All day and every day, some of the stock market's best and
brightest traders and money managers share their ideas, insights,
and analysis in real time on Minyanville's
Buzz & Banter
Here is a small sampling of the 120+ posts seen on the Buzz &
Banter this week:.
On the Wheels of a Dream
- 10:49 a.m.
This morning Jonathan Weil has a
piece on Bloomberg
) accounting. Over in the
Wall Street Journa
l there are reports of increased regulatory review of Tesla cars as
As I joked on Twitter earlier this morning: Accounting issues?
Regulatory scrutiny? For a moment I thought someone was talking
about the banks in 2008.
More seriously, I think Tesla is a great real-time example of what
happens when confidence falls post-bubble. Suddenly non-GAAP
accounting measures which were not just accepted by investors but
taken as "why this time really is different" substantiation for
extraordinary valuations quickly come under siege. And as
confidence falls, regulation naturally increases. For post-peak
confidence companies, suddenly they are being attacked across
multiple fronts. Where just months ago, everyone from investors to
suppliers to consumers to regulators all adhered to a "Don't Ask,
Don't Tell" operating model, suddenly everyone seems to be out with
a microscope. And as we saw with the banks in 2008, incremental
disclosure, rather than bringing an end to the questions, only
raises more and more.
While I should probably stop here, I would also offer another
real-time example of confidence-driven decision making in action
and that is Bitcoin. I couldn't help but smile when I read this
"Regulators See Value in Bitcoin, and Investors Hasten to Agree"
Of course they do. Confidence is a social phenomenon and just like
Washington deregulated the banks in 2009 at the top of the market,
it makes perfect sense that regulators would be positive on Bitcoin
with its price a record $1,000.
While Bitcoin may certainly go higher -- much like howTesla took on
a rocket-like trajectory honoring its founder Elon Musk at its peak
in confidence -- I would remind readers that high regulatory
confidence is a bearish, not bullish, indicator. And to these eyes,
there seems to be now be a saturating self-assured certainty to the
future of virtual currencies.
Clear & Present Markets
- 3:26 p.m.
1. The currency wars are taking shape. What we have seen to this
point has not been a "war" but rather coordinated devaluations
among developed economies. I think it is prudent to use the term
"war" in the context of the PBOC actions because emerging market
economies have borne the brunt of these policies in the form of
inflation and less competitive currencies. The intention of the
PBOC to end intervention in the currency market and broaden the
yuan's daily trading limit, in addition to implementing market
based interest rates, means China is taking meaningful steps to
develop competitive capital markets. We have been headed down the
road of liberalization for a while, but it seems recent changes
empower Chinese officials to accelerate this process, bringing
outside capital into China. Replacing a reserve currency is a
process, not an event, and this is another of several signs that
the dollar is losing its status as the world's reserve currency.
Accelerating yuan convertibility and interest rate liberalization
are major steps to creating a competitive alternative. A stronger
yuan would benefit the Chinese consumer, who would have increased
purchasing power, but exports would be less attractive to global
consumers. I am long the
) as a long-term way to play the long awaited, but yet to
materialize, rise of the Chinese consumer.
2. I have been looking at some data recently that is helping me
make sense of the disconnect between financial market price
performance and economic fundamentals. While the Fed has stated
that QE is aimed at using asset prices as a policy to drive
economic activity through the behavioral impact of a "wealth
effect," there does not appear to be a correlation between the
financial interventions and fundamentals in the "real" economy.
Housing is the one area where I would concede a correlation, but we
are seeing asset price inflation across markets, not just housing.
In short, while the Fed is causing asset prices to become
overvalued, it is doing little to support the fundamentals that
support those elevated valuations. What we are left with is
declining household income, higher taxes, over indebtedness, and
asset valuations that are disconnected from economic realities. If
you put all of this together, you will see that it is essentially
austerity, using another mechanism. As we heard in comments from
), the consumer is tapped out and price competition is what will
drive sales this holiday season. ZIRP is aimed at pulling demand
forward, and after 5 years, we may be reaching the point in which
we have pulled most of that demand forward and must deal with
declining demand. The price competition and deflation we are seeing
may be a manifestation of that.
3. Finally, the bombing of the Iranian Embassy in Beirut is a
tragedy and a sign of the destabilization in the Middle East. Pay
attention to the shifting geo-political landscape there. The Saudis
are upset over the US non-action in Syria and then opening a
diplomatic dialogue with Iran. Stratfor has been pointing out for
years that the US needs to align itself more with Iran and less
with Iran's mortal enemy Saudi Arabia, and we are beginning to see
the shift emerge. The Saudis seem to be countering this by getting
friendly with Egypt and to some extent Israel, but we should be
aware that the proxy wars in Iraq and Syria appear to be spreading
to other regions.
The Hump Day Cometh!
- 9:54 a.m.
We've reached the half-way point of this freaky week as global
indices "back and fill" recent gains. You know the drill; with
mainstay indices up smartly this year--the Dow Jones Industrial
Average is up 22%, the S&P is ahead 25% and the NASDAQ is
sporting a 30% return--fund managers are 'on edge' with 28 sessions
left until the year-end letters are penned.
In recent sessions, we've paid homage to the technical
landscape--initial support resides at
with more meaningful supports down at
(INDEXNASDAQ:NDX) 3255--as we continue to respect the performance
anxiety-driven "long squeeze," with the buyers higher and the
sellers lower into year-end. Perception is reality in the
marketplace and the masses are making the bet that current
perception continues to manifest into January.
There are a few caveats as the bulls count their Benjamins. For
one, the Investor's Intelligence Weekly Advisor Sentiment finds
53.6% bulls and only 15.5% bears, which is near the prior peak of
55.2% bulls two weeks ago. That dovetails into the VXO chart below,
which shows that "fear" is a kitten's whisker away from 25-year
support. If the past is a prologue to the future, option hedges
and/or stock replacements is emerging as a smart strategy.
Another flag, for those who care of such things, is the price
action in high-beta. Tesla,
which was king of the world at $190
, is suddenly the poster child of ambition gone awry, while other
fliers, such as
(FB) have been sudden battlegrounds. These names remain a terrific
proxy for the aforementioned performance anxiety as they provide
the best bang for the buck for those trailing their benchmarks.
On the news front, we'll get the FOMC minutes this afternoon at 2PM
ET, which will be dissected in kind. Keep an eye out for any
tangible shift in
; while Mrs. Yellen's Fed prides itself on wearing white feathers
(read: remaining dovish), any dissension in the ranks could rattle
psychology in kind.
Good luck today; be the ball.
Click to enlarge
Click to enlarge
Swap Spreads and IOER
- 1:06 p.m.
I commented on the collapsing interest rate swap spreads. I've had
the conversation with a few more people today and at this point
have a pretty good handle on what's going on.
Realized volatility in the Treasury space is collapsing back to a
multi-year low again. This is essentially because the market is
embracing forward guidance, lower for longer, and allowing the Fed
to tell them where rates should and will be.
. So there has been a lot of short covering and new longs added in
2016 or longer Eurodollars, which drives swap spreads tighter. This
also explains why the MOVE Index of interest rate volatility is
back to the May lows.
I do like the fact that the market is becoming more rational, but I
think we passed rational on our way to overtly complacent and that
worries me. If and when interest rate vol picks back up, it might
not be a pretty sight again.
The leak about the ECB deposit rate cut into the negative is adding
more flames to the fire about an IOER cut. In his interview earlier
this morning, St. Louis Fed President Bullard mentioned that the
cut to the IOER rate has been discussed by the FOMC in the past. To
my knowledge, when looking at the cut in early 2012, they found
that the costs outweighed the benefits. So let's set sail on the SS
Theoretical to analyze some things and how it may affect domestic
I'll give a rundown of what the Interest on Excess Reserves (IOER)
rate is. The rate, currently at 25bps, is paid to banks on excess
reserves they hold from the Fed. To my understanding, total
reserves are calculated as the monetary base minus the value of
Federal Reserve notes, and excess takes into account required
reserves. As of last June 26, there are $2.04trln of total reserves
($2.5trln as of Nov 13, but I do not have excess for that date), of
which $1.92trln are considered "excess". Basically, only 6% of the
money the Fed has "printed" is actually being used.
I imagine there is a structural limit to how many of these reserves
can be used. For example, to my understanding, the only primary
dealer eligible to receive reserves in exchange for Treasuries are
those that are commercial banks. So these reserves are going to the
(JPM), etc. These banks can only lend out a certain amount, it's
not free money, and affects their leverage ratio. The asset
(reserve) is essentially a deposit and must be matched against a
liability before being taken onto the balance sheet. Next, you have
banks being pressured by all sorts of new regulation to limit their
size, so regardless of an IOER cut, they aren't incentivized to
take on more loans.
Practically, the IOER rate acts as a ceiling for overnight rates.
So if the rate was lowered to 0, that would cause widespread
dysfunction in money markets and repo markets. If a money market
fund is leveraging bank assets at 0%, they have ZERO incentive to
take on that risk. My guess is that they are thinking about
lowering it to 10bps because the 5bps rate from the Fixed Rate
Reverse Repo Facility acts as the floor. It would then enforce a
band of 5bps to 10bps for overnight rates and the Fed Funds rate.
Things Are Looking Better in Biotech
There are a million crosscurrents out there in the Market.
Uber-Minyan Jeff Saut, who in the nearly 10 years (!) I've been
writing for Minyanville has been right an astoundingly large
portion of the time, is
warning of weakness next week
. Smaller biotech has been gingerly in risk-on mode for most of
this week -- to the point where we relaxed our short exposure on
the names in which we had nice gains. In my experience, that's
usually a coal-mine canary for outperformance by the broader
This is a buyer-driven market. When buyers take a vacation --
figuratively or, like next week, literally -- the market drops.
There haven't really been many sellers. For the other portfolio
managers out there, when was the last time a colleague asked you
"So what do you like on the short side?" People simply aren't all
that interested in selling. They're cranky when they have to sell.
That sentiment is an incredible tailwind for stocks, for however
long it might last.
For those interested in my home sector (biotech), do yourself a
favor and pull up separate yearly charts of the
NASDAQ Biotech Index
(INDEXNASDAQ:NBI) for 2010, 2011, 2012, and 2013. Print them out
and line them up one atop the other (I have this hanging on my wall
over my desk). You'll see we're pretty much beyond the point of the
traditional Fall drop in biotech. Seasonality is less of a
headwind. We have the big American Society of Hematology meeting in
early December and then all the specialists in my space start
positioning their portfolios trying to anticipate which companies
will have positive gains heading in and out of our sector's Super
Bowl -- The JP Morgan Healthcare Conference in San Francisco
January 13-16. That creates buying pressure, macro issues being
I wouldn't be surprised to see a little weakness next week per Mr.
Saut's tells, but I think we're on the edge of another upswing in
biotech. As Toddo says, we're rapidly closing in on year-end, and I
suspect the hot performance in the biotech sector are going to
cause portfolio managers at generalist funds to add biotech
exposure so they can talk about that in their year-end letters.