Even Hellicopter Ben would have balanced remarks. However, Janet Yellen has taken dovishness to an all-time high or low dpending on your perspective.
The stock market is presently a roulette wheel with dimes on black and dynamite on red... The ‘buy the dip’ mentality can introduce periodic recovery attempts even in markets that are quite precarious from a full cycle perspective. Galbraith reminds us that the 1929 market crash did not have observable catalysts: “the crash did not come – as some have suggested – because the market suddenly became aware that a serious depression was in the offing... for it is in the nature of a speculative boom that almost anything can collapse it."
Why can't, or rather won't, the Fed let the bubble market collapse once again? Simple - as the following chart shows, the illusion of wealth is now most critical when preserving the myth of the welfare state: some 50% of all US pension fund assets are invested in stocks and only 20% in Treasurys.
As regular readers are well aware, when it comes to "more than arms length" equity market intervention in New Normal markets, the New York Fed's preferred "intermediary" of choice to, how should one say, boost investor sentiment aka "protect from a plunge", is none other than Chicago HFT powerhouse, Citadel. Yet one question had remained unanswered: just how does Citadel manipulated stocks? We now know the answer, and perhaps more importantly, it also links in to the true culprit behind the May 2010 Flash Crash, no not Waddell & Reed, but quote stuffing. Most importantly, the revelation that for Citadel quote stuffing is not just some byproduct of some "innocuous" HFT strategy, is that none other than the Nasdaq has now stated on the record, that the most leveraged hedge fund (at 9x regulatory to net assets), and the third largest after Bridgewater and Millennium, used quote stuffing as a "trading strategy."
This weekend’s “Things To Ponder” is comprised of a variety of readings that cover a fairly broad spectrum from educational to informative and even a little bit sarcastic.
Back in February we observed, with some surprise, when Soros Fund Management, the investment vehicle of the famous Hungarian billionaire investor revealed in its Q4 13F that the firm had taken its bearish S&P 500 ETF - aka SPY - put exposure to a then record $1.3 billion notional, prompting us and many others to ask if Soros was preparing for a market crash. Fast forward to today when following the latest 13F disclosure from the same fund, we note, with double the surprise that a quarter after the same ETF put was lowered to "only" $299 million notional, Soros has once again increased his total SPY Put to a new record high of $2.2 billion, or nearly double the previous all time high, and a whopping 17% of his total AUM.
The record-breaking outflows in high-yield bonds are not the only indication that the U.S. economy could be on the verge of very hard times. Retail sales are extremely disappointing, mortgage applications are at a 14 year low and growing geopolitical storms around the world have investors spooked. For a long time now, we have been enjoying a period of relative economic stability even though our underlying economic fundamentals continue to get even worse. Unfortunately, there are now a bunch of signs that this period of relative stability is about to end. The following are 14 reasons why the U.S. economy's bubble of false prosperity may be about to burst...
Obviously, this weekend's reading list is focused on what to do now. Is this just another "dip" that investors should buy into? OR, is this the beginning of the long overdue intermediate term correction or a "mean reverting" process?
"If this is the beginning of a more important, intermediate term, correction; how large could it be?" There is one important truth that is indisputable, irrefutable, and absolutely undeniable: "mean reversions" are the only constant in the financial markets over time. The problem is that the next "mean reverting" event will remove most, if not all, of the gains investors have made over the last five years. Hopefully, this won't be you.
Outspoken non-status-quo thinker Reserve Bank of India Governor Raghuram Rajan may be set to have his central banker card revoked... for telling too much truth (here in 2012, here in 2013, and most recently here). Having previously noted that "international monetary cooperation has broken down," the WSJ reports that Rajan warned Wednesday that the global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense. Simply put, he concludes, "we are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost."
Although the NYSE was closed between July 30 and December 12 of 1914, stocks were quoted by brokers and traded off the exchange. Global Financial Data has gone back and collected stock prices during the closure of the NYSE to recreate the Dow Jones Industrial Average while the NYSE was closed. We collected the data for the 20 stocks in the new DJIA 20 Industrials and calculated the average of the bid and ask prices from August 24, 1914 to December 12, 1914. This enabled us to discover that the 1914 bottom for stocks actually occurred on November 2, 1914 when the DJIA hit 49.07, over a month before the NYSE reopened. Few people realize that stocks in the US had already bottomed out and were heading into a new bull market when the NYSE reopened on December 12, 1914. The DJIA did not revisit this level until the Great Depression in 1932.
“But long term...and economic law says, if you keep printing a lot of paper money, the value of the dollar and currency will go down, and things and most prices will go up and indeed gold always goes up against that currency” - Ron Paul
From Alexander the Great to British rule, history, if it has a lesson, teaches us that no group of men can conquer the world. It’s simply too big, too vast, and too complex. Humanity is far too restless to sit and take orders from dictators halfway across the globe. The mindset that wishes one country to have an iron-grip on world affairs is horribly naïve. Empires are not free. Washington’s credit card can’t be charged to infinity. The need for prudence is growing larger by the day. For the sake of average Americans, and peaceful citizens across the world, let’s hope it gets here sooner than later.
One of the biggest mistakes that investors make is falling prey to cognitive biases that obfuscate rising investment risks. Here are 5 counter-points to the main memes in the market currently...
From 1998 to 2013, Barclays and Deutsche Bank sold 199 basket options to hedge funds which used them to conduct more than $100 billion in trades. The subcommittee focused on options involving two of the largest basket option users, Renaissance Technology Corp. LLC (“RenTec”) and George Weiss Associates. The hedge funds often exercised the options shortly after the one-year mark and claimed the trading profits were eligible for the lower income tax rate that applies to long-term capital gains on assets held for at least a year. RenTec claimed it could treat the trading profits as long term gains, even though it executed an average of 26 to 39 million trades per year and held many positions for mere seconds. Data provided by the participants indicates that basket options produced about $34 billion in trading profits for RenTec alone, and more than $1 billion in financing and trading fees for the two banks.