by ilene - August 27th, 2015 9:52 pm
Courtesy of Joshua Brown, The Reformed Broker
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.
by ilene - August 27th, 2015 8:54 pm
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.
by ilene - August 27th, 2015 8:43 pm
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.
That may look significant, but let’s investigate further.
DGI vs. GDP Percent Change from Year Ago
by ilene - August 27th, 2015 8:13 pm
… 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.]
by ilene - August 27th, 2015 7:30 pm
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.
by ilene - August 27th, 2015 5:00 pm
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
by ilene - August 27th, 2015 3:30 pm
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
- 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%.
- 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.
- 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.
- 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,
by ilene - August 27th, 2015 2:06 pm
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.
by ilene - August 27th, 2015 1:07 pm
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
by ilene - August 27th, 2015 12:46 pm
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
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