I wrote on Wednesday evening late night that it didn’t matter what Janet Yellen was going to say especially given the ramp up into the non-event. We got a text book reversal gravestone doji candle and then follow through on Friday. I expect an inside day with perhaps a small rally day on Monday. This will make the bulls feel good and the bears who shorted the hole on Friday throw-up. Monday will be noise so STAY FOCUSED AS THE PRIMARY TREND IS DOWN!
There was much gnashing of the teeth by the financial glitterati about Yellen’s performance during the press conference on Thursday. Many said she sounded incoherent and exuded a lack of confidence. Perhaps…but when has she not sounded like the Grand Equivocator? I have been listening to this woman speak in tongues for months and it has always been nonsensical kaka. So why now does the market choose to sell off? Again we are in a Bear Market. My point is this: turn off the TV and stop listening to economists, strategists and especially CNBC commentators. We are flipping to a point in the cycle where the pundits will be searching for reasons why the market is selling off and analyzing them ad nauseam. It just doesn’t matter what they say.
Why are we in a bear market? Well the bottom line is this: The Fed and other CB’s have provided free money to speculators that have levered up to buy just about everything including stocks. The rise in the markets over the last 7 years was jump started by the CBs but was aided and abetted by willing market participants who over time all jumped on board and followed the trend with ever increasing amounts of leverage. Leverage and cheap money are the keys for the Bull market and it is also the fuel for the Bear market. We have seen the emerging markets, commodities and now credit roll over as levered speculators are taking on water. The last man standing was the U.S. stock market and that has begun to lilt as of August. Why are we rolling? Because everything is a cycle and eventually there are no more buyers. We have reached peak margin debt. The truth is there are very few bears short at the top as they have been shamed into humiliation or lost all their money. Once the buyers are exhausted price then tries to seek an equilibrium. As it does so the last folks in on margin get taken out first so that is why the down is always quicker than on the way up. As more margin calls begin the masses are eventually awakened to the issue at hand and they begin to liquidate and some even flip short. We are at an early stage when we really have not even begun to scratch the surface of margin calls yet. Once this cycle begins the Fed and CB’s are powerless to stop it (hint: it has already begun). The most powerful man in finance right now is the margin clerk in the back office. He cares not a whit about what folks on TV are saying or what the Fed might do. Once this cycle begins it is hard to stop if not impossible. Usually it starts off slowly and then turns into a waterfall. In August you got a taste of what is to come. Of course we will not go down in a straight line so one must be flexible and take profits on extreme moves down expecting a bear market rally. However, because of the insane amounts of leverage in the system the chances of a 1987 and 1929 style crash are extremely high so caution is warranted.
The rally we just had was a bear market rally and likely ended on Thursday afternoon. I expect the speed of the downtrend to reassert itself next week. The rally we just had is historically called the second chance rally and is usually the launch point of a crash. I am not calling for a crash but if one were to start then this is the set up where I would be looking for it to begin. Like I said previously, Monday should be an inside day but if we should gather steam from Tuesday on to the downside and start taking out key support I would become extremely cautious. Take a look at the second derivative of margin debt on this chart below. Without margin debt accelerating I see this market going much much lower over time.
I should say that while I am not publicly calling for a crash I am positioned for one. Remember talk is cheap and positioning is all that matters. How is that for an enigmatic statement?
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Your market statements are always thought provoking, BlueStar. Thanks for taking the time to post.
Bluestar, stumbled across your website when I ran a search for correlations between hi-yield bond and stock markets. One of your earlier posts was about this. Lots of smart people out there forecasting doom these days but your blog stands out for its thoughtfulness. Good stuff man!
While I tend to think that a market crash is an extreme outlier event with a very very minute chance of occurring and predicting one is usually a fools errand, some of the stuff I see is a real concern.
Here is a chart from Dhort.com. When looking at free credit balances, I don’t see much room to withstand a drawdown http://www.advisorperspectives.com/dshort/charts/markets/nyse-margin-debt.html?NYSE-investor-credit-SPX-since-1980.gif
Then you read this from Ameritrade “Margin loans are at record levels and client cash as a percentage of total client cash remains near historic lows. …….clients are increasingly turning to trading derivatives which were a record 44% of trades per day in the quarter.” This strikes me as levering up on your leverage with no credit to spare. Then you add to that the market structure itself with the occasional vanishing liquidity and this looks to be a potential prescription for disaster. Maybe a crash-like event is no longer that much of an outlier.
I read these stats, yet no one I know is levered and many have raised cash to 50%+ over the past few months. Maybe individuals don’t matter this time? Anyway, I’m net short here but concerned that I have too much company..
I’m with PURDY here.
Who is levered.
Individuals aren’t in the market
Hedge funds have nothing but money.
Banks and insurance -ditto.
Companiies borrowing
to fund buybacks -maybe.
Purdey and Gorby,
I heard this argument before we dove off a cliff in august. In a bear market the primary trend is down. Stay focused. You are talking bull market nonsense. All of twitters bottoming indicators are bull market bottom indicators. Throw them away. Just like bears got slaughtered coming out of the 2009 low. Their indicators told them we were about to roll. stick with the trend.
Thanks blue
Blue….love your thoughts and read your blog everyday! You gave us a great short idea around June 1st (CDRB) was trading around $36 and currently is around $9….Awesome!!!
Anymore ideas like this or similar you would like to short into strength?
Thanks!!
golflover123,
throw a dart. The whole market is cooked. Look at NUS.
Thanks Blue….Great call on CDRB!!
Futures are currently down 10 handles at 9:30 ET. If this holds and we gap down and stay down tomorrow then its on.
The government will shut down.
http://www.breitbart.com/big-government/2015/09/19/carly-fiorina-pac-video-proves-planned-parenthood-legs-kicking-heart-beating-fetus-true/
Look at this video and tell me republicans won’t demand planned parenthood be defunded or no debt ceiling deal? The more attention it brings, the more likely a shutdown over political differences.
Forget about the fact that planned parenthood is a part of other functions, in the eyes of the republican voters it won’t matter and the republican knows that they won’t have a chance at reelection if planned parenthood isn’t shut down. And democrats probably aren’t going to budge either because time an opportunity to cast the republicans as evil people who don’t care about people who need welfare and foodstamps or woman’s rights.
Self interest at work…. So government shutdown is going to happen.
prepare
I’m just interested in 1 thing , that you think we’re in the beginning of this , noone really aware etc.. but in the meanwhile all of my neighborhood is all alert and aware
When I first read your informative blog
I thought that Margin debt was long only.
It just occurred to me that most short
sellers do so on margin.So what if
most of that huge margin debt
belongs to the shorts .If the American
economy is as strong as I think it is,
My oh My what a short squeeze.
Finger licking good.
XBI. Don’t look now. I’m in the October 75 puts.
price action is so uncanny bear
bood,
after seven years of a bull market its not the traders that are the tell its the big institutions. they are up to their eyeballs long.
gorby,
you can take a horse to water but you can’t make it drink.
fryguy,
everyone blaming hillary. that is nonsense they were ready to roll. just needed a push. welcome on board.
Goverment shutdown,
and shutting down the government is a problem how?
@blue so you think institutionals are still all in long and unaware here ?
don’t know if – beat hypotesis – we melt down on media apocalypse ..or chop downside ..for ..months .. an even owrse environment
*bear
bood,
absolutely. i talked to a friend at a large institution who agrees with me but he dares not speak my thesis out loud. I asked if his peers are aware of what is happening. He said they are clueless. you see as a money manager it has not paid to sell. so they will be late because they still believe in CBs. You all need to realize something. I am the tip of the spear. You are privy to the thoughts of a madman who was early but will be proven right in a big way.
Blue –
Regarding the XBI short, do you have a target? I let go of a few today just to lock in something. Still holding most of it. Put a sticky note on my monitor saying HOLD in big red letters. Not easy to be short.
Agree 100%, the selling is not because of Hilary’s tweet.
lol @selling because of hilary ..financial media or who else must be in tough times to prop this conclusion
Blue
Don,t think for a moment that I
am dissing your Ideas.Your the only
guy around making any dough.
I’m not sure exactly what Jim Rickards angle is but he told a good story:
You’re in the theater. A few people get up & slowly make their way to the door. A few more head leisurely for the exit; then more, and more.
At what point do you think, what the hell’s going on?…
When does the stampede start?
We know for a fact that the roof is burning; the only question is when does the crowd figure it out.
BlueStar is the guy who left 10 mins ago & is already halfway home.
Thanks for posting Blue.
The people who run the planet will be highly motivated to use all the tools they have, including CBs and perhaps even fiscal stimulus, in order to keep the scheme going through Nov ’17 elections.
Can’t have a Bernie, Trump, or god forbid, anyone with the last name “Paul” get in their way. Owned pols only.for congress and the white house. And there is too much interest already in “outsiders”.
Only question is: Will market forces overwhelm their efforts? I’m short but I don’t underestimate the power of the dark side. Maybe they get another year or so before the big adjustment – – it’ll be interesting.
BTW,isn’t the tip the part of the spear that gets buried in red?
Purdy,
You Pig lover you. What if collapse is exactly what TPTB wanted? Why now? The stage has been set and they are ready for the magic show to begin. Or I am talking out my ass. Or I am part of the cabal and I have been assigned to warn the masses and give you all a chance. After all us illuminated ones according to our code must tell the plebs what we are going to do before we do it. 😉
“…because in secret there is a mighty organisation of the
governing class and mightful ones as well as many of their obedient lackeys emerging from amongst your humanity,
who are creating a secret order of darkness with their own evil laws and ordinances, who are bent on hatred for the
poor and weak and against the economically imprisoned and all normal citizens. And it is their desire to seize ever
more might, more money and entire mastery over the whole earth and your humanity for themselves, therefore it is
spreading their evil supremacy over the world, supported by its obedient vassals of all kinds who are greedy for
blood as well as profit. Even the powerful ones of the economy are feeling the might and obeying the evil laws of
the dark order which is spreading its dangerous and fatal poison of hatred everywhere, into everything and against
everyone who does not share the same opinion as the dark might.”
Juice
I thought Cheney was retired.
BlueStar,
Thanks for the warning to the ‘useless eaters’. We appreciate it. It’s possible that when the markets cascade, some other ‘events’ will happen to happen to distract the masses. Perhaps ISIS, Russia & China will team up to hack our infrastructure because they hate our freedoms. No worries, the i-patriot Act will be signed into law. Just kidding (-:
Juice,
You are creeping me out. I was just joking.
gorby,
I manage the Cheney estate.
“What if collapse is exactly what TPTB wanted? Why now? The stage has been set and they are ready for the magic show to begin”
LOL, I’ve considered that possibility too:)
Congrats on you short biotech..
Blue
LOL
anecdotal,
yes. just performing my 33 degree duties.
Bluestar,
In regards to margin, one thing NOBODY is talking about is how all of the wirehouses have been pumping SBL (Securities Based Lending). Almost everyone’s book at a major wealth mgmnt shop is collateralized. Money cant be used to purchase more securities. They were paying ridiculous bonus payment out to reps hitting the goals of money lent.
That’s all well an good when market is roaring higher but no bueno when that turns the other way and goes out of balance.
What are your thoughts…. I think it really effects the velocity of these down days
TommySays,
I think I understand what you are saying. Are you talking about if JPM Private bank has a client worth $100 million and they lend him $50 million against his portfolio? If that is what you are saying then yes I agree. This is likely to be a rich man’s panic.
Yes, that’s exactly what I am referring too.
Clients put their portfolio up as collateral and they use the money on houses, property, cash flow, cars, yachts, whatever etc.
To replace drop in brokerage revenue they went HARD in pushing this on everyone. The whole “Private Bank” business model revolves on this.
Nobody every speaks a word of it.
TommySays,
Yes I agree. I assumed everyone knew. Yes folks listen to Tommy. The margin is not in your neighbors margin account its with the guy who sold his business for 200 million and has it at JPM then they lend him $100 million to go play with it because they tell him that the Fed has our back. Why would seemingly smart rich people do this? Because of Greed.
Blue – how much trading around these rallies and selloffs are you doing? Do you have a so-called ‘core’ short which you’re basically leaving untouched for the Big Kahuna sell-off, but you also set aside a certain amount for trading the squiggles for entertainment purposes?
TommySays ,
Thanks for that. The high margins
make a little more sense now
as an insider at a wm, i can say that yes it does seem the securities based lending is desirable for the firm.
Are portfolio lines included in margin debt data? I always assumed portfolio lines are not included in the data.
thegametheorist,
as an “industry insider” my perspective… I say this…
Seem desirable ? More like a gravy train. Reps are being paid 50% bonus on their yearly GDC to hit the loan targets . Firms are charging folks PRIME on $5-9mm. Thats a lot of beans
These things go out of balance, it is the reason you see this really liquid, dividend paying names and MLPS getting liquidated like the firms balance sheet is toxic.
A lot of times they don’t even alert to maintain the loan balance. They just liquidate the securities.
BillieJones,
I don’t know if it is included in the margin debt data. I would lean on the side of saying yes only because it is orchestrated just like margin is as far as how a BD treats it.
They refer to it as Non-Purpose and the money is prohibited for use of purchasing more securities
difference in loan rates varies around 100bps
So Blue, how you spending your last night on earth? I’m taking my son to a baseball game.
Dan,
I live on Maui. It is Paradise therefore I am immortal and the End of the World is a non event for me.
If the “smart money” is the bond markets, is selling bonds more intelligent (as general philosophy) if you’re going to be early than stocks?
In hindsight, it’s also probably also more intelligent to sell the peripheral economies like the emerging markets and frontier markets if you’re going to be a bear early too, no?
EEM hasn’t even taken out the 2007 highs yet let alone the 2011 highs. FRN hasn’t been around long enough to really establish a good 2007 high but it has been in decline since late 2010.
What do you make of today? Europe got trashed but US pretty solid by comparison (and a daily hammer candle on SPY)?
There are no bears left, contrary to popular belief. “Smart” money is up to their eyeballs LONG this market. Anecdotal bullshit stories about this guy is short or this guy is long don’t matter. The vast majority of “smart” money is long here expecting to be rewarded once again for being what they think is “contrarian” into a market decline. Guess what, being long right here, right now is NOT contrarian.
Agreed tommy, though I’m not familiar with those types of compensation incentives personally. It is definitely an industry wide trend
Blue. We stay the course? I took a short of though carrying a position from much higher.
Superpostron.
I am not following? XBI Yes I am still there.
Monte Cristo.
Doji. Maybe rally a day or 2. Maybe not. we are in a bear market. Lower ultimately.
Juice,
I have a swing high short from May. levered. have not touched.
Blue, if you have access to realvisiontv.com you want to watch Burbank’s think piece from 9/21
Hello Blue.
Whilst I admire your conviction that we are in a bear market, would it not be true that failure to take out last October’s lows leaves matters uncertain in that regard.
I’ve been reading your thoughts over the past year, and whilst I agree the bubble bursts eventually, you have been similarly bearish for 12 months.
Meanwhile, I’m certain gold is going to at least $30k an ounce in a repeat of the 70s on steroids.
Good luck all.
stocks down, bonds down is your outlook, right? or yields going to go sharply negative and we’re going to follow roadmap of Japan?
GM,
We have been topping for a year. Dow took out October lows as did many other indexes. I am not going to argue with you we are in a bear market. I would say the bubble is bursting. Look around the world.
lol
Sovereign debt crisis coming. I think all bond yields rise. We will see.
09/23 ticking down to end of world….
http://www.valuewalk.com/2015/09/u-s-to-station-nuclear-weapons-in-germany-against-russia-report/
this is bullish … NOT! … wtf .. complete insanity
923 Alert,
I am immortal since I live on Paradise. End Of World is meaningless to me.
Love Maui! West Maui is paradise.
Haven’t been to Maui in years. I was glad to hear the Charley’s in Paia recovered from the fire. Love that place.
Hi Blue. New in here. Lotsa rumors that Deutsche Bank is going down soon. Any insights on this?