Cruising Into Year End?

Cruising Into Year End?

By Peter Tchir, chief strategist of Academy Securities

For the record, I am not advocating cruising into year-end. I think there will be potential opportunities to be captured by diligent asset managers and corporations. We will focus on yields and credit spreads today. But let’s start by hoping that you all had a great Thanksgiving! Last weekend’s An Amazing Country (with some questions) hopefully helped you navigate through some holiday meal discussions (or more likely, work discussions), and it remains relevant today, as does 3D Chess or 52-Card Pickup.

In fact, now that “consensus” has become that everything President-elect Trump does is “just a start” to his bargaining, I’m a little concerned that the market has become a little too complacent. Yes, we were arguing for this view, but it is surprising how quickly it seems to have morphed into a consensus trade.

Around the World with Academy Securities

In case you missed our Around The World report on Wednesday, it covers the usual suspects, but with some different twists and turns.

Sierpinski Triangle

As there is a lot of chatter about “chaos” (along with our analysis of 3D Chess versus 52-Card Pickup), I’ve been thinking a lot about the Sierpinski Triangle. You start with any type of triangle. Then, you start rolling the dice and moving from your current position in the triangle to one halfway to the corner “selected” by the die. Once you’ve gone a couple of turns to “seed” the solution, you mark the points and repeat ad infinitum. What seems random, creates, with 100% certainty, an elaborate pattern that I cannot believe many people would have guessed to be the output of this exercise (it is often one of the early chapters on anything about chaos theory).

So, as we watch the machinations coming out of D.C., we are still left wondering whether an elaborate pattern will emerge from the current selection process.

It does seem that the market went from doubting all the moves out of D.C. (which seemed too pessimistic) to suddenly seeing order (or at least no major stumbling blocks) from D.C. – which might be too optimistic.

Expect Some Chaos

Okay, chaos is probably too strong of a word, but I do think that the market should be prepared for some setbacks, as not every negotiation or appointment will go smoothly. It is the nature of President-elect Trump’s style – from his old real estate days to his first term as president – he will push, he will be aggressive, and there will be some confusion.

Inflation

Inflation might be the trickiest variable to estimate right now. Over time, we could see the economy turn one way or the other, and we could see the jobs situation change, but inflation, in my view, has  the widest range of possible outcomes in the coming months.

  • Tariffs, as discussed last week, could push inflation higher. That is not our base case (and is not consensus), but there is some risk here.

  • Immigration issues could impact inflation quite dramatically. Again, we covered this last week, and our base case is that Trump will go after some high profile wins and listen to some of his constituents, who don’t want wholesale deportations that would disrupt the labor force. Again, consensus seems to have moved in this direction as well, but our conviction on this base case is medium (at best) and there could be risks that are not being priced in appropriately.

  • The natural ebbs and flows of supply and demand. We were in the camp that believed inflation was under control, but not tamed (call it, settling into a 1.75% to 2.75% range). As businesses are allegedly pulling forward purchases to avoid potential tariffs, as China continues to try to stimulate its economy, and as we see policy to promote “onshoring,” there are some risks of inflation moving back to the high end of our range, which would likely make the Fed (and bond markets) uncomfortable.

  • Commodity prices should help the inflation story if we really are going to see a “Drill Baby Drill” mentality. Or, as discussed in detail last weekend (yes, I’m referring to that fairly often, but it forms the building blocks for much of our current work), we could see a pushback against “Not In My Backyard”, but commodity prices should remain under control (while commodity related companies can do very well with increased production).

Rates

Positioning has been and will continue to be a factor.

I’ve been pointed to the “Commitment of Traders” report: there is a lot of short interest by speculators, especially in the 10-year part of the curve. It apparently has been coming down, but if traders remain short, it will continue to help support bond prices. TLT, a 20+ year ETF, has been seeing outflows even as yields went higher – another potential indicator that positioning remains “underweight” bonds.

The negative buzz around the deficit and bond yields seems to have dissipated. In a quick note on Friday to our capital markets team and via Bloomberg to the clients I’m in IB chats with, we reduced our bullish outlook on bonds at 4.19% on 10s.
We actually saw buying right up to the last minute on Friday’s trading, but I think with the “index extension” trade over and back to full days to trade bonds, it will be difficult for the rally to continue Our target was 4.1% to 4.2%, and while we are at the high end of our range, the rally has been almost too ferocious of late to be truly believable. The fears around tariffs, immigration, and the deficit (which were overdone), have now been replaced with a degree of complacency that doesn’t seem deserved.

China TIC data showed China holding $772 billion of Treasuries at the end of September. That number has been between $780 billion and $767 billion (a very narrow range) since February. There is no obvious reason for China to grow their holdings, and if anything, as they continue their efforts to stimulate their economy and gird for potential tough negotiations with Trump, we could see them lowering the amount held in the coming months. Not a big problem for markets, but not helpful as we have a lot of bonds to auction in the coming months.

The Fed:

  • 1 cut in the next two meetings, probably this one.

  • A terminal rate of 3.875% next year, a bit above the 3.45% priced in for December 2025 (according to the Bloomberg WIRP function).

Bond Yields:

  • Expect the 10-year to inch a touch higher, pushing back towards 4.3%, with a lot of difficulty getting back to 4%.

Should be a good “range trading” environment, with a much greater risk of 50 bps higher than 50 bps lower from here, for the long end.

Credit

It has been almost six months since we devoted serious attention to the credit markets.

Back in June, we published How Tight Can Credit Spreads Go?, and were unequivocally and unapologetically bullish on credit. We listed trends like private credit, banks competing for lending (to grow their net interest margin), and how much the high yield bond market has changed as reasons why fretting over old charts makes little sense. We dragged out our old standbys – Maslow’s Hierarchy of a Credit Bubble, The 5 Circles of Bond Investor Hell, and a picture of one of the remaining IG 200 hats! If you lived through the GFC and traded CDX indices, you likely remember the hats.

While CDX didn’t get to 20 bps, it has traded very well, as has any measure of corporate bond spreads.

While I remain very comfortable with credit, it is more difficult to sit here near the lows and continue to add to credit. It might not take much to “upset” the apple cart here, at least a little. While the arguments for liking credit so much (at what already seemed like tight levels back in June) largely remain in place, they are all a bit worn here. Just like that favorite shirt that is still up there on your list, but you can tell that it is getting dated.

If you go back two years, we are still at, or near, the lowest average yield for the corporate bond index (it varies with time, depending on the type of issuance, maturity, rating, etc.). We’ve seen a brief reprieve on the rates side, but even though I’m bullish credit (kind of) and bullish rates (but not really at this moment), the Bloomberg League Tables show $1.58 trillion issued this year and $1.2 trillion issued last year.

The number of scenarios that are likely to play out, ending with higher average yields on this index, are more numerous and plausible than those scenarios that drive this average yield lower.

  • Much lower Treasury yields. I don’t see how we get to much lower Treasury yields from here, without some sort of a problem facing the economy. Something that we’re trying to do could backfire, but I find it difficult to believe that credit spreads will remain tight if we see Treasuries rally significantly from here. Sure, we can get back to 4%, but the scenario for a “benign” move back to 3.7% doesn’t seem plausible to me. I’m recalling a longtime client once telling me that the best interest rate hedge, if you own high-yield bonds, is to own Treasuries. It sounds backwards, but works surprising well in times of stress – which is what would have to be occurring to push yields lower now.

  • Much higher Treasury yields. This risk seems much greater than getting much lower yields (especially as the opposite view becomes consensus). It is extremely difficult for spreads to keep up with bond yields. It just becomes difficult for spreads to move even 10 bps tighter from these levels, if bond yields move 25 bps higher. So yes, higher Treasury yields will likely be accompanied by tighter spreads, but all-in yields will be higher.

Sure, Goldilocks could make an appearance and let overall yields go lower, but Goldilocks tends to be a better acquaintance of equity traders than fixed income traders!

Bottom Line

If you are a fixed income asset manager, you can switch to moderately underweight duration here. If you are a corporate bond manager, I think it’s time to get back down to a normal, rather than overweight, position. Maybe even inch towards underweight/short. While it is anathema for hedge funds to think about running IG credit without rate hedges, I think betting on overall yields going higher is the right move, as scenarios with significantly lower overall yields seem unlikely.

If you are an issuer, do the opposite and look for opportunities to sell debt at reasonable yields. While some people will be on vacation, coupon payments, maturing debt, and the pressure to match indices do not take time off in December. There will be cash coming into the market, and in this day and age, even desks that are half-staffed can process a LOT of bonds! I’d rather take advantage of what I think will turn out to be a decent overall yield, relative to what we might see in January.

If you are an equity investor, nothing has really changed – be nimble, trade the ranges, and be overweight sectors that are catching up. Seasonality should still be helpful, but since people have been talking about (and presumably positioning for) seasonality since September, I’m a bit skeptical it will be overwhelmingly strong, at least at the start of the month.

Be long on risks that benefit from a push to extract and refine commodities, if not domestically, much closer to home (and further away from China). Be wary of big tech at these valuations and watch carefully for China’s attempts to push their brands globally, especially into emerging markets – that is a risk that still seems largely dismissed, even as it is occurring.

Everything that comes across my stream in terms of CRE scares me, which the contrarian in me finds even more tempting. The exact opposite is occurring with crypto, but watch out for a rug pull there. Hopefully you all had a great Thanksgiving weekend and a fun holiday season, but I suspect that the market will create multiple opportunities to adjust portfolios as D.C. will remain front and center.

Tyler Durden
Sun, 12/01/2024 – 16:20

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“It’s Illegal”: Canadian Media Sues OpenAI For ‘Scraping Large Swaths Of Content’ To Train Chatbot

“It’s Illegal”: Canadian Media Sues OpenAI For ‘Scraping Large Swaths Of Content’ To Train Chatbot

Five Canadian media companies are suing OpenAI, alleging that the ChatGPT creator has breached copyright and online terms of use in order to train the popular chatbot.

The joint lawsuit, filed on Friday in the Ontario Superior Court of Justice, follows similar suits brought against OpenAI and Microsoft in 2023 by the New York Times, which claimed copyright infringement of news content related to AI systems.

The Canadian outlets – which include the Globe and Mail, the Toronto Star and the Canadian Broadcasting Corporation (CBC), are seeking what could amount to billions of dollars in damages, as they have demanded 20,000 Canadian dollars (US$14,700) for each article they claim was illegally scraped and used to train ChatGPT.

“OpenAI is capitalizing and profiting from the use of this content, without getting permission or compensating content owners,” the group said in a Friday statement, adding that they’re responsible for the “bulk of Canada’s journalistic content.”

The plaintiffs are also seeking a share of OpenAI’s profits, as well as a halt to the use of future content.

“OpenAI regularly breaches copyright and online terms of use by scraping large swaths of content from Canadian media to help develop its products, such as ChatGPT,” the group said in a statement.

“OpenAI’s public statements that it is somehow fair or in the public interest for them to use other companies’ intellectual property for their own commercial gain is wrong,” they added. “Journalism is in the public interest. OpenAI using other companies’ journalism for their own commercial gain is not. It’s illegal.”

The lawsuit claims that OpenAI circumvented specific technological and legal tools – such as the Robot Exclusion Protocol, copyright disclaimers and paywalls, which exist in part to prevent scraping or other types of unauthorized use of their published content.

In the NYT vs. OpenAI and Microsoft case, which is currently in discovery, the Times claims the company similarly broke laws to train ChatGPT, as well as provide search results.

The Canadian case has a narrower focus – scraping data for training – not search results, and does not name Microsoft.

“We believe we have a strong case related to the training of the models. The training of the models is the core of the problem,” said Sana Halwani, a partner at the Canadian law firm Lenczner Slaght, which represents the media organizations in the lawsuit, in a statement to the NYT.

The Canadian publishers could find some of their claims easier to prove than others, with copyright infringement being the toughest, according to Lisa Macklem, a lecturer King’s University College at Western University in Ontario, who is an expert in copyright and media law. -NYT

“While it seems obvious that OpenAI is infringing copyright, it is technically very difficult to prove, and this underscores the immediate and pressing need to have regulations put in place, demanding, at the very least, transparency on what is in the training data of generative AI,” said Macklem.

OpenAI’s problems don’t end there. Over the summer, Elon Musk – who co-founded OpenAI in 2015 but left in 2018 under bad circumstances, sued OpenAI, claiming that two of its founders, Sam Altman and Greg Brockman, breached the company’s founding contract by putting commercial interests ahead of the public good.

Tyler Durden
Sun, 12/01/2024 – 15:45

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America’s First 24-Hour Stock Exchange Gets Operational Approval

America’s First 24-Hour Stock Exchange Gets Operational Approval

Authored by Naveen Athrappully via The Epoch Times (emphasis ours),

U.S. regulators have approved a nonstop stock exchange to begin operations in the country, which is expected to boost overnight liquidity available to traders.

The U.S. Securities and Exchange Commission in Washington on Sept. 18, 2008. Chip Somodevilla/Getty Images

“24 Exchange announced today that it has received approval from the U.S. Securities and Exchange Commission to operate 24X National Exchange as the first national securities exchange in the U.S. that allows trading of U.S. securities 23 hours each workday,” the company said in a Nov. 27 statement.

The exchange will be launched in two steps. In the first stage, it will operate between 4 a.m. ET and 7 p.m. ET on weekdays beginning in the second half of next year.

In the second stage, trading will be offered between 8 p.m. ET on Sunday through 7 p.m. ET on Friday. Every trading day will have a one-hour operational pause aimed at allowing the company to conduct tests and upgrades.

Dmitri Galinov, the founder and CEO of 24 Exchange, called the SEC approval a “thrilling development.”

“With this historic SEC approval in place, we will build and operate a customer-driven Exchange that can rapidly align with market demands and adapt quickly to client feedback,” he said.

Galinov pointed out that traders are often at risk when markets remain closed at their geographical location. Traders are not able to quit positions when major and sudden events unfold.

The 24X National Exchange seeks to solve this issue by offering around-the-clock trading, he noted. Initially, the exchange will seek to boost overnight liquidity for American equities by tapping into trading volumes from the Asia Pacific region.

Some procedures are pending, including making additional filings with the SEC, before the 24-hour trading is activated, the company said.

Benjamin Schiffrin, the director of securities policy at market advocacy group Better Markets, criticized the SEC approval of 24X National Exchange, warning that this harms investors and damages markets.

Allowing overnight trading subjects retail investors to new risks, he said. “Retail investors trading during an overnight session will be trading in a market where there are few buyers and sellers, and where prices will be more volatile and less favorable than during normal hours.”

This means that, during overnight sessions, retail investors will only get the best prices in a bad market, thereby losing money if they had traded during normal business hours,” he said.

Risky Behaviors

Schiffrin noted that people tend to engage in “riskier behaviors” during nighttime.

Trading platforms may send notifications and prompts at night when traders are “particularly susceptible” to inducements and allow people to easily trade with just a simple push of a button.

He provided an example of legalized sports betting that entices people to bet with ease, thus leading to a “gambling addiction crisis.” The financial industry could use similar tactics to hook investors into trading that can have “potentially serious consequences,” Schiffrin said.

In comments submitted to the SEC, two researchers from the University of Washington and Stanford University suggested that increasing trading hours could reduce net gains made by retail investors.

They said that during pre-market and post-market sessions, liquidity tends to be low, volatility high, and prices “arguably less informationally efficient.”

“Our research indicates that retail investors systematically underperform during these types of conditions,” they said.

“While attracting more volume to these sessions is presumably the intention of 24X Exchange, the majority of trading activity will likely remain in the daily market session, meaning these issues will remain salient for out-of-hours retail traders.”

24X National Exchange’s approval comes as the NYSE revealed in October that it plans on extending weekday trading time at its Arca equities exchange to 22 hours per day.

With this update, trading during weekdays will operate between 1:30 a.m. and 11:30 p.m. ET. The fully electronic exchange will offer all stocks, ETFs, and closed-end funds listed in the United States for trading.

Tyler Durden
Sun, 12/01/2024 – 15:10

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Australian Broadcasting Boss Attacks Joe Rogan As ‘Malevolent Figure Preying On The Public’

Australian Broadcasting Boss Attacks Joe Rogan As ‘Malevolent Figure Preying On The Public’

The far flung nation of Australia and its close neighbor New Zealand were widely considered two of the worst examples of authoritarian western response to the covid pandemic.  The Australian public was locked down and under house arrest in the larger cities.  In some cases only one person would be allowed to leave home at a time and could only travel a short distance to shop for necessities.  People who went to public parks or beaches were fined or arrested.  Covid camps were created to detain not only people who had traveled overseas, but also people who simply tested positive.

Most disturbing of all, Australian officials had people arrested who dared to criticize the lockdowns on social media. Australian news organizations widely defended such measures in lockstep with the government narrative.  With the exception of a few minor complaints, journalists from the land down under acted as propagandists for the government and for Big Pharma.

It was these Orwellian conditions and similar attempts across the west that led to many personalities in the alternative media to speak out and become decidedly anti-establishment.  One of those figures was podcaster Joe Rogan.  

Rogan attracted the full fury of the corporate media for engaging in interviews with lockdown critics who debunked many of the narratives put forward by government authorities.  As it turns out, in the majority of cases Rogan and his guests were right.  The fearmongering over covid was overblown.  The lockdowns were ineffective.  Social distancing was ineffective.  The masks were ineffective.  The vaccines were suspiciously experimental and proven less effective than natural immunity.  Death numbers were inflated by comorbidities.  

The virus itself only has an average Infection Fatality Rate (IFR) of 0.23%, meaning 99.8% of all people regardless of vaccination status were under no threat (the original false claims from the WHO and others was that the virus was deadly for 3% of people).     

The lockdowns were pointless in terms of public health, but very useful in terms of public control.

To this day, many in the media still despise Joe Rogan and the alternative media for revealing the inconsistencies within the covid theater.  Not to mention, they hate the fact that their elitist ivory tower is being torn down by civilian journalists.  This was the motivation behind a recent attack on Rogan by the head of the Australian Broadcasting Corporation, Kim Williams, at the Australian Press Club (Williams took over the position at ABC at the start of 2024).  Williams described Rogan as ‘malevolent’ – a person that ‘preys on the fears of the public’.

Many would refer to the venomous comments spit by Kim Williams as gaslighting and projection.  Joe Rogan is popular because of his sincerity, a quality which is severely lacking in modern journalism.  It’s the establishment media that commonly exploits fear and disinformation to set the public into a frenzy; it’s this very behavior that caused millions of consumers to abandon mainstream outlets in the first place. 

The ABC reported in 2023 that public trust in corporate media and the government was in steep decline post-covid.  Instead of asking why this is the case and having the courage to participate in some self examination, media elites have instead chosen to blame podcasters like Joe Rogan (and the supposed ignorance of the public) for their fall from grace.

When ABC radio host Raf Epstein (an employee) asked Williams to speak further about his views on Mr Rogan and expand on his broad-brush attack, the ABC boss dredged up old covid-era accusations with no validity. 

Epstein:  “Are you worried that podcasts that don’t provide the scrutiny that you might get on the ABC, that they are the future, and that we really are going out of fashion?”

Williams:  “Well, I would hope that we’re the best antidote to misinformation and, more alarmingly, disinformation…I mean, Joe Rogan did an enormous, in my view, an enormous amount of damage back in 2020 and 2021, when he was particularly virulent in many of his remarks about vaccinations…I don’t think people have unlimited license to say what they want, simply because they believe something to be so…”

It’s important to note that covid cases and deaths plunged in 2021 well before the experimental mRNA vaccines were widely released to the public.  It should also be noted that the vaccines did not prevent transmission as officials originally claimed.

Williams then turned to gaslighting.  Angry that he had received so much criticism online for his comments, he accused Rogan fans of being “made of glass” and unable to handle critique. 

Williams:  “What fascinates me is you say something negative about Joe Rogan – and I have been swarmed with the most unbelievably vicious responses. I got one this morning that said that I should stay in my lane and watch out, and you read it and you think, ‘What are you saying to me?’”

Epstein:  “Do you think they’ve got glass jaws?”

Williams:  “Their whole body is made of glass. How can people react in such a, frankly, demonic fashion? I really stand back in disbelief…”

Keep in mind, ABC news has shut off comments on the Youtube video of Williams’ Press Club interview.  Exactly the kind of behavior you would expect from a mainstream propagandist with a glass jaw. 

Asked whether podcasts were “a threat” to the ABC, Willaims answered in the affirmative.

“Of course they’re a threat to the ABC. I think they’re a threat to all views that are contrary into their own…If they represent the newfound mainstream, our society has deep troubles, and the only response that is available is to back education and knowledge…Knowledge is the is the antidote to this kind of hysterical rubbish.”

Considering the reality that the alternative media has been consistently proven right while the corporate media has been consistently exposed as dishonest, this kind of rhetoric from Williams rings rather humorous.  The attacks on alternative personalities like Rogan stink of desperation.  The last gasps of a dying institution long bereft of honor or honesty.   

Tyler Durden
Sun, 12/01/2024 – 11:05

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Extreme Speculation Has Returned

Extreme Speculation Has Returned

Authored by Lance Roberts via RealInvestmentAdvice.com,

A Holiday-Shortened Week

Last week, we discussed the increasingly bullish market forecasts for next year. We also noted that the market tends to trade positively heading into the Thanksgiving holiday, to which the market did not disappoint.

For the week, while there was a bit of sloppy trading along the way, the market finished at new highs, eclipsing the 6000 level on Friday. Technically, the market remains in a very bullish setup, holding support at the 20-DMA and then breaking out to new highs. That rally reversed the short-term “sell signal,” which gives the market room to trade higher into the first week of December. The rising trend line from the August lows remains the likely peak to any rally in December, and as noted last week, expect some weakness in the second and third week of December as mutual funds make annual distributions. For now, any corrective action in early December should be bought in anticipation for a rally into year end.

As we discussed previously, the key drivers for December will be continued share repurchases, portfolio manager rebalancing, and window dressing for year-end reporting. These supports will continue into year-end, and with the Federal Reserve likely to cut rates in mid-December, we expect market participants to remain on the “bull train” for now. As suggested last week:

“If you are underweight equities, consider minor pullbacks and consolidations to add exposure as needed to bring portfolios to target weights. Pullbacks will likely be shallow, but being ready to deploy capital will be beneficial. Once we pass the inauguration, we can assess what policies will likely be enacted and adjust portfolios accordingly.”

While there is no reason to be bearish, this does not mean you should abandon risk management. As we will discuss this week, investors are becoming exceedingly optimistic once again.

Investors Are Very Optimistic

I recently wrote an article on how investors have rarely been so “exuberant” in the markets. To wit:

“Consumer confidence in higher stock prices in the next year remains at the highest since 2018, following the 2017 “Trump” tax cuts.

We also discussed households’ allocations to equities, which, according to Federal Reserve data, have reached the highest levels on record.

But we also see exuberance in overall equity allocations in the markets climbing higher with the market.

Professional investors are ramping up exposure to chase the market into year-end. The chart below of the NAAIM Index highlights when professional investor allocations exceed 97%. Such has historically been at or near short-term market peaks. In other words, professional investors are no different than retail investors who ” buy tops” and “sell bottoms.”

While allocation levels and optimism are certainly signs of market bullishness, those levels are more of a function of a massive flow of liquidity. In other words, there is “too much money chasing too few assets.” However, it is crucial to understand that “exuberance” is a necessary ingredient for pushing asset prices higher. This is why “sellers live higher, and buyers live lower.” In every market and asset class, the price is determined by supply and demand. If there are more buyers than sellers, then prices rise, and vice-versa. While economic, geopolitical, or financial data points may temporarily affect and shift the balance between those wanting to buy or sell, in the end, the price is solely determined by asset flows.

Currently, rising liquidity levels support investor optimism as asset prices continue to rise. However, as we will discuss, such activity does not necessarily equate to more “extreme speculation,” which often precedes significant market corrections. While optimism can drive short-term gains, history shows that extreme speculation detaches valuations from fundamentals, leaving the market vulnerable to larger declines.

As we noted in that previous article:

“Risk isn’t always what it seems. When the market feels the safest, that’s often when it’s often the riskiest. Think about it — when everything is going smoothly, people tend to take more risks, which can lead to market bubbles and crashes.”

However, when investor optimism morphs into more extreme speculative behaviors, investors should consider a more cautious outlook.

Signs Of Extreme Speculation

Following the 2020 pandemic shutdown, the Government and Federal Reserve went into overdrive, providing round after round of fiscal and monetary support. Money flooded into the economy, from PPP Loans to rent moratoriums, $1500 checks directly to consumers, debt forgiveness, zero interest rates, and quantitative easing. Unsurprisingly, much of that money entered the financial markets, and retail investors plowed nearly $900 billion in market-related ETFs. Interestingly, in 2024, most of those supports are gone, interest rates have risen sharply, and the Federal Reserve is reducing its balance sheet. Yet, somehow, investors figured out a way to push $913 billion (YTD) into ETFs, which is a record inflow.

That surge of capital into ETFs has contributed to the outsized performance of large capitalization companies, primarily the “Magnificent 7,” relative to the rest of the index.

However, it is not just U.S. investors dumping money into the financial markets. Foreign investors have also been shifting capital to the U.S. financial markets versus other countries.

As noted above, there is nothing wrong with investor optimism, which moves markets higher. However, when markets continually rise, even in an environment where they shouldn’t (high interest rates), such leads investors to throw caution to the wind by taking on additional risk. As that risk-taking builds and is rewarded by higher prices, risk-taking morphs into more extreme speculation. For example, the surge of capital into 3x Leveraged S&P 500 ETFs has been remarkable.

However, it isn’t just that one ETF that investors are aggressively piling funds into. The chart below shows the surge in all levered ETFs.

In addition to the two examples of growing leverage and market speculation, Michael Lebowitz noted in our Daily Market Commentary:

“We see surging volume in leveraged single-stock ETFs. An example of such an ETF is Granite Shares NVDL. The ETF offers a 2x leveraged holding of Nvidia shares. If Nvidia falls by 3%, the ETF will decline by 6%. Conversely, if Nvidia rises by 5%, the ETF will climb 10%. Accordingly, leveraged single-stock ETFs can be incredibly speculative. Furthermore, the massive surge in volume in such ETFs, as we share below, further confirms speculative behaviors are growing.

Leverage and extreme speculation can drive markets higher than most investors forecast. However, in the process, they create a divergence between fundamentals and valuations, thus exposing the markets to risk. Increased leverage and speculation are not reasons to sell immediately, but they indicate that markets are getting frothy, warranting our close attention.

As he notes, the problem with taking on leverage is that while leverage works to your benefit on the way up, it will crush investors on the way down. A good example is the levered 2x Long ETF (MSTU) for Microstrategy (MSTR), the 5th most traded ETF on November 20th.

The problem is that MicroStrategy peaked the following day and has since wiped out a large chunk of that more extreme speculation.

However, such is always the consequence of speculation, and the end results are always poor. While speculation can last for some time, it always does end. Unfortunately, what causes it to end is a failure of the underlying fundamentals to keep up with the fantasy.

Signs To Watch To Signal The End Of Extreme Speculation

This brings us to the obvious question, “What should I be watching for to signal a shift in investor sentiment?”

Part of that answer falls into forward earnings expectations. Forward earnings estimates are optimistic and well above their long-term historical logarithmic growth trend. While such deviations existed previously, they were usually close to the point where such optimism ended. The ends of those exuberant periods of earnings growth generally coincided with a recession or a mean-reverting event. However, while estimates are currently very elevated, they can remain that way longer than you think possible.

The timing of an event that reverses extreme speculation is always the most challenging part. However, as discussed this past week, credit spreads can provide us vital clues as to a shift in sentiment that has not yet become apparent in the equity markets. To wit:

“Watching spreads provide insights into the health of the corporate sector, which is a major driver of equity performance. When credit spreads widen, they often lead to lower corporate earnings, economic contraction, and stock market downturns. Widening credit spreads are commonly associated with increased risk aversion among investors. Historically, significant widening of credit spreads has foreshadowed recessions and major market sell-offs. Here’s why:”

  1. Corporate Financial Health: Credit spreads reflect investor views on corporate solvency. A rising spread suggests a growing concern over companies’ ability to service their debt. Particularly if the economy slows or interest rates rise.

  2. Risk Sentiment Shift: Credit markets tend to be more sensitive to economic shocks than equity markets. When credit spreads widen, it typically indicates that the fixed-income market is pricing in higher risks. This is often a leading indicator of equity market stress.

  3. Liquidity Drain: As investors become more risk-averse, they shift capital from corporate bonds to safer assets like Treasuries. The flight to safety reduces liquidity in the corporate bond market. Less liquidity potentially leads to tighter credit conditions that affect businesses’ ability to invest and grow, weighing on stock prices.

Given the exceptionally low spread between corporate and treasury bonds, the bull market remains healthy, so extreme speculation is being rewarded. However, as shown below, such periods ALWAYS end.

“While there are several credit spreads to monitor, the high-yield (or junk bond) spread versus Treasury yields is considered the most reliable. That spread has been a reliable predictor of market corrections and bear markets. The high-yield bond market consists of debt issued by companies with lower credit ratings. Such makes them more vulnerable to economic slowdowns. As such, when investors become concerned about economic prospects, they demand significantly higher returns to hold these riskier bonds. When that happens, the spreads widen warning of increasing risks.

Historically, sharp increases in the high-yield spread have preceded economic recessions and significant market downturns, giving it a high degree of predictive power. According to research by the Federal Reserve and other financial institutions, the high-yield spread has successfully anticipated every U.S. recession since the 1970s. Typically, a widening of this spread by more than 300 basis points (3%) from its recent low has been a strong signal of an impending market correction.”

As investors, we suggest monitoring the high-yield spread closely because it tends to be one of the earliest signals that credit markets are beginning to price in higher risks. Unlike stock markets, which can often remain buoyant due to short-term optimism or speculative trading, the credit market is more sensitive to fundamental shifts in economic conditions.

The current bullish sentiment will continue to push asset markets higher in the near term. However, extreme speculation like we are seeing in various areas of the market will eventually end, and likely end badly for most. The timing of the event is the most difficult part.

*  *  *

Are you looking for complete financial, insurance, and estate planning? Need a risk-managed portfolio management strategy to grow and protect your savings? Whatever your needs are, we are here to help.

Tyler Durden
Sun, 12/01/2024 – 10:30

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These Are The World’s Binge-Drinking-est Countries

These Are The World’s Binge-Drinking-est Countries

Which countries tend to drink the most on average?

As Statista’s Anna Fleck reports, according to the World Health Organisation, Austria, Ireland and Czechia are the world’s biggest binge-drinkers.

Infographic: The world's worst countries for binge-drinking | Statista

You will find more infographics at Statista

That term is defined as consuming more than six units or three pints of lager on one occasion over the past 30 days.

Read more on the indy100.

Tyler Durden
Sun, 12/01/2024 – 08:45

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5 Critical Elections To Watch Out For In 2025

5 Critical Elections To Watch Out For In 2025

Authored by Jacob Burg via The Epoch Times,

Next year could be pivotal for both Democrats and Republicans, as the former will look to regain ground after an array of losses in 2024, while their opponents are eager to grow their existing electoral advantages.

Even though 2025 will lack the same decisive electoral landscape seen in general election years like 2024—where control for both Congress and the White House was hanging in the balance—there are key contests next year that could test both Republicans’ and Democrats’ viability moving forward.

These races will also determine the extent and strength of public support for President-elect Donald Trump and whether his victories across the Electoral College and national popular vote are indicative of a broader mandate, as he and his allies have suggested.

Here are some of the critical races to watch in 2025.

Virginia Governor and Legislature

Virginia is one of several states where Trump improved on his 2020 numbers. That year he secured 44 percent with roughly 1.96 million votes. But this year, Trump climbed to 46.6 percent, with 2.01 million votes.

Virginia governors are limited to a single term, which means Republican Gov. Glenn Youngkin cannot run for reelection. When Youngkin won in 2021, he was the first Republican to win a statewide election in the Old Dominion since 2009.

While Virginia has voted for a Democrat presidential candidate in every election since 2008, Vice President Kamala Harris’s margin of victory was 5.2 percent, compared to then-candidate Joe Biden’s 10.1 percent margin of victory in 2020.

Virginia’s Republican attorney general Jason Miyares has decided not to run, leaving the field open for Lt. Gov. Winsome Earle-Sears, a Republican who Younkin endorsed as his successor.

Rep. Abigail Spanberger (D-Va.) launched her gubernatorial campaign in late 2023, which could create a scenario for Virginia to elect its first female governor if she wins the Democrat primary and runs against Earle-Sears, the first woman to serve as the state’s lieutenant governor.

Trump’s performance next year could be critical for the race, particularly among voters in Virginia’s Washington suburbs.

Two years ago, Democrats were able to flip control of Virginia’s House of Delegates, one-half of its state legislature, to give them a slim 51–49 majority.

After Trump halved Democrats’ White House margins between 2020 and 2024 in the Old Dominion, these races next year could be a critical test of whether that GOP performance will endure past 2024.

Democrats also hold a narrow majority in Virginia’s state Senate, 21–19. They will try to hold onto those advantages while Republicans will battle for potential upsets, which will be critical if Democrats win the governor’s race.

The GOP would need control of Virginia’s Legislature to check the agenda of a potential incoming Democrat governor if Republicans lose that race.

New Jersey Governor

Like Virginia, Trump’s numbers vastly improved in New Jersey in 2024. Four years ago, Biden carried the state by 15.94 percent, but Harris’s win this year was by a far smaller margin of 5.9 percent.

This was indicative of a broader trend in 2024, where Trump made considerable gains in multiple blue states compared with 2020.

In New Jersey, Republicans are hoping to carry that success into 2025 by flipping the governor’s mansion.

Democrat Gov. Phil Murphy is term-limited, and his margin of victory in 2021 was just 3 points, far smaller than his 13.5-point win in 2017.

State Reps. Mikie Sherrill and Josh Gottheimer, Newark Mayor Ras Baraka, Jersey City Mayor Steven Fulop, former Montclair Mayor Sean Spiller, and former state Senate President Steve Sweeney are among Democrats mulling the gubernatorial primary.

Republican Jack Ciattarelli, who lost to Murphy in 2021, is considering next year’s GOP primary along with radio host Bill Spadea, state Sen. Jon Bramnick, and former state Sen. Ed Durr. Trump’s looming endorsement could impact who clinches the Republican primary in 2025.

New York City Mayor

In another historically blue state, there’s a critical test for New York City Major Eric Adams, a Democrat, who is up for reelection next year amid low approval ratings and federal corruption charges.

According to a Justice Department statement, prosecutors allege in September that Adams “has used his prominent positions in New York City government to obtain illegal campaign contributions and luxury travel” and “solicited and accepted these benefits from foreign nationals, businessmen, and others.”

“By allegedly taking improper and illegal benefits from foreign nationals—including to allow a Manhattan skyscraper to open without a fire inspection—Adams put the interests of his benefactors, including a foreign official, above those of his constituents,” U.S. Attorney Damian Williams said in the statement.

Adams has denied any wrongdoing and pleaded not guilty to the charges. The federal trial is set to begin in April 2025.

Many Democrats have entered the race to challenge the incumbent, including New York City Comptroller Brad Lander, New York State Assemblyman Zohran Mamdani, state senators Zellnor Myrie and Jessica Ramos, former New York City Comptroller Scott Stringer, former Obama White House aide Michael Blake, and Democrat donor Whitney Tilson.

Attorney Jim Walden, an independent, will also run in the race.

Wisconsin Supreme Court

In 2025, partisan control of Wisconsin’s Supreme Court will be on the ballot.

Currently at a 4–3 liberal majority, Wisconsin’s high court will split to 3–3 after Justice Ann Walsh Bradley’s retirement.

Those running for Bradley’s seat are Dane County Judge Susan Crawford, a liberal, and former state Attorney General Brad Schimel, a Republican.

In addition to Planned Parenthood of Wisconsin, Crawford also represented the Madison teachers union during their lawsuit challenging former Republican Gov. Scott Walker’s Act 10, which restricted many public workers’ collective bargaining rights.

Schimel, who is now a Waukesha County Circuit Court judge, handled several prominent cases as attorney general, including an appeal to state legislative maps that were struck down as an unconstitutional gerrymander in 2016.

The case was heard by the U.S. Supreme Court and successfully appealed.

Schimel also appealed a case trying to revive a 2013 law that said physicians with admitting privileges to a hospital within 30 miles of an abortion procedure were the only doctors who could perform the procedure.

The case was brought before the U.S. Supreme Court, which declined to hear the case.

In 2023, the last time Wisconsin’s Supreme Court partisan control was on the ballot, groups broke records and spent tens of millions of dollars in advertising on the election cycle.

Tyler Durden
Sun, 12/01/2024 – 08:10

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Zelensky More Unpopular Than Ever After Nearly 3 Years Of War: Mainstream Media Admits

Zelensky More Unpopular Than Ever After Nearly 3 Years Of War: Mainstream Media Admits

While the war-weary US and European populations have long ago lost their fascination with Ukraine’s President Volodymyr Zelensky, which was on display during his September trip to Washington—largely met with little enthusiasm even among Congressional leaders—it is less common for the mainstream media to admit his star power has completely faded.

However, a fresh assessment in Britain’s The Times newspaper details the extent to which there’s been a general “disenchantment” with him both at home and abroad as he’s clearly lost his “shine”.

Amid steady Russian military gains in the east, and under pressure by Washington drop the military enlistment age from 25 to 18 (which would be hugely unpopular among Ukrainians), if a presidential vote were held tomorrow Zelensky would very likely lose.

Youngest Ukrainian president ever, via AFP/Getty Images

“Just 16 per cent would vote to re-elect him for a second term, according to an opinion poll of 1,200 Ukrainians published this week by the Social Monitoring Centre in Kyiv,” The Times writes. “The poll, the most comprehensive study of electoral preferences since the invasion began in 2022, also found that about 60 per cent would prefer Zelensky not to even stand for re-election.”

The publication comments bluntly that this shows “Zelensky’s popularity is fading” and the reality is “very few Ukrainians envision him as their next president.

Perhaps he himself is fully aware of this, after having canceled scheduled elections last spring, and extending indefinitely the maintenance of martial law across the country which prevents a valid election from taking place.

On the inevitability of Zelensky’s popularity fading and plummeting, The Times observes further:

It was perhaps inevitable that Zelensky’s leadership would lose its shine. No Ukrainian president apart from Leonid Kuchma, whose 1999 re-election was marred by suspicions of vote fraud, has secured a second term since the country gained independence from the Soviet Union.

“Maintaining popularity in this country is incredibly challenging, particularly during a difficult war,” Ponomarenko said. “It is a pattern we’ve seen before. We elect a new ‘saviour of the nation’ as president with sky-high approval ratings, quickly grow disillusioned and, in the best case, ensure their landslide defeat in the next election.”

But the “next election” may be further away than ever, as Zelensky is unlikely to relinquish power so long as the war with Russia continues. If a full truce is eventually secured, he may actually step down soon afterward.

As for the aforementioned poll and potential rivals to the presidency, the same publication notes that “ahead of Zelensky, with 27 per cent was Valery Zaluzhny, the former commander-in-chief of the Ukrainian armed forces who has served as the ambassador to Britain since July.”

But again, all of this is reason enough to believe that Zelensky will keep pushing elections further and further down the road, and with no clear timeline of lifting martial law in the war-ravaged nation. Currently, he’s still going all-in with pressing Western allies for NATO membership.

Tyler Durden
Sun, 12/01/2024 – 07:35

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US Reps Urge Biden For Full Pardon Of Julian Assange

US Reps Urge Biden For Full Pardon Of Julian Assange

Authored by Dave DeCamp via AntiWar.com,

House Reps. Thomas Massie (R-KY) and James McGovern (D-MA) have sent a letter to President Biden urging him to pardon WikiLeaks founder Julian Assange to send a message that Biden will “not target or investigate journalists and media outlets simply for doing their jobs.”

“We write, first, to express our appreciation for your administration’s decision last spring to facilitate a resolution of the criminal case against publisher Julian Assange and to withdraw the related extradition request that had been pending in the United Kingdom,” Massie and McGovern wrote in the letter dated November 1, which was first made public earlier this past week.

Via Fox News

Assange was freed in a plea deal earlier this year after spending more than five years in London’s Belmarsh Prison while battling a US extradition request. He was indicted by the Trump administration in 2019 for exposing US war crimes by publishing classified documents leaked to WikiLeaks by former Army Private Bradley (now Chelsea) Manning in 2010.

Under the indictment, Assange could have faced up to 175 years in prison in the US for publishing the documents, a standard journalistic practice. While the plea deal set him free, it required him to plead guilty to violating the Espionage Act.

“The terms of Mr. Assange’s plea agreement have now set a precedent that greatly deepens our concern,” Massie and McGovern said. “A review of prosecutions under the Espionage Act makes clear that Mr. Assange’s case is the first time the Act has been deployed against a publisher.”

The lawmakers pointed to comments from Jodie Ginsberg, the CEO of the Committee to Protect Journalists, who said, “While we welcome the end of his detention, the US’s pursuit of Assange has set a harmful legal precedent by opening the way for journalists to be tried under the Espionage Act if they receive classified material from whistleblowers.”

Massie and McGovern concluded the letter by saying, “We therefore urge you to consider issuing a pardon for Mr. Assange. A pardon would remove the precedent set by the plea and send a clear message that the US government under your leadership will not target or investigate journalists and media outlets simply for doing their jobs.”

According to Fox News, Assange’s brother, Gabriel Shipton, is heading to Washington in January to push for a pardon before Biden leaves office. Click here to add your name to an open letter calling on Biden to pardon the WikiLeaks founder.

Tyler Durden
Sun, 12/01/2024 – 07:00

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The Five Reasons Why Syria Was Caught By Surprise

The Five Reasons Why Syria Was Caught By Surprise

Authored by Andrew Korybko via substack,

The disaster in Aleppo was avoidable and is just as bad as it looks…

The Turkish-backed terrorists’/“rebels’” advance on Aleppo, which was analyzed here, came as a shock to most observers.

There was almost half a decade of peace between the March 2020 ceasefire and now, yet practically nothing was done to prepare for this possibility.

This was in spite of the front line remaining roughly two dozen kilometers away from Aleppo, which should have reminded Assad of how vulnerable his country’s second city is.

Here are the five reasons why Syria was caught by surprise:

1. Complacency & Corruption

The Syrian Arab Army (SAA) rested on its laurels because it took the Russian-brokered ceasefire for granted, after which the country’s infamous corruption kicked in to degrade its capabilities. There’s no excuse for why even basic drones weren’t used for intelligence, surveillance, and reconnaissance (ISR) to detect the buildup that preceded this advance. A large part of why the SAA didn’t do anything is likely because it assumed that its Russian and Iranian allies would shoulder these responsibilities for them.

2. The Russian-Iranian Rivalry

Russia and Iran fought together against terrorism in Syria, but they’re also rivals who are competing with each other for premier influence over Damascus. So intense is their competition that Russia always does nothing other than occasionally complain whenever Israel bombs the IRGC there, never once giving Syria the means to intercept these attacks or retaliate afterwards. Had they not been rivals, then Russia and Iran could have jointly strengthened the SAA, carried out ISR in Idlib, and bolstered Aleppo’s defenses.

3. Distracted & Crippled Allies

To make matters even worse for Syria, the terrorists’/“rebels’” advance on Aleppo came precisely at the moment when Russia is distracted with the special military operation (SMO) and Iran has been crippled by its West Asian Wars with Israel. Without sufficient Russian airpower and Iranian manpower, including that which the latter could have called upon from Hezbollah, it’ll be extremely difficult for the SAA to push the attackers away from Aleppo. This factor, more than any other, might have even sealed its fate.

4. Ignoring The SMO’s Lessons

Even amidst the Russian-Iranian rivalry and its allies’ aforesaid problems, the SAA could have learned the SMO’s lessons on its own and correspondingly prepared much better for what ultimately came to pass. Masterful drone tactics and strategically dispersed units have characterized the attack thus far, both of which are hallmarks of the SMO, yet the SAA was totally unprepared for this. It must therefore take final responsibility for failing to do its duty in learning from that conflict and adapting its defenses accordingly.

5. Not Compromising For Peace

The last reason why Syria was caught by surprise is because it didn’t compromise for peace by accepting 2017’s Russian-written “draft constitution”, which was constructively critiqued in detail here. It’s chock-full of concessions so one can sympathize with Syria for rejecting it, but in hindsight, this could have finally resolved the conflict and thus averted the ongoing fiasco in Aleppo. For this reason, it could be revived during these desperate times, but the “opposition” might now demand even more concessions.

The disaster in Aleppo was avoidable and is just as bad as it looks.

It’s not part of a “5D chess master plan” to “trap the terrorists in a cauldron” like some members of the Alt-Media Community have implied or claimed.

Observers should reject the “insight” shared by those who already discredited themselves with their fantastical takes on the SMO and the West Asian Wars.

The “politically inconvenient” truth is that Syria was caught by surprise, the SAA is on the backfoot, and the worst might be yet to come.

Tyler Durden
Sat, 11/30/2024 – 23:20

via ZeroHedge News https://ift.tt/3l5kv6f Tyler Durden