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"Unleash Hell…"

 

It seemed like a done deal early on as the panic-buying sent stocks soaring to new record highs but some North Korea headlines and Jeff Gundlach's warnings seemed to turn the market and investors were in tenterhooks into the close to see if VIX-clubbing could keep the Dow winning streak alive…But then Trump dropped the "fire and fury" line and all hell broke loose…VIX >11!!

 

A big short-squeeze, extended by JOLTS, sparked panic-buying into and beyond the European close but it soon faded and stocks clung to the unch-line until President Trump dropped the "Fire and Fury" speech…

Seriously…

Brink of nuclear war. Dow down 31 points

— RANsquawk (@RANsquawk) August 8, 2017

Futures show the crazy swings best…

 

The S&P's lack of movement continues…for the 15th day

2474, 2473, 2473, 2470, 2477, 2478, 2475, 2472, 2470, 2476, 2478, 2472, 2477, 2481… 2474

 

FANG Stocks dumped, erasing yesterday's gains…

 

Interestingly, USDJPY and S&P Futs decoupled shortly after North Korea headlines… and by the close, stock traders had been forced back to reality…

 

Clear safe-haven buying in bonds and bullion when Trump dropped the "fire and fury" speech…

 

The Dollar Index ramped higher on JOLTS data, running stops from Friday's payrolls spike, then fading to close marginally higher…

 

Treasury yields rose on the day but Trump's North Korea tirade sparked some safe haven buying…

 

The curve steepened with 30Y underperforming…

 

 

Gold spiked back up to unchanged on the Trump comments…

 

WTI closed lower, coiling up into the API data tonight..

 

Still we are sure this is just dip in stocks that should be bought…

Because the disconnect between hope and reality has never been so wide.

The exuberant-sounding earnings growth (thanks to depression-like base effects) are not showing up in forward-looking expectations for growth…

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Speaking at a press event at his golf resort in Bedminster, N.J., President Trump offered a stern warning to the rogue dictator of North Korea, Kim Jong Un, saying that he “best not make any more threats to the United States” or they “will be met with fire and fury like the world has never seen.”  Per Bloomberg:

“North Korea best not make any more threats to the United States.  They will be met with fire and fury like the world has never seen.”

“He has been very threatening beyond a normal statement.  And, as I said, they will be met with fire, fury, and frankly power, the likes of which this world has never seen before.”

.@POTUS: “North Korea best not make any more threats to the U.S. They will be met with fire and fury like the world has never seen.” http://pic.twitter.com/nUjWck9aGk

— Fox News (@FoxNews) August 8, 2017

 

Of course, first thing this morning we reported that according to a 500-page report by the Japanese Defense Ministry, North Korea may now be in possession of a miniature nuclear warhead. That said, the report did not move the market because the Japanese report was largely inconclusive and did not claim with certainty that this is the case.

Shortly thereafter, the exact same narrative escalated when the WaPo echoed what Japan said, only it now “confirms” that North Korea has successfully produced a miniaturized nuclear warhead that can fit inside its missiles, “crossing a key threshold on the path to becoming a full-fledged nuclear power, U.S. intelligence officials have concluded in a confidential assessment.”

As the WaPo added, the analysis completed last month by the Defense Intelligence Agency came on the heels of another intelligence assessment that sharply raises the official estimate for the total number of bombs in the communist country’s atomic arsenal.

“The IC [intelligence community] assesses North Korea has produced nuclear weapons for ballistic missile delivery, to include delivery by ICBM-class missiles,” the assessment states, in an excerpt read to The Washington Post. The assessment’s broad conclusions were verified by two U.S. officials familiar with the document. It is not yet known whether the reclusive regime has successfully tested the smaller design, although North Korean officially last year claimed to have done so.

It seems the President has potentially had some extra time to catch up on Game of Thrones during his vacation…

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(GLOBALINTELHUB.COM) — Dover, DE 8/8/2017 — Global Intel Hub exclusive interview — Elite E Services sat down with Mike Connor, Principal and Senior AP of Alpha Z Advisors, LLC – a trading advisor offering alternative investments based on strategies incorporating research on price anomalies, behavioral biases and institutional practices. In November of last year, Alpha Z Advisors LLC was ranked #1 Options Strategies Category by Barclay Hedge, a service that tracks funds’ strategies. So we wanted to learn more about on the Alpha Z Advisors strategy, as we have always supported options as a great way to not only hedge investments but also provide additional alpha to any portfolio. Also, futures options are generally traded on regulated exchanges – unlike FX which are mostly traded over the counter (OTC).

Who is Mike Connor?

Professional risk manager and former member of the Chicago Mercantile Exchange, who has more than 40 years’ experience in the futures and options industry.

What is the story behind Alpha Z Advisors?

Professor William Ziemba started Alpha Z Advisors, LLC with trading capital from friends and family. The initial investors were individuals he knew from the academic world in addition to a few referrals from the initial investors. The fund has grown in size from trading profits from the initial capital without attracting new investors.

How has the performance been?

2015 had great performance, more than 100% return, but it probably will never happen again due to a management decision to reduce initial margin to equity risk.

Why has it been so consistent?

The fund primarily trades options based on CME’s S&P 500 E-mini contract. Trading centers around the extreme prices of puts on the E-mini contract. The big money in trading options is made from being long, but returns are inconsistent (but the risk is usually very well controlled). The consistent money is made by being short options, but it comes with risk, and to stay in the game the risk has to be controlled.

How do you control the risk?

By properly hedging the positions either with other options or a futures position, and by margin to equity control. Short (selling) options positions are no different than an insurance company policies – you are selling price insurance. Like any insurance company, we’re going to have occasional disasters, like Katrina – but they should be manageable. Over a long time horizon, well managed market disasters should not prevent us from continuing to perform. We have had our share of ups and downs, and fortunately we have been able to survive all drawdowns. Good risk control and position sizing are the most important factors in any trading campaign.

What factors may impact the strategies’ performance?

Implied Volatility. Volatility is opportunity, but left unchecked it can be a horrible threat.

Considering the results, why do you think there’s not larger AUM?

Until recently we have not solicited publicly. This is our first concentrated effort at soliciting investors. In addition, we put together a minimum account size so high ($250K for the managed account, $100K for the fund). Our account size should eliminate many potential investors. We are looking for sophisticated investors that can take a part of their portfolio and take greater risk for a higher return.

How can investors ‘prove’ that the performance is ‘real’ – is there an institutional My FX Book ? There’s been a lot of CTA frauds that were real CTAs but used fake performance to lure investors – what assurances can we offer them about Alpha Z?

All the accounts – all the funds’ assets – all the performance results are compiled every month by an independent CPA firm. The statements themselves can be verified by the FCM.

Positions are manually stress-tested intra-day.

What makes Alpha Z Advisors LLC different than other CTAs?

I’m not sure if that’s the case, we have a very professional trading plan. You can go to Amazon and buy books published by our founder Dr. William Ziemba, actually he’s published more than 50 books on statistical abnormalities and opportunities in the stock market. It certainly does not mean we cannot lose, or have losing open positions – we are going to have losing positions there is no way around it. But overall, if we can control the risk and keep margin to equity at a reasonable level we should be able to survive during the bad times. We have, I think, enough excess margin to sit through a significant rise in implied volatility and still survive, if the positions and margin to equity can be properly controlled. Like any market position whether it is options or futures an unexpected giant gap opening is always a threat to open market position’s stability.

What makes the strategy different?

Trades are well positioned and I believe are market entry timing is very good. Our exposure is laid out over a broad time horizon (we don’t trade in nearby month, for example). If futures were a bullseye, you’d have to hit the target almost dead center to make a profit, with options, you can just hit the wall and still make a profit – of course, only with properly controlled risk and other parameters. I do not know how other CTA’s manage their positions and stress test their market risk, but I am confident our process is robust. What we do is not magic, it’s simply neutralizing the risk as much as possible, and there is a number of ways we accomplish that. It is all about understanding what the options can do if they move against you, and how you can respond adverse market activity.

The execution is done by a professional service. One way we keep our costs down other than accounting, is to try and soft dollar expenses through a soft dollar basis.

Customers are free to choose any brokerage house they want that clears at the CME. If customers do not have any preference, we are happy to set them up with our preferred FCM.

For more information contact:

Mike Connor

312-470-6260

Or visit http://ift.tt/2hCtt0M

This article/interview is for information/educational purposes only and is privileged, confidential and proprietary. This article/interview is NOT an offer to sell or a solicitation of any investment products or other financial product or services, is NOT an official confirmation of any transaction, or an official statement. Past performance is not indicative of future results. There is a substantial high and unlimited level of risk of loss in trading commodity futures, options, options writing, equities and off-exchange foreign currency products; such trading is not suitable for all investors.  Investors should only invest money they can afford to lose.

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Ask any farmer in California what keeps them up at night and we would guess that nearly all of them would list ‘labor shortages’ and ‘water access’ as their top two concerns.  Ironically, despite over 90 million American citizens choosing to sit out of the labor force and California having one of the highest minimum wage rates in the country, farmers in the Golden State struggle every year to find enough labor to keep fruits and vegetables from literally rotting on the vine.

Meanwhile, as the new administration promises to crack down on illegal immigrants, farmers are feeling the labor shortages in 2017 more than ever.  As the Wall Street Journal notes today, many farmers have turned to the H-2A agricultural visa program to recruit temporary workers from Mexico but the process is generally described as “bureaucratic, costly and time-consuming.”

In the first nine months of fiscal 2017, which began Oct. 1, the U.S. Labor Department certified more than 160,000 temporary workers—the bulk of them from Mexico—to harvest berries, tobacco and other crops in the U.S. under the H-2A agricultural visa program. That was up 20% from the period a year earlier.

 

The annual issuance of H-2A visas nearly doubled from 85,248 in fiscal 2012 to 165,741 in 2016. The U.S. doesn’t cap the number of these visas.

 

Outside of agriculture, use of another type of seasonal-work visa also has surged in response to increased U.S. demand for unskilled laborers such as hotel housekeepers. The Department of Homeland Security in July raised the annual cap on H-2B visas by more than 20% to 81,000. The majority of workers receiving this type of visa also are from Mexico.

 

But, despite its flaws, farmers say that any efforts to further curtail temporary agricultural visas would only result in more product losses for farmers and higher grocery bills for American consumers.

American farmers for several years have voiced concerns about labor shortages, often paired with complaints about the H-2A visa program, which many see as overly bureaucratic, costly and time-consuming. The program requires employers to pay for food, housing and transportation for seasonal guest workers. Still, most farmers say the program is crucial to the U.S. agricultural industry.

 

“It’s extremely burdensome,” but cutting the program would “bring the industry to its knees” because there aren’t enough U.S.-born farmworkers, said Steve Scaroni, owner of large-scale farms in several states and founder of Fresh Harvest, one of the largest recruiters of H-2A workers in the U.S. “Within a week there wouldn’t be salad in the store” if the program was canceled, he said.

 

In 2015, farmers in California’s Santa Barbara and San Luis Obispo counties, which grow roughly 30% of the strawberries in the U.S., reported $13 million in losses because they lacked enough labor to harvest their crops in a timely manner.

 

Last year, vegetable farmers in the two counties reported they had 22% fewer workers than needed on average, while berry farmers put the worker shortage at 26%, according to a survey conducted by a local growers association.

Of course, as we’ve pointed out numerous times before, America doesn’t really have a “labor shortage” at all, but rather, a massive skills and/or motivation gap resulting from decades of American youth being indoctrinated with the notion that focusing on obtaining a skills-based trade job, rather than going to college, was somehow demeaning, racist and/or misogynistic. 

You know, because throwing 10’s of thousands of dollars at millions of high school kids who will use their taxpayer-subsidized student loans for hedonistic, binge-drinking spring break trips to Cancun, all while ‘earning’ a 1.5 GPA in anthropology from a state school and then returning to mom’s basement with no job after graduation, is just so much more enlightened and progressive.

Meanwhile, the cost of that progressivism is an economy that has ~95 million people who have voluntarily taken themselves out of the labor force, many because they simply don’t possess the right skills or are unwilling to take jobs that they’ve been convinced are ‘demeaning.’

 

For those who still aren’t convinced….perhaps you have another explanation for why over 30% of the ~75 million 18-34 year olds in this country (roughly 22.5 million people) are currently living at home with mom and dad while everyone from homebuilders to farmers are struggling to find workers?

 

Of course, in the end, labor restrictions and soaring minimum wages will simply result in more of America’s food production being outsourced to Mexico and South America.  That said, something tells us that the progressives in California who jammed through their $15 minimum wage and essentially made it impossible to farm fresh fruits and vegetables in their state are not going to be all that happy when they learn about Mexico’s environmental regulations, or lack thereof, on food production.

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With Q2 earnings season rapidly approaching its end, Bank of America points out a curious observation: stocks that beat earnings expectations are not getting “rewarded” with higher prices. This is the first time this has been observed in 17 years  – the last time the market seemed oblivious to corporate upside was in 2Q 2000… just before the Tech Bubble burst. As BofA warns, “this could be a warning sign that equity market expectations and positioning more than reflect the good results.”

Adding to peak valuation concerns, BofA’s quant strategist Savita Subramanian also expects full-year EPS growth to decelerate from 8% in 2017 to 5% in 2018, and redundantly adds that “the stock market may not react well to decelerating earnings.” That’s one way of putting it.

Some more details on this notable “market peak” phenomenon:

Companies which beat on EPS and sales have performed in-line with the market the subsequent one and five days – the first time we’ve seen no reward for beats since 2000.

 

 

 

Companies which missed on both metrics have underperformed by 3ppt the subsequent one and five days – greater than the historical average underperformance of 2ppt.

 

 

Punishment for misses has been greatest in Tech – which is extremely crowded vs. history by active funds. The reward for beats has generally been muted (or nonexistent) across all 11 sectors, but is so far largest in Consumer Discretionary on a one-day basis (1.1ppt) and Real Estate on a five-day basis (1.5ppt). Performance spreads have been muted based on guidance as well (Table 4).

 

Now as noted above, one possible explanation for this phenomenon of no earnings season upside for the beaters, coupled with substantial downside for everyone else is that it “could be a warning sign that equity market expectations and positioning more than reflect the good results.“

Alternatively, as we first discussed last week, another possibility for the bifurcated earnings response is due to the change in market structure itself.

One week ago, BofA’s Subramanian again looked at the response of stocks which missed EPS estimates, and found two dramatically different outcomes for stocks with high vs low passive ownership. This is how she describes her findings:

Not only can crowding by active managers suggest risk to stocks, but high-passive ownership can matter, particularly during earnings season. Over the past seven quarters (including the 2Q earnings season so far), stocks with high passive ownership that missed on EPS and sales have underperformed those with low passive ownership by 1.5ppt on average during the following day, and the spread has widened significantly during recent quarters. This increased performance spread may be attributable, in part, to lower “true float” in these stocks, which appears to have driven increased volatility.

The increasingly disproportionate adverse reaction of highly passive-owned stocks is shown in the chart below: it is most evident in Q2 2017 earnings.

BofA’s take, which can easily be tested for validation purposes, presents various arbitrage opportunities chief among which is creating a basket of high passive ownership stocks, and betting on sharp declines either through single-name short positions or puts while avoiding low passive ownership names, with expectations of this skewed return profile.

One potential hurdle is that this earnings season – which is now almost over – companies with notable misses have been relatively few, although if this pattern persists, it should provide significant alpha opportunities during the Q3 earnings season, when the overall quality of earnings is expected to decline substantially as the base effect of last year worst quarter will be in the rearview mirror, while the much anticipated surge in energy earnings will have trouble materializing if oil fails to trade solidly in the mid-$50 range, not to mention the risk of either inflation finally creeping higher or the Fed following through with its balance sheet unwind promise.

In any case and perhaps most troubling to the bulls, yet another ghost from a recent market crash has emerged, and whatever the underlying cause, it may haunt traders until the bitter end of the current market cycle which, increasingly more are starting to admit, will be quite dire to most P&Ls.

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Following on from his recent cautious commentary on low levels of bond yields and equity vol (and cheapness of gold), DoubleLine Capital's Jeff Gundlach outlined details of his views on the markets to CNBC this morning and what the catalyst for "an explosion in volatility" could be.

Gundlach recommends investors "de-risk" their stock and bond portfolios as his "favorite indicator" suggests "yields are going to break out to the upside," and that will lead to market volatility.

 

"One of the things that I follow to give a really good short-term cyclical indication of the yield of the 10-year Treasury is the ratio of copper to gold," Gundlach said Tuesday on CNBC's "Halftime Report."

The copper-to-gold ratio just hit its highest level since May 2015.

"When the copper-gold ratio is rising it's incredibly suggestive that something is going on that might be a little inflationary," he said.

 

"It suggests to me yields are going to break out to the upside. … The leg up in yields will be a catalyst of volatility in the market."

As a result, Gundlach believes it may be wise to lower exposure to assets that are up dramatically during the bull market.

"I think you should be de-risking systematically," Gundlach said.

 

"Even if it takes six to nine months for the markets to head down you're not giving up very much."

Furthermore, as we noted previously, the bond manager expects the yield jump to cause volatility and is buying puts on the S&P 500…

"One of the biggest manias out there right now is selling vol… because the carry on shorting the VIX is strong as long as volatility doesn't spike very much."

Gundlach believes that the next drop in the markets will "send the VIX not to 10… but easily to 20."

Gundlach notes confidently…

"I'll be disappointed if we don't make 400 percent on the puts, and we don't even need a big market decline for that to happen."

Which makes sense as we noted previously, it will not take much to make the VIX go bananas…

It’s easy to become numb to the low volatility environment and the risks it presents.  While trying to pick a trough in vol has been a fool’s errand, focusing on the risks resulting from vol being so low is not.  Low volatility has produced a regime where the risks are asymmetric and negatively convex, so being prepared for an unwind is critical.  This is not a call that vol is about to spike, but you need a plan if it does.

This note details how a short vol unwind might develop. A violent rise in volatility could be driven by just a 3% to 4% one-day S&P 500 selloff.  Right now the risk is greatest in the VIX complex, and demand for VIX futures from three main sources could result in 100,000 contracts ($100mm vega) to buy in a down 3.5% SPX move.  For context VIX futures ADV over the last year is 230,000 (although has risen to as high as 700,000 in big selloffs).

Read more here…

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Corporate leverage has never been higher, and policy uncertainty is extremely elevated… so it makes 'perfect' new normal sense that high-yield credit spreads have collapsed to multi-year tights. However, as Goldman Sachs notes, the extreme dislocations are starting to show some cracks (as HY ETF option skews suggest investors quietly positioning for wider spreads).

Even as leverage, both gross, net and normalized, hits all time high, Goldman sees the scramble for high yield paper (amid a lack of supply and benign defaults), represented by near record low HY spreads and yields, has never been greater.

 Here are Goldman's thoughts on the matter:

While much is rightfully made of the leadership of Tech, the promise of Financials and the conundrum of Low Vol, an area to which we believe investors should pay closer attention is the High Yield (HY) space. A combination of the search for yield, lack of supply and a benign default environment has driven HY spreads to near their tights. Meanwhile, much like the VIX, these spreads are diverging versus increased Policy Uncertainty – a historically strong relationship.

 

Further, many equity market factors are increasingly correlated with HY spreads while the options market suggests concern on the come (e.g., elevated skew versus other fixed income markets). It is against this backdrop that we showcase the extremes forming and the historical “playbook” in terms of factor performance if spreads do widen. Hint: You sell growth.

• TINA, at least when it comes to yield: US HY spreads have tightened 60bp in 2017 and are near the lowest level since the Great Recession. In yield terms, this equates to a yield-to-worst (YTW) of 5.5%, which is near multi-decade lows.
• Fundamentals: Leverage stretched, defaults benign: Low rates have incentivized companies to raise debt and leverage is elevated. That said, defaults have been benign at about 2% over the last year (ex Energy, Metals & Mining), which is significantly below the 30-year average of 4.7% on the back of sustained, if uninspiring economic growth.
• A word on technicals: The search for yield along with the recent lack of supply is also likely playing a role. Almost 1/3 of the YTD tightening occurred in July alone as primary market issuance was basically nonexistent ($9 bn, the 2nd slowest July since 2010).
• Equity investors are paying attention: While low yields/tight spreads indicate that credit investors do not see much risk in their market, the strong performance of our Balance Sheet factor (Low Net Debt/EBITDA vs. High) this year suggests equity investors are increasingly nervous. Notably, this has been driven by both legs of the trade working – in plain English, this mean that names with low leverage have outperformed the average stock while those with weak balance sheets have underperformed.

The dislocation is extreme to say the least…

 

However, there are some signs of cracks in the facade. Here is what Goldman is watching…

Factors are cueing off HY spreads: We note that a number of equity factors are cueing off HY spreads as indicated by higher-thanaverage correlations vs. history. Indeed, correlation for each of Volatility, Financial Returns, Size, Short Interest and Integrated factors is in the 90th+ %-ile relative to the last 5 years. Net, if spreads move, these factors have the potential for dislocation in portfolios. 

The upcoming legislative agenda. Historically, HY spreads moved directionally with Policy Uncertainty though similarly to the VIX, the correlation has broken down more recently.

With Debt Ceiling talks and potential tax reform on the near-term policy agenda, we see potential for this relationship to re-assert itself. As we wrote previously, there are some signs that uncertainty is weighing on corporate spending, M&A and by extension economic growth. 

Better to navigate with a compass than without. We leverage our Macro to Micro Compass to analyze which factors have historically been most sensitive to widening HY spreads.

We find that during these periods, investors gravitated towards safety and quality (e.g., solid financial returns, strong balance sheet, high integrated scores and large size).

And finally, Goldman sees evidence that investors are already positioning for wider spreads. Since the crisis, investors have increasingly used ETFs as a way to trade high yield views, with trading volume of HYG (the largest by AUM) now 3x larger than CDS.

We note that HYG skew – the difference between how much investors are willing to pay for puts vs. calls in the options market – has increased over the course of 2017 suggesting increasing nervousness.

In addition, HY skew also screens as elevated vs. most other fixed income markets.

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