Is This All You Got Bulls?

I said about a week ago the market direction would be resolved.  I would not exactly call this a break out just yet.  Come on bulls! The bears have been put on ice.  Only 14% of us left and now your short squeeze fuel is gone.  What will carry the market higher? Fundamentals? Unless the economy is about to achieve lift off and all that nasty deflation we were worried about two weeks ago has magically disappeared I guess the only thesis left is: The Fed Has Your Back.  So essentially if you are a bull and don’t take profits here you are expecting multiple expansion on what looks like overall numbers coming down.  I wish you luck.  Perhaps you will be right.

I expect a pull back soon.  If we get confirmation I will be shooting energy and financial stocks in the back.

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I predicted at the beginning the year that we would have bone crushing volatility.  That has turned out to be the case.  For example the IWM has had six 5% moves up and down since the start of 2015 for a total return of 30% if you traded perfectly both long and short.  Of course no one has done that so most of us have been frustrated.

We have arrived at the moment of truth as this market is coiled and will soon break out of its range.  The next move will be a quick 10% move either up or down and will likely set the tone for the next several months.  The battle is between those who believe it is business as usual and that the CB’s have our back or you are a bear and the CB’s are about to lose control.  The bulls have to be at peace with the fact that currencies and commodities are seeing 6-10 sigma volatility and that the increased volatility has not caused systemic dislocations both financially and economically.  The Bears have to be at peace with fact that they have been utterly wrong for the last 6 years and do they feel lucky this time.  Everyone talks about these bears.  Where are they? At tops there are no more buyers as the longs have run out of ammo and the bears have run out of capital.  Nothing but air below.  Is it time for the blow off top or time for a greater than 10% correction? Let me know your thoughts.  Do you feel lucky…well do you?  Seriously, I wish both bears and bulls good luck over the next few weeks.

 

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I thought this Greek election issue would have been on its way to irrelevancy by now for global markets.  Usually a party promises its people one thing and then once in power they pivot towards the establishment.  Greek bond spreads have done nothing but widen this week because the New Greek Finance Minister, Yanis Varoufakis, is talking tough.  At first I thought it was nonsense talk initially but as the Greek bonds imploded I investigated further.  Apparently this Yanis is a very serious man as written in the FT:

“Greece will no longer co-operate with the “troika” of international lenders that has overseen its four-year bailout programme, the country’s finance minister said.

Yanis Varoufakis also said Greece would not accept an extension of its EU bailout, which expires at the end of February, and without which Greek banks could be shut off from European Central Bank funding.

“This position enabled us to win the trust of the Greek people,” Mr Varoufakis said during a joint news conference with Jeroen Dijsselbloem, chairman of the eurogroup of eurozone finance ministers, who was visiting Athens for the first time since a leftwing government came to power this week.”

Below is a BBC Interview with Yanis.  The first 3 minutes set the BBC narrative so skip to minute 3 to hear Yanis speak.

http://youtu.be/BiIO4YciewU

Yanis is an academic and an economist.  I think the ECB will have their hands full negotiating with this man.  He wrote a book on Game Theory (Game Theory: A critical text. London and New York: Routledge, 2004).  He is also a blogger (http://yanisvaroufakis.eu) and says he will continue blogging even though he is Finance Minister and pressure has been put on him to stop blogging.  He also tweets @yanisvaroufakis.  The next date to watch is February 28th as the current bailout program for Greece expires and needs to be renewed.  So basically we have a month of negotiations while the capital markets are wobbling.  This should make for a very volatile month. Watch the Greek bond spreads as they will tell us if Yanis has begun to cave into the EU demands.  However, my gut is telling me this man is different and he just might surprise us while the market consensus is that Greece will fold to the demands of the Troika.

I like this man…..he has Balls.  Its like the movie “300” when the Greek King Leonidas tells the vastly superior Persian forces that he will not bow.  Unfortunately for us the next month is all about Greece news flow unless this gets resolved quickly.  After what I learned about Yanis and watching him in the BBC interview I have serious doubts that this will blow over soon.

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I will be brief commenting on the FOMC meeting.  The Fed does not see a problem or so they say.  The economy is just dandy.  They do not have your back for now.  They will need the market to go much lower first before they can act.  Look at bonds hitting new all time highs today!  They are screaming deflation.  There is now an air pocket of Central Bank news flow and earnings overall are coming in weak.  The path of least resistance is now lower IMHO but it will be very choppy.  If you are long the “Central Banks have my back” meme it is now up to Draghi.  A chilling thought.

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A blizzard is descending upon NYC as I write these insane ramblings tonight.  My first random thought is why are we poking the Russian Bear?  I have come to believe that the people running the State Department are essentially psychopaths.  Why else would they implement a regime change in Ukraine and install Neo-Nazis.  One of the key guys in the new Ukraine Government is Oleh Tyahnybok.  He is pictured below giving his parties salute which curiously resembles another salute from a certain Nazi dictator in Germany from WWII.  I guess that fits since he is a Neo-Nazi.  The other picture is the picture of McCain giving support to these lunatics.  Apparently this man has a problem with the Jews.  In a speech he gave in 2004 he mentioned kicking out the Moscow Jewish Mafia from Ukraine.   You won’t find mention of this this man or his Neo-Nazi brethren in the MSM because it does not fit the narrative of USA good and Putin bad.

I bring this up because I have been watching this situation with great interest.  Over the weekend there was a bombing of Mariupol in Ukraine where 30 civilians were killed.  What was interesting is that there were ample amounts of you tube videos that I initially thought were randomly filmed and retweeted out.  Later as reports came out that both sides denied the attacks I then thought about the convenient dash cam footage that captured the bombings so well.  It dawned on me that Kiev likely staged these attacks to prompt an excuse for more sanctions against Russia and depict the Rebels and Russia as murderers of civilians.  Obama immediately on cue issued a statement condemning the bombings and said that more sanctions were coming.  By the way Obama has nothing to do with this whole operation.  It has become apparent to me that the Commander in Chief is really checked out.  They wake him up and put him in front of a teleprompter and he reads from the script.  He just can’t even muster the energy to play the part.  Just watch him closely the next time he says anything on TV.  It is really sad.

What the hell is the end game here?  I would like to remind the deep state psychopaths in charge that Russia is not Libya!  They have nukes and a former KGB leader at the helm.  They are not amateurs!

Then today we have the news story about the FBI arresting Russian Spies who were trying to get info from Wall Street on ETFs and HFT’s.  I am sorry but this is a completely bogus story.  The dopes at the FBI have been watching the Russian Spy movie “Jack Ryan Shadow Recruit.”  Clearly the war propaganda machine is beating a louder and louder drum.  I fear we are about to go from a proxy war to something else.  Please be prepared for this Black Swan rather than the Greek Kabuki Theater side show.  If we try to cut the Russians out of the SWIFT payment system one of Putin’s lackeys said that would likely be an act of War.  If you hear Obama mention this as a sanction then hit the bid and lighten up on risk assets.  Please don’t leave comments about this being conspiracy theory.  I have read a lot of non MSM material and everything I say is closer to the truth than the nonsense MSM narrative that the US is good and Russia is bad.  I am trying to figure out what our motivation is for toppling the previous regime and setting up our puppet government in Kiev and how far we are willing to take this.  I fear Putin is playing chess while we are playing checkers.

My second rambling thought is focused on earnings and the Market.  Earnings season is coming in sub par so far.  Financials have not impressed, energy is essentially out of the game, retail is very spotty and tech earnings are underwhelming.  Consensus Earnings Estimates for 2015 have fallen 10% since August 2014.  So my philosophical question is do you really think the market can go up from here this year with earnings coming down?  To assume that you must get multiple expansion from the ECB and BOJ QE efforts.  The question that must be asked is this non-reserve currency QE as effective as Fed QE to our stock markets.  In addition to this philosophical question, we have currency mayhem, widening credit spreads, deflationary moves in bond yields and potential geopolitical back swans everywhere.  My guess is that positive gains for the market will be hard to come by this year unless we get QE4.

The Fly has accused me of being insane.  I like being insane otherwise why would I live on the side of a Volcano?  Plus, to be in this business of picking stocks and navigating the markets one has to be a little off their rockers.  Enjoy your snow day New Yorkers!

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Oil Producing Sovereign Wealth Funds (Source: Wikipedia)

Country	$Billions
UAE	1078
Norway	893
Saudi Arabia	762
Kuwait	548
Qatar	256
Russia	181
Khzakhstan	156
Algeria	77
Libya	66
Iran	62
Brunei	40
Azeraijan	37
Iraq	18
Bahrain	11
Mexico	6
Total	$4,191

 

The oil bust has stranded high yield debt, slashed capex budgets and will cause major layoffs.  One third of all capex in the S&P 500 over the last 5 years has come from the energy shale boom.  The negative multiplier effects in our economy will be many.

In addition to economic headwinds we also have financial flow headwinds.  Food for thought: The oil producing countries which were running a surplus and buying our financial assets and recycling their petro-dollars will likely be running deficits.  At $40-50 oil they will be net sellers of financial assets.  What was once a tailwind for the bull market is now a head wind.  These countries have a combined asset value of $4.2 Trillion.  After Dodd-Frank the ability of Wall Street to handle size like this is greatly impaired.  Clearly not all $4.2 trillion will be for sale but it is about the flow and direction.  I expect increased volatility over the next several years as a result.

Technical and fundamental analyses are increasingly lining up to generate a significant swoon in financial markets.  Negative Reflexivity is on the cusp of taking hold of the situation.

 

 

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Back in 1999 I was a lowly Equity Research Associate for Donaldson, Lufkin & Jenrette (DLJ) working on the electric utility team.  I had graduated from business school in 1997 and was already getting ready to resign and go to the buy side and become a technology analyst after putting in my two years as a slave.  DLJ was the best learning experience of my life.  I learned how the equity sell side sausage is really made and how the capital markets truly work.  For that I am truly grateful.

I was sitting in my office on a Sunday in May of that year preparing what was called the Weekly DLJ Electric Utility Research report.  Around 3:00 PM Rob, Curt Launer’s equity research associate, walks into my office and begins to go on a rant.  Before I describe the rant, I must give a little background on Rob.  Rob had just graduated from Yale and was all of 23 years old and was an Irish citizen.  Rob was off the charts smart but also off the charts weird.  Many of us suspected he was the “Mad Shitter” who was smearing his feces on the stall doors and latches in the 12th floor mens bathroom of the DLJ equity research department.  Rob was also working for Curt Launer, the Natural Gas analyst, who covered Enron for DLJ.  Curt was a banking whore who made millions from all the investment banking work that DLJ and he did for Enron.  Curt was a classic example of what was wrong with the unholy alliance between equity research and investment banking.  Now Rob walks in to my office his face bright red and proceeds to tell me that Enron was a fraud in a rather thick Irish accent.  “I tell you they are lying! The numbers don’t tie out.  The CFO just yelled at me.  I tell you its a fraud Eddie……a complete fraud!”  I tell Rob to calm down and take a chill pill.  A bunch of other people from around the office begin to gather around us and he tells his full story.

He was working on the Azurix deal.  It was the water services company that Enron spun out in June of 1999 and listed it on the NYSE.  He claimed that none of the numbers made any sense and that when he questioned management they basically told him in a nice way to fuck-off.  A normal Wall Street slave would have thought that he must be wrong and would just go with what the CFO told him.  Rob was by no means normal and continued to press them with more questions and follow up calls.  He had just got off the phone with management and the CFO out right told him to Fuck-Off and hung up the phone on him.  We all thought that Rob was a raving lunatic.  Who was this punk and possibly the “Mad Shitter” to be calling Enron liars?  Back in 1999, Enron was the hero of the energy sector and Wall Street.  They invented the term asset-light.  Their stock was on fire and they were launching the broad band trading market.  How dare he question them.  Also it did not help that Rob looked a little bit like Gollum from the Lord of The Rings.

Within a week Rob was transferred from equity research to investment banking.  The rumor was that Enron’s CFO called Curt and reamed him out and told him that they never wanted to see or hear from Rob again.  Well as you know millions of dollars were on the line.  Who was Curt to believe, his genius rain man analyst (Gollum) or CFO Andy Fastow?  Curt went with his pocket book and not with Gollum.  The rest is history as Enron stock went to Zero on December 2, 2001.  Rob was not insane as we all thought.  He was a visionary and a prophet.  We were the insane ones.  The mass delusion of crowds.  I was a part of it.  We are a mere 13 years and change from that day in History and what have we learned?  I would say not much.  The nature of man has not changed.  Those who wish to con us and we the Marks who want to get rich fast have not changed.  Greed however is going to turn to fear soon in this market.

History is about to repeat itself.  The tide of liquidity is slowly drifting out and this cycles frauds and scams will reveal themselves soon.  Look to companies that rely on the capital markets to fund their growth as Wall Street is a willing accomplice in looking the other way due to the fees collected.  Feel free to share what you think are sketchy companies and any anecdotes of malfeasance.  Rob was ultimately proven correct but even if you listened to him in 1999 you would have had your face ripped off shorting this stock.  I believe now is the time to create a list of shorts as the tide on liquidity goes out.

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The Swiss pulled a fast one on the world today with the stunning overnight currency revaluation.  The most surprising aspect of this move is that the head of the IMF, Christine Legard, was not informed and in her own words was “a bit surprised.”  The implications of this fact are tremendous.  The global coordination of central bank policy is now over.  It likely has been over for awhile but now the global trading community has just become aware of this fact.  Large commercial players will be in the process of deleveraging after the Swiss decision.  In the FX market leverage of 10:1 is quite common.  Knock on effects will occur and I expect stocks to be collateral damage.  The Global carry trade will defiantly be affected.  I urge extreme caution as we now have the Central Bank omnipotence meme called into question.

I am now convinced that financial market reflexivity has reversed and the feed back loops are becoming negative.  I am working on creating a list of shorts.  Once we have structural bear market confirmation I will be deploying my dry powder on the short side.  I may start adding some in slowly over the next few weeks. I am up 7.5% YTD.  I urge extreme caution as the game is changing and the large players begin to realize the central bank put may be over.  I suspect we go lower first but then get a powerful bounce into ECB QE announcement next Thursday.  I am sitting on my hands today.  I will look to layer shorts into the rally next week.

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This note is to Janet Yellen, her other Central Bank Proxies and you my fellow investors.

We have what looks like a left translated intermediate cycle top unfolding.  Rather than bore most of you with what that means I will be brief: It is very bad and means the market should fall apart here and correct.  It should take out the December low and then some.  However, I am a suspicious man and I also believe that Janet and her cadre of traders and technicians see this set up as well.  If they were to act to erase this set up they need to do so soon.  I expect a few well timed phrases and perhaps some rapid fire E-Mini Futures buying via a proxy either tomorrow or Thursday.

The invisible hand is no longer invisible.  I see you Janet! Make your move!  However, if you intervene and the rally fails to stick then you have lost control.  If you do nothing then we know you are finally letting this market go.  If you succeed in your meddling then we shall be seeing this same scenario playing out again in a few weeks.  It looks like we are getting close to forcing your hand.  Let it fall and be free of this burden or announce QE4 too soon and risk the dissolution of your institution by having to explain to a Republican Congress why another QE was needed if the economy was so good.

As I and others on this site have mentioned recently the only play here is to be short until the market is much lower and Janet has cover and more data to announce QE4. Then get long for one last hurrah.

The market forces of deflation are finally forcing your hand Janet.  How are you going to play this? We see you Janet!

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Strange and bizarro days indeed!  We had a set up that was quite precarious and dangerous that could have turned into something very ugly.  As I warned in my last post the central banks will not go gently into the night. With only a five day decline of 4.5% they completely freaked out and trotted out Fed Governor Evans from Chicago who said “If we raise rates now it would be a catastrophe.”  Magically futures ramped and we are off to the races again.

I was talking to a technical guru on Tuesday night and he said the Fed is likely to intervene soon because this market has the potential to just fall apart.  It was creepy how quickly he was proven right.  If you are a bull you need to ask yourself does Evans statement and timing make any sense whatsoever?  Why would it be a catastrophe? Why his very precise timing for a statement into a mere 4.5% decline?

Lets get real for a moment shall we.  Something is not right here at all.  By their actions, I now believe that the Fed is absolutely petrified of what they have created and for some reason they can’t seem to just let it fall apart now.  Why do they keep levitating this market?  What are they waiting for?  They must know that eventually they will fail and what they are doing is only making matters worse.  The speed of this market is very concerning.  I think they fear a crash in equities similar to what is happening in oil.  The volatility we are about to see this year is going to be epic.  After this intervention it is clear to me that we are going to get spinal tap “it goes to 11” volatility.  Strap on your hard hat because we have just entered the danger zone.

Why have they stopped QE?  The economy is not better.  Clearly without QE the asset markets fall apart.  Do they think Japan and the ECB can carry the water?  Or is there something more nefarious going on here?  I will wax philosophical on this subject in a few days.  There is definitely something happening here- what is is ain’t exactly clear yet.  What we are witnessing is the greatest illusion of all time.

The Fed will need to constantly try to prevent a market collapse more and more often. I expect more Evan like actions to be the norm going forward.

The 10 year bond yield has had a 10% decline in the first 4 days of this year which is the biggest move ever recorded for a start to the year.  Dana Lyons pointed out that the second biggest move we had at a beginning of a year was in 2008 and it was 5%.  This is why the Fed is freaking out.  However they continue to talk about an economic recovery.  I got news for you we never really had a true one and the spell that most of the investing public is under is about to be broken.  The recovery was driven by a credit reflation that produced mal-investment that can’t possibly produce enough cash flows to service the debt.  You see deflation was always built into the cake.  It was only a matter of time until it became visible to us.  Bonds are screaming deflation.  Most of what you read about our economy or see on TV is garbage.  Watch asset prices as they tell the real story.  Bonds and commodities are veritas while stocks are a mendacium.  Stocks will be joining the veritas club soon enough.

 

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