Marie Huillet notes, researchers have escalated their claims about market manipulation in winter 2017, now claiming that a single whale was responsible for Bitcoin’s historic price surge. The development was reported by Bloomberg on Nov. 4.

image courtesy of CoinTelegraph

John M. Griffin and Amin Shams – of the universities of Texas and Ohio respectively – have updated their previous research, which made the case that market misconduct was allegedly behind Bitcoin’s bull run to an all-time high of $20,000 in December 2017. 

“Clairvoyant market timing” or manipulation

Griffin and Sham’s analysis, first published in a research paper in June 2018, had argued that transaction patterns on the blockchain suggested Tether had been used to provide price support and manipulate the Bitcoin market:

“Purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. The flow is attributable to one entity, clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests insufficient Tether reserves before month-ends.”

Rather than indicating demand from cash investors, they argued that these patterns aligned with a “supply-based hypothesis of unbacked digital money inflating cryptocurrency prices.” 

In an update to their previous research, the academics are intensifying their argument, which is set to be formally published in a forthcoming peer-reviewed paper for the Journal of Finance. 

They reportedly argue that an analysis of Tether and Bitcoin transactions from March 1, 2017 through March 31, 2018 consolidates their view that a single entity — transacting via Tether’s sister firm, crypto exchange Bitfinex — is behind the manipulation:

“This pattern is only present in periods following printing of Tether, driven by a single large account holder, and not observed by other exchanges.”

The academics continue to claim that:

“Simulations show that these patterns are highly unlikely to be due to chance. This one large player or entity either exhibited clairvoyant market timing or exerted an extremely large price impact on Bitcoin that is not observed in aggregate flows from other smaller traders.”

Bitfinex rebuffs allegations

Tether’s General Counsel Stuart Hoegner has rebuffed the academics’ claims, releasing a statement that their research is “foundationally flawed” and derives from an insufficient data set. 

He has further alleged that the research was motivated to bolster a “parasitic lawsuit” against Tether, Bitfinex and the latter’s operator, iFinex.

Since Fed Chair Powell dropped his dovish ‘not hiking until inflation explodes’ comments at last week’s press conference, the long-end of the US Treasury curve has seen a massive round-trip.

Initially tumbling 20bps on the lower-for-longer-er comments, the last few days have seen that unwind entirely as trade optimism dominated sentiment.

Source: Bloomberg

Nomura’s MD of Cross-Asset Strategy, Charlie McElligott, notes that investors who had herded into “Long Worst Case Scenario, Short Good News’ positions are being hit with unwind-y flows, as the latest FT report that the US is set to drop or reduce tariffs ahead of the Phase 1 signing escalates the Global DM Bond selloff / bear-steepening.

The equity market is indeed pricing in a China trade deal…

Source: Bloomberg

McElligot further details that:

Global DM Bonds remain offered with curves continuing to (bear) steepen, as a number of tactical “reversal catalysts” have converged to lean-into the 2019 “Everything Duration” trade and caused knock-ons across thematic cross-asset “trend trades.”

For example…

Source: Bloomberg

Our much-discussed CTA model’s anticipation of pending SIGNAL “FLIP” TO SHORT (will go -29%) in both TY- and ED$- (ED4) positions remains firmly “in-place” and set to turn tomorrow, on account of the majority-loaded 3m window (now 64.7% weighted) turning outright “Short” and overriding the 1Y window, which not surprisingly remains “long” / trend-intact.

NOMURA QIX CTA MODEL’S “TY” SIGNAL SET TO “FLIP SHORT” IN T+1:

SAME WITH THE “ED$” MODEL IN T+1:

Further, McElligott notes that the flurry of heavy issuance this week across USTs, EGBs and US Corp IG is indeed piling-onto this dynamic, with yesterday seeing $11.825B from 10 issuers US High Grade alone and dealers estimating upwards of $95B of Corp IG paper across the month of November.

There too are central bank catalysts in the form of the ongoing BOJ efforts to steepen the JGB curve, as well as increasing “Fed Pause” narrative shift away from the heavily positioned “Fed cutting to Zero in a year” crowd

And finally, as noted above, the general “risk-ON” as the thematic dynamic I’ve been pointing towards as an “asymmetric positioning risk” plays-out.

Notably, any powerful blast of US yield curve bear-steepening typically spells pain for US Equities “Momentum” factor, which in-turn has meant broad “fundamental” manager performance pain – and that’s exactly what happened.

And if the momentum collapse relative to value is anything to go by, things could get a lot worse for “everything duration” holders…

Source: Bloomberg

Key point here from McElligott:

JUST LIKE this past September’s “Momentum Massacre” – is that this is a “crowding” issue is amongst FUNDAMENTAL managers and NOT a “QUANT” phenomenon (as many “blame” it to be) per se, as “pure” sector-TILTED “1Y Price Momentum” factor is -6.2% (proxy for fundamental manager crowding into the “Everything Duration” trade) over the past four sessions alone, underperforming the sector-NEUTRAL “1Y Momentum” factor (-4.4%) by a whopping 180bps over that short window.

In-fact, “QUANTS” have largely benefitted from this recent “Value” over “Growth” / “Min Vol” phenomenon since the start of September’s bond sell-off began, as “Value” remains a core tenet of traditional risk-premia multi-factor models.

For now, McElligott suggests the melt-up takes the S&P to 3100 – due to options strike weights…

But given the massive delta/gamma, what happens after that could be significant – and timed with a potential planned signing (or not) of a US-China trade deal.

Nomura Quant Strategy:

“The market’s expectations for a US-China trade agreement are becoming stronger with each passing day, and many investors seem to have come to the conclusion that they have no choice but to take on more risk“

Source: Bloomberg

Bloomberg notes that for some, the bond declines bear a resemblance to the market “tantrum” of 2015, when German borrowing costs soared after the European Central Bank indicated it wouldn’t cut rates further. Back then, the sell-off in bunds saw German rates soar from as low as 0.05% to around 1.06% in less than two months.

“It is starting to smell a bit like the sell-off in the spring of 2015, but it is actually easier to put some factors behind it this time,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S.

“Pricing is no longer for lower rates and momentum has shifted.”

Source: Bloomberg

The moves so far aren’t that extreme, but some market observers have suggested there are echoes. This time around, the Federal Reserve has played a similar role to the 2015-vintage ECB, signaling that it is taking a pause, while Australia’s central bank held rates Tuesday and Sweden’s Riksbank is determined to hike by the end of the year.

So, is it a breakout, or fake-out?

Authored by John Mauldin via MauldinEconomics.com,

Banks are a place where you store your cash, right? Not exactly.

When you deposit money in a checking or savings account, you aren’t just letting the bank hold it on your behalf. You are lending the bank that money and the bank is borrowing it.

That’s why deposits show as a liability on the bank’s balance sheet.

We think of banks as lenders, and they are, but they’re also borrowers. They make money by lending at higher rates than they pay as borrowers, and by leveraging their deposits via fractional reserves.

Modern Central Banking

This is obvious if you think about it.

How can your bank simultaneously a) promise you can withdraw your cash on demand and b) lend that same cash to someone else?

That’s possible only because they know only a few people will want their cash back on any given day. And if cash requirements are more than expected, they can borrow from other banks or the Federal Reserve, as needed.

Modern central banking and regulatory practices have practically eliminated the old-fashioned bank run. It still happens occasionally, but the system can absorb it.

That’s because, while depositors can withdraw cash from a given bank, it is hard to withdraw from the banking system. Even if you buy gold, the gold dealer will probably deposit your cash in their bank, leaving the system exactly where it was before.

The System Is Vulnerable

Now, the system can be shaken up if too many people decide to hold physical paper money, or they transfer deposit money into other instruments banks can’t leverage as easily.

Central bank reserve requirements also play a role. The banking system is far more elaborate than the most complicated Swiss watch but it just keeps on ticking… until it stops.

Something weird happened in September, for reasons that remain a little murky. The repurchase agreement or “repo” market seized up.

I’ll spare you a plumbing lesson; all you need to know is that repos are really, really important for overnight funding.

Without them, it’s very hard for banks, brokers, funds, and other market participants to square their books. Modern banking simply wouldn’t function and the system would shut down.

Now, this wasn’t a catastrophe. The Fed injected some liquidity and everything seems okay for now. The important part is that it shouldn’t have happened and worse, apparently no one saw it coming.

Shades of 2007–2008

We had a string of similar hiccups in 2007–2008. All were manageable but eventually they added up to something much worse. So, this wasn’t a good sign for market stability.

That’s the problem with unconventional monetary policy. It may solve your immediate problem but create bigger ones later, as French economist Frédéric Bastiat said. We now know the Fed’s 2017–2018 rate hikes, concurrent with the balance sheet reductions or “QT” (quantitative tightening), were probably too aggressive, as even the Fed now tacitly admits. I said at the time they were running a two-factor experiment with unpredictable results. Could we now be seeing them? And if so, are they over?

No one knows, but the Fed looks rattled. And a rattled Fed isn’t what we need.

*  *  *

I predict an unprecedented crisis that will lead to the biggest wipeout of wealth in history. And most investors are completely unaware of the pressure building right now. Learn more here.

Two months ago we concluded our analysis of the July Jolts by reminding readers that “JOLTS is 2 months delayed, so we wouldn’t be surprised if the next few months JOLTs is where the real ugliness lies.” That’s precisely what happened.

Just in case the last few declining payrolls reports weren’t sufficient to indicate that the US labor market is cooling rapidly, the latest JOLTS released today by the BLS confirmed that US workers are going through a decidedly rough patch, as the total number of job openings tumbled, and after last month’s 7.051 million total was revised sharply higher to 7.301 million, it tumbled again, sliding by 277K to 7.024 million, below the 7.063 million expected, and the lowest number in 17 months, since March 2018.

Yet even with the slowdown in job openings, there was still more than 1 million more job opening than unemployed workers; in fact there have now been more US job openings than unemployed workers for a record 19 consecutive months.

Unlike last month, though, when there was a modest decline in the rate of hires, in September the number of hires rebounded by 50K to 5.934 million, which still was modestly above where the payrolls implied number suggests:

The rebound in hiring, and the upward prior revision, meant that from an annual contraction, hiring once again levitated into expansion, rising by 4.7% in September, up from from a revised +1.0% increase in August.

Finally, in the latest indication of the slowing labor market, we saw the so-called “take this job and shove it” indicator – the total level of “quits” which shows worker confidence that they can leave their current job and find a better paying job elsewhere – drop for the second month in a row, and in September the number of quits slid by 103K to 3.498MM from 3.601MM, the biggest monthly drop since January 2018.

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