Category Archives: Stock Market

The ‘Dilemma From Hell’ Facing Central Banks

We present some somber reading on this holiday season from Macquarie Capital’s Viktor Shvets, who in this exclusive to ZH readers excerpt from his year-ahead preview, explains why central banks can no longer exit the “doomsday highway” as a result of a “dilemma from hell” which no longer has a practical, real-world resolution, entirely as a result of previous actions by the same central bankers who are now left with no way out from a trap they themselves have created.

* * *

It has been said that something as small as the flutter of a butterfly’s wing can ultimately cause a typhoon halfway around the world” – Chaos Theory.

There is a good chance that 2018 might fully deserve shrill voices and predictions of dislocations that have filled almost every annual preview since the Great Financial Crisis.

Whether it was fears of a deflationary bust, expectation of an inflationary break-outs, disinflationary waves, central bank policy errors, US$ surges or liquidity crunches, we pretty much had it all. However, for most investors, the last decade actually turned out to be one of the most profitable and the most placid on record. Why then have most investors underperformed and why are passive investment styles now at least one-third (or more likely closer to two-third) of the market and why have value investors been consistently crushed while traditional sector and style rotations failed to work? Our answer remains unchanged. There was nothing conventional or normal over the last decade, and we believe that neither would there be anything conventional over the next decade. We do not view current synchronized global recovery as indicative of a return to traditional business and capital market cycles that investors can ‘read’ and hence make rational judgements on asset allocations and sector rotations, based on conventional mean reversion strategies. It remains an article of faith for us that neither reintroduction of price discovery nor asset price volatility is any longer possible or even desirable.

However, would 2018, provide a break with the last decade? The answer to this question depends on one key variable. Are we witnessing a broad-based private sector recovery, with productivity and animal spirits coming back after a decade of hibernation, or is the latest reflationary wave due to similar reasons as in other recent episodes, namely (a) excess liquidity pumped by central banks (CBs); (b) improved co-ordination of global monetary policies, aimed at containing exchange rate volatility; and (c) China’s stimulus that reflated commodity complex and trade?

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/11/07/macquarie%20central%20banks.jpg

The answer to this question would determine how 2018 and 2019 are likely to play out. If the current reflation has strong private sector underpinnings, then not only would it be appropriate for CBs to withdraw liquidity and raise cost of capital, but indeed these would bolster confidence, and erode pricing anomalies without jeopardizing growth or causing excessive asset price displacements. Essentially, the strength of private sector would determine the extent to which incremental financialization and public sector supports would be required. If on the other hand, one were to conclude that most of the improvement has thus far been driven by CBs nailing cost of capital at zero (or below), liquidity injections and China’s debt-fuelled growth, then any meaningful withdrawal of liquidity and attempts to raise cost of capital would be met by potentially violent dislocations of asset prices and rising volatility, in turn, causing contraction of aggregate demand and resurfacing of disinflationary pressures. We remain very much in the latter camp. As the discussion below illustrates, we do not see evidence to support private sector-led recovery concept. Rather, we see support for excess liquidity, distorted rates and China spending driving most of the improvement.

We have in the past extensively written on the core drivers of current anomalies. In a ‘nutshell’, we maintain that over the last three decades, investors have gradually moved from a world of scarcity and scale limitations, to a world of relative abundance and an almost unlimited scalability. The revolution started in early 1970s, but accelerated since mid-1990s. If history is any guide, the crescendo would occur over the next decade. In the meantime, returns on conventional human inputs and conventional capital will continue eroding while return on social and digital capital will continue rising. This promises to further increase disinflationary pressures (as marginal cost of almost everything declines to zero), while keeping productivity rates constrained, and further raising inequalities.

The new world is one of disintegrating pricing signals and where economists would struggle even more than usual, in defining economic rules. As Paul Romer argued in his recent shot at his own profession, a significant chunk of macro-economic theories that were developed since 1930s need to be discarded. Included are concepts such as ‘macro economy as a system in equilibrium’, ‘efficient market hypothesis’, ‘great moderation’ ‘irrelevance of monetary policies’, ‘there are no secular or structural factors, it is all about aggregate demand’, ‘home ownership is good for the economy’, ‘individuals are profit-maximizing rational economic agents’, ‘compensation determines how hard people work’, ‘there are stable preferences for consumption vs saving’ etc. Indeed, the list of challenges is growing ever longer, as technology and Information Age alters importance of relative inputs, and includes questions how to measure ‘commons’ and proliferating non-monetary and non-pricing spheres, such as ‘gig or sharing’ economies and whether the Philips curve has not just flattened by disappeared completely. The same implies to several exogenous concepts beloved by economists (such as demographics).

The above deep secular drivers that were developing for more than three decades, but which have become pronounced in the last 10-15 years, are made worse by the activism of the public sector. It is ironic that CBs are working hard to erode the real value of global and national debt mountains by encouraging higher inflation, when it was the public sector and CBs themselves which since 1980s encouraged accelerated financialization. As we asked in our recent review, how can CBs exit this ‘doomsday highway’?

Investors and CBs are facing a convergence of two hurricane systems (technology and over-financialization), that are largely unstoppable. Unless there is a miracle of robust private sector productivity recovery or unless public sector policies were to undergo a drastic change (such as merger and fiscal and monetary arms, introduction of minimum income guarantees, massive Marshall Plan-style investments in the least developed regions etc), we can’t see how liquidity can be withdrawn; nor can we see how cost of capital can ever increase. This means that CBs remain slaves of the system that they have built (though it must be emphasized on our behalf and for our benefit).

If the above is the right answer, then investors and CBs have to be incredibly careful as we enter 2018. There is no doubt that having rescued the world from a potentially devastating deflationary bust, CBs would love to return to some form of normality, build up ammunition for next dislocations and play a far less visible role in the local and global economies. Although there are now a number of dissenting voices (such as Larry Summers or Adair Turner) who are questioning the need for CB independence, it remains an article of faith for an overwhelming majority of economists. However, the longer CBs stay in the game, the less likely it is that the independence would survive. Indeed, it would become far more likely that the world gravitates towards China and Japan, where CB independence is largely notional.

Hence, the dilemma from hell facing CBs: If they pull away and remove liquidity and try to raise cost of capital, neither demand for nor supply of capital would be able to endure lower liquidity and flattening yield curves. On the other hand, the longer CBs persist with current policies, the more disinflationary pressures are likely to strengthen and the less likely is private sector to regain its primacy.

We maintain that there are only two ‘tickets’ out of this jail. First (and the best) is a sudden and sustainable surge in private sector productivity and second, a significant shift in public sector policies. Given that neither answer is likely (at least not for a while), a coordinated, more hawkish CB stance is akin to mixing highly volatile and combustible chemicals, with unpredictable outcomes.

Most economists do not pay much attention to liquidity or cost of capital, focusing almost entirely on aggregate demand and inflation. Hence, the conventional arguments that the overall stock of accommodation is more important than the flow, and thus so long as CBs are very careful in managing liquidity withdrawals and cost of capital raised very slowly, then CBs could achieve the desired objective of reducing more extreme asset anomalies, while buying insurance against future dislocation and getting ahead of the curve. In our view, this is where chaos theory comes in. Given that the global economy is leveraged at least three times GDP and value of financial instruments equals 4x-5x GDP (and potentially as much as ten times), even the smallest withdrawal of liquidity or misalignment of monetary policies could become an equivalent of flapping butterfly wings. Indeed, in our view, this is what flattening of the yield curves tells us; investors correctly interpret any contraction of liquidity or rise in rates, as raising a possibility of more disinflationary outcomes further down the road.

Hence, we maintain that the key risks that investors are currently running are ones to do with policy errors. Given that we believe that recent reflation was mostly caused by central bank liquidity, compressed interest rates and China stimulus, clearly any policy errors by central banks and China could easily cause a similar dislocation to what occurred in 2013 or late 2015/early 2016. When investors argue that both CBs and public authorities have become far more experienced in managing liquidity and markets, and hence, chances of policy errors have declined, we believe that it is the most dangerous form of hubris. One could ask, what prompted China to attempt a proper de-leveraging from late 2014 to early 2016, which was the key contributor to both collapse of commodity prices and global volatility? Similarly, one could ask what prompted the Fed to tighten into China’s deleveraging drive in Dec ’15. There is a serious question over China’s priorities, following completion of the 19th Congress, and whether China fully understands how much of the global reflation was due to its policy reversal to end deleveraging.

What does it mean for investors? We believe that it implies a higher than average risk, as some of the key underpinnings of the investment landscape could shift significantly, and even if macroeconomic outcomes were to be less stressful than feared, it could cause significant relative and absolute price re-adjustments. As highlighted in discussion below, financial markets are completely unprepared for higher volatility. For example, value has for a number of years systematically under performed both quality and growth. If indeed, CBs managed to withdraw liquidity without dislocating economies and potentially strengthening perception of growth momentum, investors might witness a very strong rotation into value. Although we do not believe that it would be sustainable, expectations could run ahead of themselves. Similarly, any spike in inflation gauges could lift the entire curve up, with massive losses for bondholders, and flowing into some of the more expensive and marginal growth stories.

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While it is hard to predict some of these shorter-term moves, if volatilities jump, CBs would need to reset the ‘background picture’. The challenge is that even with the best of intentions, the process is far from automatic, and hence there could be months of extended volatility (a la Dec’15-Feb’16). If one ignores shorter-term aberrations, we maintain that there is no alternative to policies that have been pursued since 1980s of deliberately suppressing and managing business and capital market cycles. As discussed in our recent note, this implies that a relatively pleasant ‘Kondratieff autumn’ (characterized by inability to raise cost of capital against a background of constrained but positive growth and inflation rates) is likely to endure. Indeed, two generations of investors grew up knowing nothing else. They have never experienced either scorching summers or freezing winters, as public sector refused to allow debt repudiation, deleveraging or clearance of excesses. Although this cannot last forever, there is no reason to believe that the end of the road would necessarily occur in 2018 or 2019. It is true that policy risks are more heightened but so is policy recognition of dangers.

We therefore remain constructive on financial assets (as we have been for quite some time), not because we believe in a sustainable and private sector-led recovery but rather because we do not believe in one, and thus we do not see any viable alternatives to an ongoing financialization, which needs to be facilitated through excess liquidity, and avoiding proper price and risk discovery, and thus avoiding asset price volatility.

Source: ZeroHedge

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Stagnation Nation: American Middle Class Wealth Is Locked Up in Housing and Retirement Funds

The majority of middle class wealth is locked up in unproductive assets or assets that only become available upon retirement or death.

One of Charles Hugh Smith’s points in Why Governments Will Not Ban Bitcoin was to highlight how few families had the financial wherewithal to invest in bitcoin or an alternative hedge such as precious metals.

The limitation on middle class wealth isn’t just the total net worth of each family; it’s also how their wealth is allocated: the vast majority of most middle class family wealth is locked up in the family home or retirement funds.

This chart provides key insights into the differences between middle class and upper-class wealth. The majority of the wealth held by the bottom 90% of households is in the family home, i.e. the principal residence. Other major assets held include life insurance policies, pension accounts and deposits (savings).

What characterizes the family home, insurance policies and pension/retirement accounts? The wealth is largely locked up in these asset classes.

Yes, the family can borrow against these assets, but then interest accrues and the wealth is siphoned off by the loans. Early withdrawals from retirement funds trigger punishing penalties.

In effect, this wealth is in a lock box and unavailable for deployment in other assets.

IRAs and 401K retirement accounts can be invested, but company plans come with limitations on where and how the funds can be invested, and the gains (if any) can’t be accessed until retirement.

Compare these lock boxes and limitations with the top 1%, which owns the bulk of business equity assets. Business equity means ownership of businesses; ownership of shares in corporations (stocks) is classified as ownership of financial securities.

https://i0.wp.com/www.oftwominds.com/photos2016/ownership-assets2-16.jpg
These two charts add context to the ownership of business equity. Note that despite the recent bounce off a trough, the percentage of families with business equity has declined for the past 25 years. The chart is one of lower highs and lower lows, the classic definition of a downtrend.
https://i1.wp.com/www.oftwominds.com/photos2017/biz-equity10-17a.png
The mean value of business equity is concentrated in the top 10% of families.While the value of the top 10%’s biz-equity dropped sharply in the global financial crisis of 2008-09, it has since recovered and reached new heights, while the value of the biz equity held by the bottom 90% has flat lined.
https://i0.wp.com/www.oftwominds.com/photos2017/biz-equity10-17b.png

Assets either produce income (i.e. they are productive assets) or they don’t (i.e. they are unproductive assets). Businesses either produce net income or they become insolvent and close down. Family homes typically don’t produce any income (unless the owners rent out rooms), and whatever income life insurance and retirement funds produce is unavailable.

This is the key difference between financial-elite wealth and middle class wealth: the majority of middle class wealth is locked up in unproductive assets or assets that only become available upon retirement or death.

The income flowing to family-owned businesses can be spent, of course, but it can also be reinvested, piling up additional income streams that then generate even more income to reinvest.

No wonder wealth is increasingly concentrated in the hands of the top 5%: those who own productive assets have the means to acquire more productive assets because they own income streams they can direct and use in the here and now without all the limitations imposed on the primary assets held by the middle class.

By Charles Hugh Smith | Of Two Minds

Morgan Stanley: “Client Cash Is At Its Lowest Level” As Institutions Dump Stocks To Retail

The “cash on the sidelines” myth is officially dead.

Recall that at the end of July, we reported that in its Q2 earnings results, Schwab announced that after years of avoiding equities, clients of the retail brokerage opened the highest number of brokerage accounts in the first half of 2017 since 2000. This is what Schwab said on its Q2 conference call:

New accounts are at levels we have not seen since the Internet boom of the late 1990s, up 34% over the first half of last year. But maybe more important for the long-term growth of the organization is not so much new accounts, but new-to-firm households, and our new-to-firm retail households were up 50% over that same period from 2016.

In total, Schwab clients opened over 350,000 new brokerage accounts during the quarter, with the year-to-date total reaching 719,000, marking the biggest first-half increase in 17 years. Total client assets rose 16% to $3.04 trillion. Perhaps more ominously to the sustainability of the market’s melt up, Schwab also adds that the net cash level among its clients has only been lower once since the depths of the financial crisis in Q1 2009:

Now, it’s clear that clients are highly engaged in the markets, we have cash being aggressively invested into the equity market, as the market has climbed. By the end of the second quarter, cash levels for our clients had fallen to about 11.5% of assets overall, now, that’s a level that we’ve only seen one time since the market began its recovery in the spring of 2009.

While some of this newfound euphoria may have been due to Schwab’s recent aggressive cost-cutting strategy, it is safe to say that the wholesale influx of new clients, coupled with the euphoria-like allocation of cash into stocks, means that between ETFs and other passive forms of investing, as well as on a discretionary basis, US retail investors are now the most excited to own stocks since the financial crisis.  In a confirmation that retail investors had thrown in the towel on prudence, according to a quarterly investment survey from E*Trade, nearly a third of millennial investors were planning to move out of cash and into new positions in the second half of 2017. By comparison, only 19% of Generation X investors (aged 35-54) were planning such a change to their portfolio, while 9% of investors above the age of 55 had plans to buy in.

Furthermore, according to a June survey from Legg Mason, nearly 80% of millennial investors plan to take on more risk this year, with 66% of them expressing an interest in equities. About 45% plan to take on “much more risk” in their portfolios.

In short, retail investors – certainly those on the low end which relies on commodity brokerages to invest – are going “all in.”

This was also confirmed by the recent UMichigan Consumer Survey, according to which surveyed households said there has – quite literally – never been a better time to buy stocks.

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/10/14/mich%20stock%20prices.jpg

What about the higher net worth segment? For the answer we go to this morning’s Morgan Stanley earnings call, where this exchange was particularly notable:

Question: Hey good morning. Maybe just on the Wealth Management side, you guys had very good growth, sequential growth in deposits. There’s been some discussion in the industry about kind of a pricing pressure. Can you discuss where you saw the positive rates in Wealth Management business and how you’re able to track, I think, about $10 billion sequentially on deposit franchise?

Answer:  Sure. I think, as you recall, we’ve been talking about our deposit deployment strategy for quite sometime, and we’ve been investing excess liquidity into our loan product over the last several years. In the beginning of the year, we told you that, that trend would come to an end. We did see that this year. It happened a bit sooner than we anticipated as we saw more cash go into the markets, particularly the equity markets, as those markets rose around the world. And we’ve seen cash in our clients’ accounts at its lowest level.

In other words, when it comes to retail investors – either on the low, or high net worth side – everyone is now either all in stocks or aggressively trying to get there.

Which reminds us of an article we wrote early this year, in which JPM noted that “both institutions and hedge funds are using the rally to sell to retail.Incidentally, the latest BofA client report confirmed that while retail investors scramble into stocks, institutions continue to sell. To wit:

Equity euphoria continues to remain absent based on BofAML client flows. Last week, during which the S&P 500 climbed 0.2% to yet another new high, BofAML clients were net sellers of US equities for the fourth consecutive week. Large net sales of single stocks offset small net buys of ETFs, leading to overall net sales of $1.7bn. Net sales were led by institutional clients, who have sold US equities for the last eight weeks; hedge funds were also (small) net sellers for the sixth straight week. Private clients were net buyers, which has been the case in four of the last five weeks, but with buying almost entirely via ETFs. Clients sold stocks across all three size segments last week.”

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/10/14/bofa%20client%20flow%20oct%202017.jpg

The best way to visualize what BofA clients, and especially institutions, have been doing in 2017 is the following chart:

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/10/14/inst%20flows.jpg

Meanwhile, a familiar buyer has returned: “buybacks by corporate clients picked up as US earnings season kicked off, with Financials buybacks continuing to dominate this flow.”

And just like during the peak of the last bubble, retail is once again becoming the last bagholder; now it is only a question of how long before the rug is pulled out. For now, however, enjoy the Dow 23,000.

Source: ZeroHedge

The Crash Of ’87 Remembered: “It Was Clear The Acapulco Cliff-Dive Was On For Monday”

“The markets in a panic are like a country during a coup, and seen in retrospect that is how they were that day,” wrote a young Salomon bond salesmen named Michael Lewis, of the chaos he witnessed. “One small group of people with its old, established way of looking at the world is hustled from its seat of power.”

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As Bloomberg details, most of the people willing to share their memories count themselves as winners who seized the moment as an opportunity not only to make money, but also to insert themselves in the new financial order – Paul Tudor Jones, Stanley Druckenmiller, Nassim Nicholas Taleb. Their story, and the story of Black Monday, is the birth story of modern financial markets – a wild ride of shock, angst, and, for some, glory.

In the weeks before Black Monday, a few investors spotted patterns that gave them pause.

The most confident were Paul Tudor Jones and Peter Borish, young partners at a small hedge fund in Lower Manhattan. In a prescient Sept. 24 note to investors, Jones even signed off with “caveat emptor” – buyer beware.

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PETER BORISH, head of research at Tudor Investment Corp. and Paul Tudor Jones’ No. 2:

We were tracking exponential moves in the equity market. The main one was the equity move in the 1920s, and the market in 1987 looked almost identical. The week before Black Monday, the technical and fundamentals aligned, and so we thought Monday would be the day.

ALLAN ROGERS, head of government bond trading at Bankers Trust Co.:

In the first half of 1987, the bond and stock markets diverged for seven months. Bonds went straight down, equities straight up. These sorts of divergences always get my attention. In August and September, I persuaded management to cover all of our hedged short positions in sovereign fixed income, and we built up a long position in notes and bonds.

MICHAEL LEWIS, bond salesman at Salomon Brothers:

A week or two before Black Monday, Salomon announced job cuts. They chopped a few departments, including the municipal and money-market groups. It felt ill-considered and rushed. Nobody completely understood why.

ROGERS:

Nippon Tel, the Japanese telephone company, was going to do an IPO in mid-August. I thought that would pull money from other segments of the equity market. In early October there was another IPO, which I think was a very large British company. These IPOs were a big deal to me, because the main thing I pay attention to is changes in global money flow.

BORISH:

Many people thought that Japan would crash before the U.S., because Japan was more extended on fundamentals; they would be long U.S. and short Japan. We looked at the 1920s, and it was Britain, the older bull market, that went first. So we said, “No, the old goes first, because people have more hope on the new.” By the way, Japan didn’t go until 1989.

STANLEY DRUCKENMILLER, founder of Duquesne Capital Management, who was also running several funds for Jack Dreyfus’s mutual fund company:

On Friday I placed a bet that U.S. stocks would rally, on the thinking that the week’s 9 percent decline in the Dow had been overdone. Over the weekend, after studying trading charts and talking to Jack, I knew I was wrong.

While Druckenmiller considered his options that weekend, U.S. Secretary of the Treasury James Baker III told his German counterparts: “Either inflate the mark or we’ll devalue the dollar.”

PAUL TUDOR JONES, founder of Tudor Investment Corp.:

When Baker threatened a devaluation of the dollar over the weekend, it was apparent the Acapulco cliff dive was on for Monday.

JIM LEITNER, Bankers Trust FX trader:

During the day, the noise level in the trading room got quite ferocious. The chairman of the bank, who at one point had been a trader, walked onto the trading floor and stood behind my chair, which was a first.

LEWIS:

I remember walking from the 41st floor down to the 40th floor. The 41st floor was this cathedral of bonds, and then you walked down to 40 and were in this cramped, low-ceiled, dark place that was the equity department, with a lot of guys who were named Vinny and Tommy and Donny. They’d been around forever, and they had Brylcreem in their hair and big guts and they smoked too much and they were lovable. And they were all going through this visceral animal experience. People were screaming and going absolutely crazy in ways I’d never seen before. It was the first time in my career at Salomon Brothers where I was actually interested in standing beside the equity department and watching these people do their job.

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/15/20171016_19872.jpg

JONES:

There was red everywhere, and all I could think about was how cornered the portfolio insurers were.

HOWARD MARKS, head of the high?yield bond department at Trust Company of the West:

Portfolio insurance convinced people that they could somehow own more stocks without increased risk, which is fanciful. And like all silver bullets, it didn’t work.

HARLEY BASSMAN, mortgage trader at Merrill Lynch & Co.:

As a mortgage trader, I was watching stocks in what seemed like an out-of-body experience—and yes, I was thinking 1929.

JONES:

The friends and counterparties I was speaking with were gripped with complete fear.

BLAIR HULL, managing partner of Hull Trading Co., a Chicago-based market-making firm specializing in options:

The 1987 crash is the only time I’ve ever seen the market makers scared to death.

CHANOS:

I canceled my meetings and went to a friend’s office. The few times I tried to enter orders, I couldn’t get through. The structure of the market was dependent on these technologies that were voluntary. I was trying to cover my shorts and a buyer is what they were looking for, but people were not picking up the phones. So basically I sat on my hands, which turned out to be the right thing to do.

I check into my hotel, and there’s all kinds of security. I asked what was going on: Alan Greenspan and Margaret Thatcher were both checked in as guests. I get to my room and I’m trying to call New York, but I can’t get through. I had to go to another friend’s office, because the Fed chief and his staff had basically subverted the hotel switchboard.

ORISH:

We were concerned about a lot of the counterparties and their liquidity, so the best place to be was in fixed-income futures, because if worse came to worst, we could always take delivery of the bonds.

SHIELDS:

Greenspan lands in Dallas, and the story is that when he got off the plane he asked where the market ended up. The response was “Five oh eight” and Greenspan replied: “Oh, good, it had a nice rally.” He thought it was 5.08. He had only been in office since August, so I think he was a bit of a deer in the headlights.

ROGERS:

I was so scared that I got $10,000 out of the bank, took it home, and stored it in the rafters. When I moved out, I forgot that I’d stashed the money. I think it’s still there.

JONES:

I was feeling guilty about our success. I thought we were going into the Great Depression.

BORISH:

I had 1929 on my mind. Paul and I were concerned about our friends and people who were struggling that day.

*  *  *

And here is Paul Tudor Jones’ infamous live interview as the dust settled…

So what was learned from the Crash of ’87? Not much in my opinion.

As John S Lyons summed up perfectly, for starters, the laws of human nature have yet to be repealed. Additionally, high frequency trading is today’s version of program trading. Only now, instead of transmitting an order through a stock broker, who sends it to a floor broker, who give it to a trader, who takes it to a specialist at the post where the stock in question is trading, high frequency computer generated orders are automatically entered at the behest of complex algorithms and are executed and reported back in milliseconds. Witness the May of 2010 “flash crash” where the market lost about 1000 points and then mostly recovered all within 15 minutes.

In summary, risk cannot be removed from the stock market. The Crash of ’87 affected everyone. Crashes will occur again. Wear a seat belt!

*  *  *

Could never happen again …

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/10/12/20171010_eod10.jpg

Source: ZeroHedge

 

It’s Over For Tech Start-ups

It’s over for tech start-ups — just look at today’s earnings reports

  • Blue Apron and Snap had disappointing earnings reports on Thursday.
  • Both companies have been targeted by one of the Big Five — Blue Apron by Amazon, Snap by Facebook.
  • Start-ups and investors should look to the margins, or prepare to face the tech giants.

Two newly public tech companies reported earnings on Thursday, and both were ugly for their investors.

Meal-kit preparer Blue Apron missed earnings expectations by a wide margin in its first earnings report since going public in late June. It reported a 47 cent per share loss instead of the expected 30 cent loss, blaming high customer acquisition costs and staffing a new distribution plant in New Jersey.

The stock dropped 17 percent and is now trading at about half its IPO price.

In its second earnings report as a public company, Snap disappointed Wall Street with its user growth numbers for the second consecutive time and fell short on earnings.

The stock dropped about 17 percent after hours. It’s now off about 33 percent from its IPO price.

Blue Apron and Snap have a lot in common. They’re consumer focused. They have devoted followers. They’re losing money hand over fist.

And both were targeted directly and aggressively by two of tech’s biggest companies.

Between the time Blue Apron filed for its intial public offering, on June 1, and when it went public, on June 28, Amazon announced that it was buying Whole Foods. The speculation that Amazon would use the purchase to improve its home delivery service sent demand for Blue Apron’s IPO down, and the company slashed its IPO range from $15-$17 down to $10-$11.

Then, reports emerged that Amazon had already launched a meal kit, which was on sale in Seattle.

In the case of Snap, it was Facebook. Mark Zuckerberg and company had been fighting to blunt Snap’s growth ever since its co-founder, Evan Spiegel, rejected his buyout offer in 2013. It began to see progress with the launch of Instagram Stories in August 2016, which duplicated Snapchat’s own Stories feature. Over the next year, it gradually copied nearly every major Snapchat feature in its own products.

Less than a year after launch, Instagram Stories has 250 million daily users and is growing at a rate of around 50 million every three months. Snap has 173 million and grew only 7 million during the quarter.

The experiences of these companies are discouraging for start-up investors and founders who dream of someday creating an Amazon or Facebook of their own.

The five big tech companies — Alphabet (Google), Apple, Amazon, Facebook, and Microsoft — have attained unprecedented wealth and power, with trillions of dollars in combined market value and tens of billions of dollars in free cash flow.

They also need to satisfy Wall Street’s appetite for growth, which means they have to get new customers or earn more money from existing customers, quarter after quarter, year after year. One way to do that is to expand into new markets.

https://sc.cnbcfm.com/applications/cnbc.com/resources/files/2017/08/10/SNAP_chart.jpeg

They’ll gladly outspend their smaller competitors on product development and hiring while undercutting them on price.

That doesn’t mean curtains for Blue Apron or Snap. Both companies could come up with a leapfrog innovation that catapults them (for a while). Young nimble companies overtake older and slower companies all the time — that’s how the Big Five started. Microsoft disrupted IBM. Google and Apple disrupted Microsoft. And so on.

But companies and tech investors need to be wise about the risks of betting on upstarts that are going up against these giants.

If you hope to make money through online advertising, you’ll be challenging Google and Facebook. If you’re doing anything in e-commerce, logistics or delivery, you’ll run into Amazon. In cloud computing, get ready to see Amazon, Microsoft and Google. If you’re building hardware, Apple likely stands in the way.

It might be better to focus on the niches that the Big Five don’t yet dominate. Their health-care efforts are still in early stages, and none is playing heavily in financial tech, drones or robotics. Microsoft’s power in enterprise software is blunted to some degree by other old giants like IBM, Oracle and SAP, plus newer players like Salesforce.

It’s always been hard to build a successful start-up. With the increasing dominance of the Big Five, it’s harder than ever.

By Matt Rosoff | CNBC

 

Greenspan Nervous About Bond Bubble

https://tse4.mm.bing.net/th?id=OIP.y37-EDY0aF-MRQCrDknuwQERDk&w=256&h=200&c=7&qlt=90&o=4&pid=1.7Equity bears hunting for excess in the stock market might be better off worrying about bond prices, Alan Greenspan says. That’s where the actual bubble is, and when it pops, it’ll be bad for everyone.

“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Federal Reserve chairman said in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

While the consensus of Wall Street forecasters is still for low rates to persist, Greenspan isn’t alone in warning they will break higher quickly as the era of global central-bank monetary accommodation ends. Deutsche Bank AG’s Binky Chadha says real Treasury yields sit far below where actual growth levels suggest they should be. Tom Porcelli, chief U.S. economist at RBC Capital Markets, says it’s only a matter of time before inflationary pressures hit the bond market.

“The real problem is that when the bond-market bubble collapses, long-term interest rates will rise,” Greenspan said. “We are moving into a different phase of the economy — to a stagflation not seen since the 1970s. That is not good for asset prices.”

Stocks, in particular, will suffer with bonds, as surging real interest rates will challenge one of the few remaining valuation cases that looks more gently upon U.S. equity prices, Greenspan argues. While hardly universally accepted, the theory underpinning his view, known as the Fed Model, holds that as long as bonds are rallying faster than stocks, investors are justified in sticking with the less-inflated asset.

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Right now, the model shows U.S. stocks at one of the most compelling levels ever relative to bonds. Using Greenspan’s reference of an inflation-adjusted measure of bond yields, the gap between the S&P 500’s earnings yield of 4.7 percent and the 10-year yield of 0.47 percent is 21 percent higher than the 20-year average. That justifies records in major equity benchmarks and P/E ratios near the highest since the financial crisis.

If rates start rising quickly, investors would be advised to abandon stocks apace, Greenspan’s argument holds. Goldman Sachs Group Inc. Chief Economist David Kostin names the threat of rising inflation as one reason he isn’t joining Wall Street bulls in upping year-end estimates for the S&P 500.

While persistently low inflation would imply a fair value of 2,650 on the benchmark gauge, the more likely case is a narrowing of the gap between earnings and bond yields, Kostin says. He is sticking to his estimate that the index will finish the year at 2,400, implying a drop of about 3 percent from current levels.

That’s no slam dunk, as stocks have proven resilient to bond routs so far in the eight-year bull market. While the 10-year Treasury yield has peaked above 3 percent just once in the past six years, sudden spikes in yields in 2013 and after the 2016 election didn’t slow stocks from their grind higher.

Those shocks to the bond market proved short-lived, though, as tepid U.S. growth combined with low inflation to keep real and nominal long-term yields historically low.

That era could end soon, with the Fed widely expected to announce plans for unwinding its $4.5 trillion balance sheet and central banks around the world talking about scaling back stimulus.

“The biggest mispricing in our view across asset classes is government bonds,’’ Deutsche Bank’s Chadha said in an interview. “We should start to see inflation move up in the second half of the year.”

By Oliver Renick and Liz McCormick | Bloomberg

Nasdaq Triggers Market-Wide Circuit-Breaker As AMZN “Crashes” 87% After-Hours

Nasdaq has issued a market-wide trading halt amid what appears to be a “glitch” that sent a number of the largest Nasdaq-listed stocks to crash or spike to exactly $123.47 per share.

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This move crashed the value of companies including Amazon and Apple, sparked chaos in Microsoft, while sending Zynga rocketing up more than 3000%.

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On the eve of the US Independence Day holiday and in after-hours trading, The FT reports that market data show that companies such as Apple, Amazon, Microsoft, eBay and Zynga were repriced at $123.47.

The Bloomberg data terminal listed either “market wide circuit breaker halt — level 2” or “volatility trading pause” on all the stocks affected.

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The glitch did not affect any market trading, including after hours.

The mysterious reset to $123.47 per share meant that Amazon in theory saw its share price marked down 87.2 per cent…

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while shares in Apple fell 14.3 per cent…

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But Nasdaq-listed Microsoft had jumped 79.1 per cent — which would value the company at nearly $1tn…

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As Bloomberg reports, the apparent swings triggered trading halts in some securities, according to automatically generated messages. The halts are a mechanism exchanges use to limit the impact of particularly volatile sessions. A system status alert on Nasdaq’s website said that systems were operating normally at 8:23 p.m. ET. After-market hours on Nasdaq typically last from 4 p.m. to 8:00 p.m.

In a statement, Nasdaq said the glitch was related to “improper use of test data” sent out to third party data providers, and said it was working to “ensure a prompt resolution of this matter”. In cases of any clearly erroneous data, trades made are cancelled.

As a reminder this is not the first time ‘glitches’ have occurred on holidays… remember gold on Thanksgiving 2014.

Source: ZeroHedge