Archives for August 2015

The Dollar: Now What?

The US dollar has been on a roller coaster ride. Many have lost confidence in the underlying trend.  An important prop for the dollar, namely the prospects for the Fed's lift-off has been pushed out again, this time ostensibly due to the heightened volatility of the financial markets, apparently sparked by events in China.
The September Fed funds futures have nearly fully priced out the risk of a hike next month. The effective Fed funds have traded 14-15 bp this month, and the September Fed funds contract implies an average effective rate of 17.5 bp next month.
We continue to believe that the main driver of this third significant dollar rally since the end of Bretton Woods is the divergence of the trajectory of monetary policy between the US (and UK) and nearly all the other high income countries, and many emerging markets, including China.  There are a number of cross-currents, and other considerations, including market positioning, use of euro and yen for funding purposes, and hedging flows that at times may obscure or even reverse (technical correction) the underlying trend.
Nevertheless,  we expect the divergence theme to gain more traction over time.  The Federal Reserve will raise rates at some juncture and not only will the ECB and BOJ continue to ease for at least the next 12 months, but there is risk that the central bank balance sheet exercise lasts even longer.  The ECB's staff, which will update its forecasts in the week ahead, is likely to shave both its growth and inflation forecasts at the September 3 central bank meeting.
The Dollar Index was slammed to its lowest level since January in the market panic at the start of last week.  It overshot the minimum objective of the double top pattern we noted (~94.30).   It rebounded and on Thursday had retraced nearly 61.8% of the decline since the August 7 (~98.33).  The trend line drawn off that high and the August 19 high (~97.08) comes in near 95.80 on Monday and falls to about 95.15 by the end of the week.  A move above 96.40 signal a return of the 98.00-98.30 area.
The panic saw the euro reach almost $1.1715 at the start of last week.  The subsequent sell-off saw it shed more than nickel.  The euro settled on its lows for the week, leaving a potential shooting star candlestick formation on the weekly charts.  The break of $1.12 creates scope for another half cent of declines but pushing the euro below the $1.1130 area may require fresh fundamental incentives, possibly in the form of more confidence that the Fed is still on track to hike rates next month, or that the ECB is particularly dovish.   On the upside, the $1.1280-$1.1310 band should limit euro gains if the euro bears who had been squeezed out of their shorts are going to re-establish.
Switzerland unexpectedly reported that its economy expanded in Q2.  The consensus was expected the second consecutive quarterly contraction.  That helped stall the dollar's upside momentum.  The CHF0.9680 is a potent block now to additional dollar gain, though if it is overcome, the next target is near CHF0.9800.  Support is seen near CHF0.9500.  Support for the euro is pegged at CHF1.0750 and then CHF1.0700.  A break of CHF1.0680 would mark a significant technical deterioration.
The dollar also retraced 68.2% of its losses against the yen of the drop from August 18 high near JPY124.50 through the spike low on August 24 near JPY116.20.  When that retracement objective near JPY121.35 is overcome, there is a band of resistance in the JPY121.80-JPY122.15 that will provide the next test.    On the weekly charts, the dollar posted a potential bullish hammer pattern.  An appreciating dollar against the yen assumes firm, if not rising US rates, and stability to higher equities.
The greenback rose against all the major currencies last week save the Japanese yen. Sterling was among the weakest.  Losing about 2.20%, sterling nearly matched the Australian dollar's decline (2.25%), which was only surpassed by the New Zealand dollar's 3.35% fall.  Since August 18, the implied yield on the June 2016 short sterling futures contract fell more than 13 bp as investors anticipate that greater deflationary forces will delay a BOE rate hike.
Sterling fell to its lowest level since July 8 before the weekend.   A convincing break of the low set then (~$15330) could spur a further drop into the $1.5180-$1.5200 area. Sterling closed below its 100-day moving average (~$1.5480) for the first time since early May.  It has spent most of the last two months above the 200-day moving average (~$1.5370) as well.   On the weekly charts, sterling posted a large outside down week, which is a bearish development.  On the top side, the $1.5450 area should offer resistance.
The Australian dollar tested a monthly trend line dating back to 2001.  It is found near $0.7025.   Assisted by a head and shoulders bottom on the hourly bar charts, the Australian dollar bounced a little through $0.7200 before the sellers re-emerged.  It stopped shy of the measuring objective of the head and shoulders pattern, which seems to reflect the aggressiveness of the bears.  Even though the RBA is not expected to cut rates when it meets on September 1, it is not expected to rule out a future cut.  A rate cut becomes more likely if the currency stops falling.  Look for another test on the $0.7000-$0.7025 support.  
Canada's fundamentals are poor and this seemed to outweigh the recovery in oil prices.  Also, the US two-year premium over Canada recouped most of the ground it had lost earlier in the week. Canada is expected to report a contraction in Q2 GDP in the coming day,s and a softening of the labor market in August.   The US dollar's pullback from the CAD1.3355 spike on August 25 fizzled near CAD1.3140.   Another run at the highs looks likely.  Over the longer term, we look for the Australian dollar to fall toward $0.6000 and the US dollar to rise toward CAD1.40. 
Oil prices staged a strong rebounded in the second half of last week after falling to $37.75 on August 24.  The bounce carried the October light crude futures contract to $45.25, which completes a 61.8% retracement of the slide in prices since July 29.  The next objective is seen near $46.80 and then $48.00.  There is good momentum, and the October contract finished the week above its 20-day moving average (~$42.95) for the first time since June 23.  The October contract posted a potential key reversal on the weekly bar charts.  It made a new multi-year low early in the week and then proceeded to rally, taking out the previous week's highs.  It closed at its highest level since the end of July.  
The 10-year US Treasury yield plunged to 1.90% in the panic at the start of last week.  As markets calmed and economic data, including durable goods orders and a sharp upward revision to Q2 GDP helped yields recover by 30 bp before consolidating.  Some link the rise in US yields to selling by Chinese officials.  While we do not rule out some Treasury sales, we suspect that it is being exaggerated as is the market's wont. 
Note that the TIC data, which is not complete, but authoritative, shows China's holdings of US Treasuries rose by about $27 bln in H1 14, which is the most recent data.   The Federal Reserve custody holdings of Treasuries for foreign officials rose by about $26 bln this month, which includes a $9 bln liquidation over the past two weeks.  We anticipate yields can move back into the 2.20%-2.25% range.  A stronger barrier in yields may be encountered closer to 2.33%.  
The S&P 500 recoup half of what it lost after registering the record high on August 18 near 2103 to the panic low near 1867 on August 24-25.  That retracement is found near 1985.  Small penetration of this did take place, but buying grew shy ahead of the 2000 mark.  The 61.8% retracement is found near 2013, and additional resistance is likely near 2050.  Support is seen in the 1940-1945 area.  While the technical considerations appear constructive, with a potential bullish hammer candlestick pattern on the weekly charts, developments in overseas markets are a wild card.  
Observations based on speculative positioning in the futures market:  
1.  The CFTC reporting week ending August 25 saw large swings in currency prices and several significant (10k contracts or more) adjustments of speculative gross futures positions. The gross long euro and yen positions jumped 19.3k contracts (to 87.8k) and 14k (to 59.9k) respectively.  The powerful short squeeze in the yen was reflected by a 37.1k contract decline in the speculative gross short position.  
2.  The gross short Australian dollar position jumped by 13.6k contracts to 111.0k, making it the second largest gross short position after the euro.  The euro's gross short position was trimmed by 7.3k contracts, leaving 153.9k still short. The gross short Mexican peso position soared by 18.4k contracts to 103.5k.  
3.  Although there were minor adjustments in the speculative gross sterling position, they were sufficient to switch the net position from short to long for the first time since September 2014.  The bulls added 6k contracts to the gross long position, which now stands at 58.1k contracts.  The bears trimmed the gross short position by 1.2k contracts, leaving 54.8k.  The net long position stands at 3.3k contracts.  
4.  The general pattern was adding to longs and cutting shorts for the euro, yen, and sterling.  Speculators added to gross short Canadian and Australian dollar positions and the Mexican peso.  Speculators trimmed gross longs of these currencies, except for the Canadian dollar. 
5.  Given the subsequent price action over the August 26-28, we suspect that some of these new positions were unwound in the euro and yen.  Sterling fall in the second half of last week warns that some of the late longs may have also been cut.  Sentiment still appears overwhelmingly negative toward the dollar-bloc.  
6.  The net long US 10-year Treasury futures slipped to 1.3k contracts from 7.3k.  Gross longs and shorts were cut.  The bulls sold 58.4k contracts, leaving the gross long position at 395.2k contracts. The bears covered 52.4k gross short contracts, leaving 393.9k.  


7.  The net long speculative light sweet crude oil futures positions were pared by 5k contracts, leaving 215.6k.  Given the large movement in prices, it is surprising to see how small of a position adjustment took place.  The longs added 1k contracts, lifting the gross position to 474.2k contracts.  The bears trimmed their gross position by 4k contracts, leaving 215.6k.  


Nicole Foss Talks Economics At The End Of The Age Of Oil

Courtesy of The Automatic Earth

Albert Freeman Effect of gasoline shortage in Washington, DC 1942

Nicole Foss recently participated in a live Skype ‘forum’ discussion at the Doomstead Diner site that also included among others, Gail Tverberg and Ugo Bardi. I declined to participate, too many cooks and all that, and seeing how long this thing went on, I have no doubt that was a good decision. Even if my absence obviously reduced the potential charm and entertainment value considerably.

I’ll run this in episodes. Today’s post contains the first.

Part II – Economics at the end of the Age of Oil

The site blurb:

China Currency Devaluation

Q: Perhaps the biggest mover in the credit markets these days is China. They have a huge shadow banking industry, and have been the recipients of a lot of ‘hot money’ seeking high yield returns for years. however, they are now rapidly devaluing their own currency of the Yuan or Renminbi, basically destroying the carry trade across the currency pair with the dollar. Can currency devaluation help the Chinese? What are the knock on effects across the rest of the developing world and industrialized countries?

Market Manipulation

Q:The Chinese devaluation brings up another question, that of market manipulation. The Chinese not only banned short selling on their bourses, they in fact banned selling entirely. Here on our own markets, HFT programs are regularly causing market flash crashes in various sectors, and there is constant talk of manipulation in the PMs. How pervasive is this manipulation, and how long can it work to keep the system running?

The new 1% regime


The new 1% regime

Courtesy of The Reformed Broker, Joshua Brown

Nicholas Colas, chief market strategist at Convergex, a global brokerage company based in New York, has this to say about the proliferation of “1%” days we’ve been experiencing in the stock market this year…

Screen Shot 2015-08-28 at 8.37.31 AM

The surge in volatility over the past week enabled this year’s aggregate number of plus or minus 1% moves in the S&P 500 – currently 40 – to exceed last year’s total of 38. There were nineteen positive 1% or more days in 2014, and 19 negative days compared to 22 up days and 18 down days this year. We need 14 more 1% days in order to reach the annual average of 54 since 1958, representing only 16% of the next 86 trading days left in the year.

As we progress throughout the balance of 2015, we expect to encounter more of the volatility of the past week than the past few years. One percent or more days tend to pick up by the fifth or sixth year of bull markets such as the rallies of the 1980s, 1990s, and 2000s, and we are in our seventh.

Additionally, the VIX often hits its annual peak in October – for example last year – more so than any other month with a total of 5 since 1990. December may statistically register as the quietist month with 7 annual troughs over the past 25 years, but this year may prove different due to the uncertainty surrounding the Federal Reserve’s timing of an interest rate hike.

Josh here – Last October, I felt that the Relentless Bid period that began in 2012 had finally come to an end (see: There She Goes, My Beautiful World). It appears as though I may have been correct. Stocks have made gains repeatedly from that moment, but they’ve given them back each time. Just buying anything and counting on the rising tide hasn’t really helped investors at all in the last 10 months.

According to Nick, we’re getting close to hitting the long-term average of annual 1% days with plenty of time to exceed it: “Getting back to the annual average of 53.6 dating back to 1958 requires 13.6 more days of plus or minus one percent moves, or 16% of the next 86 trading days of the year. Reaching the annual average of 61.5 since 1971 would take 21.5 more days, or a quarter of the trading days left in 2015.”


Tell ‘Em That It’s Human Nature
CONVERGEX – August 28th 2015


The Data Still Says “Go”


The Data Still Says “Go”

Courtesy of Joshua Brown

Ethan Harris, US economist at Bank of America Merrill Lynch, put this out to clients two days ago:

As the markets continue to sell-off, an increasingly popular view among investors is that the Fed won’t hike until next year. Global growth is weak, Chinese policy mistakes have destabilized their markets and the US equity market has finally succumbed to the pressure, with a roughly 10% correction. Thus far only a handful of economics teams at major houses have shifted their Fed call to next year, but both market pricing and most clients we talk to see a significant delay in Fed tightening.

We think some delay is possible, but a big delay is unlikely. It is always dangerous to make big forecast changes during periods of turmoil in markets. It is a bit like going food shopping right before dinner—your gut, instead of your mind, starts driving your decisions. Yes, if the Fed met today, they would very likely take a wait and see attitude and delay hiking. Why create further market volatility? Why not wait to see whether this is an economically important shock? However, there are three weeks before the Fed decides. If the markets stabilize, the Fed outlook will feel a lot different.

In the 48 hours since this note, the US economic data has continued to come in stronger than expected. Yesterday’s 3.7% revised print for 2Q GDP growth was the obvious highlight, along with some new data this morning on consumption and personal income.


Personal spending, measuring how much Americans paid for everything from home rent to dental care, rose 0.3% in July from a month earlier, the Commerce Department said Friday. Consumption climbed 0.3% in June and 0.8% in May.

Personal income, reflecting Americans’ pretax earnings from salaries and investments, climbed 0.4%, replicating the gains of the prior three months. Within that category, workers’ wages and salaries climbed at the fastest pace since last November, as did their disposable income.

Combine this with a sanguine James Bullard interview on Bloomberg TV this morning, and the chips are lining up behind a “go” for liftoff at the FOMC’s September conclave. The Fed views the market volatility emanating from emerging markets as something worth watching, but not necessarily anything that should derail its own plans at the moment. The transmission mechanism from the Shanghai Composite shitshow to the US economy’s fundamentals simply isn’t apparent at the moment.

My preference is a Fed hike of 25 basis points in September and then nothing in October. I think we’ve already paid for it in blood and tears and the market is fed up (pun intended) with the whole will-they-or-won’t-they drama of the last 9 months.

Paradoxically, the thing that markets seem to fear most – the first rate hike – may end up being the catalyst that shoots stocks through the top of the range. It’s pure psychology, not economics, but removing a key piece of uncertainty has frequently served as an upside catalyst in recent years. The first hike and the market’s reaction may be just another example of this.


When the data say “go” but the markets say “no”
Bank of America Merrill Lynch – August 26th 2015

Pictures via Pixabay (topbottom).

The One Chart The Military-Industrial Complex Is Hoping Mean Reverts

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

While most of the world will be hoping the following chart never (ever) mean-reverts to its previous historically devastating highs, there is one group that is 'banking' on it… The Military-Industrial Complex…

Source: @MaxCRoser

Of course, as Ron Paul recently explained recently, the current enemy of choice is Russia:

"The people have to have the propaganda convert them into someone they hate, so they can hate…so you had to have a Saddam Hussein, an Ayatollah, or somebody else, and right now it’s Russia."

Paul goes on to note that while the Cold War may have fueled the need for American military spending, its end has left Washington without a clear enemy to demonize. The US government is now spreading disinformation about subjects like the Ukraine crisis in order to paint Russia as a villain.

“All of a sudden the Cold War’s over, and there’s a full explanation of what’s going on in Ukraine, and it’s not all the Russians’ fault, I tell you,” Paul said. “But we have to have an enemy to keep on churning this.”

“Could you believe that maybe the military-industrial complex might have something to do with this?” he added. “Because they probably don’t deliberately say well this started a war, but this started some aggravation which ended up in a war much bigger.”

But we give the last word to Dwight Eisenhower…

Nothing has changed in 54 years… in fact it has just got worse.

Imagination Sets In

Courtesy of Mish.

One of my constant themes over the past few years is the underfunding of state and local pension plans. Illinois is particularly bad, but let’s look at some aggregate data.

The National Association of State Retirement Administrators (NASRA) provides this grim-looking annual picture.

Annual Update

Between the end of 2007 and end of 2014, pension plan assets rose from $3.29 trillion to $3.71 trillion. That’s a total rise of 12.76%.

Plan assumptions are generally between 7.5% to 8.25% per year!

S&P 500 2007-12-31 to 2014-12-31

In the same timeframe, the S&P 500 rose from 1489.36 to 2058.90.

That’s a total gain of 590.54 points. Percentage wise that’s a total gain of 40.22%. It’s also an average gain of approximately 5.75% per year.


Continue Here

How Trump Continues To Lead In The Polls

Courtesy of ZeroHedge. View original post here.

Recent polls indicate that, despite public outcry against his incendiary comments on women and minorities, Donald Trump is still the leading Republican candidate.

Here are some reasons Trump stays so popular with his supporters:

  • Highly relatable lack of qualifications for holding government office
  • Americans’ appreciation for classic underdog story of man who started with only several hundred million dollars and went on to make several billion dollars
  • Only candidate to publicly state willingness to make America great again
  • Exploits other Republican candidates’ weaknesses by allowing them to open their mouths and speak on issues
  • Very, very handsome
  • Voters eager to see presidential library with three infinity pools and rooftop driving range
  • Bolstered by impassioned endorsement from Donald Trump
  • Eccentric, megalomaniac billionaire still more relatable to average American than anyone willing to dedicate life to politics
  • Appeals to widespread desire to see nation implode sooner rather than later

Source: The Onion

Here’s The Argument That Wins In 2016

Courtesy of John Rubino.

Vox is a fairly new website with a mission to not just report the news but explain it. A typical article will lead with a lot of background, bringing readers up to speed on what the subject is and why it matters before moving on to current events. All things considered, this is a great site with a refreshing approach.

But it’s not always right. The following article is a backgrounder and opinion piece on why easy money is a good thing, and why the US needs to emulate China and throw newly-created currency at stock market corrections and other intolerable problems. It’s well-structured and well-written, and is exactly the kind of argument that will impress desperate politicians when the current volatility turns into full-fledged crisis. As such it will provide intellectual cover for next year’s opening of the monetary floodgates:

What the US can learn from China’s response to the stock market crash

There’s a lot to criticize about how the Chinese government has handled the recent stock market turmoil. Over the past two months, Chinese regulators have banned some executives from selling shares, ordered other companies to buy shares, and provided government funds to finance debt-funded stock speculation. Those steps were only going to make things worse in the long run.

But this week, China’s government did something that made sense: It loosened monetary policy. By flooding the economy with cash and lowering interest rates, China’s central bank hopes to cushion the economic downtown and hasten a recovery.

Central bankers in the United States and Europe would be well advised to follow China’s lead. They can’t do exactly what China did because interest rates here and in Europe are already at zero. But the US Federal Reserve and the European Central Bank can and should be doing more to support economic recovery.

Printing money boosts economic growth
The basic job of a central bank like the Federal Reserve is simple. When the economy is weak, the bank boosts economic growth by expanding the money supply. The limit to this strategy is that printing too much money will create inflation. But in general you should try to boost the economy as much as possible without creating an inflation problem.

Right now, most economic data suggests that the Fed has been doing too little to support the economy. Over the past couple of years, the unemployment rate has fallen to 5.3 percent. That’s pretty good, but it could be better. The unemployment rate stayed below that level for multiple years during each of the last two expansions. The economy has also been growing at only about 2 percent per year, below the rate of previous expansions.

And there’s no reason to worry about inflation getting too high. To the contrary, prices rose just 0.2 percent during over the last year, far below the Fed’s 2 percent inflation target. That’s mostly because energy prices have been dropping, but even if you exclude volatile food and energy prices, the inflation rate is still a too-low 1.8 percent.

Of course, just because inflation is low now doesn’t mean it will be forever. But fortunately we can also measure market-based expectations of future inflation by comparing how the market values inflation-adjusted and non-inflation-adjusted bonds. According to this measure, markets expect the average inflation rate over the next decade to be below the Fed’s 2 percent target:

All of these indicators suggest that the Fed is doing too little to support the growth of the American economy.

And things are even worse in Europe. While Germany and a few other countries are enjoying decent unemployment rates, the unemployment rates in Greece and Spain are reminiscent of America’s Great Depression. And inflation in the eurozone is an anemic 0.2 percent, suggesting that the European Central Bank could do a lot more to support the economy without worrying about inflation.

Interest rates are zero, but that doesn’t mean central bankers are powerless
Ordinarily, central banks conduct monetary policy by targeting interest rates. When they want to stimulate the economy, they announce that they’re going to print more money until short-term interest rates fall to a new, lower level. China did that on Tuesday, cutting a key interest rate to 4.6 percent.

But since the 2008 financial crisis, short-term interest rates in the United States and the eurozone have been close to zero, leaving little room for further rate cuts. That has created a misconception that they can’t do more to support economic recovery.

But cutting short-term interest rates is just one way for central banks to boost the economy. Fundamentally, central banks conduct monetary policy by creating new money and using it to buy assets. When a central bank “cuts interest rates,” what they’re really doing is printing money and buying short-term government bonds with it. That becomes ineffective once short-term interest rates fall to zero. But central banks can always buy other assets.

Indeed, that’s exactly what the European Central Bank began doing earlier this year: It began buying long-term government bonds in a program called “quantitative easing.” The Fed used the same strategy to pull the US economy out of recession from 2008 to 2014. By 2014, the Fed believed it had done enough to get the economy growing again, and it halted the program.

But the last year’s economic data suggests that judgment was a mistake. The US economy is still weak, and more stimulus would be helpful. And while the ECB’s bond-buying program was a step in the right direction, it’s becoming clear that it should be doing more as well.

The fact that China devalued its currency earlier this month and cut interest rates this week provide an additional reason for easier money in the US. A weaker yuan means that Chinese goods are cheaper in world markets, making it harder for US exporters to compete. Looser monetary policy can boost domestic demand, cushioning the blow for US exporters.

The Fed’s big problem is political rather than economic
The past year has seen slow economic growth and very low inflation, which would ordinarily be seen as signs that monetary policy was too tight. Yet in recent months, the Fed has been debating whether to make monetary policy still tighter, by raising interest rates for the first time in six years.

The reason for this is that despite economic data suggesting monetary policy is too tight, many people believe Fed policy is too loose. Before 2008, it had been decades before interest rates had fallen to zero. And so people believe that six years of zero-percent interest rates must be a sign that monetary policy has been dangerously loose.

But the Fed’s hawkish critics are mistaken. Six years of zero-percent interest rates are not necessarily a sign that monetary policy has been too loose. Indeed, if we want to eventually return to a “normal” economic environment of non-zero short-term interest rates, the last thing the Fed should do is raise interest rates now.

Just as 10 percent interest rates in the 1970s wasn’t necessarily a sign of tight money, today’s historically low zero-percent interest rates aren’t necessarily a sign of loose money. If money were really loose, we’d see a booming economy and rising inflation. Instead, growth and inflation have both been low for the last seven years.

The real (and, alas, obvious) flaw in the inflationist worldview is that the only true way to avoid the tumult that follows asset bubbles is not to blow bubbles in the first place. A “throw money at every problem” strategy, in contrast, only guarantees more and bigger asset bubbles by encouraging excessive borrowing. Their short-term success plants the seeds of future disaster.

The article also fails to note that we’ve been following such a policy since at least the late 1990s when Federal Reserve chair Alan Greenspan responded to a series of crises in Asia and Latin America (and here, with the collapse of hyper-leveraged hedge fund Long Term Capital Management) with lower interest rates and accelerated currency creation. Easy money, in other words.

That this worked in the moment gave credence to the idea that it was good policy. That it resulted in a ratcheting up of systemic debt that made each successive bust bigger than the one before was conveniently overlooked. Easy money advocates seem to take the world as they find it, with the amount of debt weighing on the system accepted as a given. Instead they should be looking at how we got here and learning the long-run rather than just the short-run lessons of past policy choices. Why, for instance, are interest rates already at zero? Could it be that all the debt we took on to battle previous crises makes growth under normal interest rates impossible?

Anyhow, Vox’s argument is about to win. It will be echoed in the New York Times by Paul Krugman and others, on Wall Street by the big banks that control the government (and that literally own the Fed), and by legislators who have elections coming up (which is to say all of them). By early 2016 it will be mainstream conventional wisdom, and the resulting easy money policy will dwarf the QEs that came before.

In so many ways this is shaping up as 2008 redux, only bigger and much, much more chaotic.


Visit John’s Dollar Collapse blog here

Weekend Reading: Just A Correction, Or Something Else

Courtesy of Lance Roberts via STA Wealth Management

Earlier this week I posted two pieces of analysis with respect to the recent dive in the markets. The first discussed the possibility that this is just a correction within an ongoing bull market. The second delved into the possibility that a new cyclical bear market has begun. Only time will tell which is truly the case.

However, in ALL cases, the initial decline led to a subsequent bounce and ultimately retested previous lows. As shown in the chart below, this was the case in 2010 and 2011 which were ultimately followed by Federal Reserve interventions that helped the bull market regain its footing.


The question is whether, with economic growth rates slowing and deflationary pressures building, will the Fed again intervene by postponing rate hikes and injecting liquidity? Or, is this recent correction just the beginning of something larger? Only time will tell for certain. However, there is mounting evidence that we are indeed closer to the end of this bull market cycle than the beginning.

This weekend's reading list is a smattering of views from bulls, to bears and everything in between as to the recent correction. Is it just a correction to be followed by a resumption of the bull market? Or something else?


1) Panic Attack Or Start Of A Bear Market by Ed Yardeni via Dr. Ed's Blog

There have been lots of panic attacks since the start of the bull market in early 2009. The first four of them occurred from the second through the fourth years of the current bull market, and they were full-fledged corrections. They were all triggered by worries that a recession was imminent, with anxiety focused on three major and varying concerns: a double-dip in the US, a disintegration of the Eurozone, and a hard landing in China–all having the potential to cause a global recession either individually or in combination. When those fears dissipated, relief rallies ensued."


Read Also: Was Monday's Plunge Capitulation, Nah! by Simon Constable via Forbes

2) Dog Days Of Summer Not Over Yet by Jeff Hirsch via Almanac Trade Tumblr

"The Dog Days are not over for the market. This hazy, hot and sultry time during July and August were named the Dog Days of summer in antiquity by stargazers in the Mediterranean as the time period before and after the conjunction of Sirius, the Dog Star of the constellation Canis Major (Big Dog) and the sun. Back in the day the Dog Days were often plagued with, fever, disease and discomfort.

Selling continues to plague the stock market and we expect selling will continue through September, the other worst month of the year along with its neighbor August. September is the worst month of the longer term since 1950. Around this time last year I was on CNBC and the other commentator in the segment, Dan Greenhaus, Chief Global Strategist, BTIG (Great guy and analyst whom we respect and does great work), keenly pointed out the S&P 500 had been up in 8 of the previous 10 years from 2004 to 2013. So maybe September was not bad for the market anymore."

Read Also: 10 Things To Consider About Recent Market Panic by John Ogg via 24/7 Wall Street

3) What Happens Next Is Important by Adam Grimes via

"In October 2014, the selloff in stocks was strong enough (i.e., generated enough downside momentum) that we might reasonably have looked for another leg down. If that scenario was in play, what we "should have" seen was a fairly slow bounce, setting up some kind of flag/pullback, that would pretty quickly break to new lows. If that had happened, there was a possibility that we'd see continued legs of selling and the eventual breakdown of trends on higher timeframes. This is a good roadmap for how lower timeframe trends can have an impact on higher timeframes.

Instead, what happened? The market turned around, rocketed higher, and we knew, literally within the space a few days, that this wasn't an environment in which we were likely to find good shorts. Instead of the slow bounce, we got a hard bounce and the market quickly went to new highs. Following the decline, that type of bounce was unusual, but it was a clear message from the market."


Read Also: Some Good Things About Crashes by Matt Levine via Bloomberg

4) 99.7% Chance We're In A Bear Market by Myles Udland via Business Insider

"In his latest note to clients, Edwards warns that the recent snapback rallies we've seen in the stock market are merely headfakes and that stocks are probably headed lower.

In his note, Edwards references a model developed by his colleague Andrew Lapthorne, which incorporates macroeconomic and fundamental equity variables, and which currently indicates a 99.7% probability that we are in a bear market."


Also Read: Here's Why The Stock Market Correction Isn't Over Yet by Anora Mahmudova via MarketWatch

But Also Read: Most Top Flight Market Timers Are Bullish by Mark Hulbert via MarketWatch

5) When There Is No Place To Hide by Ben Carlson via A Wealth Of Common Sense

"Some people assume that because nearly all risk assets fall at the same time that markets are becoming more and more intertwined with one another. While I think that globalization and the free flow of information could potentially be speeding up market cycles, risk assets have been highly correlated during stock market corrections for some time now. This is nothing new. Here are the historical numbers that show how different stock markets and market caps have performed during past large losses in the S&P 500:"


Read Also: It's Different This Time…But Its Happened Before by Erik Swarts via Market Anthropology

Other Reading

Like 2008 Never Happened by Jeffrey Snider via Alhambra Partners

The Difference Between Traders And Investors by Cam Hui via Humble Student Of The Markets

Timing The Markets With Value And Trend by Meb Faber via Meb Faber Research

Interview With Jim Grant: Market A Hall Of Mirrors via ZeroHedge

Are Central Banks Corrupted? By Paul Craig Roberts via The Economic Populist

Fact vs Fiction: Low Oil Prices And Houston Housing by Aaron Layman via Arron

A Laugh For A Tough Week

Everyone Who Started Watching MadMoney In 2005 Now Billionaires via The Onion

"You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in wonderland, and I show you how deep the rabbit hole goes."Morpheus, The Matrix

Have a great weekend.

Fed Queen Race: Personal Income Rises 0.4% as Expected; Good for Rate Hikes? GDP?

Courtesy of Mish.

Personal income for July rose as expected in today’s Personal Income and Outlays report. Consumer spending rose nearly as expected, led of course by auto sales. Price pressure was nonexistent.

There’s no hurry for a rate hike based on the July personal income and outlays report where inflation readings are very quiet. Core PCE prices rose only 0.1 percent in the month with the year-on-year rate moving backwards, not forwards, to a very quiet plus 1.2 percent. Total prices are also quiet, also at plus 0.1 percent for the monthly rate and at only plus 0.3 percent the yearly rate.

On the consumer, the data are very solid led by a 0.4 percent rise in income that includes a 0.5 percent rise in wages & salaries which is the largest since November last year. Other income details, led by transfer receipts, also gained in the month. Spending rose 0.3 percent led by a 1.1 gain in durables that’s tied to vehicle sales. The savings rate is also healthy, up 2 tenths to 4.9 percent.

The growth side of this report is very favorable and marks a good beginning for the third quarter. This at the same time that inflation pressures remain stubbornly dormant. And remember this report next month will reflect the August downturn in fuel prices. With the core PCE index out of the way, next week’s August employment report looks to be the last big question mark going into the September 17 FOMC.

Favorable Beginning for Third Quarter GDP?

Let’s investigate the above Bloomberg claim “The growth side of this report is very favorable and marks a good beginning for the third quarter.”

Today’s GDPNow Forecast 

The Atlanta Fed GDPNow Forecast sees it this way:

“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.2 percent on August 28, down from 1.4 percent on August 26. The forecast for real GDP growth in the third quarter decreased by 0.2 percentage points following this morning’s personal income and outlays report from the U.S. Bureau of Economic Analysis. The slight decline in the model’s forecast was primarily due to some weakness in real services consumption for July, which lowered the model’s estimate for personal consumption expenditures from 3.1 percent to 2.6 percent for the third quarter.

GDP Now Model

GDP By Quarter

2015 Q1: 0.6%…

Continue Here

Putin To Get $3 Billion From US Taxpayers After Ukraine Bond Debacle

Courtesy of ZeroHedge. View original post here.

On Thursday, Ukraine struck a restructuring agreement on some $18 billion in Eurobonds with a group of creditors headed by Franklin Templeton. The deal calls for a 20% writedown and a reprofiling that includes a maturity extension of four years and an across-the-board 7.75% coupon. All told, Kiev should save around, let’s just call it $4 billion once everything is said and done (there are some miscellaneous loans and bonds that still have to be worked out). 

That’s the good news. 

The bad news is that Ukraine also owes $3 billion to Vladimir Putin.

Now obviously, owing Vladimir Putin $3 billion is not a situation one ever wants to find themselves in, but this particular case is exacerbated by the fact that Putin did not loan the money to Ukraine as we know it now, he loaned the money to a Ukraine that was governed by Russian-backed Viktor Yanukovych. Of course Yanukovych was run out of the country last year following a wave of John McCain-attended protests.

Well, one thing led to another and here we are 18 months later with a festering civil war and a sovereign default and on Thursday, Ukrainian finance minister Natalie Jaresko offered the same restructuring terms to Russia that it offered to Franklin Templeton and T. Rowe. In effect, Jaresko was attempting to tell Vladimir Putin that Ukraine would allow him to take a 20% upfront loss on the $3 billion he loaned to Yanukovych who was overthrown by the current Ukrainian government with whom Moscow is effectively at war. As you might imagine, Putin was not at all interested. 

So what happens now?

Well, it’s simple actually. Someone owes Vladimir Putin $3 billion which he intends to collect in full and he could care less if Franklin Templeton and T. Rowe Price are willing to take a 20% hit. 

Who’s going to pay him, you ask? Probably the US taxpayer. Here’s BofAML:

The $3bn Russian bond is included in debt restructuring, but Russia will not participate in debt restructuring and will either be paid $3bn from reserves in December or there will be a political decision to agree on an extension, likely without haircuts. We believe the $3bn bond is likely to be classified as sovereign debt and the IMF would likely be forced to pay it (as a holdout) in order to continue the program in December.

Got that? The IMF (so, the US with the tacit support of the taxpayer) is going to pay Vladimir Putin his $3 billion which he loaned to Viktor Yanukovych who the US effectively helped to overthrow. 

And if that isn’t hilarious enough for you, consider that the rationale behind paying Putin 100 cents on the dollar is that the IMF needs to be able to justify the continual flow of IMF bailout funds to Kiev, some of which must be used to pay Gazprom which immediately remits the funds to Putin’s personal money vault. 

So in a nutshell, the US is going to pay Putin in order to ensure that it can continue to pay Putin.

*  *  *

Bonus: Ukraine restructuring decision tree

The Troubling Decline Of Financial Independence In America

Courtesy of Charles Hugh-Smith, Of Two Minds 

By financial independence, I don't mean an inherited trust fund. I mean earning an independent living as a self-employed person. Sure, it's nice if you chose the right parents and inherited a fortune. But even without the inherited fortune, financial independence via self-employment has always been an integral part of the American Dream.

Indeed, it could be argued that financial independence is the American Dream because it gives us the freedom to say Take This Job And Shove It (Johnny Paycheck).

This chart shows the self-employed as a percentage of those with jobs (all nonfarm employees). According to the FRED data base, there are 142 million employed and 9.4 million self-employed. (This does not include the incorporated self-employed, typically physicians, attorneys, engineers, architects etc. who are employees of their own corporations.)

This chart depicts self-employment from 1929 to 2015. Self-employment plummeted after World War II as Big Government and Big Business (Corporate America) expanded and the small family farmer sold to agri-business or went to the city for an easier living as an employee of the government or Big Business.

Self-employment picked up as the bulk of 65 million Baby Boomers entered the work force in the 1970s. Not entirely coincidentally, a 30-year boom began in the 1980s, driven by financialization, technology and the explosion of new households as Baby Boomers got jobs, bought homes, etc. These conditions gave a leg up to self-employment.

Self-employment topped at around 10.5 million in the 1990s, and declined sharply from about 2007 to the present. But the expansion of self-employment from 1970 to 1999 is somewhat deceptive; while self-employment rose 45%, full-time employment almost doubled, from 67 million in 1970 to 121 million in 1999.

Financial independence means making enough income to not just scrape by but carve out a modestly middle-class life. If we set $50,000 as a reasonable minimum for that standard (keeping in mind that households with children recently estimated they needed $200,000 in annual income to get by in San Francisco), we find that according to IRS data, about 7.4 million self-employed people earn $50,000 or more annually.

This works out to a mere 6% of the full-time work force of 121 million, and only 5% of the employed work force of 142 million.

There are a number of reasons for the decline of financial independence/self-employment. I cover the fundamental changes in the economy in my book Get a Job, Build a Real Career and Defy a Bewildering Economy.

But there are other less structural reasons, such as nonsensically complex and costly regulations–a topic explained here recently by entrepreneur Ray Z. in Our Government, Destroyer of Jobs (August 12, 2015).

As many readers pointed out, these complexity barriers limit competition to Corporate America chains and provide make-work for government employees and politically protected guilds.

What's the difference between a Socialist Paradise where 95% of the people work for the state or a quasi-state institution, and a supposedly "free market economy" in which 95% of the people work for the state or a cartel-state institution? Given that the vast majority of employees are trapped in their jobs by the threat of losing their healthcare insurance, how much freedom of movement and non-inherited financial independence is available?

This reality is described in Health Care Slavery and Overwork (via Arshad A.)

True financial independence is probably even scarcer than these bleak numbers suggest. As a self-employed person myself, I have to pay my own healthcare insurance costs –a staggering $15,300 per year for bare-bones coverage for the two of us (no meds, eyewear, dental, $50 co-pay for everything, etc.).

Only 3.9 million taxpayers took the self-employed health insurance deduction. That's a pretty good indicator of how many taxpayers are actually living solely on their income, that is, they don't have a spouse who has family healthcare coverage via a government or corporate job.

That's a mere 2.7% of all 142 million employees. If you can't work for yourself and afford health insurance, something is seriously messed up.

Endangered Species: The Self-Employed Middle Class

Steve Keen on Economic Forecasts, Ponzi Schemes, GDP, China; One Way Streets and Poison

Courtesy of Mish.

Economic Forecasts

Economist Steve Keen pinged me in response to my post Regional Manufacturing Expectations From Mars.

In that post, I compared Richmond Fed manufacturing survey expectations (six month look ahead projections made in February for August), to what actually happened in August.

In response, Steve Keen Tweeted

@MishGEA gets it wrong! Says “Regional Manufacturing Expectations From Mars” when they’re really from Uranus.

I duly stand corrected. I am now planetarily aligned with Keen on the distinction between Mars and Uranus.

China Implosion

On a more serious note, please consider the Financial Times article Why China’s stock market implosion might not be very meaningful, by Izabella Kaminska.

Kaminska quotes Steve Keen as follows …

One key peculiarity about China’s economy—and there are many—is that much of its growth has come from the expansion of industries established by local governments (“State Owned Enterprises” or SOEs). Those factories have been funded partly by local governments selling property to developers (who then on-sold it to property speculators for a profit while house prices were rising), and partly by SOE borrowing. The income from those factories in turn underwrote the capacity of those speculators to finance their “investments”, and it contributed to China’s recent illusory 7% real growth rate.

With property price appreciation now over, those over-levered property developers aren’t buying local government land any more, and one of the two sources of finance for SOEs is now gone. Borrowing is still there of course, and the Central Government will probably require local councils to continue borrowing to try to keep the growth figures up. But the SOEs are already losing money, and this will just add to the Ponzi scheme. The collapse of China’s asset bubbles will therefore hit Chinese GDP growth much more directly than the crashes in the more fully capitalist nations of Japan and the USA.

Heart of the Matter

Keen indeed gets to the heart of the matter about SOEs, borrowing, and illusory growth rates….

Continue Here

The Dow Roundtrips


The Dow Roundtrips

Courtesy of Joshua Brown, The Reformed Broker

round trip


Five trading days in the Dow Jones Industrial Average and a roundtrip between here and the close last Friday.

God forbid you had gone a few days doing something other than obsessing over the market. You’d take a look at the current level and conclude that not much has gone on.

The hard part is that we don’t always get a V-shaped bounce. And sometimes, the bounce isn’t permanent – just a temporary development to suck more buyers in. But you can’t know in advance, nor can anyone else, so its probably not a great idea to go leaping off a diving board headfirst into the most hysterically bearish or bullish narrative you can find.

Managing the mental ups and downs is more important than trying to manage the market’s ups and downs for most investors. For short-term traders, however, this is paradise.

Have at it, guys.

Computers are the new Dumb Money


Computers are the new Dumb Money

Courtesy of Joshua M. Brown, The Reformed Broker

You want the box score on this latest weekly battle in the stock market?

No problem: Humans 1, Machines 0

Because if you think it was human beings executing sales of Starbucks (SBUX) down 22% on Monday’s open, you’re dreaming. And if you believe that it was thinking, sentient people blowing out of Vanguard’s Dividend Appreciation ETF (VIG) at a one-day loss of 26% at 9:30 am, you’ve got another thing coming.

By and large, people did the right thing this week. They recognized that JPMorgan and Facebook and Netflix should not have printed at prices down 15 to 20% within the first few minutes of trading and they reacted with buy orders, not sales. They processed the news about the 1200+ individual issue circuit-breakers and they let the system clear itself.

Rational, experienced people understood that an ETF with holdings that were down an average of 5% should not have a share price down 30%.

Conversely, machines can only do what they’ve been programmed to do. There’s no art, there’s no philosophy and there’s no common sense involved. And volatility-shy trading programs have been programmed to de-risk when prices get wild and wooly, period. Their programmers can’t afford to have an algo blow-up so the algos are set up to pull their own plug, regardless of any qualitative assessment during a special situation that is obvious to the rest of the marketplace.

Warren Buffett once explained that “Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” Ordinary investors, in the aggregate, have learned their limitations the hard way over the last few decades. This is why 25% of all invested assets are in passive investment vehicles and Vanguard is now the largest fund family on the planet. Retail players gave up on the fever dream of Mad Money long ago; Mom and Pop are now investing in the missionary position from here on out.

Software, on the other hand, has not learned this lesson. The problem with computers is that they can’t be programmed with humility.

The Financial Times notes that computers now represent more than half of each day’s activity in the stock market. Which means they are mostly trading amongst and against each other:

While it may take weeks before regulators understand why the plunges occurred, one reason for the swing is that automated computer programs have changed how markets function…

Orders are being executed at lightning speeds in huge volumes. But there is another, often overlooked implication: these machines are being programmed to link numerous market segments together into trading strategies. So when computer programs cannot buy or sell assets in one segment of the market, they will rush into another, hunting for liquidity.

Since their algorithms are often similar (or created by computer scientists with the same training) this pattern tends to create a “herding” effect. If a circuit breaks in one market segment, it can ripple across the system faster than the human mind can process. This is a world prone to computer stampedes.

With the exception of HFT, which simply needs volatility and volume to thrive, I would say its a safe bet that quantitative strategies largely blew a gasket on Monday. Especially the really risk-averse ones, the ones that are directed to sell first and ask questions later. On Monday, it paid to ask questions first. Unfortunately, that function isn’t in the code.

This winter, I moderated a panel at the Battle of the Quants conference and interviewed four computer scientists on the leading edge of software-based trading. One of them was a particularly smarmy snot-nose from the West Coast who matter-of-factly informed the crowd that he “could write a program that crushes the market in my sleep.” I knew he was full of shit the moment he referred to himself as “an algorithmist.” Whatever dude, hope you’re sleeping well now.

Gerald Loeb, one of the greatest investors in history, said “If there’s anything I detest, it’s a mechanistic formula for anything. People should use their heads and go by logic and reason, not hard and fast rules.” Loeb, who would go on to found EF Hutton and make big money in the market for decades, said that his big takeaway from the Crash of 1929 and its aftermath was that nothing works all the time. A durable quantitative trading system builds this idea in. A flawed one tunes it out, and you get something like Long Term Capital Management or the blow-ups thatoccurred during the taper tantrum in 2013.

I’ll leave you with a quote from Dominique Dassault of the Global Slant blog, someone who’s more knowledgeable about black box trading than I ever will be:

While in Greenwich Ct. one afternoon I will never forget a conversation I had with a leading quantitative portfolio manager. He said to me that despite its obvious attributes “Black Box” trading was very tricky. The algorithms may work for a while [even a very long while] and then, inexplicably, they’ll just completely “BLOW-UP”. To him the most important component to quantitative trading was not the creation of a good model. To him, amazingly, that was a challenge but not especially difficult. The real challenge, for him, was to “sniff out” the degrading model prior to its inevitable “BLOW-UP”. And I quote his humble, resolute observation “because, you know, eventually they ALL blow-up“…as most did in August 2007.

Dassault’s take is that everyone is running a variation of the same strategy, and they’re all managing risk the same way – dumping oceans of stock the moment there’s a problem.

The Paradox of Dumb Money is that when it realizes its limitations, it ceases to be dumb. I can assure you that none of the thousands of black box quant managers have yet reached this realization about themselves.

The new game for traders is not running away from rapacious algos. Instead, it’s going to become about exploiting their failure to reason.

Pictures via

Yet Another Dispute Over GDP; What’s Really on the Fed’s Mind?

Courtesy of Mish.

Disputes over GDP go on and on and on. MarketWatch reports By another measure, the U.S. economy was ho-hum in second quarter.

There are two ways to compute how well the economy is doing.

One is to tally all the goods and services produced during a given time period — that’s called gross domestic product.

Another is to measure all the incomes earned in the production of those goods and services — that’s called gross domestic income.

Over time, they should be exactly the same. But measurement isn’t easy, and so the Commerce Department not only reports both figures, but also for the first time on Thursday averaged the two together.

The result wasn’t great: It’s showed a 2.1% average for the second quarter, since GDP growth was a sterling 3.7% and GDI was a meager 0.6%.

According to Josh Shapiro, chief U.S. economist at MFR, that’s the largest gap between the two measures of the economy since the third quarter of 2007.

Some research has shown the GDI figures to be a more accurate representation of economic activity, but the evidence is mixed and the debate continues. Nonetheless, the disparity reported in Q2 does lend credence to the notion that the GDP growth reported in the quarter likely overstates the underlying vitality of the economy in the span,” he said in a note to clients.

Two Measures

That may look significant, but let’s investigate further.

DGI vs. GDP Percent Change from Year Ago

Continue Here

The Best Explanation If Exposed As An Ashley Madison Member…

Courtesy of ZeroHedge. View original post here.

… comes from Dan Loeb of Third Point, who as Gawker points out admits to being a member of the hacked cheating website: due diligence:

“As my family, friends and business colleagues know, I am a prolific web surfer. Did I visit this site to see what it was all about? Absolutely – years ago, at the time I was invested in Yahoo and IAC and was endlessly curious about apps and websites. Did I ever engage or meet with anyone through this site? Never. That was never my intention — as evidenced by the fact that I never provided a credit card to set up an account.”

Indeed, as the author points out, this is an "entirely plausible excuse for being on Ashley Madison" especially for someone who was financially affiliated with comparable websites. In fact, for anyone on Wall Street caught on Ashley Madison and having to explain to their significant other why they were on (a website where some 95% of the members were many to begin with) the explanation is all too simple: to test out the platform and its profitability ahead of their imminent (and now permanently scrapped) IPO. Period, end of story.

Unless the story doesn't end there, like in this case: "it doesn’t explain why someone who had no intention of engaging with other adulterers described himself as looking for “discreet fun with 9 or 10,” as indicated in his profile data.

I asked Loeb why he’d entered his desire for “discreet fun” into a website he had no intention of using. He replied: “That field was part of going on the site and I gave a brief line that sounded plausible.”

Loeb’s statement also doesn’t explain why he checked his private messages on an account he never used to “engage” with anyone. The profile data shows that the last time he did so was on December 9, 2013—eight months after he joined Ashley Madison.

Here is what a better explanation may have sounded like: "I am a billionaire: does it look like I need to secretly hook up on an anonymous website when I can go out and have any woman I want?"

[Picture of Dan Loeb from Reuters, here.]

“Computer Glitch” Plaguing ETFs Is “Unrelated” To Monday’s Flash Crash, BNY Swears

Courtesy of ZeroHedge. View original post here.

On Wednesday, we asked if Monday’s catastrophic ETF collapse which saw over 200 funds fall by at least 10% was just a warmup for a meltdown of even greater proportions. 

The problem, you’ll recall, was that in the midst of Monday’s flash-crashing mayhem, a number of ETFs traded at a remarkable discount to fair value. Essentially, market makers looked to have simply walked away (there’s your HFT "liquidity provision" in action) or else put in absurdly low bids in order to avoid getting steamrolled when the constituent stocks came off halt. The wide divergences weren’t arbed for whatever reason and the result was an epic breakdown of the ETF pricing mechanism. 



As we wrote on Wednesday, this was proof positive that contrary to popular belief (which, incidentally, is itself contrary to common sense in this case), an ETF cannot be more liquid than the assets it references and when liquidity dries up in the underlying as it did on Monday, the market structure is clearly inadequate to cope. 

But don’t worry, because the problem has been identified.

It’s simply a "computer glitch" at Bank of New York Mellon. Here’s WSJ:

A computer glitch is preventing hundreds of mutual and exchange-traded funds from providing investors with the values of their holdings, complicating trading in some of the most widely held investments.

The problem, stemming from a breakdown early this week at Bank of New York MellonCorp., the largest fund custodian in the world by assets, prompted emergency meetings Wednesday across the industry, people familiar with the situation said. Directors and executives at some fund sponsors scrambled to manually sort out pricing data and address any legal ramifications of material mispricings, those in which stated asset values differed from the actual figures by 1% or more.

A swath of big money managers and funds was affected, ranging from U.S. money-market mutual funds run by Goldman Sachs Group Inc., exchange-traded funds offered by Guggenheim Partners LLC and mutual funds sold by Federated Investors. Fund-research firm Morningstar Inc. said 796 funds were missing their net asset values on Wednesday. 

Ok, got it. So basically, if you want to know what the NAV of your fund is, you’ve got to go stock-by-stock and calculate it the old fashioned way. And what, you might ask, does this mean for investors in these most liquid of all securities? 

The effects of the breakdown are threefold: It has made ETFs more costly to trade, hindered investors’ ability to trade accurately in and out of popular investment vehicles, and forced fund companies to scurry to price securities.

Here we see the hallmarks of liquidity: i) rising trading costs, ii) an acute inability to trade in and out of the market accurately, and iii) issuers that have no idea what’s going on. 

And how about HFTs, who, you’re reminded, insist that they provided liquidity during Monday’s chaos? 

Several traders said they were forced to calculate their own net asset value for ETFs and that they widened the spreads, or the difference, between listed buying and selling prices to accommodate for the higher risk of trading.

"We measure our edge in terms of subpennies," one trader said. "We can’t afford to be off by a penny."

So if we had to venture a guess as to what might have happened here, it might go something like this: once the halts got started, it became impossible to calculate ETF NAV causing "liquidity providers" to widen out their bid- asks in order to protect themselves against NAV uncertainty, and that, in turn, caused anyone who had a market order in to hit the bid at absurdly low prices, taking out stops, and before you knew it, the rampant confusion simply caused Bank of New York Mellon's/ SunGard's platform to malfunction. 

Of course we'll never know what really happened, but what we can say is that if the following is true, it would be some damn coincidence:

The outage wasn’t related to the market turbulence Monday that included the largest-ever intraday point decline in the Dow Jones Industrial Average, the bank said. 

*  *  *

Incidentally, the official word is that the problem was caused by "an operation systems change performed on Saturday." Read the note below and decide for yourself.

SunGard BNY Mellon InvestOne External Statement_FINAL

A Bottom, But Not THE Bottom

Courtesy of Lance Roberts via STA Wealth Management

Earlier this week I posted two articles. The first discussed the possibility that this is just a correction within an ongoing bull market. The second delved into the possibility that a new cyclical bear market has begun. Only time will tell which is truly the case.

The bounce over the last couple of days has been met with "party hats" by the mainstream media as a sign that the bottom is in and the worst is now behind us. Historically such has not been the case as witnessed by looking at the 1987, 1998, 2010 and 2011 corrections that occurred within an ongoing bull market. In every case, the markets bounced off correction lows only to retest those lows several weeks later. As I stated then:

"The sharp 'reflexive' rally that will occur this week is likely the opportunity to review portfolio holdings and make adjustments before the next decline. History clearly suggests that reflexive rallies are prone to failing, and a retest of lows is common. Again, I am not talking about making wholesale liquidations in accounts. However, I am suggesting taking prudent portfolio management actions to raise some cash and reduce overall portfolio risk."

The esteemed technician Walter Murphy recently had some interesting commentary in this regard.

"Our sense is that the volatility of recent days is a sign that the S&P 500 is attempting to put a short-term bottom in place.

Nonetheless, the weekly and monthly Coppock Curves are down, with the weekly oscillator positioned to remain weak for at least another 5-6 weeks. In addition, there are no meaningful divergences. For example, the daily Coppock and RSI(8) indicators are at their lowest levels since August 2011.

Another indicator that may prove to be guideline is the S&P’s Bullish Percent Index, which is also at its lowest reading (22.4%) since 2011. During the 2011correction, the BPI initially fell to 20.4% in August, experienced a relief rally to 54.4% in September, and then fell to 21.8% in October. The October low was a bullish divergence because it was higher than the August reading even though the “500” recorded a lower low. This divergence was followed by the just-completed four-year rally. Thus, if past is prologue, we might (and do) expect a short-lived S&P rally that will be followed by renewed weakness to lower lows. The significance of those anticipated lower lows will be determined by the presence (or lack) of positive divergences."


There is a possibility that the October lows could turn out to be THE bottom for now. However, even if that is the case, many investors will wish they hadn't jumped in so quickly.

Then there is the possibility that the lows don't hold.

For investors, the real question should be what is the most dangerous: Missing out on a potential short-term rally in a very extended bull market, or catching the next big decline? That is for you to decide.

Fed Won't Hike In September

As I have repeatedly suggested since the beginning of this year, there was little ability, despite their incessant jawboning, for the Fed to raise rates this year….if ever. To wit:

"The Fed is slowly coming to realize that 'forward guidance', 'QE' and artificially suppressing interest rates does indeed boost asset prices and creates a burgeoning 'wealth gap.' However, since those programs only affect the top 20% of the population that actually has money to invest, it does little to create real prosperity across the broad economy.

But here is the real question: 'If, after six-plus years of economic expansion, the economy is not strong enough to withstand a hike in rates now, when will it ever be?'"

With global economic weakness now sweeping back into the US combined with a sharp decline in the financial markets, it was not surprising to see Bill Dudley, President of the New York Fed, in the media delivering a message.

"From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago."

Of course, no rate hike means monetary policy remains accommodative for a while longer which sent stocks rebounding sharply following his comments.

However, the problem continues to be that despite the hopes and wishes of the Federal Reserve, both economic growth and inflation continue to be illusive. While Mr. Dudley current blames the lack of inflation on falling oil prices, it is only the latest excuse in a long series of missed forecasts. As I discussed in "Meet The Worst Economic Forecasters Ever…"

 When it comes to the economy, the Fed has consistently overstated economic strength. This is clearly shown in the chart and table below."


The problem now, despite their ongoing optimistic hopes, is the collapse in China's economic growth is creating a deflationary backwash on the U.S. This can be clearly seen in the breakeven inflation expectations in the bond market.


There is little ability currently for the Fed to hike rates in September. While most analysts are pushing the rate hike out to December of this year, the reality is that it could be much further out than that.

Earnings Recession Continues

While the lack of inflation and economic growth remains the Fed's nemesis for monetary policy, earnings are no longer the investor's friend. Political Calculations posted a good analysis about the ongoing deterioration in earnings. To wit:

"Today, we'll confirm that the earnings recession that began in the fourth quarter of 2014 has continued to deepen."


"In the chart above, we confirm that the trailing twelve month earnings per share for the S&P 500 throughout 2015 has continued to fall from the levels that Standard and Poor had projected they would be back in May 2015. And for that matter, what S&P forecast they would be back in February 2015 and in November 2014."

With prices and valuations elevated, and earnings deteriorating, the backdrop for a continued "ripping bull-market" is at risk. The problem for the "perma-bulls" is that the deflationary backwash, combined with already weak economic fundamentals, continues to erode the ability for earnings to meet elevated future expectations. It is likely earnings will continue to disappoint in the quarters ahead and put further downward pressure on asset prices to close the current gap between "financial fantasy" and "economic realities."

Just some things worth thinking about.

Underwater picture via Pixabay. 

GDP by Other Measures; Will the “Real” GDP Please Stand Up?

Courtesy of Mish.

In the wake of a stronger than expected GDP report (see Second Quarter GDP Revised Up, as Expected, Led by Autos, Housing), some are questioning the stated growth.

For example, the Consumer Metrics Institute says "On the surface this report shows solid economic growth for the US economy during the second quarter of 2015. Unfortunately, all of the usual caveats merit restatement".

Consumer Metrics Caveats

  1. A significant portion of the "solid growth" in this headline number could be the result of understated BEA inflation data. Using deflators from the BLS results in a more modest 2.33% growth rate. And using deflators from the Billion Prices Project puts the growth rate even lower, at 1.28%.
  2. Per capita real GDP (the number we generally use to evaluate other economies) comes in at about 1.6% using BLS deflators and about 0.6% using the BPP deflators. Keep in mind that population growth alone (not brilliant central bank maneuvers) contributes a 0.72% positive bias to the headline number.
  3. Once again we wonder how much we should trust numbers that bounce all over the place from revision to revision. One might expect better from a huge (and expensive) bureaucracy operating in the 21st century.
  4. All that said, we have — on the official record — solid economic growth and 5.3% unemployment. What more could Ms. Yellen want?


I certainly agree with point number three. Significant GDP revisions are the norm, even years after the fact. The numbers are of subjective use at best because GDP is an inherently flawed statistic in the first place.

As I have commented before, government spending, no matter how useless or wasteful, adds to GDP by definition.

Moreover, inflation statistics are questionable to say the least, as are hedonic price measurements and imputations.


Imputations are a measure of assumed activity that does not really exist. For example, the BEA "imputes" the value of "free checking accounts" and ads that number to GDP.

The BEA also makes the assumption that people who own their houses would otherwise rent them. To make up for the alleged lost income, the BEA actually assumes people rent their own houses from themselves, at some presumed lease rate. Imputed rent is an addition to GDP.

Why stop there? On the same basis people who cut their own grass would have to pay someone else to do it for them. And married men might go to prostitutes if they were not married.

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Okay, We’re Awake Now

Courtesy of John Rubino.

It’s safe to say that most of the world is riveted by the news pouring out of the major (and minor) stock markets. Record declines followed by near-record spikes — besides being disorienting for anyone with a preferred direction — are uncomfortably reminiscent of early 2008 when volatility in pretty much every asset class soared, soon to be followed by an epic crash and the deepest recession since the 1930s.

Is this that again? Who knows, but when the Big One does arrive, its first week will probably feel a lot like this. So, happy watching.

In the meantime, here’s a brief selection of opinion and advice released in the past few days, beginning with a primer on volatility itself from the Associated Press:

Q&A: What to make of the recent volatility in the markets

The wild swings in the stock market this week have sent market volatility levels to heights not seen since the financial crisis.

Volatility can sound scary, but it’s a natural part of any market. Here’s a breakdown on how it works:

In the simplest of terms, volatility is how dramatically a market moves from one day to another.

A trader once described market volatility as like the turbulence that can hit an aircraft. An airplane might be trying to get from 35,000 feet to 30,000 feet, but turbulence will cause the plane to move up or down a few hundred feet, or rock left to right, on its way there. The higher the volatility, the rockier the passengers’ ride is from point A to point B.

First of all, volatility is not good or bad, it’s just another way to describe how the markets are performing.

But more often than not, heightened volatility happens at times of uncertainty in the financial markets. When traders have reason to be worried, they might sell or buy a stock in larger amounts than usual, causing the company’s stock price to whipsaw around.

There are a few measures, but the most quoted one is the Chicago Board Option Exchange’s Volatility Index, most often called the VIX. The VIX essentially measures how volatile that investors expect the market to be in the next 30 days. The higher the reading, the more volatility expected, but a reading of above 30 points is generally considered a sign there’s a lot of fear in the market.

The VIX hit a record of 80.86 at the height of the financial crisis. It has mostly remained below 20 for the last few years, with occasional but fleeting surges higher.

The recent shakeout of the financial markets has sent the VIX surging. It traded as high as 53.29 Monday, a level not seen since 2008-2009. The index has pulled back significantly from those levels, closing at 30.32 on Wednesday.


Options premium sellers make hay while volatility rules

(Reuters) – Wild gyrations in the U.S. stock market that sent a key measure of volatility to a near seven-year-high has created a big opportunity for options premium sellers, and traders are making the most of it while it lasts.

U.S. stocks rose on Wednesday, with the market on track to snap its six-day losing streak. It was still a volatile day, however, with the Dow industrials trading in a 420-point range, and the ups and downs were expected to continue.

Monday’s sharp selloff sent the CBOE Volatility Index .VIX, the market’s favored barometer of volatility, up 25 points to 53.29, the highest since Jan 2009. The VVIX Index .VVIX, the volatility index for the VIX, shot to an all time high of 212.22.

Though volatility is still high at 32.24 on Wednesday, it is off sharply from the high on Monday.

“I think the market is implying that yes, volatility may be higher going forward, but not to the same extent that we have seen in the last couple of days,” said Christopher Jacobson, derivatives strategist at Susquehanna.

Higher volatility expectations helps boost options prices. Traders who sell that protection – in effect betting on volatility to fall – have jumped at the opportunity to sell options to collect fat premiums.

“I think traders think there is a pretty good chance that we have seen the top in the VIX even if we haven’t seen the bottom in the S&P 500 .SPX,” said Bill Luby, chief investment officer of Luby Asset Management of Tiburon, California and publisher of the ‘VIX and More’ blog.

In that type of situation, those who sell puts and calls try to collect as much premium – the cost of an option – as possible while prices are high. Premium selling was likely a big part of options activity the last few days, strategists said.

“If you are of the mindset that the worst is over and that things are going to get better from here, then this is an ideal time to sell options premium,” said Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin.

David Miller, portfolio manager of Catalyst Macro Strategy Fund, said the fund had been lapping up premium over the past few months when it was cheap.

“We are selling premium now that premiums are significantly higher,” he said. The fund trades options on individual securities, international exchange-traded funds, and VIX ETFs.


Six days of declines, then the Dow surges 620 points: How volatility is roaring back into world markets

(Financial Post) – Volatility has returned to stock markets with a vengeance.

After six days of consecutive declines, including some of the worst trading sessions in years, the Dow Jones Industrial Average surged by 620 points on Wednesday, or nearly four per cent, in its biggest one-day gain since 2011.

Wednesday’s gains were also enough for the S&P 500 to pull itself out of correction territory. The index had fallen by 11 per cent from its May highs as of Tuesday (a correction is defined as a pullback of 10 per cent of more). The S&P/TSX Composite Index also posted a big gain, climbing 230 points, or 1.75 per cent, to 13,381.59.

The recent large swings are a departure from the sleepy performance of markets in the past couple of years, which have left traders more accustomed to seeing a trading day average declines or gains of roughly one per cent. Analysts said the recent trading sessions are evidence that after a long period of low trading volumes, volatility has returned to the market — meaning buying on dips might not prove as profitable as it has in recent years.

“We are always wary of ‘catching falling knives,’” said Jeremy Hale, global macro strategist at Citigroup, adding that he and his team have elected to “stand aside and wait until things stabilize.”


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Who Will Be The Bagholders This Time Around?

Courtesy of Charles Hugh-Smith of Of Two Minds

Once global assets roll over for good, it's important to recall that somebody owns these assets all the way down. These owners are called bagholders, as in "left holding the bag."

Those running the rigged casino have to select the bagholders in advance, lest some fat-cat cronies inadvertently get stuck with losses. In China, authorities picked who would be holding the bag when Chinese stocks cratered 40%: yup, the poor banana vendors, retirees, housewives and other newly minted punters who borrowed on margin to play the rigged casino. [To be fair, these banana vendors picked themselves. ~ ed.]

Corrupt Chinese officials, oil oligarchs and everyone else who overpaid for flats in London, Manhattan, Vancouver, Sydney, etc. will be left holding the bag when to-the-moon prices fall to Earth.

Anyone buying Neil Young's 2-acre estate in Hawaii for $24 million will be a bagholder.

(If nobody buys it at this inflated price, Neil may end up being the bagholder.)

Bond funds that bought dicey emerging market debt (Mongolian bonds, anyone?) and didn't sell at the top are bagholders.

Everyone with bonds and stocks in the oil patch who didn't sell last summer is a bagholder.

Everyone holding yuan is a bagholder.

Everyone who bought euro-denominated assets when the euro was 1.40 is a bagholder at euro 1.12.

Everyone with 401K emerging market equities mutual funds who didn't sell last summer is a bagholder.

Everyone who reckons "buy and hold" will be the winning strategy going forward will be a bagholder.

Anyone buying anything with borrowed money is a bagholder. Leveraging up to buy risk-on assets like Mongolian bonds and homes in vancouver is brilliant in bubbles, but not so brilliant when risk-on turns to risk-off. As the asset's value drops below the amount borrowed to buy it, the owner becomes a bagholder.

Anyone betting China's GDP is really expanding at 7% and the U.S. economy will grow by 3.7% next quarter is angling to be a bagholder.


Kansas City Region Activity Remains in Deep Contraction

Courtesy of Mish.

Unlike housing and auto sectors, economic regions dependent on oil activity remain severely stressed.

For example, the Kansas City Fed regional factory report came in today at -9, compared to an Economic Consensus of -4.

Factory activity in the Kansas City Fed's region remains in deep contraction, at minus 9 in August vs minus 7 in July and deeper than the Econoday consensus for minus 4. New orders are also at minus 9 with backlog orders at minus 21. These are deeply depressed readings that point to a long run of weak activity in the months ahead. Production is already far into the negative column at minus 16 with hiring at minus 10. Price readings in the August report are in contraction.

This report speaks to significant distress for the region which is getting hit by the oil-led fall in commodity prices. Taken together, regional reports have been mixed to soft so far this month, pointing to slowing for a factory sector that got a bit boost from the auto sector in June and July.

Mike "Mish" Shedlock


Second Quarter GDP Revised Up, as Expected, Led by Autos, Housing

Courtesy of Mish.

Economists had been expecting today’s second quarter GDP estimate to rise from initial readings, based largely on auto sales and housing, and they were correct.

“The GDP estimate released today is based on more complete source data than were available for the ‘advance’ estimate issued last month. In the advance estimate, the increase in real GDP was 2.3 percent. With the second estimate for the second quarter, nonresidential fixed investment and private inventory investment increased. With the advance estimate, both of these components were estimated to have slightly decreased.”

Advance Estimate vs. Second Revision

Economic Consensus

GDP was a bit higher than the Bloomberg Economic Consensus.

The second-quarter did show a big bounce after all, up at a revised annualized growth rate of 3.7 percent which is 5 tenths over the Econoday consensus and just ahead of the high estimate. The initial estimate for second-quarter GDP was 2.3 percent. This report points to better-than-expected momentum going into the current quarter.

Consumer demand was strong with personal consumption expenditures at a 3.1 percent rate led by an 8.2 percent rate for durables, a gain that was tied to vehicle spending. Residential investment was very strong, at plus 7.8 percent, as was nonresidential fixed investment which, boosted by an upward revision to structures, came in at plus 3.2 percent. Inventories contributed to second-quarter growth as did improvement in net exports. Final demand proved very solid, at plus 3.5 percent. The GDP price index, unlike many other price readings, is showing some pressure, at 2.1 percent and just above the Fed’s general policy goal.

The economy’s acceleration is now much more respectable from the first quarter when growth, at only 0.6 percent, was depressed by heavy weather and special factors. Splitting the difference, first-half growth came in a bit over 2 percent which, as it turns out, is right in line with the similar performance of 2014 when first-quarter growth, again depressed by severe weather, fell 2.1 percent followed by a 4.6 percent surge in the second quarter. Growth in the third quarter last year was 4.3 percent which would be a very good performance for this third quarter.

The impact of today’s report on Fed policy for September’s FOMC is likely to be minimal. Focus at the upcoming meeting will be on the state of the global financial markets and, very importantly, the strength of next week’s employment report for August.

GDPNow Third Quarter

I do not believe today’s report will impact estimates for third quarter for the Atlanta Fed GDPNow Model by much if any. We will find out on the next update, tomorrow.

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