Saturday, 5 August 2017

Weekend Update 05/08/17 Oh What A Tangled Web We Weave.

It is always the best policy to speak the truth, unless, of course, you are an exceptionally good liar.
Jerome K. Jerome, Idler Magazine 1892.

The US employment report turned out to be a big yawn yesterday.  Only those who bet on zero and green, got paid out. The losers were those who bet on red and black. The Fed won’t hike its key interest rate until near the end of the year, and then by a tiny quarter of one percent. Complacency rules once again [for now.] But not for much longer I think. The Fed’s punchbowl is getting filled with Koolaid.

Dow ends at record for 8th straight day, powered by jobs report

Published: Aug 4, 2017 4:28 p.m. ET

Payrolls not seen changing the outlook for Fed action

U.S. stocks closed higher on Friday, with the Dow ending at a record for an eighth straight session following a read on the labor market that came in above expectations, a sign that current valuations may be supported by current economic activity.

The Dow Jones Industrial Average DJIA, +0.30% gained 66.71 points, or 0.3%, to 22,092.81, finishing at its highs of the session, which also represented an intraday record. The blue-chip average has risen for a nine straight trading days, its longest such streak since February. With the day’s record, it has now posted 34 record closes thus far this year.

See: Howard Gold’s 3 reasons a stock-market correction is coming

The S&P 500 SPX, +0.19%  rose 4.67 points, or 0.2%, to 2,476.83, while the Nasdaq Composite Index COMP, +0.18% climbed 11.22 points, or 0.2%, at 6,351.56. All three indexes dipped into slightly negative territory within the first hour of trading, but subsequently rebounded, ending near their highs of the session.

Gains were spurred by the July payrolls report, which showed the U.S. created 209,000 new jobs in July, easily beating Wall Street forecasts for 175,000 jobs. Separately, the unemployment rate moved to 4.3% from 4.4%, retouching a 16-year low.

Beneath the glow of stock-market records, darkly bearish trends are lurking

Published: Aug 4, 2017 4:26 p.m. ET

Recent weeks have seen sharp drops in the percentage of stocks above their 50-day moving averages

Major U.S. stock-market indexes are trading near record levels, but does that statistic simply mask an ominous picture that’s being painted behind the scenes?

Market breadth, a measure of how many stocks are rising versus the number that are dropping, has turned “exceedingly negative,” according to Brad Lamensdorf, a portfolio manager at Ranger Alternative Management. Lamensdorf writes the Lamensdorf Market Timing Report newsletter and runs the AdvisorShares Ranger Equity Bear ETF HDGE, +0.47% an exchange-traded fund that “shorts” stocks, or bets that they will fall.

“As the indexes continue to produce a series of higher highs, subsurface conditions are painting an entirely different picture,” Lamensdorf wrote in the latest edition of the newsletter. He noted that the year-to-date advance in equities — the S&P 500 SPX, +0.19%  is up 10.6% in 2017 — has been driven by outsize gains in some of the market’s biggest names.

Most notably, the so-called FAANG stocks, which refers to a quintet of technology and internet names, have by themselves contributed more than 28% of the benchmark index’s gain. Separately, megacap names like Boeing Co. BA, -0.23%  and Johnson & Johnson JNJ, -0.13%  have also outperformed the broader market.

“The good performance of these large companies is masking the fact that many stocks, including REITs and those in the retail sector, have already entered bear-market territory,” Lamensdorf wrote, referring to real estate investment trusts.

Let this be your final warning on U.S. stocks’ overvaluation

Published: Aug 4, 2017 3:23 p.m. ET

When prices have risen this high, a market crash has always occurred

Watch out for your exposure to U.S. stocks.

That’s the message of history, even if it isn’t the message of Wall Street analysts and strategists.

As stock prices soar to new heights, the S&P 500 Index SPX, +0.19% has now reached levels of overvaluation only ever seen during the dot-com bubble and in 1929 — an eye-watering 31 on the measure known as the “Shiller PE” ratio.

But even if we fudge the numbers and exclude the depressed earnings from the global financial crisis a decade ago, we still get a reading of 25.5. That’s still way up there, and in almost 150 years, every time stocks have gotten anywhere close, they’ve come crashing down again.

Long-term view

The Shiller PE is named after Yale economics professor and Nobel laureate Robert Shiller, who tracks the data and popularized the concept. It compares stocks against the average earnings of the past 10 years, rather than just one year, as Wall Street likes to do. The argument is that longer-term measures smooth out the distortions of booms and busts.

Shiller has tracked his data back to 1881. The stock market’s average reading has been about 16 over that time. But that’s masked a wide range, from the single digits all the way up to 45 in early 2000.

----For reference, it’s only reached a level of about 25 on five previous occasions: 1901, 1928-9, 1966, 1996-2002 and 2003-2007. Each one ended with a crash.

This weekend, a modern 21st century market trading problem that even King Solomon couldn’t solve equitably. Enjoy. It may be rent-seeking gambling 21st century style, but it’s not capitalism, and it shouldn’t be bailed out, if/when it all goes wrong. And according to disgraced, fallen former guru, “Whip Inflation Now” button, Greenspan, it’s all about to go horribly wrong.

"It looks stronger just before it isn't stronger," he said. Anyone who thinks they can forecast when the bubble will break is "in for a disastrous" experience."

There are two kinds of guru . There is the guru that is always wrong, and that knows it is wrong, and glories in it; and there is the guru that is always right — except when you rely upon it, and then it is more wrong than you would think a guru could be in a civilized country.
With apologies to Jerome K. Jerome,
Clocks, from "Idle Thoughts of an Idle Fellow" 1910.

And no one knows more about disastrous experience than former Maestro Greenspan. Just look at the experience he put America through after getting gun shy after “Black Monday,” October 19, 1987. Though the problem really dates back to the Great Nixonian Error of fiat money, communist money, August 15, 1971, that US Treasury Secretary John Connally thought up as a scam on the rest of the world.

Shortly after taking the Treasury post, [1971] Connally famously told a group of European finance ministers worried about the export of American inflation, that the dollar "is our currency, but your problem."

G-10 Meeting, Rome November 1971.

Greenspan: Bond bubble about to break because of 'abnormally low' interest rates

  • Former Fed Chief Alan Greenspan said "abnormally low" interest rates will break a bubble in the bond markets.
  • Greenspan is famous for warning markets about "irrational exuberance" and the consequences it can bring.
Jeff Cox | @JeffCoxCNBCcom  August 4, 2017.
Former Federal Reserve Chairman Alan Greenspan issued a bold warning Friday that the bond market is on the cusp of a collapse that also will threaten stock prices.

In a CNBC interview, the longtime central bank chief said the prolonged period of low interest rates is about to end and, with it, a bull market in fixed income that has lasted more than three decades.

"The current level of interest rates is abnormally low and there's only one direction in which they can go, and when they start they will be rather rapid," Greenspan said on "Squawk Box."

That low interest rate environment has been the product of current monetary policy at the institution he helmed from 1987-2006. The Fed took its benchmark rate to near zero during the financial crisis and kept it there for seven years after.

Since December 2015, the Fed has approved four rate hikes, but government bond yields remained mired near record lows.

Greenspan did not criticize the policies of the current Fed. But he warned that the low rate environment can't last forever and will have severe consequences once it ends.

"I have no time frame on the forecast," he said. "I have a chart which goes back to the 1800s and I can tell you that this particular period sticks out. But you have no way of knowing in advance when it will actually trigger."

One point he did make about timing is it likely will be quick and take the market by surprise.

"It looks stronger just before it isn't stronger," he said. Anyone who thinks they can forecast when the bubble will break is "in for a disastrous" experience."

Now back to the problem that broke poor King Solomon.

It's enough to make you wish for a blockchain. Oh, wait.

by Matt Levine 2 August 2017, 20:23 GMT+1
A few months ago we talked about a weird legal dispute over the Dole Food Co. buyout. Dole's chief executive officer, David Murdock, had taken it private for $13.50 a share in 2013, but shareholders thought it was worth more. So they sued, and won, and Murdock was ordered to pay shareholders an extra $2.74 a share plus interest, and shareholders were told to submit claims for their money.

But there was a problem: People submitted more claims than there were shares. This turned out not to be fraud, or carelessness: People really owned more shares than there were shares! It's just that other people owned negative shares. In rough numbers, there were 37 million shares outstanding, and people owned 49 million shares, but other people were short 12 million shares. The way short selling works is that X borrows a share from Y and sells it to Z. So Y owns one share, and Z owns one share, and X owes one share, and everything balances out and there's only one share outstanding. So the millions of extra shares made complete sense.

But that doesn't answer the question of what to do about it. When the buyout closed, back in 2013, it was straightforward enough: If you owned a share, you got paid $13.50. If you were short a share, you had to pay $13.50. So shareholders got paid 49 million shares times $13.50 a share, and short sellers paid 12 million shares times $13.50 a share. (And David Murdock paid 37 million times $13.50 for the shares he was buying. 1 ) But in 2017, it was more complicated. If you owned one of the 49 million shares back in 2013, you were due the extra money in 2017. If you were David Murdock and you bought 37 million shares in 2013, you had to pay the extra money in 2017 -- but only on the 37 million shares you bought. But what if you were short the stock in 2013? Was your obligation discharged by paying the $13.50 in 2013, or are you still on the hook to come up with more, four years later?

The answer is a mess. The Delaware judge who heard the case sort of punted this issue to the Depository Trust Co., which keeps track of all the shares of all the companies, and told DTC to follow its procedures to figure it out. The practical answer seems to be that the short sellers' brokers were on the hook to come up with the extra money, and that the brokers' ability to go after the short sellers depended on the margin and stock-lending agreements they had with those sellers. 2 Anecdotally, it seems that the brokers have mostly tried to seek payment from their customers who were short -- and that some of those customers feel pretty aggrieved about it. You can see why: They closed their trades four years ago, and whatever irregularities occurred in Murdock's buyout of Dole weren't their fault. Why should they have to pay for them? Even beyond the arguable unfairness, it is just administratively messy: Someone has to find all those short sellers. If you were short Dole shares in 2013, and subsequently closed your account, wound up your fund, or died, how would a broker get you to pay up?

---- Ha ha ha, what a fool I was. Here is an announcement from Bitfinex, a bitcoin exchange, that is mind-blowing and wonderful and far weirder than anything a Delaware court could come up with. It has to do with Tuesday's hard fork of bitcoin, in which each holder of a bitcoin ended up with both (1) the original bitcoin, on the original bitcoin blockchain, and (2) a new bitcoin, on a new "Bitcoin Cash" blockchain, which is trying to become a viable alternative flavor of bitcoin. 3 (The convention seems to be to call original bitcoins BTC, and the new Bitcoin Cash bitcoins BCH or BCC. I'll use "BTC" and "BCH" here.) Jian Li writes:

To use an imperfect analogy from corporate finance, you could think of the fork as a spinoff. For most of PayPal’s life, it was owned by eBay. Holders of the EBAY ticker owned the parent company eBay, which encompassed eBay proper as well as PayPal. On the day of the spinoff, eBay stockholders received, for each EBAY share they owned, one PYPL share. At the same time, they got to keep their existing EBAY shares.

Something a little like that is going on with the bitcoin fork, although it is a bit stranger metaphysically. 4  It is also a bit stranger economically. In a spinoff, you'd expect the original company's value to drop by roughly the value of the spun-off company, which after all it doesn't own any more. 5  BCH spun off from BTC on Tuesday afternoon, and briefly traded over $700 on Wednesday (though it later fell significantly). But BTC hasn't really lost any value since the spinoff, still trading at about $2,700. So just before the spinoff, if you had a bitcoin, you had a bitcoin worth about $2,700. Now, you have a BTC worth about $2,700, and also a BCH worth as much as $700. It's weird free money, if you owned bitcoins yesterday.

But what if you owned negative bitcoins yesterday? What if, that is, you had borrowed bitcoins in order to sell them short? Well, in stock lending situations, the normal way that this works is that the short sellers (stock borrowers) have to come up with whatever is distributed on a stock. If you are short a stock and it pays a $1 dividend, you have to come up with $1. If it spins off a subsidiary, you have to go out and buy a share of the subsidiary to deliver back to your stock lender. If it is acquired in a leveraged buyout for $13.50, you have to come up with $13.50. If it distributes a pony to each shareholder, you have to come up with a pony. 6

You could imagine bitcoin lenders taking the same approach: If you were short a bitcoin going into the fork, now you have to deliver one BTC and one BCH to your lender. Or not! In fact, when bitcoin distributed a pony of indeterminate value to its holders, Bitfinex decided -- not unreasonably -- that it would be unfair to make bitcoin borrowers come up with it. The value of Bitcoin Cash is uncertain and volatile, and forcing bitcoin shorts to go out and buy Bitcoin Cash to cover their shorts might create artificial demand for it and push up the price. So Bitfinex announced, last week, that short sellers would not have to come up with any BCH. 7

This creates a problem: If people are long 125 bitcoins, and other people are short 25 bitcoins, then there are a total of 100 bitcoins at the exchange. If there are 100 bitcoins, then 100 BCH will be distributed on them. But if people own 125 of those 100 bitcoins, and if you get only 100 BCH, and if the shorts don't have to come up with the shortfall, then you can't give one BCH to each bitcoin holder. One option here would be to just not give them any BCH, and ignore the whole thing, which seems to be the approach that several bitcoin exchanges took. 8  But Bitfinex took the more customer-friendly -- though pretty ad hoc -- approach of just divvying up the BCH evenly among all the long holders of bitcoins. With my stylized numbers, if people were long 125 bitcoins and short 25, then each long holder would get 0.8 of the 100 BCH distributed to Bitfinex, and the short holders wouldn't have to come up with anything. 9

But this creates another, funnier problem: That's so easy to game! Here's what you do:
  1. Set up an account, borrow one bitcoin, sell it short, collect $2,700.
  2. Set up another account, buy a bitcoin, spend $2,700.
  3. When the fork happens, your long account ends up with +1 BTC and +0.8 BCH.
  4. Your short account ends up with -1 BTC and -0 BCH (because Bitfinex doesn't require you to come up with the BCH).
  5. Net, you have $0, 0 BTC and 0.8 BCH.
  6. The 0.8 BCH were worth as much as $560.
  7. That money was totally free. 10
This is such a dumb obvious arbitrage that lots of people tried it. Bitfinex was not happy. "After the methodology announcement on July 27th, several accounts began large-scale manipulation tactics in an attempt to obtain BCH tokens at the expense of exchange longs and lenders on the platform, causing the distribution coefficient to artificially plummet," said the exchange's Wednesday announcement, which claimed that "this kind of manipulation - including wash trading and self-funding shorts - is in violation of Bitfinex’s terms of service." So:


'To Start Press Any Key'. Where's the ANY key?

Alan Greenspan, with apologies to Homer Simpson.

Finally, something too good not to share on a lazy northern hemisphere summer weekend.

The incredible 'vein maps' of the world that reveal rivers as you've never seen them before

  • Maps show the complex river basins around the world
  • Were made by geographer, GIS analyst Robert Szucs
  • Varying thickness of the lines indicates stream order 

A series of colourful maps has revealed a breathtaking look at the vein-like network of river systems around the world, plotting the countless waterways that stretch across nearly every continent, from North America to Australia.

The maps, created by geographer and GIS analyst Robert Szucs, visualize permanent and temporary rivers and streams, using a rainbow of colours to differentiate the intricate branches.

Using a system known as Strahler Stream Order Classification, Szucs highlights the staggering breadth of Earth’s watersheds, with the individual flows involved in each particular basin shown as lines of varying thickness.

The creator uses the open-source QGIS software to visualize the networks based on scientific data.

By the Strahler Stream Order, branches of higher stream orders are indicated as thicker lines.

Szucs, who shares his work on Imgur under the name Fejetlenfej, has created stunning maps of the river basins all around the world, including those in the United States, Africa, South America, Australia and Japan.

High resolution prints are available on Etsy as well, where he goes by Grasshopper Geography.

The work reflects a ‘lifelong passion for beautiful maps,’ combining scientific expertise with art to create maps that are both ‘informative and beautiful,’ Szucs explains on his website.

He recently updated his map of the United States, which reveals the massive expanse of river basins across the country – in particular, those which feed the Mississippi River. 

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