May 29, 2017

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” —Sir John Templeton

We can finally confirm we are living in dystopia this week with global order signalling distress, our confidence in the systems waning towards despair just reading about the daily bombings and incredulous political theatrics. Surely we are in some form of dystopia as financial markets march happily along to new utopian heights?

No longer is terror confined to the untamed regions of Afghanistan and Pakistan, but appear to be sprouting around the neighbourhood of comfortable Singapore, reading about a Thai hospital bombing just a few hours before the big one in Manchester, and then striking again in a Jakarta bus station; not to mention the lockdown in Mindanao, Philippines with casualties piling up. For the innocent children killed in Manchester, we are no longer surprised that 2 kind Samaritans were killed for stepping in to stop the harassment of 2 young Muslim girls in Portland, USA, this weekend.

With Donald Trump talking about terrorism in his Ramadan statement, we have a busload of 29 Coptic Christians slaughtered in Egypt and more action in Afghanistan today with another suicide bombing.

ISIS has had a busy week, claiming credit for most of the attacks except for Thailand, where bigger troubles are brewing with claims of a secret opposition army based “in the forest”, as Trump’s first foreign trip went by uneventfully, with few faux pas’ worthy of chastising even if he did shove that Montenegro prime minister aside, making the chap famous, even if little was achieved in terms of other results.

Violence doth beget hate, fear and more violence, as hate crimes in Manchester have now doubled and we have BBC under fire for telling the public to “get used to” terror attacks, as Trump’s new Homeland Security Chief in the US makes matters worse, telling Fox News that people “would never leave the house” if they knew what he did about terrorism. 

What has happened is that we have got used to it, just looking at AFP’s summary of major terror incidences in Europe for the past year which is left out more than a few “major” ones like the July shooting in the Munich mall (9 casualties), Normandy’s priest beheading and the killings of the French police commander and wife just to name a few they missed.

Market Defiance or Resilience

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Fear and anger are both good and perfect reasons for the markets to demonstrate the act of Market Defiance, the typical predictable response to acts of terror and a Definite response every time the West tried to “diss” or rile China! The RALLY follows, yes, when Moody’s had to downgrade China for the first time since 1989.

China ended the week tweaking their Chinese Yuan fixing mechanism, following the capital controls on outflows which surely does not bode well for their desire to be assimilated into the MSCI Global EM Indices where currently, only A shares will be considered in June this year. Now try commenting about that in negative light and watch the markets fly!

The Algos, PPT and the Pain Trade

The timing has been perfect this week when we have the most S&P 500 shorts since 2014 and never before have we had “an equity advance as big as this year’s occurred simultaneously with more short sales, according to exchange data compiled by Bloomberg going back to 2008.

So much for sell in May, why not press the pain trade with the help of those unemotional algorithms that are seeing big money behind them now because The Quants Run Wall Street Now and if you are looking for evidence, look no further than the fact that algo hedge funds saw $4.6 bio of new inflows this year when overall the hedge fund industry saw outflows of $5.5 bio, and now take up 25% of hedge fund assets. While hedge fund manager earnings dropped to the lowest in a decade, quants are becoming prominent on the 2017 hedge fund rich list.

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Source: Valuewalk

Yet, to be absolutely fair, the indisputable winner for the week and the month of May would be the Bitcoin, gaining 73.86% for the month and 17% for the week which would have been 44% if it had closed at the new historic high it made of $2,798 on Thursday, possibly because Chinese retail punters have found a new substitute to punt instead of their downgraded stocks and commodities. Thank goodness the foreign exchange market is still out of their punting reach.

Perhaps the Bitcoin, too, got caught up in the algo-fever as ‘bots enter the game, for we know that high-speed traders (another algo-driven game) are taking over the Bitcoin game, all of them as aware as ourselves that “if you bought $100 of bitcoin 7 years ago, you’d be sitting on $72.9 million”, or more, after its record-breaking run which may run further, as we suggested 2 weeks ago given that the total number of Bitcoins that can exist is limited to 21 million and we are at 15 million right now.

There will be no bad press for anything tech, in my opinion, algorithms and artificial intelligence are all in the same revered category and there are many an ordinary human trader burnt and confused by the price actions this week who will be ready to answer Goldman’s question below.

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For you see, algorithms do not have to be right but they win as long as they make you throw in the towel first.

While we are at the blame game, the other conspiracy theory bandied around for the resilient S&P 500 index is the Plunge Protection Team, a word coined to loosely represent the President’s Working Group on Financial Markets created by President Reagan in 1988 but have come to mean government intervention in financial markets.

Legendary vulture investor Asher Edelman, the 1980s model for Gordon Gekko, strayed into what must’ve been uncomfortable territory for CNBC during an appearance on “Smart Money” when he discussed his view that the government’s “plunge protection team” is the only thing propping up the current market rally, and said he suspects that it has again been recently been intervening in the market to keep stocks at record highs.”

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Fingers have also been pointing to the SNB, Swiss National Bank, which is a listed for-profit company with a $63 bio, mostly US, stock portfolio and yet a possible agent for the PPT to prevent a big decline in stock prices. Hardly likely, they will be chasing new highs in that case, in my humble opinion.

How about hackers and our idea of fin-hack? It is plausible on a large scale given how few of them actually get caught.

The Crash Is Coming

Big names are calling for a correction.

“The Fed is going to keep raising rates,” he said. “The big question for the Fed is are the things happening in Washington and the scandals there … is that crippling enough to derail the markets?” Mark Grant, strategist who predicted the post-election rally

And we have an incomplete list below of the recent comments.

Much as we like to say that they are all wrong at the same time, skeptical contrarians that we are, it is worth considering that they could be all right.

Let us revisit the definitions taken from Wikipedia.

  • Bear Market = generally accepted as a price decline of 20% or more over a 2 month period
  • Market Correction = short term price decline of 5 to 20%.
  • Bear Market Rally a.k.a. Dead Cat Bounce = price increase of 10 to 20% before the bear trend resumes.

Consider this, that no one would be buying stocks right now unless they were cutting losses, or even to hedge a HY bond portfolio that is short bonds and most certainly if they were an unemotional algo-bot, in for that short term trade and quick to change their mind in an instant.

That said, anyone who emerges from this week feeling optimistic must either be out of touch with headlines or, a daredevil.

That is because we have the US FOMC coming right up when interest coverage ratios for high yield bonds are lagging well behind their credit spreads, according to Bloomberg, but we will not have the US tax reform to save us till Christmas even as the debt ceiling beckons in September; more White House turmoil with Trump’s son in law implicated next week; more elections in France and Germany; a nutty North Korean dictator testing his anti-aircraft toy this weekend, among other things, such as acts of terror the world must learn to live with and, notwithstanding the risks rising in China.

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Methinks that stocks are a tad euphoric right now but the question du jour is when and not why. Like I said about wagering on Bitcoin 2 weeks back, I am willing to wager that now is a time to short stock indices, in this low volatility and low rates environment where we have investors exiting small caps at the highest rate in a decade, European equities yielding more than their junk bonds, the FOMC in mid-June and the odd behaviour from short sellers in defiance to the Market Defiance Rally and some unexplainable revulsion to the acceptance of mounting terrorist acts.

Now, will we buy at the instance of a 5% correction or will we wait for the bear proper?