The Cboe Volatility Index (VIX) spiked to its highest level in nearly half a year on Wednesday, reflecting a trifecta of investor worries: next week’s U.S. elections, a lack of fresh relief measures and a third wave of coronavirus cases around the world.
While the VIX fell back to 38 today, market volatility is alive and well.
Even as U.S. stocks hit record highs in August and September, the VIX remained elevated as investors refused to abandon their hedges ahead of a potentially turbulent fourth quarter that holds a presidential election. The S&P 500 notched multiple new highs during those months, but the VIX never fell below 20—a phenomenon that hasn’t occurred in two decades.
Since putting in its last high on Sept. 2, the S&P 500 sold off almost 9%, while the VIX has doubled to 40. That’s about three or four times what the volatility index trades at during placid times, though it’s still half of what it was in March, when the VIX closed at a record 82.69.
Cboe Volatility Index (VIX)
Explaining The VIX
The VIX measures implied volatility, a figure based on the price of near-term S&P 500 Index options. When stocks gyrate wildly, options contracts—which allow investors to buy or sell at predetermined prices—tend to cost more.
In addition to being a thermometer of investor sentiment, the VIX is used by investors and traders as a tool for hedging and speculation. There are no products that precisely track movements in the VIX itself (spot VIX) because the portfolio of options that the index tracks is constantly changing.
VIX futures and exchange-traded products that track VIX futures—like the aforementioned VXX and UVXY—are the next best thing. They tend to have a pretty tight correlation with spot VIX over short time periods, while that correlation breaks down over longer time periods due to the structure of futures markets, which require the “rolling” of contracts from month to month that eats away at returns.
Strong Hedging Demand
The VIX usually rises when stocks fall, and vice versa. That’s why it has a reputation as Wall Street’s “fear gauge.” But this year, the normal correlation has broken down, as the VIX has stayed high throughout both up and down markets.
The most likely explanation for this phenomenon is the strong demand for hedging by investors who don’t want to be blindsided by an unexpected election outcome or another COVID-related hit to the economy.
This week, all that hedging proved prescient as stocks tumbled the most since March amid rising coronavirus cases worldwide. Concerns that more virus relief measures may not come until next year added to the downbeat mood on Wall Street.
A look at the VIX futures curve suggests that volatility traders think that the peak of uncertainty is right now. The futures curve slopes downward throughout the rest of the year and into next year (a condition known as backwardation), though implied volatility remains stubbornly high for many months into the future.
Other instruments investors use for hedging, like gold and Treasuries, are also elevated, though off their recent highs. Spot gold prices were last trading close to $1,900/oz, down from the record $2,064 seen in August, but still in rarified air. The SPDR Gold Trust (GLD) was last trading with a 23.3% year-to-date return.
At the same time, the 10-year Treasury bond yield was last trading at 0.79%, down from 1.92% at the start of the year. The yield may be near the upper end of its range of the past seven months, but it is still at historical lows.
I found this trading commentary wise for the timing of the “Trump Coronavirus Market Nightmare” and wanted to share this in our Bull & Bear Blog:
In this analysis, I’ll be shedding light using experience:
How President Trump’s Covid-19 Positive news may impactthe market
Similarities and differences in historic cases
Why Trump possibly announced his testing positive so quickly
Trump’s Testing Positive
Trump testing positive for Covid-19, 4 weeks before the presidential elections, is not good news
Especially considering that the current market is momentum-driven, such bad news is good enough to scare new investors from pouring money into the market
We can see a similar case where the president’s medical condition negatively impacted the market
President Eisenhower suffered a heart attack on September 25, 1955.
Before this incident, the stock market was at an unprecedented bullish rally
Immediately after the news was released that he was hospitalized, the market fell by 6%, leading to $14 billion instantly vanishing
Eisenhower recovered, and it was later announced that his condition was not serious
Eventually, the market bounced and continued to rally upwards
President Trump also announced his testing positive for Covid-19 a few hours ago
Just as Eisenhower’s case, the stock market is in an uptrend, with significant bullish momentum
The market is correcting, due to bad news, but not as significant as that of the past
Just as Eisenhower, considering the fact that Trump will be taken care of seriously, it’s most likely that he will recover from the virus
As such, it’s reasonable to expect that the market will continue to rally upwards
However, it’s also important to consider those market situations are not the same as the past
For a more in-depth explanation on what makes today’s market special, check out my previous analysis below:
Why did Trump announce his condition?
This is an important question to ask, as Trump announced his testing positive for COVID via twitter
Trump is arguably the most powerful person in the world. He could have concealed his condition if he really wanted to, and later justify it as “classified information”
What could have been Trump’s intentions behind this?
In the case of the Prime Minister of the UK, Boris Johnson, his support rate was at 48% prior to him testing positive
After he got the virus, there was a sentiment of sympathy among the general public, leading to his support rate skyrocketing to 72%, an all-time high support rate ever since Tony Blair
Given this case and the fact that the presidential elections will be held in 4 weeks, Trump could have been targeting this sympathetic sentiment among the general public
It’s also highly likely that Trump recovers quickly, with the best medical staff from the country treating him
As such, he will be qualified to talk about the issue (as someone who has caught the virus) and suggest that he’s the only one capable of solving the problem.
As past cases demonstrate, problems regarding the President’s medical condition is never good for the market. However, given that the president recovers quickly, this could end up being a massive ‘buy the dip’ opportunity.
This is the last hoorah for the old Democratic leaders. They know they are soon “out the door” because of their age.
Not having to stand for reelection because Nancy Pelosi (born March 26, 1940) who is now 80 years old and Charles “Chuck” Schumer (born November 23, 1950) who is 70 now, and Joseph “Joe” Biden Jr.(born November 20, 1942) who is 78 do not stand a chance in hell of holding on to power much longer.
They are now more desperate to overthrow Trump with the help of the media as they deal a death-blow to the investment community.
Beside their plan to restore taxes to the pre-Reagan era of 70%, their last hoorah is to impose a tax on every buy or sell transaction.
Wall Street has been dumping money into Governor Cuomo’s coffers trying to hold off this proposal.
He has been standing up against the Democrats in Washington but this is yet still part of the intense battle going on for the 2020 election.
It costs to store it and with no income from the investment without selling it has always been one of the major obstacles to institutional investing in gold. Others have argued that central banks were the biggest lenders of gold and they did so to manipulate prices.
That myth has never stood the test of time for they were lending gold in up and down markets which never altered the natural cycle. In general, any entity which owns gold has always sought to lease it out to earn income.
The borrowers have been generally mines who may need to smooth their cash flow and will borrow gold to sell now which is replaced when the newly mined gold is refined and then used to repay the loan. Other borrowers have tended to be jewelry manufacturers who may be operating on a contract basis to buy gold and again need to borrow to smooth out the flow of manufacture.
Borrowing gold has normally been conducted at interest rates which are below that of borrowing cash because there are costs to physically deliver gold. Consequently, there have been also arbitrages on the interest rates between gold loans and cash loans. This is another whole new area of complexity. Therefore, the fact that gold loans have gone negative is indeed a reflection of lower demand from some industries like the jewelry trade as stores are locked down and people have lost their jobs and marriages have crashed.
If we look at the numbers from the Gold Council you will see that in 2019 new mine gold declined. The sharp rise in the gold supply is coming from people selling their old gold jewelry we called scrap. The rise in gold scrap is reflecting the decline in demand from the jewelry trade.
Indeed, the World Gold Council put out that the gold jewelry trade declined 6% in 2019. As the recession expands into 2022, the retail jewelry demand will decline rather than expand.
With retail down, this is contributing to gold lease rates moving negative.
So, the answer to the question of “Should You Borrow Gold?” is NO. However, you can profit handsomely whether Gold’s price rises or declines.
InterAnalyst members are immediately notified of directional momentum in Daily, Weekly, and Monthly momentum charts with signals like the actual samples above.
Many retail businesses including grocery stores and fast-food restaurants have been wrangling with a national coin shortage.
Some are posting notices informing customers that they will need to pay in exact change or use alternative payment methods such as credit cards.
What’s driving this scarcity of quarters, dimes, nickels, and pennies?
The answer from the U.S. Mint: COVID-19. The virus caused some Mint branches to temporarily slow or suspend production this spring. By May, the total number of circulating coins minted this year came in at around 4 billion, a 1 billion-coin shortfall compared with the same period in 2019.
Now as economic activity recovers, there aren’t enough coins to go around.
A big part of the problem is that the Mint continues to produce more pennies than any other denomination. It now costs two cents to mint a penny, making them a losing proposition from an economic perspective.
It’s questionable whether the typical consumer even wants to bother with collecting pennies as change. Their value has been so diminished by inflation that they are functionally worthless.
Over the past 50 years, the purchasing power of U.S. coins has gone down by then 85%, according to the Bureau of Labor Statistics’ own CPI Inflation Calculator.
Anyone in 1970 who had proposed minting a fractional pennyworth only one-fifth of one cent would have been laughed at. Yet today, the penny laughably circulates at less than one-fifth the purchasing power of a cent in 1970.
Back then, pennies were composed of solid copper. Today they contain mainly cheaper zinc. (Pre-1983 copper pennies can be purchased by investors based on their intrinsic copper value for potential use in barter and trade – or to profit from rising copper prices.)
According to sound money advocate Will Luther, pennies “get minted today because clever lobbyists are good at harnessing nostalgia and advancing junk arguments about rounding. A private coin industry would not be able to waste taxpayer funds for the sake of subsidizing metal miners or pleasing their representatives in Congress. Instead, private mints would produce the kind of coins people actually want to use.”
While the practical case for ditching pennies is strong given their extremely low utility these days, we would caution against the dangers of sliding down a slippery slope that could lead to the elimination of all circulating coinage and paper notes.
Big banks and some government bureaucrats have used the global pandemic as an excuse to push for a cashless, all-electronic payment regime.
The recent National Coin Shortage has been awfully convenient for advancing the War on Cash – an agenda that would ultimately do away with financial privacy by forcing everyone onto traceable digital systems.
Since currently circulating coins and paper cash are poor stores of value, the best way to hold money privately, off the financial grid, is through hard money.
A possible change in near-term trend is likely as we approach this month in S&P 500 established back during March. Normally, this implies that the next turning point should be a reaction high. Technical resistance stands at 3393.76 and it will require a closing above this level to signal a breakout of the upside is going to unfold. Our technical support lies at 2271.03 which is still holding at this time. which is still holding at this time,” stated Livio S Nespoli of InterAnalyst.us.
Some caution is necessary since the last high 3393.52 was important given we did obtain three sell signals from that event established during February. Nonetheless, this market is trading below that high by more than 5 percent. Critical support still underlies this market at 2532.68 and a break of that level on a monthly closing basis would warn a further significant decline ahead becomes possible.
The market has consolidated for the past 2 Months and only 3393.54 would suggest a reversal in the immediate trend. The previous low of 219186 made during March only a break of 244749 on a Monthly closing basis would warn of a technical near-term change in trend.
With recent spikes in coronavirus cases and fluctuations in the economic data, the market seems to be stuck in a range amid elevated volatility and how the V became a W.
“For now, volatility and choppy markets remain our base case as an uneven economic recovery likely unfolds, the stock market was suggesting a V-shaped recovery, but the more likely scenario is rolling Ws with a sideways to downward bias.” Liz Ann Sonders, chief investment strategist at Charles Schwab, said in a note.
The central bank unleashed another weapon in its arsenal this week, saying it will start buying individual corporate bonds. As comforting as it is to have the Fed’s support, the central bank can only do so much to ease investor fears.
“The Fed can’t prevent the volatility we’re seeing in stocks, and tt will likely take years for the economy to fully recover and there remain other uncertainties on the path ahead. As such, investors may continue to struggle with this mismatch between markets and the economy before seeing the case for new highs.”
Fed Chairman Jerome Powell reminded investors again in his semiannual testimony before Congress that “significant uncertainty remains about the timing and strength of the recovery.”
With the Rails index back to all-time highs this seems like an especially appropriate question considering the fundamental data which is…. well, see for yourselves.
Consider where rail stocks are trading:
Do fundamentals justify this price? Here is the chart of total carload and intermodal traffic for 2018, 2019 and 2020.
Total U.S. carload traffic for the first five months of 2020 was 4,713,757 carloads, down 14.7 percent, or 815,413 carloads, from the same period last year; and 5,186,630 intermodal units, down 11.3 percent, or 661,703 containers and trailers, from last year.
And another way to see the unprecedented divergence tells us Where The Stock Market Goes Now:
U.S. railroads originated 740,171 carloads in May 2020, down 27.7 percent, or 282,965 carloads, from May 2019. U.S. railroads also originated 912,922 containers and trailers in May 2020, down 13 percent, or 136,241 units, from the same month last year. Combined U.S. carload and intermodal originations in May 2020 were 1,653,093, down 20.2 percent, or 419,206 carloads and intermodal units from May 2019.
In May 2020, one of the 20 carload commodity categories tracked by the AAR each month saw carload gains compared with May 2019. It was farm products excl. grain, up 324 carloads or 10.6 percent.
Meanwhile, commodities that saw declines in May 2020 from May 2019 were coal, down a record 127,201 carloads or 40.7%; Coal carloads are down 26.1% so far this year and have declined on an annual basis for 13 straight months.
In short, lowest rail traffic in years, and that was based on a trend even before the coronavirus, and yet rails stocks are at all time high.
Here is why:
As BMO rates strategist Ian Lyngen writes in “Jay’s Market, Just Trading in it“, a core theme of trading has been “the remarkable resilience of the equity market despite a shuttered economy, historic job losses and civil unrest across the US.”
So to get to the bottom of the question on every trader’s mind – just who is behind this rally – BMO sent out a poll to its clients where the first question showed a clear consensus for the driver behind the move; “73% offered the Fed as the inspiration behind the S&P 500’s impressive rally”, vastly more than those who cited labor market recovery/reopening optimism (6%) greater fiscal stimulus (5%), and progress on Covid-19 treatment (6%). And now that Powell owns this rally, he better not allow to reverse.
1. What is driving the swift recovery of equities?
a) Fed – 73% b) Earnings Optimism – 0% c) Labor market recovery – 6% d) Further fiscal stimulus – 5% e) Progress in treating/preventing Covid-19 – 6% f) Other (please specify) – Reopening Optimism/ All of the Above/ Underinvestment
Less relevant to the market’s ramp but just as interesting in terms of what markets expect for the Fed to unveil next in the central bank’s creeping nationalization of capital markets, were responses to BMO’s second special question – when, or even if the FOMC will roll out yield curve control – which were not nearly as clear cut with a wide variety of opinions. 3-6 months was the most common answer with 33%, which points to the September, November, or December meeting as the most probable venue for the introduction of the new policy tool. Within ‘3 months’ or ‘not this cycle’ both took a roughly equal share as the second most frequent reply, so as Lyngen notes, “clearly investors are split on whether YCC needs to be deployed rapidly, or not at all given the state of the economy and recovery. 6-9 months and 9+ months both rounded out the replies with 14% and 12%, respectively.”
2. When will the Fed announce yield curve control?
a) Within 3 months – 21% b) 3-6 months – 33% c) 6-9 months – 14% d) 9+ months – 12% e) Not this cycle – 20%
Finally, an interesting snapshot on how investors respond to data is BMO’s question how respondents will react to tomorrow’s jobs report: In the event of a disappointment and a Treasury market rally, the clearest takeaway was a reluctance to take profits – only 25% would sell versus a 37% average and the lowest read since October 2019. Meanwhile 11% would join the rally and buy and 64% would do nothing compared to respective averages of 7% and 56%.
The other meaningful takeaway was a positive skew on the belly of the curve as 36% thought the next 15 bp in 5-year yields will be higher; well below the 45% average and matching last month’s figure as the lowest since November 2019.
The velocity of money is like blood pressure. If it is too high or too low, it can be the Velocity Of Financial Collapse. Too high indicates inflationary pressures are building and/or the presence of speculative bubbles. If too low, deflationary pressures are growing, presaging a dangerous collapse. (eLearning)
The velocity of money reached its high during the 1990s dot.com bubble. After it collapsed in 2000, low-interest rates (2002-2007) fueled another bubble, the US property bubble, and when it collapsed in 2008, the velocity of money again plunged and never recovered.
Despite trillions spent by central banks after 2009, the velocity of money has continued to fall. Today, in 2020, the velocity of money reached an all-time low. In Q1, the average velocity was only 1.37. Q2 will be even lower.
To offset the historic plunge in demand caused by COVID-19, central banks resorted to money printing on an unprecedented scale. While the money printing will stave off starvation for the vast majority at the bottom of the economic food chain and ensure profits for the few still at the top; today’s money printing will turn fiat money into little more than food stamps and give the economic elites little incentive to do otherwise.
Despite central banks’ excessive money printing, hyperinflation may not occur, at least not immediately. In capitalist economies, because currencies are circulating coupons of credit and debt, when credit disappears, so, too, does “money”; and, today, money is disappearing into deflation’s waiting paw even faster than the Fed can print it.
The mandate of the Fed in 1913 was to create a system of debt-based fiat money that insured bankers profited, i.e. “made bank”, off all societal productivity, a never-before-seen form of economic parasitism.
Since that time, the Fed has done admirably with that mandate, given the problems they’ve had to deal with, e.g. a dangerously low gold/fiat ratio in the 1920s, the 1929 stock market crash, the 1930s collapse of world trade, the loss of gold reserves due to US overseas military spending, the serial collapse of bubbles beginning in 2000 triggering “the great recession of 2008, the amuse-bouche to what is now about to happen,
AMERICA THE FROG
The frog is frozen still
In water now so hot
The water’s almost boiling
But the frog knows it not
Quickly it must jump
To avoid a boiling death
The Fates themselves are watching
With collective bated breath
Will America survive?
Or will it now succumb
Its heritage abandoned
Its future now undone
By its own hand it’s threatened
Itself its great threat
The frog continues sitting still
In denial ignorant yet
The water’s getting hotter
The heat’s turned up to high
And it’s an even money bet
That the frog is gonna die
It is June 2020. The water’s boiling. The frog’s still in the pot. The velocity of financil collapse it closer than we might imagine.
Market Support Is Deteriorating Fast as the market rally to date has been defined by the five largest stocks in the index. Via Goldman Sachs:
“Broader participation in the rally will be needed for the aggregate S&P 500 index to climb meaningfully higher. The modest upside for the largest stocks means the remaining 495 constituents will need to rally to lift the aggregate index.”
Such also becomes problematic when corporations are issuing debt at a record pace to supplant liquidity needs to offset the economic crisis rather than repurchasing shares. It’s worth remembering that over the last decade, buybacks have accounted for almost 100% of net stock buying.
Overbought & Extended
Besides the supportive underpinnings, the technical backdrop is also conducive for corrective action in the short-term. Here is something that is more compelling:
“The number of stocks above the 50-dma is pushing record levels. Historically, whenever all of the overbought/sold indicators have aligned, along with the vast majority of stocks being above the 50-dma, corrections were close.”
Such doesn’t mean a “bear market” is about to start. It does suggest, at a minimum, a correction back to support is likely.
… it’s probably because it is, as the latest Wall Street professional to join the chorus of naysayers and skeptics including such luminaries as David Tepper and Stanley Druckenmiller, claims.
In an interview with the Financial Times, Manolo Falco, Citigroup’s co-head of investment banking said that financial markets were “way ahead of reality” with tougher times to come, and is warning corporate clients that they should raise as much money as they could before the pandemic’s true cost is factored in by investors.
“We definitely feel that the markets are way ahead of reality. We really are telling every client to tap the market if they can because we think the pricing now couldn’t get any better,” Falco said, adding that “as the second quarter comes along and we start seeing the pain, and the collateral effects of that, we think this is going to be much tougher than it looks.”
Manolo Falco, Citigroup’s co-head of investment banking.
His comments came at the end of a week when stock markets largely rallied even as relations between the US and China just hit rock bottom, as riots were about to break out across the US which now has more than 40 million unemployed, and as millions of businesses around the world remained shut and economies lurched towards their worst recessions in memory.
“Markets are pricing a V [shaped recovery], everyone’s coming back to work, and this is going to be fine,” Mr Falco said. “I don’t think it’s going to be that easy quite frankly” said the investment banking icon who just made Robinhood’s shitlist.
Investors’ optimism led investment grade companies to raise a record $1 trillion of debt in the first five months of the year, putting investment banks such as Citi on course for a surge in debt capital markets revenues in the second quarter of the year compared with 2019.
Citi is not the only bank to take advantage of the bond issuance feast, which has been explicitly backstopped by the Fed which as we learned last week has been busy buying up over a dozen ETFs.
Last week senior bankers predicted another strong quarter for trading. This was especially true at JPMorgan Chase, whose investment bank boss Daniel Pinto said trading revenues in the second quarter could be up as much as 50% compared with a year earlier.
Falco was more circumspect on the prospect of a wave of activist investment in the aftermath of the coronavirus crisis. Low asset prices can tempt activist investors to buy into companies on the cheap and then look for ways to make them more profitable, often by cutting costs and jobs, but mostly issuing more debt (although with corporate leverage now at even record-er levels than just 2 months ago it is unclear just who has the capacity for even more debt).
“You gotta be careful though because an activist can become very quickly a focus of governments if they really step in too hard at a time when people, what they want is to protect employment and to actually get things going in the economy,” Falco said. “We’ve got to be careful because in some cases . . . maybe those [investments] are at the wrong time and could create a lot of anger.”
We doubt that: in fact, if activist investors step up and end up causing millions more to be fired, it will simply mean that the government’s free handouts will have to be extended even further, Congress will have to pass even more stimulus bills, and the Fed will have to monetize even more debt bringing us that much closer to the period of runaway inflation so eagerly sought by the Federal Reserve.
In other words, more layoffs mean win, win, wins for everyone, except those who still believe in working hard and saving, of course.
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