Volatility

Now down 5 of the last 6 days, WTI Crude is crumbling another 3.5% today, back to a $42 handle for the first time since the manic surge at the end of August. Furthermore, the dramatic decoupling of Oil VIX from Oil that occurred at the end of August has now converged.

Listening to the mainstream media would imply that the Fed has made the decision already; but Fed Funds Futures are priced (as-of 11/10/2015) for only a 66% chance of the Fed raising to 0.25%-0.50% in December. It isn't the foregone conclusion you would think after watching CNBC. We do not think the Fed will have enough time of relative solace to raise even once before a global slowdown/recession is obvious in the U.S.

While the market may still rally to new highs, the late August free fall in stock prices and spike in volatility served as a wake-up call for investors. In the past ten weeks, major equity indices have recovered virtually all those losses, giving investors an unusual second opportunity to position their portfolio for an important inflection point in monetary policy as the Fed likely starts raising interest rates. Simply put, investors who were not properly positioned and frustrated by their performance in the late August swoon are being given a do-over.

"Apple has lowered its component orders by as much as 10% according to our teams in Asia. The cuts seem to be driven by weak demand for the new iPhone 6s, as overall builds are now estimated to be below 80mn units for the December quarter and between 55-60mn units for the March quarter."

"...middle-aged whites have lost the narrative of their lives. ... while universal health care, higher minimum wages, aid to education, and so on would do a lot to help Americans in trouble, I’m not sure whether they’re enough to cure existential despair."

"Historically, the statistical or mathematical properties of the financial markets have shifted as the economic recovery nears full employment (i.e., at about the 5% unemployment rate the contemporary recovery has reached). Traditionally, at this point in the recovery, the stock market suffers more frequent declines, bond yields rise more often, average annualized returns from both asset classes are lower, diversification benefits tend to diminish, and recession risk is enhanced."

The market drop in August triggered by China devaluing the Yuan (another victim of the US Dollar bull market) was just the start. Once the US Dollar rally really begins picking up steam, we could very well see a crash.

Once again, the two major macroeconomic announcements over the weekend came from China, where we first saw an unexpected, if still to be confirmed, increase in FX reserves, and then Chinese trade data once again disappointed tumbling by 6.9% while imports plunged 18.8%. So how did the market react? The Shanghai Composite Index rose for a fourth day and reached its highest since August 20because more bad data means more easing from the PBOC, and just to give what few investors are left the green light to come back into the pool, overnight Chinese brokers soared after Chinese IPOs returned after a 5 month hiatus. Elsewhere, Stocks and currencies in emerging markets slump on prospect of higher U.S. borrowing costs before year-end and after data underscored slowdown in Asia’s biggest economy. Euro strengthens.

China's exports fell for the fourth consecutive month in October as evidence of collapsing global demand and trade continues to pile up. “A lot of Westerners think this helped us out a lot. But the 2% depreciation actually hurt us. It was in every newspaper and customers called us within hours pushing for 6% discount, so we had to give them 4%."

"After many years of ultra-accommodative polices, it is clear that ongoing interventions have failed to boost actual economic growth and only exacerbated the destruction of the middle class. It is clear that employment growth has only been a function of population growth, as witnessed by the ongoing decline in the labor-force participation rates and the surging levels of individuals that have fallen out of the work-force. While we will continue to operate to foster maximum employment and price stability, the reality is that the economy overall remains far to weak to sustain higher interest rates or any tightening of monetary policy."  

• Bank of America 150K
• BNP Paribas 150K
• Morgan Stanley 165K
• Deutsche Bank 175K
• JPMorgan 175K
• HSBC 175K
• UBS 180K
• Goldman Sachs 190K

Shunned... In this 'free-stuff-army' world full of expectations of moar for less (or nothing), it should come as no surprise that the ultimate buy-one-get-a-unicorn-free clothes retailer - Men's Warehouse - just unleashed a 30% off sale on its stock. Due to a self-described "decline in traffic" as the firm transitioned away from the Buy-One-Get-Three-Free campaign, comparable store sales are expected to collapse 20-25%. This has smashed the stocks to its lowest since August 2012...

"Summarizing technical flows from option hedges, volatility targeting, CTA and Risk Parity funds, we believe that these strategies largely re-levered to pre August crash levels. This was a significant driver of the S&P 500 performance in October and hence poses some downside risk.... The risk of this increasingly one dimensional positioning across CTAs, Macro and some of Equity Long-Short managers is that these trends don’t materialize and trades become too crowded. The result could be a sharp reversion as positions are exited."

This is the fifth time in the past three years that the VIX rose 2% of more on a day the S&P 500 also rose, and short-term volatility expectations were at least 10% below longer-term volatility expectations. Those dates were: September 14, 2012, January 21, 2014, August 25, 2014, and May 18, 2015. Over the next month, the S&P 500 was not able to gain more than +1% at its best point, and suffered a loss averaging -3.2% at its worst point. Quite a negative reward-to-risk ratio.