Tag Archives: ETFs

Why Is The Dow Outperforming The SPX And Naz?

“The combination of central banker-applied brute force (buying everything in sight) and deitylike central banker pronouncements has dampened market volatility and frisky free-lancing, but at the same time it has encouraged risk taking (in market positioning, not it business formation). We have thought, and still think, that confidence in central banks and policymakers has been unjustified and thus could erode or collapse at any time. Since the major financial institutions which comprise the financial system are still way overleveraged and opaque (in fact with record amounts of debt and derivatives at present), such a break in confidence could happen abruptly and without warning.” – from Paul Singer’s Q2 investor letter (note: Paul Singer is the founder of Elliot Management, one of the most successful hedge fund management firms since its inception in 1977).

Singer is considered one of the most shrewd and accomplished investors in the modern era. The quote above embodies two of the concepts I’ve been discussing for quite some time in the weekly Short Seller’s Journals:  Central Bank intervention will ultimately fail in spectacular fashion; the Too Big To Fail Banks (TBTFs) currently have more leverage and OTC derivatives – the latter well hidden off-balance-sheet – than just before the 2008 financial crisis/de facto collapse.

Singer has been quite vocal recently about the inevitability of an eventual market/systemic collapse. It’s not a question of “if,” but of “when.” I read an analysis last week from Graham Summers of Phoenix Capital in which he suggests that the Fed would lose control of the VIX – lose control of its ability to keep the VIX suppressed – and a large spike up in the VIX would trigger an avalanche of selling from the $10’s of billions in Risk Parity Funds. These funds buy stocks when the VIX falls and unload stocks when it rises – all based on algorithms which are automatically executed by “black box” computerized trading systems.

I have to believe that the Fed (not the FOMC figure-heads but the Phd “rocket scientist” personnel who work behind the scenes at the Fed) is well aware of this possibility and has
taken the necessary steps to ensure the readiness of a “safety net” that will buffer the selling deluge that would accompany an uncontrollable spike in the VIX.

Upon further reflection, I believe that the eventual “black swan” event will be an unanticipated derivatives explosion that occurs from an out-of-control OTC derivatives position buried deep off-balance-sheet on one of the TBTFs. This is what occurred in 2008. The Lehman bankruptcy/liquidation triggered a massive counter-party failure by AIG on OTC derivatives underwritten by Goldman Sachs. This was the event that prompted then-Treasury Secretary and ex-Goldman CEO, Henry Paulson, to scramble furiously to arrange a Fed/taxpayer bailout of AIG and Goldman. The bailout was extended to dozens of banks, domestic and foreign. But the Goldman/AIG implosion was the nexus.

Circling back to the relevancy of Paul Singer’s quote, the degree of risk embedded in TBTF bank OTC off-balance-sheet derivatives can not be properly assessed because, not only did changes to accounting regulations enable banks to hide derivatives more easily and thereby lie to the institutional investor universe, but bank officials (including CEO’s) lie about their risk exposure to the Fed and to Government regulators. Some bank CEO’s do not even know the full extent of risk hidden on their bank’s balance sheet. Jamie Dimon admitted this when the JP Morgan London derivatives “whale” catastrophe occurred (2012). Having been on a risky bond trading desk in the 1990’s, I can attest first-hand that trading desks have the ability to hide risky or bad positions from a bank’s upper management. We did this every year before our books were marked to market and squared for bonus pool assessment by the risk control and accounting people.

At this point, I thus think that stock market crash event-trigger will be the detonation of a derivatives bomb (Warren Buffet’s weapon of mass financial destruction). Likely a credit, interest rate or currency based derivatives position and related counter-party default. The Fed will not see it coming because it was covered up and never disclosed to the Fed. Is this the flight-to-quality that marks the beginning of the end for the stock market

The Fed heads dating back to at least Alan Greenspan always remark that it’s impossible to know whether or not an asset bubble is occurring until after it pops. Yellen went as far as to suggest there would not be another financial market crisis in our lifetime. These assertions are so absurd that I don’t think a response is necessary. But I ran some varying duration index comparisons and discovered this (click to enlarge):

You can see that the SPX, Dow and Naz were tightly correlated in mid-July. This correlation extends further back in time. You see that the Dow began outperform the SPX/Naz starting Tuesday, July 25th, after AMZN reported an unexpectedly huge earnings miss (the plunge in the green line), the SPX and Naz entered a downtrend while the Dow continued higher.

Back in the day when investors were more likely to on focus fundamentals rather than stockprice momentum, a chart like the one above would elicit references to Dow theory, which asserts that the final stage of an out-of-control bull market culminates with a “flight-to-quality” from risky stocks into the lowest risk market sectors. Traditionally the Dow is considered less risky than the universe of stocks that comprise the SPX and Naz.

The idea behind this theory is that, as big investors sense that smaller-cap, higher-beta stocks have reached a point of overvaluation and high risk, these investors move money from the overvalued stocks into the Dow stocks, which are traditionally considered more stable and more liquid. Investors ride the Dow until the entire market rolls over. Some articles appeared last week which made note of the deterioration in technical indicators. For instance, one analyst noted that the recent string of Nasdaq new highs occurred with “negative breadth” to a degree that ha not been seen since 1999-2000. Negative breadth is when an index has more stocks declining than advancing. It’s a negative divergence that often signals that large investors are moving more cash out of the stocks than is flowing into stocks.

No one knows for sure which of the many hidden “financial bombs” will explode unexpectedly and cause a market melt-down.  But like all Ponzi schemes throughout history, the U.S. Ponzi scheme will implode under a massive weight of hubris, extreme greed and widespread ignorance disguised as complacency.

The above commentary is from the latest Short Seller’s Journal. Despite the inexorable climb to new records in the Dow, SPX and Naz, dozens of stocks are falling from the sky like pheasants in hunting season.  The Short Seller’s Journal can help you make money from the short side. You can learn more here:  LINK


The Markets Are More Broken Than We Thought

Not only has volatility ramped up and several NYSE Rule 48’s issued over the past week, but now the ETFs are broken. I’ll have more to say about this in a future post but Bank of New York, which is the custodian for a large number of ETFs, has not issued an updated price for any of its ETFs for a week.  And today the VIX ETFs were behaving like apes on LSD:  VIX ETFs Are In Crisis Mode

The Fed’s points of interventions have become more obvious by the day and it’s becoming more obvious that the Fed’s ability to prop up the stock market is losing traction:


Either the massive stock market bubble is finally bursting or the Plunge Protection Team is letting the stock market drop so they can blame their decision to defer raising interest rates again in two weeks on China.

Some of the stock bubble angels have fared better than the S&P 500, but that will soon change, as many of them have a high beta vs. the SPX, meaning that they move a lot more in either direction than the overall market. My favorite “bubble angel” is Amazon.com – click to enlarge:


AMZN gapped up at the end of July on its aggressively promoted Q2 earnings report. It trended sideways for several days and filled that gap on last weeks stock market sell-off. It bounced, along with the SPX when the Fed pumped the market back up and it has rolled back over the last two trading days. So it filled that break-away gap from the end of July, bounced and has re-filled that gap.

The SPX has already crashed through its 50 and 200 day moving averages, now it’s AMZN’s turn. If the stock market continues to slide, the selling in AMZN will accelerate. Assuming the Fed’s continued attempts to prop up the stock market fails, AMZN will quickly shed another 100 pts down to its 200 dma.

My report on AMZN shows in fine detail why the Company’s Q2 earnings were a literal joke. AMZN trades at 45x EBITDA and 323,699x operating income.  To say that AMZN is “overvalued” is an extreme insult to the term “overvalued.”   The hedge fund community is loaded up on AMZN.  They will be looking for “bagholders” to whom they can unload blocks of AMZN.  The Swiss National Bank does not own any AMZN, amazingly, so I’m guessing they’ll pass on being a stool pigeon for the hedge funds.

You can read why AMZN is insanely overvalued in my AMAZON dot CON report.  Several readers of this report have already made several hundred percent gains from buying puts. My report has a section devoted to capital management and options strategies, if you are not comfortable shorting stock outright.

You can access this report  by clicking on the link just above or by clicking on this pic: