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Whipsaw Wednesday – Yesterday’s Gains Reverse Pre-Market

Wheeee, what a ride! 

As we noted in yesterday's Live Member Chat Room, bouncing exactly to our predicted 4,350 line (see yesterday's Morning Report) on very low volume was nothing to get excited about and was actually considered a failure for the day – espeically as all the gains came at the open and we just puttered along from there.  

Things began reversing right at yesterday's close and now we're back to Friday's lows and back to a technically failing market.  Oil (/CL) topped out yesterday at $79.78 and we put our foot down there as well getting into shorts at 12:12 in our Chat Room that averaged out at $79.08 and, already this morning, we're $4,000 and we'll stop 2 out over $78.50 and the other two at $78.75 to lock in gains but, hopefully, today's EIA Inventory Report sends us back below $77.50, for another $4,000 gain before that happens:

Last night's API Report showed a "surprising" (to Economorons) build of 951,000 barrels for Oil, 3.7Mb of Gasoline and 2.5M barrels of Distillates – doesn't really sound like the strong demand picture Goldman Sachs, Barron's and other paid manipulators were trying to paint last week, does it?  For more insights, see the classic: "Goldman’s Global Oil Scam Passes the 50 Madoff Mark!"  See, it doesn't matter if we expose the scam – there's new suckers born every minute…

Commodity prices in general are through the roof and, as you can see from this chart, it's a very strong indicator of a coming recession.  Why?  Because you get less stuff for more money – that's why.  How is productivity going to increase if you are getting less stuff for more money?  How will the economy grow when you are getting less stuff for more money?  

Couple that with an INSANE Fed Policy that pretends there is no inflation during one of the worst recorded rounds of inflation in history – and you have a recipe for disaster which is why, last week, Elizabeth Warren called Fed Chairman Powell "The most dangerous man in America. 

Having 10% inflation and 0% interest means your cash is being devalued at a rate of 10% per year.  10 years of this and your life savings is reduced to an effective zero.  That's why money is pouring into Housing (again) and Equities – there's nowhere else to get a return but neither housing or equities guarantee a positive return – which is what allows the Government to keep borrowing money (by selling bonds) at ridiculously low interest rates – at least you know you'll get your (devalued) money back.  

And the Government NEEDS money – they are borrowing about $250Bn per month this year.  Just the interest on that new $3Tn at 2% is $60Bn, which is more than the US spends on Agriculture ($49Bn), Natural Resources and the Environment ($40Bn), Science, Space & Technology ($34Bn) or Energy ($7Bn).  And, currently, Congress has not voted to extend the debt ceiling, which means every month, we need to find another $250Bn worth of programs to cut – like Veteran's Affairs ($218Bn),  Education ($236Bn) or Transportation ($146Bn).  Of course we're not going to touch our $1,000Bn Military Budget, are we?   

This is, of course, Trump's budget from last July and what Congress is saying is "Sure we passed the budget, but we're NOT going to authorize PAYING for it – that would be crazy!"  So we will default, if it comes to that and then maybe all our credit cards will be cancelled and then we'll have to live within our means which means – unfortunately – we have to either cut Government Spending by 50% or increase taxes by 100% – dealer's choice.

And Discretionary Spending, you will notice, is "only" $1.6Tn of the $6.6Tn budget – those are the programs I noted above – they would have to be ENTIRELY cut and THEN we'd have to cut another $1.4Tn from our $5Tn of mandatory expenditures but then there would be no Government around to collect or distribute it – so it's kind of a moot point…  

We'll see which side of 4,350 the S&P 500 ends up on today but the major headwind at the moment is a stronger Dollar, driven by demand from China, where investors are panic-redeeming their Dollar-backed Property Bonds as other Chinese companies join Evergrande on Bankruptcy Watch.  

Debt issued by companies such as Kaisa Group Holdings Ltd. , Redsun Properties Group Ltd. , and Yuzhou Group Holdings Co. tumbled in price. An 11.25% bond from Kaisa due in April 2022 dropped to less than 73 cents on the dollar by late Wednesday in Hong Kong, down from more than 86 cents at the start of Tuesday, according to Tradeweb.

Issuing new debt by Chinese companies is now at 17% – the highest level in 10 years so, of course, the defaults will begin to spread and we could be in a full-fledged property crisis in no time if the Chinese Government doesn't step in (they've been doing a soft, rolling bailout of Evergrande for a month but it's spreading anyway).

The main trigger for the recent declines was Fantasia’s bond default, which occurred just days after Evergrande missed a second interest payment deadline on a set of dollar bonds. While Evergrande has a 30-day grace period before its offshore investors can declare a default, there was no grace period on Fantasia’s bond that matured Monday.  

Fantasia’s nonpayment surprised investors because the Shenzhen-headquartered developer had recently said it had no liquidity issues, and indicated it had enough cash to repay the outstanding amount on a five-year dollar bond it issued in 2016. Fantasia, like Evergrande, was an active issuer of high-yield dollar bonds in the last few years.

“Trading has been extremely active. It has been very choppy; markets are very nervous,” said Michel Lowy, the chief executive of SC Lowy, a financial institution specializing in distressed and high-yield debt. “It’s not just Fantasia. That was material, but seeing developers come through with pretty horrendous sales numbers for September is not helping,” he added.

Be careful out there!


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  1. Good morning all

    Wow Phil, you used the "R" word today

  2. Good Morning.

  3. Good morning from foggy no Wisc. It's like being in the Lake Country in England-gorgeous with fall colors in full glory.

  4. Good morning an goaaaaaaaalllllllllllllllll!!!! on oil at $77.50 – don't be greedy! 

    It's certainly going to bounce here so may as well cash in.

  5. R Word/Stock – What other possible outcome could there be if they don't keep up the stimulus?

    Fall/Pirate – What's that?  Is that when the bottom leaf falls off the palm tree?  

    This Is How Other Nations Pay for Child Care. The U.S. Is an Outlier.

  6. Wow, crazy market action – oil looking weak into the report.


    That short on /NG would have been as painful as I imagined:


  7. Pretty good build, net 5.1Mb but no worse than expected after API so, as I said, $77.50 should be bouncy and we'll call it a rejection at $80 so $2.50, so 0.50 bounces makes $78 weak and $78.50 strong.  Not sure I want to re-play it and risk the nice gains we already banked.  

  8. Watch those REITS:

    • Piper Sandler analyst Kevin Barker downgrades Annaly Capital Management (NLY -1.8%) and AGNC Investment (AGNC -0.7%) to Neutral from Overweight ahead of expected interest rate volatility.
    • Barker now sees mortgage REITs as fairly valued "given we see increasing rate volatility over the next several months, especially as we approach a potential tripping of the debt ceiling in late October/early November."
    • While he expects both REITs to maintain their current dividends, the increased risk of rate volatility while spreads stay relatively tight implies the risk-reward of owning the agency mREITs is fairly balanced.
    • He'd be more positive if leverage remains low and spreads widen to "present more attractive investment opportunities."
    • He sees PennyMac Financial Services (NYSE:PFSI) and Mr. Cooper Group (NASDAQ:COOP) as the best-positioned mortgage originator/servicers ahead of Q3 earnings.
    • In early trading, most mortgage REITs are in the red — iShares Mortgage Real Estate Capped ETF (BATS:REM) falls 1.1%, VanEck Vectors Mortgage REIT Income ETF (NYSEARCA:MORT) drops 1.0%.



    • Shares of Qualcomm (NASDAQ:QCOM) -0.3% are off slightly in morning trading and now down nearly 16% from the recent peak hit in late July.
    • From a technical stadpoint, the stock moved into oversold territory last week as the relative strength index dropped below 30. The RSI is now at 26.
    • That contrarian signal could spur some buying interest, but there's reason for concern looking at the simple moving averages.
    • Qualcomm's (QCOM) 50-day SMA is a little more than $2 away from crossing below its 200-day SMA, a bearish technical signal known as a death cross.
    • On Wall Street, Jefferies started coverage on QCOM at the beginning of the month with a hold rating and a price target of $137, noting the challenges of 70% earnings exposure to a maturing handset market.
    • But Mizuho said yesterday it remains positive on handset makers with strong demand for 5G across the globe.
    • Earlier this week, Qualcomm (QCOM) and SSW Partners secured a $4.5B all-cash deal for Veoneer (NYSE:VNE).
    • Yesterday, SA contributor The European View argued that QCOM is just taking a breather before the next peak storm.

    Thank you Vlad! 

    • U.S. Steel (NYSE:X) -4% pre-market after Goldman Sachs downgrades shares to Sell from Neutral with a $21 price target, cut from $24, seeing "higher capital intensity driving negative free cash flow momentum."
    • As Goldman expects some of the major producers could struggle as higher steel prices reverse course, the firm also cuts Nucor (NYSE:NUE) to Neutral from Buy with a $108 price target, down from $123; NUE -2.6% pre-market.
    • But Goldman also upgrades Cleveland-Cliffs (NYSE:CLF) to Buy from Neutral with a $24 target, as analyst Emily Chieng says "idiosyncratic opportunities" in the company are underappreciated, and raises Commercial Metals (NYSE:CMC) to Neutral from Sell with a $33 target, citing relative underperformance.
    • ETF: SLX
    • U.S. Steel shares have shed ~10% since mid-September on worries that the company's planned addition of a new steel mill will disrupt the current favorable supply and demand environment.
    • Record margin debt, approaching $1 trillion.
    • Record option volumes, which recently exceeded stock market volumes for the first time ever.
    • Record equity inflows and household net worth exposed to the stock market.
    • What could possibly go wrong?

  9. Good afternoon, Sorry for the delay. Here is the link to today's webinar.

  10. We were liking FDX during the Webinar but no official play yet.

    MANU getting interesting.

  11. Phil/morning post: 10% loss per year = 34.8% in ten years (%Amount = 0.9^10)

  12. Copper and aluminum fall amid worsening global growth outlook

  13. Law of diminishing returns/BDC – Yes, but I said effectively zero, not zero.  The idea is that it sucks, right?