February 2016

[admin]

Not part of the 1%, but at least temporary part of the 7%

It wasn't just you. Virtually all investors lost money during the atrocious month of January. Over 93% of investors were in the red last month, according to data shared exclusively with CNNMoney by Openfolio, an app that allows people to see how their investment portfolios stack up with others.

Ouch. 93% of investors lost money in January - Feb. 1, 2016

While we're losing a little with

• INVN (1000 at $9.40) closed Jan at $8.21
• JKS (500 at $ 22.16 and 500 at $18.90) closed Jan at $20.58
• SKX (500 at $29.20) closed Jan at $28.19

We're winning more with:

• ELLI (500 at $60.40) closed Jan at $69.83 (and up a further 7% today)
• MU (1000 at $9.90) closed Jan at $11.03

And especially with the shorting of the VIX July futures:

• 1 at $22.35 closed Jan at $21.35
• 1 at $23.00
• 2 at $23.90

[admin]

We did seriously consider closing our most profitable position today, which is ELLI, as the shares just kept on climbing in a difficult market:

They were up a whopping 7% today, ending at $74.72 (the chart is self-updating).

What stopped us? Well, ELLI is reporting earnings on the 11th, and they have a habit of blasting expectations.

Still, we expect a little retrenchment from this in the short-term. The rally is a bit streched and the shares overbought.

[admin]

We've made a little January score update table which you can find here.

[admin]

One of the four horeseman (FB, GOOG, AMZN, NFLX) is at the point of breaking down, interesting..

Netflix

• Nearest Resistance: $130
• Nearest Support: $95
• Catalyst: Buyout Rumors

Shares of Netflix (NFLX - Get Report)  are up more than 4% this afternoon, a move that's being attributed to a Forbes article yesterday that speculated Apple (AAPL -Get Report)  could make an offer for Netflix as a way to get exposure to the TV content business. The mere mention of a deal between the two companies appears to be enough to excite Netflix investors -- and it's a pop in shares that couldn't have come at a better time for anyone who owns this stock.

After a strong performance in 2015, Netflix has been looking "toppy" in the long term, testing a major potential breakdown level at $95. If that $95 price tag gets materially busted, then look out below. Netflix is managing to hold its head above that level in today's session.

[admin]

Interesting read on the curious connection between oil and the markets

Even casual observers know oil is exerting uncommon influence on stocks. What’s less clear is how the energy market has come to dominate sentiment in industries with seemingly no connection to crude prices. Understanding why oil is casting such a spell is more than an academic inquiry. The reason matters, given how big the moves have been. Almost $1.6 trillion has been erased from U.S. stocks in 2016. If oil is contributing, it’d be nice to know why. Here are four theories on what’s underpinning the connection. They range from a straight economic signal to speculation oil’s plunge threatens to lay low everything up to and including the financial system.

Tracing Oil's Hypnosis of Stocks From Wealth Funds to Junk - Bloomberg Business

Especially in the face of this:

A new note from Francisco Blanch at Bank of America Merrill Lynch, however, puts the oil move into a much bigger perspective, arguing that a sustained price plunge "will push back $3 trillion a year from oil producers to global consumers, setting the stage for one of the largest transfers of wealth in human history."

BofA: The Oil Crash Is Kicking Off One of the Largest Wealth Transfers in Human History - Bloomberg Business

[admin]

Here is something we've been warning about for some time (here and here):

Our analysis of the central bank's liquidity operations implies thatChina's FX reserves could have dropped by up to USD140bn(USD130bn after valuation adjustments) to around USD3.19trn in January.

If correct, this would be the biggest monthly drop in foreign-exchange reserves on record, beating the record fall seen in December.

Barclays does include a caveat, that it wouldn't take much to blow the calculations off course: "Note, small modifications in our assumptions can change these estimates to a wide range of USD80-180bn."

But the message is clear; China's grand pile of dollar reserves is being run down at an ever faster rate. Here's the chart:

BARCLAYS: China is about to announce the biggest monthly drop in FX reserves on record

[admin]

More on China

It might seem odd that a country running a $600 billion trade surplus in 2015 should be worried about currency weakness. But a combination of factors, including slowing economic growth and a gradual relaxation of restrictions on investing abroad, has unleashed a torrent of capital outflows. Private citizens are now allowed to take up to $50,000 per year out of the country. If just one of every 20 Chinese citizens exercised this option, China’s foreign-exchange reserves would be wiped out. At the same time, China’s cash-rich companies have been employing all sorts of devices to get money out. A perfectly legal approach is to lend in renminbi and be repaid in foreign currency. A not-so-legal approach is to issue false or inflated trade invoices – essentially a form of money laundering. For example, a Chinese exporter might report a lower sale price to an American importer than it actually receives, with the difference secretly deposited in dollars into a US bank account (which might in turn be used to purchase a Picasso).

The Great Escape from China by Kenneth Rogoff - Project Syndicate

[admin]

Mark Tinker, head of equities for AXA Framlington in Asia, said the bulk of the outflows are to pay off liabilities. “Chinese corporates are issuing corporate bonds in record quantities and using the capital to restructure their balance sheets, both onshore and offshore. This is not capital flight, it is asset liability matching, both duration and currency. It is a good thing being presented as a bad thing,”

Time running out for China on capital flight, warns bank chief - Telegraph

The IIF’s Mr Collyns, a former assistant US Treasury Secretary, is less sanguine. He calculates that total dollar debt in China peaked at roughly $1.5 trillion in late 2014, if all forms of exposure are included. “We think they have paid off a third of this. Half of the outflows are to repay dollar debt,” he said. “What is worrying is that there could be a broadening of the outflows. There has been a surge in 'errors and emissions' and this is ominous. A lot of this is a capital outflow below board through inflated trade invoices and other forms of subterfuge, and some of it is ending up in the London property market,”

Time running out for China on capital flight, warns bank chief - Telegraph

[admin]

Some interesting pondering on the VIX, highly relevant as we are shorting July VIX futures here:

Evan Lucas, market strategist at IG, expects the CBOE Volatility index, known as the VIX VIX, +10.01% to average above 17.3 ( the yearly average over past 25 years) for 2016. The VIX is a forward-looking indicator that shows the market’s expectations of 30-day volatility. A value above 30 is associated with big volatility, while below 20 indicates a less stressful market (Investopedia).

He rattles off four scenarios under which the VIX could spike this year:

1) Signs of hyperinflation could start to appear from the seven-year bull market that has been brought on by the Fed’s quantitative easing program, which then leads to a sharp correction for stocks.

2) Contraction continues to show up in readings on manufacturing and industrial production. In other words, expect more of the same from last week’s dismal ISM numbers. (Read: Why stock market investors should worry about ISM’s downtrend)

3) People’s Bank of China shocks the market with a sharp devaluation. Lucas says pay attention to the ramping up of Chinese stimulus programs in the past week (including Monday) ahead of the Feb. 8 Lunar New Year’s break.

4) Employment starts to feel a squeeze and slow. Friday’s nonfarm payrolls might offer a clue. Read all of Lucas’s thoughts here.

Which of these four scenarios is going to goose the VIX? - MarketWatch

The first scenario is clearly rubbish, but the rest are not.

[admin]

We're closing 2 (half of our short position) in the VIX Jul futures at $21.95 for a combined profit of $3900