What is the street watching? First, there is a report circling from JP Morgan’s quantitative team

Pot and politics (but not together!)
The chase by Frances Horodelski:

Friday’s child is full of loving and giving. Hope you have both today.

For perspective, here’s what the week has wrought: As of last night’s close, and compared to last Friday’s close, the Dow is higher by 1.18%, the TSX by more than 2% and oil +4.57%. Volatility is a day-to-day event, the result is often times something different. Anyway, Friday is here and while Chinese markets rallied, the rest of the world is giving some back (remember the Dow was up 1000 points in two days).

What is the street watching? First, there is a report circling from JP Morgan’s quantitative team that highlights the potential for some significant selling ahead based on option and derivative positioning by trading accounts such as CTAs (commodity trading accounts), Risk Parity portfolios and Volatility Managed strategies. The report reads like a math treatise and easily undermines anyone’s belief that investing is all about buying good companies at good prices. The upshot of the report is that more wild down swings (like Monday’s 1100 point drop) are head. There is one glimmer of hope in the article is that some of these positions could be the first to reverse (that is start buying) when volatility declines. This report is being given some attention because a similar report was distributed last Friday that essentially laid out the events for Monday. We’ll see.

The street is also watching the last of the bank earnings with a modest beat by Bank of Nova Scotia that belies the strong underlying performance including +15% in Canadian banking and +11% in international banking. As Greg Bonnell noted this morning, if this is how our Canadian banks weather the weakening storm of the Canadian and international economies, they’ll be pretty well set-up for the improvement on the other side. We’ll be speaking with the CFO of Scotia this morning. The bulls like the numbers for BNS; the bears however have some lingering concerns. The three banks that were expected to raise dividends (Royal, CIBC and BNS) did so. And the cycle continues.

The world is waiting for Jackson Hole this weekend and especially the key note speaker, Stanley Fischer. Notwithstanding the markets react to comments from Dudley and George and Lockhart, the two people that matter most are Janet Yellen (not attending the conference) and Mr. Fischer. His words will be well parsed for his leaning on the next move (September, October, December, next year). Apparently the must attend event is a discussion on global inflation with Mr. Fischer, BOE Governor Mark Carney and the Reserve Bank of India Governor Raghuram Rajan.

Analyst are changing opinions this morning including a buy rating on CIBC from Veritas, buy of Citigroup from Guggenheim and New Gold a buy at Mackie Research.

Finally, there are bulls and bears out there. Carl Icahn is probably neither but pragmatic. He has taken an 8.48% stake in Freeport McMoRan – one of the worst performing S&P 500 stocks in the past three years having collapsed from more than $60 to a low of $7.52 this week. Will be an interesting story to watch – gold, copper, and oil.

Keeping it short today. Join us at BNN today when the President of the CFA Institute provides a four-point plan for how the financial services industry can clean up its act. We’ll also talk pot and politics (but not together!). Have a great weekend.

Flash Crash - Funds Algorithem trading systems dump stocks on mass...

And the fear index the VIX shot to 50 today and back down...

Bulls Vs Bears...Markets Crashing But There Is Hope!

What's real and what's hyperbole 
The chase by Frances Horodelski:

The bears playbook will be much in evidence today and I can hear their growling everywhere. The Dow futures are down more than 400 points at 7:30 a.m. ET. Here is the tally from last week: The Dow down 5.82%. The S&P 500 down 5.77%. The Nasdaq down 6.78%. The S&P/TSX down 5.63%. All ten sectors in the U.S. were lower last week led by Energy (-8.65%) while in Canada it was similar carnage but healthcare led the way (-9.43%) and there was one bright light – telecom +1% on the week. Golds too outperformed with a positive week, with 20 out of 21 members higher led by Alamos Gold (+21.5%) and the sector higher by 6%. Canadian banks which will be much in focus this week with third quarter reports, also had a dismal week with group down 4.7% led lower by Canadian Western Bank (-9%). Year to date the group is down 11.89% with Home Capital and Canadian Western Bank shareholders feeling the most pain (-44% and -32%, respectively). But no bank was spared – all ten components are down on the year. The yield on the Canadian Bank index is 4.33%.

As I said last week, this is one of the most anticipated corrections in years. Most expected theChinese stocks to fall after a speculative feeding frenzy that took the market to ridiculous levels of valuation. Most thought a correction of some magnitude would be “healthy” and many portfolio managers were waiting for the opportunity to buy. Most didn’t expect it to happen in one or two days. Orderly declines are much more healthy than disorderly ones – this one is turning disorderly. Remember that the margin clerks rule when markets collapse like this (now down almost 600 points on the Dow).

So there will be bears. But let’s highlight the bulls’ playbook for fun. Corrections happen and we’re in one. They aren’t great but let’s look at some of the things that could point to something decent ahead. Earnings in the second quarter (excluding energy) showed a decent 10+ gains for S&P 500 companies. The American economy continues to grow (and the Atlanta Fed GDPNow gauge has been showing an acceleration of expectations albeit still modest). Jobs are plentiful and the jobless rate has fallen. The number of millennials has surpassed the number of bombers in the American population have the potential for more homes, more cars and more consumption generally. The Fed remains accommodative (remember the balance sheet isn’t shrinking, they remain committed to re-investing maturing bonds and rates – with or without a hike – are exceptionally low. The CNN fear/greed index is at FIVE (paralytic fear). The amount of damage underneath the averages is severe including more than 80% of NYSE and TSX listed stocks down trading below their respective 50 day moving averages. Stocks are relatively expensive (compared to their own history) but still not outrageous (the bears love the charts that show stocks are the third most expensive compared to 1929 and 2000). The S&P is trading at 16.65x forecasted earnings while the TSX is at 16.8x. The ECB remains committed to “whatever it takes” and continues to buy some $65 billion worth of bonds per month. There is no credit crunch here folks – the leading cause of recessions historically (I know it is always different this time but still important to watch what matters). While all fingers are pointing to China, their ability to soften any blow is mighty (the PBOC’s reserve ratios are at 18.5% compared to the Fed’s 0.25%). According to the latest insider reports, insiders are decidedly bullish with sellers:buyers at 7:1 versus 25:1 in June (insiders on average tend to be sellers rather than buyers given options and significant components of compensation related to stock).

Now if you want to get bearish, there are no shortage of reasons (including the technical picture which always can be convincing when trend lines are broken). Unfortunately, they seem to me to be the same reasons on a loop – Fed, Europe and China. This week it is China. Remember to step back and focus on what is real and what is hyperbole. There will be a lot of the latter today. It used to be when the world was a mess, the world flocked to the U.S. dollar and U.S. treasuries. That isn’t happening as traders are buying the Euro, the yen and the Swiss Franc,

There will be news. Like the Iranians who are intent on shipping oil at any price. There are earnings this week (Best Buy tomorrow and Gamestop and Tiffanys on Thursday). There will be economic data releases including U.S. housing tomorrow, durable goods on Wednesdayand a second look at U.S. Q2 GDP on Thursday.

This not a time to be a hero but it is also not a time to panic. Take a hard look at each and every company in your portfolio and put your bear hat on. Do the numbers under the most uncompromising of scenarios – and see what will remain standing. Hold fast. And hold onto your hat. For months strategists have been forecasting heightened volatility. We’re there now. September is the worst month of the year seasonally – but maybe September came a month early. At BNN we’ll try to cut through the noise and provide clear-headed analysis. Stay with us.

Much to do and much to learn

Much to do and much to learn
The chase by Frances Horodelski:

Maybe because we look at things every day—corrections seem to happen in slow motion. This has been the most anticipated correction in history it seems for the New York markets (we haven’t had a serious one since 2011). The indicators have been there for a while. The Transports peaked in December. The generals (S&P 500 and Dow) peaked in May while the Nasdaq—always late to a party—peaked on July 20. We’ve been watching (and talking) about the internals for some time which also provided the clues that something was coming.

Here’s the tally so far: The TSX is down 11% from its April high (and 12.3% from all time September 2014 highs). The S&P is down just 4.5% while the Dow is down 7.2%. The Nasdaq has dropped 6.5% in a month. The movement has been the most painful but over a longer time frame – down 12.22% since December 29 peak – for the Dow Jones transports.

I’ve been told that what leads in the correction is also what can lead on the way out. Gold? Materials, staples and telecom have been the outperformers in the past week/month in both the U.S. and Canada. We’ll see whether that defensive posturing is the signal of more defensiveness to come. Alternatively, are we seeing the capitulation trade in energy that sets up for the next cycle? The S&P has had seven weeks of alternating performance (down, up, down, up, down, up, down). The CNN fear/greed index is at 10.

Yesterday I highlighted a number of the worries around the world. Add North Korea to the list today as Kim Jong Un traded threats with South Korea and the military has been put on a “war footing”.

For reference, U.S. strategists remain generally bullish on where U.S. equities will end the year. Right now the median target for the S&P 500 is 2225 within a 2100-2350 range. I think I said last week that we could get a pop, a drop and then a rally into the end of the year. I probably should have said pop, drop, pop, drop, pop, drop – and then the rally. The volatility will likely continue. Is there anything new in the mix? Maybe the realization that China’s economy is weaker than we thought (numbers in the 3-4% GDP growth range are becoming more prevalent) and that the country’s leaders are a little less capable at managing the markets and the economy. Today’s WSJ, below the fold, talks about the Tianjin explosion and how it has undermined the people’s confidence in the leadership. Pretty much everything else is the same. The ECB is still in there buying $65 billion worth of bonds per month (until September 2016). The PMI for both manufacturing and services in the Eurozone continue to show expansion (and at a pace slightly better than expectations). The Atlanta Fed’s GDPNow forecast for the U.S. economy has started to tick up again – and while the street remains much more bullish on growth, the gap is narrowing. Growth will be positive in Q3. Interesting that a dovish fed caused a big market hiccup – maybe a rate hike will be a plus. And what about all that “a fall in oil is like a tax-cut for the masses”? Of course, the price of gasoline hasn’t fallen at the same pace as oil – but it still could and it certainly has provided some consumer relief. Jobs are being had. Wages are rising (slowly). I don’t want to be a Pollyanna. The world is thinking that central bankers have lost control. And they’re hunkering down for something worse but when the weak are running, the strong take action.

Having said that, the technicians are nervous and in the short term, the charts might dictate. From Bill Strazzullo at Bell Curve Trading: “Note how the TSX tested the 13,800-13,700 area. This is the CRITICAL level I talked about on the show last week (mid-range of the June 2013 rally). Gut check time for the Canadian equity market. If the TSX fails here it is down to 13,400/300, another attempt at a rally that probably fails around 13,700-13,800 and then down again, possibly as deep as 12,900/700.” Another view from Raymond James Jeff Saut (who thought August 12th was the low and still thinks a bottom will be put in before September comes) lines up a number of indicators that are suggesting capitulation such as the NYSE McClellan Oscillator (about as oversold as it gets), puts are being bought at a pace more than calls that hasn’t been seen since 2012, the above-noted CNN fear/greed index is well into fear. While he notes “never on a Friday” – the bottom is near. For the TSX, the story might also be similar – if only the price of oil could find some level of support. Soon my friends, soon. Next week’s bank results – coming after a miserable year-to-date for the sector (down 10.45% year to date) – could be the supporting trigger.

Where is the most pain this year? The emerging world. In the past 13 months, according to Yardeni Research, almost one trillion ($940.2 billion) has flowed out of the 19 largest emerging market economies. That is double the outflow of $480 billion during three quarters of the financial crisis (2008-2009).

Canadian equity markets OUCH!

If you’re feeling the pain of the Canadian equity markets, these comments might explain. According to Scotia Capital’s strategist, on a market cap basis, the TSX is down 9.2% year-to-date and 21% year-over-year. 

However, the difference between this performance and the equal weight is -4.2% and -18%, year-to-date and year-over-year, respectively, is the widest in 15 years (Nortel?). Today, this reflects the weight and performance of Valeant. 

So if you own Valeant, you’re happy (or for that matter most everything else that isn’t energy, materials and even some financials). As for pain, breaking down the Dow Jones can show how skewed performance is this year. 

The index is down about 3% on the year but there are big winners (United Health, Nike and Home Depot) but there are nine components down more than 10% YTD including Intel (-20%), Dupont (-23%) and Chevron (-23%) although the latter did break a 15-week losing streak last week. 

Breaking into the top ten in terms of performance, and beating the market, is McDonalds (+6% year to date). For reference in 2014, the best performing stock YTD was Intel (+31%).



Full Article

Bull to bear?
The chase by Frances Horodelski:

Sublimity: “It’s the instant when one thing is about to become something else. Day to night, caterpillar to butterfly. Fawn to doe. Experiment to result. Boy to man.” - Dr. Hauptmann, All the Light we cannot see. Bull to bear(?).

Here’s the news that might be important to you. Barron’s has a bullish review on Potash (5.8% yield and potential upside to $34 U.S. in the next year and a $52 replacement value). On the negative side, oil could see $20 with a fast snap back after citing CFTC speculative long positions as a big negative (although net long positions of the speculators have declined over the past few months while the net short position of the commercials has also been declining – i.e. less short). In a summary of the 13F filings by major investors, position changes that stand out include Bridgewater exiting Potash, Fairholme adding to Sears Canada and Imperial Metals, The Gates Foundation reducing its position in Berkshire and adding BP, Kyle Bass added to Valeant, Paulson lowered his position in GLD, Pershing exited Actavis, Soros bought TimeWarner, Facebook and Dow.

If you’re feeling the pain of the Canadian equity markets, these comments might explain. According to Scotia Capital’s strategist, on a market cap basis, the TSX is down 9.2% year-to-date and 21% year-over-year. However, the difference between this performance and the equal weight is -4.2% and -18%, year-to-date and year-over-year, respectively, is the widest in 15 years (Nortel?). Today, this reflects the weight and performance of Valeant. So if you own Valeant, you’re happy (or for that matter most everything else that isn’t energy, materials and even some financials). As for pain, breaking down the Dow Jones can show how skewed performance is this year. The index is down about 3% on the year but there are big winners (United Health, Nike and Home Depot) but there are nine components down more than 10% YTD including Intel (-20%), Dupont (-23%) and Chevron (-23%) although the latter did break a 15-week losing streak last week. Breaking into the top ten in terms of performance, and beating the market, is McDonalds (+6% year to date). For reference in 2014, the best performing stock YTD was Intel (+31%).

For the week, the big stories will centre around the consumer and retail sales. In Canada,August 21st will see retail sales for June (estimate +0.2%). In the U.S., we’ll get a slew of companies reporting including WalMart, TJX and Home Depot tomorrow with Target, Lowes, American Eagle and Staples (among others). The big industrial name for the week will be Deere on Friday. The big corporate story this morning is Liberty Interactive (owner of QVC) buying Zulily (ZU) for $18.75/share which is a 49% premium to Friday’s close. As well, Jeff Bezos reacts to the New York Times description of how Amazon treats its employees – he says he’d quit the Amazon described in the article noting also that he doesn’t recognize the Amazon described in the article.

The week will likely continue volatile as the street waits for the Fed in September (last month’s FOMC meeting minutes will be released on Wednesday). The futures calculated probability of a hike in September remains a coin toss although most strategists would say it is a done deal. In other economic data, Japan’s economy contracted in the second quarter, but at a slightly less aggressive pace than the street had been expecting.

From analysts this morning Trican downgraded to sell at BMO (new $2 target), GDI integrated downgraded to Hold at TD ($21 target). Lots of downgrades to hold on the street including Cisco (at Morgan Stanley), Fresh Market (at BMO), Micron (at Wedbush). Imperial Metals upgraded to buy at M Partners with $12.50 target.

On BNN today, we’ll try to get to the heart of the oil story in Canada and the world. If you’re wondering why gasoline remains at such a high price relative to the collapse in crude,

 

Newfangled stock scams on the rise

Rapid trades and fake filings among techniques being used

NEW YORK— Stock scams are about as old as the market itself, but the combination of worldwide information technology and automated programs that can make thousands of trades in a second has created new paths for potential frauds.

The U.S. government says alleged scammers have used methods including rapid trades, fake regulatory filings and news reports to get an advantage and make profits. Here are a few examples: In May 2010, the Dow Jones industrial average plunged 600 points in about five minutes and closed with a loss of 348 points.

Regulators said the dive was triggered by a computerized selling program, and, in April 2015, the U.S. government filed criminal charges against British futures trader Navinder Singh Sarao.

The U.S. Department of Justice said Sarao used an automated trading program to manipulate the market and charged him with fraud and commodities manipulation. Sarao has said he was merely good at his job.

Shares of Avon Products rose as much as 20 per cent in May after a false Securities and Exchange Commission (SEC) filing said an investment firm wanted to buy the cosmetics retailer for $8 billion (U.S.). That was a big premium for a company that had struggled with falling sales and reduced revenue.

In May, the SEC sued a Bulgarian man, Nedko Nedev, and said he and five others violated securities laws by creating fake takeover offers.

The SEC said Nedev also made fake bids for Rocky Mountain Chocolate Factory in 2012 and insurer Tower Group International in 2014.

In July, Twitter’s stock climbed as much as 8.5 per cent after a fake story said the messaging service received a $31-billion buyout offer.

That, too, was a significant premium over Twitter’s market cap at the time, and it came as investors worried about Twitter’s losses and its user growth.

The story appeared on a website that mimicked the business news page of Bloomberg. Twitter shares returned most of those gains after Bloomberg said the story was a fake.

The same month, two men were arrested in Israel and accused of trying to cheat millions of people by driving up the price of penny stocks by sending false and misleading spam emails.

A U.S. citizen was also sought. The charges included conspiracy and securities fraud, and the SEC said the men ran at least 20 stock promotion websites. The scam was a pump-and-dump scheme designed to drive up the price of the stocks, so the promoters can sell them at an inflated price before the truth comes out and the prices fall again.

On Tuesday, the U.S. government said a group of hackers and securities brokers broke into the computer systems of three companies that publish news releases and traded on the information in hundreds of press releases before the public saw them.

The Justice Department says the group had members in Ukraine and the U.S., and it made $100 million over the years from trading shares of heavy machinery maker Caterpillar, Invisalign braces maker Align Technology and other companies, based on info in the unpublished releases.

With all of the angst comes opportunity The chase by Frances Horodelski:

Equity markets are in a bit of panic mode. The CNN fear/greed index is down to 9 (extreme fear) and the only thing right now preventing it from being at zero is the VIX which has risen (+12% yesterday) but remains relatively low (13.7 on the spot VIX). A year ago, the index was 7 – the S&P 500 was 1933.

According to regular guest Bill Blain from Mint Partners, when the world is a mess “Buy bonds, buy bonds, and if in doubt, buy some more bonds.” And that seems to be what’s happening as the German two-year bond has fallen to a record low (27 basis points) as have French and Italian twos. U.S. tens are trading down through recent support at 2.2% and now down to May lows of about 2.1%. The twos in the U.S., while slightly lower in yield are still double (65 basis points vs 30 basis points) the lows of last October – and the curve continues to flatten but this time with the long end falling.

So it is all about the macro today (hate that!). But with all of the angst comes opportunity. Having said that, my superstitious hat sees a good bounce and then a plop and then a year-end rally (see August through December last year). Play accordingly.

Currency markets–where the moves by the Chinese are reverberating through currency, fixed income and equity markets around the world. According to Dennis Gartman, while everyone is watching the renminbi versus the U.S. dollar, he believes the more important relationship is versus the yen where that currency has seen a dramatic 40% decline against the Chinese currency since 2011. That might be the more important cross to watch. Lots of moving parts in this story. And comparisons will be made to 1998 (the Asian currency crisis) – our goal will be to distinguish this from that as well as find the opportunities in the mess.

Interesting spin. China does a tremendous amount of trade with Europe and especially Germany. The first thought was that Germany would suffer as its goods became more expensive as China’s currency weakens. The DAX got smoked yesterday (the equivalent of 400 Dow points) and it is getting smoked again today (the equivalent of another 400 Dow points). But, it the perverse world of trades, the euro is stronger because a weak yuan will ultimately stimulate a Chinese economy and ultimately make for a better market for German (and European) goods. You can’t make this stuff up. The theory is that currencies react to economic differentials not rate differentials – hence Euro up – for six days in a row.

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