Institutional Investors

Explaining the catalysts that move the "market" overnight has become so farcical it is practically an exercise in futility and absurdism.

Financial engineering is one of the worst ills perpetuated by the Fed’s regime of cheap debt and money market subsidies for speculation. And these deformations are turbo-charged by the tax code which creates a powerful bias toward loading capital structures with tax deductible debt, and to delivering returns as lightly taxed capital gains rather than ordinary income. In fact, stock buybacks and LBOs are the bastard offspring of the IRS and Federal Reserve.

As noted earlier, while tens of thousands of Bloomberg terminal users were twiddling their thumbs during an outage that lasted several hours, China crashed.  There was some confusion about the cause of the rapid move, but it appears the catalyst was an announcement by the China Securities Regulatory Commission in which it allowed fund managers to lend shares for short-selling, and will also expand the number of stocks investors can short sell, in a bid to raise the supply of securities in the market.

Who’s dumb enough to buy this stuff—10-year debt at negative yields and 100-year debt in a doomed currency?  Institutional investors, of course—large pension funds and the like. You might look at news like that and think, well, that’s crazy, I’d never do that. But the fact is, it’s being done with YOUR MONEY. Just like Winston Churchill commented that it’s false to characterize the fighting at places like the Somme, Verdun etc. in WWI as battles, when they were actually more like prolonged sieges, what’s happening in the financial world today is similar. The financial world today is the same. Billion dollar stimulus packages. Quantitative Easing 1, 2, 3… Negative interest rates. Negative long-term debt yields. Cash withdrawal and transaction controls. Higher taxes. Capital controls...

As everyone settles down in anticipation of another session of parabolic Hong Kong euphoria driven by desperate housewife traders, or a manic plunge straight down, none other than the CEO of the Hong Kong Exchange, Charles Li, found some time to pen a blog post to give "a little advice to investors", providing vivid aphorisms "Investment is like swimming: if you do not enter the water, you will never learn to swim" and to caution speculators that the opportunity is "not to quickly make a  fortune, but ... to provide long-term wealth preservation and appreciation" and that there is also such a thing as risk as everyone scrambles to chase the latest bubble breakout. His blog post's punchline: "Do not worry!  Do not panic!" We doubt anyone will panic, at least not until the selling begins.

When Will Bad News Cease to be Good News for Stocks? It is quite amazing to watch this. Even as one economic datum after another indicates that a major slowdown is underway that could well turn into a recession (keep in mind that this is not a certainty – at similar junctures in recent years, aggregate economic data recovered just in the nick of time), the US stock market continues to take everything in stride. The longevity, intensity and persistence of a bubble is per se not proof that it will inevitably continue – it is only an indication of the likely amount of pain the market will eventually dispense.

• Political Battle Ramps Up Over Iran Nuclear Deal (WSJ)
• Greece moves to quell default fears, pledges to meet 'all obligations' (Reuters)
• Isolated Greece pivots east to Russia, China and Iran. But will it work? (Telegraph)
• Frustrated officials want Greek premier to ditch Syriza far left (FT)
• Greek political unrest and deepening debt crisis fuel talk of snap election (Guardian)
• Rand Paul’s Challenge: Charting His Own Course (WSJ)
• In Greenspan Conundrum Redux, Odds Are on Bond Traders’ Side (BBG)
• Yemen's Aden suffers amid clashes, aid deliveries delayed (Reuters)
• Record Gasoline Output to Curb Biggest U.S. Oil Glut in 85 Years (BBG)

Surprisingly, the flow of crude oil is still accelerating, much like the money going into crude oil funds. Three of the largest crude oil funds include USO, OIL, and UCO. UCO is unique due to the fact that it’s an exchange-traded fund that uses leverage, mostly in the form of derivatives, to correspond to twice (200%) the daily performance of its underlying benchmark, the Bloomberg WTI Crude Oil Sub-index. Many large financial institutions have large stakes in UCO and thus are still betting that crude oil can make a comeback beginning in 2015.

• Samaras Says He’d Join Alliance to Keep Greece in Euro (BBG)
• Tensions with Warren camp could loom over Clinton campaign (Reuters)
• Ackman Report on Herbalife in China Figures in Probe (WSJ)
• Al Shabaab storms Kenyan university, 14 reported killed (Reuters)
• Iraq’s Four-Mile Line of Supertankers Fuels Shipping-Rates Surge (BBG)
• Menendez's fate could sharpen Republicans' edge in Senate (Reuters)
• IRS Chief Chides Ted Cruz Over 'Abolish the IRS' Mantra (BBG)
• Yemen Houthi fighters backed by tanks reach central Aden (Reuters)

If there is one chart that most clearly captures the unsustainable US home price appreciation bubble, it is the following which was released overnight from RealtyTrac: home price appreciation nationwide has outpaced wage growth by a 13:1 ratio!

What would happen, for example, if a large number of holders decided to sell a high yield bond ETF all at once? In theory, the ETF can always be sold. Buyers may be scarce, but there should be some price at which one will materialize.  But we can’t get away from depending on the liquidity of the underlying high yield bonds. The ETF can’t be more liquid than the underlying, and we know the underlying can become highly illiquid.... no investment vehicle should promise more liquidity than is afforded by its underlying assets. Do these recent promises represent real improvements, or merely the seeds for subsequent disappointment?

• ECB Tells Greek Banks Not to Boost Exposure to Athens Government’s Debt (WSJ)
• Search teams probe wreckage of jet in French Alps (Reuters)
• Flight Recorders Offer Best Hope of Explaining Jet’s Fatal Drop (BBG)
• Yemen Houthi militia sweeps toward Aden in threat to president (Reuters)
• In Nigeria, Oil Price’s Slide Deters Theft (WSJ)
• Saudi Arabia building up military near Yemen border (Reuters)
• Quant Who Shook the Financial World Tries More Humble Approach (BBG)
• Executive Pensions Are Swelling at Top Companies (WSJ)

It’s time for the Japanese to get seriously scared now. Like many other countries, Japan – and its political class – creates a false image of enduring prosperity by letting its central bank increasingly buy up ever more of its sovereign bonds. It’s a total sleight of hand, there is nothing left that’s real. There’s no there there. This is of course the same as what happens in Europe. And it’s precisely because central banks buy up all these bonds, that their yields scrape the gutter. It’s a blueprint for killing off the last bit of actual functionality in an economy.

"Equity crowdfunding, or raising capital directly from a large group of investors, is widely used for projects from technology to fashion. Now, at least two small Texas firms are testing the concept in the oil and gas industry."

"Under our central case, gold prices are likely to rise gradually, eventually breaking through the USD2,000/oz level within the next decade. This is the most likely outcome, to which we assign a 45% probability," ANZ analysts say, in a note explaining how a number of factors are converging to make the outlook for gold particularly bullish.