Category Archives: Stocks

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Internet Advertising

I’m seeing an increasing number of companies (e.g. Proctor and Gamble, Restoration Hardware, Uber… ) complaining publicly that they are receiving little or no value for their internet advertising spending. It is trite to say that half of every advertising dollar is wasted, you just don’t know which half. But in these cases, companies claim to be reducing their internet ad spending without significant negative impacts. Reasons given include poor placement and fraud, although these seem very hard to quantify.

Given that a big chunk of the market cap out there comes from highly valued internet advertising companies (Google, Facebook, etc.) I think one should “watch this space.” Closely. Very closely.

Nothing Unusual Here

Zero hedge of course. Just for the record.

That Which Is Not Seen

Alhambra Partners

After tax, corporate profits are still slightly less in Q2 2017 than in Q4 2014, and barely more (+3.4%) than in Q1 2012 five years ago.

SocGen’s Albert Edwards:

Our Ice Age thesis has always called for US and European 10 year bond yields to converge with Japan. We still expect that to happen, with the downward crash in US yields likely to be particularly shocking. There is mounting evidence that underlying US CPI inflation has already slid into outright deflation in exactly the same way that Japan did seven years after its credit bubble burst. Hence we repeat our call for US 10y bond yields to ultimately converge with Japan and Germany at around minus 1%.

In short, stocks are grossly overvalued and Treasury bonds are similarly undervalued. Not news, of course, just some confirmation bias.

Sticker Shock

A buying panic in the biotechs today as the FDA approved a radical new therapy for certain blood cancers.

This therapy, developed by Novartis, costs a cool $475,000 for a course of treatment.

Nothing To See Here

The dip-buyers and volatility-sellers are quickly reversing the overnight selloff, due to the Korean missile crisis.

These strategies work until they don’t. The absolute lack of fear is totally consistent with market tops.

The good news is that Treasuries are holding on to most of their overnight gains. When the bond and stock markets disagree, the bond market is usually right.

Steppin’ On The VIX

Just hearing the song “Puttin’ On The Ritz.”

Seriously, it is interesting to watch this at work. Today it has been particularly obvious, with VIX and XIV moving in different directions. Different in the sense of the implied direction in the case of XIV. XIV is the big inverse VIX ETF. Of course, it is priced off the VIX futures price index, not the VIX itself which is a cash index calculated from option prices. I presume the movement of XIV means that the VIX futures are being sold and XIV is following along.

As I write, XIV is unchanged on the day and the cash VIX is up 3%. To me this indicates shorting of the VIX futures in an attempt to pressure the market higher.

There is a massive speculative position shorting VIX via futures and associated ETF instruments. The counterparties (“commercials”) are using the futures as a hedge, I presume.

Using VIX futures provides great leverage to market manipulators. I think these futures contracts are the most dangerous thing the CFTC has ever permitted, and will lead to a 1987-style catastrophic outcome when these shorts are forced to cover.

Extreme Crazy

I was going to say Peak Crazy, but we all know things can always get crazier. Some things that spring to mind.

Political craziness: Mob violence on left and right, blatant defiance of federal law by city politicians, attempts to rewrite or at least deny history, demonization of Trump, Putin and anybody associated with them, and so on. Immigration in Europe – it’s that 4.7 kids per woman in Africa that nobody dares to talk about. Not to mention the crazy fat kid.

Fiscal craziness: Federal funding of runaway price increases, notably in university tuition, prescription drugs but also many other subsidized goods and services. Gross under-funding of state and local pension schemes even under ludicrous assumptions about future returns.

Monetary craziness: Central banks threatening to tighten but pumping away, consumer credit at record highs in US and elsewhere (Canada, that’s you I’m talking about with highest household debt in the world), government deficits keep growing. Subprime crdiet still gowing while defaults rise. Most of all, ICOs. People pouring money into blockchain-based tokens. Really?

Market craziness: Housing bubbles in China, Canada, Australia, UK and some US cities. Massive (record) risky speculation in many markets – short vol, long crude for example. Setups (risk parity) similar to portfolio insurance (remember 1987?).

I could go on. But I won’t. I’m just grumbling while I wait.

Portfolio Insurance

A strategy called portfolio insurance, which nowadays we would call a form of dynamic hedging, is widely blamed for the 1987 crash. This strategy, in effect, creates a ‘stop-loss order’ that gets larger in size and closer to the current market price as volatility gets lower.

The combination of shorting volatility, option hedging and risk-parity strategies sets up a very similar situation. Make hay while the sun shines, but thunderstorms are likely.

Illinois And The Tsunami

Apparently the standoff between Governor Rauner and Speaker Madigan continues. As it should. Madigan’s willingness to dispense unfunded largesse to his supporters is largely responsible for the state’s financial woes. Today also the state was ordered by a Federal court to pay its backlog of Medicaid bills, which will be interesting as the state is already cash flow negative.

However the biggest issue is the unfunded state employee pension obligations. This article from Bloomberg contains a nice graphic ostensibly showing the funding levels of most states (no data for California? Really? just check this blog)

These reported funding levels are a cruel joke. These funds continue to assume 7-8% returns, despite the fact that they have not achieved them for years. Just look at the column showing the decline in funding ratio from 2014 to 2015. Not only are the assumptions high, but they are for long-term averages, so that they adjust future return estimates higher to compensate for below-average realized returns. John Hussman’s work shows more or less zero returns for the next 12 years, with the high likelihood that there will be a major drawdown in that period. Drawdowns are lethal to pension funds because the payment of benefits continues, sapping the capital base and making recovery to previous levels nearly impossible.

Pension funds used to invest in bonds. The trustees would meet once a quarter, review the actuarial forecast of liabilities and approve adjustment of the laddered bond portfolio’s maturities to exactly meet the liability schedule. Then there would be lunch and golf. The future returns would be locked in and the contributions needed to fund the bond portfolio would be obtained from the sponsor. Everyone got to sleep at night.

Then Wall Street decided that pension funds had a lot of money, and not enough was being siphoned off into Wall Street pockets. So the sales force went out, armed with charts showing that stocks had historically offered higher returns than bonds. Higher returns mean that less contributions would be needed, so fund sponsors bought the pitch. Yes, stocks have offered higher returns but for a reason – much higher risk. Well, we’ll just assume a long-term average return and surely it will average out. GLWT.