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Is It Finally Time To Buy Stock Market Vol?



Authored by Kevin Muir via The Macro Tourist blog,

“You’re such an idiot,” one of my new hedge fund manager reader friends wrote me the other day. “You spent the last couple of years warning about the possibility all of this Central Bank monetary madness causing a huge rip higher in risk assets. And here we are, it is finally here, and instead of taking a victory lap, you are monkeying around trying to fade the rally by buying Nasdaq put spreads. You’re incorrigible”

Yeah, my pal is right. If I am being honest, this is my biggest weakness. Too often I am contrarian to the point of my own detriment. I have never been good at riding an overly popular trade to its fullest.

It was easy for me to trade stocks from the long side when everyone was scared about the next crash. Yet now that most everyone has abandoned their fear, I find it almost impossible to stay long as they push it higher and higher.

And to be truthful, for a fleeting moment last week, I felt like I might do the impossible, and catch the top in the stock market. After grinding higher for the past week during the Chinese Communist Party Congress meeting, as Beijing was wrapping up, stocks finally looked like they were ready to sell off.

Yet after two poor trading days mid-week, Thursday after the bell; Amazon, Google and Microsoft released their earnings and sparked one of the biggest Nasdaq rallies of the past decade.

But the really interesting part? The rally was extremely narrow. Here is a chart of the Nasdaq 100 daily performance compared to the Nasdaq 100 equal-weighted index.

I didn’t come up with the idea for this chart. Instead I stumbled upon the stat in a market commentary, but couldn’t find the actual chart. So I thought it needed to be created as, in the history of the Nasdaq 100 equal-weighted index, the NDX has never outperformed by as much as Friday’s 2.8% face ripper.

Now don’t worry. I will not become some bitter short seller that just sits in a bathrobe screaming at kids to get off his lawn. Yet I must admit to being thankful that I expressed my short side trading stab using cheap options instead of outright futures.

And before I go any further, I should have known better. The Market Gods were bound to reign down their vengeance as, the previous week, Reformed Broker’s Josh Brown’s article “Just own the damn the Robots” took an awful amount of flack (some of that from yours truly – “The Winners of the New World Redux”).

It was the famous speculator Bernard Baruch who said, “the main purpose of the stock market is to make fools of as many men as possible.” Although this quote should probably be updated to include women, it is just as relevant today as it was decades ago.

It should be no surprise that given the huge pushback to Josh’s article, the Market Gods’ next move would be to make fools out of all of Josh’s critics and send the FANG stocks screaming higher.

Now don’t mistake my comments as a belief this investing theme should be embraced. The boat still is extremely crowded, and there is no way I could bring myself to chase the robots, the Nasdaq, or any stock market up here into this euphoria. I am a trader that believes this mad scramble into equities is long-in-the-tooth. But I can’t resist pointing out how, the greater the pushback, the greater the chance the writer is on to something.

Narrow, narrow, narrow

Back to the narrowness of this rally. I stumbled upon this great post by a more quantitative driven twitterer, SJD10304, Steve Deppe, the author of the Charts & Sheets blog.

It seems to me that Steve is acutely aware that this thread is data mining at its worse, and that he posted it as somewhat facetiously, but it’s interesting nonetheless.

The $SPXA50 that Steve is referring to is the percentage of stocks within the S&P500 that are above the 50-day SMA (simple moving average). Since 2002 there have been 237 weekly declines of more than 10% for this indicator, but only 5 occurrences also coincided with the actual S&P 500 closing higher.

What do you think the results of those 5 occurrences look like?

Look at the column “SPX FWD 1 Week Return.” That’s the S&P 500 return after these conditions were met. Although in 2002 there were a couple of positive results, the last three have been big losers, with the 2008 instance being especially painful.

Don’t go out and sell spooz with both fists because of this stat. I am not showing it to justify a short position. I am posting it to show the unusual aspect of the current environment.

Amazon will destroy us all

A few months back, when Amazon announced they were buying Whole Foods, the rest of the grocers were crushed.

At the time, one of my longtime readers, Jonathan Carey (and a terrific source for what is happening on the ground in San Francisco), emailed me to say;

“I have figured out how this bull market ends: Amazon announces it is going to enter each industry – and then every stock sells off.”

Jonathan’s comment made me laugh, and I saved it for a time like now when Amazon’s dominance seemed particularly unstoppable. And I guess this plays into Josh Brown’s just-own-the-damn-robots piece. The winners of the new era economy are crushing everyone else. Whether it is Amazon, Google or Facebook, these new titans are destroying existing businesses, and it is increasingly becoming a winner-take-all economy.

So it really shouldn’t be any surprise that the breadth of the stock market rally is becoming more and more narrow. After all, the winners are becoming a smaller and smaller group.

This summer I noticed that ProTradebuddy.onlines filed a prospectus for an ETF that went long online retailers (ie:AMZN) while shorting traditional bricks and mortar stores.

I wondered if the Amazon / Whole Foods announcement, combined with the filing of this ETF, might coincide in the top of this trend. Obviously, we need more than just a filing to mark the top. I can’t wait for this ETF product to trade, as I suspect by the time there is enough demand to float an ETF, it will be all-baked-in.

Monetary madness

Up until now, this post has been filled mostly with recounts about what has happened, with little insight into what might happen. And although I am not changing my tune that the US stock market is overbought and ripe for a surprise correction, I am adding a trade to my arsenal.

There is no doubt that Friday’s action was wild. And even though it ripped against me, I will take that sort of action any day when compared to the previous month, which consisted mostly of days dripping higher.

Something changed in the character of trading last week. Starting towards the end of the Chinese Congress Party meeting on Tuesday, financial asset volatility stopped declining, and picked up.

And although I am bearish on the near term stock market action, I concede there is a chance that this giant-f’d’-up-monetary experiment that Central Banks have embarked on, gets away on them. They have stuck an ungodly amount of monetary stimulus into the financial system over the past decade. A declining velocity of money has muted the effects, but there will reach a point when it finally lights, and the effects will be unprecedented.

A good trader never says never, so I am keeping an open mind to the possibility this overbought rally just gets more and more overbought. After all, the rules have gone out the window when they pumped trillions of dollars into the financial system. When some pundit tells you they know for certain how this will affect markets, ignore them – they are full of shit. The truth is that no one knows how this madness will end because it has never been done before.

But that doesn’t mean there aren’t ways to take advantage of this situation.

Finally time to buy vol

Now I am about to recommend a long volatility trade, and before you label me some perma-bear that thinks the monster VIX short position will end in a 2008 debacle – read this – The VIX Article No One Will Like.

I am not buying volatility because of positioning. Although I do acknowledge the large speculative VIX future short position, that is not the driving reason behind my trade.

Too many investors are stuck with this weird belief that HIGHER STOCKS = LOWER VOLATILITY. This is simply not true. Granted there is a tendency for the stock market to take the stairs up, and the elevator down. This is why stock returns and volatility are often inversely correlated. But it is not written in stone.

In a melt-up scenario, it is very possible that stocks become more volatile, not less. Volatility represents the variability of prices. In a run-away market, prices will zip around like Friday more and more, not less.

Just look at the 1999 dotcom period.

From 1990-1995 realized volatility declined, but then when stocks took off in 1996 in the crazy DotCom bubble mania, vol went along for the ride.

So yeah, I know there are a bunch of perma-bears recommending long volatility for an end-of-the-world trade, but ignore them. You don’t need to be a doomsdayer to be a vol bull.

Don’t get me wrong, I still think many risks are being overlooked by over-enthusiastic stock bulls. The winding down of Central Bank monetary stimulus, the recent Chinese policy change regarding financial asset prices, the constantly flattening yield curve, the monster short VIX futures position – all of these indicators are screaming danger. But everyone knows those reasons, and I am not adding any value harping on all the risks the market has been ignoring for the past few months. Yet that’s not why I think volatility is a great buy. Volatility is a great buy because the market is stretched, and these sorts of moves don’t end by markets quietly rolling over. And neither can they simply grind higher forever. Risks of an epic melt-up make vol just as appealing as risks of a crash.

This trade is difficult to structure. The steep curve in VIX futures market makes holding a long volatility trade pricey.

And before you email me telling me that implieds are still expensive versus realized, don’t bother. I know.

But the key word there is “realized.” There is no doubt that past volatility has been moronically low. I am predicting an increase in realized volatility going forward. I get it – so is the rest of the market. Yet I think it could happen in an upward move just as easily as downward decline.

I don’t want to get into a complicated option discussion. There are a million of different ways to play this. The important part is that the end of the short volatility trade is probably over. If we get my anticipated correction, vol probably goes bid. If the stock market continues to accelerate higher, vol also probably goes bid. Either way, I think volatility is set to rise. I actually feel more confident about that call than my prediction that the next-move-is-down for the stock market.


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Ex-Bosnian Serb commander Mladic faces verdict in genocide trial



THE HAGUE (Reuters) – The U.N. tribunal on war crimes in former Yugoslavia hands down its final verdict on Wednesday in the genocide trial of Ratko Mladic, the ex-Bosnian Serb general accused of ordering the massacre of 8,000 Muslim men and boys at Srebrenica.

Fikret Alic, one of the survivors of concentration camps shows his photo on the cover of Time before the trial of former Bosnian Serb military commander Ratko Mladic before a court at the International Criminal Tribunal for the former Yugoslavia (ICTY) in the Hague, Netherlands, November 22, 2017. REUTERS/Michael Kooren

Prosecutors demanded a life sentence for Mladic, 74, who was the Serb army commander in Bosnia’s 1992-95 war and is also charged with crimes against humanity over the siege of Sarajevo in which 11,000 civilians died from shelling and sniper fire.

The Srebrenica slaughter was Europe’s worst atrocity since World War Two. Mladic faced 11 charges in total and pleaded not guilty to all of them. He is expected to appeal if convicted.

Srebrenica, near Bosnia’s eastern border with Serbia, had been designated a “safe area” by the United Nations and was defended by lightly armed U.N. peacekeepers. But they quickly surrendered when Mladic’s forces stormed it on July 11, 1995.

The Dutch peacekeepers looked on helplessly as Serb forces separated men and boys from women, then sent them out of sight on buses or marched them away to be shot.

A bronzed and burly Mladic was filmed visiting a refugee camp in Srebrenica on July 12. “He was giving away chocolate and sweets to the children while the cameras were rolling, telling us nothing will happen and that we have no reason to be afraid,” recalled Munira Subasic of the Mothers of Srebrenica group.

“After the cameras left he gave an order to kill whoever could be killed, rape whoever could be raped and finally he ordered us all to be banished and chased out of Srebrenica, so he could make an ‘ethnically clean’ city,” she told Reuters.

The remains of Subasic’s son Nermin and husband Hilmo were both found in mass graves by International Commission of Missing Persons (ICMP) workers. The ICMP have identified some 6,900 remains of Srebrenica victims through DNA analysis.

Mladic’s lawyers argued that his responsibility for murder and ethnic cleansing of civilians by Serb forces and allied paramilitaries was never established beyond reasonable doubt and he should get no more than 15 years if convicted.

The “Butcher of Bosnia” to his enemies, Mladic is still seen as a national hero by compatriots for presiding over the swift capture of 70 percent of Bosnia after its Serbs rose up against a Muslim-Croat declaration of independence from Yugoslavia.


Survivors of concentration camps pose with banners before the trial of former Bosnian Serb military commander Ratko Mladic before a court at the International Criminal Tribunal for the former Yugoslavia (ICTY) in the Hague, Netherlands, November 22, 2017. REUTERS/Michael Kooren

Prosecutors said the ultimate plan pursued by Mladic, Bosnian Serb political leader Radovan Karadzic and Serbian President Slobodan Milosevic was to purge Bosnia of non-Serbs – a strategy that became known as “ethnic cleansing” – and carve out a “Greater Serbia” in the ashes of old federal Yugoslavia.

In arguing for Mladic to be imprisoned for life, prosecutor Alan Tieger said anything else “would be an insult to victims and an affront to justice”.

Mladic was indicted along with Karadzic in 1995, shortly after the Srebrenica killings, but evaded capture until 2011.

File picture: Former Bosnian Serb army commander Ratko Mladic attends his trial at the International Criminal Tribunal for the former Yugoslavia (ICTY) at The Hague May 16, 2012.. REUTERS/Toussaint Kluiters/Pool

His trial in The Hague took more than four years in part because of delays due to his poor health and will be the last case – barring appeals – to be heard by the International Criminal Tribunal for the former Yugoslavia (ICTY).

“From the legal point of view we expect the court to release the general,” Mladic’s son Darko told Reuters. “During the trial we have not seen any evidence against him. What we are worried about now is his health.”

Mladic has suffered several strokes, though U.N. judges rejected a flurry of last-minute attempts by defense lawyers to put off the verdict on medical grounds.

But his lawyers faced an uphill battle, given a mountain of evidence of Serb atrocities produced in previous trials. Four of Mladic’s subordinates have received life sentences, while Karadzic was convicted in 2016 and sentenced to 40 years.

Milosevic, who defended himself, died in prison in 2006 before a verdict was reached in his case.

Mladic’s lawyers argued that Sarajevo was a legitimate military target as it was the main bastion of Muslim-led Bosnian government forces. They also asserted that Mladic left Srebrenica shortly before Serb fighters began executing Muslim detainees and was later shocked to find out they had occurred.

However, prosecutors argued that under war crimes law, even if Mladic did not directly order the killings, he should have known what his subordinates were doing, and would be liable for failing to punish those who committed atrocities.

The ICTY indicted 161 people in all from Bosnia, Croatia, Serbia, Montenegro and Kosovo. It has convicted 83, more than 60 of them ethnic Serbs. Tradebuddy.onlineL8N1NL7ZT]

Reporting by Toby Sterling, Stephanie van den Berg and Ivana Sekularac; editing by Mark Heinrich

Our Standards:The Thomson Reuters Trust Principles.


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Budget Preview: Chancellor Philip Hammond’s Impossible Task To “Square The UK’s Circle”



At lunchtime today, Philip Hammond will give the weakened Conservative government’s first budget in the new parliament.

Against a likely backdrop of downgrades for the economy from the OBR, the Chancellor will be under immense pressure to provide a sound plan going forward on many issues. As Statista’s Martin Armstrong notes, the NHS has already had its call for an emergency boost of £4 billion rejected, but there will need to be at least some answers to the problems surrounding health and public services funding.

As a new survey by ComRes shows, this topic is one of particular importance to the public, with 67 percent saying that there should be more investment in these services, with a slight majority even saying they would personally be prepared to pay more taxes to enable it.

Clearly, this is a highly significant budget and we would be greatly surprised if it’s considered a success. As we noted yesterday, Reuters columnist and former European economics editor of The Economist, Paul Wallace, believes:

Few British budgets have mattered as much as the one that Philip Hammond will deliver to the House of Commons on Nov. 22. The chancellor of the exchequer must shore up Theresa May’s perilously shaky government ahead of a vital Brexit summit of European leaders in mid-December. At the same time Hammond has to keep a grip on the public finances.

However, it’s worse than that, as the Chancellor is also under pressure from senior members of the Conservative party, never mind UK citizens, to increase spending amid widespread fatigue with austerity. Here is the Financial Times on the stiff challenge Hammond is facing.

UK Chancellor Philip Hammond is under pressure from all sides as he prepares to deliver his second Budget on Wednesday. The first Budget of a new parliament is traditionally the time for chancellors to take bold decisions about taxes and spending. But the economic forecasts are likely to be difficult, public services are under strain, and pro-Brexit MPs are increasingly turning on the chancellor over his support for a “soft Brexit”. If Mr Hammond produces a safety-first Budget, he squanders his opportunity to decisively shape Britain’s future. But boldness risks backfiring, and steering a middle course threatens to satisfy nobody.

The FT notes that the Chancellor’s statement will “serve a cold dish of downgrades for the UK economy” from the independent “Office for Budget Responsibility” (OBR). This year’s growth forecast is expected to be cut from 2.0% to 1.6% and for 2018 from 1.6% to 1.4%. The medium-term forecasts depend on the OBR’s assumptions on productivity growth, which it has already flagged will be cut “significantly”. The FT expects that.

That means growth figures for 2020 and beyond will be closer to 1.5 per cent a year, compared with the 2 per cent that the fiscal watchdog had previously forecast.

Paul Wallace highlighted productivity as Hammond’s biggest problem.

But the gravest challenge he faces is economic: Britain’s persistent productivity blight…


Other advanced economies have also experienced setbacks to productivity growth following the financial crisis. Where Britain stands out is in the severity of its reverse. The shortfall in productivity is the main reason real wages are now 4 percent lower than 10 years ago, a potent reason why the leave campaign prevailed in the Brexit referendum.

While public finances look slightly more robust in the near-term, the outlook is deteriorating 3-4 years out, as the  FT explains”

Tax revenues have been stronger than expected this year, alongside lower-than-expected public spending. As a result, this year’s expected public borrowing will fall by about £8bn. The debt burden will begin to fall next year, giving Mr Hammond the opportunity to boast that he has turned the corner on public finances. But good news in the short term disappears towards the end of the forecast horizon, as weaker economic forecasts bear down on projected tax revenues. Before any accounting or tax changes, the deficit forecast in 2020-21 is likely to rise by more than £10bn compared with the March forecast. The government has already said it wants to reduce borrowing to under 2 per cent of national income by 2020-21, but Mr Hammond’s headroom is likely to roughly halve, from £26bn to about £13bn, in that year.

However, he does have one thing up his sleeve…an off-balance sheet accounting gimmick.

The chancellor wants to signal that after a difficult year, things are looking up, with debt falling and Brexit-related uncertainties lifting. To offset bad news in the medium-term public finances, he will use a £5bn-a-year accounting change — by taking housing associations’ borrowing off the government’s books — to free up more money for housing, wages and healthcare.

Affordable housing is a major problem for Hammond and Prime Minister Theresa May. According to the FT:

Fixing the “broken housing market” is the government’s biggest domestic priority. The chancellor wants to make rents more affordable and ease the path to home ownership for younger adults who have deserted the Conservative party in recent elections. Mr Hammond has already set a target of 300,000 new homes per year, but has also insisted there is no “single magic bullet” to solving housing problems.

He will announce a housing package on Wednesday that is likely to include commissioning of new building on public land and funding for local authorities to construct homes. He will also reaffirm the Tories’ promise from last month’s party conference to commit £10bn more of Help to Buy equity loans, and set out plans to lower stamp duty for some first-time buyers. There will be no big reform of planning laws for the “greenbelt” of protected area outside of London, but local authorities could be given more powers for compulsory purchase of land.

In its budget preview, the left-leaning Guardian newspaper highlights the deteriorating outlook for public finances due to the productivity problem.

Lower expectations for the output per worker will have an impact on the gross domestic product, cutting the amount of economic output available for taxation. The Institute for Fiscal Studies reckons the downgrade will contribute to a £20bn black hole in the public finances, limiting Hammond’s spending power if he wants to stick to his pledge to remove the deficit by the mid-2020s. John McDonnell, the Labour shadow chancellor, seized on the October data to argue that seven years of spending cuts had “caused pain and misery for millions with little to show for it”.

As if “Fiscal Phil” Hammond didn’t have enough on his plate, he’s also been lambasted for his gaffe that “there are no unemployed people” in Britain, in a television interview at the weekend. Disliked by the pro-Brexit side of his party, Hammond’s budget speech is being viewed by some as the “make or break” moment of his career. We concur.

Meanwhile, Bloomberg has been doing some sleuthing on budget preparations by government departments and think tanks. It identifies six things to look out for when Philip Hammond stand up in parliament to deliver his speech.

The U.K. budget is usually a mixture of measures that have been heavily trailed in the run-up by various government ministers, with a liberal sprinkling of surprises. In the past six months there have been myriad consultations and papers on everything from the offshore oil to air pollution that hint at possible measures in the works. Bloomberg trawled through that documentation, as well as recent announcements, to identify six areas that are likely to get a mention when Chancellor of the Exchequer Philip Hammond lays out his economic blueprint.

1. Stamp Duty and the Housing Crisis
Prime Minister Theresa May last week pledged that it’s her personal mission to “build more homes, more quickly.” To that end, the budget is likely to include a number of measures to encourage construction and enable younger people to get on the housing ladder. Asked on the BBC on Sunday about whether the home-buying tax known as stamp duty would be cut for younger buyers, Hammond declined to discuss tax matters, but didn’t deny he was looking at the measure.

“We recognize the challenge for young first-time buyers, that in many parts of the country deposits are now very large,” Hammond said. “Nobody is saying we’ve done enough. We must do more. We recognize there’s a challenge there and on Wednesday I shall set out how we intend to address it.”

2. North Sea Oil and Gas
Whilst remaining committed to its climate-change goals, the U.K. is also trying to extract as much value from its waning oil and gas fields in the North Sea. The industry is crucial to the economy in Scotland, which would be grateful for any assistance to a financial lifeline even as it remains angry at the Conservatives for taking it out of the European Union.

At the last budget in March, the government published a “discussion paper” that examined allowing transfers of tax history between buyers and sellers of oil and gas assets — a measure designed to make it easier to buy and sell the fields, and keep them producing for longer. It would allow buyers to get a tax refund as a result of any costs incurred decommissioning the field at the end of its life.

Hammond told the Sunday Times he’s “looking at” a possible change in the tax rules, which is “the No. 1 ask of my Scottish colleagues.” Even so, he did issue a note of caution, adding that the Treasury needs to ensure the reform “is robust and that we don’t inadvertently create scope for gaming on a grand scale in the tax system.”

3. Boosting Research & Development
May on Monday said the government aims to increase public and private research and development spending to 2.4 percent of economic output by 2027, and beyond that to 3 percent. “This could mean about 80 billion pounds ($106 billion) of additional investment in the next decade,” she said.

As part of an announcement the same day linked to her government’s Industrial Strategy — due to be published next week — she said that would begin with a commitment for an extra 2.3 billion pounds of investment in the 2021-2022 tax year, taking total public investment to 12.5 billion pounds that year. The government also signaled plans for a 1.7 billion-pound fund focused on improving regional transport links.

4. Shale Wealth Fund
In another measure aimed at boosting the fossil-fuel industry — in this case by making it more palatable to local communities — the government promised at the last election to overhaul a pledged fund worth as much as 1 billion pounds to distribute some of the profits from hydraulic fracturing.

The aim is to ensure “a greater percentage of the tax revenues from shale gas directly benefit the communities that host extraction sites.” The government last week responded to a consultation on the issue pledging the fund will initially consist of as much as 10 percent of tax revenues from shale-gas extraction, with proceeds to be spent on projects ranging from play parks for children to improved transport links and restoring historical sites.

5. Air Pollution Tax
Diesel vehicles have become a political football of late. For years, governments ignored evidence that diesel is worse for air quality and encouraged its use because the fuel is less damaging to the climate than gasoline. With air pollution now under the microscope in London in particular, the government published an air-quality plan over the summer and is likely to include measures in the budget designed to help clean up the air in Britain’s cities by encouraging cleaner vehicles.

Possible measures include raising the sales tax on diesel cars, known as vehicle excise duty, or raising taxation on diesel fuel itself, which is currently taxed at the same level as gasoline, at about 58 pence per liter. The government has also said it will consider programs to encourage motorists to trade in their older, more polluting cars, for newer, cleaner ones. Ministers also stepping up efforts to encourage the use of more electric vehicles by supporting the development of batteries and the deployment of charging points.

6. Fund for Start-Ups
In August, the government proposed a new National Investment Fund that would help start-ups access the “patient capital” funding they need to develop into so-called “unicorns” — innovative companies valued at over $1 billion. A consultation on the proposal closed in September, and Hammond is likely to propose a confirmed plan of action in the budget.

The consultation suggested funding should come from the British Business Bank, replacing the backing currently received from the European Investment Fund. One of the reasons this could get a mention is that the the government is keen to demonstrate that London can attract Big Tech even when it’s no longer in the European Union.

Although the view is hardly unique to this government, a mere 22 percent said that they feel taxpayers’ money is currently being spent wisely.

Whether this percentage will go up or down after the Chancellor’s statement today, remains to be seen.


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