…And “Horrible, Unacceptable” GE Goes Green

Having tumbled 10% in the pre-open after massively missing earnings expectations and slashing guidance, panic-dip-buyers have stepped in and (thanks in large part to passive index buyers flooding into The Dow), General Electric is now green…

"Kitchen sink" is the new no-brainer… as CEO call sit "horrible and unacceptable"


Dow-buyers helping out (and it looks like some Dow vs GE pairs hit at the open)…


It seems Dow at 1000x the price of GE remains solid resistance…


Institutions Are Selling To Retail Investors At An Unprecedented Pace

According to the latest EPFR fund flow data compiled by BofA’s Michael Hartnett, the great “institutional to equity” stockholding rotation is accelerating, with another $8.8bn allocated to equities, more than all of it from retail investors, and another $5.8bn going into bonds, offset by a $0.4bn outflows from gold.

Ironically, the one place where active investors are still putting back at least a token fight against the robots is in bonds, where $3.6bn went into active bond funds this week vs “only” $2.2bn into passive bond ETFs. And, as Hartnett writes, active AUM is fighting back, if only in bondland, where there have been $1.04tn in active bond inflows past 10 yrs vs. $0.93tn into passives…

…. a very different trend from what has taken place in stocks in the past decade (Chart 2) where institutions are delighted to dump to “low-cost” passive alternatives.

Of course, this particular “great rotation” is no surprise: earlier this week we were surprised to report that on its conference call, Morgan Stanley reported that the cash levels in its clients (retail) accounts, is the lowest it has ever been:

… we’ve been talking about our deposit deployment strategy for quite sometime, and we’ve been investing excess liquidity into our loan product over the last several years. In the beginning of the year, we told you that, that trend would come to an end. We did see that this year. It happened a bit sooner than we anticipated as we saw more cash go into the markets, particularly the equity markets, as those markets rose around the world. And we’ve seen cash in our clients’ accounts at its lowest level.

Meanwhile we also showed that institutions continue to sell at a torrid pace, and as BofA reported, in the last week when the S&P hit new all time highs, its clients were net sellers of US equities for the fourth consecutive week. Large net sales of single stocks offset small net buys of ETFs, leading to overall net sales of $1.7bn. Net sales were led by institutional clients, who have sold US equities for the last eight weeks; hedge funds were also (small) net sellers for the sixth straight week.

The best way to visualize the institutional selling? This chart from BofA:


Who bought? Why retail’s favorite investment product of course, ETFs: “Private clients were net buyers, which has been the case in four of the last five weeks, but with buying almost entirely via ETFs. Clients sold stocks across all three size segments last week.”

* * *

Going back to the latest fund flows report, BofA reports that for all the talk about an imminent surge in interest rates, yields are still winning: $6.3bn inflows to IG+HY+EM bonds this week; investors continue to discount low-rate environment. This happens as the 5s30s yield curve (88bps) is the flattest since GFC, a fact Mike Hartnett finds “remarkable given the Philly Fed Employment outlook hit a 50-year high today.” Just as surprisng: bond funds have now seen 31 straight weeks of inflows, as investors continue to overwhelmingly pick yield over capital appreciation.

Across the globe, Japan is losing (for a change), with a record $4.4bn outflows from Japan equities (86% ETF redemptions, possibly via BoJ); which is odd considering the Nikkei hasn’t had a down day in the past 14 days: the longest stretch of gains on record! It likely won’t last however, with BofA predicting that after Sunday’s election “we expect Japan TOPIX to revert to tracking US bond yields (Chart 4).

In the US, where the S&P just hit all time highs, there was a solid week of $7.5bn US in equity inflows.

Some more bad news for professional investors:  while there have been inflows in 17 of past 19 weeks, all of this continues to go into passive funds, with $11.1bn flowing into ETFs offset by another $2.2bn outflow from mutual funds.

As a result, Hartnett concludes that robots continue to win, especially since this week’s launch of the 1st ETF in which stocks will be selected by robots (AIEQ) comes as tech funds see biggest inflows in 38 weeks; AIEQ outperforming SPX thus far.

As for the retail equity euphoria, nowehere is it more obvious than in BofA’s high net worth client tracking where YTD flows show a decisive cyclical shift by private clients, who are buying bank loans, financials, EAFE ETFs, while shunning quality, utilities, large caps & dividends (Chart 6). And as the next chart shows, equity allocations among BofA private clients are just shy of all time highs, and well above where they were during the last market peak.

BofA’s takeaways:

  • Alpha in bonds; inflows to active funds continue to outstrip passive
  • AIpha in stocks: first ETF where stocks selected by robots launches amidst biggest Tech inflows in 38 weeks
  • Tick-tock: risk-on equity & bond flows push B&B indicator up to 7.6

To which we can only add: the rush by institutions to dump their equity holdings to retail investors – courtesy of “low-cost” ETFs – has never been greater. The only question now is when does the Fed pull the trapdoor, as it always does just when the market peaks…


Can Trump Drive A Wedge Between Saudi-Russian Alliance?

Authored by Zainab Calcuttawala via OilPrice.com,

Together, Russia and Saudi Arabia produce a fourth of the world’s oil. The laws of competitive international commodity trading have pit the two petrostates on opposite poles of the U.S.-Russia geopolitical rivalry. But a new era of American oil exports and ailing national budgets is pulling Moscow and Riyadh together in trying financial times.

President Barack Obama’s administration maintained a cold distance from Saudi Arabia in its final years. As the United States and its European allies began a war against the Islamic State in 2014, Saudi Arabia focused its military might on Yemen—a country on the Arabian Peninsula facing the brutal consequences of an extended Arab Spring. Iranian arms and funding reached the pockets of the Shiite Houthi rebels, who hoped to build a new regime in Yemen, to the chagrin of Wahabbi Saudi Arabia. 

President Donald Trump’s White House has extended an olive branch towards Riyadh as the new State Department lays out its foreign policy agenda.

But this new diplomatic program runs contrary to the KSA’s economic goals. American oil exports, reinstated back in December 2015, counter the effects of OPEC’s landmark agreement to lower bloc-wide output by 1.2 million barrels per day in an effort to alleviate an international supply glut.

As a major oil exporter, Russia was invited to participate in the agreement when it was being discussed back in 2016. American exports were still limited to specific destinations back then, and U.S.-based companies had only just begun to secure supply contracts in Asian and European markets. Any threat to the success of the deal from the other side of the Atlantic seemed far-fetched just a year ago. 

But the tables have turned.

Washington doesn’t rely on oil profits to run its nation. Moscow and Riyadh do—and heavily so. A boost in active rigs in the Permian basin, as well as other areas in the north of the country, has put shale oil and gas in the center of Russo-American geopolitics. As Moscow approves an extension of its 300,000-bpd output drop commitment with OPEC, the U.S. department of energy eyes new markets for American fossil fuels. Energy Secretary Rick Perry made his rounds to Japan in May to open the world’s largest liquified natural gas (LNG) consumer’s doors to U.S.-drilled supplies. The carbon-light fuel is considered a gateway energy source for developed countries as grid systems shift to renewable and alternative power options.

In Europe, American infringement of Russian dominance in gas markets is even clearer. The European Union has faced off against Moscow regarding the Crimea annexation and the Syrian revolution in recent years, but Russian control over Europe’s energy supplies undermined the continent’s geopolitical leverage. 

This new landscape puts Saudi Arabian interests in line with those of Russia. Both mega producers need to contain the growth of the outbound American fossil fuel industry, but the Iran issue remains a key point of contention between Riyadh and Moscow. The KSA is neck-deep in a showdown against Qatar for its involvement with Tehran on the South Pars gas field. New Crown Prince Mohammad bin Salman’s assertive stance locks the country in an irreconcilable rivalry with Iran. In contrast, Moscow stood by Iran through the latter’s experience as an international global pariah.

So far, President Trump has announced Iran’s official decertification from the nuclear deal, which doesn’t dismantle the deal completely, but provides the Republican Congress a route to sanctions it didn’t have before. The White House also approved new sanctions against the country’s Revolutionary Guard last week. These new developments are bound to bring back the Tehran and Moscow alliance in full force, potentially alienating the KSA in its anti-Iran stride.

The exact dynamics of the Moscow-Riyadh axis are still being forged in OPEC meetings around the world. Time will tell whether Saudi wants this new ally badly enough to reduce its belligerence against Iran, if that’s what the future of the relationship comes to.


Gold, Yen Jump After Reports Yellen Returns To The White House (For Lunch With Gary Cohn)

Update: Reuters reports a White House spokesperson confirms Yellen is at The White House for lunch with Gary Cohn – nothing out of the ordinary.

Yellen odds fell back to 24% from 30%.

*  *  *

You know it’s a quiet day when…

Gold is up, USDJPY down, TSY yields tumble after reports that Janet Yellen is back at The White House following her 30 minute meeting with President Trump yesterday…

Bloomberg reports:


Gold, Yen, and Bonds jump…

Perhaps it’s time to turn the algo sensitivity dial down from ’11’.

And Yellen’s odds just exploded…


Junk Bond Managers Are Now Buying Equities

Stocks are so hot that junk bond managers want in to equity markets. Bloomberg’s Lisa Abramowicz explained the conditioning that’s led to this – simply that the performance rankings of corporate debt funds shows that those which are taking the most risk have, not surprisingly, booked the best performance in 2017. While this involved purchasing lower-rated credit instruments, in some cases, it has meant buying more equities.

Abramowicz cites two funds, firstly the Fidelity Capital & Income Fund, this year’s top-performer in high yield debt. FC&IF steadily increased its equity exposure to more than 20% earlier this year.

Secondly, the Loomis High Income Fund increased its equity holdings by more than six times between mid-2016 and early 2017, albeit from a low level.

Besides purely ignoring risk for return’s sake, we suspect that active portfolio managers are also responding to the career risk of losing funds to passive investment vehicles. In addition, we suspect some are probably adherents to the synchronised global growth thesis and bonds don’t have the same “juice.”

Abramowicz attributes the behaviour to managers seeing less value in risky credit than in equities. As she shows, the incremental yield on junk versus the yield on the S&P 500 has narrowed considerably.

Abromowicz expects this to end badly, which most of us know this to be true. We also know that this  behaviour is not confined to the wealth management sector.

The lead story on the front page of the Sunday Telegraph’s Money section at the weekend was “Insurer’s risk-taking threatens next crash.” The article cited a warning from the IMF “The International Monetary Fund has issued a stark warning about the potential for a giant shock from the industry amid some serious dangers lurking ‘under the surface’…as they battle to deliver returns against historically low interests rates…’Market risk is rising. The search for yield may have gone too far. There is simply too much money chasing too few yielding assets,’ said Tobias Adrian, IMF' s financial counsellor.”

It always brings us back to our central banking friends, who have carefully fermented twin bubbles in equities and bonds as portrayed in the following slide from Fasanara Capital (see “What To Look For If This Is Indeed A Major Bubble")

And the positive feedback loops that go with them, which support the “trending” in bull markets.

As the slide theorises, “An unstable equilibrium is a state in which a small disturbance will produce a large change.”


Dan Loeb: “We Have Climbed Over The Market’s Wall Of Worry This Year”

Dan Loeb entered 2017 bullish, certainly much more so than most of his hedge fund peers, and so far it has paid off. As he writes in his latest quarterly letter to investors, in which he wastes no time to report his Q3 and YTD returns (of 3.4% and 14.5%, outperforming the S&P’s 14.2%), “the big surprise for the markets in the past twelve months has not been political events like Brexit or Trump’s election but the degree and breadth of global GDP upgrades, as shown in the chart below…. Global GDP revisions on a twelve month trailing basis are positive for the first time since the European sovereign crisis in 2011. They have fueled an earnings-driven – as opposed to a multiple-driven – equity markets rally, especially in markets levered to growth upgrades. We believe the US has room to lead versus the rest of the world from here and while we have increased exposure to Europe overall this year, primarily through our substantial investment in Nestlé, the majority of our portfolio remains in US equities.”

Of course, as Loeb admits, this upside surprise is “largely owed to the worldwide easing of financial conditions that started during the first quarter of 2016, catalyzed by the weakening of the US Dollar and the Fed’s failure to execute on its forecasted four interest rate hikes last year.” Artificial as the growth may be, Loeb does not see it ending any time soon, in fact…

supported by strong global GDP growth and the prospect for tax reform, S&P 500 earnings prospects are solid. Bottom-up estimates imply ~12% earnings growth next year ($146 for 2018) which would still be ~7% after the typical 5% haircut that such estimates experience as the year unfolds. This is not unrealistic considering that a variety of macro indicators like the ISM and consumer confidence are consistent with double-digit forward earnings growth. While the outcome of tax reform is uncertain, it could conservatively add 5% to EPS which would put 2018 earnings growth in the double-digit zone. While the implied ~17.5x forward price-to-earnings ratio is high by historical standards, low interest rates coupled with still solid earnings growth suggest valuations can remain high amid a tame business cycle.”

Incidentally, 146*17.5x is 2,555 on the S&P, and with stock trading at 2,568 at this moment, it would imply that stocks are already trading at a premium to the double digit EPS growth assumed for next year and applying one of the highest fwd PE multiple on record.

Looking ahead, Loeb predicts that only an “exogenous shock” such as a recession can kill the party, although ever the optimist, the Third Point manager says that the risk of a recession is low, for three reasons:

The biggest risk to our positioning and view is a recession. Recessions are, by their nature, unexpected. However, we think that the risk today is low for three reasons:


  1. economic growth levels are relatively high and momentum is fairly stable. When these conditions are present, recession risk is low, particularly in the near-term;
  2. in the medium-term, recent inflation has been less responsive to changes in “slack” (the unemployment rate) than it has been historically. This lowers the chances that the Fed will need to hike aggressively, which in the past has been associated with increased recession odds if it failed to properly calibrate policy withdrawal;
  3. credit growth has been subdued. While there are pockets of the credit markets that pose risk, we have not seen evidence of broad-based excesses and thus do not see a systematic risk of a popping credit bubble at present.


Considering these three factors and with recession models flagging low risk, we are comfortable with our positioning but vigilant in looking for data that could alter our current thesis.

In fact, according to Loeb, there is absolutely nothing that presents a risk factor any more.

Mapping out the course to year-end, we see more of the same conditions. While we invest a lot of time and effort in the analysis of policymaking, it doesn’t appear for now that any of the incremental changes under consideration in tax cuts or rates – whether or not they come to pass – will materially impact the markets. We expect the Fed to continue to raise rates but changes to FOMC leadership will determine the pacing.

Throwing shade at his billionaire peers, most of whom have in recent months listed numerous – and valid – reasons why they refuse to chase the low-volume, central bank driven levitation to all time highs, Loeb writes that his fund “climbed over the market’s wall of worry this year by focusing on data and facts, adhering to our process, and avoiding emotional reactions to news headlines and sentiment shifts.”

 Backed by an understanding of the favorable global economic backdrop, we have generated profits this year through stock picking, where opportunities have been plentiful across sectors and on both the long and short sides. While our long book has been the standout, single name shorts, which account for almost 20% of equity exposure, have generated substantial alpha. Our credit exposure – in corporate, structured, and government – is modest, and we are committed to being disciplined in this asset class, particularly when equities are this compelling. This is one of the benefits of having a bottom-up process of asset allocation.

Finally, even Loeb admits that what was originally a distressed debt, high yield bond fund (as per his background at Jefferies) has had to shift its investment focus and “pay up” for “higher-quality companies with market-dominating positions”, as well as addition of an “internal data science team and hired a full time practitioner of the dismal science of market strategy.

Our approach to investing at Third Point has always been to be adaptable and dynamic and, when necessary, to learn new skills necessary to excel in financial markets. When we started the firm in 1995, we were primarily a distressed debt and high-yield shop that minored in special situations such as risk arbitrage and spin-offs. During the late 1990s, we scoffed at the business models and valuations of some of the high flying tech stocks of the day and eventually profited by taking short positions in them before the bubble popped. More recently, our equity investment framework has drawn us to larger market capitalizations and we have learned to “pay up” for certain higher-quality companies with market-dominating positions. We continue to invest in companies where we see great potential hamstrung by poor management or governance but we have developed a way of working constructively with boards and management teams to effect change and drive sustainable value for all shareholders. In credit, we have added expertise in structured credit and sovereign debt since the financial crisis, allowing us to invest successfully during dislocations in those markets. Our ABS credit expertise has also positioned us to invest in the equities as well as structured products of several promising fintech companies. Over the past year, we have developed an internal data science team and hired a full time practitioner of the dismal science of market strategy. Perhaps the most important development has been the evolution of the firm’s culture which, among other things, emphasizes collaboration, transparency, candor, and a dedication to supporting one another in our efforts to improve our thought processes and skills.


On a broad level, this growth of our skill set across a spectrum of securities and geographies has been part of an overall commitment to process improvement and “Kaizen”. In a time of great change, our job is to stick to our process and generate superior risk-adjusted returns for our partners while keeping an eye around the next corner. We are well-positioned to do this with the combination of a senior investment team with an average of nine years of experience at Third Point and innovative, new data science and macro groups hired over the past year.

Full letter below:


Zimbabwe Panic Sends Bitcoin Soaring Over $6000 – Now Bigger Than Goldman Sachs

Cryptocurrencies are broadly higher this morning with Bitcoin leading the way to new record highs at $6000 – nearing $100 Billion market cap, bigger than Goldman Sachs – as demand from Zimbabwe soars (and Spanish concerns see activity rise).

Most of the biggest cryptos are higher…

But Bitcoin is leading – now above $6000 for the first time ever…

And is now 'bigger' than Goldman Sachs…

As CryptoCoinsNews reports, Zimbabweans are attempt to escape yet another currency debacle…

According to TheNational.ae, bitcoin adoption in Zimbabwe is seemingly skyrocketing as the country’s economic situation looks bleak. So much so, that one bitcoin is trading at nearly $10,000 on the Golix.io exchange, while the global average is, at press time, of $5,642.00.


According to a local trader, bitcoin isn’t just being bought by individuals, but by businesses with bills to pay. The country adopted the U.S. dollar back in 2009 as its fiat currency, as the Zimbabwean dollar had lost nearly all its value.


At press time, LocalBitcoins Zimbabwe has people buying bitcoin at the global average, and some buying the cryptocurrency for cash for well over $10,000 in the country’s capital. Bitcoin, as every bitcoiner would expect, is helping people in the country survive times of economic uncertainty, as Zimbabwe has been embroiled in a crisis for years.

Where to from here? Some suggest $7000 is a key technical intersection…

h/t @Phinamics


Gold Star Widow Releases Trump’s Call: “Tell Your Children I Said Their Father Was A Great Hero”

As the imbrogilio over President Trump's private call to the widow of Sgt. David Johnson killed in action in Niger continues to torment, The Daily Caller's Henry Rodgers reports Gold Star widow Natasha De Alencar released the audio of a phone conversation she had with President Donald Trump in April about the death of her husband who was killed in Afghanistan.

“I am so sorry to hear about the whole situation. What a horrible thing, except that he’s an unbelievable hero,” Trump told her in the call about her husband Army Staff Sgt. Mark R. De Alencar, which The Washington Post released.


“Thank you. I really, really appreciated it,” she said. “I really do, sir.”

Trump also told the widow if she is ever in Washington D.C. that she is welcome in the Oval Office.

“If you’re around Washington, you come over and see me in the Oval Office,” he said.


“You just come over and see me because you are just the kind of family … this is what we want.”


“Say hello to your children, and tell them your father he was a great hero that I respected,” Trump said.


“Just tell them I said your father was a great hero.”

The phone call was released after White House chief of staff Gen. John Kelly pushed back against Florida Democratic Rep. Frederica Wilson’s criticism that Trump told Sgt. Johnson’s widow “he knew what he signed up for,” during Thursday’s White House press briefing.

And finally, the story has now morphed to being about General Kelly and not what President Trump may or may not have said to Sgt. Johnson's widow – it appears MSNBC has decided that Kelly's emotional comments…

Were driven by his racism…

MSNBC host Lawrence O’Donnell said he was “stunned” by White House chief of staff John Kelly’s remarks about Democratic Rep. Frederica Wilson of Florida, suggesting that the former general was a product of a racist upbringing.


“John Kelly never sat next to Frederica Wilson in his elementary school,” he added.


Joy-Ann Reid lauded fellow MSNBC host Lawrence O’Donnell’s Thursday night segment in which he characterized White House Chief of Staff Gen. John Kelly’s attack on Democratic Rep. Frederica Wilson as the product of his “segregated” Irish Catholic upbringing.


You Think You’re Free, Catalonia? Think Again, Spain Says

You Think You’re Free? Think Again, Spain Says, Begins Preparations to Crack Down on Catalan

Written by Nathan McDonald, Sprott Money News


You Think You're Free? Think Again, Spain Says, Begins Preparations to Crack Down on Catalan - Nathan McDonald


Governments all over the world need control: they need control over “their” people, they need control over “their” money supply, and through this control they can grow their power and ability to dictate our everyday lives.



Everyone is born under a system of control in today’s modern world. Arguably, for most of history, it has been this way. Sure, we are given freedoms as long as we play within our specifically defined set of rules, but just try to break these rules and watch how quickly the hammer comes down on top of your head.



This is exactly what we have witnessed on October 1st, within the Catalan region of Spain, who voted OVERWHELMINGLY, 92.1% in fact, to exit Spain and become independent. This was a nonviolent, democratic process, by a set of people of a specific region, yet they have learned the hard way that their destiny is far from their own.



The government of Spain looks at this prosperous region as theirs and the people that make up this area are their cash cows – cash cows that are attempting to hop the fence and drift off the farm. This cannot and will not be allowed.



The violent crackdown that we witnessed on October 1st showed the government of Spain’s hand, but they are far from the only government that would act in this way. The global elites of both the West and the East all would act in a similar manner.



Prime Minister Mariano Rajoy is now taking additional steps, invoking Article 155 of their Constitution, which gives them the right to “restore the legality” of the semi-autonomous region. Which I’m sure as you can guess, means forcefully removing the “renegade” government of Catalonia by any means necessary.


Still, Catalonia’s President Carles Puigdemont is not backing down in the face of these threats and hopes that the region can separate peacefully – a truly hopeful wish in my opinion.



This has led to civil society organizations within Catalonia to call for retaliation against the government of Spain, requesting that all citizens within the region initiate a bank run by withdrawing their funds all at once, together.



If you think this call to action is to be taken lightly, then you are forgetting one of the key elements that give the ruling class their power: their control over the fiat money supply and the banking system that keeps it going.




The citizens of Catalonia are going to learn the hard way just how little money the modern day banking system keeps in physical reserve. Quickly the vaults and ATMs will run dry – and then what?



I for one am hopeful that this situation will resolve itself peacefully and the people of Catalonia will be set free, as they have democratically requested, and that this will be a bright shining example of liberty and free will in a modern time. Sadly, I highly doubt that is what is going to occur.



Unless the government of Catalonia steps down on their own accord, then you can expect to see violence and blood in the streets. This action cannot and will not be tolerated by the elites of the world, lest the rest of us peasants get any silly ideas in our heads.



Questions or comments about this article? Leave your thoughts HERE.





You Think You’re Free? Think Again, Spain Says, Begins Preparations to Crack Down on Catalan

Written by Nathan McDonald, Sprott Money News



Paul Ryan Pans Schumer, Pokes Clinton, Picks On Trump At Al Smith Dinner Roast

As opposed to the awkward cat calls and snide looks of last year's Al Smith Memorial dinner (roast) – just days before the election, Speaker Paul Ryan's comments last night had a little for everyone… and no one booed!

He began with some jabs at President Trump to soften the audience up…

"Enough with the applause… You sound like the Cabinet when Donald Trump walks into the room."


"I don't think I've seen this many New York liberals, this many Wall Street CEOs in one room since my last visit to the White House."

And then it was game on as the Speaker took shots at Schumer, Clinton, and Trump's tweets…

The speaker said that he has indeed dealt many times with an "abrasive New Yorker with a loud mouth… But, once you get to know him, Chuck Schumer's not all that bad," he said.


"I know why Chuck [Schumer] has been so hard on President Trump. It's not ideological; Chuck is just mad he lost his top donor."


"Wisconsin is a fantastic place to visit in the fall," he said of his home state. "Looking back, someone should've told Hillary Clinton that fact."


"The truth is, the press absolutely misunderstands and never records the big accomplishments of the White House … Look at all the new jobs the president has created — just among the White House staff."


"Stephen Bannon said I was born in a Petri dish at the Heritage Foundation," he recalled, adding jokingly. "No one knew Steve believed in science."


"Every morning I wake up in my office and I scroll through Twitter to see which tweets I will have to pretend I didn't see later on."


"Every afternoon former Speaker John Boehner calls me up, not to give advice, just to laugh."

And finally, on Trump's remarks to the dinner last year:

"Some said it was unbecoming of a public figure and they said that his comments were offensive. Well, thank God he's learned his lesson."

Highlights below…