Why did I even bother trying to play for a small pullback by shorting the top. You had no post Thanksgiving hangover in the market. Thanks to more feel good news on tax reform from the Senate, the S&P went straight up from the opening bell. I still have a small short, but will look to get out before the end of the month.
Fast Money crowd were raging bulls yesterday. All the good news from Senate tax reform debates did its job. With the extremely low put call ratios and the seasonal weakness for this week, it was worth a shot but the momentum is just too strong, and those with big gains seem reluctant to sell this year. It feels like a toned down version of 1999. Instead of retail being excited about stocks, it is the institutions. Retail has flocked to bitcoin, the institutions have flocked to stocks.
Eventually the shorts will get paid well, probably next summer, but timing the top is key. It is very hard to stick with a losing position that will pay off big and suddenly. In order to catch that sudden down move, you have be willing to hold a short position for the long run. Not easy to do when long term shorts have been a one way ticket to the poor house.
Don't see any long term signs of a top yet, but we sure are building a lot of air underneath. It will make the volatility all the more crazy when the market goes back to trading a more reasonable valuation.
Wednesday, November 29, 2017
Monday, November 27, 2017
Bitcoin Shopping Spree
Bitcoin is the hottest item this holiday season. It is the hardest to trade legitimately, but still the most popular among retail. It figures that retail these days will flock to something that is anti-establishment, much in the way they flocked to Trump. Of course, Trump didn't end up being anti-establishment, he is hyper-establishment, looking to give big business donors a huge gift in the form of tax "reform".Socioeconomically, the underlying distrust of government and desire for alternative investments (the masses don't seem to have real enthusiasm for stocks anymore) has led to this dash for cybertrash. You can't really compare this to the dotcom bubble or housing bubble. At least there was some underlying value there, but cryptocurrencies have no real underlying value. I am sure the bitcoin maniacs will argue with me on this, but unless governments give up their printing press in favor of bitcoin, it has no underlying value. And what government would be dumb enough to give up one of their main sources of power to throw their monetary fate into bitcoin?
This really tops the cake among bubbles that I have seen. You had stamps in the late 70s/early 80s, baseball cards in the late 80s/early 90s, and Beanie Babies in the late 90s, but this is on a global scale and larger. At least for the above bubbles, there it at least some nostalgic/sentimental value for the asset, but that is absent with bitcoin. It may be the closest thing to the tulip bubble.
Investing in bitcoin is not investing in block chain technology. Block chain is a transaction mechanism, not an investment. And the number of transactions that bitcoin can process is less than 5 per second, which makes it quite slow, compared to a VISA which can process more than 24000 transactions per second. So that just makes bitcoin a store of value, which is not backed by any governments. It is essentially competing with gold and silver, or even art and antiques, except it has no physical uses, which makes the value even more ethereal.
If I had to make a guess, it would be similar to gold, a weak dollar play, so a weakening US economy, and thus a more dovish Fed would help bitcoin sentiment, so I think there is another leg higher for this bubble in that case.
I am in no rush to short bitcoin because I do believe the dollar will get weaker over the next couple of years, and that could trigger another rush into bitcoin. It will be interesting to see how bitcoin trades once futures trading is available on the CME and CBOE. If the longer dated futures contracts have sufficient liquidity, I would be willing to take a long term short position in bitcoin sometime next year.
The seasonally strong period before Thanksgiving and Black Friday played out, and that sets a possible pullback this week. I took a small short looking for a pullback this week.
Wednesday, November 22, 2017
Tax Cuts and a Weaker Dollar
The institutions are throwing caution to the wind and diving into risk. In both stocks AND bonds. When you have this much complacency and fearlessness, you see buyers of stocks and buyers of long bonds. They don't want the shorter duration stuff anymore in fixed income, because the Fed is going to raise rates a bunch more times, flattening the yield curve, according to the "experts".
With bond, stock, commodity, and FX volatility so low, it encourages bigger positions in stocks and bonds. The best way to get a big position in bonds is to go for the 30 year bond, the biggest bang for your buck. The best way to get a big position in stocks is to go for Nasdaq stocks, also the biggest bang for your buck. The S&P is at 2600! Who would have expected that with revenue growth at 5%? Of course, US corporate profit margins are at all time highs and those who said it was mean reverting are saying its different this time. This is due to quasi monopolies in existence in the US, thanks to the big corporations lobbying on Capitol Hill to extend and expand patents, keep competition to a minimum, etc.
And now you have the big time corporate tax cuts coming down the pike, which seems to be unpopular among those who actually have seen the proposals, which is a small minority, of course. This should help corporations expand their profit margins further, at expense of a weaker dollar. Yes, a weaker dollar. Fiscal stimulus that lead to higher deficits with limited economic impact are dollar negative, not positive. And this tax cut will just be another way for corporations to expand their stock buyback programs. With individuals getting very small tax cuts, it provides limited economic stimulus.
The Republicans have deftly crammed down a very business friendly bill, at the expense of the value of the dollar, because the Fed will end up printing the money to pay for the deficits anyway to keep the Treasury's interest rates low. If Japan can do it, for sure the US can do it with the world's reserve currency and a Fed that is a slave to financial markets.
If you follow the most likely course of events over the next 5 years, it is as follows: You will have massive budget deficits, thanks to an aging population which raises Medicare and Social Security spending, and of course, the Trump tax cuts. The proposal appears to have a giant loophole for individuals to incorporate themselves in order to benefit from the lower business tax rates for S corps and LLCs. So the deficit will likely go up a lot more than projected. Of course, the deficits which will be funded by Treasuries, will eventually be financed by Fed QE, when there is the slightest downtick in the economy. And when Fed starts cutting rates again, the dollar will get destroyed and you have 2010 to 2012 all over again, as the Eurozone can't handle a strong euro.
Back to the current market. It is a pig of a stock market. There is no value. It is what it is. I am looking at a possible small short for Friday, as CNBC Fast Money seemed wildly bullish. And is usually a sign that upside is limited.
But during this time of year, you may get a slight pullback in late November, early December, but that is about it. You almost never see weakness starting from mid December to year end. So if you want to short, you want to keep it short term, and the pullbacks will be small. Next year will be the time to get aggressive on shorts, not now. Tops usually last a long time, so the opportunity to short at high prices will be there for a while. No rush.
With bond, stock, commodity, and FX volatility so low, it encourages bigger positions in stocks and bonds. The best way to get a big position in bonds is to go for the 30 year bond, the biggest bang for your buck. The best way to get a big position in stocks is to go for Nasdaq stocks, also the biggest bang for your buck. The S&P is at 2600! Who would have expected that with revenue growth at 5%? Of course, US corporate profit margins are at all time highs and those who said it was mean reverting are saying its different this time. This is due to quasi monopolies in existence in the US, thanks to the big corporations lobbying on Capitol Hill to extend and expand patents, keep competition to a minimum, etc.
And now you have the big time corporate tax cuts coming down the pike, which seems to be unpopular among those who actually have seen the proposals, which is a small minority, of course. This should help corporations expand their profit margins further, at expense of a weaker dollar. Yes, a weaker dollar. Fiscal stimulus that lead to higher deficits with limited economic impact are dollar negative, not positive. And this tax cut will just be another way for corporations to expand their stock buyback programs. With individuals getting very small tax cuts, it provides limited economic stimulus.
The Republicans have deftly crammed down a very business friendly bill, at the expense of the value of the dollar, because the Fed will end up printing the money to pay for the deficits anyway to keep the Treasury's interest rates low. If Japan can do it, for sure the US can do it with the world's reserve currency and a Fed that is a slave to financial markets.
If you follow the most likely course of events over the next 5 years, it is as follows: You will have massive budget deficits, thanks to an aging population which raises Medicare and Social Security spending, and of course, the Trump tax cuts. The proposal appears to have a giant loophole for individuals to incorporate themselves in order to benefit from the lower business tax rates for S corps and LLCs. So the deficit will likely go up a lot more than projected. Of course, the deficits which will be funded by Treasuries, will eventually be financed by Fed QE, when there is the slightest downtick in the economy. And when Fed starts cutting rates again, the dollar will get destroyed and you have 2010 to 2012 all over again, as the Eurozone can't handle a strong euro.
Back to the current market. It is a pig of a stock market. There is no value. It is what it is. I am looking at a possible small short for Friday, as CNBC Fast Money seemed wildly bullish. And is usually a sign that upside is limited.
But during this time of year, you may get a slight pullback in late November, early December, but that is about it. You almost never see weakness starting from mid December to year end. So if you want to short, you want to keep it short term, and the pullbacks will be small. Next year will be the time to get aggressive on shorts, not now. Tops usually last a long time, so the opportunity to short at high prices will be there for a while. No rush.
Wednesday, November 15, 2017
Questioning the Effect of QE
The ECB will reduce their QE to 30 billion euro starting next year, and there are rumblings about the potential effect of central banks pulling back stimulus in 2018. Unlike other investors, what is more of a dark cloud on the equity market is the high valuations relative to the growth rates. This overvaluation is conveniently rationalized by low interest rates, which is easily debunked when you compare the valuations of Europe and Japan versus the US. If low interest rates are the reason for a higher multiple, then how come NIRP Europe and ZIRP Japan are priced cheaper in all valuation metrics compared to PIRP US?
The light blue line is the S&P 500, the dark blue line is Eurostoxx 50. Since March 9, 2015, when ECB QE started, the S&P has outperformed the Eurostoxx, 25.2% to 8.4%. While the US was tapering and tightening, the ECB was pumping out 60 billion euro per month, and Europe still can't outperform the US. So maybe QE isn't the end all, be all for the stock market.
When investors can't understand why stocks are going up, the most convenient rationale is the expanding balance sheet of the global central banks. Not many people question this belief, even though the divergence in US and European equity performance since ECB QE simply doesn't support the case.
This brings me back to the current market. Europe has been getting pummeled in November. I guess there is no positive seasonality in that market. The US has tried hard to ignore the scarecrow European market, going up on gap down opens for 2 straight sessions. Today will market another day of a healthy gap down thanks to Europe. Europe has usually been a good forecaster of future US performance, so this European weakness should foreshadow future weakness in the US.
Perhaps the long awaited 3% correction comes after Thanksgiving, since the US doesn't like to selloff ahead of that festive time period. So expect the market to stabilize soon, as Europe is approaching strong support levels in the Eurostoxx made post French election and late September, just above 3500. S&P should stay above 2550, but be capped under 2600 till Thanksgiving.
Sentiment wise, it feels a lot like fall of 2014, after the market V bottomed in mid October, and went straight up till end of November. That was the last time I have seen this kind of exuberance and complacency for equities. Investors spent much of 2013 and 2014 getting max exposure to equities, as the market complacency finally kicked in the internal greed algo. Same as post November 2016. I can picture a 2018 that will be an even uglier version of 2015, purely due to the extent of the overvaluation. Remember, the higher they go, the harder they fall.
The light blue line is the S&P 500, the dark blue line is Eurostoxx 50. Since March 9, 2015, when ECB QE started, the S&P has outperformed the Eurostoxx, 25.2% to 8.4%. While the US was tapering and tightening, the ECB was pumping out 60 billion euro per month, and Europe still can't outperform the US. So maybe QE isn't the end all, be all for the stock market.
When investors can't understand why stocks are going up, the most convenient rationale is the expanding balance sheet of the global central banks. Not many people question this belief, even though the divergence in US and European equity performance since ECB QE simply doesn't support the case. This brings me back to the current market. Europe has been getting pummeled in November. I guess there is no positive seasonality in that market. The US has tried hard to ignore the scarecrow European market, going up on gap down opens for 2 straight sessions. Today will market another day of a healthy gap down thanks to Europe. Europe has usually been a good forecaster of future US performance, so this European weakness should foreshadow future weakness in the US.
Perhaps the long awaited 3% correction comes after Thanksgiving, since the US doesn't like to selloff ahead of that festive time period. So expect the market to stabilize soon, as Europe is approaching strong support levels in the Eurostoxx made post French election and late September, just above 3500. S&P should stay above 2550, but be capped under 2600 till Thanksgiving.
Sentiment wise, it feels a lot like fall of 2014, after the market V bottomed in mid October, and went straight up till end of November. That was the last time I have seen this kind of exuberance and complacency for equities. Investors spent much of 2013 and 2014 getting max exposure to equities, as the market complacency finally kicked in the internal greed algo. Same as post November 2016. I can picture a 2018 that will be an even uglier version of 2015, purely due to the extent of the overvaluation. Remember, the higher they go, the harder they fall.
Monday, November 13, 2017
Bonds and Stocks Going Down Together
An interesting thing happened on Thursday and Friday last week, which hasn't been common this year. Both the stock market and bond market sold off. While the drop in stocks isn't that much, the VIX has gotten perkier, going above 11. The selloff in bonds wasn't trivial, the 30 year sold off 11 bps in 2 days, which is a large move these days.
Bonds and stocks going up together is quite common, and so are stocks going down and bonds going up, or stocks going up and bonds going down, but both stocks and bonds going down is pretty rare. I don't have the numbers this year, but I don't recall bonds going down this hard while stocks were also down. In 2015, both bonds and stocks going down together was more common, as stocks topped out ahead a vicious correction in August-September, and then again in January 2016.
Just another straw on the camel's (bull's?) back.
We have VIX trading higher again this morning, and with the S&P hardly down on the day. The long side seems saturated and the VIX sellers are feeling some pressure. There is subtle sell pressure across asset markets, and this is something new for this market.
On a side note, with CME announcing they will be introducing bitcoin futures later this year, I have noticed the extreme volatility over the past few days. It reminds me of the volatility in late 1999 of the dotcom bubble. Also the talk on social media has changed from calling it an outright bubble this summer, to more of an acceptance/belief of blockchain as a revolutionary technology. Seems like bitcoin too is nearing its final legs of a bull market, although I do believe it will top out after the S&P, not before it.
Bonds and stocks going up together is quite common, and so are stocks going down and bonds going up, or stocks going up and bonds going down, but both stocks and bonds going down is pretty rare. I don't have the numbers this year, but I don't recall bonds going down this hard while stocks were also down. In 2015, both bonds and stocks going down together was more common, as stocks topped out ahead a vicious correction in August-September, and then again in January 2016.
Just another straw on the camel's (bull's?) back.
We have VIX trading higher again this morning, and with the S&P hardly down on the day. The long side seems saturated and the VIX sellers are feeling some pressure. There is subtle sell pressure across asset markets, and this is something new for this market.
On a side note, with CME announcing they will be introducing bitcoin futures later this year, I have noticed the extreme volatility over the past few days. It reminds me of the volatility in late 1999 of the dotcom bubble. Also the talk on social media has changed from calling it an outright bubble this summer, to more of an acceptance/belief of blockchain as a revolutionary technology. Seems like bitcoin too is nearing its final legs of a bull market, although I do believe it will top out after the S&P, not before it.
Thursday, November 9, 2017
Don't Ask Don't Tell Gap Down
These are the most powerful gap downs. When no one knows why it's going down. And in premarket, of all times. Usually you are getting the no news moves higher in premarket, not this. Don't ask, don't tell.
For the first time in months, I am seeing signs of buyer exhaustion as the Russell 2000 continues lower while the S&P continues higher. The Russell finally couldn't keep it together and cracked on Tuesday, going down 1%. A 1% move in any US stock indices is considered a big move now. We are in that kind of low volatility grind.
This week, the calm in the S&P has masked a Eurostoxx that is starting to lag, even with a weaker euro, continued lagging breadth in the US indices, as the leadership is becoming thinner. And now this, a gap down for no reason.
By the way, isn't tax reform supposed to be that great catalyst for another move higher? Well, clearly the market doesn't think that there will be any significant growth boost from the package, as bonds rallied after last week's announcement, even as the S&P was grinding higher. The flattening yield curve, as the 5-30 spread has gone below 80 bps, shows skepticism about future growth, as well as the ample liquidity out there in fixed income. The money has to go somewhere. And usually its either stocks and bonds. And with stocks at these levels, there is a lot of money that needs to go to bonds to make a more balanced asset allocation.
The equity fund flows are also flashing a warning sign, as October had heavy inflows. It is feeling like the topping process has begun, and we should have a hard time rallying much more from here. The only fly in the ointment is seasonal positive time period of November and December, which is amplified by the incentives to postpone capital gains due to possible tax cuts for 2018. So while the topping process has probably begun, it should take a few months before we go down the mountain. The bear suit has gathered enough dust, I will have to dust it off and put it on soon.
For the first time in months, I am seeing signs of buyer exhaustion as the Russell 2000 continues lower while the S&P continues higher. The Russell finally couldn't keep it together and cracked on Tuesday, going down 1%. A 1% move in any US stock indices is considered a big move now. We are in that kind of low volatility grind.
This week, the calm in the S&P has masked a Eurostoxx that is starting to lag, even with a weaker euro, continued lagging breadth in the US indices, as the leadership is becoming thinner. And now this, a gap down for no reason.
By the way, isn't tax reform supposed to be that great catalyst for another move higher? Well, clearly the market doesn't think that there will be any significant growth boost from the package, as bonds rallied after last week's announcement, even as the S&P was grinding higher. The flattening yield curve, as the 5-30 spread has gone below 80 bps, shows skepticism about future growth, as well as the ample liquidity out there in fixed income. The money has to go somewhere. And usually its either stocks and bonds. And with stocks at these levels, there is a lot of money that needs to go to bonds to make a more balanced asset allocation.
The equity fund flows are also flashing a warning sign, as October had heavy inflows. It is feeling like the topping process has begun, and we should have a hard time rallying much more from here. The only fly in the ointment is seasonal positive time period of November and December, which is amplified by the incentives to postpone capital gains due to possible tax cuts for 2018. So while the topping process has probably begun, it should take a few months before we go down the mountain. The bear suit has gathered enough dust, I will have to dust it off and put it on soon.
Monday, November 6, 2017
Heavy into Equities
Retail is heavily overweight equities. The Fed issues a quarterly review of the financial accounts of United States which includes flow of funds and the levels of financial assets and liabilities for households. The numbers surprised me. I bought into the belief that more money flowing into bond funds and out of stock funds since 2008 was a rebalancing by households as stocks went higher. But it pales in comparison to the amount that equities have rallied compared to fixed income. It really has been a TINA market, There Is No Alternative.
In essence, for retail, as of 2017 Q2, they are holding more in equities ($16.9 trillion ) than checking, savings and money market funds ($1.1 + $9.1 + $1 trillion) and bonds ($3.9 trillion) combined. For reference, in 2009 Q4, they held $7.2 trillion in equities, $0.9 trillion in checking, $6.7 trillion in savings, and $1.4 trillion in money market funds, and $4.6 trillion in bonds. Basically, households have more than doubled their allocation to equities while reducing their allocation to bonds over the past 8 years.
What is interesting is that even at the peak in the S&P in 2007, household equities holdings was still at $6.1 trillion, which is less than at the end of 2009 ($7.2 trillion), when the S&P was much lower. So it has been a long term trend of households rebalancing towards more equities and less fixed income over the past 10 years, regardless of what the stock market has done.
This runs counter to the claim that this is the most hated bull market in history. The flow of funds is speaking loudly, and it is overweight stocks.
We have hit another new high today. It's another day, another new high. VIX is below 10, so no need to start looking for a top. I will not try to pick a top and go short unless I see more volatility. This is a nightmare market for shorts, and a pretty bad market for traders. It is heavenly for buy and hold investors. The trader's time to shine will eventually come. Make sure you are one of the traders left with sufficient capital to take advantage of the other side of the mountain. That is why I am doing very little here, especially in S&P. I see a few opportunities here and there in other markets, but nothing to get excited about.
In essence, for retail, as of 2017 Q2, they are holding more in equities ($16.9 trillion ) than checking, savings and money market funds ($1.1 + $9.1 + $1 trillion) and bonds ($3.9 trillion) combined. For reference, in 2009 Q4, they held $7.2 trillion in equities, $0.9 trillion in checking, $6.7 trillion in savings, and $1.4 trillion in money market funds, and $4.6 trillion in bonds. Basically, households have more than doubled their allocation to equities while reducing their allocation to bonds over the past 8 years.
What is interesting is that even at the peak in the S&P in 2007, household equities holdings was still at $6.1 trillion, which is less than at the end of 2009 ($7.2 trillion), when the S&P was much lower. So it has been a long term trend of households rebalancing towards more equities and less fixed income over the past 10 years, regardless of what the stock market has done.
This runs counter to the claim that this is the most hated bull market in history. The flow of funds is speaking loudly, and it is overweight stocks.
We have hit another new high today. It's another day, another new high. VIX is below 10, so no need to start looking for a top. I will not try to pick a top and go short unless I see more volatility. This is a nightmare market for shorts, and a pretty bad market for traders. It is heavenly for buy and hold investors. The trader's time to shine will eventually come. Make sure you are one of the traders left with sufficient capital to take advantage of the other side of the mountain. That is why I am doing very little here, especially in S&P. I see a few opportunities here and there in other markets, but nothing to get excited about.
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