Category Archives: Strategy & Scenarios

Unicorns

Recent and prospective IPOs:

Nothing to see here, move along. It’ll be fine. Really.

Groundhog Day

This, from zero hedge, says it all:

This is the part in Groundhog Day where Phil Connors kills himself again, and again, and again.

With stocks itching for a new excuse to levitate higher, they got that overnight when a Reuters report on fresh “progress” in the U.S.-China trade talks and renewed “optimism” in a trade deal helped propel world stock markets to a 6-month high on steered investors away from save havens such as the Japanese yen, even as 10Y treasury yields dipped modestly, as the same catalyst that has driven stocks higher on virtually every single day in the past quarter has continued to do so again and again, right out of the cult groundhog movie.

It was a great movie and had a happy ending. Too bad this will not end as happily.

FOMO!

FOMO is the Fear Of Missing Out. It is the only reason I can think of for this continued market advance in the face of a economic newsflow that shows rapid weakening, other than of course another massive liquidity injection by the Bank of China.

The semiconductor index is a mystery inside the main enigma. Even the Russell 2000, usually the highly volatile home of small speculators, is under-performing the S&P, as are both the NDX and the broad Nasdaq. Yet the semis are up 1.3% as I write, even after more than 7x gains since the beginning of the bull, while the industry is foundering in the face of lackluster demand. Bizzare.

Are You Kidding Me?

Thanks to zero hedge.

Enough Already

How long can Trump and Xi continue to goose the markets with optimistic statements without actually achieving a substantive deal?

Either there’s something else going on or the algos are gullible enough to jack up prices with any hopeful words, but never disappointed with the inevitable walkbacks?

The Price Is Not Right

Note that the government funded cartels are stealing everyone’s money.

Central Banks Rule

Why is the stock market so strong?

Very simple. China injected 5% of GDP in net new credit into its economy in one month.

Panic.

Woof!

Sadly, the last hope for avoiding financial catastrophe is disappearing as Powell steps back from reining in the credit bubble.

Caveat Emptor

Bond guru Jeff Gundlach observed that the stock market has become a market for high-risk CDO residuals.

I must admit that I had not thought about this but he is exactly correct. CDOs (Collateralized Debt Obligations) were at ground zero in the last financial crisis. A CDO is constructed from a collection of assets, for example mortgages, and is divided into slices (“tranches”) which receive income in a priority sequence, based on the cash flow the CDO collects from the pool of bonds or other assets it owns. So for example, if $100 comes in, then slice 1 may be entitled to the first $25, slice 2 the next $25 and so on. But if only $10 comes in, slice 1 gets it all and nobody else gets any money. The last or lowest priority slice is called the residual, which receives whatever is left over after the other slices with fixed entitlements have been satisfied.

Gundlach’s point is that companies which have bought back shares with debt now have a capital structure essentially identical to that of a CDO, where the debt obligations have first claim on the company’s income and the equity investors must be satisfied with the crumbs. They are in the same position as the owner of the residual tranche of a CDO. So long as earnings are high and interest rates are low, all is well and there will be yachts and jets. But when the tide goes out, there will be naked swimmers as the ugly side of leverage becomes visible. Read Jeff’s piece and be very very scared.

Loose Cannons

In the days of fighting sail, the ship’s main armament typically consisted of rows of cannons lined up on each side of the ship. These cannons fired through ports in the side of the hull and were mounted on wheels so that they could be pointed and able to recoil when fired. Normally, they were constrained by heavy ropes. But from time to time one or more would get loose. Each cannon could weigh as much as three tons and would then roll around the gun deck as the ship pitched and rolled, crushing anything or anybody in its way. The gundeck would be crowded most of the time – each gun on a large ship had a crew of 14 men who not only worked but ate and slept near their gun. Needless to say, a loose cannon could do much more damage than any broadside from an enemy ship.

In the market, the black boxes or “algos” are the equivalent of the loose cannons of yore. They are out of control and roll around in herds, as many of them share similarly programmed rules. You can watch the “herding” in the stock market by watching the “Tick” as it moves to extremes in both directions – that’s the herd. You hear about “flash crashes” – that’s a herd of algos running over some security or asset class. They pose a huge danger to the financial system, and need to be reined in. The mistake that the regulators make is to only consider them as single entities, without comprehending the emergent phenomena arising from unintentional herding behavior.