Tag: Finance (page 1 of 49)

New “Wu Tang Coin” Raises Money To Buy Martin Shkreli’s Copy Of “Once Upon A Time In Shaolin”

In the latest sign that the market for initial coin offerings has probably peaked, Bloomberg is reporting that a company is planning to launch an ICO with the explicit goal of raising enough money to purchase the only extant copy of “Once Upon A Time In Shaolin”, the rare Wu Tang Clan record and current record holder for most expensive single album ever sold. Martin Shkreli once paid $2 million for the record.

Behold Wu-Tang Coin, the digital token at the heart of a purported ICO whose sole purpose is to raise money to buy and publicly release the Wu-Tang Clan album that convicted fraudster Martin Shkreli once spent $2 million on.

The coin launched Monday, according to its Twitter account, which has a whopping 13 followers. Rare Music Ltd., the company behind the efforts, is seeking to raise $3 million to $4 million, according to a white paper listed on the internet. Because of its decentralized nature, the creators of Wu Tang Coin claimed in a White Paper that an ICO would be able to circumvent legal restrictions barring the owner from publicly releasing the album for commercial purposes until the year 2,103.

The goal of the project is to release the album for free on the internet. The company says coin holders will be compensated with "gifts" to incentize participation.

A straightforward purchase of the album by a music company would be pointless because the album cannot be “commercially exploited” in a reasonable amount of time. Therefore,
we propose to:

1. Raise funds via an ICO and attempt to negotiate a purchase with the album’s current owner.

2. Give Wu-Tang Coin donors to the ICO (i.e. owners of Wu-Tang Coin) gifts to incentivize participation.

3. Release the album on all free and paid streaming music sites after a short amnesty period (six months) designed to give owners of Wu-Tang Coin time to enjoy the album exclusively, before everyone else.

As we reported earlier this month, the ownership of the Wu Tang album is in doubt after Shkreli sold the album on eBay for just over $1 million – about half what he paid for it in late 2015, shortly before being labeled “the most hated man in America” after his former company, Turing Pharmaceuticals, raised the price of Toxoplasmosis drug Daraprim by 5,000%.

After being convicted on three counts of securities and wire fraud after the conclusion of a month-long trial in Brooklyn Federal Court, Shkreli's bail was revoked shortly before the auction ended and he was sent to a notorious federal jail in Brooklyn to await his sentencing in January. Prosecutors asked that his bail be revoked after a published what he described as a satirical post saying he would pay a $5,000 bounty for a strand of Hillary Clinton's hair. It's unclear what will happen with the Wu Tang album.

Read the White Paper in full below:

Wu-Tang+Coin+whitepaper+v1.0.0 by zerohedge on Scribd




Here Are The Congressional Aides That Traded On Insider Information Over The Past Year

Up until April 2012, members of Congress and their staff were the only people in the country actually allowed to trade stocks on insider information.  That was supposed to change with the passage of the STOCK (Stop Trading on Congressional Knowledge) Act which was signed into law by Barack Obama on April 4, 2012.  But, as we all know, laws are only meaningful to the extent our legislators and bureaucracies are willing to enforce them.

Given that intro, it is with great ‘shock’ that we share with you the results of a Politico study which would seem to suggest that Congressional aides continue to trade on insider information on a fairly regular basis despite the existence of the STOCK Act.  We guess the SEC didn’t take seriously the STOCK Act’s attempt to “criminalize behavior that is normal.”

The first such example of a “questionable” trade comes to us from Daniel Swanson, an aide to Senator Dick Durbin (D-IL) of the Judiciary Committee…why does it not surprise us that our first example comes from Illinois?  As Politico notes, Swanson made some very “timely” trades in Mylan late last year as he managed to dump up to $60,000 worth of stock just two days before the DOJ levied a $465 million penalty on the company for their EpiPen billing practices.  Ironically, Swanson’s boss worked with the DOJ on the Mylan settlement…

On Sept. 28, 2016, three members of the Senate Judiciary Committee sent a letter to the Justice Department suggesting that the drug company Mylan was violating Medicaid laws.


Nine days later, the Justice Department reached a massive $465 million settlement with the firm.


In between, another action happened almost invisibly: A Judiciary Committee aide to Sen. Dick Durbin (D-Ill.) dropped somewhere between $4,004 and $60,000 in Mylan stock from his and his child’s portfolios.


If an aide had done the same thing in the executive branch, he or she could be investigated for violating federal conflict-of-interest law. But the Durbin aide’s ownership of shares of Mylan, and their timely sale, are reflective of Congress’ persistent refusal to crack down on stock trading by staffers, even in firms overseen by their committees.


…but we’re sure the timing of the trade was just a coincidence.


But it’s not just Swanson, Paul Ryan’s Chief of Staff has also managed to get really “lucky” on the timing of some trades over the years.

David Hoppe, a fellow Wisconsin native and former Hill aide, to serve as his chief of staff. Hoppe left lobbying jobs with both his own firm, Hoppe Strategies, and the K Street powerhouse Squire Patton Boggs to work for the new speaker. After he moved back through the revolving door, Hoppe continued to trade stock in companies with interests before Congress.


David Hoppe, a longtime Capitol Hill aide-turned-lobbyist, joined the speaker’s office in late 2015 as Ryan became speaker of the House. Through personal accounts, Hoppe and his wife bought and sold shares in dozens of stocks while Hoppe worked at the speaker’s office, including purchases of energy and pharmaceutical stocks made shortly before Congress passed bills benefiting the companies he traded. Hoppe told POLITICO he did not discuss any stock trades with his brokers while working for Ryan.


And the list goes on and on…

Diane Dewhirst, deputy chief of staff to House Minority Leader Nancy Pelosi, disclosed her spouse’s purchase of stock in two pharmaceutical companies, Astrazeneca and GlaxoSmithKline, in December 2016, shortly before Congress passed a medical research bill that benefited both companies.


Meanwhile, on the House Energy and Commerce Committee, which sets energy policy and is the main committee overseeing Obamacare, at least six aides have bought and sold stock in companies with interests in the work of the committee. One longtime committee aide in an oversight role bought and sold more than two dozen health care and energy stocks during 2015 and 2016 and sold his stock in Express Scripts, the prescription drug sales company, as the company came under scrutiny over its role in setting drug prices last October.


On the House and Senate appropriations committees, which make broadly influential spending and policy decisions through annual government funding bills, at least 18 House aides and 14 Senate aides have bought or sold at least one stock, through their own accounts or family members’. For example, one senior House Appropriations aide working for a member focused on energy and water funding has, through various family accounts, bought and sold shares in companies including Royal Dutch Shell, Energy Transfer Partners, Dow Chemical and Emerson Electric. Another longtime aide on the committee’s staff who is focused on investigations and research, which are at the heart of the committee’s decision-making, holds and trades stock in companies with major interests in the committee’s work, including pharmaceutical companies such as GlaxoSmithKline and energy companies such as Occidental Petroleum.

Of course, proving that a Congressional aide traded on insider information can be next to impossible which is precisely why watchdog groups have long called for staffers to be restricted completely from trading stocks of companies that have business before their committees. 

Government watchdogs say that, at a minimum, staffers should be prevented from buying shares of companies with business before their committees. But they are not. And despite the disparity between the rigorous standards for the executive branch and the laxness of Congress, the House and Senate have taken a permissive approach even to enforcing existing rules.


That’s a serious problem, watchdogs say, because aides often have more of a hands-on role than the members themselves in crafting details of legislation that could have enormous consequences for individual companies. And because aides are rarely in the spotlight, there’s more potential for ethical lapses to go unnoticed.


“The staff level is actually more dangerous, because they don’t get scrutiny and they’re not accountable,” said Meredith McGehee, chief of policy at Issue One, a watchdog group for money and politics. “If a member does it, he can get defeated. A staff person can wield enormous amounts of power that isn’t seen, and there’s really no way to hold that staff accountable.”

But we’re sure this is just an attempt by Politico to “criminalize behavior that is normal…”


“It’s Not Too Late…”

Authored by Kevin Muir via The Macro Tourist blog,

One of the great parts of writing this letter is the people I get to meet. Among those I enjoy hearing from is former NYSE floor trader, Clay Tompkins. His years spent on a trading floor gives Clay a certain insight about markets that is tough to describe. It involves a willingness to fade consensus accompanied with a healthy respect for the power (madness?) of the crowd.

Clay sends me tidbits from time to time, with a few wise words that always seem to resonate with me. In the heat of the summer, he started sending warnings about Apple.

Kev, There’s an interesting piece on Novo Nordisk in the WSJ today, about how they improved their insulin and raised prices accordingly, with the result that customers opted for the older, cheaper formulation.


Apple is doing the same, and I think the results will be the same. My daughters scoff at the idea that they or their friends would seriously pay $1100-1400 for the new phone. Andy Kessler called this the “ radial tire” problem, whereby radials, getting 50,000 between replacement killed the bias ply model which needed changing every 12,000.


Buffett and Tepper and all the rest are too rich to get it.


I know your site says “ macro”, but at 3.6% of the S&P, a falling Apple will have real repercussions.

At the time Apple was trading at $161, and few were bearish of America’s largest stock. Then on August 24th, Clay sent another note with a link to a Business Insider article, “Dixons Carhone shares crash over 30% as ‘people hold on to their phones for longer’”. He ended the email with the words, “And they still bid AAPL. I think the longs lose the thread in 3 weeks…”

Well, Clay was almost spot on, only missing the fact that Apple longs had just one more week of gains ahead of them! As soon as September hit, the pink tickets came out for Apple.

Today, most know the bearish Apple story. A disappointing new iPhone announcement, with few new must-have features, has resulted in the lowest pre-orders Apple has seen in quite some time. Clay is on to something, and as usual, way ahead of the curve.

Now some of you will look at the last couple weeks of Apple stock weakness and claim the bad news is already discounted. But I don’t think it is too late to sell. Not by a long stretch.

I know Apple is cheap on a fundamental basis. I know Buffett owns it, and has “never sold a single share of Apple.” Yeah, the PEG ratio is low, but when you reach Apple’s size, it’s difficult to justify a big multiple based on continuing growth. Eventually, you hit a point where growth becomes increasingly difficult. And I think Apple has reached that point.

Yet it’s not just Apple that worries me. Check out this headline.

I realize that eventually even Mark Zuckerberg needs to eat the marshmallow, but let’s not kid ourselves – Zuck is not selling because he needs the money.

There have been a handful of hot tech stocks that have driven this rally of the past few years. The so-called FANG group (Facebook, Amazon, Netflix, Google), along with a couple of other cult favourites (Apple and Tesla), have captured almost all of the speculative fervour.

Along the way, skeptics have been ignored and bearish arguments have not mattered. Dips have just been buying opportunities, and the Nasdaq has led the stock market rally higher. Yet that is slowly shifting. During the last couple of weeks I have noticed that often Nasdaq underperforms the broad market, and it looks more tired than Lindsay Lohan’s probation officer.

Over the weekend, L2 Professor Scott Galloway wrote a must-read piece about the potential inflection point for these tech darlings. Take the time to read it – “No Mercy / No Malice: The Worm Has Turned.

These stocks are a potential disaster in the making. They are over-extended, behaving poorly, have insiders pitching stock, and most importantly, smart, big picture thinkers are for the first time questioning their business models all the while, shrewd, market savvy veterans are leaning on the sell button.

Many a pundit have made fools of themselves calling for the top in the stock market, but I think we are at an important point for the FANG + APPL and TSLA stock crowd. I am by no means a perma-bear, and have at times even reluctantly joined on the bull side. Yet I can’t help but get the feeling that we are close to the point where all the good news for these tech favourites is baked-in.

Don’t believe me that investors might be a little over confident about FANG’s continuing dominance? How about this new ETF?

When they start making levered ETFs that go long one of the FANG stocks (Amazon), while simultaneously shorting its competitors, you know you have reached the point in the party where it is time to look for the door before the cops show up.

I don’t know how I am going to express this view. Maybe I will shift some of my hedges into Nasdaq put spreads. Maybe I will sell Nasdaq futures against a long position in the S&P’s. Maybe I will just short the FANG basket. I just know the time where I want to be long these trendy stocks is long past, and for the bold, writing some short sell tickets is probably the right trade. After all, even Zuckerberg has finally hit the sell button, and according to all the millennials I know, that guy is a genius.

*  *  *

Long grains: worse than the Casino

My buddy Clay’s prescient call on Apple was the trigger for today’s post, but I wanted to talk about another completely unrelated trade. And the funny part is here too, Clay recently sent me an article that struck a chord. From Reuters:

Large part of Louis Dreyfus’s grains team leaves company


PARIS (Reuters) – A large part of Louis Dreyfus Company’s European grains trading team, including Global Head of Grains David Ohayon, has left the company, trade sources said on Tuesday.


No one was available at Dreyfus for comment.


Several sources also said Cesar Soares, Regional Head of Grains for Europe and Black Sea, and senior trader Pascal Durouchoux had left.


Dreyfus is part of the so-called ABCD quartet of global agricultural traders along with Archer Daniels Midland, Bunge and Cargill [CAR.UL], which have been restructuring in response to falling profits.

In the summer of 1987, Salomon Brothers closed their entire money market division because of lack of profits – after all why bother trading T-bills when stocks were flying? A few months later, the equity crash hit, and money markets went bizerk. Time and time again, the closing of desks, or the leaving of entire teams, signaled a secular low in that asset class.

You can probably see where I am going with this. The trouble is, you have heard me make this argument before. And let’s be honest, grains are not my friend.

In the epic Scorsese film, Casino, Sharon Stone’s character, Ginger, keeps going back to her deadbeat boyfriend, Lester Diamond (played by James Woods), no matter how well she is treated by her husband Sam Rothstein (Robert De Niro). Sam showers her with everything she has ever wanted, diamonds, furs, cars, but it doesn’t matter. Ginger can’t help but return to the loser boyfriend.

Well, grains are my Lester Diamond. No matter how much pain they bring me, I come back like a lost puppy. Now sometimes I managed to squeak out a little win, catching a reluctant fleeting rally. But grains always end up betraying me.

Although I love to remind everyone of Don Coxe’s famous line, “the best bull markets occur when those that know it best, love it least, because they have been burned the worst, I am approaching the point where I am wondering if I should continue picking up Lester’s phone call. After all, don’t the other markets treat me fine? Shouldn’t I be happy putting grains in the rearview mirror?

I have been fortunate to avoid one of the post-GFC’s (Great Financial Crisis) greatest destroyers of wealth – the VXX long trade, but I have replaced it with my own relentless bleeding asset – wheat, and the other grains.

Now before you get too despondent about wheat’s performance, this chart is somewhat misleading. On a relative basis to VXX, wheat is an all-star.

Since the GFC, holding a straight long position in VXX has cost you almost 100%. Wheat, on the other hand, has lost you only 63%.

All kidding aside, grains are my nemesis, and I understand if you ignore my ramblings on the subject. My much-hoped-for secular turn is nowhere to be found, and timing on any blue tickets has had to be near perfect to make any money.

But I refuse to give up on grains. I still believe it to be one of the last true remaining “cheap” assets.

And like an idiot, I am going to tell you why I am buying them again.

This summer we had a little bit of a weather scare, but it lasted for about two weeks before the relentless grain selling returned.

Once again we had a great growing season, and according to the USDA, yields are terrific. The trouble is that many farmers don’t believe the reports, and have been waiting to hedge their crops.

So every tiny bit of a rally has been met with a barrage of selling from offside producers. And that’s why we have melted lower.

Call it spidey-sense, or call it stupidity, but I think it is time to buy the grains again. Almost everyone has given up on this perpetually disappointing asset class. Ag desks are closing, farmers are throwing in the towel, futures traders are loath to even mention the word. Grains are still the last remaining cheap asset, and I am not giving up. After all, grains are one of my true loves, and I know they won’t hurt me again…


Techs Wrecked, Financials Falter As Korean Threats Spark Gold Gains

Well that all escalated rather quickly…

Brent spiking (Kurds and Korea), Gold spiking (Korea), AAPL tumble (weak orders), FANG bloodbath… large into small and growth into value.

The day's broad activity was driven by North Korean headlines which sparked a bid for gold (and early anxiety over Europe after Germany's election)…


Gold regains the lead year-to-date…


But Stocks suffered some more serious drawdowns with Tech stocks worst 4-day loss in 3 months to one-month lows… Small Caps reached a new intraday record high early on (and Trannies clsoed green)…


Nasdaq VIX Spiked above 16 – back to the upper end of recent trading band but notably not as big a spike as prior tech wrecks…


S&P VIX spiked above 11 intraday (back above its 50- and 100-DMA) as S&P lost its 2500 level… but the machines did their best to ramp the S&P back


And VVIX (expectations for the uncertainty of VIX going forward) has never been higher relative to VIX…


Big switch from growth to value today…


And stocks' Momentum factor is now down for the month…


FANG Stocks worst day since early June.


Facebook's (election-related headlines) and Netflix's (Fox streaming headlines) worst day since Nov 2016…


AAPL down 12 of the last 15 days (and down almost 10% from its record highs) closing below its 50- and 100DMA (filling the earnings night gap higher)…


Bank stocks continue to decouple from the yield curve…


Treasury yields fell on the day on a safe haven bid with more 2s30s flattening…trading died after the kneejerk on korea headlines…


Interstingly, the dollar index was well bid today (back to FOMC-Day highs)…


Driven by EUR weakness on the heels of Merkel's horrible election outcome…


Despite the dollar strength, Gold surged off its 50DMA (and Silver off its 100DMA) back above $1310…


WTI Crude surged above $52 (on the back of Kurdish referendum fallout concerns) and RBOB  followed oil prices higher…


But Brent spiked to its highest since July 2015 with a massive backwardation and dramatically rich to WTI…


Finally, Bitcoin also spiked on the North Korean headlines…


Well that didn't work… yet…



Levered Loan Volumes Soar Past 2007 Levels As “Cov-Lite” Deals Surge

If a surge in covenant-lite levered loans is any indication that debt and equity markets are nearing the final stages of their bubbly ascent, then perhaps now is a good time for investors to take their profits and run.  As the Wall Street Journal points out this morning, levered loans volumes in the U.S. are once again surging, eclipsing even 2007 levels, despite the complete implosion of bricks-and-mortar retailers and continued warnings that “the market is getting frothy.”

Volume for these leveraged loans is up 53% this year in the U.S., putting it on pace to surpass the 2007 record of $534 billion, according to S&P Global Market Intelligence’s LCD unit.


In Europe, recent loans offer fewer investor safeguards than in the past. This year, 70% of the region’s new leveraged loans are known as covenant-lite, according to LCD, more than triple the number four years ago. Covenants are the terms in a loan’s contract that offer investor protections, such as provisions on borrowers’ ability to take on more debt or invest in projects.


“If feels like the market is getting frothy,” said Henrik Johnsson, co-head of global debt-capital markets at Deutsche Bank AG . “We’re overdue a correction.”

Meanwhile, volumes are surging even as traditional lender protections have become basically nonexistent.  As S&P LCD points out, over 70% of levered loans issued so far in 2017 are considered “covenant-lite” versus only 30% of those issued in 2007.

Before the financial crisis, the boom in leveraged loans was one of the signs of markets overheating. As the crisis intensified in 2008, investors in U.S. leveraged loans lost nearly 30%, according to the S&P/LSTA Leveraged Loan Index.


Regulators are taking note. In its last quarterly report, the Bank for International Settlements noted the growth of covenant-lite loans and pointed out that U.S. companies are more leveraged than at any time since the beginning of the millennium. That could harm the economy in the event of a downturn or a rise in interest rates, said the BIS consortium of central banks.


The leveraged loan market has long been favored by private-equity firms raising cash to fund company takeovers. Investment banks arrange the loans and typically parcel them out to other lenders and investors.


Loan terms are now “more aggressive here in Europe,” said Christopher Kandel, a partner at law firm Latham & Watkins LLP, citing provisions giving borrowers greater flexibility to pay out dividends or incur additional debt.


Cov-lite loans barely existed in Europe before the financial crisis. “That will be the test for investors,” said Taron Wade, a director at S&P Global. “How they perform through the cycle.”

Not surprisingly, when the debt markets lose all discipline, Private Equity firms are all too happy to step forward and allow lenders to fund their “swing for the fence” acquisitions.  As the WSJ notes, the average leverage of PE deals in 2017 has exceeded 2007 levels with nearly a third of all deals levered over 6x.

That is particularly true in the U.S., where nearly a third of loans to private-equity backed companies this year are leveraged six times or more, according to LCD’s calculations of companies’ debt to earnings before interest, tax, depreciation and amortization. That is despite 2013 guidelines from U.S. regulators, including the Federal Reserve, on loan underwriting stating that leverage of more than six times “raises concerns for most industries.”


Five of the six largest new loans backing leveraged buyouts this year have exceeded those levels, according to Dealogic and Moody’s Investors Service.


The largest was a $3.15 billion loan taken earlier this year by Team Health Holdings Inc. to fund Blackstone Group LP’s leveraged buyout of this health-care provider. In January, Moody’s estimated that Team Health’s leverage was at around 7.5 times.

We’ve been saying this a lot lately but it seems like we’ve seen this movie before…


As VIX Nears Record Low, Investors Have Never Been More Worried About What Happens Next

As last week ended, VIX was crushed back near record lows to ensure the S&P 500 closed above 2500 and to prove all is well in the world – despite quakes, storms, floods, nukes, and worst of all… Fed balance sheet unwind plans.


And VIX speculators have never been more short (implicitly levered long stocks)…


So why, given all this exuberance and complacency, is uncertainty around VIX's future trajectory at relative record highs?

As Bloomberg notes, renewed bets for swings in the CBOE Volatility Index have pushed the CBOE VVIX Index to a new peak relative to the VIX.

Since the ratio between the two gauges hit a record on Aug. 9, the VIX posted moves of more than 20 percent on four separate days, including a 44 percent surge on Aug. 10.

At the same time, exchange-traded products that benefit from market calm just had their biggest weekly outflows on record, while those that gain with greater stock swings gathered more money.

As Reuters reports, the long stretch of low volatility for U.S. stocks has made betting on continued calm a popular and lucrative trade, but traders and strategists warn that risks to the trade have mounted, while the potential for profits has shrunk.

Some traders, however, have grown more wary of increased risks to the trade.

“I think a lot of folks have gotten lulled into a false sense of security because the short trade has gone so well for so long,” said Matt Thompson co-head of Volatility Group at Typhon Capital LLC, in Chicago.


“We are still shorting volatility but we have an itchier trigger finger.”

Assets under management for the top two short volatility products is at $2.8 billion and their exposure to volatility is at an all-time high, according to Barclays Capital. But the very popularity of the trade has cranked up the risk.

And of course, we all know who ends up wearing it at the end…

Positioning in these products, primarily driven by retail players, may be more skewed to the short side than the broader market where institutional investors hold sway.


“I don’t think the risk is necessarily as big on the institutional side as it is on the retail side,” said Omprakash.

In fact, it seems that only FX options traders are seeing through the bullshit…


“How Much Further?”: Goldman Warns This Is The 5th Longest Streak Ever Without A 5% Correction

Goldman is becoming increasingly worried that a correction – and a sizable one at that – appears imminent.

Two weeks after the investment bank announced that according to its Bear Market Risk Indicator the odds of a crash have risen to 67%…

… on Monday morning, Goldman cross-asset strategist Ian Wright cautions in his latest Kickstart letter that the S&P is now rapidly closing in on the longest period in history without a 5% correction, and that as of today, only 4 times in history has more time passed without a 5% correction. The warning follows similar caution from Goldman’s chief equity strategist David Kostin who as discussed yesterday, has a very bleak outlook for US stocks, and expects the S&P to slid to 2,400 by the end of the year, remain unchanged through the end of 2018 and rise just 100 points by the end of 2019.

As Wright points out today in a note titled “How much further?” in which he reminds the firm’s clients that just last week it reiterated its 12-month OW equities position in our asset allocation, “our sense is that most clients are in agreement, being “reluctantly long” equity given absolute returns are likely to be lower in the future relative to the recent past, but on a relative basis the asset class still appears the most attractive.”

And yet, just like Kostin yesterday, Wright says that given this positioning and the good level of current growth leading to concerns about it potentially slowing, “increasingly the most common question we receive is “when will the market crack?” He goes on to show that based purely on the length and resilience of the current bull market this question makes sense, particularly now – the S&P 500 is currently in the fifth longest streak in history without a 5% correction, and should the pattern continue it will become the longest streak ever by mid-December.

That said, Goldman – tactically long equities – is not suggesting a crash is imminent, and caveats that “low volatility rallies can last a long time, and that valuations can be a poor signal for returns and drawdowns in the near-term.”

In our view, these dynamics are again at play currently, with any vol being sold on spikes and dips being bought quickly, as the current low vol regime appears intact.

So in light of all the evidence of an imminent correction, what is Goldman’s advice to clients? Why, do nothing of course.

Our US equity strategists recently argued against an imminent correction, and our global equity strategist sees low risk of a bear market starting. And while most of the recent central bank meetings (ECB, BoE, Fed) all pointed to tightening policy, we think risky assets should be able to digest higher yields as long as the growth backdrop remains supportive, which we expect.

This, despite two weeks ago laying out no less than 7 reasons why Goldman’s clients just can’t wait to get out.

  • History. Many investors argue the bull market is “long in the tooth” and will soon come to an end.
  • Volatility (or lack thereof). Realized 3-month vol is nearly the lowest in 50 years. Implied vol as measured by the VIX stands at 12, a 6th percentile event since 1990.
  • Valuation. Equity valuations are stretched on almost every metric. The typical stock trades at the 98th percentile and the overall index at the 87th percentile relative to the past 40 years
  • Economics. The current US economic expansion just celebrated its 8th birthday making it one of the longest stretches without a recession
  • Fed policy. The FOMC has lifted the funds rate by 100 bp since it started tightening in December 2015. During prior hiking cycles, equity P/E multiples typically fell but multiples have actually expanded during the past two years.
  • Interest rates. Two months ago, Treasury yields equaled 2.4%, ten-year implied inflation was 1.7%, and the S&P 500 stood at 2410.
  • Politics. President Trump’s fluid positions on domestic policy disputes in Washington, D.C. and geopolitical gamesmanship with Pyongyang and Beijing make political forecasting a precarious activity.

Meanwhile, the market is now well over 300 days without a 5% correction and counting…


China’s ICO Crackdown Boosts Hong Kong’s Hopes Of Becoming Blockchain Hub

China’s decision to shutter digital-currency exchanges based on the mainland, a strategy meant to extinguish the rampant fraud and abuse associated with initial coin offerings, or ICOs, is brightening Hong Kong's hopes of asserting itself as a hub for blockchain technology.

As Bloomberg reports, while China has at least nominally embraced blockchain technology – even building a prototype digital yuan – Hong Kong’s city government has gone a step further by encouraging blockchain startups to set up shop in the city. One firm run by Johnson Leung, who has found success in finance and shipping, and now runs a blockchain startup, is focusing on applications for container ship operators.

The city’s embrace of blockchain is its latest attempt to nurture a domestic technology industry that could compliment the city’s dominance in banking and shipping. But as Bloomberg notes, betting on blockchain, a technology that has generated a ludicrous amount of hype, much of it undeserved, could be a risky proposition. Despite Hong Kong’s status as a financial hub, the city, one of the most expensive in the world for average working families, has zero “unicorns” – a term for startups valued at over $1 billion.

Skeptics say it’s a risky bet on an unproven technology – one with more than its fair share of hype and, in some cases, fraud. But a growing number of Hong Kong entrepreneurs and policy makers are convinced the online ledger system that underlies cryptocurrencies like bitcoin will eventually reshape everything from financial services to supply chains. They say the city’s laissez faire approach toward regulation, along with its expertise in finance and logistics, make it a natural hub for blockchain startups.


“I don’t see why Hong Kong can’t be a leader of blockchain technology,” said Leung, who co-founded 300cubits.tech after more than a decade in the financial industry that included stints as a research analyst at JPMorgan Chase & Co. and Jefferies Group LLC. “It’s so new that it’s not like any country has a huge advantage compared to us.”

As Bloomberg explains, the city’s government has been throwing resources at the technology, developing its own digital currency and testing different blockchain use-cases.

The city’s monetary authority is developing its own digital currency and is testing blockchains for trade finance, mortgage applications and e-check tracking. Hong Kong’s securities regulator has joined R3, a global consortium that develops blockchain technology for financial transactions, while a government-backed research institute has worked on a blockchain-based system for tracking property valuations, among other initiatives. Hong Kong Exchanges & Clearing Ltd., the city’s publicly-traded exchange monopoly, plans to start a blockchain platform for early-stage companies and their investors next year.


“Blockchain is a very high priority for us,” said Charles d’Haussy, head of fintech at InvestHK, a government economic development agency.

To be sure, the city is, like China, imposing restrictions on some of the shadier aspects of the blockchain ecosystem – namely ICOs, a new financing trend that involves selling a digital token that’s tied to a given platform or product. In theory, these tokens should get more valuable as the underlying product becomes more widely used. Some ICOs have raised millions of dollars, all without a working prototype – only a white paper that sketches out the company’s idea.

That doesn’t mean Hong Kong is giving the industry carte blanche. This month, the city’s Securities and Futures Commission told investors to be on the lookout for fraud in initial coin offerings – a form of cryptocurrency fundraising – and warned ICO issuers that they may be subject to local securities laws.


“We have to be very careful with this because on the one hand, we encourage innovation and free markets, but on the other hand, we do have to look after our small investors,” Paul Chan, Hong Kong’s financial secretary, said in a Sept. 11 interview.


Still, the city is taking a softer approach toward regulation than China, which banned ICOs this month and called for a halt in trading on domestic cryptocurrency exchanges.

In its battle to lure blockchain companies, Hong Kong is competing directly with its longtime rival, Singapore, which has also taken many steps to explore uses for blockchain technology while also encouraging the creation of a thriving startup community. As Bloomberg points out, Hong Kong doesn’t have a great track record when it comes to tech startups. Its Cyberport business incubator has been criticized as a housing development in disguise, while many local workers are reluctant to leave their steady jobs for riskier ventures because of the extremely high cost of living.

Building a sustainable blockchain hub in Hong Kong won’t be easy. Many applications for the technology, including Leung’s proposal to create digital tokens for the shipping industry, are still largely theoretical. (Leung says his tokens could be used in conjunction with so-called smart contracts to reduce the risk of default on shipping agreements.)


At the same time, competition to lure the most promising blockchain firms is fierce. Singapore, Hong Kong’s biggest regional rival, is pouring resources into its local fintech industry, as are other financial hubs including Dubai.

One official with InvestHK, the portion of the city government responsible for luring foreign investment, said that the city is keenly aware of the hype surrounding blockchain but has decided to move ahead anyway.

“There is hype, and there is the fast grab of money with ICOs in some cases,” d’Haussy said. “But what we are looking at building here in Hong Kong is an infrastructure for new businesses and existing businesses, to make sure the technology and innovations remain a key enabler for financial sector growth.”

So far at least, blockchain has been closely associated with fintech, or financial technology, which city officials believe should give Hong Kong an edge in attracting companies, given its large financial sector. Many of the city’s early startups include financially focused firms like BitMEX, a bitcoin derivatives exchange; Bitspark, a remittance platform; and Kenetic Capital, a blockchain investment firm. While Hong Kong doesn’t publish statistics on the growth of the local blockchain industry, InvestHK’s d’Haussy said anywhere from 10 to 20 companies are expected to raise funds via ICOs in the city over the next six months.

However, with the technology still largely unable to scale, the question of whether these companies will be able to survive long enough to achieve profitability before their backers throw in the towel. Not every function – especially not in the world of finance – is suitable for automation and decentralization. What works with blockchain, and what doesn’t, has yet to be thoroughly explored.

Which is, of course, one of the reasons why the industry is so interesting: The risks are large, but the payoffs, in terms of job creation and the attendant tax-revenue and growth bump, is potentially huge.


Two Key Indicators Show The S&P 500 Becoming The New “Cash”

Authored by Daniel Nevins via FFWiley.com,

Pension plan administrators do it. Their actuaries and consultants do it. Professional endowment and foundation investors do it. Financial advisors do it. Private investors may or may not do it, but they probably should.

Do what?

All of these folks already are or should be asking themselves the following question: What’s a reasonable expectation for the long-term return on a broad-market equity investment?

Professionals usually answer the question using complex models, and there’s nothing wrong with that, but we’ll keep it simple here. Simple often beats the snot out of a long white paper, and two recent developments beg for simple.

First, on Thursday the Fed released its flow-of-funds data, which includes an estimate for the household sector’s overall asset allocation. Data show allocations to corporate equities reaching 25.1% of total household (and nonprofit) assets, a level only before seen between Q4 1998 and Q3 2000. Here’s the full history:

spy returns chart 1

Now, you may say 25% is just a number, and we would agree, but only to a point. We don’t think the household sector’s current allocations tell us anything about the market’s near-term direction. In fact, we don’t detect any of the most common precursors to major market turning points, as discussed here.

But we do think household equity allocations offer clues to long-term returns. Consider the next chart, which compares the allocation data to the corresponding S&P 500 returns over subsequent periods of six, eight and ten years:

spy returns chart 2

You’ll decide for yourself, of course, how to interpret the chart, but we’ll entertain three possibilities.

First, you might rely on a few instances in which S&P 500 returns reached almost 4% after the equity allocation was 25% or more. Compared to today’s miniscule bond yields, 4% looks respectable. If stocks do, indeed, return 4% over the next six to ten years, that could be higher than the return on any other major asset class, which probably explains how stocks got so expensive in the first place.


Second, you might mentally project the scatter plot’s downward trend out to the current equity allocation. Doing that, returns appear to spread evenly around today’s cash rate of about 1%. So, whereas optimistically you might expect a return of 4% or thereabouts, more realistically a negative return is almost as likely.


Third, you might look at the data and say, “So what? We should really use a traditional indicator – one that compares prices to earnings – not an asset allocation measure.”

Which brings us to another recent development that might alter future returns—the S&P 500 busting through 2500. To account for that latest market milestone, the next chart updates one of our favorite S&P 500 indicators, the price–to–peak earnings multiple or P/PE. (Unlike a standard price-to-earnings multiple that places the past year’s earnings in the denominator, P/PE uses the highest four-quarter earnings to date, mitigating distortions that occur when earnings fall in recessions.)

spy returns chart 3

At a price–to–peak earnings multiple of 23.6, we’re currently at about the same valuation as in December 1997. Once again, you might find an optimistic interpretation – that is, the long bull market that finally ended in 2000 suggests there could still be room to bubble up from here. But the implications for long-term returns aren’t nearly as optimistic, as shown in our final chart:

spy returns chart 4

If you stare at the chart long enough, you might see a less bearish picture than in the first scatter plot above. (Stare even longer and you might see the King of France.) But the difference isn’t especially large. On either chart, the downward slope points to a meager long-term return. In fact, if we use only the scatter plots above to make our estimate, while also accounting for the Fed’s predicted interest rate path, the S&P 500 appears to offer a similar return to cash.


To be clear, we’re encouraging long-term bulls to reconsider their assumptions, but we’re not advising them to dismantle carefully diversified portfolios (meaning those that are spread sensibly among multiple asset classes). We would be more likely to recommend a major portfolio shift if the usual bear-market catalysts – sharply rising inflation, high interest rates and poor credit conditions – were present.

More to the point, it seems a good time for investors to check their expectations and risk levels. Investors should develop reasonable expectations informed by data such as those in the scatter plots above. And they shouldn’t take more risk than they’ll be able to tolerate as the next bear market plays out. As always, only a small percentage of investors will accurately time the next market cycle, and we shouldn’t bet too heavily on being among those fortunate few


The One Question Goldman’s Clients Are Asking This Week: “Where To From Here?”

Two weeks ago, Goldman’s clients were so worried about an imminent crash, the investment bank’s chief equity strategist, David Kostin enumerated no less than 7 reasons why, as Goldman itself admitted, “the question every client asks: Is an equity correction imminent?” As a reminder, the reasons – summarized – were the following:

  1. History. Many investors argue the bull market is “long in the tooth” and will soon come to an end. 
  2. Volatility (or lack thereof). Realized 3-month vol is nearly the lowest in 50 years. Implied vol as measured by the VIX stands at 12, a 6th percentile event since 1990.
  3. Valuation. Equity valuations are stretched on almost every metric. The typical stock trades at the 98th percentile and the overall index at the 87th percentile relative to the past 40 years
  4. Economics. The current US economic expansion just celebrated its 8th birthday making it one of the longest stretches without a recession
  5. Fed policy. The FOMC has lifted the funds rate by 100 bp since it started tightening in December 2015. During prior hiking cycles, equity P/E multiples typically fell but multiples have actually expanded during the past two years.
  6. Interest rates. Two months ago, Treasury yields equaled 2.4%, ten-year implied inflation was 1.7%, and the S&P 500 stood at 2410.
  7. Politics. President Trump’s fluid positions on domestic policy disputes in Washington, D.C. and geopolitical gamesmanship with Pyongyang and Beijing make political forecasting a precarious activity.

Incidentally, like a good shepherd, Goldman quickly comforted said worried clients, giving two reasons why a crash is not imminent:

  • First, investors are not complacent. In Sir John Templeton’s timeless observation, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Investors today are situated between skepticism and optimism. Few are euphoric as 27% of core managers are beating their benchmark. “Tormented bulls” best describes investor mentality.
  • Second, US economic growth persists led by consumers that account for 69% of GDP. Monthly job growth has averaged 175K YTD, wages are rising (our leading indicator is a 2.7% rate), confidence is at the highest level since 2001, and household balance sheets are the strongest since 1980.

And, at least so far, Goldman has proven correct, with the S&P rising to new all time highs above 2,500 even as the Fed hiked rates one more time in the interim in an unexpectedly hawkish move which expects at least one more rate hike in December and 3 more in 2018.

So what are Goldman’s clients worried about now? According to the latest note from David Kostin, what Goldman’s clients want to know now that an imminent crash is no longer of concern, is “where to from here?” or as Kostin writes, “what is the likely path forward now that the 8½ year long bull market has lifted the S&P 500 index by 1824 points (270%) since its 667 low on March 9, 2009” and just broke the 2500 threshold for the first time and this week set a new high of 2508.

Or, in other words, “how should investors think about the next 100 point move?” Here is Goldman’s answer:

The tactical near-term path of the market during the next few months will be determined more by a change in valuation (lower P/E multiple) as investors confront a higher prospective interest rate environment than a shift in underlying fundamentals such as a change in the sales, margin, or earnings outlook. This view explains our year-end 2017 target of 2400 (-100 points).

In terms of price targets, Kostin says that the forward path of S&P 500 during the next few years will be determined more by sales growth than a shift in valuation, however the Goldman analyst is hopeful that sustained modest economic growth will support top-line revenue growth. This view is the basis for Goldman’s year-end 2019 target of 2600 (+100 points), while its year-end 2018 forecast of 2500 implies a flat 1-year price return, and Kostin expects that stocks with high expected sales growth will outperform during the next 12-months.

Before Goldman elaborates on what happens next, it first looks at how we got here:

Looking back at the drivers of the bull market reveals that higher profits contributed 1111 points (61%) of the index gain since 2009 as trailing EPS rose to $130 from $67. An improvement in expected earnings growth added 209 points (11%) of the 1824 point index gain as forecast EPS growth rose to 9% compared with -1% at the low in 2009. The higher valuation of the market accounted for 504 points (28%) of the overall index climb as the forward P/E multiple rose to 17.7x today vs. 10.1x at the trough (Exhibit 1).




Earnings growth since 2009 has been powered by a combination of changes in sales and margins. Margin expansion disproportionately explains the growth in profits. The more than 300 bp improvement in margins (to 10% from 7%) accounts for 80% of earnings growth for the S&P 500 index (excluding Financials, Utilities, and Real Estate). Sales growth contributed 20% of the overall earnings growth outside of the sectors above.


Summarizing the building blocks of overall EPS growth contribution to the 1824 point gain in the S&P 500 since 2009: roughly 30% stems from margin expansion, 8% from increased sales, and 23% from higher earnings in Financials, Utilities, and Real Estate (for a total EPS growth share of 61%).

With the past out of the way, here is Goldman’s rather gloomy response to the question that keeps its clients up at night: “what will keep the market levitating higher?

Looking forward, rising labor costs and interest rates are headwinds to further profit margin expansion. We assume margins climb by 20 bp to 9.9% in 2018 but slip to 9.8% in 2019. Our US Economists’ Wage Survey Leading Indicator stands at 2.7%. Their forecast of 5 hikes during the next 15 months compares with 2 hikes implied by the futures market. Our forecast is more hawkish than the path of the median estimate in the Fed’s Summary of Economic Projections (SEP) released this week. We forecast Treasury yields will reach 2.75% at year-end 2017, 3.25% in 2018, and 3.6% by 2019.


Similarly, we assign a low probability of further valuation expansion. The aggregate P/E multiple ranks in the 89th percentile vs. the past 40 years and higher interest rates typically correspond with lower valuations. The S&P 500 currently trades at 18.0x our top-down 2018 EPS forecast of $139 and 17.2x bottom-up consensus of $146. By the end of next year, the P/E on our top-down 2019 estimate of $146 will be 17.1x, one point below today.


Absent support from improving margins or P/E multiple expansion, equity returns are likely to be dependent on sales growth. Our baseline forecast is revenues grow by 4.7% in 2018 and 4.5% in 2019. Our top-down sales model specifies 5 macro variables that have historically driven revenue growth.


None will spark acceleration in sales growth during the next 3 years.

  • 1. US GDP growth: Our US economics team forecasts GDP growth of 2.4% in 2018 and 1.7% in 2019. Although above the trend growth rate of 1.75%, the modest pace of expansion is unlikely to accelerate S&P 500 sales growth.
  • 2. World GDP growth: We forecast global GDP growth of 3.9% in 2018 and 2019. Although recent data has been encouraging, 71% of S&P 500 sales is domestic, dampening the possible sales tailwind from faster non-US growth.
  • 3. Inflation: Inflation as measured by core PCE has remained below the Fed’s 2% objective for more than five years. Our economists forecast core PCE inflation will accelerate to 1.9% in 2018 led by services inflation (+2.6%).
  • 4. US Dollar: Our FX strategists expect the trade-weighted USD will rise by 2% through 2019, creating a slight drag on S&P 500 sales growth.
  • 5. Crude oil: Our Commodity strategists expect WTI and Brent will average $55 and $58/bbl through 2019 suggesting a shallow trajectory for Energy sales. Passage of tax reform represents an upside risk to our margin and EPS forecasts. The Senate may have reached a deal to include instructions in the budget resolution to cut taxes. Every 1 pp in rate reduction equals $1 in EPS.

Amid such a downbeat environment, one in which margin expansion is unlikely, in which P/E multiples will contract, and where sales growth is unlikely, it is no surprise that Goldman’s conclusion is that “stocks with the best sales growth will outperform.”

Our rebalanced 50-stock sector-neutral High Revenue Growth basket comprises firms with the fastest sales growth in 2018. Median constituent has forecast sales growth of 14% next year vs. 5% for the median S&P 500 stock. Basket has returned 20% YTD vs. 13% for S&P 500. PEG ratio equals 1.3x vs. 1.8x for the S&P 500.

It also explains why Goldman has pretty much given up hoping for any equity upside in the US, expecting a 100 point drop by year end, an unchanged market by the end of 2018, and a measly 100 point increase in just over two years, with the S&P closing 2019 at 2,600.

What is more surprising, is that following last week’s admission by Goldman again that its bear market risk indicator surged to the highest since 2000 and 2007, and now implies a 67% probability of a market crash, that Kostin does not even contemplate the possibility of a much sharped drop in the market over the next two years…