Month: February 2018

Here’s what the ‘Warren Buffet of Crypto’ told us yesterday

If you’ve been on the Internet in the past six months, you’ve no doubt seen loads of ads touting “crypto geniuses” that have found the next token that’s going to explode…

One guy in particular seems to be following me around to every website I visit, claiming to have some special insight into the “truth” about crypto.

But the truth is, nobody has a crystal ball.

Ultimately, what’s going to drive crypto prices is what drives all asset prices in the long-run – supply and demand.

Most cryptocurrencies have a fixed supply. For example, there will only be 21 million bitcoins mined. Ever. (Today there are about 17 million in circulation).

And because there’s a fixed supply, prices should be determined by long-term demand.

Every crypto expert you talk to will have his/her own opinion on which coin is going to the moon… and why. But it’s important to form your own opinion.

With crypto, the fundamental question you should ask yourself is will there be more demand or less demand in the future?

And if you believe there will be MORE demand in the future, the next question is– which coins have superior technology?

This is an important question. Every coin has different software code with different features and limitations.

For example, Bitcoin has a big limitation in that its network can only process a few transactions per second.

Compare that to Visa or Mastercard, which can process 24,000 transactions per second – nearly 10,000 times more.

One of our team members attended a crypto conference in New York City yesterday… and of course the room was filled with self-proclaimed geniuses.

But there were a few legitimate standouts who had a much more rational view.

One of them was Barry Silbert.

Silbert founded a company called SecondMarket, an exchange for private company stock, which he sold to Nasdaq in 2015. Then he founded a company called Digital Currency Group (DCG).

He’s spent the last several years learning about and investing in the sector, includindg in various cryptocurrencies, as well as crypto companies like Coindesk.

He also founded the Bitcoin Investment Trust (GBTC), which is essentially a Bitcoin ETF.

Silbert’s firm owns $600 million worth of crypto, 95% of which is in bitcoin, Ethereum Classic and Z-Cash.

He thinks over time, that bitcoin will become a form of ‘Digital Gold,’ the industry standard for storing value in crypto.

Z-cash, Silbert explained, will be the industry standard for privacy. And Ethereum Classic will be the standard for ‘smart contracts’.

More bluntly, Silbert explained that most other coins will go to zero over time. The reason is because they don’t have any functional purpose.

Now, remember that Silbert’s opinion is exactly that: his opinion.

There are plenty of other investors in the crypto space who would say something completely different. And their logic would be equally sound.

But Silbert’s point about utility is important: why should anyone own a token that doesn’t have any purpose. Look at CryptoKitties, for instance. Where’s the value?

(Or even worse, F*ckToken, which has a $2 million market cap)

This value question goes back to what I said in the beginning about demand analysis. Will there be more demand in the future for F*ckToken and CryptoKitties, or less demand?

In the long-run, demand has to be driven by some sort of utility. The coin must present some special benefit that other coins and tokens don’t have… and that people will actually NEED.

Coins and tokens that lack this important characteristic will likely fail.

And when they do, it will seem so obvious in retrospect.

This is an easily avoidable mistake… and an important point we’ve been repeating for a long time: with crypto, as with anything else, stay rational.

A decision to BUY should be based on an informed, educated analysis about future demand… not an emotional frenzy because the price is surging.

Similarly, a decision to SELL should be rational and based on the presence of new information or a different analysis, not simply because the market is in a panic.

Source

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The ‘Other’ Fear Index Just Flashed “Panic”

As the world held its breath, in November 2016, for President Trump’s election, we noted that equity market implied correlation is flashing a ‘panic’ warning according to BMO quant Mark Steele as the little-known derivative indicator suggests traders fear a major ‘high correlation’ event and are aggressively hedging systemic risk.

And now, amid the massive unwind of the Short-Vol trade, implied correlation – the other fear index – is flashing red, as Bloomberg notes, the wild market fluctuations of recent days are sending bets for equity correlations to levels not seen since before the election (and Brexit).

Out of 505 S&P 500 Index stocks, a record 503 fell on Monday as the gauge experienced its worst decline since August 2011, and options markets are suggesting that extreme co-movement is likely to continue…

As a reminder, implied correlation measures the relative demand for macro overlays (index hedges) vs micro risk (individual stock hedges/concerns). The higher it is, the more systemically worried investors are and the more traders believe a high correlation ‘event’ is due (typically the high correlation event is a big downturn in stocks).

While VIX is well off its overnight ’50’ highs, volatility expectations have certainly returned to global financial markets, with a Bank of America Merrill Lynch measure of risk across asset classes jumping to its highest level since April.

(The Market Risk indicator is a measure of future price swings implied by option markets in global equities, rates, currencies and commodities.  Levels greater/less than 0 indicate more/less stress than is normal. )

Going back to what BMO’s Steele concluded in the run-up top the election in Nov 2016, just as we saw with Brexit, a rebound in sentiment “can be just as ferocious, and that carries the day for broad equity markets,” seemingly suggesting to buy the dip as he notes there’s “no sign of a banking system threat” that pressures equities systemically.

That may be what investors are thinking today with its XIV-pulled ramp, but one thing is different from Nov 2016 – central bank balance sheets are expected to shrink and rates are normalizing…

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Rate Revulsion: Bid To Cover Tumbles In Ugly, Tailing 30Y Auction

Earlier today we warned that, all else equal, should the day’s 30Y auction be ugly, it could send the Treasury complex reeling, unleashing another equity selloff. Well, stocks frontran that, and heading into the auction, stocks tumbled as yields jumped over the source of the day once again, only to slide as a flight to safety emerged, dragging the entire curve lower.

Which was very lucky for today’s 30Y auction which was, in a word, ugl.

The sale of $16BN in 30Y paper stopped at 3.121%, a 1.2bps tail to the When Issued 3.109%. This was the highest yield on the long end going back exactly one year, or February 2017, when the 30Y priced at 3.169% at which point the curve started to dramatically flatten.

But it was the internals where the auction was even worse: the Bid To Cover of 2.257 tumbled from 2.741 in January, and was the lowest since November; it was also below the 2.417% 6 month average.

Meanwhile, confirming recent reports that foreign buyers are fleeing US paper, the Indirect award was only 61.2%, far below the 71.5% last month, and the lowest since September, not to mention well below the 63.9% 6MMA. Directs took down a modest 8.1%, leaving 30.8% to Dealers, the highest since November.

Overall, this was another poor auction in the aftermath of yesterday’s abysmal 10Y, and only the flight to safety to TSYs – as a result of the sliding stocks – has prevented what would have been a sharp selloff in equities anyway.

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Despite Tough Talk, Oregon’s U.S. Attorney Doesn’t Plan to Shut Down the Pot Industry

In the month since Attorney General Jeff Sessions rescinded Justice Department guidelines that discouraged prosecution of state-legal marijuana merchants, only one U.S. attorney, Oregon’s Billy Williams, has publicly suggested he might respond by enforcing the federal ban on cannabis more aggressively. But judging from a meeting Williams held last Friday, he has no plans to target the state-licensed cannabusinesses that openly commit federal felonies every day.

Williams’ main complaint, which he outlined in a January 5 interview with The Oregonian and an op-ed piece published by that paper a week later, is that Oregon, which legalized marijuana in 2014, produces more cannabis than is necessary to serve adult consumers within its borders. The surplus, he says, ends up in other states, which makes it a federal concern. “We have an identifiable and formidable marijuana overproduction and diversion problem,” he said at last week’s summit, which was attended by state officials, local police, and representatives of the FBI, the Drug Enforcement Administration, and U.S. attorneys in 13 other states. “And make no mistake about it, we’re going to do something.”

While that sounds rather ominous, Williams’ attitude was collaborative rather than antagonistic. “My responsibility is to work with our state partners to do something about [the marijuana surplus],” he said. Oregon Gov. Kate Brown, whose goal is a “safe and successful cannabis industry,” said, “Attorney Williams has assured my team that lawful Oregon businesses remain valued stakeholders in this conversation and not targets of law enforcement.”

While there is no question that marijuana from Oregon is consumed in other states, that was also true before legalization, and it’s not clear to what extent licensed growers are contributing to interstate smuggling. “What I need are bottom-line answers on what the numbers are,” Williams said. “We need to have an accurate assessment of the problems we’re looking at, because its time to tackle it.”

Oregon State University sociologist Seth Crawford, who attended Williams’ summit, blamed the legal industry for producing too much marijuana. “If you were an investor and you had just dropped $4 million into a [marijuana] grow and you had thousands of pounds of flower that was ready to go but you had nowhere to sell it, the only thing you can do is sell it on the black market,” he said. “It was a system designed for failure. You created this huge industry that has nowhere to put its product.”

The Independent reported that Crawford “estimated Oregon growers produce up to three times the amount of marijuana that the state can absorb legally each year.” Crawford tells me that is actually an understatement. “The state tracking system has 3 [times] the yearly consumption sitting as inventory right now,” he writes in an email. If illegal cultivation is included, he says, “we produce far more than 3 [times] what we can consume.”

Williams’ comments imply that he does not want to stop Oregonians from consuming Oregon marijuana; he wants to stop residents of other states from consuming Oregon marijuana. Since law enforcement agencies have never managed to accomplish that, there is little reason to think they will succeed this time around. But there are ways that Oregon officials can placate Williams and allow him to declare victory.

Williams wants to “work with our state partners to do something.” Here’s something: Yesterday Oregon’s secretary of state released an audit that suggests 17 ways for the Oregon Liquor Control Commission (OLCC) to improve its regulation of the cannabis industry. “Data reliability issues with self-reported data in the Cannabis Tracking System (CTS) and an insufficient number of trained compliance inspectors inhibit OLCC’s ability to monitor the recreational marijuana program in Oregon,” the report says. “OLCC should improve processes for ensuring the security and reliability of data in the CTS and the Marijuana Licensing System. In addition, better processes are needed to monitor vendors that host and support these applications.”

Such regulatory improvements, possibly coupled with new limits on cultivation, would create the appearance of responding to Williams’ worries about overproduction. They are also very much in the spirit of the guidelines that Sessions rescinded, which were predicated on the idea that well-regulated marijuana businesses would be less likely to implicate federal “enforcement priorities,” including the prevention of interstate smuggling.

In other words, Williams’ initiative is perfectly consistent with the policy of prosecutorial restraint that Sessions supposedly repudiated. Williams is not doing anything now he could not easily have done a month, a year, or two years ago. If this is the most dramatic result of Sessions’ decision (which so far it is), the cannabis industry does not have much to worry about.

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Moody’s Pegs Venezuela In “Deeper Phase” Of Financial Insolvency

Authored by Zainab Calcuttawala via OilPrice.com,

Venezuela is now in a “deeper phase of economic stress,” Moody’s Investor Service said on Wednesday, according to The Oil and Gas Journal.

Falling oil production and tough economic sanctions have increased pressures on the nation’s financial capacity. Mismanagement and underinvestment in the country’s oil and gas industry is causing defunct facilities to produce low quality oil that does not meet the requirements of its usual buyers.

Moody’s sees “a negative feedback loop between declining production across all economic sectors, accelerating scarcity of hard currency, and an economic policy mix defined by price controls and forced discounting that exacerbate supply shortages and hyperinflation.”

Venezuela’s production is falling faster than higher barrel prices can fill the revenue gap, the credit rating agency added.

“The fall in production will only exacerbate cash-flow stress,” Moody’s research note reads.

“While oil prices have rallied in recent months, the decline in oil production will more than offset the would-be increase in dollar inflows from oil exports. This has negative implications for both debt repayment capacity and Venezuela’s already grim economic outlook.”

Hyperinflation will continue at the 4000 percent level through 2018 due to the financial deterioration.

President Nicolas Maduro is still intent on milking the digital currency fad to help alleviate the cash shortage and circumvent U.S. sanctions. After proposing an oil-backed national cryptocurrency called the petro, Maduro is now calling for an OPEC-wide one that would also include other large producers.

Speaking to media in Caracas after a meeting with OPEC’s secretary-general Mohammed Barkindo, Maduro said earlier this week, “I will make an official proposal to all OPEC members and non-OPEC states to work out a joint cryptocurrency mechanism backed by oil.”

Some 5 billion barrels of crude have been set aside to back the petro, which would be priced at $60 a piece, Russian Sputnik reports, adding that the first batch of petros to be sold will be of 100 million coins. The price per coin is tied to the price of Venezuelan crude.

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Fed Shrugs At 10% Tumble In Stocks – “It’s Small Potatoes”

Yesterday, we pointed out the recent Fed speakers appeared to be playing down this equity market turbulence, crushing the hopes that the “Powell Put” is struck anywhere close to Yellen’s.

Today, we get further confirmation.

First of all today we had Philly Fed’s Patrick Harker suggesting this volatility (a VIX above 30) makes sense based on yields…

“There are a lot of potential culprits, I would say, of increasing that volatility,” Philadelphia Fed President Patrick Harker says, referring to recent stock market sell-off.

“If you start to believe that the long end of the curve is going to start to go up, it makes sense that equities would have an adjustment,” Harker says while answering questions from reporters after a speech in New York.

Harker says stock market volatility hasn’t changed his economic outlook, doesn’t think it will impact business investment and consumer spending.

And then New York Fed’s Bill Dudley ventured on to Bloomberg TV to calm the masses, proclaiming that this drop is “small potatoes” and the decline in equity values (has no economic implications.”

Dudley confirmed that “yields moving up are putting pressure on stocks,” and reassured that “further gradual rate-hikes will increase economic confidence.”

Furthermore, Dudley seems to blame Trump – noting that “a too-strong economy could make The Fed tighten harder.”

Good luck with that.

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Immigration Authorities Want Access to All the Raw Intelligence the Feds Already Collected on You

Border PatrolNow that Congress and the president have renewed and expanded federal foreign intelligence surveillance authorities to be used on Americans and people on American soil, immigration officials want in on the information.

It’s not enough for Border Patrol, Department of Homeland Security, and immigration officials to demand to see our papers at checkpoints and stops within the United States, to try to implement facial recognition scans at airports and entry points, to try to demand access to our phones and laptops, and to start scanning license plates. Now, the Daily Beast reports, they want to officially be treated like an intelligence agency and have greater access to information collected through secret surveillance.

While this is by no means a new push confined to the current administration, Immigration and Customs Enforcement (ICE) probably has the friendliest ear they’ve had in a while in President Donald Trump. Betsy Woodruff explains:

If ICE joins the Intelligence Community, then its officials will have increased access to raw intelligence, unfiltered by analysts. This could prove useful to both of the agency’s components: Homeland Security Investigations (HSI), which investigates transnational crimes, including drug trafficking, money laundering, cybercrimes, and arms trafficking; and Enforcement and Removal Operations (ERO), which arrests and detains undocumented immigrants.

For anybody who remembers the privacy debate surrounding the renewal of Section 702 of the Foreign Intelligence Surveillance Act (FISA) amendments, the list of crimes ICE investigates is very relevant. When Congress renewed Section 702, they officially gave the FBI authorization to use this foreign intelligence law to secretly snoop on American citizens in order to investigate a list of federal crimes. That authorized list aligns very nicely with the types of crimes ICE investigates.

So if ICE were to get greater access to federal intelligence, thanks to the renewal and expansion of Section 702 of FISA, immigration officials would also get additional access to secret data collected about Americans, not just immigrants.

And Section 702’s renewal puts some wonky warrant rules in place. If an American citizen is suspected of a crime that ICE is investigating, officials are required to get a warrant to get access to an American’s private communications. But if they are not the subject of an investigation or their communications get collected in intelligence-gathering that’s not about fighting crime, they do not. So, weirdly, Americans have more due process protections from warrantless snooping if they’re suspected of crimes.

For the purposes of ICE surveillance, it’s very easy to imagine that an American communicating with an immigrant (here legally or not) having his or her phone calls or communications accessed without even knowing about it. So if ICE is allowed to intrude further into the realm of intelligence, that increases the number of federal officials allowed to have access to secret snooping not just of immigrants or people in foreign lands, but of Americans here at home as well.

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Dow Drops 500 Points, S&P Breaks Below Key Support As Rate Vol Spikes

US equity markets are tumbling to fresh lows…

As rate vol soars…

The S&P 500 has broken back below its 100DMA…

Equities are nearing correction once again…

All major US equity indices are now lower year-to-date…

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This Vol Fund Run By A Former SAC Quant Is Crushing It

Amid horror stories of crashing vol-selling funds and entire VIX-linked products getting decimated, like the now infamous XIV, an occasional success story emerges. Take Global Sigma: the fund, which is run by CIO Hanming Rao formerly a stat arb quant, and macro futures and options trader at Millennium and SAC, has a Vol Arb strategy that is absolutely crushing it at a time when most of its vol-selling peers are getting hammered.

The reason: GS Hedge is a systematic long VIX directional trading strategy. Here is its technical description:

The strategy’s prediction models are informed by Global Sigma’s history as an early trader of the weekly options on the S&P500 futures contract launched by the CME in Q3 2009. The option strategy’s risk management framework has been driven by the model’s 1-day price distribution prediction forecast of VIX that was first utilized by Global Sigmain 2009.

Some more on the fund’s history: Global Sigma began trading managed accounts in late 2009. Global Sigma employs a model-driven, high turn-over approach to trading options.

Global Sigma has become one of the most active managers of the weekly expiry S&P500 options contract in the CTA industry and generally seeks to trade inefficiently priced Puts and Calls. The strategy partially hedges the portfolio’s Delta/Gamma exposures in a discretionary manner by taking positions in the S&P500 futures market and by buying under priced Puts and Calls. The average daily Delta exposure of the portfolio since inception has been -0.13, -0.23 since January 2013.

Technicals aside, what the fund does – in simple English – is simple: it is long both the VIX and long S&P futures, or as it states, “Long VIX, beta-hedged with Long S&P 500, i.e. a tail risk hedge.”

Approximately 40% of the time a long VIX position is established that is beta-hedged with 6 to 10 eMini S&P500 contracts. 60% of the time, a 1-day normal price distribution is predicted and the portfolio remains 100% in cash.

What makes Global Sigma unique is that unlike other fat-tail funds who are mostly long the VIX and suffer constant theta decay in hopes of striking it rich on day when the VIX soars, this fund pair trades the VIX and the S&P with little if any day-to-day decay. Instead, what it hopes for is days like Monday when as Natixis pointed out on Tuesday, the “VIX spike corresponded to a 15% market crash”, and instead the S&P dropped “only” 4%.

As a result, the otherwise unspectacular pair trade generated unprecedented returns, and as can be seen in the table below, just had its best month every, generating a 18.1% return in just the first week of February, and is now up 26.8% YTD.

Curious to learn more? Here is an Opalesque interview with Global Sigma’s founder, Hanming Rao. First some more background:

He began his career in finance in 2005 as a Quantitative Researcher at Ellington Management. From 2006 to 2009, he was a Global Macro trader at SAC Capital where he managed a exposure in global futures and OTC products including short-term OTC options on the S&P500 Index.

In early 2009 Hanming joined Millennium Partners which he left on friendly terms to set up his own firm having obtained seed capital from an X-Harvard Professor. Today, Global Sigma manages approximately $300m in two main strategies involving options and futures on the S&P500 and Treasury Bond/Note contracts.

The original program has a track record of six and a half years. Over this time, the program has generated an average annual return of 14% with a 2.6 Sharpe with 92% profitable months. The correlation to the S&P500 has been -0.04.

 

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