Month: September 2018

Authored by Adam Taggart via PeakProsperity.com,

HFTs remain a major issue…

Joe Saluzzi, co-founder of Themis Trading LLC, outspoken exchange expert, and author of the excellent exposé Broken Markets, returns to give us an update on the state of high frequence trading — otherwise known as HFT.

In the past, Saluzzi has been a vocal critic of the dominant and parasitic role HFT algorithims play in today’s financial markets, siphoning off profits at the expense of the “dumb money” (i.e. retail investors) while undermining the integrity and stability of exchanges. Front running, spoofing, flash crashes — HFTs are the culprits behind them.

Saluzzi actually has some positive developments to note: namely that the obscene profits the HFTs used to make (i.e., steal) are moderating as the arms race in the industry has escalated and the players are increasingly competing with each other. Also, the SEC appears to be moving much faster now towards putting some material constraints in place.

But the unfair advantages that HFTs enjoy, as well as their threat to market stability, are still very real. If we don’t continue to fight to bring them under control, we risk a vicious downdraft during the next big market crisis should the algos instantly exit in a panic:

If the HFT algos get spooked and stop trading, then you got a major problem.

In times like this when there’s no storm out there, it’s time to fix the house now to make sure that when the storm comes the house doesn’t get knocked down. So how do you fix the house? By getting rid of the conflicts of interest, maybe adding more obligations for market makers, looking at those off-exchange venues which are considered ‘dark pools’ and learning what’s going on there, looking at all different types of the issues that continue to haunt us — most of which don’t become visible until they don’t pop up at the end.

Can you force a market maker to stand there and buy stock when the stock market is coming down? No. You can’t force them to do that. And that’s the way it is.

You can’t assume that there’s going to be liquidity today at this minute because there was a liquidity yesterday. It doesn’t make any sense. The market makers will disappear. So is there enough natural liquidity? And that’s really the issue. Natural liquidity is real buyers and sellers, institutions and retail. And unfortunately, natural liquidity is still much, much smaller in the market than the ‘artificial’ liquidity created by HFTs.

So I still think you focus on fixing the structural issues. You’ll have better odds, but will you prevent another flash crash? No.

There was a famous story back in the 2010 crash. They quoted one HFT trader as saying, “I saw it coming. I saw that it was happening, and I went to my keyboard, and I typed the letters “HFT STOP”, and I hit enter. And that basically took me out of every market.” So basically, he had a ripcord. He pulled the ripcord, and it took him out because he didn’t know where the risk was. He didn’t know what markets were doing what, and he wanted no part of it. So what happens if everybody types in HFT STOP at the same time? You’ll get a major vacuum in liquidity again. You can’t prevent it. You can’t.

So yeah, when things next get hairy, I’d expect markets to get really choppy out there.

Joe also has some choice words for the crypotcurrency market, where he sees a lot of the worst risks he once saw during the early days of HFT:

I think that this market is just filled with fraud, filled with manipulation, filled with all sorts of abuses. And until you can somehow figure out a way to regulate it, no way – and I’m very strong on this opinion – no way should any crypto ETF be formed or approved by any regulator in the U.S.  How are you going to create a derivative based on a crypto currency which is unregulated? It’s a timebomb. 

Click the play button below to listen to Chris’ interview with Joe Saluzzi (48m:16s).

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Back in December, when the bitcoin – and crypto – train was rushing along full speed to a (very brief) date with $20,000, a bevy of small and micro-cap companies jumped on board using a simple gimmick: just add the words “blockchain” or “crypto” to their name. The best example of the irrational exuberance of this period, the gullibility of investors, and how this simple “strategy” worked miracles if only for a short time, was the company formerly known as Long Island Iced Tea which in mid-December changed its name to Long Blockchain. The result was a 500% surge in its shares.

Nine months later the crypto bubble may have popped (Long Blockchain was last trading at 19 cents), but the shortcuts to rapid stock price appreciation remain, thanks to the new bubble that has emerged to replace cryptos: cannabis.

Consider the following examples: New Age Beverages shares tripled this month; Alkaline Water stock doubled; while IntelGenx Technologies did that in a single day last week.

How did they do it? Simple: as Bloomberg summarizes, while on the surface, the companies have almost noting in common – one makes trendy Kombucha drinks, another pH-balanced water, while the last makes oral films for medications – they all plan, or at least hope, to become the next Tilray if only in terms of its stock price, and capitalize on the legal cannabis market that has fascinated investors in recent weeks, by “developing” cannabis related business lines.

In a flashback to the gimmicks (ab)used by crypto companies, New Age Beverages saw its stock spike after a conference presentation earlier this month where company executives showed a slide titled “Tested CBD Beverage in CO,” referring to drinks infused with marijuana-derived cannabidiol. The stock added $14.5 million to its market capitalization that day alone, ending the session at $94.4 million.

Separately, yet in very similar fashion, the maker of Coco Libre coconut water and Bucha Live Kombucha also announced plans to debut its portfolio of CBD-infused beverages at a trade show for convenience stores in Las Vegas next month. This was enough to catapult the stock price, and the California-based New Age now carries a valuation of about $190 million.

Stepping back, one can see a similar pattern across the sector: a custom Bloomberg index of the so-called WINO, or Weed In Name Only, stocks with cannabis business lines shows them outperforming the ETFMG Alternative Harvest exchange-traded fund, as well as the S&P 500, since the start of the year.

Here are some of the other companies looking to get in on the green rush, courtesy of Bloomberg:

Advantis

The over-the-counter packaging company gained 22 percent Monday on an agreement to package cannabis-infused gummy edibles. The Jacksonville, Florida-based company said the candies “will be the first of several edibles to be packaged by Advantis.”

Alkaline Water

Investors in this high-alkaline bottled-water manufacturer have seen their fortunes grow by 72 percent since the company announced that new products coming to market soon will include a hemp-derived CBD-infused Alkaline88 water.

Coca-Cola Co.

Even mega-cap Coca-Cola can’t ignore this hot industry. The Atlanta-based soft-drink maker said it’s monitoring the cannabis industry and is interested in CBD-infused drinks. The move follows alcohol maker Constellation Brands’ multi-billion dollar investment in Canopy Growth.

Corbus Pharmaceuticals

The biotech stock saw a 54 percent spike on September 20 after saying it licenses about 600 compounds that target the same system in the human body that marijuana affects — even though its products are derived from synthetics and not the cannabis plant itself.

Intrexon

Shares in Intrexon Corp., the Zika-drugmaker and genetic engineer of salmon, surged 32 percent Monday after announcing it had engineered a yeast strain to extract “low-cost, robust and consistent” cannabinoids for medical use.

IntelGenx Technologies

The maker of VersaFilm — a medication delivery product that dissolves in a patient’s mouth — has a non-binding letter of intent with pot provider Tilray to develop cannabis-based uses. The stock more than doubled on the announcement.

Shopify

The e-commerce platform is becoming the website provider of choice for Canada’s pot rollout after signing deals with several provinces and companies, including Aurora Cannabis, to host sales channels.

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Authored by Tom Luongo,

For bear markets to truly end investor sentiment has to get to a point where they would rather walk on broken glass than buy that asset or asset class.  We’re reaching that point in the precious metals market.

In conjunction with that we also have to see arrogance on the part of short-sellers convinced that all rallies will be sold, keeping a lid on prices.  It doesn’t matter if buyers come in at higher prices or above significant technical support levels, they will push because they become convinced this is a one-way trade.

We see this in the government bond markets as well.  In traderspeak it’s called the [Insert Head of Central Bank Here] Put.  The Greenspan Put begat the Bernanke Put which morphed into the Yellen Put.

Over the past few months we’ve seen sign after sign that the gold and silver markets are nearing the end of their bear markets.  These are signs of extreme distress.  The first I’ve already mentioned, record speculative short positions among futures traders.

Then there was the re-balancing of Vanguard’s $2.3 billion Gold and Precious Metals fund into the Global Capital Cycles Fund, trimming exposure to precious metals to 25% of AUM — Assets Under Management.

And now we’re seeing the M&A (Mergers and Acquisitions) phase of the bear market.  Where companies begin merging to shave costs after having already cut back on production to preserve cash flow.

It was just announced that American Barrick Corp (NYSE:ABX) and RandGold Corp (NASDAQ:GOLD) are merging into one company.  The largest mining company by market cap in the world at around $18 billion.

Primary silver producers like Endeavor Silver (NYSE:EXK) are shuttering high-cost mines in this pricing environment.  Well run companies with low debt and strong balance sheets don’t do mergers like this, they tough it out or go on a hostile raid of assets under-valued by the market.

There is always something that stands in the way of Gold’s breakout.  I’m as frustrated by it as anyone else in the space.  But, the reality is that gold at this point is the retail investor’s hedge against government instability and loss of institutional faith.

I’ve made the point before and I’ll make it again, the last gold bull market was primed to go for two years before it finally began in earnest.  Gold made a low in 1999 but it took until after 9/11 for it to finally move above the important technical levels to force short sellers and heavily-forward-hedged producers like Barrick to lift their hedges and cover.

9/11 kicked off the last one, in my view.  The history on it is clear.  The U.S. government was attacked bodily that day which tore at the world’s view of its primacy.  The response from then FOMC Chair Alan Greenspan was to radically lower interest rates and open the liquidity taps.

That fueled the first leg of the decade-long bull market.  Then when his replacement Bernanke began pulling back and raising rates, he imploded first the marginal commodity markets, resulting in Bear Stearns’ failure and then a housing market collapse as the hot money turned cold and the banking system seized up.

Gold fell from $1033 to $681 during 2008 and the only response from the Fed was “Print, Baby, Print!”

This did not engender confidence. Gold’s second and more explosive wave of its bull market nearly tripled its price in just over two years.

Eventually, the central banks coordinated policy in 2011, the Swiss pegged the Franc to the Euro, Merkel was re-elected and that commitment to stability provided enough cross-market liquidity and confidence to rein in gold.

Because retail demand took off in the wake of the Bush v. Gore debacle and then an attack on U.S. soil for the first time since Pearl Harbor.  It lasted until the central banks finally coordinated action to soothe the worst fears of the financial markets in September 2011.

So, is that happening today?  No.  The rumblings are there.  Brexit, Italeave, the bureaucratic coup against Trump, this idiocy surrounding Kavanaugh’s confirmation, Syria, the end of coordinated QE from western central banks.

All the pieces are in place.  All that’s left is the catalyst.

But, everyday we see another headline of a major player in the space throwing in the towel is another data point that we are getting closer to that catalyst.

There is an extreme amount of leverage and misallocation of capital thanks to a decade of central bank largesse and destroying price discovery in the most important markets in the world, the sovereign bond markets.

Given that state of affairs when the catalyst occurs – Trump is impeached, Brexit fails, Merkel is overthrown in Germany, a King Leopold moment, or simply the outbreak of hostilities between the U.S. and Russia over Syria – it will be the ride of a lifetime for gold investors.

And an incredibly stressful time to be alive.

*  *  *

Join my Patreon because you think stress is bad.

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Moments ago Nike reported Q1 earnings which beat on the top and bottom line, with EPS of 67c beating the estimate of 63c (with a 14% tax rate), on revenue of $9.95BN, also just above the $9.94BN, if not quite above the high end of the forecast range which stretched to $10.20BN.

And yet, the stock reaction was rather negative, and that is being attributed to some on the modest miss in the Q1 gross margin which printed +44.2%, just below the consensus estimate of +44.3%.

Furthermore, a geographic breakdown of revenue shows that while revenues came in stronger than expected in North America and EMEA, they missed in China and Asia Pacific/Latin America, as follows (courtesy of Bloomberg)”

• 1Q North America rev. $4.15 billion, estimate $4.10 billion
• 1Q EMEA rev. $2.61 billion, estimate $2.60 billion
• 1Q Greater China rev. $1.38 billion, estimate $1.40 billion
• 1Q Asia Pacific & Latin America rev. $1.27 billion, estimate $1.30 billion

Nike also reported inventories of $5.2 billion, which unlike the build in prior periods was flat year over year, “primarily driven by a clean marketplace with healthy inventories across all geographies due to strong full-price sell through on new innovation.”

“We are delivering stronger global growth and profitability than we anticipated entering this fiscal year,” said Andy Campion, Executive Vice President and Chief Financial Officer, NIKE, Inc. “While foreign exchange volatility has increased, our underlying currency-neutral momentum continues to build as we transform how NIKE operates, drives growth and creates value for our shareholders.”

The company also announced that during the first quarter, NIKE repurchased a total of 17.8 million shares for approximately $1.4 billion. As of August 31, 2018, a total of 167.2 million shares had been repurchased under the company’s existing $12BN repurchase program for approximately $10.1 billion. In June 2018, the Board of Directors authorized a new four-year $15 billion share repurchase program that will commence upon the completion of the current program.

As a result of the geographic weakness, and the modest margin miss, the stock stumbled, dropping as much as 4%, before recovering some of its after hours losses.

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WTI extended gains today after OPEC signaled it may not replace Iranian oil that’s disappearing from global markets as U.S. sanctions loom, but slumped off its highs of the day after Trump slammed OPEC for “ripping off the world.”

As Bloomberg noted, OPEC shrugged off the threat to Iranian supplies over the weekend, spurring some of the world’s most-sophisticated traders to forecast a return to $100-a-barrel oil. At such prices, crude demand “will be annihilated,” Petromatrix GmbH’s Olivier Jakob said.

“The market is assuming that OPEC will behave as they claimed they will at this meeting, but I don’t think that’s necessarily something that will be long-lived,” said Thomas Finlon, director of Energy Analytics Group in Wellington, Florida. A big reduction in Iranian exports “will cause the market to tighten up.”

Trump said OPEC is “ripping off the world,” in an address to the United Nations today.

 

API

• Crude +2.903mm (-1.5mm exp)

• Cushing +260k (-150k exp)

• Gasoline +949k

• Distillates -944k

A surprise crude build and Cushing stocks rose…

WTI (Nov) hovered at $72.30 into the API print (caught between OPEC and Trump comments) but kneejerked lower (back below $72) on the surprise build in crude and gasoline inventories.

“Oil prices at $72.00 is quite an interesting level we haven’t seen in a long time,” said Phil Streible, senior commodity broker at RJ O’Brien & Associates LLC. “Brent and WTI have been some of the better performing commodities over the last week, so you’re definitely going to have fund managers jumping on board trying to ride that wave a little bit higher.”

The bulls are levering up too, as Bloomberg notes that the total number of options traded on Brent crude surged on Monday to about 274,000 contracts, the highest ever, data showed.

The flurry was driven by record call trading — including bets on $100 a barrel or more — as the global benchmark reached an almost four-year high and major oil trading houses publicly predicted the return of triple digit crude for the first time since 2014.

“If Saudi Arabia doesn’t want to play ball with Trump and lift production then higher prices are a self-fulfilling prophecy,” said Richard Fullarton, founder of London-based oil hedge fund Matilda Capital Management. “That seems to be the trade for the next quarter.”

However, not everyone’s so bullish, we note Brent crude prices are set to stabilize in $70-$80/bbl range into the end of year as “another supply catalyst beyond Iran would likely be needed for prices to meaningfully break to the upside,” Goldman Sachs’ analysts including Damien Courvalin say in note Tuesday.

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Submitted by Kevin Muir of The Macro Tourist

Way back in August of 2013, two FRBNY staffers wrote a paper titled, “The Pre-FOMC Announcement Drift”. It was a great paper by David Lucca and Emanuel Moench which highlighted the tendency for the S&P 500 to rise in the period right before FOMC meetings.

The data they used was from 1994 to 2011 and it showed a clear pattern of the S&P 500 being bid going into the FOMC announcement.

The ‘tourist’s version

I have talked about this phenomenon in the past, and inevitability, a bunch of readers have chimed in to let me know that this anomaly has largely disappeared.

So, today I decided to do the work and update the FOMC Drift study for the past eight years.

I did it a little differently to save myself some time, but the gist is largely the same.

Instead of focusing on the intra-day data, I have taken the much easier route of calculating the returns for the day before the FOMC announcement (T-1), the day of (T+0) and the day after (T+1). Then I calculated the average daily returns of all other trading days not included in this set.

Here is the cumulative gain for each of those series since 1997 (as far back as Bloomberg let me go):

For the return of the “other days”, I straightlined the average of all days not in the set.

What jumps out immediately is how profitable this strategy was during the period from 2006 to 2009. The next easy observation is the steady rise from 2009 to 2015.

However, over the past three years, the strategy has definitely flatlined. Here are the individual returns for the T+0 days:

Look closely at the recent data. It’s less volatile, with larger declines and more muted rises.

So yeah, my readers (as is usually the case) are way smarter than me and have correctly identified that this strategy has recently been a push.

I am not ready to give up on it yet. This period also coincides with a relatively hawkish Fed.

It’s probably no coincidence that the Federal Reserve made its first hike in almost a decade on December 15th, 2015 and this was also the point where the FOMC Drift stopped working.

Given the change in the Fed’s policy bias, it would have been reasonable to forecast the FOMC Drift turning into the FOMC Skid, but yet the strategy has simply treaded water since that time. To me, this is encouraging. Wait until the Fed finally stops tapping on the brake – this strategy’s alpha might not be completely dead, merely taking a well deserved breather. I contend the FOMC Drift shouldn’t be banished to the dustbin just yet…

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At today’s close?

 

China was down in the early session (catching down to US markets after being closed) then flatlined in the afternoon session…

 

Italian stocks extended the outperformance as Spain lagged…

 

Futures show US equities starting to slide in the pre-market then reverse at 11amET, but Dow and S&P were unable to hold their algos bounce as Nasdaq surged… (ugly close)

 

On the week, Nasdaq remains the leader, Trannies the loser…

 

FANG stocks extended yesterday’s panic-bid ramp…

 

Treasury yields popped early in but faded lower as the day wore on. 30Y ended very modestly lower and the rest of the curve slightly higher in yield…

 

10Y Yield broken above 3.11% early on ended the day almost unchanged…

 

And the yield curve flattened modestly…

At the shorter-end, we note that the eurodollar curve is no longer inverted across Dec 19 to Dec 20…

 

The Dollar slipped lower on the day reversing overnight gains…

 

Yuan slipped lower…

 

The Argentine Peso plunged after the central bank governor unexpectedly resigned…

 

Cryptos had an ugly day after headlines on Mt.Gox Trustee selling…

 

Silver surged today as gold and crude trod water…

 

Silver notably outperformed Gold…

 

Sending the Gold/Silver ratio tumbling to 3-week lows…

 

Finally, we will give Gluskin Sheff’s David Rosenberg the last word – a reminder of what happened when Consumer Confidence was here before…

Interesting that consumer confidence just hit its ‘best’ level since Sept. 2000. Classic sign of pent-up demand peaking out. Recession began 7-months later, as a clear contrary signpost. pic.twitter.com/avH6PC8jfB

— David Rosenberg (@EconguyRosie) September 25, 2018

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