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The persistence of the recent stock rally is nearly unprecedented in the past 50 years.

Perhaps the most impressive aspect to the stock market rally over the past several months has been its relentlessness. Much to the bears’ chagrin, it has felt as if the market is on a one-way ticket higher. If you have observed this reluctance on the part of stocks to go down, you are not imagining things. By some quantitative measures, the recent bid is among the most relentless the market has seen in the past half century.

For example, it’s been our recent observation that, no matter how the market opened, it has consistently closed the day strongly. We took a look at that apparent trend more objectively and found some evidence to back up our observation.

Specifically, we looked at the recent intra-day behavior in the S&P 500. We did this by measuring the index’s closing price minus its opening price on a daily basis. Positive readings indicated strong intra-day action while negative readings signaled weakness. We, in turn, tallied all of the negative intra-day readings (e.g., days when the S&P 500 closed below its open) over rolling 25-day periods.

Going back 55 years, the average cumulative intra-day losses over a 25-day period is about 660 basis points, or 6.6%. As of yesterday (October 10), the last 25 days have seen a grand total intra-day loss of just 96 basis points, or 0.96%. If that seems small, it is.

In fact, outside of the period ending November 26, 2014, this is the smallest cumulative 25-day intra-day loss in the past 46 years – and the only one registering less than 100 basis points.

So, what is the message behind this relentless bid? Is the market over-extended and overdue for a pullback? Or is the bid a sign of persistent demand, standing ready to continue to buoy stock prices?

*  *  *

In a premium post at The Lyons Share, we take a quantitative look at similar relentless bids throughout history and the subsequent reactions in the stock market. The results help orient our expectations of the potential aftermath to our present situation. If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. Considering what we believe will be a very difficult investment climate for awhile, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

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“Cage-free” eggs were supposed to be the next big thing in America.  Over the past several years everyone from McDonalds to Wal-Mart has promised to convert to cage-free eggs on the premise that millennial consumers would demand at least 144 square inches of space for the layers of their morning omelettes to frolic in freedom. As it turns out, Americans couldn’t seem to care less whether chickens have 144 square inches of freedom or the hisotrical 67 square inches…they just want cheap eggs, hold the bullshit. 

As Bloomberg points out this morning, egg producers all over the country are scrapping plans for cage-free projects as people simply don’t seem to be interested in paying 7.5x more for their “humane” products compared to the same ole eggs they’ve purchased their whole life.

A dozen cage-free large browns cost as much as $2.99 in the Midwest last week, for example, while a carton of Grade AA white conventionals went for as little as 39 cents, according to the U.S. Department of Agriculture.

 

That “higher-price gap,” as Cal-Maine Foods Inc. CEO Dolph Baker called it, has cut into specialty-egg demand. The company, the largest U.S. egg producer, said earlier this month it is adjusting its cage-free output accordingly.

The largest egg producers, from Rose Acres in Indiana to a project in Arizona, say their shutting down their cage-free capital projects until consumers show in interest in paying a market-clearing price for the product.

The producer, which started turning a profit in September after 15 months in the red, is finishing work on these types of barns in Indiana and Arizona and mothballing another Arizona project, Rust, the CEO, said. Then it’ll wait, for as long as it takes. “We are going to be in a holding mode until retail pays a warranted price.”

 

“It’s been bad,” said Marcus Rust, chief executive officer of Seymour, Indiana-based Rose Acre Farms Inc., the second-largest U.S. egg producer. It spent $250 million over four years to upgrade conditions; today about 20 percent of its hens are cage free. And now, Rust said, “we are shutting our construction program down.”

 

The whole industry is slowly climbing out of a period of losses, which sets up a sort of chicken-and-egg predicament: Many farmers are too strapped at the moment to build facilities they may need in a few years, when — some skeptics say if — big buyers make good on their cage-free promises.

 

Few “are in a hurry to make the transition,” said Jesse Laflamme, CEO of Pete and Gerry’s Organics in Monroe, New Hampshire. Farmers aren’t sure which way to turn or how fast. “It’s going to be turbulent.”

Of course, if you live in the great state of California then you have no choice but to buy cage-free eggs after legislators there passed a law requiring that “eggs sold in the state to be laid by chickens whose confinement allows them to lie down, stand up, extend their limbs and turn around.”  We can only imagine how many $15 per hour minimum wage workers will be required to visit hen houses all over the state to ask each chicken to turn around…

The egg oversupply built up after the 2015 avian-flu outbreak killed tens of millions of chickens, sent prices soaring and spurred aggressive restocking. At the same time, some producers started expanding hens’ living quarters. A California law that year required eggs sold in the state to be laid by chickens whose confinement allows them to lie down, stand up, extend their limbs and turn around. McDonald’s and Wal-Mart said they’d aim to make the cage-free shift by 2025. Others in the business of acquiring wholesale eggs set similar goals.

 

Some pledgers, such as food-service providers Sodexo Inc. and Aramark, are well along the way to completely converting to cage-free for eggs in shells in the U.S., according to the advocacy group Compassion in World Farming. It said in a recent report that others, including Marriott International Inc. and Walt Disney Co., haven’t made public how they’re progressing. McDonald’s, which buys around 2 billion eggs every year in the U.S., is on track to meet its 2025 mark, the company said. Wal-Mart declined to comment, and Marriott and Walt Disney didn’t immediately respond to requests for comment.

Just another misinformed, liberal policy that disproportionately hurts the poorest American families…ironically, the families that Democratic California politicians say they’re most eager to help.

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It didn’t take long for Europe’s biggest nations – the other signatories to the Joint Comprehensive Plan of Action, aka the Iran Nuclear Deal –  as well as Russia, to slam Trump’s unilateral decision to decertify the Iran agreement and, in the process, put the entire deal in jeopardy. Moments ago, in a joint statement, Theresa May, Angela Merkel and Emmanuel Macron all reiterated their commitment to the JCPOA, are concerned by the possible implications of Trump’s decision not to recertify the deal, and urged the US to think hard before taking further steps that might undermine it further.

Here is the statement they released together moments ago:

We, the Leaders of France, Germany and the United Kingdom take note of President Trump’s decision not to recertify Iran’s compliance with the Joint Comprehensive Plan of Action to Congress and are concerned by the possible implications.

 

We stand committed to the JCPoA and its full implementation by all sides. Preserving the JCPoA is in our shared national security interest. The nuclear deal was the culmination of 13 years of diplomacy and was a major step towards ensuring that Iran’s nuclear programme is not diverted for military purposes. The JCPoA was unanimously endorsed by the UN Security Council in Resolution 2231. The International Atomic Energy Agency has repeatedly confirmed Iran’s compliance with the JCPoA through its long-term verification and monitoring programme. Therefore, we encourage the US Administration and Congress to consider the implications to the security of the US and its allies before taking any steps that might undermine the JCPoA, such as re-imposing sanctions on Iran lifted under the agreement.

 

At the same time as we work to preserve the JCPoA, we share concerns about Iran’s ballistic missile programme and regional activities that also affect our European security interests. We stand ready to take further appropriate measures to address these issues in close cooperation with the US and all relevant partners. We look to Iran to engage in constructive dialogue to stop de-stabilising actions and work towards negotiated solutions.

Federica Mogherini, the EU foreign policy chief, responded to the Trump announcement, saying the eight inspections have so far shown Iran in compliance with the nuclear deal. “There have been no violations of any of the commitments included in the agreement,” she said.

“The deal has prevented and continues to prvenet Iran from developing nuclear weapons.”

She added that the US President has many powers but that no single country has the authority to nullify the deal. “The international community, and the E U with it, has clearly indicated that the deal is – and will continue to be – in place,” she said.

Russia expressed similar sentiment, with Sergey Lavrov quoted by RIA as saying that all sides should stick to the deal and saying that the main task now is preventing the nuclear deal from collapsing.

Ironically, it was up to none other than Iran itself to remind Trump that the “deal” is not unilateral:

• ROUHANI: TRUMP DOESN’T KNOW NUCLEAR DEAL ISN’T UNILATERAL
• ROUHANI TO TRUMP: ONE COUNTRY CAN’T DICTATE TERMS OF IRAN DEAL

There was one nation that was delighted by today’s events however: the true sponsor of terrorism in the Middle East and around the globe, and certainly on September 11: Saudi Arabia. The Saudis welcomed the new US policy towards Iran and said lifting sanctions had allowed Iran to develop its ballistic missile program and step up its support for militant groups, state news agency SPA reported on Friday. The kingdom said Iran took advantage of additional financial revenues to support for the Lebanese Shia movement Hezbollah and the Houthi group in Yemen.

Actually, there was another. Israel.

Israeli Prime Minister Benjamin Netanyahu congratulated Trump for his speech, seeing an opportunity to change the 2015 nuclear deal with Tehran as well as Iranian conduct in the region. “He boldly confronted Iran’s terrorist regime (and) created an opportunity to fix this bad deal, to roll back Iran’s aggression and to confront its criminal support of terrorism,” he said in a Facebook video.

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Authored by MN Gordon via The Economic Prism blog,

The Dow’s march onward and upward toward 30,000 continues without reservation.  New record all-time highs are notched practically every day.  Despite yesterday’s 31-point pullback, the Dow’s up over 15.5 percent year-to-date.  What a remarkable time to be alive.

The President, Donald Trump, is pumped!  As Commander in Chief, he believes he possesses divine powers.  He can will the stock market higher – and he knows it.  For example, early Wednesday morning he blasted out the following Tweet:

“Stock Market has increased by 5.2 Trillion dollars since the election on November 8th, a 25% increase.”

Four minutes later, he sent out another Tweet:

“…if Congress gives us the massive tax cuts (and reform) I am asking for, those numbers will grow by leaps and bounds.”

Who knows?  Maybe President Trump is right.

These days even bad reforms – and just about everything else – are good for stocks.  And what’s good for stocks is good for everything.  For instance, according to President Trump stock market gains reduce the national debt.  He even said so this week.

President Trump’s logic for how higher stock prices reduce the national debt was unclear.  But it certainly sounds good to say.  More importantly, it sounds bullish.

Smart and Savvy Investors

On the other hand, obvious risks and hazards no longer matter. 

Not the prospect of nuclear war with North Korea will stop this bull market.  Not the gold backed yuan oil exchange agreements being developed between Beijing, Moscow, and Tehran, and the implications for the petrodollar’s reserve currency status.  Not weak jobs numbers.

So, too, runaway government debt, consumer debt, and corporate debt haven’t fazed the stock market’s trajectory.  Because everyone loves debt.  Especially bankers.  They want more debt so they can buy more stocks.

Nosebleed level valuations don’t matter either.  Because, if you haven’t heard, high valuations are no longer high; they’re permanent.  Likewise, the beginning of the Fed’s great unwind of its $4.5 trillion balance sheet has hardly elicited a flinch.

President Trump’s shoddy tax reform proposal, the proposal that would tax income that’s already confiscated via state and local taxes, hasn’t done a thing to deter today’s smart and savvy investors.  Why should they care about taxes when, thanks to The Donald, their portfolio wealth has increased by 25 percent since election day?

Of course, smart and savvy investors, particularly buy and hold index investors, have reaped plentiful fruits for mindlessly plowing their capital into low cost S&P 500 index ETFs.  Indeed, this strategy has worked well for nearly a decade.  Surely it will continue, right?

A passively managed S&P 500 Index ETF, such as the SPDR S&P 500 ETF (NYSE: SPY), is up over 279 percent since March 9, 2009.  Investors that merely bought and held have been rewarded for their lack of discrimination.  Conversely, those who scratched their head, did some homework, and concluded that the market’s fundamentals are deficient, have been sorely punished.

The Donald Can’t Stop It

Yet, while SPY investors have experienced the delightful sensation that comes with a burgeoning investment portfolio, they’ve also been handicapped.  The extended bull market has lulled them into believing that investing is easy.  All you need to know are several simple rules.

Buy and hold the SPY.  Dollar cost average.  Eschew individual stocks.  You’ll always come out ahead over the long-run.

A SPY buyer doesn’t need to study businesses to understand which ones are profitable and which aren’t.  They don’t need to bother with the tedious task of analyzing a company’s financial statement and making inferences about its growth prospects and risks.  They don’t have to read footnotes.  They don’t have to do any work.  They don’t even have to think.

But not only has the bull market made the SPY popular for individual investors.  It has also made it a popular investment for funds and institutions.  This combination has served to relentlessly push the market higher, even though there’s no fundamental rhyme or reason to justify it.

Certainly, buying SPY has been a great strategy over the last eight years.  Who can argue with 279 percent returns?  However, it’s unlikely to be a good strategy over the next eight years.

You see, passively managed ETFs that simply mirror the movement of the S&P 500 are a fantastic investment vehicle when the stock market rises over an extended period.  On the other hand, in a bear market, when there’s a protracted stock market decline, these passively managed index tracking ETFs are terrible investments.  When the stock market crashes by 50 percent – which it likely will, these ETFs will also crash by 50 percent.

No doubt, with each passing day, the bull market moves closer to the next bear market.  That’s when the trajectory will no longer be up.  But, rather, it’ll be down.  That’s when SPY portfolios will vaporize as the herd attempts to panic out of the market at precisely the same moment.

What’s more, when push comes to shove, The Donald can’t stop it.

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Russia and China Strengthen Their Alliance, Weakening the US Dollar in the Process

Written by Nathan McDonald, Sprott Money News

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Just a couple of weeks ago, we wrote a post about Citibank and the 35 year old they recently put in charge of once again making the bank into a powerhouse in the Synthetic CDO market.  Less than a decade after being forced to take a taxpayer funded bailout to avoid an embarrassing bankruptcy filing, it seemed as though Citi had learned precisely the wrong lesson from the 2009 financial collapse, namely that their bad behavior would forever be backstopped by the American taxpayer.  But please don’t lose too much sleep over the risk to your tax bills because this time Citi says they’re positive they’re building the business in a “way that insulates them from any losses.”

Now, fast forward just a couple of weeks and it seems that the serial high-yield issuer, Windstream Communications, is suddenly reminding wall street why it’s a bad idea to package up a bunch of synthetic securities referencing risky credits, lever it 10x and then tranche it up and pretend there is no risk.

As Bloomberg points out today, in the beginning of August, Windstream’s 2-year credit spreads were historically tight to 5-year risk, a phenomenon partially attributable to a surge in Synthetic CDO demand for short-dated contracts.  But that all changed in a matter of weeks after Windstream missed earnings, cut its dividend and got slapped with lawsuit from a hedge fund alleging that one of the company’s spinoffs amounted to a default.

The telecommunications company features in an estimated $3.5 billion of complex wagers — known as synthetic CDOs — that the global credit boom will keep America’s heavily indebted companies out of trouble for a while longer. Junk-rated Windstream, along with the magic of financial engineering, helped Wall Street turbocharge yields and breathe new life into an exotic investment that had been left for dead in the wreckage of the 2008 financial crisis.

 

Now, the company has emerged as a troubling omen as it tussles with a hedge fund that Windstream says is trying to push it into bankruptcy. After synthetic CDO bets sent the cost of insuring the company’s debt in the short-term toward historic low levels, Windstream’s sudden troubles are giving investors a flavor of how quickly their fortunes can turn.

 

“We have seen this movie before,” said Peter Tchir, a strategist at Academy Securities Inc. in New York, who has traded and advised on credit derivatives for over two decades. “Investors become convinced that while there might be risk, it is further in the future. It leaves the market susceptible to surprises.”

 

“Just like in early 2007, when curves were very steep and it seemed as though everyone was a seller of credit protection, especially short dated protection – we saw how quickly that could reverse,” Tchir said.

Mass confusion, eerily reminiscent of 2008, quickly ensued as holders of Synthetic CDOs on the hook for $350 million worth of short-term Windstream credit risk attempted to hedge their positions resulting in an inversion of the company’s curve.

As Bloomberg notes, the process all started when demand from Synthetic CDOs forced the spread between 5 and 2-year credit risk to all-time wides…

Because the latest synthetic CDO trades have largely been limited to three years or less, the contracts are suppressing yields on shorter-term credit swaps, leaving CDO investors vulnerable to a sharp correction were sentiment to sour in the next few years.

 

That’s what happened with Windstream. During the first half of 2017, the resurgent CDO market pushed down the amount investors are paid for two-year Windstream credit swaps to about four percentage points less than what investors in a five-year swap would have been paid. During the previous decade, the gap was about two percentage points, meaning that two-year swaps investors earlier this year were getting paid about half the amount they would have received in previous years relative to the longer-term contracts.

…which rapidly changed in mid-August resulting in substantial losses that could threaten to wipe out the riskiest slugs of CDOs depending on their level of exposure to the credit.

By August everything had changed for Windstream. The cost of two-year swaps soared as the company missed analysts’ sales forecasts and halted its dividend amid customer losses and a declining landline business. S&P downgraded the company in September.

 

Also last month, Windstream said it received a letter from a bondholder, later identified by Bloomberg News as Aurelius Capital Management, who claimed the company’s spinoff of a unit amounted to a default on its debt.

 

Two-year swaps surged so much that the annual premium surpassed what investors buying five years of protection were paying — an anomaly in the market known as an inverted curve. By the end of September, credit-swaps traders were demanding an annualized 25 percentage points to insure against a Windstream default for two years, a level that implied a 60 percent probability of default.

 

The stakes are high for CDO investors because an estimated $350 million of Windstream credit swaps insuring its debt have been included in CDOs since 2015, according to the market participant familiar with the transactions. That’s almost two thirds of the net $550 million of outstanding credit swaps covering the firm’s debt as of Sept. 1, according to the latest data from ISDA.

For those who have forgotten how Synthetic CDOs work, below is a quick reminder.  To summarize, you go out and find a bunch of suckers willing to backstop trillions of dollars worth of credit risk in return for a few bps in annual premium payments.  You then tranche out the risk being taken by the CDO investors so that those at the top can get a AAA-rating and, in return, tell their investors that they’re taking no risk at all.  Those investors then lever up their capital another 10x so they can make 8% returns on a ‘risk-free’ investment…it’s basically as safe as having you’re own printing press from the U.S. Treasury.

Typically, these CDOs pool together about 100 different credit-default swaps tied to various companies, which are then sliced into varying levels of risk called tranches — senior, mezzanine and equity. Over the life of a deal, which generally lasts two to three years, the swaps generate a steady stream of income for “long” investors (and are paid by “short” investors on the other side of the trade who want insurance against a potential default).

 

The equity tranche has the biggest risk of getting wiped out if losses from defaults exceed roughly 5 to 7 percent, and nets the highest returns.

And guess who’s buying all this garbage?  If you guessed 20-something year old pension and insurance fund investors who were in middle school during the last financial crisis then you’re absolutely right…congratulations.

Yet after years of rising markets, declining corporate defaults and tighter credit spreads, the trade is finally attracting greater interest. Increasingly, pension funds and endowments have become senior tranche investors in many of Citigroup’s synthetic CDOs. And because the CDOs are derivatives, they have small upfront costs and amplify returns.

 

“There is a whole generation of people in finance who never knew or forgot what the problems were with synthetic CDOs,” said Janet Tavakoli, a 30-year veteran of the financial markets who runs a consulting firm and has written books on structured credit and CDOs. “Just as derivatives can lever up the upside, they can lever up the downside.”

Then again…maybe this is just a great opportunity for more Synthetic CDOs to come along and Buy The Fucking Windstream 2-Year CDS Dip.  

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Authored by Mike Shedlock via MishTalk blog,

Truly driverless vehicles are about to hit the streets of California.

The naysayers who said this will never happen, or won't happen for a decade are about to be proven wrong.

Tech Crunch reports California DMV Changes Rules to Allow Testing and Use of Fully Autonomous Vehicles.

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Yesterday during JPMorgan's earnings call, CEO Jamie Dimon relayed the following…

"I wouldn’t put this high in the category of important things in the world, but I’m not going to talk about bitcoin anymore."

It seems 'anymore' to Dimon means 'less than 24 hours' as during a panel at an IIF event today, the outspoken bank boss – apparently still feeling threatened by the disruptive technology – lashed out again at the cryptocurrency…

• *DIMON: PEOPLE WHO PURCHASE BITCOIN ARE STUPID
• *DIMON: "WHO CARES ABOUT BITCOIN?"
• *DIMON: I DON'T UNDERSTAND THE VALUE OF SOMETHING WITHOUT VALUE
• *DIMON: I COULD CARE LESS ABOUT BITCOIN
• *DIMON: BITCOIN IS `A GREAT PRODUCT' IF YOU ARE A CRIMINAL'

And then he ended with another promise…

• *DIMON: THIS IS THE LAST TIME I TALK ABOUT BITCOIN

We wonder how long that will last.

Image courtesy of CoinTelegraph

And then Larry Fink piped in…

*FINK: BITCOIN IS AN INDEX TO MONEY LAUNDERING

We have to say for 'something' that is not worth talking about and he "couldn't care less about," the big status-quo-sustaining banking elite sure do talk about Bitcoin a lot!!

Perhaps this is why…

And even more upsetting for the 'master of the universe' is that his words had zero effect as Bitcoin is now immune to bankers' bleating…

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