Bank of America: Derivative Triggers Might Annihilate the Hang Seng, Very Soon

This is a research note that was circulating today–that I didn’t get around to discussing–due to the face ripping market I was enjoying throughout the day.

The banks sold their clients structured products (God I hate that phrase) that gave them exposure to Chinese stocks traded in Hong Kong, aka “H-shares.” If you recall, everyone was sucking the skin off China’s knee caps just 1 year ago. Boy have circumstances changed.

Apparently, there is a “knock-in” feature that triggers if the H-shares fall below 8,000, with a notional value of $13.6 billion and another $16.8 billion between 6,000-7,000.

Banks have purchased futures on the gauge of so-called H shares to hedge exposure to structured products that they’ve sold to clients, according to Chan. Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions to maintain the effectiveness of their hedges, he said. Additional pressure points may also come at lower levels, Chan said.

“As the market goes lower from here, the downward move may accelerate,” he said. “There will be a large amount of hedging in futures which dealers need to unwind.”

Guess where the H-shares are trading now?

Pray for a rally.

Obama’s good friends, the Iranians, are back to selling their crude on the world markets again, much to the chagrin of our other dear friends, the masterminds behind 9/11, the Sauds.

Cramer posits that Iran is offering extreme discounts to recapture market share, which is exacerbating the crisis. Furthermore, short sellers are using the deleterious events in the oil patch to start targeting banks who have lent money to the industry.

OPEC is a thing of the past. Free markets, and desperate men, are destroying value in the oil patch. The sort of selling we’re seeing is reminiscent of past bubbles– when they popped– and the margin call sellers who were forced out, as a result.

You fools. The Dow closed down 250 and you’re celebrating in the streets, naked, as if you won the lottery.

There were signs of hope, however. Inside of Exodus, my bubble basket closed up 2.6%.

All that is great, especially when the lows of today’s session, down 565, looked pretty darn ominous. But let’s review what lies ahead.

Janet Yellen has been saying, for over a year, the downward price of oil was “transitory”– and that once it stabilized– inflation would rear its disgusting head.

WRONG.

This woman could not be more wrong about the economy, the tape, if she tried. They aren’t going to reverse their stance on rates. They’re ideologues, purposely ignoring markets because they believe in their mission.

Aside from the Fed, we have an out of control downward spiraling Chinese economy, being led by amateurs. And, to boot, there are jihadists in Saudi Arabia, hell bent on destroying America and its latest ally, Iran, working towards bringing oil to single digits by the end of the month, seemingly. The result of lower crude is disaster for US producers. Bankruptcy and large bank write downs await.

In short, let’s get a few percent to the upside before celebrating over the bones of our enemies.

For now, dark days still are directly ahead.

Rumors of derivatives in Hong Kong. Today’s reversal from -566, allowed us to avoid the ominous “Dow Theory sell signal.”

Watch what happens in Asia tonight.

Oil’s rebound is what drove today’s rally.

Had we broke 1,801 on the SPY, there would’ve been dragons in these lands.

SPY has been rallying since 12pm

NFLX is green.

FCX is green, reversing a huge 10% drop.

X is up.

TWTR is running higher.

BBG, AGIO, WLL, LRCX, QUNR and a bunch of stocks that have no business being up in this sordid tape, are all higher.

This could only mean one thing: A LATE DAY RALLY.

I reallocated into SPY this morning, giving me, once again, a 200% SPY position–alongside 25% in TLT.

LET THE RALLY COMMENCE!

As an American, you enjoy the fruits of a dollar backed by the full faith and credit of the strongest military on earth. It is the reason why we are currency reserve. Make no mistake about it.

Ever since Europe decided to do QE and our Fed pursued a strong dollar policy, there have been consequences. Now that our Fed has decided to RAISE rates into the teeth of a cataclysmic decline, the situation has been exasperated.

For example, crude.

Or, the Mexican peso, at new lows–down 25% over the past year.

Are pesos too Spartan for you? How about our loyalist friends to the north and their ridiculous oil backed loonie, down a whopping 45% over the past two years. This is great news for you road trippers out there, wanting to see the vast expanse of wasteland called Canada.

Or Brazilian real, getting really crushed, down 53% v dollar over the past year.

Argentinas peso, off by 56% v the dollar the past year.

Let’s not forget Vlads ruble at new lows, down 30% v the dollar over the past 3 months.

All hail, King Dollars and its ruinous side effects. Do you see the dislocations?  Everyone is freaking out over China’s 6% depreciation, while  the deleterious deflationary affects of King Dollars stabs the third world, and Canada, in the face–sponsored by your insane Janet Yellen Fed.

It really is a cruel thing to discuss “Trader Bill’s” portfolio amidst this crisis, after the misfortune that he endured in 2015. Then again, he’s a guy who bought a $100 million apartment just for fun. All is fair game in love and war and Le Fly loves to make war, all the time.

By the looks of Bill’s portfolio: APD, CP, HHC, MDLZ, PAH, QSR, VRX and ZTS, as well as his HLF short, he might be down 18% for the year.

He reported Pershing’s NAV a week or so ago and it was off by 11.4%. But that was then, when times were good and the losses were midget sized. Now we have bigger losses and Bill’s concentrated portfolio of complete shit is leading the charge for an industry that is having a problem wading through the Federal Reserve induced wealth destruction.

Hopefully this post marks the absolute bottom in stocks, permitting Bill and I to celebrate, in separate venues of course, popping champagne corks into the faces of our prospective employees.

One does not rumble without including Dally and one does not have an economic crisis without having Nouriel Roubini tell listeners that things are collapsing and how the Fed might’ve made a policy mistake.

Maria interviewed Roubini today, in Davos (naturally), to discuss recent turmoil, the Fed and how it pertains to equity markets cascading into the pits of hell.

We all now know the Fed made a policy mistake. Some of us (audibly clears throat) knew this was going to happen. The only way out from this mess is for the Fed to shut the fuck up about hiking rates and to be a little realistic about the current situation with regards to ZERO-FUCKING-INFLATION in the system.

Cramer wants to know where are the “jokers” who said raising rates would be good for the economy and the market.

–Sobering time

–Housing peaked

–Autos peaked

–Oil has to go to $20

You can tell he’s a ticking time bomb and he’s one -300 open away from blowing his top and going John Rambo on the Fed.

How apropos for the fiends in Davos, spending millions to be seen at the decadent splendour of the world economic forum, to have a real life crisis to discuss–and donkeypunch each other– over glasses of hot chocolate. As their helicopters descend upon the mountain resort, Dow futures drop by 300–making their shallow lives a bit more tangible.

Here are some of the pre-market movers.

SDRL -11.8%, CHK -9.1%, VALE -8.6%, DDD -7.1%, BBL -6.8%, SUNE -6.5%, DVN -6.3%, BHP -6.2%, DOC -5.7%, FTNT -5.5%, SYMC -5.3%, MT -5.1%, AMD -5.1%, PBR -5%, DB -4.6%, HSBC -4.6%, IBM -4.6%, FCX -4.5%, MU -4.4%, IBKR -4.4%, RDS.A -4.4%, APC -4.3%, STO -4.2%, CS -3.9%, JOY -3.7%, BAC -3.7%, SLB -3.5%, TWTR -3.5%, C -3.4%, TOT -3.4%, AEG -3.4%, SSS -3%, BIDU -2.9%, BABA -2.9%, BCS -2.9%, JPM -2.7%, ING -2.7%, LYB -2.7%, RACE -2.6%

Look, I can’t recall a market this stressed since the dot com collapse, when we’d simply gawk at the screens in utter amazement and make fun of the prices of the S&P for delving into the colonial era years. We’d be so distraught over the capital destruction, the only logical course of action would be to get drunk during lunch and pretend we were all participating in a group nightmare–like from the movie Nightmare on Elm Street. The country was just getting over 9/11 and everyone was insecure about the future.

But what about today?

We have Fed governors more concerned with inflation than the trillions of dollars being lost in capital markets, not including the hundreds of billions that will be lost by basic resource bond holders. How can they be so stupid? Perhaps it’s by design. The real morons are the economists who come on the teevee and explain to us how QE failed and how “normalization” of rates is an absolute necessity.

The only necessity demanded of Janet Yellen’s Federal Reserve is to read the data and use some common sense when it comes to stoking the fires with incendiary comments– at a time when markets are in crisis.

Just like in 2008, the Federal Reserve is going to cause an economic crisis and then have all of us bowing to their greatness when they bail us out again.