Archive - Aug 2015

"Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter. [Their] projections suggest a depreciation of more than 8 percent by Dec. 31 and about 20 percent by the end of 2016."

A half-century ago, America - and then the world - was rocked by a mighty stock-market crash that soon turned into the steepest and longest-lasting depression of all time. Those who ignore the lessons of history are doomed to repeat it - except that now, with gold abandoned and each nation able to print currency ad lib, we are likely to wind up, not with a repeat of 1929, but with something far worse...

Following the biggest (and only) market correction in years, the biggest weekly surge in the VIX ever, the second wholesale market flash crash in history coupled with the first ever limit down trade in the Nasdaq and the E-Mini, not to mention the biggest intraday bearish reversal since Lehman, it would appear that the "smart money" actually was aptly named.

News That Matters

Because no discussion of global dollar pegs and entrenched FX regimes would be complete without mentioning the Hong Kong dollar...

One of the fallacies being propagated about yesterday's flash crash, is that somehow HFTs came riding in as noble white knights and rescued the market from a collapse instead of actually causing it. This particular lie is worth a few quick observations and explanations of what really happened.

With declining crude revenues clashing head on with the cost of simultaneously financing the state while intervening militarily in Yemen, the Saudis are looking to tap the bond market (a move which could increase debt-to-GDP by a factor of 10 by the end of next year) and some are speculating that the riyal’s dollar peg could ultimately prove unsustainable. Now, as Bloomberg reports, "Saudi Arabia is seeking to cut billions of dollars from next year’s budget because of the slump in crude prices."

With professionals proclaiming yesterday's meltdown "historic," and generously telling investors "don't try to overthink what you're seeing," it is clear that the real impact of the carnage wrought by a combination of Fed-indiced crowded trades and HFT illiquidity-providers is yet to be fully appreciated. While Financial advisers, almost unanimously, have cautioned clients not to panic... As one retail investor exclaimed, yesterday's open "was a life-changing 20 minutes."

Hold onto your bootstraps. Markets are setting themselves up for a surprise as the Fed is still likely to hike rates in September.  Today’s ‘risk-on’ move is a function of those expecting delay.  Rising levels of market volatility are here to stay and will be magnified by this ‘surprise’. Those ignoring the warnings of a rate hike by Fed officials do so at their own peril.

With some of the biggest hedge funds - including Greenlight, Third Point, Glenview, Lone Pine, Fir Tree, Steadfast, Omega, York, and Canyon - all heavily invested in Sun Edison, we can't help but wonder if the total and utter collapse in the stock from yesterday's highs indicated forced liquidations that smashed it another 18.6% lower today with dramatically escalating volumes into the last hour (when stocks collapsed...)

"China halts intervention in stock market so far this week as policy makers debate merits of an unprecedented government campaign to prop up share prices and what to do next, according to people familiar with situation. Some leaders support argument that stock market is too small relative to broader economy to cause crisis, says one of the people, who asked not to be identified as deliberations are private Leaders also believe intervention is too costly, person says."

In a deja-vu-all-over-again echo of last week, API reported a huge 7.3 million barrel drawdown in oil inventories this week (against expectations of a build) and sparked a headline-driven jerk higher in crude prices. Last week the same happened and the next day DOE reported a huge build (consensus for tomorrow is a 345k draw), crushing oil prices... Trade Accordingly...

A stunning 78% of Democrats in New Hampshire view Bernie Sanders favorably in the latest polls. As The Hill reports, Hillary Clinton was viewed favorably by that percentage in April, but that has dropped 15 percentage points among Democrats. With Sanders topping Clinton by a 44 to 37 percent margin (VP Joe Biden garnered 9%), and Trump support among Republicans at 35%, it appears serial lying is not paying off for the Oligarchy (for now)...

What we’ve been experiencing in markets is the plain and simple fear that always accompanies a broken story. The human reaction to a broken story is an emotional response akin to a sudden loss of faith. It’s a muted form of what Stephen King defined as Terror … the sudden realization that the helpful moorings you took for granted are actually not supporting you at all, but are at best absent and at worst have been replaced by invisible forces with ill intent. The antidote to Terror? Call the boogeyman by his proper name. It’s the end of the China growth story, one of the most powerful investment Narratives of the past 20 years. And that’s very painful, as the end of something big and powerful always is.

"Off The Highs" - hope is fading fast as The Dow is now down over 350 points from its pre-open highs after the China rate cut and has broken back below the crucial 16,000 level...