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Recovering Large Cap Growth PM. How I invest my own money is nothing like how I had to play the insane benchmark game.

VISA Long: The Cash Elimination Theme Is Accelerating!

As the central banks lose control and begin to implement NIRP they need to ban cash because NIRP is ineffective if folks take their money out of the banks and stuff it in their mattress.  In addition,  if cash is eliminated greedy over indebted governments can extract more from the citizenry via electronic tracking and taxing.  Essentially it eliminates the black market.  The powers that be have floated this idea and I have no doubt it will be implemented.

Visa has agreed to purchase Visa Europe at what looks like an expensive price but if you assume that the ECB eliminates cash in the next 2 years the purchase is a steal.  Do the math and you will be stunned at the growth rate if the ECB applies the cashless policy.  Currently 60-80% of all transactions in Europe are cash based.  This is essentially a play on government tyranny and central bank policy failure.  Every Large Cap Growth manager must own this stock and the stock is a great offset to shorts for Hedge Funds in the coming bear market.  I love this stock and this theme!

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2016 Is Already The Theater Of The Absurd

Happy New Year!  Well its only day 3 of 2016 and so far its is absolutely off the charts absurd from a news flow standpoint.  Let us recap the weekend’s events shall we?

1) Trump says emphatically that Obama and Hillary created ISIS.

2) An armed militia of 150 people has decided to occupy Federal Land and claim that they are planning on staying there for years.   Word is that the FBI are mobilizing in force.

3) Saudi Arabia beheads Shiite Cleric Nimr al-Nimr.  The rabble in Iran firebombs the Saudi Embassy.  The Saudis respond by severing diplomatic ties to Iran and tell angry officials from the White House that they don’t give a rats ass that they are angry. Clearly a stable situation.

4) Obama has decided its a good idea to write executive orders banning guns and will hold a town hall meeting on CNN to discuss.  I am so glad he has his priorities straight.

5) Texas Governor Abbott has issued a warning to Obama about gun control: Molon Labe “Come and Take It!”

6) As I write this China/Asia equity markets are imploding and Sunday night S&P Futures are down 17 handles.

This year I have anointed as THE THEATER OF THE ABSURD Year.  As it is written so it shall be.  Good luck this year.  We are all going to need it.


Wikipedia Definition: The Theatre of the Absurd (Frenchthéâtre de l’absurde [teɑtʁ(ə) də lapsyʁd]) is a designation for particular plays of absurdist fiction written by a number of primarily European playwrights in the late 1950s, as well as one for the style of theatre which has evolved from their work. Their work expressed what happens when human existence has no meaning or purpose and therefore all communication breaks down, in fact alerting their audiences to pursue the opposite. Logical construction and argument gives way to irrational and illogical speech and to its ultimate conclusion, silence.[1]


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AMZN: The Ghost of Xmas Yet to Come!

I would like to introduce a meme before the sell side or buy side catches on.  As you know AMZN was up 100% this year as Bezos revealed the AWS business to the world.  The meme is this: AWS growth is unsustainable.  Not only is it unsustainable I predict that the sell side forward revenue growth rate for AWS will  go to zero or negative by Christmas next year.   It has come to my attention that 50% of AWS growth comes from start ups and my guess is that the majority of those dollars are Unicorns.  AMZN has been an indirect beneficiary of QE largess.  The Fed’s easy money created a bubble in VC funded start ups.  That funding peaked this year and is now in decline as the Unicorn bubble is bursting.  I expect this bubble to unravel fast as we are in the part of the cycle where the capital markets shut down for companies burning cash.

This set up reminds me of the easy money days of 1998-2000.  Then the investment world thought it was a good idea to fund a multitude of new telephone companies (CLECs).  These companies all rushed out and bought telecom equipment and helped to propel the stocks of Cisco, Nortel and Lucent.  These arms merchants were the must own large cap stocks of 1999 and 2000.  About 50% of their revenues came from the CLECs towards the end of the cycle.  The CLECs went away when the capital markets shut down and with it the revenues for these arms merchants went the way of the Dodo bird.

The problem for Amazon is that the Fortune 500 are not putting large portions of their business on the cloud yet nor will they soon.  Therefore there will be a big growth chasm that AMZN needs to cross.  I suspect the $150 billion in market cap being assigned to AWS is not anticipating such a growth hiccup.  Additionally,  I question how profitable this whole business is in the first place but for now lets just focus on the fact that revenues in the AWS division will roll over this year.  I am not short the stock but I will be stalking this and I predict my meme will come true and that AMZN will be one of the worst performing large cap growth stocks next year.

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Merry Christmas!-Potential Grinch Sighting

Happy Holidays!  I don’t mean to be a bummer but I see a potential Grinch around the corner that may steal the rest of the Santa rally and in fact could be a very dangerous set up.  I see several things pointing to the fact that we are close to the top of this brief rally from Monday’s low.  We have been in a downtrend since the November 3rd top with deep Fibonacci re-tracements that are tradable but the over all trend has been down as we have made a series of lower highs.  The most important factor for my warning is that the cyclical structure of this market since the December 2nd trading cycle top looks very similar to the July-August cyclical structure.  In July we came out of the trading cycle low on the 7th of July and peaked 9 trading days later on July 20th.  That top was a trading cycle top that was very left translated.  The average trading cycle runs 40 trading days from low to low so if you top in under 20 trading days it is left translated.  Since that one peaked in just 9 days it was extremely left translated.  Left translated tops are bearish because the market has more time to go much lower in price before the bottom.  In a bull market trading cycles are right translated meaning the top occurs more than 20 days from the previous low so it has less time to go lower in price so the low is higher than the previous trading cycle low which creates the higher highs and higher lows of your typical bull market structure.  In simplistic terms right translation means BTFD and left translation means STFR.


The December 2nd trading cycle top, like the July top,  peaked in 12 trading days from its November 16th trading cycle low which was also very left translated.  In addition, it has made lower lows since the November 16th low which is also a sign that the December 2nd high was the trading cycle top.   From a time perspective the July-August structure is very similar to now.  The trading cycle low on July 7th to August 18th (before crash launch) was 30 trading days while this similar November-December cyclical structure is at day 28 as of December 24th.  Some might argue that last Friday was the trading cycle low which could be the case and we could see a rally thats goes above the December 2nd high.  However, that would be unlikely because it would mean that the trading cycle bottomed in 23 days which is not within the timing band of the trading cycle low and would be a week too early.  The average trading cycle runs 29-43 days from low to low so the odds are the current cycle low lies ahead of us.  If this count is right could it be a crash like August?  No idea but if we take out last Friday’s low I don’t think its going to be pretty as everyone is looking up for the Santa rally and seems to think the worst is behind us.

In addition to the structural set up described above we are extremely stretched on my VIX indicators.  The vix indicators I use are not 100% accurate but they do show how stretched the current price action is due to temporary volatility suppression.  As a general rule over the last year when these indicators get this stretched the market loses price momentum and rolls soon thereafter.  The VVIX/VIX ratio (Chart 1 below) is at an extreme as well as the VIX/VXV ratio (Chart 2 below).  Christmas Eve Price action blew these indictors out.

Chart 1


Chart 2


The bearish fundamental case has been around for awhile and is fairly straight forward:

1) The Fed is tightening and liquidity is leaving the system.

2) Credit Spreads are blowing out and are much wider now than they were at the August equity crash lows.  The credit cycle has peaked and equities will soon follow.  Liquidity in Junk Bonds is non-exitstent.

3) The strong dollar is causing deflationary pressures around the globe which have collapsed commodity prices which in turn is putting pressure on Corporate profits and cash flows which has also led to the credit cycle peak.

4) S&P profits and revenues are rolling over and on a trailing twelve month basis profits have dropped to mid 2013 levels when the S&P was at 1660 making the trailing 12 month PE 21 versus the then 17 PE.  Not very compelling in my humble opinion.

5) A literal plethora of geopolitical nonsense that could lead us into WWIII.

Basically if you are bullish your implicit bet is that we get multiple expansion on decreasing revenue and earnings at the beginning of the first Fed tightening cycle in over 10 years with rumors of wars everywhere.  Sounds like a reasonable bet if you are certifiably insane and/or a Millennial.

The internal indicators of the market are improving a little bit but they were also doing the same thing in August before the crash.  If the above cyclical structure is correct it will trump the internals and we should roll soon and hard.  Structure trumps everything in the end.

Bottom line: I believe that we have seen the Santa top on either Thursday the 24th or we will in the next day or two with a slightly higher high than the close on Thursday.   I also think if I am right we will see volatility explode into the new year.  The structure of the VIX and the VVIX have been altered since the August crash with rising trend lines of higher lows.  The VIX low made on Thursday had a nice hammer reversal candle (Chart below).  I loaded up on Volatility about an hour before the close.   From where I sit the stars are lining up to take this market down.

As an aside the rally out of the August low to the November 3rd high was a higher degree rally.  I was not expecting that in October.  I was wrong.  Cycle work is an art not a science.  The November 3rd top was likely an intermediate top and potentially a seasonal cycle top.  If it was the latter as well…then look out below.  The last seasonal cycle low was August 24th so a seasonal cycle top in 2 months is so left translated it is beyond bearish.   If we go to new ATH’s then all of my above analysis is just wrong and we get Unicorns and Rainbows.  I get my cycles work from Tim Wood at Cyclesman.com but I augment it with my own fundamental and technical indicators which don’t always line up with Tim.  They are lining up now.  I like cycles because that is my religion and belief system.  As above so below! Everything is cyclical IMHO.  Part of me hopes that I am wrong because if I am not then the next 12 months will be horrific and the structure before us today will lead to fantastical future headlines of doom and gloom.  However, note that I will be turning bullish into those horrendous headlines if the right cyclical bottoming structure appears.  Markets never bottom on good news.




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While You Were Sleeping Central Bank Omnipotence Ended

The BOJ unleashed a surprise QE last night.  The problem is that the Nikkei, the USDJPY and the SPX futures should have exploded up.  Instead they reversed and gave up all their gains and even went lower.  Why? We have reached peak central banking marginal return.  There are no more buyers.  Maximum leverage has been reached and now I am afraid the carry trade unwind may be beginning.  The omnipotence of the central bankers was accomplished through willing speculators who levered up.  Like all cycles they eventually end.  The central bankers really don’t have power except that afforded to it by the market participants.  Perhaps the speculators have run out of ammo.  We shall see. Years ago I had a trader who when asked why the market was down would always say “There are more sellers than buyers”.  At the end of the day its ultimately about supply and demand.

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Cash Credit Now Worse Than October Stock Lows!



The Credit markets continue to get worse and liquidity in the corporate cash bond market is simply dreadful.  The chart above is the basis spread between the individual cash bond members of the IG CDX Generic 5 Year CDS Index and the Index itself.   What the basis is saying is that the derivative instrument (1st chart below) is trading more expensive to the cash basket in the index because it is more liquid than the bonds themselves.  This spread is now at all time wides of negative 17 basis points.  The basis at the October wides was 5.5 basis points and the IG CDX at the October wide was about 95 bp.  Added together the cash wides were 100 bp in October.  If you apply the same math to today and add 86 IG CDX and 17 bp we get 103 bp for the cash members.  So basically we are wider today than at the October stock lows but yet the S&P is 10% higher.  So while on the surface it appears that IG CDX CDS has not reached the October wides it is not good underneath the hood.  Additionally the VVIX (volatility of the volatility) broke out today and closed at 10 week highs (second chart below).  When I see the VVIX explode like this it suggests to me that someone somewhere is struggling behind the curtain and that counter party risk is becoming elevated.

My message is quite simple.  Credit needs to improve pronto or the same conditions that existed in August for a rapid repricing of equities exits.  However, we also have the FOMC meeting next week and I also think we need one more lower high before a big correction can take place.  Either way my bias has been and continues to be that this is a bear market rally that is about to fail.  At the very least avoid all over levered companies until the dust clears.

cdx december


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Currency Mayhem: The Fed’s Hobbesian Choice!


Draghi whiffed on delivering the goods today but the truth be told the EUR chart was putting in a bottoming megaphone which is very bullish.  So I don’t think it mattered much what he said and the dollar was topping and about to turn down as well.  US equities had a rough go of it today because of what appeared to be an unwind of a long US stocks short EUR levered carry trade.

Due to the ensuing currency wars and now what appears to be a lack of CB coordination we have had drastic changes in the relationship between US stocks and different currencies.  The biggest changes have occurred between the Euro and US stocks and the Us Dollar and US stocks.  In fact the changes are so drastic that it really leaves the Fed with a Hobbesian Choice between imploding the real economy globally or letting the air out of the US stock market.  Let me explain.

Below I have three graphs the first two are the most important.  They all show a specific currency’s daily correlation versus the SPY.  In the first graph we see what many of us have come to know as the Dollar carry trade where the Dollar goes down and SPY goes up.  That relationship has flipped on its head and now SPY is positively correlated with the Dollar.  It is not as strong a correlation as the inverse was in the past but it is a huge sea change.  As capital is fleeing countries that are depreciating their currency we are the beneficiary of huge capital flows into our bond and stock markets.  However a stronger dollar is also causing earnings of US global companies to go down and deflation to rage across the globe.  This is putting a strain on corporate cash flows and it looks like the credit cycle has peaked.  I suspect the reason the SPY has levitated sideways for 18 months is due to the fact the marginal buyer has been a foreign entity despite weakening credit and fundamentals.  The correlations for both the Euro and the Dollar flipped around June of 2014 right about the time that credit spread tightness peaked as well.  I have no doubt that the cessation of US QE has been the ultimate cause of these relationship flips.  Less dollars being printed versus other currencies has caused a supply demand imbalance with the result being a strong Dollar versus all other currencies on the planet.

Bottom line: the short EURO or JPY and long SPY trade looks crowded at this point.  The chart of the Dollar looks to have topped and the Euro looks to have bottomed.  Addtionally many smart FX traders are telling me that the JPY looks ready to rally which also will cause selling of US stocks.  The unwind of this trade will no doubt put pressure on the US equities markets and will likely help propel the selling pressure over the next few weeks and perhaps months.  The trade is unwinding because the boats are too loaded to one side and folks will soon realize that Janet is not going to raise rates.  If she doesn’t raise rates the dollar goes lower and so do our stock markets due to this new correlation and foreign marginal buyer disappearing or selling.  Recall we sold off on September 17th when the dollar tanked as she delayed the rate hike.  However, if she raises rates it could cause continued contraction/deflation due to dollar strength and she risks a credit implosion and a banking crisis.  Her choice appears to be saving the system or letting stocks sink and a recession unfold.  Essentially the stock market seems doomed to me either way.  When you mess with mother nature this is what happens.  They truly have painted themselves into a corner.  I wonder if Janet is aware of the grim choice before her?  If not I suggest someone forward this to her pronto.

SPY/DXY Correlation



SPY/EUR Correlation



SPY/JPY Correlation




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Absolutely Surreal



The last two and a half weeks have been absolutely surreal.  The fast pace of the news events and the absurdity of our leaders have been nothing less than astonishing. Lets do a quick recap shall we:

1) Paris ISIS Murders: French response is to declare martial law, close the boarders, go to war with ISIS and confer with the Russians in Syria.  Obama before the attack says that very same day that ISIS is contained.  Then after the attack he acts like a petulant child and blames Republicans for inciting Islamic Extremism rather than being a man and admitting he was wrong.  Then later that week he defiantly flips congress the bird and says he is going to bring in mostly young male Syrian refugees into the country via UPS cargo planes (yes UPS is smuggling them in so we should all short this stock).  Half the State Governors tell Obama to go to hell and we have an interesting stalemate situation.

2) Planned Parent Hood Attack: Obama wants to confiscate guns.  Media blames GOP and Pro-life movement for creating an environment that set this attacker off.  Mind you this guy looked like a spaced out zombie who self-identified himself as a woman to the police.

3) Turkey blows a Russian Jet out of the sky: Russia brings in the big guns and basically is daring Turkey to shoot back.  Russia and the alternative media expose Turkeys’ President Erdogan and his Son as James Bond villains who are transporting ISIS oil into turkey and then selling it on the cheap.  Apparently Turkey was just protecting their “interests” in Syria when they shot the plane down.  The US is exposed as having done nothing about the oil supply chain for over a year because, as they claim, they were concerned about the environment. ROTFLMO!  Just too funny to be believable.  So basically it has come out that ISIS is a sham organization created and supported by the West to topple Syria’s Assad.  We have the former DIA ex-head Michael Flynn basically admitting that ISIS has been funded by the US.  You can’t make this up its so absurd.  Essentially this man just threw Obama under the bus.

4) Obama goes to Paris to fight for a solution to the big con known as climate change.  He claims by going its a big rebuke to the terrorists.  He and his insipid followers try to claim that terrorism is caused by global warming.  Again you can’t make this up.  This man is mentally deranged.

5) Two Fed heads walk back their rate hike talk.  Janet Yellen gives a hawkish speech canceling out the 2 Fed heads.  Equities look like they either want to have a blow off top or crash depending on the day.

6) Mass shooting in California that appears to be from Muslim Extremism but will be downplayed by DC and the media because it doesn’t fit the narrative of the white right wing anti-governemt types who love guns and liberty (fyi they actually led with that narrative before anything was known).  Obama wants to take the guns again.  Gun sales explode.

7) Germany and the UK have both decided they want to play in the reindeer games and have decided to bomb Syria.  They have not really said who they are going to bomb but they will bomb somebody. Again you can’t make this up.  We are watching a bad Bond movie plot in real life as we cascade towards WWIII.

If you are not amazed at the absurdity going on here then you are not paying attention.  I believe the system is about to implode and these idiots known as our leaders are pulling out the oldest playbook known to man which is War.  It will be used as a distraction for the masses.  Its an old favorite Rich Man’s trick and it goes way back.  How else can you explain this insanity we are watching?

Market Update:

Before I begin the market is not going to go down because of the items above except maybe WWIII.  The business cycle and credit are driving stocks right now.  The market is trying to put in a second major top of a higher degree nature.  I messed up and thought it would come later after some more downside first.  I think the May highs will hold and we will roll.  When we do then the bear will be confirmed for all to see.  If we chop around here for awhile I could be wrong.  Either way we should know soon this week or next.  Credit continues to get worse and junk and leveraged loans keep hitting new lows.  I also think the odds of rolling are higher now because other asset classes look ripe for big intermediate term moves.  Here are my thoughts in brief for now: Stocks are rolling, T-Bonds are going higher, the dollar is going to turn lower, oil looks lower first then it turns up eventually, gold and silver look ready to turn up and the euro looks ready to turn up as well.  I don’t know exact timing but within the next 2-4 weeks I expect these moves to begin.

We live in interesting times friends.  History is unfolding before us and it is more bizarre than I could have ever dreamed.


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Peak Political Correctness On Campus


Happy Thanksgiving!  I am going to take a break from the markets to talk about the current wave of political correctness sweeping the Nations’s Universities.  I am a strong proponent of civil debate and freedom of speech.  The current situation has reached levels of absurdity that in my day would have been laughed at on my campus.

The current issue in a nutshell is this: free speech is offensive to a small minority on the campus and in addition to their “safe spaces” there is a movement to completely eradicate free speech that is offensive.  I recently had the opportunity to talk to a board member of a prestigious university who is a great friend and a mentor to me.  This person gave me my shot to be a PM in the business.  This person also happens to be a minority that was called in to help negotiate a settlement between the administration and the students.  The good news is this university is not going to ban free speech.

We basically tried to pinpoint what the exact nature of this problem was and how to solve it.  Before I begin I want to make something very clear this is not a necessarily a minority vs majority issue.  Apparently everyone on campus is offended.  The movement is a ploy to control what others say and to regulate speech of all kinds.  Aside from the obvious totalitarian nature of this movement at it’s core it is about other peoples feelings being hurt.  The greatest sin now is to hurt someones feelings by what you say whether it was a true hurt or imagined.  Today’s current students want the administration to step in and regulate speech they find offensive.   Back when my friend and I went to college people said stupid things all the time.  We came to the conclusion that one of the greatest lessons of college was to learn that you can’t control what other people say or do but you can control how you react to it.  Most folks who say outrageous things are looking for a reaction.  When you get upset and react visibly you have given them the power.  On the other hand if you ignore them and walk away they have no power over you.  Learning to have a thick skin and ignoring what other people say or do is one of the best skills you can develop in life.  The world is full of assholes and we can’t legislate them away.  Back in our day these things were self regulating.  Bigots and assholes were ignored and on the academic front people that had weak arguments and critical thinking lost in the exchange of ideas.

We came to the conclusion that the primary cause of this sensitivity is from over parenting to the point that collectively these kids never learned how to work things out between themselves.  When my friend and I were growing up our parents were just not that involved.  We did not have arranged play dates, our parents did not go to every sporting event and when we were bored they would open the screen door and say go find someone to play with outside.  We would roam the neighborhood from dawn to dusk until dinner.  Issues and problems between kids were sorted out on the playground.   Apparently today our parents would be reported to Child Protective Services and arrested for letting us roam the neighborhood.  So basically these kids have been pampered and protected by mommy and daddy from any bullies and meanies.  I went on a road trip a few years ago to visit friends and we discussed that we were all way too involved in our kids lives compared to our parents who in retrospect really didn’t do much other than feed and clothe us and instill some manners and morals.  The rest was up to us.

The good news is that my friend is actually going to suggest  to the administration that part of the university experience for these kids is to learn that one can only control how one reacts to offensive speech and that one cannot control what others say or do.  Clearly there are codes of conduct that have been established by Universities and we had them when I was there but we can’t let them morph into Mao’s Little  Red Book.  The University experience is about becoming an adult and should not be an extension of over protective parenting.

I think this trend has primarily peaked because we have reached crazy extremes, generational cyclicality and unfortunately its going to get very serious for these graduates very soon.  It is becoming increasingly apparent that the debt crisis is morphing into a geopolitical crisis and economic crisis.  The drumbeats of war which have been faint are becoming louder and louder.  These students will be pining for the halcyon days of having their feelings hurt.

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PastedGraphic-2 (1)

The markets most recent move up was an options expiration levitation trick.  I don’t expect much more gas here unless we get some more central bank intervention soon.  In the above chart advancing volume & issues versus declining volume & issues has rolled over as price continues to advance.  The optimist would say that the breadth of the market should improve and the troops should follow the generals.  Everyone knows that 5 stocks are leading the charge.  The problem with that optimism is that credit continues to roll over.  So odds are high we top out for a dip soon as 5 stocks can’t hold up the market forever.  The dip could be brief like 3-5% or more meaningful.  I remain short stocks and SPY as I believe that the Top in May will hold.   Everyone seems pretty jazzed up about seasonality into year end and complacency remains high while bullish sentiment has returned and bears are all but extinguished.  I will remind folks we had a 5% dip last December.  My belief is that if we take out last Mondays Paris Terror lows we have the potential for some accelerating downside that could be more than 5%.  The bulk of the Santa rally may be behind us.  I expect a turn soon maybe after a little more levitation.

Basically we are slowly watching the Global Economy roll over.  Retail sales in the US are looking rather grim as seen from the top line implosions of many retailers.  The Inventories to sales ratio continues to climb and is now at recessionary levels not seen since the great financial crisis.  Deflation is spreading from the emerging markets and energy into other areas and corporate cash flows are declining.  We are basically seeing an old fashioned credit cycle maturing and rolling over.  Equity valuations will not hold if credit does not improve soon.  I am currently looking at Airlines to short as the charts look awful, they have a lot of debt and follow corporate profits both up and down.  The first thing to go in a downturn is business travel.  The airline stocks peaked late last year as corporate profits peaked then as well.

Below are several charts showing credit and business inventories:

CCC High Yield Bond Price Index

CCC High Yield Index


Leveraged Loan Yields

leveraged loan

Inventories To Sales Ratio


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