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On The Origin Of Crashes & Clustering Of Large Losses

Excerpted from John Hussman's Weekly Market Comment,

Abrupt market losses typically reflect compressed risk premiums that are then joined by a shift toward increased risk aversion by investors. In market cycles across history, we find that the distinction between an overvalued market that continues to become more overvalued, and an overvalued market is vulnerable to a crash, often comes down to a subtle but measurable shift in the preference or aversion of investors toward risk – a shift that we infer from the quality of market action across a wide range of internals. Valuations give us information about the expected long-term compensation that investors can expect in return for accepting market risk. But what creates an immediate danger of air-pockets, free-falls and crashes is a shift toward risk aversion in an environment where risk premiums are inadequate. One of the best measures of investor risk preferences, in our view, is the uniformity or dispersion of market action across a wide variety of stocks, industries, and security types.

Once market internals begin breaking down in the face of prior overvalued, overbought, overbullish conditions, abrupt and severe market losses have often followed in short order. That’s the narrative of the overvalued 1929, 1973, and 1987 market peaks and the plunges that followed; it’s a dynamic that we warned about in real-time in 2000 and 2007; and it’s one that has emerged in recent weeks (see Ingredients of A Market Crash). Until we observe an improvement in market internals, I suspect that the present instance may be resolved in a similar way. As I’ve frequently noted, the worst market return/risk profiles we identify are associated with an early deterioration in market internals following severely overvalued, overbought, overbullish conditions.

With respect to Federal Reserve policy, keep in mind the central distinction between 2000-2002 and 2007-2009 (when the stock market lost half of its value despite persistent and aggressive Federal Reserve easing), and the half-cycle since 2009 (when Fed easing relentlessly pushed overvalued, overbought, overbullish conditions to increasingly severe and uncorrected extremes): creating a mountain of low- or zero-interest rate base money is supportive of risky assets primarily when low- or zero-interest rate risk-free money is considered an inferior holding compared with risky assets. When the risk preference of investors shifts to risk aversion, Fed easing has provided little support for prices (see Following the Fed to 50% Flops), which is why we believe it is essential to read those preferences out of the quality of market action.

Our most important lessons in the half-cycle since 2009 are not that overvaluation and overextended syndromes can be safely ignored. Historically, we know that these conditions are associated with disappointing subsequent market returns, on average, across history. Rather, the most important lessons center on the criteria that distinguish when these concerns may be temporarily ignored by investors from points when they matter with a vengeance. In other words, our lessons center on criteria that partition a bucket of historical conditions that are negative on average into two parts: one subset that is fairly inoffensive, and another subset that is downright brutal. Central to those criteria are factors such as deterioration in the uniformity of market internals, widening credit spreads, and other measures of growing risk aversion. Once that shift occurs, market declines often bear little proportion to whatever news item investors might latch onto in order to explain the losses.

As Didier Sornette pointed out more than a decade ago in Why Stock Markets Crash, “the underlying cause of a crash will be found in the preceding months or years, in the progressively increasing build-up of market cooperativity, or effective interactions between investors, often translating into accelerating ascent of the market price (the bubble). According to this ‘critical’ point of view, the specific manner by which prices collapsed is not the most important problem: a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. Think of a ruler held up vertically on your finger: this very unstable position will lead eventually to its collapse, as a result of a small (or an absence of adequate) motion of your hand or due to any tiny whiff of air. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary. In the same vein, the growth of the sensitivity and the growing instability of the market close to such a critical point may explain why attempts to unravel the local origin of the crash have been so diverse. Essentially, anything would work once the system is ripe… exogenous, or external, shocks only serve as triggering factors. As a consequence, the origin of crashes is much more subtle than often thought, as it is constructed progressively by the market as a whole, as a self-organizing process. In this sense, the true cause of a crash could be termed a systemic instability.”

Keep in mind that even terribly hostile market environments do not resolve into uninterrupted declines. Even the 1929 and 1987 crashes began with initial losses of 10-12% that were then punctuated by hard advances that recovered about half of those losses before failing again. The period surrounding the 2000 bubble peak included a series of 10% declines and recoveries. The 2007 top began with a plunge as market internals deteriorated materially (see Market Internals Go Negative) followed by a recovery to a marginal new high in October that failed to restore those internals. One also tends to see increasing day-to-day volatility, and a tendency for large moves to occur in sequence.

An interesting feature of the recent air-pocket in stock prices is that many observers characterize the depth of the recent selloff as meaningful. What we’ve seen in recent weeks is very minor in a historical, full-cycle context. The market has not experienced even a single 3% down day in nearly 3 years. The chart below shows the cumulative number of 3% down-days in the Dow Jones Industrial Average over the prior 750 trading sessions, in data over the past century. It’s certainly not an indicator that we would use in isolation, but in given current valuations and the recent deterioration in market internals, we should not be surprised if this absence of large daily losses is short-lived.

I mention large down-days for a reason. A market crash comprises of a series of one-day losses that may be large, but are not particularly extraordinary in and of themselves. The problem is that they tend to occur in sequence rather than independently. In the chart above, you’ll notice that the cumulative total of 3%+ down days often spikes nearly vertically from zero, meaning that large down days tend to cluster. We may wish to believe that a 25-30% market plunge has zero probability since we know that the probability of a one-day loss of several percent is quite low, making a whole series of them seemingly impossible. But that view overlooks the tendency of large losses to occur in succession. It also overlooks the tendency for monetary easing to support stocks only when low- or zero-interest risk-free assets are considered inferior holdings in comparison to risky ones.

In Didier Sornette’s words, analyzing a crash in terms of individual daily returns “is like a mammoth that has been dissected in pieces without memory of the connection between the parts… Independence between successive returns is remarkably well verified most of the time. However, it may be that large drops may not be independent. In other words, there may be ‘bursts of dependence’ … leading to possibly extraordinarily large cumulative losses.”

In short, recent weeks have seen a strenuously overbought record high in the S&P 500 featuring the most lopsided bullish sentiment (Investor’s Intelligence) since 1987, coupled with increasing divergence and deterioration across a wide range of market internals, including small-capitalization stocks, junk debt, market breadth, and other measures. With compressed risk premiums now joined by indications of increasing risk aversion, we remain concerned that risk premiums will normalize not gradually but in spikes, as is their historical tendency.

E-Mini Liquidity Has Crashed 40% In The Past Quarter, JPMorgan Finds

Confused why one second the market is down 1%, and then moments later, upon returning from the bathroom, one finds it up by the same amount on negligible volume? Simple: there continues to be zero liquidity. Although, not just in equities, but in bonds as well, something this website - and the TBAC and Citi's Matt King - has warned for over year. It is the lack of bond liquidity that led to last week's dramatic surge in bond prices as Bloomberg noticed overnight.

So for those curious just how bad bond liquidity is now, here is JPM's Nikolaos Panigirtzoglou with the explanation:

For the safest bond markets, bid-ask spreads typically remain very narrow in good times and bad, and shifts in liquidity conditions are best captured by changes in market depth. Our fixed income research measures market depth by averaging the size of the three best bids and offers each day for key markets. Figure 3 shows two such measures, for 10-year cash Treasuries (market depth measured in $mn) and German Bund futures (market depth measured in number of contracts). Again, these measures appear consistent with deterioration in market depth i.e. the ability to transact in size without impacting market prices too much. The recent deterioration in market depth has been more acute for USTs than Bunds, also evidenced by the large daily moves in UST yields in recent days.


Yeah, ok. Nothing new: wondering who the culprit is, look no further than the Fed which now owns 35% of all 10 Year equivalents across the curve, a liquidity shortfall for everyone else that will only get worse if and when the Fed embarks on QE4 (just a matter of time), as we explained last May in "Desperately Seeking $11.2 Trillion In Collateral, Or How "Modern Money" Really Works."

But what about equities: turns out here things are worse. Much worse. About 40% worse according to JPM's take of CME data:

An alternative liquidity measure comes from the CME, which reports a quarterly measure of “market depth”, that is, the transaction cost of trading in reasonable size across a selection of futures markets (e.g. for Mini S&P500 futures, 500 contracts lot). This measure shows how deep the market is in terms of the quantity of orders resting on the best bid and best offer, i.e. number of contracts at best bid-ask spread in the limit order book. The quarterly change in this measure between June and September as % of its average over the past three years is shown in Figure 4. Over the past quarter there has been significant deterioration in the market depth for S&P500 and Crude Oil futures but an improvement for agricultural commodity futures. There has been no material change in the market depth for FX, i.e. euro and yen futures contracts, over the past quarter. The market depth metric for these contracts continues to be at the very top of the past three years’ range.


JPM's sugarcoated conclusion: "Market depth metrics appear to have deteriorated across all asset classes." Which is perfectly ok when the market is rising: it means that tiny buying volume can lead to outsized returns. Where it becomes a huge problem, as last week showed, is when the central planners lose control, for whatever reason, and the market finally sells off. That's when one's faith in St. Janet and the CTRL-Priory of Eccles is truly tested.

Doctors "Hit Breaking-Point" As Ebola Death Toll Tops 4500; Nigeria 'Clear' But Harvard Issues Travel Ban

The WHO is coming under increasing scrutiny over its response to the the deadly epidemic. As The BBC reports, after stating that the death toll has hit 4,555 worldwide, a leaked internal document shows "nearly everyone involved in the outbreak response failed to see some fairly plain writing on the wall." There are a few tidbits of good news this weekend: the Spanish patient's test returned negative, 48 "at-risk" people in Dallas have been cleared, and Nigeria has been declared "ebola-free". Sadly, the bad news keeps coming: the virus has spread to new regions of Guinea (affecting mining operations), Moodys warns the economic legacy will linger, IMF slashes growth forecasts for Africa, and most critically, MSF doctors are at their breaking point: "The epidemic is still getting worse... I don't see a light at the end of the tunnel." Lastly, Harvard has imposed a travel ban from Ebola-affected nations.


As The BBC reports, the WHO is under fire over response to epidemic,

Although a flu pandemic was expected, Ebola was most definitely not expected in Liberia, Guinea or Sierra Leone. The virus had never been seen in West Africa before.


So when the first cases were reported in March there was no big WHO machine ready to roll. As it turns out, West Africa's Ebola outbreak actually began in Guinea last December and seems to have gone almost unnoticed for three months.


"Nobody knew that this disease called Ebola would be possible in such parts of Africa," said Dr Isabelle Nuttall, the WHO's Director of Global Capacities, Alert and Response.


"The speed of reaction was initially determined by the fact that the disease was not known to occur in this part of Africa."




on 1 April, the WHO's senior communications officer, Gregory Hartl, suggested that MSF was scaremongering.


"We need to be very careful about how we characterise something which is up until now an outbreak with sporadic cases," he said.


"What we are dealing with is an outbreak of limited geographic area and only a few chains of transmission."




An embarrassing internal WHO document, leaked to the Associated Press last week, indicates senior WHO officials know mistakes have been made, suggesting "nearly everyone involved in the outbreak response failed to see some fairly plain writing on the wall".

*  *  *

As Bloomberg reports, front-line doctors are at their breaking points,

“I don’t see a light at the end of the tunnel,” said Lucey, a physician and professor from Georgetown University who is halfway through a five-week tour in Liberia with Medecins Sans Frontieres, the medical charity known in English as Doctors Without Borders. “The epidemic is still getting worse,” he said by phone between shifts.




MSF has been the first -- and often only -- line of defense against Ebola in West Africa. The group raised the alarm on March 31, months ahead of the World Health Organization. Now, after treating almost a third of the roughly 9,000 confirmed Ebola cases in Africa -- and faced with a WHO warning of perhaps 10,000 new infections a week by December -- MSF is reaching its limits.


“They are at the breaking point,” said Vinh-Kim Nguyen, a professor at the School of Public Health at the University of Montreal who has volunteered for a West African tour with MSF.

*  *  *

The Good News...

  • WHO declares Nigeria Ebola-free
  • Spain Ebola patient may be free of virus after negative test
  • Dallas sees 48 people cleared of Ebola risk after monitoring
  • White House said to seek additional funds to fight Ebola spread

President Barack Obama is preparing to ask Congress for additional funds to combat Ebola, a move that could shift some political pressure from the White House to lawmakers in the last two weeks before midterm elections.

The Bad News...

  • Heineken sends Sierra Leone staff home as Ebola shuts bars
  • IMF cuts Africa growth forecast amid Ebola virus, insecurity
  • U.S. Ebola protocol revision includes full-body suits: AP
  • Ebola economic legacy to linger after crisis, Moody’s reports
  • Ebola spreads to new regions in Guinea near AngloGold mine

The Ebola virus spread to two new regions in Guinea, including an area where an AngloGold Ashanti Ltd. mine is located.


The place that reported infections in the Siguiri area is 30 kilometers (19 miles) from the Johannesburg-based company’s facility, the Ministry of Health and AngloGold said in statements yesterday. Employees haven’t been infected and operations continue, the mining company said.




“We continue to strengthen surveillance and we conduct daily monitoring checks on all employees,” AngloGold spokesman Chris Nthite said in an e-mailed response to questions. “Some of our employees live in Siguiri.”

*  *  *

And finally, as Breitbart reports, Harvard has imposed a travel ban...

Harvard University has imposed an effective travel ban on Ebola-striken countries, requiring students, faculty, and staff to obtain official permission from the university administration before traveling to affected parts of West Africa, and possibly staying off campus for 21 days after returning to the U.S. from those countries.


The severe restrictions at Harvard, reported early Monday by the Harvard Crimson, "expand on those detailed in August that asked for Harvard students, faculty, and staff to avoid nonessential travel to the three countries." The new restrictions also exceed any guidelines imposed by the U.S. government.

*  *  *

So the PhDs' think we need a travel ban? Wonder what Ron Klain thinks?

MeaT THe FaRCeSToNeS...


JAKARTA—U.S. Secretary of State Fred Farcestone will urge Asian leaders Monday to help prevent the Islamic State from recruiting and committing terrorvision in Southeast Asia and to help keep the Ebola virus from spreading to the region from the U.S., officials said.

Guess Who Wasn't Shorting Treasurys

After America's commercial/investment banks crushed all momentum chasers hedge funds in 2014, with one after another after a third recommendation to go long stocks and short bonds starting in late of 2013 and repeating the broken record every single month because, you know, "the recovery", ignoring the massive outperformance of bonds over stocks in 2014 as Treasury shorts have been forced to cover at ever higher prices now that the global economic emperor was finally was revealed to be completely and utterly naked (thanks Goldman)...


... one would think that banks would have eaten at least a little of their own cooking, and partaken in what has become a ridiculously crowded 10 Year TSY short, which according to the latest CFTC COT report saw another 131K net shorts added, the most since May 2014.


Well, one would be wrong. As in very wrong. Because as the following H.8-sourced chart shows, not only have commercial banks not added to Treasury shorts, but their long exposure of Treasurys (page 2, line 5) is now the highest in... ever

So as banks were urging their clients to short, short, short bonds, they bought, bought, bought every single CUSIP they could find.

Which should not come as a surprise to anyone.


Stocks, Bond Yields Drop After Rosengren-IBM-Oil Triple-Whammy

As futures opened last night, it was all looking so bright as the 'rebound' extended and every knife-catching "in it for the long-run" manager was proved 'right'. Then Eric Rosengren pissed in the punchbowl - explaining QE will end in October "unless somethinh dramatic happens" - somewhat taunting the market to crash to ensure the Fed keeps the party going. Markets leaked lower and then came Big Blue which slammed futures lower. Oil prices are falling once again this morning, ECB's bond-buying was a disappointment, and USDJPY's fundamentals hit an air-pocket. Having retraced perfectly 50% of last week's losses, the S&P 500 is fading at the open...

Rosengren started it... IBM didn't help...


and Oil weakness is not helping...


Treasury yields down 2-3bps...


Of course its all about fun-durr-mentals....


Of course, it wouldn't be the HFT-dominated US equity markets without a morning ramp to VWAP (enabling all those institutional sellers to get out) - but once again bonds and carry ain't buying it...


Charts: Bloomberg

Hedge Funds Have Worst Week Since 2011: Here Are The Best And Worst Performers In October And 2014

First, the bad news: Last week was the worst week for hedge funds since 2011.

Then the good: hedge funds dropped by less than half what the decline in the broader market was, largely because many hedge funds still haven't been fully shaken out of their shorts, despite 6 years of relentless central planning seeking to crush all bears

Specifically, as BofA reveals, the diversified hedge fund index was down 2.4% for the week ending Oct 15, while S&P500 was down 5.4% on a price returns basis. CTA advisors were at the top, up 0.85% while Event Driven funds were down 4.2%.

The full breakdown below:

The breakdown by strategy:


Here are the Top 20 best and worst performing hedge funds in 2014:


And finally, here is a performance summary of a selection of the most prominent hedge funds in the US, first sorted by October performance, worst to best:


And here is the same universe, but with a YTD performance sort:

Source: BofA, HSBC

Technical Glitch Downs Bank Of England's $110 Trillion Payments System

The Bank of England's "Real Time Gross Settlement Payment System" (RTGS) - the UK's equivalent of the US FedWire - has gone offline this morning due to a technical glitch, according to The Telegraph. RTGS, which processes large payments in real-time (including home purchases) between British banks - and processed GBP70 trillion in payments across 5000 entities last year - has been down since 6am London time (the fault was disclosed over 5 hours later at 1130 London Time). For now the largest payments are being processed manually and smaller payments are on hold.


Bank of England issues statement on technical issue with RTGS

— Bank of England (@bankofengland) October 20, 2014


As The Telegraph reports,

The infrastructure that processes large payments including house purchases between British banks has gone offline, the Bank of England has said.


The central bank said the “Real Time Gross Settlement Payment System” (RTGS), which settles large transfers between banks, had gone offline, and remained so on Monday morning.


It said that the biggest payments were being processed manually and reassured the public that all payments would be on Monday.




The RTGS is set up to settle large payments in real time, rather than at the end of the day, reducing risk.


The system - which processes payments such as house purchases - has been down since 6am on Monday morning. The large banks were contacted early in the day, and the Bank disclosed the fault at around 11.30am.




The RTGS routes payments made through CHAPS (the Clearing House Automated Payments System), which settles important and time-sensitive payments, including house purchases.


According to the CHAPS website, it processed £70 trillion of payments last year and is used by 5,000 financial institutions.

Why is this serious?

The system helps keep the day-to-day running of banks going by acting as an intermediary between banks. If a payment is going to be made between banks, RTGS credits the bank receiving the funds quickly, and takes funds from the bank sending money, removing the risk for the receiving bank.


In effect, RTGS sits at the top of the payment structure for banks, as shown by this Bank of England document:


*  *  *
Nothing to see here, move along...

ECB Unleashes (Covered) Bond Buying Program, Sovereigns Sell Off

Draghi, we have a problem. Just as Coeure 'promised' the ECB, according to The FT, began its bond-buying program this morning. However, peripheral sovereign bond-buying front-runners banking on the ECB greater fool to offload to are disappointed as they are go no easy money love. The initial program is covered-bond-buying (similar to US MBS, but a considerably smaller market) and the ECB will reveal how much it has bought each Monday afternoon (starting next week). Greek bonds are suffering the most with 5Y yields at cycle highs once again and prices at lows (vanquishing all of Friday's gains).


As The FT reports,

The European Central Bank has started to buy covered bonds, launching its latest attempt to stave off a vicious bout of economic stagnation in the eurozone.


The purchases are the first in a bond-buying programme that is expected to see the ECB place billions of euros of covered bonds and asset-backed securities on its balance sheet over the next two years in an attempt to revive lending and growth across the region.


The ECB confirmed that the central bank had begun purchasing the assets on Monday. The purchases of asset-backed securities are expected to start later this year.


The central bank will reveal how much it has bought every Monday afternoon, starting next week.

And the disappointed sovereign front-runners continue to sell...

and 20 mins later...


As Greece implodes back to higher yields and lower bond prices...


*  *  *

Of course, do not forget that the ECB has already changed its mind and changed it back on exactly which bonds are eligible for its buying program - as we detailed here.

*  *  *

None of this should be a surprise - remember what happened the last time the ECB bought sovereign bonds...

Spanish and Italian bond yields (upper pane) blew wider as the volume of ECB bond buying (lower pane) picked up...


Charts: Bloomberg

How Far Will the Stock Market Rebound Go?

Submitted by Pater Tenebrarum of Acting-Man blog,

A Brief Look at the Technical Backdrop

We can actually not answer the question posed above with certainty. We don’t know for sure whether the recent market decline was a “warning shot” or merely a short term shake-out. In this we are in good company: the whole world doesn’t know.

However, our guess at this juncture is that the decline was of the “warning shot” variety, as it has violated long-standing uptrend support lines – something that the market has managed to avoid in previous corrections over the past three years. There are also fundamental reasons for thinking so, which we discuss briefly further below. However, based on fundamentals alone, it cannot be determined whether the stock market is already “ripe” for a larger degree decline, or whether its uptrend will resume in the short/medium term.

To be sure, the technical picture certainly conveys no certainties about the future either. However, should the market peak at a “typical” retracement level or at a previous lateral support level (thereby confirming its new status as resistance) and resume its decline from a lower high, yet another change in character will be recorded. In that case, the probability that a larger degree decline is underway would accordingly increase further.

Below are charts of the most important indexes showing Fibonacci retracement levels of the recent correction and lateral resistance levels. Although it is unknowable why the market often finds support or runs into resistance at Fibonacci retracement levels (there is certainly no logical reason for this), it has happened quite often in the past, so it is useful to be aware of them. Possibly it has become a self-fulfilling prophecy, because so many traders use technical analysis nowadays.

The first chart shows the S&P 500 Index (SPX), the NYSE Composite (NYA), the Russell 2000 (RUT) and the RUT-SPX ratio. What is noteworthy is that the Russell outperformed the large cap indexes from Monday to Thursday, thereby giving slight advance warning of an imminent short term low. However, this streak ended on Friday. Whether that was just a short term blip remains to be seen, but one should continue to keep an eye on the Russell’s relative performance. If the action on Friday was the start of another period of underperformance, it will represent a fresh warning signal. Note that large speculators have amassed a fairly large short position in Russell 2000 futures. In the short term, this may invite some additional short covering. However, speculators have largely been correct with their bets on Russell futures over the past decade (apart from a brief moment in the summer 2011 correction).


SPX, NYA, RUT and RUT-SPX ratio. Fibonacci retracement levels and nearby lateral resistance levels – click to enlarge.


The next chart repeats the above exercise for DJIA, Nasdaq and NDX.


DJIA, Nasdaq and NDX. All the major indexes have essentially bounced back to the 38% retracement level that is generally regarded as the minimum target for a rebound. 50% and 62% rebounds tend to be more common per experience, but there can be no assurance that either of them will be reached – click to enlarge.


Sentiment Data

Below are charts of a few sentiment data, mainly short term oriented ones (long term sentiment indicators are still at levels that are among the most extreme on record – specifically, mutual fund cash levels remain close to a record low, while margin debt is still close to a record high). The first three indicators are the equity only put-call ratio, the Rydex bull-bear ratio and Rydex bear assets:


The equity put-call ratio is in “signal-less” territory at the moment, but the Rydex bull-bear ratio is close to its year-to-date low, while bear assets are close to a year-to-date high. However, they remain at levels that have either only been recorded in 2014 and 2000 (bull-bear ratio) or solely this year (bear assets remain in a range that is the smallest in history) – click to enlarge.


Next we take a look at the Investor’s Intelligence survey. The percentage of bulls in this survey (which was taken on Wednesday, when the market reached its intra-week low) has not surprisingly declined quite a bit, but has happened with the bear percentage is quite remarkable. Just as Rydex bear assets remain within their lowest range on record, the bear percentage in the II poll has risen to a mere 17.3% – which used to be considered extremely low in the past.


The Investor’s Intelligence Poll. Why is the percentage of bears still so tiny? – click to enlarge.


The reason why we are bringing this up is that there has never been an important correction low with the bear percentage in the II-poll at a mere 17.3%. Normally we see it swell to between 40%-50% (see 2011) at major correction lows and it tends to at least approach 30% in minor corrections (see 2012). 17.3% is normally consistent with a market peak rather than a low.

What this and the extremely low level of bear assets in the Rydex funds is telling us is that practically no-one expects a big decline. Many investors and investment advisors seem to be allowing for a correction, and may even concede that it could become larger, but very few seem to be concerned about the potential for a really big downturn. This is a negative contrary indicator for the market.


Fundamental Backdrop

It is clear by now that the economies of the world ex the US aren’t performing particularly well. China’s economy is slowing noticeably after money supply growth fell to its lowest rate of change in many years, which has impaired the country’s real estate bubble. Since China’s authorities seem to be set on continuing to move the economy away from overbuilding and massive capital investment, no significant monetary stimulus measures should be expected in the near future.

What strikes us as remarkable about the situation in Europe is that all it took for the ongoing economic malaise to become a “triple dip” recession, was a slowdown in true money supply growth from a peak of 8.6% to a recent 6% year-on-year. This is noteworthy, because it is the first empirical confirmation of our long-held suspicion that the “threshold level” at which a slowdown in money supply growth unmasks various bubble activities in the economy has increased.

We suspect that something similar may apply to the US economy. While the broad US money supply TMS-2 most recently still grew at a historically high rate of approx. 7.6% y/y, this represents a massive slowdown from the approx. 16.5% to 17% peak levels of late 2009 and late 2011. At the same time, the economy remains quite imbalanced. The ratio of capital to consumer goods production has continued to climb and is currently just down a smidgen from a recent new all time high. If one compares capital and consumer goods production side-by-side, there is now an unprecedented gap between the two. We believe this is a result of the artificial suppression of interest rates by monetary pumping. Note in this context also that the huge issuance volumes in the junk bond market in recent years are by themselves already indicating that a lot of malinvestment is in train. These economic activities would under normal circumstance never get this much cheap funding. We can be quite certain that a lot of the associated investments will eventually turn out to have been misguided.


The ratio of capital goods (business equipment) to consumer goods production in the US has reached a new all time high recently – click to enlarge.


Only two times in history has capital goods production in the US exceeded consumer goods production (the red line shows consumer non-durables production, which has barely increased since the 2008 crisis) – click to enlarge.


Such economic statistics must of course always be taken with a grain of salt; for instance, monetary inflation is certainly not the only factor in the rising long term trend of US capital goods production exceeding consumer goods production. Partly it can be explained by the fact that a lot of consumer goods production has moved off-shore. Even so, there are still discernible fluctuations, which are mainly the result of boom-bust cycles induced by monetary pumping.

When interest rates are artificially suppressed by large additions to the money supply, more and more investment tends to move toward production processes temporally distant from the consumer stage. This is because under conditions of monetary pumping, price signals in the economy are falsified. Longer production processes that would normally be avoided because they are not in line with society-wide time preferences suddenly appear to be profitable, and it is only later revealed that either the real resources to complete them are lacking, or if they are completed, that they simply cannot be continued without incurring major losses once the price structure has normalized.

Usually this normalization in relative prices occurs once monetary policy becomes tighter – and this is indeed happening now (“tapering” of QE is tightening, even if the Federal Funds rate remains at rock bottom levels).

Lastly, given how poor the economic recovery has been overall, we can tentatively conclude that the economy’s pool of real funding has sustained severe damage in the preceding credit boom(s), and has undoubtedly been weakened further in the most recent one.

For the stock market (and other “risk asset” markets like junk bonds and also higher rated corporate bonds) this means that the fundamental backdrop that makes a major denouement possible is definitely in place now. However, we cannot state with certainty whether there is still room for the imbalances to grow even further. What we do know for sure is that the risks appear very high already.



In the past few years the stock market has always recovered from corrections to make new highs, and we cannot be sure if the party is indeed over. However, both from a fundamental and technical perspective, the probability that it is over seems quite high. Should market internals and trend uniformity to the upside improve again, this assessment would obviously have to be revised. However, there are surely more than enough warning signs extant now and every financial asset bubble must end at some point.

As an aside, in spite of the heavy cooing by various Fed doves last week, we don’t think the present course toward tighter policy will be abandoned immediately. For the Fed to actually react, a lot more damage would likely have to occur in asset markets and economic data would have to become uniformly negative, which is so far not the case in the US. The danger that it will happen – i.e., that similar to Europe, the slowdown in money supply growth will render numerous bubble activities unprofitable – is however great.

Euro Risk Due To Possible Return of Italy To Lira - Drachmas, Escudos, Pesetas and Punts?

Euro Risk Due To Possible Return of Italy To Lira - Drachmas, Escudos, Pesetas and Punts?

The European status quo and EU elites are becoming increasingly concerned by popular calls in Italy for Italy to leave the European Monetary Union and the euro "as soon as possible" and return to the lira. 

Beppe Grillo, the leader of Italy's Five Star Movement has shocked EU elites by launching of a non-binding consultative referendum on the matter which will be put before the parliament.
"We will collect half a million signatures in six months – a million signatures – and we will take our case to parliament, and this time thanks to our 150 legislators, they will have to talk to us” the Telegraph reports Grillo, the popular comedian and increasing popular politician as having said.
Italy's Five Star Movement has thrown down the gauntlet and believes that a return to the lira may be the only way to end the economic depression and indeed save Italian sovereignty and indeed democracy.

Italian Lira

The movement, for whom 25% of Italians voted in last year's general election, and a further 21% in this years European elections, appear to be upping the ante following the failure of the the EU bureaucracy and the ECB to acknowledge demands, last May, for the creation of Eurobonds to support the Euro and the abolition of the EU fiscal compact.

Both measures are staunchly opposed in Germany. They see the creation of Eurobonds as a means to make Germany responsible for the borrowing of struggling peripheral nations. 

Peripheral nations such as Italy, Greece, Spain, Portugal and Ireland argue that they should not be made carry the entire burden of a problem caused, at least in part, by their participation in the monetary union. 

The customary method of devaluing a sovereign currency in order to make their exports more competitive is not open to them.

The fiscal compact requires that Eurozone states keep a balanced budget. According to Ambrose Evans Pritchard, the respected  International Business Editor of the Telegraph, the ”Fiscal Compact is economic insanity. It would force Italy to run massive fiscal surpluses for decades. These would cause an even deeper depression, pushing the debt ratio even higher, and would therefore be scientifically self-defeating."

While it is still early to speculate on the outcome of this process, it is worth considering the implications of the fifth largest economy in Europe jettisoning the Euro.

At the height of the Euro crisis in early 2012 it looked possible that the entire monetary union project might rupture as the interest yielded on the bonds issued by the more vulnerable states began to soar. This has begun to happen again in recent days and Greek bonds have seen a new vicious sell off and 10 year yields have soared to nearly 9% (see below).

That is, investors in the bond markets had come to regard the bonds of Italy, Greece, Spain and others as high risk investments and required a much higher rate of return to compensate for this risk. 

At that time, talk of the creation of a Eurobond was rife but the Germans held fast. It was looking as though these struggling countries would be forced to leave the euro until, at the eleventh hour, ECB governor Draghi stepped in, in July 2012, and announced that the ECB "is ready to do whatever it takes to preserve the euro." 

This was interpreted to mean, among other things, that the ECB would buy bonds of struggling countries if necessary. Without Draghi having to actually do anything, risk was regarded as having been removed, at least temporarily, from the system and there has been a relative calm and confidence in the viability of the single currency since then.

But crisis seems to be surfacing again as seen in the sharp increase in volatility and decline in stock markets and certain bond markets in recent days and again today.

For many Italians, the slow grind of depression has tested their patience beyond endurance. Youth unemployment is at an incredible 46% and industrial production has fallen 25%. Many note that, since joining the euro, Italy - once an industrial powerhouse of Europe - has been unable to compete with Germany due to an overvalued currency.

In Greece the effects of Draghi's pronouncements appear to have run their course and now actions may be required. The stock market has retraced around 50% of its gains since the "Draghi put." It is down a sharp 23.65% this year alone.

There are increasing calls in Greece for a return to the drachma – polls show 33% in favour of a return to the Greek drachma at this time.

The fact that it is impossible for Greece to regain competitiveness and recover from depression while clinging to the euro is becoming increasingly evident. Prominent economists such as Nouriel Roubini, as well as investor George Soros have said as much and influential voices in Greece are now questioning the wisdom of clinging to the euro.

Even uber Keynesians and money printing advocates such as Paul Krugman have previously warned of the euro breaking up and Italy returning to the Italian lira and France returning the French franc.

In Ireland, dissatisfaction is not being expressed through euro skepticism. However, there is certainly a sense that enough austerity is enough. 

Up to 100,000 people took to the streets the weekend before last, to protest the introduction of water meters and privatisation of the water supply. This was a very large turnout by Irish standards and may be the start of the Irish public awakening from their recent apathetic slumber. 

Criticism of the EU and ECB remains muted in Ireland. Although, the recent revelations by former central bank head, Patrick Honohan, regarding the manner in which the losses of reckless European banks were foisted onto the Irish taxpayer, is making even the most hardened euro phile somewhat skeptical. Not skeptical of the EU per se but of a policy of blindly accepting unfair and damaging policies foisted on Ireland.

In Spain and Portugal none of the structural problems that led to the crisis have been solved. And with data from Germany suggesting it is entering recession it may be only a matter of time before the eurozone is in crisis mode once again.

Debt levels remains very high throughout the EU.

In this environment, the ECB is in a much more difficult, some would say impossible position, as the panacea of ultra low interest rates can no longer be administered.

In the fifteen years since the introduction of the euro, we have had six years of austerity and monetary hardship.  If Europeans are faced with more of the same it is likely that disillusionment with the euro project will be inflamed. 

It is hard to envisage an orderly breakup of the EMU. Like Cortez - who burned all but one of his ships before marching inland to take on the Aztec empire - turning back was not factored into the architecture of the monetary union. 

There are now three real scenarios that could play out in the coming months. 

First, is that the German people, politicians and Bundesbank manage to prevent the ECB from embarking on the ‘bazooka’ of Euro QE. Given huge deflationary pressures, this would likely lead to deflation and an economic depression in Europe and globally.  

The second scenario is that Draghi and the ECB manage to overcome German opposition to euro QE or euro debt monetisation and printing. This would lead to the euro being debased and devalued and falling in value versus major currencies and especially gold.

The third scenario is that Italy or Greece opt to leave the monetary union and revert to their national currency. Their new liras and drachmas see sharp devaluations.

There is also the possibility that we see the deflation first and then the euro or national currency devaluations. It is worth remembering that gold is both a hedge against currency devaluation and inflation and also gold is a hedge against deflation.

Gold has no counterparty risk and cannot go default or go bankrupt , unlike companies and governments.


What should investors and savers in European countries do to protect themselves from the risk of currency debasement and devaluations?

The answer remains obvious and can be seen in the charts above. Gold is an important hedging instrument and financial insurance that will protect people from the potential return to liras, drachmas, escudos, pesetas and punts.

These are the types of scenarios where gold comes into it's own as financial insurance and a store of value.

Get Breaking News and Updates On Gold and Markets Here


Today’s AM fix was USD 1,241.00, EUR 972.65 and GBP 769.71 per ounce.
Friday’s AM fix was USD 1,238.00, EUR 966.89 and GBP 769.61 per ounce.
On Friday, gold fell $1.70 or 0.14% to $1,237.80 per ounce. Silver slipped $0.10 or 0.58% to $17.28 per ounce Friday. Gold had a second week of gains and rose 1.2% last week, while silver fell 0.40% after the selling on Friday pushed silver lower for the week. 

Gold in British Pounds - 2 Years (Thomson Reuters)

Gold in Singapore fell initially prior to rising in later trade prior to London opening when prices were capped again. Silver for Swiss storage or immediate delivery gained 0.5% to $17.40 an ounce. Spot platinum rose 1.1% to $1,272.75 an ounce after ending last week little changed. Palladium rose 0.6% to $761 an ounce, after falling 3.6% last week.

Gold has rallied almost 4% in the past two weeks and reached one month high of $1,249.30 last Wednesday. Futures climbed to $1,250.30 on October 15, the highest price September 11. 

The net long position in futures and options jumped 39% in the week to October 14, snapping the longest run of reductions since 2010, according to CFTC data.

While Asian shares rose today, European stocks fell again, following their longest streak of weekly losses in more than a year. Worse than estimated financial results from large companies added to concerns over the region’s recovery.

European equities have led a global rout that erased as much as $5.5 trillion from the value of shares worldwide as concern over the region’s economic recovery re-emerged, amid speculation that the ECB’s stimulus measures would not be enough to spur growth. 

Stocks pared losses today, due to rumours that the European Central Bank bought short dated French covered bonds.

Gold in Euros - 2 Years (Thomson Reuters)

Government bonds from Italy and Spain fell, extending a selloff from last week. Italy’s 10-year rate climbed another four basis points to 2.54% after increasing 17 basis points last week. Spain’s rose three basis points today to 2.19%.

The S&P 500 rallied on Friday, but it still locked in its fourth straight weekly decline. Its longest bearish run in over 3 years, as investors are becoming wary about the fragile global economy, another European debt crisis and the risks posed by the ebola virus and possible contagion.

See Essential Guide To Gold and Silver Storage In Switzerland

Frontrunning: October 20

  • Stick to tapering and rates pledge, says Boston Fed chief (FT)
  • Turkey to let Iraqi Kurds reinforce Kobani as U.S. drops arms to defenders (Reuters)
  • Obama makes rare campaign trail appearance, some leave early (Reuters)
  • Japan GPIF to Boost Share Allocation to About 25%, Nikkei Says (BBG)... or three months of POMO
  • Japan Stocks Surge on Report GPIF to Boost Local Shares (BBG)
  • China Growth Seen Slowing Sharply Over Decade (WSJ)
  • Russia, Ukraine Edge Closer to Natural-Gas Deal (WSJ)
  • Leveraged Money Spurs Selloff as Record Treasuries Trade (BBG)
  • After clashes, Hong Kong students, government stand their ground before talks (Reuters)
  • Female cabinet members’ resignations undermine Abe’s recovery efforts in Japan (WaPo)
  • Nigeria declared Ebola-free after containing virus (Reuters)
  • Value Investors Hoarding Cash See Few Bargains After Rout (BBG)


Overnight Media Digest


* Democrats, worried as polls show their chances of retaining control of the Senate dwindling, are plowing money into long-shot races in unexpected states. (

* In a blow to Prime Minister Shinzo Abe's government, Japan's industry minister announced her resignation on Monday over allegations of financial impropriety. Yuko Obuchi is the first cabinet minister to step down since Abe came to power in December 2012. (

* The Fed is likely to end its bond-buying program this month even as market volatility and uncertainties about the global economy have rattled investors and led to some mixed messages from central-bank officials. (

* An investor group from Hong Kong and Abu Dhabi is launching a bid to buy Reebok from Adidas in a move that would unwind a disappointing eight-year marriage of the sneaker makers. (

* Nearly six years after its near-death experience, Ally Financial Inc is nearly out from the U.S. government's clutches, and taxpayers are earning a profit of more than $1 billion as the firm heads out the door. (

* A lawsuit against Walgreen Co paints a picture of the rough and tumble maneuverings inside a company grappling with disappointing earnings, activist hedge funds and a major deal. The suit by former Chief Financial Officer Wade Miquelon alleges Walgreen's chief executive and a company board member defamed him in meetings with large shareholders that became the basis of a page-one article in The Wall Street Journal. (

* Syngenta AG faces escalating legal battles over its sale of genetically engineered corn seeds that some farmers and agricultural companies say have roiled international grain markets this year. U.S. farmers in 11 states have sued Syngenta in federal courts during the past few weeks, alleging losses they say arose from the Swiss seed-and-chemical company's move to sell biotech seeds before the corn was approved by Chinese authorities for import there. (

* Pension-fund managers across the United States are rethinking their investments in hedge funds in the wake of a retreat by the California Public Employees' Retirement System. (

* California is hoping to conjure some real-life jobs in the smoke-and-mirrors world of visual effects for movies and television shows-part of the state's latest attempt to win back its most famous industry. (

* When cold weather looms across the United States, natural-gas prices usually rise. This year they are falling, after a record production boom nearly replenished stockpiles left at their lowest since 2003 by last winter's freeze. (



European Commission President Jose Manuel Barroso has warned UK Prime Minister David Cameron that he will strive to write new EU freedom of movement rules for they are an integral part of Britain's internal market. Barroso said a proposal from the British Government to cap on immigration from Europe would probably breach EU rules.

Britain's financial watchdog aims to curb resource-heavy probe into alleged benchmark rigging. The financial regulator will issue a number of private warnings this year, what legal experts alert that it could lead to "enforcement by the back door".

London-based bitcoin exchange, Coinfloor, is planning to strengthen its trade operations by raising money from investors in order to trade a wide range of currencies and launch a bitcoin fund.

Royal Bank of Scotland Group Plc, which is set to enter the peer-to-peer lending market, marks the latest sign of alternative finance getting a grip by moving into the mainstream.



* Yahoo is betting that Tumblr's alliances with popular television shows like "The Voice" will help drive its growth. Still, 16 months after Yahoo Inc paid $1.1 billion for Tumblr, the company's investors are questioning the success of the acquisition. Independent online research firm eMarketer says that while Tumblr's growth rate is faster than that of competitors such as Pinterest or Instagram, its audience remains the smallest. (

* On Sunday afternoon, IBM Corp issued a statement saying it would make an announcement on Monday. IBM did not provide any further details but analysts say the most likely possibility is that IBM's long-running negotiations to shed its computer chip manufacturing operations have resulted in a deal. (

* The Washington Post continued its expansion over the weekend by adding a national edition. Local newspapers across the nation can now deliver with their Sunday papers a 24-page color tabloid edition of the Washington Post. Stephen P. Hills, president and general manager of the Post, said by email that local newspapers would sell the weekly edition "as an add-on to their subscriptions" and that it would include local advertising. (

* The Federal Reserve still plans to wrap up its bond-buying campaign at the end of October and remains likely to raise interest rates in mid-2015, although it now seems less likely to act sooner, analysts say. (




** Ottawa continued to auction off stockpiled medical supplies to the public, even after the World Health Organization requested the protective gear amid an Ebola outbreak raging in West Africa. (

** Ontario is considering funding spots for graduate students from abroad, bowing to pressure from universities that say their global competitiveness is harmed because they have to turn away qualified foreign applicants due to lack of money. (

** TransCanada Corp's C$11 billion Energy East pipeline project has run into another stumbling block in Quebec as public opposition mounts over a possible threat to the endangered beluga whales in the St Lawrence River. The Calgary-based pipeline company is still awaiting provincial government permission to continue its exploratory and drilling work on a planned export terminal at Cacoun. (


** Beginning next year, the Royal Canadian Mounted Police is aiming for the first time to enroll just as many women as men in its training academy in Regina. (

** Liberal leader Justin Trudeau said he would impose greater discipline on himself to avoid making off-the-cuff remarks that his opponents could use against him. In an interview with the Ottawa Citizen, Trudeau acknowledged that his own jokes had sometimes given political fodder to critics. (

** Canada could generate up to C$32 billion more in exports over the next 10 years if it creates a yuan trading hub to do business in the world's fastest growing currency, the Canadian Chamber of Commerce said in a new report. The chamber joined the call of some of Canada's largest banks and financial institutions to promote Canada as a center for renminbi (yuan) trading. (




- Violent clashes erupted in Hong Kong early on Sunday, despite the scheduling of two hours of talks on Monday between the government and students protest leaders.


- The European Union has decided not to launch an anti-subsidies investigation into Chinese telecommunications equipment makers, helping avoid trade wars between the world's two major economies.

- The annual Beijing Marathon was held on Sunday as planned despite the heavy smog, while competitors wearing masks triggered controversy.


- The fourth Plenary Session of the 18th Central Committee of the ruling Communist Party of China, which will start on Monday, will open a new page in the improvement of the country's legal system, this mouthpiece of the party said in an editorial.


- The latest injection of liquidity into commercial banks by the People's Bank of China signalled the government's continued policy to conduct targeted easing to help curb the slowdown in China's economy, economists said.


- Five companies face delisting within 30 days after the China Securities Regulatory Commission on Friday issued new rules to get loss-making companies or those in violation of regulatory practices to delist.



The Times

VIRGIN WAITS BEFORE SEEKING ITS MONEY Days after a rival bank was forced to cancel its stock market flotation, Virgin Money <IPO-VMH.L> has delayed its own 2 billion pounds ($3.22 billion) listing because of the recent collapse in equities worldwide. The lender said that it planned to price its shares "as soon as constructive market conditions allow", but it would not complete a listing by the end of this month. ( HEDGE FUNDS TO SNAP UP TESCO'S ASIA ASSETS Some of the world's largest private equity groups are planning to make offers for Tesco's 9 billion pound Asian business as the ailing supermarket group prepares to publish its delayed results next week. (

The Guardian

BARROSO WARNS CAMERON THAT ARBITRARY MIGRATION CAP WOULD BREACH EU LAW UK Prime Minister David Cameron has suffered a blow to his EU reform plans after the outgoing president of the European commission, Jose Manuel Barroso, said an arbitrary cap on free movement within the EU would be incompatible with European law. ( WATCHDOG TO PURSUE INQUIRY INTO SEX STING AGAINST MP BROOKS NEWMARK

The Independent Press Standards Organisation (Ipso) is to continue to investigate the Sunday Mirror for the sex sting carried out against MP Brooks Newmark even though the complaint against the newspaper has been dropped. This will be the first time that a press regulator has continued to investigate a complaint in the absence of a complainant. It follows new rules by the industry in the wake of the Leveson inquiry into the failures of newspaper publishers that followed the phone-hacking scandal. (

The Telegraph

PRUDENTIAL BACKS 1 BLN STG TIDAL POWER PROJECT Prudential Plc is poised to become the key investor in a 1 billion pound tidal power station, securing the future of the infrastructure project. The FTSE 100 insurer, through its investment arm M&G, is to inject up to 100 million pounds in the Swansea Bay Tidal power station. The insurer will be the cornerstone investor in the project, which is scheduled to open in 2018. The backing from Prudential means the project is now likely to get the go ahead. (

DELTA: AIRLINES WILL ALWAYS FIGHT FOR SPACE AT HEATHROW OVER GATWICK Delta Air Lines Inc, the US airlines giant, has warned that global carriers will continue to fight for space at Heathrow, even if Gatwick is selected for expansion. The carrier, which owns a 49 percent stake in Virgin Atlantic , said any solution to Britain's looming aviation capacity crunch must involve some expansion at Heathrow because the business traveller market surrounding the west London hub is too valuable to surrender. (

Sky News

BRITISH FIRMS CONSIDER PAYING FOR EGG FREEZING British companies have said they would consider following Apple Inc and Facebook Inc's lead by paying for female staff to freeze their eggs. This week one of Europe's largest fertility clinics is opening on the edge of the city of London. (


Gusts of up to 70mph threaten to cause travel disruption and difficult driving conditions as the tail end of Hurricane Gonzalo hits Britain. Gales are expected to affect much of the country on Tuesday, leading the Met Office to issue a "yellow" weather warning for most parts, including the Midlands, northern England, Wales, Northern Ireland, and western Scotland. (



Fly On The Wall Pre-Market Buzz


No major domestic economic reports scheduled for today.



AIG (AIG) upgraded to Buy from Hold at Deutsche Bank
Align Technology (ALGN) upgraded to Buy from Neutral at Goldman
Align Technology (ALGN) upgraded to Outperform from Neutral at Credit Suisse
Alliance Holdings (ahgp) upgraded to Buy from Neutral at Citigroup
Allison Transmission (ALSN) upgraded to Outperform from Neutral at Credit Suisse
BNY Mellon (BK) upgraded to Neutral from Sell at Goldman
Brown Formanupgraded to Buy from Neutral at SunTrust
CONSOL (CNX) upgraded to Buy from Neutral at Citigroup
Comerica (CMA) upgraded to Market Perform from Underperform at Bernstein
Comerica (CMA) upgraded to Neutral from Reduce at Nomura
E-Trade (ETFC) upgraded to Conviction Buy from Buy at Goldman
Freeport McMoRan (FCX) upgraded to Neutral from Sell at Citigroup
Hospitality Properties (HPT) upgraded to Buy from Hold at Stifel
Intrawest Resorts (SNOW) upgraded to Buy from Neutral at Goldman
KeyCorp (KEY) upgraded to Buy from Hold at Deutsche Bank
Micron (MU) upgraded to Outperform from Sector Perform at Pacific Crest
Newmont Mining (NEM) upgraded to Buy from Neutral at Citigroup
News Corp. (NWSA) upgraded to Neutral from Underperform at Macquarie
Prosensa (RNA) upgraded to Overweight from Underweight at JPMorgan
Swift Transport (SWFT) upgraded to Buy from Neutral at Citigroup
TD Ameritrade (AMTD) upgraded to Buy from Neutral at Goldman
TerraForm Power (TERP) upgraded to Overweight from Neutral at JPMorgan
Unum Group (UNM) upgraded to Outperform from Market Perform at Raymond James
Western Alliance (WAL) upgraded to Outperform from Market Perform at Keefe Bruyette


Ambit Biosciences (AMBI) downgraded to Neutral from Buy at Citigroup
American Capital downgraded to Market Perform from Outperform at JMP Securities
Avista (AVA) downgraded to Sell from Neutral at UBS
BancFirst (BANF) downgraded to Market Perform from Outperform at Raymond James
CGG SA (CGG) downgraded to Sell from Neutral at Goldman
CareFusion (CFN) downgraded to Hold from Buy at Stifel
Cliffs Natural (CLF) downgraded to Sell from Neutral at Citigroup
DENTSPLY (XRAY) downgraded to Neutral from Buy at Goldman
Mead Johnson (MJN) downgraded to Hold from Buy at Deutsche Bank
PNC Financial (PNC) downgraded to Hold from Buy at Deutsche Bank
People's United (PBCT) downgraded to Market Perform from Outperform at Raymond James
Preferred Bank (PFBC) downgraded to Outperform from Strong Buy at Raymond James
Primerica (PRI) downgraded to Market Perform from Outperform at Raymond James
Principal Financial (PFG) downgraded to Market Perform from Outperform at Raymond James
Seadrill (SDRL) downgraded to Neutral from Buy at Citigroup
Stillwater Mining (SWC) downgraded to Neutral from Overweight at JPMorgan
Westar Energy (WR) downgraded to Neutral from Buy at UBS


CONE Midstream (CNNX) initiated with a Neutral at Citigroup
CONE Midstream (CNNX) initiated with a Neutral at Goldman
CONE Midstream (CNNX) initiated with a Neutral at JPMorgan
CONE Midstream (CNNX) initiated with an Outperform at Credit Suisse
CONE Midstream (CNNX) initiated with an Outperform at RBC Capital
CONE Midstream (CNNX) initiated with an Outperform at RW Baird
CONE Midstream (CNNX) initiated with an Outperform at Wells Fargo
CyberArk (CYBR) initiated with a Hold at Deutsche Bank
CyberArk (CYBR) initiated with a Neutral at JPMorgan
CyberArk (CYBR) initiated with an Equal Weight at Barclays
FNFV (FNFV) initiated with an Outperform at Keefe Bruyette
MannKind (MNKD) initiated with a Neutral at Goldman
Medley Management (mdly) initiated with a Buy at Deutsche Bank
Medley Management (mdly) initiated with an Outperform at Credit Suisse
Pall Corp. (PLL) initiated with an Outperform at Cowen
Sensata (ST) reinstated with an Overweight at Barclays
Vail Resorts (MTN) initiated with a Neutral at Goldman
Vitae Pharmaceuticals (VTAE) initiated with a Buy at Stifel
Vitae Pharmaceuticals (VTAE) initiated with an Outperform at BMO Capital
Vitae Pharmaceuticals (VTAE) initiated with an Outperform at JMP Securities


GLOBALFOUNDRIES to acquire IBM's (IBM) microelectronics business for cash consideration of $1.5B that is expected to be paid to GLOBALFOUNDRIES by IBM over the next three years
Cleco (CNL) to be acquired by a group of North American long-term infrastructure investors led by Macquarie Infrastructure and Real Assets and British Columbia Investment Management Corporation, together with John Hancock Financial and other infrastructure investors for $55.37 per share in cash, or about $4.7B
Elliott Advisors expressed concerns over Family Dollar (FDO) merger, nominated slate of seven candidates for election to the Family Dollar board at the company’s annual meeting (DLTR, DG)
QEP Resources (QEP) sells midstream business to Tesoro Logistics (TLLP) for $2.5B (QEPM)
Honeywell (HON) sees $280B in business jet deliveries from 2014 to 2024


Companies that beat consensus earnings expectations last night and today include:
Hasbro (HAS)

Philips (PHG) reports Q3 net income EUR (103M) vs. EUR 281M last year
SAP (SAP) cuts FY14 operating profit view to EUR 5.6B-EUR 5.8B from EUR 5.8B-EUR 6B
SAP (SAP) reports Q3 Non-IFRS EPS EUR 0.84 vs EUR 0.78 last year


Yahoo (YHOO) to unveil turnaround, M&A strategy on Tuesday, WSJ reports
Tesco (TSCDY) accounting probe reveals staff's 'inappropriate behavior,' Telegraph reports
Carnival (CCL) cruise passenger tests negative for Ebola, Reuters reports (TKMR, SRPT, BCRX, CMRX, NLNK)
Danone (DANOY) says not carrying out review on Mead Johnson (MJN) takeover, Reuters reports
CBS (CBS) could see 25% gain, Barron's says
Schlumberger (SLB) is inexpensive and has room to rise, Barron's says
Western Digital (WDC) looks like inexpensive big data play, Barron's says
Post Holdings (POST) shares look attractive, Barron's says


Adamis Pharmaceuticals (ADMP) files to sell 2.84M shares for holders
Community Financial (TCFC) files $75M mixed securities shelf
First Busey (BUSE) files $250M mixed securities shelf
Netlist (NLST) files $40M mixed securities shelf
Nuvilex files $50M mixed securities shelf
Sears (SHLD) files automatic mixed securities shelf

Blood Red From Big Blue: Why IBM Is Crashing, In Charts

Remember when three short months ago we revealed what was "the scariest chart in IBM's history", namely the one, showing IBM's total debt to equity ratio, which has exploded and surpassed Lehman highs, as the company scrambled to issue more and more debt and use it to repurchase more and more stock?

With this chart, incidentally, we also explained why IBM's ridiculous stock repurchasing strategy, which had seen $37.7 billion in stock buybacks since 2012, or more than the total debt issuance of $33.6 billion during the same period...

... could not continue and why, inevitably, IBM would have a massively disappointing quarter.

Well, that quarter just hit, when moments ago in an early press release, IBM reported abysmal adjusted EPS of only $3.68, a huge miss to the
$4.32 Wall Street expected, mostly a function of one simple thing: the
buyback "strategy" finally hit a brick wall.

Incidentally, we predicted just this in "The Great Stock Buyback Craze Is Finally Ending." And sure enough, IBM's Net Debt explosion has finally started to recede as even Big Blue is suddenly worried about a very blood red downgrade by the rating agencies.

Don't worry though: there is some hope, if not much, now that the genie is out of the bottle that IBM will revert back to what it does best - financial gimmicks - quite soon:

At the end of September 2014, IBM had approximately $1.4 billion remaining from the current share repurchase authorization. The company expects to request an additional share repurchase authorization at the October 2014 board meeting.

Funny: so does everyone else.

* * *

Ok, fine, the financial engineering of IBM's EPS is finally over, right on schedule, but what about its top line?

Well, it is here that the disaster really shifted into overdrive.

As the first chart below shows, Q3 revenue of $22.4 billion, a huge miss to the consensus $23.37 billion, was the lowest quarterly revenue since... Q1 2009!.

And, just as bad, on a Y/Y revenue change basis, the 5.6% drop was the biggest annual decline in revenue since the Lehman Q3 2009 comp, when sales plunged 6.9%.

Finally, now that the financial engineering no longer fools most of the people all of the time, IBM is finally forced to admit the truth:


Bottom line, at last check IBM shares were down over 8% premarket, an instant loss of $15 billion in market cap, and is dragging the broader indices far lower. Surely, the GIPF will be busy doubling down on its purchases of IBM stock in today's session.

And now the time has come for companies to finally sit down and do the math on the IRR on all those hundreds of billions in stock buybacks.

And the aftermath...

Futures Fade Entire Overnight Rally

And the overnight futures ramp started off so promising.

Now that Abenomics has officially failed (because even Goldman is providing reasons why it didn't work), and Abe is being deserted by his ministers left and right, and not just any ministers but women - the same gender which he has been swearing recently he will do everything in his power to get better employment positions - the Nikkei news service disseminated yet another (no really) blurb about the only leverage Japan has, namely that the $1.2 trillion pension fund will boost its stock allocations from 12% to 25%. Putting this in context it means, that instead of holding $144 billion, the GPIF would own $300 billion, or... just about 3 months worth of Japanese POMO!

Alas, the Mrs Watanabe Kamikaze pilots are unable to do simple math and inversely plunged headfirst into headline, sending the TOPIX +4% overnight, just days after it re-entered bear market territory, because there clearly is nothing like "price stability" of an entire nation's equity index trading like a pennystock on steroids. The headline pushed the USDJPY higher by about 70 pips from the Friday close to just under 107.5, and US equity futures up to just about 1900, before more somber and rational voices took over and picked up on Rosengren's comment from last night that QE3 is ending, absent some dramatic change (like a 5% "plunge" in stocks?), and the USDJPY was back under 107 at last check, with futures back in freefall mode.

For whatever reason, futures have faded the entire move higher, and the huge IBM earnings miss which was announced moments ago will hardly help with the tone today. In fact, the only thing that may be helpful is for Rosengren to do a DieselBOOM and retract.

Overnight, the Nikkei 225 (+3.98%) posted its biggest 1-day gain in over a year, and back above the key 15000 level, exiting correction territory. The index underpinned by reports that the GPIF is working out plans to increase its portfolio allocation to domestic stocks to around 25% from 12%. However, despite a gap higher in European stock futures at the open, the domestic news in Japan failed to feed through and once cash equity trade resumed downward pressure soon was felt from heavyweights SAP (-4.2%) and Philips (-3.9%), both of which issued disappointing earnings reports. The FTSE MIB has outperformed its peers following confirmation this morning that the ECB has started its purchases of covered bonds.

Looking to the day ahead, we have German September PPI (expected at 0% MoM) and Italian August industrial orders and sales (with the former expected in at +0.2% MoM). On top of these data reads, the ECB's Coeure is speaking today in London whilst the EU and Japan are holding trade talks in Brussels. We will also have earnings from SAP, Apple and IBM today as Q3 earnings season presses on.

Bulletin Headline Summary from Bloomberg and RanSquawk:

  • Nikkei 225, finishes up 3.98%, supported by comments that the GPIF is working out plans to increase its portfolio allocation to domestic stocks to around 25% from 12%
  • Focus on disappointing earnings updates from heavy weights SAP, Philips & IBM who are seen down 6% in pre-market
  • Looking ahead direction will likely be dictated by the performance of Wall Street with a lack of scheduled macro events, Apple due to report after-market
  • Treasuries decline, 10Y yields 2.21% after last week’s rally that saw yield slide as much as as much as 33.5bps to 1.862%, lowest since May 2013.
  • Last week’s market gyrations sparked questions about whether bank regulations implemented after the 2008 financial crisis exacerbated price declines by limiting the ability of Wall Street banks to make markets
  • ECB bought short-dated French covered bonds today, according to three people familiar with the matter, who asked not to be identified because they’re not authorized to speak about it
  • The ECB’s unprecedented inspection of lenders’ books will help end a slump in lending that’s dogged southern Europe for years, said executives at some of the region’s largest banks
  • France’s finance and economy ministers fly to Berlin today to try to convince their German counterparts of their plans to improve competitiveness and to press for more investment
  • Fed policy makers are missing a key element as they assess the health of the labor market: data that includes whether those who are employed are overqualified for their job or would like to work more hours
  • Russia’s foreign minister said his country will refuse to accept conditions to end sanctions after talks in Italy failed to produce a breakthrough over the truce in Ukraine’s conflict-ridden east
  • Protest leaders will meet government officials tomorrow for talks to end more than three weeks of pro-democracy demonstrations, as Hong Kong’s top official blamed foreigners for adding to the foment
  • Obama put aside closed-door fundraisers for a few hours and stepped onto the stages at rallies for allies running for governor in Illinois and Maryland, two heavily Democratic states
  • Sovereign yields mixed, EU peripheral yields decline. Asian stocks surge. European stocks fall, U.S. equity-index futures higher. Brent crude lower, gold and copper gain

US Event Calendar:

  • None scheduled
  • Just 4 POMOs to go: 11:00am: Fed to purchase $1b-$1.25b notes in 2019-2020 sector


Bund futures are seen higher into the North American cross over supported by weakness in European stocks after several disappointing earnings pre-market. However, trade has lacked conviction given the lack of scheduled calendar events today resulting in modest volumes (260k). In terms of fundamental news, the ECB has said it has started its purchases of covered bonds, this being confirmation of its previously announced programme, but has helped benefit the peripheral markets with spreads coming off their widest levels.

In terms of US headlines from the weekend:

Fed expected to maintain its steady-stance approach, according to Hilsenrath. (WSJ)

Fed's Rosengren (non-voter, Dove) said he is open to adjustment to the overnight Repo facility as Fed approaches rate rise and can easily imagine conditions in which Fed would keep rates near zero until 2016. Rosengren also added that uncertainty could shift lift-off by 6 months. (RTRS) Fed's Williams (non-voter, Dove) said his baseline forecast implies ending current asset-purchase program this month and rate increases in FFR target range starting sometime next year around mid-2015. (WSJ)


Overnight, the Nikkei 225 (+3.98%) posted its biggest 1-day gain in over a year, and back above the key 15000 level, exiting correction territory. The index underpinned by reports that the GPIF is working out plans to increase its portfolio allocation to domestic stocks to around 25% from 12%. However, despite a gap higher in European stock futures at the open, the domestic news in Japan failed to feed through and once cash equity trade resumed downward pressure soon was felt from heavyweights SAP (-4.2%) and Philips (-3.9%), both of which issued disappointing earnings reports. The FTSE MIB has outperformed its peers following confirmation this morning that the ECB has started its purchases of covered bonds.


FX markets have been relatively quiet as the market continues to take a breath from the high degree of volatility observed last week. GBP/USD has seen some slight out performance with comments from BoE's Weale (soft hawk, dissenter) this weekend who said interest rates need to rise, and the BoE should focus on outlook for prices in 2 to 3 years, not current inflation rate. (Telegraph) Separately BoE’s Haldane (neutral) said that markets have probably overreacted and “what we have seen over the past week is financial markets catching up with the data”. (Observer)


The December WTI crude future contract is seen flat in the North American open as participants look ahead towards the OPEC meeting in Vienna scheduled on the 27th of October and any commentary in the intervening time period that may indicate whether or not the cartel will act to counter the recent slide in prices. In relevant news, Saudi Arabia’s oil exports have fallen to their lowest in three years in August while volumes used by local refineries rose to a record high. The country exported 6.663mln bpd, down from 6.989mln bpd in July. (RTRS)

Copper traded near a six-month low as weak fundamentals and the prospect of fresh supply continues to weigh on prices at the start of LME Week in London. Although China was said to have injected new liquidity in to the banking system over the weekend, markets keenly await tomorrow’s China industrial production and GDP numbers for growing evidence of a slowdown in the world’s biggest copper consumer.

Goldman Sachs sees downside risk to its 6-month copper forecast of USD 6,600/mt as seasonal factors, a once-in-twentyyear supply cycle and lack of China demand for financing deals could will result in a major LME stockpile build. The bank also maintains its 3-month and 12-month forecasts of USD 6,660/mt and USD 6,200/mt respectively. However, Goldman remains bullish on nickel over the next 6-12 months as high-grade nickel ore stocks to be drawn down. (BBG)

* * *

DB's Jim Reid Concludes the Overnight Recap

So what have we learnt from a pretty fascinating and testing week for markets. Above all else we've been given a pretty big clue that global markets still need stimulus to maintain positive momentum. The mere suggestion by Bullard (a non-voter) on Thursday that instead of his previous preference for a Q1 hike, he might actually support an extension of QE, sent markets spiking higher in the last trading session and a half of the week. The S&P 500 and Stoxx 600 ended the week +3.6% and +5.4% above their Thursday intra-day lows with both indices ending the week just -1% lower.

The Fed was not the only central bank making dovish noises as the market was falling last week. In the UK, on Friday the BoE’s chief economist said on Friday that economic data since June had left him “gloomier” about the economy to the extent that he now thought that, “interest rates could remain lower for longer, certainly than I had expected three months ago.” The ECB’s Coeure said on Friday that the ECB Governing Council is, "ready to take additional non-conventional measures, if needed," whilst also commenting that the ECB, “will start within the next days to purchase the assets that are foreseen under our new purchase programmes, with the objective to steer the balance sheet of the ECB to a higher level.” Easing noises were also coming out of China later in the week as Bloomberg News reported that the PBOC is set to inject around 200bn Yuan into some national and regional lenders to help them prepare for year-end liquidity needs according to, “a government official familiar with the matter.”

So with all this attention on central banks, as this week progresses markets will likely start focusing on the 2-day FOMC next Tuesday/Wednesday. Although there's no planned press conference the statement will be heavily anticipated as will whether they decide to keep the last legs of QE going. I'd imagine most would think it unlikely that they will but much might depend on what transpires this week. If Bullard's turnaround continues to reassure the market then maybe there is less need to heed his advice.

Wrapping up the market moves on Friday, credit markets reflected the positive sentiment as Main and Xover closed 5bps and 30bps tighter respectively in Europe whilst US credit indices saw similar moves. Bond markets in the European periphery recovered some of the widening earlier in the week, led by 10 year yields in Greece which rallied 84bps to close below 8%. Treasuries and Bunds were weaker both closing 4bps wider whilst the VIX also fell sharply, ending Friday down almost 10points at 22 from its Wednesday high.

Asian markets are following the stronger US tone from Friday. Bourses in Hong Kong, Sydney, Shanghai and Seoul are up +0.3%, +1%, +0.3% and +1.5% respectively. Whilst in Japan, equities have received a boost with the Topix rallying 3.7% following a report in the Japanese press over the weekend that the $1.2tn Government Pension Investment Fund plans to raise its allocation target for domestic shares to 25% from 12%.

Looking ahead, in lieu of the FOMC meeting next week, one of the biggest data points of the week is US CPI on Wednesday. As Joe Lavorgna pointed out to us, since late June the 5-year breakeven inflation rate has declined roughly 60 bps to 1.5% and now stands at the lowest level since September 2011 (1.4%). So the inflation number over the next few months could have a large impact on the Fed's ability to raise rates over the next 12-18 months. We still think they'll struggle to raise rates much before the next recession when they'll be forced into QE again.

Looking to the day ahead, we have German September PPI (expected at 0% MoM) and Italian August industrial orders and sales (with the former expected in at +0.2% MoM). On top of these data reads, the ECB's Coeure is speaking today in London whilst the EU and Japan are holding trade talks in Brussels. We will also have earnings from SAP, Apple and IBM today as Q3 earnings season presses on.

It looks set to be a busy rest of the week for economic data too. We will get Chinese investment and retail sales reads on Tuesday as well as Q3 GDP. Later on Tuesday we'll also get US existing home sales data, whilst the EU, Ukraine and Russia are scheduled to hold gas talks in Brussels. On Wednesday we will get the BoE's latest minutes and the aforementioned September CPI data for the US. Thursday is PMI day as we see the October PMI reads for Japan, China, France, Germany, the euro area and the US. Given current global growth concerns this numbers looks set to be even more important than usual, with particular focus on the European releases. Also on Thursday we will get French October manufacturing and business confidence, UK September retail sales, US jobless claims, the Chicago and Kansas Fed activity indices and EU leaders will meet for a summit. Finally on Friday we will get the latest China property price data, the November German GfK, Italian August retail sales and September wage growth, UK Q3 GDP, US new home sales data and French unemployment. The rating agencies are also set to release their latest rating reports on Germany, Italy and Spain. In terms of other major earnings reports this week, in Europe we have GSK, Credit Suisse, Daimler, Tesco, and BASF reporting whilst in the US Verizon, Boeing, Dow Chemical, AT&T, Caterpillar, Amazon, Microsoft, P&G and Ford are all releasing earnings.

Also on the agenda this week are the results of the ECB’s AQR and stress tests which are expected to cover around 130 banks, with the results of the probe set to be officially published on Sunday. The banks will get the results a few days earlier so it may be inevitable that leaks start to occur later in the week.

Public Health Expert Explains How to Prevent a Panic About Ebola: Tell the Truth!

The head of the Center for Infectious Disease Research and Policy at the University of Minnesota – Dr. Michael Osterholm – is one of the world’s top infectious disease experts and a prominent public health scientist.

Dr. Osterholm just gave a talk shown on C-Span, explaining how to prevent the public from panicking about Ebola:

I categorically reject the idea that you can’t tell people you “don’t know” … because you’re afraid you’ll scare them.


There is a complete [scientific] literature on risk communications that says people are never frightened if you tell them you don’t know, but “this is what I’m doing to learn”.  Or [if you tell them] “this is something, and it might be very scary.”


The literature shows – over and over again – there are 2 things that will turn them to be very concerned … if not scared.


One is if you tell them with certainty “A”, and then you tell them with certainty “B”, and then A and B don’t happen … or they happen in a way you didn’t tell them.  Then they wonder about your credibility.


The second thing is if you get dueling banjos.  If you get one one person saying A, and another person saying “oh, you’re going to scare people, don’t say that” … because it’s not true. The literature supports that’s when people get concerned.




One of the worst enemies we can have today is dogma. Dogma should be, at the first instance, the thing we jettison immediately Do not fall into the trap of dogma. I see far too many today doing that for the fact that they want to reassure the public about A,B or C … and that is a dangerous path.

And see this.

Dr. Osterholm gives an example: the medical community is trying to downplay the fact that some people with Ebola never have a fever … right up until the time they die. The failure to talk openly about this fact will only end up shaking people’s confidence:

(And temperature screening is easily fooled, even when an Ebola carrier does have a fever.)

One of our recurring themes is that happy talk doesn’t fix anything.

Giving false assurances only backfires … instead making people lose trust in their governments and institutions, and increasing their fear.


Bonus: Top Ebola Experts: This Strain Is Much Worse Than We’ve Ever Seen Before (Video)

The Pentagon Will Use 30 Person "Quick-Strike Team" To Deal With Domestic Ebola Patients

President Obama may have been busy golfing this weekend, and his brand new Ebola Czar may have had more pressing matters to attend than the White House's Saturday evening meeting on the US "response to domestic Ebola cases" (because clearly the Ebola Czar is superfluous at such Ebola-related events), but that doesn't mean that the administration will once again be caught with its pants down the next time an Ebola index patient is unveiled on US soil. Nope.

In taking a page right out of America's response to the Ebola pandemic in... West Africa, where the US has dispatched several thousands troops to do, something, unclear what, earlier today, it was revealed that the U.S. military is forming a 30-person "quick-strike team", which according to CNN is "equipped to provide direct treatment to Ebola patients inside the United States, a Defense Department official told CNN's Barbara Starr on Sunday."

From CNN:

The team will be under orders to deploy within 72 hours at any time over the next month, the official said.  The Department of Health and Human Services requested the military team, and the Pentagon has given verbal approval, the official said.


The team will include five doctors, 20 nurses and five trainers, Pentagon press secretary Rear Adm. John Kirby said in a statement.


The Pentagon has been working to determine what assistance it could offer the civilian health care sector following a White House meeting last week during which President Barack Obama said he wanted a more aggressive response, according to two Defense officials.


Defense Secretary Chuck Hagel ordered chief of the Northern Command, Gen. Chuck Jacoby, "to prepare and train a 30-person expeditionary medical support team that could, if required, provide short-notice assistance to civilian medical professionals in the United States," Kirby said.


Jacoby is already working with the military on the joint team, Kirby said, and once formed, it will head to Fort Sam Houston in Texas for up to seven days of training in infection control and personal protective equipment. The training, provided by the U.S. Army Medical Research Institute of Infectious Diseases, will begin "within the next week or so," Kirby said.


The team will remain in "prepare-to-deploy" status for 30 days, he said. It will be able to respond anywhere in the U.S. if "deemed prudent by our public health professionals," he said.

To summarize: the Pentagon, as in the US army, will provide direct treatment to Ebola patients.

So just how exactly is the US army's crack 30-person "SWAT" team which has a whopping 5 doctors, more competent to deal to deal with what is, at last check, a medical situation than, say, America's medical professionals? Or is, in the parlance of our times, where an "Iraq military advisor" really means crack commando fighting Syrian troops on the ground on behalf of Qatar and Saudi Arabia, "direct treatment" merely a euphemism for something far less enjoyable?

For the partial answer to some of these questions, please read "Public Health Emergency Declared In Connecticut Over Ebola: Civil Rights Suspended Indefinitely, and also "Obama Mobilizes National Guard, Army Reserves To Fight Ebola" - they serve as a good starting point for where all of this is ultimately headed.

Three Of The Four JPMorgan "Market Bottom" Indicators Are All Flashing "Oversold" Green

In the past week we discussed how to determine market bottom (or top) conditions either in extensive verbiage, or various pretty charts of the most prominent inflection points in US market history. Whether or not those are relevant to the current centrally-planned regime, where all of a sudden everyone is shocked, SHOCKED, to learn that there is no bond market liquidity (something we kept warning about again and again and again), remains to be seen. Still, some such as JPM, are already rushing to the defense of their clients (i.e., the people to whom JPM's prop desk may have some selling left to do) by providing a handy backtest of which key technical indicators proved useful in the past when determining market bottoms (if not tops - that one JPM will probably never, ever disclose), and what these are saying at this moment.

So for all those who need convincing that the "bottom is now in", and are desperate to BTFD because other, greater fools will also BTFD and so on, here it is, straight from Jamie Dimon's (well, technically Nikolaos Panigirtzoglou's) mouth:

The recent correction is also raising questions about which indicators have been useful in gauging equity market bottoms. The current equity market correction is the 19th (with 5% or more decline in the S&P500 index) since the current equity bull market started in March 2009. One simple way to assess which indicators have been useful in calling the bottom is shown in Table 2. Table 2 shows the minimum reading of four technical indicators within 2 days before or after each equity market bottom. These four indicators are 1) 14-day- RSI or Relative Strength Index which is a price based technical indicator comparing the magnitude of recent price gains and losses to identify overbought or oversold conditions, 2) 14-day VZO or Volume Zone Oscillator which is a volume based technical indicator. VZO separates up volumes from down volumes, it smoothes these volumes by an Exponential Moving Average for a given period, and then divides by the total volume for the same period. Similar to RSI, VZO’s usefulness is in identifying overbought/oversold volume conditions, 3) the S&P500 skew which is an option based price indicator we regularly use in our Option Skew Monitor in Chart A8 in the Appendix and the 4) call/put turnover ratio for US equities as reported by CBOE which is an option based volume indicator.


The green colour denotes a “successful” indicator, i.e. an indicator which happens to be below its lower threshold within 2 days before or after the market bottom. The lower threshold is defined as two standard deviations below the mean since 2009, for all of the four indicators. The message from Table 2 is that RSI and VZO appear to be the most useful indicators followed by the call/put turnover ratio. All these three indicators are currently pointing to oversold conditions. Last time this happened was in August 2011. One of the characteristics of the August 2011 correction was that the equity market was slow to recover.


What are you doing still reading this? You should be out there BTFD with both hands (and certainly the mini bounce into Friday was telegraphed from a mile away)! And after all, JPM has a lot of selling left into this "oversold" market.

The Chart That Explains Why Fed's Bullard Wants To Restart The QE Flow

Remember when the Fed (and their Liesman-esque lackies) tried to convince the world that it was all about the 'stock' - and not the 'flow' - of Federal Reserve Assets that kept the world afloat on easy monetary policy (despite even Bullard admitting that was not the case after Goldman exposed the ugly truth). Having first explained to the world that it's all about the flow over 2 years ago, it appears that, as every equity asset manager knows deep down (but is loathed to admit for fear of losing AUM), of course "tapering is tightening" - as the following chart shows, equity markets are waking up abruptly to that reality. So no wonder Bullard is now calling for moar QE - he knows it's all there is to fill the gap between economic reality and market fiction.


Tapering is Tightening.... as the flow of Fed free money slows... so equity performance suffers.


Of course it's not just the Fed (as Citi shows below) but for now the ECB seems unable to pull the trigger and the BoJ is hitting both political and market sentiment limits on its craziness.


And we better get moar... because the gap between perception and reality is huge...


Charts: Bloomberg and @Not_Jim_Cramer

The Crowded "Long-Dollar" Train Just Got Even More Crowded

With two weeks of weakness, one might be forgiven for thinking the crowded "long-dollar" train had let off a few passengers (after its post-Bretton Woods record-breaking streak of gains).



But no, as Goldman notes, that train just got even more crowded... as overall USD speculative net positioning is now the most long it has been in recent memory.



EUR net shorts increased $1.4bn to $24.6bn.

JPY net shorts decreased $1.2bn on the week to $11.8bn.

*  *  *

As an aside, just as we warned, the collapse in short-end yield in the last 2 weeks followed the most net short speculative positioning in 2Y futures since 2007...


...and is likely not over yet... as even though the net short has been unwound extremely rapidly, in 2007, the yield compression did not stop there.


Source: Goldman Sachs

Equity Futures Open Higher, Retrace 50% Of Losses On USDJPY Kneejerk

UPDATE: A little early to call yet but Fed's Rosengren quoted in FT "QE will end in October unless something dramatic happens" has knocked USDJPY and S&P lower...


More incoherent chatter from Japan about raising Japan's GPIF allocation to "more than 20%, or around 25%" on the basis of Prime Minister Shinzo Abe's 'expert views' have sent USDJPY higher out of the gate and thus S&P 500 futures are tracking - just as they did Friday afternoon - higher. Treasury futures prices are 6 ticks lower (+2.5bps yield) - retraced all the bond-short capitulation gains from Wednesday. S&P futures are 9pts higher - retracing 50% of last week's losses.




Did this...


Which means this...


Dead cat bounce (as the majors track back down to Russell 2000 weakness on Friday)... or new new highs?

Charts: Bloomberg