Archive - Oct 14, 2015 - Story

"You thought it was safe to drive 90 miles an hour on a rain-slicked narrow road while you were tipsy because the airbag would save you, but it still hurts when you crash." This is the Paradox of Risk: the more risk is apparently lowered, the higher the risk we are willing to accept.

Way back in June we documented the “curious” case of Sweden’s broken QE and when we used the term “broken”, we didn’t just mean that inflation expectations weren’t moving higher. We meant that bond yields were rising as the adverse impact from the illiquidity "premium" surpassed the price appreciation benefit from frontrun central bank buying. Fast forward three months and Sweden looks set to “solve” the broken QE problem and by extension ensure it can stay in the currency war games by expanding the list of eligible assets to muni bonds.

Venezuela’s economy is in desperate trouble. The country is highly dependent on oil reserves and has no significant substitute for black gold in the near term. That reality makes Venezuelan President Nicolas Maduro’s recent efforts to tout the country’s technology industry laughable.

"As allied countries wouldn’t tolerate arms shipments to groups affiliated with al-Qaeda, Turkey definitely can’t accept weapons aid to groups linked to PKK."

Earlier today the largest U.S. mortgage lender Wells Fargo reported results that beat expectations by the smallest possible increment. What caught our attention, however, was the fuel that keeps Wells Fargo's engine humming: mortgage applications. Unfortunately for the housing bulls, there was no good news here because after rushing higher in early 2015 on the latest false hope of an economic recovery or due to fears rates are rising, Wells' mortgage applications and the associated pipeline have declined ever since.

AAPL shares are down 1.75% this morning - the biggest loss since September - sending the "no brainer" stock price back into the red for 2015. Having been unable to break resistance at the 50-day moving average, and with AAPL back under $110, we are sure investors will be "swapping" their stock certificates for iPens.

Business Inventories were unchanged in August (less than the expected 0.1% rise) with manufacturers down 0.3% - bad for Q3 GDP but Business Sales tumbled 0.6% MoM (the biggest drop since January), down across the board. So clearly no inventory liquidation has started yet (so the pain is yet to come) and this has driven the inventory-to-sales ratio up to 1.37x - the highest in this cycle. The last 2 times the ratio was at this level, the US was in recession.

For the first time since September 2013, The USD Index just signalled a "death cross." Three of the last four times that the 50-day moving-average crossed below the 200-day moving-average, The USD Index tumbled significantly.

If the aim of The Fed's communication strategy was to convince the market that rates will not rise for a very long time... then they have been successful. Just as Goldman Sachs forecast, a US rate-hike is now extremely unlikely before March 2016 and falling fast. In fact, all of the major regions are seeing the market's implied number of months until a rate-hike rising rapidly.

Back in August, we brought you the story of 1MDB, the Malaysian development bank turned-Najib slush fund with deep ties to Goldman. About a month later, the FBI announced an investigation into the fund after Malaysia arrested a former official who was trying to fly to New York to urge US authorities to look into the whole debacle. Now, as WSJ reports, the FBI and DOJ are looking into Goldman's role.

"The big battle preparations in that area are clear. There is a large mobilization of the Syrian army ... elite Hezbollah fighters, and thousands of Iranians who arrived in stages in recent days."

“In a world where the value of paper money is affirmatively aimed at being degraded by central bank policy, it’s kind of surprising to me that gold can’t catch a bid...I like gold. I believe its under-owned. It should be a part of every investment portfolio, maybe five to ten percent."

Retail Sales (ex Auts) dropped 0.3% in September, the 2nd drop in a row, the biggest drop since January (at the heart of the weather-driven economic weakness). For the first time since February, the 'Control Group' Retail Sales dropped (down 0.1% vs +0.3% expectations) as sales dropped in 7 of 13 categories (but notably autos rose significantly but was offset by a collapse in gas station spending). Notably 27 out of 27 'experts' agreed that the control group sales data woul dnot be negative.. wrong! Year-over-year data shows sustained stagnant growth in retail sales historically aligned with a recessionary environment.

"when this sort of thing happens following bullish moves it has almost always signaled the end of the bull-run. Couple this unanimity of price movement with the “reversals” noted above and we have a situation that  concerns us greatly. Indeed it concerns us enough to exit our long positions entirely upon receipt of this commentary… Certainly we do not like switching positions this quickly, for we appear to be flippant and foolhardy, but history tells us that we have no choice."

Gold had a busy night as China's significantly weaker Yuan 'Fix' sent the precious metal higher top test the 200-day moving average and Europe's open (Asia's close) sparked a modest flash-crash retracing the entire move.