ICI reports that the week ended July 14 saw another massive outflow from domestic equity mutual funds of $3.2 billion, bringing the July total to $7.3 billion, and year-to-date equity outflows to a stunning $37.5 billion. Yet neither liquidations, nor redemptions, nor mutual fund capitulation, nor lack of liquidity, nor lack of human traders, nor rumors that it is all one big scam, can tame the market’s most recent bout of irrational exuberance: in a time when equity funds had to redeem over $7 billion in stocks, the stock market surged by 90 points!
Just like last week, despite huge order blocks of selling pressure, the fact that volume is so light and liquidity so tight, the market succeeds in ramping ever higher, now that the few remaining carbon-based market participants have reverse engineered the key algo "predictive" frontrunning mechanisms, and manage to fool them that there is bid side interest, into which all domestic equity mutual funds manage to sell en masse. Soon enough there will be little left to sell, which will, paradoxically cause a much overdue market crash. (It is a bizarro market for a reason). And even as equity mutual funds are running on fumes (explains Bill Miller’s call of desperation yesterday), all the money in the world continues to rush into credit funds: the past week saw inflows into every single bond category, with a total of $5.8 billion going into all taxable bond funds. We are gratified that behind the fake equity facade of "alliswellishness", everyone is pulling their money out of stocks with an increased sense of urgency. Retail has had it with this pathetic shitshow of a market: the computer can front run each other for all anyone cares. We are fairly confident that the Obama administration will not have a soft spot in its heart to bail out the quant community… unless, of course, Rahm Emanuel discovers some way to unionize algorithms and give them voting rights.
It seems everyone is perplexed by the most recent irrational bout of July market action. Like clockwork, once July rolls in, the market surges, no questions asked. This year, the ramp is particularly blatant because as the attached chart demonstrates, bonds, which are a far more credible barometer of market (in)sanity, indicate the S&P is rich by at about 50 points. As this spread will most certainly converge eventually as we discussed previously, a short stock, short bond position would generate some much needed P&L in this world of deranged fractal algorithms. As to what may have caused the most recent bout of irrational exuberance, David Rosenberg has the most logical, and generic solution: excess liquidity and a short covering spree, and "nothing fundamental here."
From Breakfast with Dave
WHAT’S DRIVING THE MARKET?
We’ve been asked repeatedly how the stock market has managed to bounce off the nearby lows with such veracity. Especially with the ongoing weakness we have seen in the incoming U.S. economic data due to the fact that the retail investor still refuses to participate and is solely focused on income-generating strategies. The answer is that the market may have been on the receiving end of another few jolts of liquidity. M2 money supply has expanded $38.5 million in the past two weeks and the M1 money multiple has risen from 0.839 to 0.862.
When we go to the weekly data from the Fed, we see that “trading assets” on commercial bank balance sheets expanded to $325 billion in the past two weeks from $297 billion. And, when we go to the Commitment of Traders report, we see that there has been a big swing in the net speculation position on the S&P 500 “E-minis” on the Mercantile Exchange (futures and options) to a net long position of 28,172 contracts from 15,155 net shorts just two weeks ago. That’s a big part of the bounce-back — prop traders and short-coverings. Nothing fundamental here, as far as we can see.
JUST CALL IT A WHOLE LOT OF VOLATILITY
Last week’s 5.4% increase was the best performance since mid-July 2009 (week of July 17th). But yet, prior to last week, the S&P 500 saw the largest decline (-5% during the week of July 2nd) in eight
Great interview in this week’s Barrons with Ray Dalio of Bridgewater. For those who aren’t familiar with Dalio he is the founder of the largest hedge fund in the world with $75B in assets under management. I highly recommend reading the interview in its entirety, but for those just looking for some highlights I’ve done the legwork for you:
On the stock market rally:
“It caused the stock market to retrace about 60% of its decline, and it caused the U.S. economy to retrace 40% of its decline. But it did not produce new financial assets. There has been very little new lending. The stimulus produced very little in the way of economic activity.”
On the bailouts and potential for recession:
“There is a lot of criticism about saving financial institutions and running a big budget deficit, but if the government didn’t do those things we would be in a terrible situation. It will be impossible to stimulate that way in the future because politically it is untenable. That’s a risk because, between now and 2012, the economy will probably go down again, and it will be important for monetary policy and fiscal policy to be able to be stimulative, and for the Federal Reserve to be able to purchase assets again.”
How soon will the recession occur?
“It will probably come sooner than most recessions do. Usually, there is about five years between recessions, but for various reasons related to the size of the debt, the next recession is going to come sooner.”
On the recovery:
“But it is a fragile recovery, and credit growth is not picking up very much, and it goes back to the fact we still have too much debt. We have not reduced our debt burdens in any way significantly. What we’ve done is to largely roll them to the vicinity of 2012 to 2014. Corporate balance sheets are much, much better because
I haven’t thought the 75%+ rally was particularly irrational over the course of the last 12 months. Surprised by the strength? Absolutely. But irrational, no. As of late, we’ve begun to see signs that the consumer is back, but the equity action implies that the consumer is not only back, but ready to break records. In late 2006 I wrote a letter that said:
“So here we sit with a relatively healthy economy, signs of inflation and record housing prices. Sounds pretty good, right? Not so fast. The markets could certainly move higher if housing doesn’t collapse, but we see very few scenarios in which that can happen. When the housing market slows consumers will spend less and businesses will begin to suffer. The US economy will then fall into a recession and European and Asian countries will quickly follow suit as the world’s greatest consumers wilt under the environment of low liquidity and higher debt….The credit driven housing bubble remains the greatest risk to the equity markets at this time.”
The day before the market bottom in March 2009 I said government intervention would likely generate an equity rally. But I did not come close to predicting that we were on the precipice of a 75% 12 month move. Not even close. On the other hand, I have never thought the move was particularly irrational and didn’t fight the tape through 2009.
I was very constructive on the market heading into 2010 and maintained that stimulus, strong earnings and an accommodative Fed would result in higher stock prices in H1. I point this out not because I am trying to toot my own horn or gloss over my many imperfections (many can be emphasized), but overall I have been able to not only foresee the macro mechanics driving the market, but have also done a fine job translating that into…
In essence, White was saying: "it’s the debt, stupid." When aggregate debt levels build up across business cycles, economists focused on managingwithin business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy.
This short-termism that White refers to is what I call the asset-based economic model. And, quite frankly, it works – especially when interest rates are declining as they have over the past quarter century. The problem, however, is that you reach a critical state when the accumulation of debt and the misallocation of resources is so large that the same old policies just don’t work anymore. And that’s when the next crisis occurs.
It seems that Mr. [Edward] Harrison has it figured out. He goes on to spend a lot of digital ink on the periphery of the bottom line, which is that we continue to think of debt in terms of service costs (indeed, you’ll hear Bernanke talk about it, but never about the actual gross financial system debt outstanding.)
When you boil all this down, however, you get to the following chart (trendline added by moi):
You can see what’s going on here – each "crisis" leads to lower lows and lower highs.
This presents two problems:
Lower lows have run into the zero boundary. That wasn’t sufficient this time, which of course is why we got "Quantitative Easing" and other similar abortions intended to distort market rates – like guarantees on bank debt, for example. Ultimately this devolves into The Fed or The Government (as if there’s a real difference) guaranteeing everything to prevent spreads from blowing out.
Far more sinister, however, is what happens to the top line. The top line – that is, the maximum rate between crises, declines because it becomes impossible to normalize rates - nobody can afford to pay "normal" rates with the amount of leverage they have.
This is where the ultimate failure in policy arrives, and it…
Who Is Responsible For The Non-Stop Market Rally Since March?
Zero Hedge reports on Evaporating Market Liquidity
The Big Picture’s Barry Ritholtz’s Disbelief in Conspiracies
Are retail investors and non-professional stock market traders still actively involved with investing and trading their accounts? Phil sent me an article on the subject, “Where Has All the Volume Gone?” by Nicolas Santiago at his Rant and Rave blog, and I called Nicolas up to talk with him about it.
As background, Nicolas teaches stock trading and is an expert in technical analysis. He’s been trading stocks since 1991, watches the market daily, and is an accomplished technician in the studies of Elliot Wave, Gann Theory, Dow Theory and Cycle Theory. In 2007, he partnered with Gareth Soloway to form InTheMoneyStocks.Com. Currently, he trades and teaches his stock trading methods.
Let’s say the market is in an economic recovery and the financial crisis is behind us. Normally one would expect the trading volume in the stock market to increase. This has not been the case. Volume for the month of November and December 2009 have been lighter than August of 2009. Remember August is notoriously the lightest trading month of the year. Hence the term ‘summer doldrums.’ January is usually a very high volume month, yet it has started off the New Year even lighter than the last two months of 2009.
Light volume markets are very difficult to short. Hence the old saying, ‘never short a dull market’. This is as dull of a market as we have seen in many years. While there are some stocks such as Apple (NYSE:AAPL), and Amazon (NASDAQ:AMZN) that have traded with respectable volume the bulk has come from government owned names. Stocks such as Citigroup (NYSE:C), American International Group (NYSE:AIG), Fannie Mae (NYSE:FNM), and Freddie Mac (NYSE:FRE), have often accounted for one third, and sometimes
Are Federal Reserve and U.S. Government Rigging Stock Market? We Have No Evidence They Are, but They Could Be. We Do Not Know Source of Money That Pushed Market Cap Up $6+ Trillion since Mid-March.
The most positive economic development in 2009 was the stock market rally. Since the middle of March, the market cap of all U.S. stocks has soared more than $6 trillion. The “wealth effect” of rising stock prices has soothed the nerves and boosted the net worth of the half of Americans who own stock.
We cannot identify the source of the new money that pushed stock prices up so far so fast. For the most part, the money did not from the traditional players that provided money in the past:
Companies. Corporate America has been a huge net seller. The float of shares has ballooned $133 billion since the start of April.
Retail investor funds. Retail investors have hardly bought any U.S. equities. Bond funds, yes. U.S equity funds, no. U.S. equity funds and ETFs have received just $17 billion since the start of April. Over that same time frame bond mutual funds and ETFs received $351 billion.
Retail investor direct. We doubt retail investors were big direct purchases of equities. Market volatility in this decade has been the highest since the 1930s, and we no evidence retail investors were piling into individual stocks. Also, retail investor sentiment has been mostly neutral since the rally began.
Foreign investors. Foreign investors have provided some buying power, purchasing $109 billion in U.S. stocks from April through October. But we suspect foreign purchases slowed in November and December because the U.S. dollar was weakening.
Hedge funds. We have no way to track in real time what hedge funds do, and they may well have shifted some assets into U.S. equities. But we doubt their buying power was enormous because they posted an outflow of $12 billion from April through November.
Pension funds. All the anecdotal evidence we have indicates that pension funds have not been making a huge asset
On his recent media escapade, Tiger Management founder and hedge fund legend Julian Robertson stopped off to chat with the Financial Times about many topics. He has been out talking a lot about his curve caps play lately where he essentially is buying puts on long-term treasuries as he expects prices to fall and yields to rise. Julian again touched on this position in this interview but we want to turn the focus to other topics that he hasn’t previously discussed in his other recent media appearances. Here are some notable excerpts from the Tiger Management founder and hedge fund legend’s interview with the FT:
"Julian Robertson on market cycles and hedge funds
FT: You were famously bearish about technology stocks ahead of, during the tech bubble; did that experience influence you in predicting 2007, 2008?
JR: No, I don’t think so. What really caused me to predict the problems we had in 2007 and 2008 was the fact that we were spending so much more and no one was balancing the budget; no family can keep doing that forever, no corporation can keep doing that forever, and no nation can continue doing that forever. I think that’s, we did it on all three fronts; as individuals we did it, as corporations we did it, and as a nation we did it – and it blew up in our face.
FT: Why do you think corporations and in particular financial institutions were so bad at seeing that; why did they keep on dancing too long?
JR: Well, I think it goes back to greed and bad judgement, I mean that’s the thing I see. A lot of people were trying to get more risk in their balance sheets, they really were during that period, and once the risks caused their problems they then rushed out and blamed hedge funds – and that was ridiculous. These people were responsible for their own problems because they had levered up too much and made some very bad investments.
FT: One of the fascinating things about your own performance as a fund manager, particularly around the tech bubble is, you were right, but being right wasn’t such a great thing to be. How can people use that
Ponzi Scheme: a fraudulently artificial investment scheme that pays returns to investors from their own money and that of subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually offers returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors, as well as the necessary ‘accounting adjustments,’ in order to keep the scheme going. When the flow of money falters, the scheme begins to collapse, until confidence in its sustainability is lost, and the scheme quickly collapses.
Why say it myself, when this video featured below says it so well and so reasonably and completely?
A less probable but rather nasty twist on the probable scenario in the video is that after an initial reversal in the dollar that is quite sharp due to a short squeeze and a liquidity crunch, the buck and bond turn lower WITH stocks, in a general revulsion towards the Fed’s financial engineering and a loss of confidence in Wall Street.
These are all just probabilities, extrapolated from some very real current indicators and phenomena. Equities are a puffball based on fundamental measures, the insiders are selling in droves, and there is a general movement out of dollars into ‘real assets’ such as gold despite a huge drop in nominal aggregate demand.
The Fed has had a few tricks up its sleeve, and was able and willing to create a deadly housing bubble through willful policy and regulatory error in response to the tech bubble collapse of 2000.
There is still a genuine possibility that a stubborn adherence to policy errors will lead us into a decade of Japanese style stagnation as the real economy is crushed under the weight of the zombie banks. The Fed is neutral only in the headlines; it is owned by and serves Wall Street when push comes to shove. The limiting factor will be international acceptance of an increasingly debased bond and dollar.
We ought not to underestimate their desperation and ingenuity in the present situation. Much of financial innovation is a subversive response to regulation or the opportunistic arbitrage of asymmetries in leverage and information, often created for the occasion. And the Fed and the Treasury…
Chinese manufacturing remains in contraction for 2014. Output and new orders were down for the 4th consecutive month, but at a slightly reduced pace according to the HSBC Flash China Manufacturing PMI.
Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co - Head of Asian Economic Research at HSBC said:
“The HSBC Flash China Manufacturing PMI stabilised at 48.3 in April, up from 48.0 in March. Domestic demand showed mild improvement and deflationary pressures eased, but downside risks to growth are still evident...
Delhaize Group (Euronext Brussels: DELB, NYSE: DEG), the Belgian international food retailer, announces that it has signed an agreement with Tropic Group B.V. on the sale of its Bosnian & Herzegovinian stores.
Delhaize Group has signed an agreement with Tropic Group B.V., to divest all of its 39 Bo...
On Friday Russia’s parliament voted to write off roughly 90 percent of North Korea’s debt as Moscow seeks to build a gas pipeline through the Hermit Kingdom.
This weekend Reuters reported that Russia’s Duma voted to write off roughly $10 billion worth of the debt that North Korea owes Moscow from the days of the Soviet Union. The vote ratified an agreement made in September 2012, after a meeting between th...
We continue in this "V shaped" move off last week's touch of the 200 day moving average on the NASDAQ. The S&P 500 gained 0.41% and the NASDAQ 0.97%. The indexes are nearing overbought near term so a day or two of rest would serve the bulls well to try to attempt a new leg higher. In economic news existing home sales hit 4.59 million in March, versus a 4.55 million estimate.
In terms of the indexes the S&P 500 stalled at the trend line that connected the lows of summer 2013; some congestion lies ahead at year highs.
The NASDAQ has come back from deeply oversold conditions as this index is heavy with biotech and momentum stocks. The dotted blue line is the previous high; since early March we have not seen the NASDAQ make...
Bunge Limited (BG) is the world’s largest processor of soybeans. It is also a major producer of vegetable oils, fertilizer, sugar and bioenergy.
When commodities got hot in 2007-08, Bunge’s EPS shot up and the stock followed, rising 185% in 19 months.
The Great Recession took its toll on operations, dropping EPS to a low of $2.22 in 2009. Since then profits have recovered. They ranged from $4.62 - $5.90 in the latest three years. 2014 appears poised for a large increase. Consensus views from multiple sources see BG earning $7.04 - $7.10 this year and then $7.83 - $7.94 in 2015.
Shares in Las Vegas Sands Corp. (Ticker: LVS) are up sharply today, gaining as much as 5.7% to touch $80.12 and the highest level since April 4th, mirroring gains in shares of resort casino operator Wynn Resorts Ltd. (Ticker: WYNN). The move in Wynn shares appears, at least in part, to follow a big increase in target price from analysts at CLSA who upped their target on the ‘buy’ rated stock to $350 from $250 a share. CLSA also has a ‘buy’ rating on Las Vegas Sands with a $100 price target according to a note from reporter, Janet Freund, on Bloomberg. Both companies are scheduled to report first-quarter earnings after the closing bell on Thursday.
Yesterday, the market continued its winning ways for the fifth consecutive day. The S&P 500 closed within 1% of its all-time high, and the DJI was even closer to its all-time high. Healthcare, Energy and Technology led the sectors while Financials, Telecom, and Utilities finished slightly in the red. All three sectors in the red are typically flight-to-safety stocks, so despite lower than average volume, the market appears poised to make new highs.
Mid-cap Growth led the style/caps last week, up 2.87%, and Small-cap Growth trailed, up 2.22%. This week will bring well over 100 S&P 500 stocks reporting their March quarter earn...
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[Facebook] The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process.
The authorisation from Ireland’s central bank to become an “e-money” institution would allow ...
I just wanted to be sure you saw this. There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.
If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.
Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.
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Ladies and Gentlemen, hobos and tramps,
Cross-eyed mosquitoes, and Bow-legged ants,
I come before you, To stand behind you,
To tell you something, I know nothing about.
And so the circus begins in Union Square, San Francisco for this weeks JP Morgan Healthcare Conference. Will the momentum from 2013, which carried the S&P Spider Biotech ETF to all time highs, carry on in 2014? The Biotech ETF beat the S&P by better than 3 points.
As I noted in my previous post, Biotechs Galore - IPOs and More, biotechs were rushing to IPOs so that venture capitalists could unwind their holdings (funds are usually 5-7 years), as well as take advantage of the opportune moment...
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