December 2016

[admin]

Too much complacency in the markets? This suggests there is:

At least that is what the low levels of the CBOE Volatility index VIX, -1.57% known as Wall Street’s fear gauge, is signaling. The metric which allows investors to make bets on implied levels of volatility on the S&P 500 SPX, -0.25% is currently at 11.56, hovering near the lowest level of the year, set Aug 19. In other words, investors aren’t worried that bad things could upend the brisk march higher.

Wall Street’s ‘fear gauge’ implies that few are prepped for a stock-market shock - MarketWatch

Might last a little longer with the holidays and newyear, but we think it could be about time to start buying some VIX future options, or futures themselves.

[admin]

And here is another thing that can go wrong,

Although it is a founding member of the EU, Italian public support for the European project is among the lowest in Europe; it is the eurozone’s third largest economy, but its economy is the same size as it was in 2000; and it still has the third largest sovereign debt burden in the world, after the US and Japan. Italy could yet pull the eurozone apart – and indeed the EU.

Europe's make-or-break country: What is wrong with Italy's economy? | Centre for European Reform

Although again that doesn't mean it necessarily will, as we warned about this as far back as 2014, and so far they've plodded on..

Today even a 20B euro bank rescue plan, no less.

[admin]

We have a new article out this morning:

• OPEC has shot itself dramatically in the foot with the market share based strategy two years ago, foregoing hundreds of billions in revenues.
• The about-face this month is more rational, but it's very unlikely the old order is going to be restored.
• OPEC countries should take what they can get and use this to diversify their economies.

OPEC Vs. Reality, Which Will Give First? - The United States Oil ETF, LP (NYSEARCA:USO) | Seeking Alpha

Obviously not everybody agrees...

Call it a pre-Christmas lottery ticket, but someone in the oil market has been busy making a bold bet, buying contracts that will be profitable if oil surges again to $100/bbl. The $100 December 2018 call option -- a contract that gives the right to buy December 2018 futures at $100/bbl -- was the most traded contract on Tuesday across the whole ICE Brent market, the latest sign of resurgent optimism in oil.

Oil seen at $100 by year-end 2018 in lottery ticket options trade

[admin]

An industry with a bit of a shady past turns out to be highly dependent on Federal funds:

The number of for-profit schools receiving at least 90% of their revenue from federal education programs would jump from 17 to nearly 200 when the Department of Veteran Affairs’s post-9/11 GI Bill benefits are counted as federal aid, according to data released Wednesday by the Department of Education. For-profit colleges collect an outsize share of GI Bill benefits, a government program that provides veterans with funding to pay for school and housing.

Nearly 200 for-profit colleges get over 90% of their funding from the government - MarketWatch

Some of these schools used very aggressive marketing to sell fairly worthless degrees, leaving students with no better futures and a pile of debt. By no means all of these, but enough to warrant some oversight. That oversight is now set to diminish or disappear (hence the parabolic stock price movement), we're not sure this is a good idea.

Education is a long-term experience good, it's very difficult to assess the quality of a course at the point of sale, and it's easy to overstate in shiny marketing brochures.

[admin]

Markets have treated this as an isolated problem, so far. Maybe it is, maybe it isn't..

While Monte dei Paschi is considered a small bank relative to multinational giants, the fallout from a bailout could have far reaching consequences for global investors. There are concerns that the jitters could spread to other Italian banks and that the €20 billion set aside by the government on Wednesday won’t be enough to prop up all of the struggling lenders. Ipek Ozkardeskaya, senior market analyst at London Capital Group, estimates Italian banks need €52 billion to be rescued.

5 things to know about Banca Monte dei Paschi di Siena’s crisis - MarketWatch

And there is something else to consider:

A taxpayer funded-bailout carries the risk of a political backlash that could empower the so-called euroskeptic and anti-establishment 5 Star Movement. With the risk of snap elections in Italy next year, voter anger could propel this populist party into the driver’s seat. That could mean “Quitaly” or “Brexit 2.0.” Additionally, a euroskeptic government in Italy could lead to a surge in bond yields, credit downgrades and added troubles for banks, analysts say.

5 things to know about Banca Monte dei Paschi di Siena’s crisis - MarketWatch

We wrote about this not long ago:

• Just like Brexit, the Italian constitutional referendum has been a non-event in the markets.
• Given the precarious state of Italian politics, of the Italian economy, it's public finances and especially it's banking situation, this might be somewhat surprising to some.
• But until no acute crisis develops the markets are likely to remain oblivious.

All Quiet On The Southern Front? | Seeking Alpha

[admin]

Wall Street has been rallying in anticipation of full-bore fiscal stimulus likely emanating form the in-coming Trump Administration. The stock market is banking on massive tax cuts, de-regulation, infrastructure building and increased defense spending, all of which could, or should, give a sharp boost to an already accelerating economy. That appears to be the message the market is sending as it jumps to record levels and as Dow 20,000 is fast becoming a reality.

Dow 20K - risks for bull market—commentary

However, as always the devil is in the details. And there are those, like Krugman, who argue policy might actually not be so expansionary after all, because of the distributional consequences (a shift in income from those who save little to those that save a lot):

But will this actually amount to fiscal stimulus? Right now it looks as if Republicans are going to ram through their whole agenda, including an end to Obamacare, privatizing Medicare and block-granting Medicaid, sharp cuts to food stamps, and so on. These are spending cuts, which will reduce the disposable income of lower- and middle-class Americans even as tax cuts raise the income of the wealthy. Given the sharp distributional changes, looking just at the budget deficit may be a poor guide to the macroeconomic impact. Given the extent to which things are in flux, I can’t put numbers on what’s likely to happen. But I was able to find matching analyses by the good folks at CBPP of tax and spending cuts in Paul Ryan’s 2014 budget, which may be a useful model of things to come. If you leave out the magic asterisks — closing of unspecified tax loopholes — that budget was a deficit-hiker: $5.7 trillion in tax cuts over 10 years, versus $5 trillion in spending cuts. The spending cuts involved cuts in discretionary spending plus huge cuts in programs that serve the poor and middle class; the tax cuts were, of course, very targeted on high incomes. The pluses and minuses here would have quite different effects on demand. Cutting taxes on high incomes probably has a low multiplier: the wealthy are unlikely to be cash-constrained, and will save a large part of their windfall. Cutting discretionary spending has a large multiplier, because it directly cuts government purchases of goods and services; cutting programs for the poor probably has a pretty high multiplier too, because it reduces the income of many people who are living more or less hand to mouth. Taking all this into account, that old Ryan plan would almost surely have been contractionary, not expansionary.

Will Fiscal Policy Really Be Expansionary by Paul Krugman The New York Times

[admin]

We do have a new article, the good Trump and the bad Trump's effect on the markets, and how to profit:

• There are two sides to Trump, one good for the markets and one that might scare the markets.
• We saw this phenomenon most violently on election night itself.
• However, we don't think this phenomenon is gone, we explain the phenomenon and show you how to profit from it.

Is Donald Trump Going To Spoil His Own Party? - SPDR Dow Jones Industrial Average ETF (NYSEARCAIA) | Seeking Alpha

[admin]

Every year around this time, retail investors “return” their broken stocks for some of the money they put into them, in a maneuver known as tax-loss selling that lets them deduct realized stock losses against market gains. This annual tax-loss selling, which picks up between now and Dec. 30, may be particularly robust this year. That’s because with Nasdaq COMP, the S&P 500 SPX, and the Dow Jones Industrial Average DJIA, up 9%, 10.7% and 14% this year through Monday, lots of people have substantial gains to offset. But there are also fewer tax-loss selling stocks to go around. Together, these factors could mean bigger bargains for those who like to take the other side of the trade and pick up stocks getting dumped to realize those tax losses.

11 tax-loss stocks to pick up before the end of the year - MarketWatch

And there is another reason why tax loss selling might be bigger this year, the expected tax rate reductions next year..

[admin]

One of the problems with the Trump reflationary agenda (if it indeed is reflationary, but for the moment lets assume it is) is that the labor market is already close to full employment. Further boosting demand could reignite inflation, trigger a further sell-off in the bond market and produce further Fed hikes. But maybe not:

But that assumes you want to keep the labor share of income constant. If we want labor to reclaim some of the income it lost during the recession, then wage growth should stay above the 3 percent target for some time. The high levels of income going to profits may also mean that inflation wouldn’t pick up that much if wage growth surpassed productivity growth. That could explain why wage growth doesn’t seem to turn into inflation as strongly as it did in the past.

The labor share, the ongoing recovery, and structural forces - Equitable Growth

[admin]

And here a useful reminder of the destructive powers of inflation..

Households and businesses are reluctant to finance long-term investments with short-term loans or with variable-interest-rate loans, because a jump in inflation would cause their interest payments to rise sharply. Indeed, Argentina’s history of high and variable inflation has destroyed the domestic mortgage market, making it impossible for a household to use a mortgage to buy a home. Businesses are also reluctant to borrow, because they recall how previous increases in inflation — and thus in interest rates — pushed otherwise healthy companies into bankruptcy. The life insurance industry has been destroyed by high and uncertain inflation as well. Given that no one knows what the peso will be worth when future claims are paid, why would anyone buy insurance with today’s pesos?

The destructive power of inflation - MarketWatch