Short Interest

One of the primary arguments by the more "bullish" media is that the current setup is much like that of 2011 following the "debt ceiling" debate and global economic slowdown caused by the Tsunami in Japan. While there are certainly some similarities, such as the weakness being spread from China and a market selloff, there are some marked differences.

We were curious to observe what the traditionally far more rational, and skeptical, bearish community had to say about the real "quality" of the worst stocks on both the NYSE and the Nasdaq in those two brief weeks when things seemed to be getting back to normal: the stocks which if and when the Fed does lose control, would be the first to "go." Here is the answer.

Several days ago, when pointing out the record NYSE short-interest, we noted this move may simply mean the following: "a central bank intervenes, or a massive forced buy-in event occurs, and unleashes the mother of all short squeezes, sending the S&P500 to new all time highs." Today, we have confirmation that the rally has been precisely that: a massive short-covering squeeze, when Bank of America's Mike Hartnett looked at the latest weekly fund flow data and noted a "monster $53bn MMF inflows vs redemptions from equity ($4.3bn) & fixed income funds ($2.4bn)...rising cash levels indicate big risk rally (from intraday lows last week SPX +7.7%, EEM +13.5%, HYG +4.2%) driven primarily by short-covering rather than fresh risk-on."

There are two ways of looking at the NYSE short interest, which as of September 15 surged by 1.4 billion to 18.4 billion shares or just shy of the level hit on July 31, 2008: one is that a massive short squeeze is about to be unleashed, sending the S&P500 to new all time highs; the other is that just as the record short interest in July 2008 correctly predicted the biggest financial crisis in history and all those shorts covered at huge profits, so another historic market collapse is just around the corner.

When bailout-darling GM 'fessed up to an intentional ignition-switch defect, tied to at least 174 deaths, The Justice Department fined them $900 million (and no employees faced criminal charges). So, in this consequence-less world in which we live, when Volkswagen admits to literally cheating emissions-standards tests, it faces up to $18 billion in fines from The EPA, one has to wonder whether "we" have our priorities right?

News That Matters

For the third day in a row, VXX - the VIX ETF - is suffering a dramatic short squeeze (which makes sense given than short interest is 64.08mm shares against 68.1mm shares outstanding). This surge is weighing on stocks which just hit the low of teh day - with Small Caps now in the red.

For all those who need validation that they are part of a big hedge fund hotel club, which implicitly means there are few if any incremental fast money buyers left, and wish to know the top hedge fund holdings, here is a list of the 50 stocks which according to Goldman "matter the most" to hedge funds, the stocks which appear among the largest 10 holdings of hedge funds.

It will probably not come as a surprise that with oil trading at 6 year lows, and with China barely able to keep the plates spinning,  according to the latest NYSE data, Energy and Industrial were the most shorted sectors as the shorts congregate, having smelled if not blood than ongoing commodity and excess capacity turmoil. What about the remaining 8 sectors?

Just like in the case of silver three weeks ago, today's gold liquidation was not due to selling of physical metal. In fact, quite the contrary: according to the US mint, so far in July the mint has sold a whopping 143,000 ounces of physical gold - the most in over two years, or since April of 2013 - even as the price of gold briefly slid to the lowest level in 5 years.

Since yesterday's fake AVP tender offer was nothing but a targeted attempt to force a short squeeze in one of the market's most shorted stocks, the best way to be positioned for future such criminal activity is to go long precisely the most shorted stocks, the names which in any other universe would be the first to crash, burn and file bankruptcy, but in this parallel centrally-planned universe may just be the biggest winners.

How do you make what had been a very good couple of years for tens of thousands of Avon Products shorts into an absolute nightmare of a day? By doing what PTG Partners just did when moments ago it announced that, out of the blue, it would like to purchase AVP for a price of $18.75 or nearly three times higher than the Avon stock price moments before the announcement. Because why pay double when triple would do.

For 6 months, investors have been buying the idea - pitched by any and every status-quo-sustaining talking head, politician, and central banker - that low oil prices are unequivocally good for America. This has manifested itself in retail stocks handily outperforming the S&P. However, as Bloomberg notes, the last few weeks has seen that reverse dramatically as it appears investors, losing faith in the big-takers, have realized that "consumers aren't spending as much of the money saved from lower gasoline prices."

Since one should always do the opposite of what Goldman recommends (because that is what Goldman itself is trading), the following is a perfectly suitable, and free, substitute of the SQZZ ETF: all one needs to do is go long the stocks Goldman recommends to short, go short the stocks Goldman thinks will be squeezed, and wait for the money to roll in courtesy of Goldman's flow and prop traders.

As noted yesterday, the short interest heading into today's 10 Year auction was massive. So massive, in fact, that the 10Y was trading super special in repo to the tune of -2.24% as an unknown number of speculators had hoped that what did not happen in March (when the 10Y auction carried a comparable short interest) will take place today. Sadly for them, they will have to wait one more month, while suffering yet another squeeze in the interim, because moments ago the 10Y priced at a yield of 1.925%, well through the 1.929% When Issued, and the lowest yield for bond auction since the bond market's "Taper Tantrum" freak out in May of 2013.