Why we were Buying Fear Monday near the Lows

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“EU Banks are in a world of Brexit pain, we are taking advantage of fear. EU financials are a screaming capitulations Buy today. Our 7 factor capitulation model is giving us a very strong buy reading, even stronger than the one we had in February. The Jo Cox tragedy created a false reality, last week investors piled into buy the Pound and EU banks, a classic student body left. This has created an amazing short term buying opportunity for the brave investor who appreciates risk / reward.”

The Bear Traps Report, June 27, 2016

 

One of the more prominent reasons we were buying equities into Monday’s plunge was the fact that in recent years, as markets become stressed, central bankers float new creative ideas into their favorite media channels. The net result is a consistent and fairly predictable student body left, student body right market movements.

VIX Futures 3

The steepness of the VIX futures curve is one of our 21 Lehman Systemic Risk indicators. The speed of the steepening process is a key element to risk management. In all market panics, the front month VIX future trade rich to the outer months. As you can see above, on Monday of this week the VIX futures curve was flat, move into slight backwardation. We used this as a signal to bet long equities (see our Bear Traps Trade alert from Monday, June 27).

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The CBOE Volatility Index is on pace for its biggest weekly decline in history as investor nerves settle following the U.K.’s decision to exit the European Union. Since the so-called S&P 500 fear gauge surged 49 percent last Friday, it’s slid in each of the last five days for a 42 percent decline in the period. The VIX is stabilizing after last week’s 33 percent increase, which was within the 97th percentile of gains for similar periods. – Bloomberg

VIX new 2On May 29th, we recommended clients get long volatility as complacent equity markets were not appreciating coming Brexit risk.

Lehman Memories

Over the last 10 days, the S&P 500 has moved 1.3% or more (up or down) 6 days in a row. Hasn’t hit 7 since Dec 2008.

Bloomberg

 

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S&P Futures Open on Friday’s Lows, Italy Pulls a Hank Paulson Bailout

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“Central banks around the world are having more and more influence on the markets. Many people are trading off of anticipated policy moves and the crowded trades are even more profound. However, the sentiment of investors making bets on the “great divergence” has reached a fever pitch.  Fed funds futures are expecting at 78% of a 25bps rate hike, far too many people are on one side of the boat.  We believe credit risk will veto the Fed policy path next year.  We do not see rate hikes coming in 2016. We implore you to buy the gold miners GDX and long U.S. Treasury bonds.”

The Bear Traps Report, December 9, 2015

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*ITALY SAID TO WEIGH $44 BILLION INJECTION IN BANKS AFTER BREXIT

Italy’s banks we’re substantial under-performers Friday, off nearly 20% over the last 3 trading sessions.  As we stressed last year to subscribers, zombie banks in Europe hold over $1T of bad debts, Italy’s stake of smelly loans is near $400B.

Italy is considering a 40 billion euros ($44 billion) bailout of it’s banking system. 

Fresh capital for the country’s banks, Il Fatto Quotidiano reported Monday, citing government and financial sources it doesn’t identify. – Bloomberg

The government would sell debt to fund the capital injections and is talks with the European Commission, Il Fatto said. Governments can provide funds directly to banks in exceptional circumstances of systemic stress, which Italy would cite as a reason for its intervention in the aftermath of Brexit, the Italian daily newspaper reported.

Italy’s lenders are over-loaded with 360 billion euros of bad debt, while profit is also squeezed by record-low interest rates and sluggish economic growth.

 

The plunging in financial markets continued Monday.

The pound extending its record one-day selloff after the U.K.’s vote to exit the European Union threw British politics into turmoil, fueling anxiety over the decision’s impact on the wider global economy.

– Wall St has gone from entirely Yen Bears to Bulls: the Yen Brexit Surge is Seen Testing 95 in Threat to BOJ Stimulus Goals.
– Brexit vote was like a ‘Black Swan event,’ PineBridge
– In panic mode, HSBC changes their year-end dollar-yen target to 95 from 115, Goldman had a 125 dollar yen target in December, she touched 100 on Friday.

 

Every 1 handle move in the yen’s stronger currency, costs companies in Japan nearly $15m, the Bank of Japan will be forced to act, yet again.

China weakened its currency fixing by the most since last August as global market turmoil spurred by Britain’s vote to leave the European Union sent the dollar surging.

The People’s Bank of China set the reference rate 0.9 percent weaker at 6.6375 a dollar. A gauge of the greenback’s strength jumped 2.4 percent in the past two days, the most since 2011, as the British pound and the euro tumbled. The yuan dropped 0.3 percent to 6.6473 as of 6:44 p.m. in Shanghai, heading for its weakest close since December 2010. – Bloomberg

LEVERAGE

Central Bank Bal Sheets

After levering up for 8 years, central banks have brought the world on the brink of recession.

Bank of Japan sets emergency meeting tonight.

Hillary Clinton, speaking in Indianopolis at Conference of Mayors, said U.S. will also recover “from all the other shocks that are in the system” after saying Americans lost about $100b from their 401ks following the U.K.’s Brexit vote.

Front Month VIX Futures surged up to 22.50 while 8 months out stand at 22.67, the curve is nearly inverted, a classic sign of severe panic.

S&P Futures

The rout in riskier assets picked up where it left off Friday, with the Australian dollar slipping with the euro as as U.S. and Japanese index futures fell with New Zealand shares. The Norwegian krone tumbled more than 2 percent as oil dropped a second day. Sterling sank beyond $1.35, extending losses near weakest level since 1985 as investors face months of uncertainty over Britain’s future amid turmoil within the two major political parties and Scotland agitating anew for independence. Angst boosted the yen and gold, amid demand for havens following the worst day for global stocks in almost five years.

Pick up our Brexit trade ideas playbook below, just click on this link:

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Unched

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Join our Larry McDonald on CNBC’s Halftime Report Friday at 12:30pm

“Central banks around the world are having more and more influence on the markets. Many people are trading off of anticipated policy moves and the crowded trades are even more profound. However, the sentiment of investors making bets on the “great divergence” has reached a fever pitch.  Fed funds futures are expecting at 78% of a 25bps rate hike, far too many people are on one side of the boat.  We believe credit risk will veto the Fed policy path next year.  We do not see rate hikes coming in 2016. We implore you to buy the gold miners GDX and long U.S. Treasury bonds.”

The Bear Traps Report, December 9, 2015

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The clowns, otherwise know as “stock market cheerleaders” are quick to remind us every time equities near record highs.  Over the last 2 years, we’ve heard countless times how “we’re breaking out into record territory.”

Its so disingenuous. We must all deal with the reality of what were up against.  Since the Federal Reserve started to taper their monetary goodie bag, stocks have gone no where, while a few names FANG (Facebook, Amazon, Netflix and Google) have hogged all the returns.

S&P 500

S&p 500 Flat

Facebook is up 51% since November 7, 2014 while the S&P 500 is unched.

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Russell 2000

Russell

Amazon is up 98% since October 29, 2013 while the Russell 2000 is unched.

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Dow Jones Industrial Average

DOW

Google is up 23% since October 30, 2014 while the Dow Jones Industrial Average is unched.

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Central Bankers and the Next Recession

Join our Larry McDonald on CNBC’s Halftime Report Friday at 12:30pm

“Central banks around the world are having more and more influence on the markets. Many people are trading off of anticipated policy moves and the crowded trades are even more profound. However, the sentiment of investors making bets on the “great divergence” has reached a fever pitch.  Fed funds futures are expecting at 78% of a 25bps rate hike, far too many people are on one side of the boat.  We believe credit risk will veto the Fed policy path next year.  We do not see rate hikes coming in 2016. We implore you to buy the gold miners GDX and long U.S. Treasury bonds.”

The Bear Traps Report, December 9, 2015

 

Chances of a July Rate Cut from the Bank of England

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June 24: 41%

June 1: 9%

Bloomberg

Bank of England Governor Mark Carney responded to Britain’s decision to quit the European Union with a 250 billion-pound ($343 billion) pledge of funds to support the banking system. He also said policy makers will “assess economic conditions and will consider any additional policy responses.” That means more action may be forthcoming if market turmoil spills over into the economy, with investors increasing bets on an interest-rate cut by next month. – BN

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Central Bank Bal Sheets

A year ago today, 88% of Wall St was calling for 5 Fed Rate Hikes (2015 into 16) before:

-A possible China currency devaluation

-Brexit vote

-US election

The Blind Squirrel

Wall St’s cluelessness over risk management and how it relates to Fed policy never ceases to amaze us.  They’re the gang that can’t shoot straight.

File_000 (18)Central Bankers have been bamboozling Wall St. for far too long.

A Meeting of the Gods

The world’s monetary Gods, our saviors, will meet at the Bank of International Settlements meeting in Basel over the weekend.  We have a list of 3 trades focused on their next move, just click on the green link below.

As you can see above, the explosion in their balance sheets have had the end result of bringing the global economy to the brink of recession.

We must have a plan for their next move, get on our Bear Traps Report:

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U.S. Dollar Surge, Gold Surge and 10 Brexit Side Effects

U.S. Dollar Surge, Gold Surge and 10 Brexit Side Effects

Join our Larry McDonald on CNBC’s Halftime Report Friday at 12:30pm

“Central banks around the world are having more and more influence on the markets. Many people are trading off of anticipated policy moves and the crowded trades are even more profound. However, the sentiment of investors making bets on the “great divergence” has reached a fever pitch.  Fed funds futures are expecting at 78% of a 25bps rate hike, far too many people are on one side of the boat.  We believe credit risk will veto the Fed policy path next year.  We do not see rate hikes coming in 2016. We implore you to buy the gold miners GDX and long U.S. Treasury bonds.”

The Bear Traps Report, December 9, 2015

Receive our top 3 Trade Ideas post Brexit, click here below:

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Brexit Side Effects

  1. Spanish Yields Surging on Brexit Credit Risk Contagion

Prime Minister Rajoy’s People’s Party on track for 116-120 seats in Sunday’s election, according to a Gesop survey published by El Periodic d’Andorra.

• PP rises from 114-118 seats in Friday’s poll, BUT down from 123 seats in Dec. 20 election
• Left wing Podemos set for 90 seats vs 71 in December
• Socialists on 83-87 seats vs 90
• Ciudadanos 38-42 seats vs 40
• Poll based on 900 interviews conducted June 22-24
• Majority in Spanish parliament is 176 seats

Spain

  • 10-year yields jump most in 2016 Friday as U.K. chooses Brexit
  • Sunday’s election may once again be inconclusive, polls signal

Spanish government bonds may see more volatility next week after voters go to the polls Sunday to try to break a six-month political deadlock over who will govern the euro region’s fourth-largest economy.

The nation’s securities plunged on Friday, with the 10-year yield jumping the most this year, after Britain voted to quit the European Union. Riskier assets suffered as the decision threw uncertainty onto the political future of Europe, bolstering speculation other nations will move to hold similar referendums. – BN

Brexit Side Effects

2. European banks are off 47% from their 2016 highs, off 18% yesterday.

EU Banks new

Central banks are intervening globally in currency action, the Bank of Japan, S Korea, India and Denmark are all believed to have intervened overnight Thursday into Friday’s market price action.

The Eurostoxx 50 is fell 9%, that’s nearly 2000 Dow points.

3. Gold is a safe heaven once again, the media lectured us late last year that the metal had lost its security touch, wrong.

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Gold

4. S&P 500 FUTURES TUMBLED 5.1%, then closed 3.6% lower Friday.

S&P 500 1999

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5. We are witnessing a blow off top in panic bond buying, 0.15% for 30 years in Japan.

Japan 30 Year

 

6. The Fed once again is wearing the dunce hat. US markets are currently pricing out any chance of a tightening (rate hike) this year.  U.S. 2 year Treasuries’ yield plunged to 0.53%.

2 Year

7. Emerging Markets and Oil’s enemy, the global wrecking ball that is the U.S. dollar is back on the march higher.  WTI plunged 9.1% from its June high.

Friday

iShares MSCI Emerging Markets -6.2%

Brazil -2.8%

Mexico -2.7%

 

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Dollar Surge

 

8. The Pound is in Lehman Land

The pound slumped to the lowest level in 30 years on Friday, tumbling as much as 13%, as investors took fright at Britain’s shock.

HSBC and Standard Chartered Bank plunged 11%

Pound 5

We now have a Pound in Lehman land at 11;07ET

9. A Classic Trading Lesson, too Much was Priced in.  Too Many investors were on one side of the boat (Bremain) Thursday.

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The 70 Handle Plunge

S&P Terror

Too much was priced into the Bremain trade.

Thursday, currency volatility plunged on the pound from 24 to 13, the biggest one day move in the post Lehman era.  The market was well priced in for a Bremain.

Next, Mr. Market did what he always does, “exerts the maximum amount of pain on all participants.”

Look at this incredible move:

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Pound Plunge

At one point this Thursday if you wanted to trade pound sterling the bid offer reached one big figure 1.49-1.50, she closed at 1.36 now!

Leading global currencies shouldn’t trade like biotech stocks, but in a Brexit world full of “over ego filled” central bankers, they do.

Brexit Side Effects and Trade Ideas, just click below:

 

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Puerto Rico: Bogus Claims of Default?

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Bogus Claims of Default?

“We’ve proven Puerto Rico is NOT Detroit nor Greece.”

Governor Alejandro Padilla, April 2014 (after selling $3.5B bonds to investors)

A funny thing happened along the way to default, Puerto Ricans started to actually pay their taxes.  By some estimates, up to 35% of the countries’ GDP is underground, not accessible to tax collection.  Recent data shows this may be starting to change.

Government of Puerto Rico revenue for 11 months of Fiscal Year 2016 totals $14.9 million more than estimated in the budget, according to figures released yesterday by Treasury Secretary Juan Zaragoza, calling into question claims that Puerto Rico cannot pay its debts.

U.S. Treasury Caught Speeding?

The U.S. Treasury has been painting a dire picture for Puerto Rico.  In an effort to cram down investors, achieve debt forgiveness from bond holders, most investors feel the Treasuries’ recent claims have been unfounded.

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Puerto Rico new

The territory has collected $8.2 billion, compared with $7.9 billion during the same period of Fiscal Year 2015.

Puerto Rico

Debt vs. Population

2016: $72B vs 3.5m people

2006: $38B vs. 4.6m people

Bloomberg data

The major change in revenue was in the Sales and Use Tax, which was increased from 7% to 11.5% during the year. After payments on bonds issued by the Sales Tax Financing Corporation (COFINA), the levy contributed $1,355.8 billion into the treasury compared with $510.9 million last fiscal year. The amount was $27.1 million more than expected.

Individual income taxes were down from $2,106.2 billion to $1,854.3 billion, $10.4 million less than expected. Corporate income taxes edged lower from $1,478.2 billion to $1,434 billion, but were $53.6 million more than budgeted.

The 4% tax on products received by companies in the States from their manufacturing subsidiaries in Puerto Rico generated $1,675.7 billion, a bit less than the $1.741.1 billion last year and $24.8 million less than expected.

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Bond Madness

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If it was a fight, they’d stop it.  Bonds are crushing stocks 2014-16.

We have a Swiss bond below, a move 100 to 230 at nosebleed levels.

SWISS 33

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Japanese, German and Swiss bond yields plunged to records, as government debt around the world extended its best gains in two decades, with the prospect of Britain leaving the European Union boosting demand for havens.

Brexit Risk is creating extreme panic buying in bonds.  They’re jumping over the seats, swinging on the chandeliers, trying to get out through the bath room window, all in an effort to buy bonds.

Everyday the Fed doesn’t hike rates, they’re shoving more capital in places it just shouldn’t be

Federal Reserve Chair Janet Yellen fueled the rally by saying Wednesday slow productivity growth and aging societies may keep interest rates at depressed levels. Fewer Fed officials expect the central bank to raise interest rates more than once this year than they did three months ago, based on projections the central bank issued. The Bank of Japan said inflation in the nation may be zero or negative, while holding monetary policy unchanged.

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