maandag 24 juli 2017

Google Slides As Cost-Per-Click Tumbles

Google, aka Alphabet, reported Q2 earnings that beat on the top and bottom line, reporting EPS of $5.01, above the estimate of $4.45, and earnings per share excluding the $2.7 billion European Commission fine of $8.90, also above the $8.25 expected. Total Q2 revenue of $26.01 billion rose 21% Y/Y, and also beat consensus of $25.64BN. Yet while Google's top and bottom line results were both impressive, the reason why the stock was down as much as 3.6% in the after hours appears to be that while Google reported paid clicks in Q2 surged by 52%, well above expectations of a 35% increase, and more than the 44% in Q1, Google's cost-per-click, which measures what advertisers pay when people click on search ads that show up alongside the results served up by Google’s search engine, tumbled 23%, a drop from the -19% CPC reported in Q1 and down even more from the -15% in Q4 2015.
In other words, more people are clicking on ads, but those clicks are costing advertisers less money per click, and generating less sales for GOOGL. In short, a potential revenue mix concern where Google is compensating for lower pricing power (due to the encroachment of Facebook?) with higher ad volumes. One thing is certain: the CPC trend is certainly not Alphabet's friend... 


Additionally, Q2 Revenue ex-Traffic Acquisition Costs was $20.92 Billion, modestly below the $21.07 billion consensus estimate. Some other details:
*2Q Other Bets revenue $248 million
*2Q Other Bets operating loss $772 million
*2Q Google advertising revenue $22.67 billion
*2Q free cash flow +$4.57 billion
While the stock initially responded favorably, surging to new all time highs above $1000, the latest print was down 2.5% as the market digests the potentially disappointing revenue mix data...

Nasdaq Rebounds To Record Highs As T-Bill Turmoil Continues

Another day, another record high in tech stocks...


A very ugly 3mo T-Bill auction today (highest yield since Lehman and inverting the yield curve) sent yields soaring once again as debt-ceiling concerns are spooking cash markets (but not stocks)...


But as Bloomberg notes, markets focused once again on the White House as news about Russian ties continued to hold sway. Jared Kushner told reporters after his Senate testimony he did nothing wrong. “Let me be very clear. I did not collude with Russia, nor do I know of anyone else in the campaign who did so,” Kushner said. The benign news calmed risk anxiety. Trannies are down for the 6th day in a row (to lowest close in a month) as Nasdaq rallies to new record highs (up 11 of the last 12 days), a dramatically divergent day...


VIX crashed to a new record closing low, managing to get S&P green but then it snapped Retail was notably weak today (for the 2nd day in a row) as Financials outperformed...


FANG Stocks continued to rise today, 12th day in a row, ahead of GOOGL's earnings. ANG are up 15% in the last 12 days...


We note GOOGL was suddenly sold into the close, back below $1000...


Interestingly this afternoon's quiet linear meltup in stocks was not driven by a short-squeeze...


Stocks and Bonds ahve recoupled from Draghi's break...


Bond yields rose modestly from the moment Europe opened...


Crude gained on the heels of Saudi promises to make deeper cuts to exports in August. Still the move was very modest considering the headlines...


And that helped lift the Loonie to 14-month highs against the dollar....


The Dollar Index ended the day unch hovering at Aug 2016 swing lows...


Gold also went nowhere today, trading in a very narrow range...


Bitcoin was also very quite today...

IMF Sharply Lowers US Growth Forecasts As Hopes For Fiscal Boost Fade

Bullish traders who insist that US economic fundamentals remain rock-solid despite tepid growth, inflation and other signs the postelection “Trump bump” in consumer confidence is already beginning to fade should take a look at the International Monetary Fund’s latest batch of quarterly forecasts for global growth. The fund left its all-world forecasts for 2017 and 2018 unchanged from its previous quarterly update, which was released in April: It anticipates 3.5% and 3.6% growth, respectively. However, those numbers mask a sharp decline in the fund's forecasts for US growth, which have been lowered sharply to reflect expectations that President Donald Trump's promised fiscal expansion package likely won't arrive until next year, according to a report published by the IMF. In an update that shouldn't surprise anyone who’s been following US macro data since the start of the year, the fund revised its forecasts for 2017 and 2018 down 0.2% to 2.1% and 0.4% to 2.1%. It continues to expect the US economy to expand by 1.6% in 2016. The fund said its decision to lower US growth forecasts reflects in part the weak growth experienced during the first quarter. But what it calls the “major factor” behind the revision, especially for 2018, is the assumption that “fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes. Market expectations of fiscal stimulus have also receded.”
In other words, with President Donald Trump’s health-care and tax reform efforts stalled in Congress, the timeline for implementation of the expansionary fiscal policies that Trump had campaigned on, infrastructure spending and deregulation among them, has been pushed back a year or two. The IMF’s reading on the US contrasts sharply with the Trump administration’s own projections. According to Trump budget director Mick Mulvaney, the administration is hoping for a 3% growth rate in the coming years – a rate necessary to balance the Trump budget’s deficit projections...


The fund also reduced its growth forecasts for the UK, though the near-term nature of the reduction suggests the NGO believes Brexit-related disruptions will be a near-term phenomenon. The fund lowered its forecast for 2017 to 1.7% from 2.0%, while maintaining its 2018 forecast at 1.5%. Meanwhile, growth expectations for China, Japan and the eurozone have been revised higher, after strong Q1 performance and (in Europe) a reduction in political risks following Emmanuel Macron’s electoral triumph over Marine Le Pen. The emerging world is where the IMF expects to see the bulk of global growth occur from here on out. Emerging economies are projected to see “a sustained pickup in activity,” with growth rising from 4.3 percent in 2016 to 4.6 percent in 2017 and 4.8 percent in 2018. It’s expected that much of this pickup will come from China and India. “China’s growth is expected to remain at 6.7 percent in 2017, the same level as in 2016, and to decline only modestly in 2018 to 6.4 percent.
The forecast for 2017 was revised up by 0.1 percentage point, reflecting the stronger than expected outturn in the first quarter of the year underpinned by previous policy easing and supply-side reforms (including efforts to reduce excess capacity in the industrial sector). For 2018, the upward revision of 0.2 percentage point mainly reflects an expectation that the authorities will delay the needed fiscal adjustment (especially by maintaining high public investment) to meet their target of doubling 2010 real GDP by 2020. Delay comes at the cost of further large increases in debt, however, so downside risks around this baseline have also increased. Growth in India is forecast to pick up further in 2017 and 2018, in line with the April 2017 forecast. While activity slowed following the currency exchange initiative, growth for 2016, at 7.1 percent, was higher than anticipated due to strong government spending and data revisions that show stronger momentum in the first part of the year. With a pickup in global trade and strengthening domestic demand, growth in the ASEAN-5 economies is projected to remain robust at around 5 percent, with generally strong first quarter outturns leading to a slight upward revision for 2017 relative to the April WEO.”
Both Russia and Turkey are expected to see growth rebound after a series of political and, in Russia’s case, commodity related shocks, are beginning to fade. “In Emerging and Developing Europe, growth is projected to pick up in 2017, primarily driven by a higher growth forecast for Turkey, where exports recovered strongly in the last quarter of 2016 and the first quarter of 2017 following four quarters of moderate contraction, and external demand is projected to be stronger with improved prospects for euro area trading partners. The Russian economy is projected to recover gradually in 2017 and 2018, in line with the April forecast.” Growth in the Middle East is expected to slow, reflecting a slowdown in oil production. Meanwhile, the outlook in Sub-Saharan Africa “remains challenging. Growth in the Middle East, North Africa, Afghanistan, and Pakistan region is projected to slow considerably in 2017, reflecting primarily a slowdown in activity in oil exporters, before recovering in 2018. The 2017–18 forecast is broadly unchanged relative to the April 2017 WEO, but the growth outcome in 2016 is estimated to have been considerably stronger in light of higher growth in Iran. The recent decline in oil prices, if sustained, could weigh further on the outlook for the region’s oil exporters. In Sub-Saharan Africa, the outlook remains challenging. Growth is projected to rise in 2017 and 2018, but will barely return to positive territory in per capita terms this year for the region as a whole, and would remain negative for about a third of the countries in the region. The slight upward revision to 2017 growth relative to the April 2017 WEO forecast reflects a modest upgrading of growth prospects for South Africa, which is experiencing a bumper crop due to better rainfall and an increase in mining output prompted by a moderate rebound in commodity prices.
However, the outlook for South Africa remains difficult, with elevated political uncertainty and weak consumer and business confidence, and the country’s growth forecast was consequently marked down for 2018.” In a section of its report dealing with risks to the global economic outlook, the IMF said it believes risks to the global economy are roughly balanced: On the upside, the cyclical rebound in Europe could be stronger and better sustained, as political risks have diminished for now. On the downside, rich market valuations and very low volatility in an environment of high policy uncertainty have increased the likelihood of a market correction, which could dampen growth and confidence. However, the IMF urged developed countries struggling with weak demand and low inflation to continue supporting growth through monetary and fiscal policy, while cautioning central banks against raising borrowing costs too quickly.
Finally, as part of the fund’s “policy recommendations,” the fund writes that efforts “to accelerate private sector balance sheet repair and ensure sustainability of public debt are critical foundations for a resilient recovery,” while a “well-functioning multilateral framework for international economic relations is another key ingredient of strong, sustainable, balanced, and inclusive growth.” And in what looks like a swipe at Trump and his protetionist rhetoric, the fund warned against pursuing “zero-sum” policies that could weaken growth around the world. “Pursuit of zero-sum policies can only end by hurting all countries, as history shows. Because national policies inevitably interact and create spillovers across countries, the world economy works far better for all when policymakers engage in regular dialogue and work within agreed mechanisms to resolve disagreements.”
The fund also claims that the developing world’s failure to ameliorate rapidly worsening wealth inequality could “hinder market-friendly reforms” and lead to more protectionism. Over the longer term, failure to lift potential growth and make growth more inclusive could fuel protectionism and hinder market-friendly reforms. The results could include disrupted global supply chains, lower global productivity, and less affordable tradable consumer goods, which harm low-income households disproportionately. As the IMF sees it, the biggest risks, at least among developed economies, are stemming from the Federal Reserve’s monetary tightening, and the shift toward more hawkish stance by the ECB, BOE and BOC. In fact, the fund warns that “a faster-than-expected monetary policy normalization in the United States could tighten global financial conditions and trigger reversals in capital flows to emerging economies,” while the attendant dollar appreciation would only add to their woes. In the emerging world, the fund sees China as the primary risk, believing that a failure by the Chinese to continue “addressing financial sector risks” and curbing excessive credit could precipitate “an abrupt growth slowdown” that could spill over into the global economy....

Howard Kunstler; America 2017 Is Like France 1789

We are looking more and more like France on the eve of its revolution in 1789. Our classes are distributed differently, but the inequity is just as sharp. America’s “aristocracy,” once based strictly on bank accounts, acts increasingly hereditary as the vapid offspring and relations of “stars” (in politics, showbiz, business, and the arts) assert their prerogatives to fame, power, and riches - think the voters didn’t grok the sinister import of Hillary’s “it’s my turn” message? What’s especially striking in similarity to the court of the Bourbons is the utter cluelessness of America’s entitled power elite to the agony of the moiling masses below them and mainly away from the coastal cities. Just about everything meaningful has been taken away from them, even though many of the material trappings of existence remain: a roof, stuff that resembles food, cars, and screens of various sizes. But the places they are supposed to call home are either wrecked, the original small towns and cities of America, or replaced by new “developments” so devoid of artistry, history, thought, care, and charm that they don’t add up to communities, and are so obviously unworthy of affection, that the very idea of “home” becomes a cruel joke.
These places were bad enough in the 1960s and 70s, when the people who lived in them at least were able to report to paying jobs assembling products and managing their distribution. Now those people don’t have that to give a little meaning to their existence, or cover the costs of it. Public space was never designed into the automobile suburbs, and the sad remnants of it were replaced by ersatz substitutes, like the now-dying malls. Everything else of a public and human associational nature has been shoved into some kind of computerized box with a screen on it. The floundering non-elite masses have not learned the harsh lesson of our time that the virtual is not an adequate substitute for the authentic, while the elites who create all this vicious crap spend millions to consort face-to-face in the Hamptons and Martha’s Vineyard telling each other how wonderful they are for providing all the artificial social programming and glitzy hardware for their paying customers. The effect of this dynamic relationship so far has been powerfully soporific. You can deprive people of a true home for a while, and give them virtual friends on TV to project their emotions onto, and arrange to give them cars via some financing scam or other to keep them moving mindlessly around an utterly desecrated landscape under the false impression that they’re going somewhere, but we’re now at the point where ordinary people can’t even carry the costs of keeping themselves hostage to these degrading conditions.
The next big entertainment for them will be the financial implosion of the elites themselves as the governing forces of physics finally overcome all the ruses and stratagems of the elites who have been playing games with money. Professional observers never tires of saying that the government can’t run out of money (because they can always print more of it) but they can certainly destroy the value of that money and shred the consensual confidence that allows it to operate as money. That’s exactly what is about to commence at the end of the summer when the government runs out of cash-on-hand and congress finds itself utterly paralyzed by party animus to patch the debt ceiling problem that disables new borrowing. The elites may be home from the Hamptons and the Vineyard by then, but summers may never be the same for them again. The Deep State may win its war against the pathetic President Trump, but it won’t win any war against the imperatives of the universe and the way that expresses itself in the true valuation of things. And when the moment of clarification arrives, the instant of cosmic price discovery, the clueless elites will have to really and truly worry about the value of their heads....

3-Month Treasury-Bill Auction Prices At Highest Yield Since Lehman On Debt-Ceiling Concerns

It seems Morgan Stanley was right when they said "the debt ceiling worries us most," as today's 3-month T-Bill auction surprised the market with its highest yield since the fall of 2008, as investors continue to price concerns that the U.S. government will exhaust its borrowing authority around mid-October...


# As SMRA details: The 3-month bill auction stopped at 1.180%, with a 67.70% allocation at the high yield. The 3-month auction bid/cover ratio was 2.87. The average 3-month bid/cover over the past three months was 3.13. The WI was last trading at 1.165% at 11:30 AM. Indirect bidders took down 38.44% of the 3-month bill auction and Direct bidders took down 5.61%. The 6-month bill auction stopped at 1.130%, with a 34.87% allocation at the high yield. The 6-month auction bid/cover ratio was 2.91. The average 6-month bid/cover over the past three months was 3.30. The WI was last trading at 1.115% at 11:30AM. Indirect bidders took down 40.66% of the 6-month bill auction and Direct bidders took down 2.69%. So the 3-month bill is priced 5bps cheaper than the 6-month bill and both dramatically tailed. The early pricing of debt limit concerns may reflect overhang from this week’s bill auctions and the "greater influence" of government money market funds following October's reforms.
# But, Morgan Stanley recently warned that the biggest immediate risk to the market is: The debt ceiling worries us most, given that action may need to be taken within as little as seven weeks. But on the other issues, we’re more relaxed. The Senate’s Healthcare bill had an approval rating of 17%, so we doubt its failure would be a hit to consumer confidence. The Special Counsel’s investigation, whatever the outcome, will likely take considerable time. Our economic baseline was already cautious with regard to fiscal stimulus, a long-held view of our policy team. And while tax cuts could boost the market temporarily, they could also lead to a more hawkish Fed, a classic ‘be careful what you wish for.’ As the 3mo6mo yield curve inverts dramatically...


Inflecting right around the mid-October date of today's auction...

Goldman To Nervous Bitcoin Traders: Be Patient, The Next Surge Will Take It Above $3,600

Prompted by growing interest among the hedge fund community, Goldman is dedicating increasingly more "bandwidth" to covering bitcoin, and judging by the bank's bullish bias, most of the "smart money" appears to be long the cryptocurrency. In a report posted overnight by Goldman's chief technician Sheba Jafari, she writes that since "Bitcoin is still within the limits of a well-defined range, it may need another few swing within the range before resuming its underlying trend" higher. Eventually, after some potential volatility that could send it as low as $1,786 "but not much further from there", Goldman expects the original cryptocurrency to surge to a "minimum target at 2,988 and scope to reach 3,691."
# Here is how Goldman reassures its nervous clients, many of whom appear to have bought BTC near its recent all time highs, that record highs in bitcoin are just a matter of time:
- As has been discussed in recent updates, Bitcoin is in wave IV of a V wave impulsive rally that began at the ‘11 low. It’s not uncommon for a 4th wave to be complex and time-consuming.
- The fact that the market is still unable to break above the key day high on Jun. 13th (3,000) increases the likelihood of this being a triangle. These triangles are typically characterized by five swings in either direction, making it an ABCDE sequence. If this is the correct interpretation, the next leg lower should retrace back towards the bottom of wave A (1,852) but no further than there.
- Alternatively, it could also be an ABC pattern in which case the market could make a marginal new low (to ~1,786) but again, not much further than there.
- Anything above 3,000 (Jun. 13th high) will suggest potential to have already started wave V, which again has a minimum target at 2,988 and scope to reach 3,691 (the latter being a preferred target as this assumes a new high). At this point, it seems reasonable to assume that the market is in a corrective process until there’s been real evidence of an impulsive advance...


Jafari's conclusion: "Consider range-bound/corrective below 3,000. Shouldn’t retrace much further than 1,857-1,787. Eventually see potential for 3,691." While Goldman's sellside euphoria on bitcoin is tangible, one wonders if this is just the latest attempt by its prop desk to offload some holdings to institutional and retail traders who are a little late to the crypto party....

Greece Returns To The Bond Market With A Present To Its Last Group Of Bond Buyers

On the same day that Greek PM Alexis Tsipras triumphantly announced to The Guardian that "The worst is clearly behind us", Greece just as triumphantly announced that its long-rumored bond issue, the first after a three year hiatus which saw its last bond issue crash then surge, is now a reality. Just like in 2014, Greece is looking to sell another batch of five-year bonds, according to an Athens Stock Exchange filing. The bonds will be sold in benchmark size via a legion of banks, and are expected to price on Tuesday. In terms of total size, it will ultimately depend on client demand, recall that the the 2014 issue was 8x oversubscribed, with UBS expecting a possible size of €2BN-4BN while JPMorgan anticipates roughly €3BN in new bonds. But the biggest surprise in today's announcement was the announcement of a present for its last batch of bond buyers: a cash tender offer for its existing 4.75% bonds due in 2019 - the same bonds that were issued in 2014, which will be bought back at a price of 102.6. The 2019 bond have jumped in recent weeks, with the yield dropping around 15bps, though as Bloomberg notes "hardly anything has traded as is usual in Greek bonds." The bond was priced around 102.25 ahead of the announcement, before rising another 30c...


Greek 10Y bonds are currently yielding 5.28%. Putting this in context, at the peak of the financial crisis in 2012, when Greece was expected to leave the euro area, the yield surged to a record 44.21 percent. With the latest bond sale, Tsipras government is seeking to pave a path for an exit from the current bailout program, which ends in August 2018, while also capping the country’s financing needs in 2019, expected to be about 19 billion euros ($22.1 billion). After not being able to convince creditors to reduce its debt burden and being left out of the European Central Bank’s bond-purchase program, Greece is testing the market, although it still remains to be seen if Greece will be added to the ECB's QE program. Greece delayed its return to the bond market last week due to a €325 billion ceiling set by the IMF on how much debt the country can hold. Workarounds, like the infamous debt swaps that pushed Greece into its crisis in the first place, could improve Greece’s maturity profile without increasing the overall load according to Bloomberg, and can ease the government’s forays into the market.
In other words, we are right back where we started: with everyone agreeing to mask the total amount of unrepayable Greek debt, which obviously will not matter to yield-starved credit investors who will be delighted to give billions to Greece in exchange for a yield in the 4%+ range. After all, by the time the debt comes due, it will be someone else's problem. The bond sale follows the successful conclusion of the second bailout review and the disbursement of the first part of the €8.5BN tranche by the ESM on July 10. The IMF agreed to a new $1.8 billion conditional loan for Greece on Thursday, with disbursement contingent on euro-zone countries providing debt relief. Helping to ste the stage for today's announcement, on Friday S&P raised the country’s sovereign credit-rating outlook to positive, even though it kept the Greek rating at B-, 6 levels below investment-grade. Some were cautious: “Having failed to achieve anything substantial on debt relief or having Greece admitted into the ECB’s asset purchase program, the objective of the Syriza government is now a ‘clean exit’ when the bailout expires next year,” said Eurasia's Mujtaba Rahman. “This will be the first leg of that strategy, to test market appetite while simultaneously building cash buffers ahead of next year.”
Meanwhile, the euphoria is already palpable: “they’ve been doing well,” said Mohit Kumar, head of interest rates strategy at Credit Agricole CIB. “Psychologically, yields are below levels when they last came to the market. And it’s a good time to issue because if ECB starts tapering post summer, peripherals would come under pressure. ” As Landesbank Berlin's Lutz Roehmeyer told Bloomberg, it’s “perfect timing: it is after getting bailout money, after getting the go ahead for a debt reduction next year, after IMF said it is likely to join the bailout finally, after S&P rating action and still before ECB ends QE and started raising rates.” Naturally, Roehmeyer already holds Greek bonds and plans to take part in the new issue....

Existing Home Sales Slump In June, Weakest Summer Selling Season Since 2011

On the heels of homebuilder optimism tumbling to 8-month lows in July, existing home sales slumped in June (down 1.8%, more than the 0.9% decline expected) to the second lowest SAAR this year. Existing home sales are now unchanged since September, but we note that average prices are up 6.5% YoY. Total existing-home sales, decreased 1.8 percent to a seasonally adjusted annual rate of 5.52 million in June from 5.62 million in May. Despite last month's decline, June's sales pace is 0.7 percent above a year ago, but is the second lowest of 2017 (February, 5.47 million). Since rates surged, exisitng home sales have gone nowhere (but prices have risen)...


The median existing-home price for all housing types in June was $263,800, up 6.5 percent from June 2016 ($247,600)...


Lawrence Yun, NAR chief economist, says the previous three-month lull in contract activity translated to a pullback in existing sales in June. "Closings were down in most of the country last month because interested buyers are being tripped up by supply that remains stuck at a meager level and price growth that's straining their budget," he said. "The demand for buying a home is as strong as it has been since before the Great Recession. Listings in the affordable price range continue to be scooped up rapidly, but the severe housing shortages inflicting many markets are keeping a large segment of would-be buyers on the sidelines." For context, this is the weakest summer selling season since 2011, a time when seasonally sales have tended to increase...


First-time buyers were 32 percent of sales in June, which is down from 33 percent both in May and a year ago. NAR's 2016 Profile of Home Buyers and Sellers, released in late 20164, revealed that the annual share of first-time buyers was 35 percent. "It's shaping up to be another year of below average sales to first-time buyers despite a healthy economy that continues to create jobs," said Yun. "Worsening supply and affordability conditions in many markets have unfortunately put a temporary hold on many aspiring buyers' dreams of owning a home this year"....

Manufacturing Rebound Sends US PMI To 6-Month High (As European PMI Hits 6-Month Low)

Following Europe's PMI slump to six-month lows this morning, US Composite PMI rose to a six-month high, with Manufacturng surprising to the upside (4-mo high). The stronger PMI reading was supported by accelerated growth in output, new orders, employment and stocks of inputs during July, but the principal weak spot in the economy remained exports, with foreign goods orders dropping... 


As 'hard' US economic data has drastically disappointed over the last three months, Services (higher) and Manufacturing (lower) based on Markit's PMI survey have diverged markedly until today's July print which saw manufacturing catch up...


Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said: “The July PMI surveys show an economy gaining growth momentum at the start of the third quarter, enjoying the strongest monthly improvement in business activity since January. “Most encouraging was an upturn in new order inflows to the second-highest seen over the past two years, which helped push the rate of job creation to the highest so far this year, indicative of non-farm payrolls growing at a rate of around 200,000. “The principal weak spot in the economy remained exports, with foreign goods orders dropping, albeit only marginally, for the first time since last September, often blamed on the strength of the dollar.”
“The overall rate of expansion remains modest rather than impressive. The surveys are historically consistent with annualized GDP growth of approximately 2%, but the signs are that growth could accelerate further in coming months...


We leave you with UBS' comment which seemed to sum things up rather well: Manufacturing purchasing managers' opinion polls are due. Markets and media love this data. Including preliminary data, it is out twice a month. There is lots of it. There is lots of superficially interesting details. The fact that the correlation of this data to reality has collapsed does not seem to matter, it is something to talk about....

Michael Snyder; A Mystery Investor Just Made A $262 Million Bet That The Stock Market Will Crash By October

One mystery trader has made an extremely large bet that the stock market is going to crash by October, and if he is right he could potentially make up to 262 million dollars on the deal. Fortunes were made and lost during the great financial crisis of 2008, and the same thing will happen again the next time we see a major stock market crash. But will that stock market crash take place before 2017 is over? Without a doubt, we are in the midst of one of the largest stock market bubbles in U.S. history, and many prominent investors are loudly warning of an imminent stock market collapse. It doesn’t take a genius to see that this stock market bubble is going to end very badly just like all of the other stock market bubbles throughout history have, but if you could know the precise timing that it will end you could set yourself up financially for the rest of your life. I want to be very clear about the fact that I do not know what will or will not happen by the end of October. But one mystery investor is extremely convinced that market volatility is going to increase over the next few months, and if he is correct he will make an astounding amount of money. According to BI, the following is how the trade was set up;
- To fund it, the investor sold 262,000 VIX puts expiring in October, with a strike price of 12.
- The trader then used those proceeds to buy a VIX 1×2 call spread, which involves buying 262,000 October contracts with a strike price of 15 and selling 524,000 October contracts with a strike price of 25.
- For reference, bullish call spreads are used when a moderate rise in the underlying asset is expected. Traders buy call options at a specific strike price while selling the same number of calls of the same asset and expiration date at a higher strike.
- In a perfect scenario, where the VIX hits but doesn’t exceed 25 before October expiration, the trader would see a whopping $262 million payout.
# I will be watching to see what happens. If this mystery investor is correct, it will essentially be like winning the lottery. But just because he has made this wager does not mean that he has some special knowledge about what is going to happen. For example, just look at what Ruffer LLP has been doing. They are a $20 billion investment fund based in London, and they have been betting tens of millions of dollars on a stock market crash which has failed to materialize so far. But even though they have lost so much money already, they continue to make extremely large bearish bets. As of earlier this week, Ruffer had spent $119 million this year betting on a stock market shock, $89 million of which had expired worthless, according to data compiled by Macro Risk Advisors.
The investor has gradually amassed holdings of about 1 million VIX calls through three occasions so far in 2017, and each time a significant portion expired at a loss. Blame a subdued VIX for the futility. The fear gauge was locked in a range of 10 to 14 for the first three months of 2017, and while it has since climbed to as high as 15.96, it has been stuck well below 14 since a single-day plunge of 26% nine days ago. Earlier this week, the index closed at its lowest level since February 2007. But that doesn’t mean Ruffer is giving up. Already loaded up on May contracts, the firm has continued to buy cheap VIX calls expiring later in the year, wagers costing about 50 cents. I can understand why Ruffer has been making these bets. In a rational world, stocks would have already crashed long ago. The only way that stock prices have been able to continue to rise is because of unprecedented intervention by global central banks. They have been pumping trillions of dollars into the financial markets, and this has essentially completely destroyed normal market forces.
# The following comes from David Stockman; The Fed and its crew of traveling central banks around the world have gutted honest price discovery entirely. They have turned global financial markets into outright gambling dens of unchecked speculation. Central bank policies of massive quantitative easing (QE) and zero interest rates (ZIRP) have been sugar-coated in rhetoric about “stimulus”, “accommodation” and guiding economies toward optimal levels of inflation and full-employment. The truth of the matter is far different. The combined $15 trillion of central bank balance sheet expansion since 2007 amounts to monetary fraud of epic proportions. In the “bizarro world” that we are living in today, many companies are trading at prices that are more than 100 times earnings, and some companies are actually trading at prices that are more than 200 times earnings. Stock prices have become completely and totally disconnected from economic reality.
As I discussed the other day, U.S. GDP has only risen at an average yearly rate of just 1.33 percent over the past 10 years, but meanwhile stock prices have been soaring into the stratosphere. Nobody in their right mind can claim that makes any sense at all. Just like in 2000, and just like in 2008, this absolutely ridiculous stock market bubble will have a horribly tragic ending as well. Once again, I don’t know what the exact timing will be. Stocks could start crashing tomorrow, but then the Swiss National Bank could swoop in and buy 4 million shares of Apple just like they did during the months of January, February and March earlier this year. The biggest players in this ongoing charade are the global central banks. If they decide to keep pumping trillions of dollars into global financial markets, they may be able to keep the bubble going for a little while longer. But if at any point they decide to withdraw their artificial assistance, those that have placed huge bets against the market are going to make absolutely enormous piles of cash....

Things To Ponder

- Kushner, Russian Ambassador Had Undisclosed Contact (WSJ)
- Democrats take aim at big companies in economic blueprint (Reuters)
- Trump open to signing Russia sanctions legislation (Reuters)
- Senate GOP Unsure of What Health-Care Measure They Will Vote On (WSJ)
- Japan PM Abe denies favors for friend amid falling support (Reuters)

Poland's President Unexpectedly Vetoes Bill On Judicial Reform, Zloty Surges

Polish President Andrzej Duda unexpectedly said on Monday that he would veto two of three bills reforming the country's judiciary system, easing Brussels' fears that the ruling Law and Justice party will undermine the division of powers. In a news conference on Monday morning, Duda said that he would veto two of three contentious bills, one that would have forced all members of the Supreme Court to step down, except for those kept on by the president; and a second that would have given parliament control over the National Judicial Council, the body that appoints judges, the FT reports. "I have decided that I will send back to Sejm (lower house of parliament), which means I will veto the bill, on the Supreme Court, as well as the one about the National Council of the Judiciary," Duda said after days of mass street protests adding “I regret that I, as president of the Republic of Poland, wasn’t consulted over this initiative before it reached the Sejm, the lower house of parliament. I couldn’t carry out consultations on this matter and nor could the other interested entities."
Duda's veto puts him at odds with the de facto leader of the country, Jaroslaw Kaczynski, who is the leader of PiS but has no formal government post, Reuters notes. Poland’s ruling Law and Justice party claims that the changes are necessary to overhaul an inefficient system that has not been purged since the collapse of communism almost three decades ago. However, in recent days the legislation has faced mounting international criticism, and sparked days of protests, with tens of thousands of Poles taking to the streets to rally against the changes which they fear would undermine the independence of the judiciary. The US State Department on Friday urged Poland to “ensure that any judicial reform does not violate Poland’s constitution or international legal obligations and respects the principles of judicial independence and separation of powers”. Duda's decision was greeted by the opposition: "What we had was not a reform, but appropriation of the courts. I congratulate all Poles, this is a great success, really," Katarzyna Lubnauer, head of the parliamentary caucus of the opposition party Nowoczesna.
# Meanwhile the Polish zloty, which tumbled under pressure as the battle over the judicial reforms has unfolded, jumped on the news, trading up 0.9 per cent at PLN4.24 against the euro...

European Stocks Fall To 3 Month Lows On "Carmaker Cartel" Fears, Sliding PMIs; US Futures Lower

In a mixed session, which has seen Asian stocks ex-Japan broadly higher, the European Stoxx 600 index dropped as much as 0.6% after data Markit PMI data signalled euro-area economy grew in July at its slowest pace in six months while carmakers extended declines on continued concern about antitrust collusion in the industry. Germany’s DAX Index was hardest-hit euro-area benchmark, down as much as 0.8%. Autos continued to be the worst-performing sector on the Stoxx Europe 600 after EU and German regulators said they are studying possible collusion among German automakers. Der Spiegel magazine reported on Friday that BMW, Daimler and Volkswagen may have cooperated for decades on technology...


Concerns have risen that with the Euro trading near its strongest level in 2 years and appreciating 11% against the USD YTD, it may weigh on exporters’ earnings; 1.20 on the EURUSD is being seen a key barrier beyond which European earnings will suffer. As a result, the euro headed for its first decline in three days as data showed the region’s economy cooling at the start of a week packed with earnings results and a Federal Reserve rate decision. Stocks were dragged down for a second day by carmakers amid a collusion probe. The common currency halted the advance that saw it hit a two-year high after a composite Purchasing Managers’ Index fell in July to a six-month low. Automakers extended a slump as European Union and German authorities said they are studying possible collusion among German producers. Crude fluctuated as an OPEC committee gathers to discuss the progress of supply cuts. Bonds were mixed. Europe's PMI was closely scrutinized after both German and Eurozone manufacturing missed expectations:
- Flash Eurozone PMI Composite Output Index at 55.8 (56.3 in June), below the 56.2 expected and 6-month low.
- Flash Eurozone Services PMI Activity Index at 55.4 (55.4 in June), below the 55.6 expected. Growth unchanged.
- Flash Eurozone Manufacturing PMI Output Index at 56.9 (58.7 in June). 6-month low.
- Flash Eurozone Manufacturing PMI(3) at 56.8 (57.4 in June). 3-month low...


Meanwhile, in a week heavy on political and monetary events, with several key Trump-related hearings later in the week, as well as the Fed's July decision on deck, earnings from industry bellwethers from Amazon.com Inc. to GlaxoSmithKline Plc are set to provide the latest tests for a bull market that’s propelled the value of global equities to $78 trillion. According to Bloomberg, euro-area manufacturing figures indicate that gross domestic product is expanding at a 0.6 percent quarterly pace, compared with 0.7 percent in the second three months of the year, adding further doubts about the sustainability of the stock rally at a time when the strong euro is weighing on exporters.
In Asia, the MSCI Asia Pacific Index edged higher after rallying over the past two weeks to the highest level in more than 10 years. Japan’s Topix index slid 0.5 percent, after dropping as much as 1 percent earlier in the day. Australia’s S&P/ASX 200 Index lost 0.6 percent. The Shanghai Composite Index advanced 0.4 percent while Hong Kong’s Hang Seng was 0.5 percent higher. India’s Sensex climbed 0.6 percent to a record. The Australian dollar rose 0.6 percent, trading above 79 U.S. cents ahead of a speech by Reserve Bank of Australia Governor Philip Lowe on Wednesday. The Dollar slumped to a five-week low against the yen on concern a widening probe into possible ties between Russia and U.S. President Donald Trump’s election campaign may derail his growth agenda. Lower U.S. Treasury yields and oil prices spur leveraged selling in the greenback ahead of Jared Kushner’s closed-door meeting with the Senate Intelligence Committee on Monday, according to an Asia-based foreign-exchange trader quoted by Bloomberg. As noted over the weekend, hedge funds and other large speculators were the most bearish on the dollar in more than four years as the Federal Reserve meets this week.
The Polish zloty jumped the most against the euro since May after Poland’s President Andrzey Duda said he’d veto part of an overhaul of the judiciary that’s brought tens of thousands of protesters into the streets across the eastern European nation In rates, the German government bond yields edged lower after euro zone PMI data also came in below forecasts. The 10-year yield, the benchmark for euro zone borrowing costs, fell to 0.49 percent, down 0.4 basis points and its lowest in more than a week. Yields fell on Friday as the strong euro led investors to question the timing of when the ECB would begin to withdraw its stimulus.
# Market Snapshot;
- S&P 500 futures down 0.1% to 2,466.50
- STOXX Europe 600 down 0.3% to 379.14
- Nikkei down 0.6% to 19,975.67
- Topix down 0.5% to 1,621.57
- Hang Seng Index up 0.5% to 26,846.83
- Shanghai Composite up 0.4% to 3,250.60
- Euro down 0.2% to 1.1644 per US$
- Brent Futures up 0.3% to $48.19/bbl
- Gold spot up 0.1% to $1,256.03
- U.S. Dollar Index up 0.1% to 93.93
# Top Overnight News;
- The Fed will unveil the timing of its balance sheet unwind in September and wait until December to raise interest rates again, according to a Bloomberg survey of 41 economists
- U.K. Trade Secretary Liam Fox will meet his U.S. counterpart in Washington on Monday as Britain seeks a trans-Atlantic trade deal as soon as possible after leaving the EU
- The world is leaning less on its biggest economy to sustain the global recovery, according to the International Monetary Fund. Beneath the global growth figures, the drivers of the recovery are shifting, with the world relying less than expected on the U.S. and U.K. and more on China, Japan, the euro zone and Canada, according to the Washington-based fund
- The Polish zloty jumped the most against the euro since May after Poland’s President Andrzey Duda said he’d veto part of an overhaul of the judiciary that’s brought tens of thousands of protesters into the streets across the eastern European nation
- U.K.’s Fox in U.S. to Argue for Quick Post- Brexit Trade Deal
- White House Team Differs on Trump Support for Russia Sanctions
- Euro Area Economy Grows at Slowest Pace in Six Months
- OPEC Signals No Big Changes to Supply Deal at Meeting in Russia
- Fed Seen Making September Balance-Sheet Announcement: Survey
- America First No More as IMF Sees U.S. Fading as Growth Engine
- BMW Denies Diesel Cheating as EU, Germany Probe Auto Cartel
- Asda Is Said to Hold No Takeover Interest for B&M: Telegraph
- J&J Picks HIV Vaccine Candidate for Further Testing This Year
- Glaxo’s ViiV, J&J HIV Injection Shown as Effective as Oral Dose
- Blackstone Buys Clarion Events; No Terms
- Ireland to Hire Custodian to Manage Cash From Apple Tax Case
- Monsanto Cites Illegal Off-Label Products in Dicamba Findings
- Diebold Nixdorf Dragged Down by Peer’s Disappointing 3Q Forecast
- HCA in Pact to Buy Hospital From Community Health; No Terms
- Polish President Duda to Veto Part of Judiciary Legislation
- Deutsche Bank, JPMorgan Agree to Settle Yen-Libor Lawsuits
*) Asian stocks traded mixed after quiet weekend news flow and with participants awaiting the upcoming FOMC meeting on Wednesday. ASX 200 (-0.7%) traded negative as energy and financial sectors weighed on the index, whilst Nikkei 225 (-0.6%) also suffered in the red amid a strong JPY. Shanghai Comp. (+0.4%) and Hang Seng (+0.4%) were higher following the PBoes firm liquidity injection of CNY 350b1n, in addition to some Hong Kong banks reducing deposit rates to less than 4% after declines in the CNH HIBOR. Finally, 10yr JGBs were flat with brief pressure seen after the BoJ Rinban announcement, in which it reduced buying of 5yr-10yr JGBs to JPY 470bn from JPY 500bn. PBoC injected CNY 200b1n via 7-day reverse repos and CNY 150bln in 28-day reverse repos. PBoC set CNY mid-point at 6.7410, Prev. 6.7415.
# Top Asian News;
- China Banks That Funded HNA’s Growth Are Said to Halt New Loans
- Mystery Bond Trader Nets $10 Million on Treasury Strangle Gamble
- Singapore Startup Takes Bitcoin Into Real World With Visa
- India Starts Antidumping Investigation on Imported Solar Cells
- No Relief for Lanka Rupee Sliding at Fastest Pace Since 2006
- Exporters Lead Japanese Stock Decline as Yen Holds Gains
*) Broadly a negative start for European equities with weakness stemming from Automakers and Airliners. Germany automakers, BMW, Daimler and Volkswagen softer this morning following reports that the European Union confirmed a probe into alleged price-fixing, while airliners have been dragged lower by Ryanair following the release of their financial results. Elsewhere, lower crude prices, coupled with weaker than expected Eurozone PMI readings has also added to the risk off tone. Credit markets have been supported by safe-haven flow, while peripheral bonds are slightly tighter to bunds this morning. Spanish debt supported from Fitch revising its outlook on Spain to positive, while month-end extensions are aiding OATs, Bonos and BTPs.
# Top European News;
- Saudi Energy Minister: Build-Up in Global Inventories Reversing
- Polish Zloty Jumps Most Since May as President Scraps Court Bill
- Telecom Italia Shares Rise as Board Meets to Approve CEO Exit
- Czech Top Judges Say Polish Judicial Reforms Undermine Democracy
- IMF Cuts U.K. Forecast After Disappointing First- Quarter Growth
# In currenices, it has been a very quiet start to the week with the greenback a fraction firmer, however the bias remains to the downside amid the ongoing US political uncertainty. DXY saw a break below 94.00, hitting a low of 93.82 in Asia, slight attention will be placed on the FOMC decision, as participants look for clarity on the timeline of balance sheet normalisation. Antipodeans (AUD, NZD) were the notable mover overnight with much of the price action seen through the cross as AUD/NZD moved within a whisker of 1.07. RBA speak last week failed to temper the AUD rise with the currency consolidating above 0.7950 and hovering around 2Y highs. Focus will be on RBA. Governor Lowe on Wednesday who may also look to curb the recent surge. EUR sagging this morning having touched lasts week post ECB peak at 1.1684, while softer PMI releases from France and Germany have also added to the EUR easing. EUR slightly south of 1.1650 with bids noted just ahead of Friday's low at 1.1619.
# In commodities, crude prices were softer this morning with both WTI and Brent down initially, amid the OPEC/Non-OPEC monitoring committee meeting the Saudi Energy Minister has stated that there has been no discussion over deeper cuts, however there has been talks over Nigeria and Libya production caps, given their recent increase in output. Gold rangebound after prices briefly touched a 4-week high on the back of a politically. Subsequently the energy complex rebounded however, after the Saudi energy minister made some solemn promises, in which he saw Saudis capping exports at 6.6mmb/d, saying that Nigeria would cut if it reaches output of 1.8mmb/d, and sees a deep cut in Saudi August production.
# Looking at today's busy session, we get the July manufacturing, services and composite flash PMIs for Germany, Eurozone (both of which declined and missed expectations) and the US later this morning. Existing home sales data in the US will also be released....

AEX Index Update (18-7-2017)


*) De AEX is wat verder weggezakt en bevindt zich nu in de 520 S-zone. De koers volgt nog steeds in grote lijnen het ingetekende koersverloop. Zodra onder 518 kan het neerw, versnellen ri. ons 1e KD, het gap in de 510-zone...

Monday Market Observations

# We think it's still time for a sharp sell off into the cycles nested bottom. Keep a lookout for a trigger...


# The SPX and NDX held up into the high-energy 7/20-7/21 turn window that sometimes marks important peaks in bull market years. The low volume test of QQQ highs Wednesday at 143.8 argues for a pullback to test the 7/12 gap-fill area of 139-140.
# For the third day in a row, we're getting a SPX sell signal on the 5-day MA on the CBOE equity put/call ratio. The SPX failed also to break above "pivot resistance" at 2479. This implies a pullback to test the 7/12 gap at SPX 2430-2440 or QQQ 139-140. This kind of pullback calls for another leg up into August.
# Gold and silver made major lows and also rallied in an EW 5-wave pattern on the hourly chart from 7/10 into Friday Full Moon Timing Window. We are bullish and the Comex gold COTs are arguing that the PMs made a major low on 7/10. We're looking for a big rally into October
# Crude oil took out the 7/4 high on Thursday before pulling back; we are bullish for oil to make a big run into 8/20.
# Bonds finished an EW 5-wave rally on the hourly Thursday before correcting. We could se a bounce on Monday.
# The USD is in an entrenched downtrend and that is giving commodities across the board a boost....

"It Feels Like An Avalanche": China's Crackdown On Conglomerates Has Sent A "Shock Wave" Across Markets

The first to suffer Beijing's crackdown against China's private merger-crazy conglomerates, wave was the acquisitive "insurance" behemoth, Anbang, whose CEO Wu Xiaohui briefly disappeared as the Politburo made it clear that the "old way" of money laundering - via offshore deals - is no longer tolerated. Then, several weeks later and shortly after the stocks of the "famous four" Chinese conglomerates plunged after China officially launched a crackdown on foreign acquirers amid concerns of "systemic risk", it was HNA's turn, which as we described last week, risks becoming a "reverse rollup from hell", as HNA's stock tumbled, sending the LTV of billions in loans collateralized by the company's shares soaring and in danger of unleashing an catastrophic margin call among the company's lenders...


Then Beijing's attention shifted to the biggest conglomerate of them all: billionaire Wang Jianlin’s Dalian Wanda Group, which as the WSJ and Bloomberg reported was being "punished" by Beijing, and would see its funding cutoff after China "concluded the conglomerate breached restrictions for overseas investments." The scrutiny could rein in Wang’s ambitious attempt to create a global entertainment empire, including Hollywood production companies and a giant cinema chain he’s built up through acquisitions from the U.S. to the U.K. Six investments, such as the purchases of Nordic Cinema Group Holding AB and Carmike Cinemas Inc., were found to have violations, said the people, who asked not to be identified discussing a private matter. The retaliatory measures will include banning banks from providing Wanda with financial support linked to these projects and barring the company from selling those assets to any local companies, the people said. The move is an unprecedented setback for the country’s second-richest man, who has announced more than $20 billion of deals since the beginning of 2016. By targeting one of the nation’s top businessmen, the government is escalating its broader crackdown on capital outflows and further chilling the prospects of overseas acquisitions during a politically sensitive year in China.
# Summarizing the abrupt shift in sentiment in China was Castor Pang, head of research at Core-Pacific Yamaichi, who said that “to investors, political risk is now the biggest concern when investing in Chinese companies. Not only Wanda, every Chinese company won’t find it easy anymore to acquire assets overseas. Stabilizing the yuan is the top priority for Beijing now.” While it is not exactly clear just why Beijing so quickly soured on foreign transactions, as we explained back in 2015, it was abundantly clear back then these were nothing more than a less than sophisticated way to launder money offshore, unless of course the capital flight out of China is far worse than what Beijing would disclose, what has become quite clear is that Wanda was among the conglomerates including Fosun International, HNA Group and Anbang Insurance whose loans are under government scrutiny after China’s banking regulator asked some lenders to provide information on overseas loans to the companies. In other words, the foreign merger party is over. In fact, for some of the above listed 4 conglomerates, the party may be over, period.
And now as the WSJ reported over the weekend, it has become clear that China’s government reined in one of its brashest conglomerates with the explicit approval of President Xi Jinping, "according to people with knowledge of the action, a mark that the broader government clampdown on large private companies comes right from the top of China’s leadership." The measures, with President Xi’s previously unreported approval last month, bar state-owned banks from making new loans to property giant Dalian Wanda Group to help fuel its foreign expansion. The cutoff in bank financing for the company’s foreign investments highlights Beijing’s changing view of a series of Wanda’s recent overseas acquisitions as irrational and overpriced. In short, and as noted above, Yuan stability above all. For the local market, the shift in Beijing's strategy is nothing short of a seismic shift: “It feels like an avalanche,” said Jingzhou Tao, a lawyer at Dechert LLP in Beijing, who does mergers and acquisitions work. “This is sending a shock wave through the business community.”
# Regular readers are aware of what, until recently, was China's unquenchable thirst for foreign money laundering transactions, something we first pointed out at the start of 2016, and which had - until recently - grown exponentially. Since 2015, the four companies completed a combined $55 billion in overseas acquisitions, 18% of Chinese companies’ total. In recent days, however, as reported here 2 weeks ago, Wanda’s billionaire founder Wang Jianlin has been shrinking his empire by selling off assets and paying back the company’s bank loans. What is surprising about the sudden shift, is that Beijing had for years been encouraged Chinese companies to scour the globe for deals. Now, in a dramatic U-turn, it is reining in some of its highest-profile private entrepreneurs in what officials say is growing unease with their high leverage and growing influence. As the WSJ notes, "the measures serve as a stern warning for other big companies that loaded up on debt to buy overseas assets, officials and analysts say"...


How does the president fit into all of this? According to the WSJ, "Xi acted after China’s cabinet set the government machinery in gear by directing financial regulators, the economic planning agency and other bureaucracies to take a hard look at foreign acquisitions, once seen as a means for China to showcase its economic might." And, as previously reported, the crackdown started at Anbang and HNA, when Chinese banking regulators first ordered banks to scrutinize loans to Anbang in June, and other highfliers including airlines-and-hotels conglomerate HNA Group, which has pulled back on overseas investments. HNA said in a statement it continues to take a “disciplined approach” to identifying “strategic acquisitions across our core areas of focus.” Discussing the government's crackdown on conglomerates, officials at Fosun said the firm has “overseas funds and other stable financing channels,” including a fund of around U.S. $1 billion to invest, but emphasized it “fully respects the government regulations both in China and overseas markets.” Fosun has a listed unit in Hong Kong, and its strategy to invest in health care and technology “adheres to China’s global investment strategy,” said a spokesman, Chen Bo.
In any case, the most likely outcome is that in the future China’s private companies will have trouble getting capital, which would help shift financial clout further in favor of big state-owned enterprises, which may also explain President Xi's change in opinion. Beijing’s sterner line comes as big private businesses and others have been amassing capital and influence that challenge the authoritarian Chinese leadership’s firm hold on the economy. Its grip has been tested over a bumpy few years. After a 2015 stock market meltdown and a botched government rescue, a gush of money flowed out of the country looking for better returns. That in turn put pressure on China’s tightly controlled yuan and foreign-exchange reserves, both seen by Beijing as barometers of confidence in the economy. It has also led to a chilling effect on Chinese outbound investment which has crashed as shown in the chart below...


Putting the foreign merger spree in context, Chinese firms completed $187 billion in outbound deals last year, according to Dealogic, as private companies snapped up trophy properties, soccer clubs and hotels, while Chinese with means bought homes and pushed up real-estate prices from Texas to Sydney. The private sector’s share of overseas spending shot up from barely above zero about a decade ago to nearly half of China’s total overseas investments in 2016, before slipping back to 36.9% in the first half of 2017, according to Derek Scissors, a China expert at the American Enterprise Institute. But the most important factor, and among the main reasons for the current crackdown, is that amid the rush of investments, Beijing burned through nearly a trillion dollars in foreign-exchange reserves trying to steady the yuan. That ultimately led government regulators to clamp controls on money exiting the country and to scrutinize all proposed major offshore investments.
Just as we predicted over a year ago would happen, once the government finally realized that all that M&A is nothing more than capital flight. As the WSJ puts it, "the latest scrutiny is a watershed moment in the Communist government’s relations with a private sector it has never been comfortable with. Though some senior leaders, particularly Premier Li Keqiang, are urging a new culture of startups and small businesses, Mr. Xi has promoted plans to make already-large state enterprises larger and strengthen their sway over the economy." There are other reasons for the crackdown too: one is the still fresh memory of what happened in Japan when it did the exact same thing. China is acutely aware that as Japan rose to economic prominence in the 1980s, its companies splurged on American real estate and other trophy assets, resulting in losses that cascaded through Japan’s banking sector. But mostly, it is about power and control: # Mr. Tao, the Beijing lawyer, says the government’s new aggressive posture is driven in large measure by a need for control. “State-owned assets, whether in China or abroad, are still state assets,” he said. “But when private entrepreneurs take their money out, it’s gone.
It’s no longer something that China can benefit from or the Chinese government can get a handle on.” And since in any power struggle between Chinese companies and Beijing in general, and Xi Jinping in particular, the latter will always win, the market's reaction was to violently selloff any big Chinese conglomerate stocks. An early sign of government discomfort with overseas spending was Anbang’s unsuccessful $14 billion bid for Starwood Hotels & Resorts Worldwide Inc. in 2016. Authorities expressed displeasure with the bold move, believing that Anbang had offered too much, according to a person with knowledge of the situation. Anbang, which had appeared unstoppable in 2014 when it struck a $2 billion deal to buy the U.S. Waldorf Astoria hotel, fell deeper in trouble. This past June, special government investigators looking into economic crimes detained Anbang’s chairman, Wu Xiaohui, who hasn’t appeared in public since. Separately, in the case of Wanda, regulators acted in the belief the company overpaid in efforts to expand beyond shopping centers and hotels and into entertainment, according to the people with knowledge of the action.
Its largest such acquisition was of Legendary Entertainment, the Hollywood producer and financier behind films including “Jurassic World” and “The Dark Knight.” Wanda spent $3.5 billion to buy Legendary in 2016; In Hollywood, industry insiders widely believed the company paid too much. Legendary said this week that it is well-capitalized, operating normally and able to fund its film and television productions. As for HNA, recall that it was the stealthy buyer of Anthony Scaramucci's SkyBridge Capital, another deal which will soon fall under tremendous scrutiny, and which could be unwound in the coming weeks if concerns about conflicts of interest emerge again, only this time not between the US and Russia - especially once the "Russia collusion" story is finally over - but the White House and Beijing....

zondag 23 juli 2017

Morgan Stanley: "The Debt Ceiling Worries Us Most"

In the latest Sunday Start report from Morgan Stanley's Andrew Sheets, the bank's chief cross-asset strategist looks at the current state of the market; "The S&P 500, Russell 2000 and NASDAQ have hit all-time highs. Volatility has plunged back down near all-time lows. Credit is tighter and yields have been stable", and asks the same question posed by virtually everyone else in recent weeks: "what rattles this market. What breaks the egg?"  Sheets, like the bank's equity research team (which recall believes the current market is a rerun of 1999 and sees up to another 30% surge in stocks) remains optimistic saying that "risks don't warrant a defensive view yet", and adds that "with longs concentrated in DM equities and EM fixed income, no one wants to be that complacent investor at the highs, and good times are always the best time to think about what can go wrong."
- On the other hand, Sheets highlights one rising risk, namely his "high conviction that markets have passed the point where bad data can be offset with promises of further easing. But so far this doesn’t matter, because growth in 2017 has been surprisingly good. Our economists see 2Q global GDP at 4.3%Q, the highest reading since 4Q10. Weaker growth will crack the egg, but we’re not seeing it yet."
- A second risk mentioned by the X-asset strategist: "valuations and earnings. High stock valuations and strong earnings can be OK (see the early 1960s and late 1990s). High valuations and poor earnings is trouble. A disappointing 2Q earnings season would be a clear catalyst to push the market lower. But there are a few reasons why we don’t think that happens."
- A third risk is that inflation, largely benign and disappointing in recent months, returns: "for now, soft inflation is giving DM central banks cover to keep real rates deeply negative. This won’t last forever; our economists forecast the trough in US core PCE in September, inflation in Japan and the eurozone to pick up materially in 1H18 and China."
- Risk number 4 to Sheets: aggressiveness. "Growth with easy money is a cocktail for all manner of problems, from ill-advised M&A, to excessive bond issuance, to extended investor positioning. All are potential egg-crackers." But again (and you may sense a theme here) Morgan Stanley don’t think they’re negatives yet: "M&A volumes in the US and Europe are still only half the 2007 peak. US credit has yet to show strains from oversupply (although we remain cautious, seeing poor risk/reward). Our prime brokerage team tells me that hedge fund net positioning remains near its 10-year average. We’re watching all these closely." Which brings us to the biggest concern for the bank which recently beat Goldman Sachs in FICC revenue for the second straight quarter: politics, in general, and the debt ceiling in particular.
- One reason why we may not be seeing more aggressiveness is our final risk, politics. Multiple failures in the US to pass healthcare legislation, despite single-party control, raise questions about a whole host of other issues, from the debt ceiling, to the budget, to taxes. Meanwhile, news reports suggest that the ongoing probe by Special Counsel Robert Mueller is widening...


Finally, here is what Sheets, along with many others, including the T-Bill market, believes is the biggest immediate risk to the market: The debt ceiling worries us most, given that action may need to be taken within as little as seven weeks. But on the other issues, we’re more relaxed. The Senate’s Healthcare bill had an approval rating of 17%, so we doubt its failure would be a hit to consumer confidence. The Special Counsel’s investigation, whatever the outcome, will likely take considerable time. Our economic baseline was already cautious with regard to fiscal stimulus, a long-held view of our policy team. And while tax cuts could boost the market temporarily, they could also lead to a more hawkish Fed, a classic ‘be careful what you wish for.’ Incidentally, we agree with Sheets that the debt ceiling is fast emerging as the biggest downside risk catalyst, and one which has a tangible date: mid-to-late September. In light of the dire state of political discourse in Washington, and Trump's inability to form a political compromise, it is no surprise why the October 19, 2017 T-Bill yield spiked in recent days...


And why the October 19, 2017 Bill Spread has blown out...


As more traders begin to grasp what a failure to pass the debt ceiling, if only temporarily, would mean for the US....

FX Spec Positioning Hits Multi-Year Extremes As Dollar Tumbles, Euro Soars

Following the latest weekly battering of the USD, which has tumbled to near one year lows, the latest CFTC net spec positioning (which traditionally represents a lagging picture of price trend and has very limited, if any, informational value) saw a continuation of recent extreme moves, nowhere more so than in Euro and Japanese Yen net spec positions, which have shifted to most long since late 2013, and most short since January 2014 respectively. A quick summary of the latest FX CFTC net exposure via DB reveals that specs turned net long in CAD futures by 8K contracts for the first time since mid-March, buying over 16K contracts over the week...


They continued to pare their net shorts in GBP by 8K contracts to 16K contracts for the third week in a row...


In the meantime, they increased their net shorts in JPY for the fourth straight week to 127K contracts, the highest since January 2014...


But the most notable move was the surge in net EUR bullish spec positioning, which has surpassed the previous high seen in 2013. According to JPM, this recent position build up is less likely to have been driven by CTAs, as in the bank's trend following strategies framework, trend following signals turned long the euro some time ago in May. So the most recent positioning build is more likely to have driven by discretionary managers, including currency hedge funds which up until June appear to have missed out on the EUR rally...


This is shown in Figure 10, which depicts the performance of Currency HFs using the HFRI Monthly Currency HF Index and compares it with the performance of JPM’s EUR tradable index. Figure 10 implies that Currency HFs were short the euro (their performance was negative related to that of the euro) during January and February this year but they had shifted to a pretty long position in the euro in April and May. They appear to have taken profit in June missing out on the euro rise. The fact that Currency HFs had missed out on the euro’s rise in June, makes them a good candidate in them catching up in July, thus explaining the positioning build up revealed by CFTC data...


Finally, as a result of the ongoing rout in the USD, the net spec positioning in the greenback now the shortest since mid 2014...


Zoomed in and broken down by offseting FX-pair...


Aside from FX, there was several notable trends in the rates complex, where net spec positioning in TSY futs decreased for the third straight week by 32K contracts in TY equivalents to -120K contracts...


As Deutsche Bank notes, the largest sales came in TU where specs resumed adding to their net shorts by 17K contracts after a pause in the previous week, their net shorts in TU have increased by 263K contracts since May. They also increased their net shorts in WN by 8K contracts and pared their net longs in TN by a half to 12K contracts. In contrast, specs added 25K contracts to their net longs in TY for the first time in the last four weeks. After Eurodollars hit record net spec shorts in June, there has been a sharp burst of short covering, and the net short here is now roughly half where it was just one month ago...


Yet while shorts were covered in the ED space, a new record net spec short has emerged in 2Y contracts, which just hit a new all time net short of -274K contracts...


Meanwhile, after the recent fireworks in 10Y nets, which violently moved from a record short to a record long in the span of week, there has been far less movement in recent days, echoing the somewhat more stable price for 10Y futs...


A quick look at commodities reveals that there was little to note in the latest NYMEX crude move, with money managers increasing their bullish Nymex WTI crude oil bets by 36,834, the highest net-long bullish position in six weeks...


The aggressive shorting and unwind of long position in precious metals, including gold...


But especially silver, has accelerated in recent weeks, suggesting the likelihood of a sharp short squeeze is rising...


Finally, looking at equity positioning, reveals a modest increase of 23K net specs in E-mini futs... 


Even as hedge funds continue to unwind net long positioning in the tech-heavy Nasdaq, which has seen the net position roughly flat vs one week ago, and rising by 8K contracts to 39K as of the most recent week...