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Thursday, January 9, 2020

FOMO... By Executive Order: It's Time For A Reality Check

Authored by Sven Henrich via NorthmanTrader.com,

Some quick takes here on events of the day:

The lunatics are running the asylum and they pretend to be the sane ones.

The Fed is not letting up on their liquidity machine and be clear: Every single outlook they’ve issued since inception of the program has been false. First it was temporary, then it got bigger, then it was there to meet year end requirements, and now already they’re moving the ball again.

And so here we get to see the Fed two step in one set of headlines:

“Fed’s Clarida says economy in good place, does see inflation rising to 2%. Clarida says Fed’s repo operations could continue at least through April.”

An economy that’s in a good place does not need hundreds of billion of dollars in central bank balance sheet expansion and certainly not $70B, $80B, $90B, $100B of repo every day or whatever the run rate is on any given day.

Reality is the Fed is forced to do repo or overnight rates go out of control, and if that were to last for more than a few days the economy would suddenly not be in a “good place”. The house is not on fire as long as I keep dousing it with water. But it’s in a good place.

And of course the big lie is that they have it all under control. If they had it under control they wouldn’t have to keep moving the goalpost:

No, the Fed’s liquidity injections are blowing the biggest asset bubble ever. But it’s not only the Fed doing the pumping here, this is multi front pump operation.

The pumper in chief today:

Sure, you can laugh it off as a typo, although I don’t know how you miss-type 401k as 409K as the 1 and the 9 are on opposite ends of the keyboard.

But that’s not even the issue with this tweet. It’s the glaring hype and pump.

Raoul Pal had a good take on it:

Raoul Pal

✔@RaoulGMI

The irresponsiblity of this, telling the average person to take more risks this late in the cycle is simply staggering, regardless of what the markets do. To make them think a 50% return is low lacks any fiduciary responsibility. This is worse than the Greenspan housing comments. https://twitter.com/realDonaldTrump/status/1215285845336502272 …

647

10:29 AM - Jan 9, 2020

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257 people are talking about this

FOMO by executive order I called it.

But of course the entire premise of the tweet is false on top of that. 401k’s are not up 50%.

Fact is, over the past 2 years here’s your larger index performance since the January 2018 highs:

Unless your 401k is in a few select stocks and $NDX exclusively you’re not anywhere near 50%, or 70%, 80%, 90%. Complete misleading hype and misinformation. Not even the almighty $NDX is up 50% since then. And the 2019 performance is completely meaningless. People did not liquidate their 401k’s at the September 2018 highs and then bought back in at the December 2018 lows, that’s not how this works. So there was a 20% drawdown first.

But I guess we have an election to win and anything is fair game. Just get people to chase a bubble.

And speaking of election: Next week we got the “historic signing’ of a phase one trade deal with China. Also complete hype.

Not only has no one seen what’s in it, but President Xi is not only not showing up, his name won’t even be on the document:

Eunice Yoon

✔@onlyyoontv

· 19h

#China confirms phase one #trade deal signing! Commerce Ministry says Vice Premier Liu He will visit DC Jan 13-15.

Eunice Yoon

✔@onlyyoontv

Ministry didn’t confirm if Liu will head to DC as Special Envoy to President Xi. Xi not expected to have his name on the trade agreement - which in a Chinese context gives Xi distance in case issues arise after the deal.

48

7:12 AM - Jan 9, 2020

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25 people are talking about this

If you think that sounds like the makings of the biggest deal ever I have some 409K’s to sell you.

Reality check: The Chinese are covering their butts. So when you see the headlines next week keep a keen eye on any supposed details if they are even made public.

No, it’s all a big pump scheme on markets and it’s perpetuating a massive asset bubble:

Not only are a few stocks controlling much of the market cap equation that keeps getting larger and larger, now we hear via Bloomberg that only a handful of asset managers control ever more ownership of key stocks:

Index funds controlling corporate America, just like the founders had intended.

I jest of course, but you get the message: Everybody is long, the few are getting ever larger and the Fed and Trump are both doing their parts in disconnecting asset prices ever further from underlying economic reality. We’re building an inverted pyramid here with the majority of the weight on top of the pyramid and everybody sitting up there enjoying the view but with no exit plan on how to get back down.

The economy is in a good place. Now try it without repo and balance sheet expansion. Just try it. I dare ya.

My word here: Stay cautious and critical. This is an environment of hype and non sustainability. But for now the mantra appears the same as in every bubble: Buy until you die.

Disgraced Connecticut Hedge Fund Manager Bilked Investors Out Of $20M In "Ponzi-Like Fraud"

From Zero Hedge:

A Connecticut hedge fund manager has pleaded guilty to deliberately misleading his LPs and eventually bilking them out of a total of $20 million over a roughly three-year period, according to an affidavit filed Thursday.

According to the complaint, filed in the Southern District of New York, Jason Rhodes, 47, of Rowayton, Conn., along with several co-conspirators, raised funds from about two dozen investors from 2013 to 2016, claiming their money would be invested and manged by "high-performing" portfolio managers.

But their money was instead diverted to a a variety of personal uses, including a $1 million payment to settle an unrelated civil lawsuit, a trip to Dubai, a luxury timeshare and an investment in a trucking company Rhodes co-owned with his wife.

According to the affidavit, between November 2013 and December 2016, Rhodes and a bevy of accomplices-turned-state-cooperators "willfully and knowingly" altered account statements and misled their LPs - primary members of wealthy families - out of a combined $19.6 million via a "Ponzi-like" scheme that involved using fresh money from new investor-victims to pay back older investors.

As many readers are undoubtedly thinking, Rhodes' scheme essentially involved taking a page out of the Bernie Madoff playbook, without the decades of fraudulently advertised market-beating returns.

Of course, the fraud at Sentinel - the name of Rhodes' firm - unfolded on a much smaller scale: Sentinel was a decidedly "boutique" firm with only 25 investors and a grand total of about $20 million under management. The firm raised most of its money by pitching wealthy families, and apparently had some success. And by the time the Rhodes and his partners were caught, they had squandered pretty much all of this money.

According to the affidavit, Sentinel marketed itself as having access to "high-performing portfolio managers" who helped guide two separate funds at Sent one of which focused on M&A arbitrage, and another that was a simple long-short equity fund.

Rhodes co-founded Sentinel with Mark Varacchi, who is named in the affidavit as an unindicted co-conspirator. In addition to leading the firm, Rhodes acted as chief risk officer, and also was the sole individual at the firm with signatory authority over Sentinel's prime brokerage accounts. Before Sentinel, Rhodes served as the managing director for risk management at "an institutional risk management firm", and also claimed to have worked as a "senior risk manager" at another unnamed multi-billion dollar hedge fund.

Varacchi and another named co-conspirator, Steven Simmons, both previously pleaded guilty to conspiracy to commit fraud.

According to the section of the affidavit that detailed Rhodes' fraudulent scheme, Rhodes created several sub-accounts at his prime broker, ostensibly to hold funds belonging to different LPs.

Then, between 2013 and 2016, Rhodes delivered no fewer than 26 'wire out' requests to his prime broker with the stated purpose that the money being withdrawn would be used to cover redemptions.

But in each of these instances, the funds were instead transferred to private accounts that Rhodes controlled. A complete breakdown can be found below:

Instead of being returned to clients, he money was used to pay back prior investors, and to cover the firm's operating expenses, while some was also used for "personal" expenses by Rhodes and his co-conspirators.

At one point in 2013, Rhodes told one co-conspirator that he needed to take $80k out of the firm's accounts to invest in a "trucking business". In another violation, Rhodes took a portion of a $5 million investment from an LP and improperly used it to settle a civil lawsuit filed against Rhodes & Co.

The scheme started to unravel in 2015, when an LP asked for documentation verifying their $4 million-plus position in the fund, at a time when the accounts for both of Sentinel's Radar-branded funds had just over $1 million left. Unwilling to risk their fraud being discovered, Rhodes altered documentation from his prime broker to try and misrepresent to the investor the amount of money available in their sub-account.However, the LP eventually did discover the discrepancy, and threatened to report Rhodes to the authorities if their money wasn't returned. To accomplish this, Rhodes worked with Simmons to try and solicit more money from other LPs at the firm with the goal of using that money to pay back the other LP before they decided to report Rhodes to the SEC.

Eventually, this pile of lies, dodges and poor investments caught up with Rhodes, who has now pleaded guilty. It's unclear when he will be sentenced.

Rhodes is copping to four counts, including conspiracy to commit securities and wire fraud, securities fraud, wire fraud and investment advisor fraud.

Read the full indictment below:

u.s. v. Jason Rhodes Complaint by Zerohedge on Scribd

Citadel Securities Sues Quant Who Stole Its "ABC Strategy" Algo Which Made $50MM A Year

From Zero Hedge:

Three things are certain: death, taxes and quants suing other quants for stealing their secret, money-making algo sauce.

Ever since secretive quant giant Renaissance sued Millennium in the early 2000s for "expropriating" its quant trading strategies when it poached Russian quants Pavel Volfbeyn and Alexander Belopolsky, not a year passes without one or more high profile lawsuits gets lobbed between some of the most iconic HFT or quant funds. And 2020 is no different because as Bloomberg first reported, Citadel Securities, Ken Griffin's market making firm, has sued a British hedge fund, GSA Capital, over its attempt to hire a senior Citadel trader amid allegations that GSA obtained "a secret trading strategy while using texts and Whatsapp messages to hide all traces of the plan."

At the center of this lawsuit is what Bloomberg described as Citadel’s "ABC Strategy," a closely-guarded automated trading strategy, i.e., algo, that cost Citadel "more than $100 million to develop" and which was generating more than $50 million a year trading stocks in the U.S. and Europe. And while there is little additional information, one can understand why an algo, especially one which appears to have involved "guaranteed" profits courtesy of high-frequency trading and consistently generated tens of millions in profits, would be a highly desired piece of source code for anyone to possess, especially an up and coming competitor that was seeking to "set up a new high-frequency trading business."

Incidentally, for those unfamiliar with why HFT "market makers" are nothing short of money printers, look no further than Virtu, which as we reported back in 2015, had lost money on just one trading day in 6 years!

In any case, that's precisely the algo that GSA was going after when it set out to hire Citadel's high-frequency trader, Vedat Cologlu, a 2007 Wharton grad and self-described "stat arb trader", who helped operate and administer the models whose "returns were notably high given the low level of risk it took on."

However, in its lawsuit, Citadel alleged that the UK fund wanted more:

GSA asked for sensitive information on his equity-trading including his profits and the speed of the trades. And then Cologlu handed over a plan that Citadel argues was based on its own confidential model, including the way the algorithm made predictions.

As noted above, the case which was filed last month, is the latest example of the lengths funds with proprietary trade secrets and automated strategies "where companies deploy computing power to identify trades promising the biggest mismatches or largest payoffs with the least amount of risk", will go to protect their IP.

And in a world in which scalping dimes, nickels and pennies has become increasingly difficult now that virtually every HFT strategy has become commoditized (and cannibalized), the NYSE was forced to launch laser-based transmission towers to give the peasants using mere microwaves a leg up, it is perhaps not surprising that this latest case involves two market giants who would otherwise be able to coexist in any market but this one.

GSA was spun out of Deutsche Bank AG in 2005 and manages around $7.5 billion. Citadel Securities, the market making division of Citadel, of course needs no introduction. Citadel’s legal filing names GSA founder and majority owner Jonathan Hiscox as a defendant, alongside other officials including the chief technology officer. As Bloomberg notes, it has yet to file its formal defense, but said Wednesday it rejects the claims and plans to vigorously defend itself.

According to the Citadel complaint, GSA officials must have been aware of the need for secrecy because they regularly sought to keep details of the courtship out of emails where they could be easily discovered. In May 2019, GSA’s head of recruitment Douglas Ward emailed a junior employee saying that the job interview questions be “Kept off e-mail.”“GSA well knew that Mr. Cologlu’s responses would contain or would be derived from Citadel’s confidential information and hoped to conceal their wrongful conduct,” Citadel’s lawyers said in the filing dated Dec. 16.

It's not just stealing top secret money printing golden goose "algos" - trading firms and hedge funds, who have for long used fat pay checks to lure employees, have hit a wall when it comes to the top talent - especially in a market where the vast majority of hedge funds underperformed the market - and have been engaged in an intense battle to hire and retain talent. The latest front line is to recruit technologists who are seen as key to future-proof trading strategies.

As Bloomberg notes, Cologlu - who earned more than $700,000 in 2018 as a quant researcher - was looking for a move after 11 years at Citadel. The firm cited messages saying Cologlu was keen to build out his own business and believed there was a market to trade European stocks. GSA for its part dubbed the plan “Project High Speed Rail” and was making moves to enter the high-speed algorithmic trading business by joining the Turquoise trading facility run by the London Stock Exchange, according to the lawsuit.

Yet while quants and math PhDs may be brilliant at spotting patterns and correlations, they seem to lack even the most rudimentary common sense, and Cologlu sent Citadel's trading plan to his work email account, which was promptly noticed by Citadel and an investigation began. The GSA recruiter speculated Cologlu had “been called out by Citadel.” That was indeed the case, and Cologlu confirmed to the Citadel legal team that he’d provided GSA with the trading strategy plan. It was unclear what happened next: according to the lawsuit, Cologlu has been suspended, but a person familiar with the situation said he has left the company.

At that point Citadel claims that it confronted GSA about its meetings with Cologlu, and an internal lawyer agreed to cooperate and shredded the hard copies of Cologlu’s trading plan. In addition to damages, Citadel is seeking an injunction to stop GSA from using any of its confidential information, and has also asked the judge to order GSA to destroy all paper and computer copies of the information.

Monday, January 6, 2020

JPMorgan Silver Criminal Charges & Not QE4 REPO Loan Fiasco Timing

From Zero Hedge:

JP Morgan silver price rigging accusations go way back to when the world's largest G-SIB took over bankrupting Bear Stern's alleged losing naked short silver position in March 2008. All along the way, blogosphere silver analysts like Ted Butler have been publically making allegations against JP Morgan's silver market trading actions.

Having now almost become fully synonymous with a consortium of alleged financial market riggings. Allegations that JP Morgan has been rigging precious metals markets are now not just some supposed tin-foil ZeroHedge hat wearers domain, some 12 years on.

Rather JP Morgan silver rigging is now the freaking US Department of Justice's allegation purvue. The US DoJ states that JP Morgan broke various financial laws in the precious metals markets for almost a full decade, acting as a Racketeer Influenced and Corrupt Organization.

The nutty coincidence is that in middle September 2019, the ongoing Not-QE4 Federal Reserve REPO Loan ramp got underway at the same time that the US Department of Justice threw the RICO Act at JP Morgan's allegedly crooked precious metals trading desk.

JPMorgan Silver Manipulation Saga 2008-2020

Could it be Jaime Dimon & Co. wants to show the US Government who is not only too big to fail but also unprosecutable given that JP Morgan is the Bank for International Settlements' Financial Stability Boards' largest Globally Systematically Important Bank?

Brazen might be the fact that if the US prosecutes JP Morgan directors criminally, the mega-bank may merely throw the global economy into a tailspin in retaliation.

Why have we allowed JP Morgan to have this much power over our global economy?

Why does JP Morgan Chase & Co. likely hold the most silver bullion in the world currently?

If global financial threats and bailout blackmail have become commonplace since the 2008 Global Financial Crisis.

How much longer will 6 Bail-In-Able Mega-Banks in the USA be allowed to own about 1/2 of +5,200 US bank sectors' financial assets under ownership?

Given the facts and allegations ongoing, why would a sane person do any business with these mega-bank 'patriots'?

Saturday, January 4, 2020

Just Two Companies Accounted For Nearly 20% Of The Market's Entire 2019 Return

From Zero Hedge:

Two weeks ago, when looking back at 2019, Morgan Stanley concluded that the observed market action was indicative of one of the most bizarre years ever, because while the S&P ended up returning a whopping 29% in 2019, just shy of 2013's 29.3% and the second best year for the market since 1997, earnings actually dropped, which means that all the market upside came from multiple expansion. There was another bizarre aspect to 2019: it was a year when despite the blockbuster overall return of the S&P, "bullish" strategies actually underperformed.

Now, in his year in review weekly, Goldman's David Kostin makes some observations of his own, and reaches a similar conclusion to that from Morgan Stanley.

For one the S&P 500, which soared started in early October, just around the time the Fed launched QE4, reached 35 new all-time highs last year, with 20 of those days coming in the last two months. US equities also bested other major global markets, outperforming Japan (15%), Europe (23%), and emerging markets (15%).

So far so good, yet what is more notable is how the market reached its impressive returns, and here Goldman confirms what we already knew, namely that valuation expansion drove nearly all of the S&P 500 return in 2019. To wit, according to Goldman earnings growth explains just 8% of the S&P 500 return last year (others disagree, and Morgan Stanley for example observes that earnings were actually negative in 2019 meaning earnings growth subtracted from total returns). Instead, as Kostin notes, "three 25 bp Fed cuts helped lift company valuations. The S&P 500 forward P/E expanded from 14x to 19x and accounted for 92% of the index price gain."

But while it was largely known that the entire market gain was on the back of multiple expansion (and record buybacks), where things get far more interesting is the sectoral composition of the upside: here as Goldman notes, just one sector, Information Technology, posted a 50% total return and accounted for 32% of the S&P 500 index return. Financials contributed 14% to the index return, followed by Communication Services at 11%.

As a reminder, we also know who the source of stock buying was for most of 2019: companies themselves, which in 2018 and 2019 unleashed a record buyback spree, with IT, until recently sporting the most debt flexibility, buying back the most stock of any market sector funded with a tidal wave of debt issuance.

Away from tech, while all sectors posted positive double-digit returns, Energy fared the worst (+12%) due to weak earnings and volatile oil prices, although spot Brent rose by 23% during the year.

But what is most remarkable is just how skewed the market has become in representing the moves of just a handful of what Goldman calls large-cap “superstar” firms, which powered most of the S&P 500 return. While three Semiconductor companies – AMD (+148%), LCRX (+119%), and KLAC (+104%) – were the best-performing S&P 500 stocks, "superstar" firms AAPL (+89%) and MSFT (+58%) were the top two contributors to the S&P 500 index gain. In fact, combined the two firms accounted for nearly a fifth of the entire S&P 500 return, or 17% to be exact, in 2019. Extending that list, just the top 10 companies contributed over 10%, or exactly a third, of the S&P's total 31% return.

Not all superstars soared: regulatory scrutiny and slowing growth weighed on other superstar firms, although it's funny that Goldman says that GOOGL, which was up +28% and AMZN, up+23%, "lagged the index." Because up 28% is just so disappointing. At the opposite end of the spectrum, ABIOMED (-48%), Macy’s (-38%), and Occidental Petroleum (-28%) were the worst performing S&P 500 constituents last year.

What else? Well, as Kostin writes, "the 10th anniversary of the bull market has drawn parallels to the late 1990s."
Indeed, as discussed extensively here previously, in 1998, the Fed delivered 75 bp of “insurance cuts” and the S&P 500 rallied by 27%. And just like now, valuations exploded - from 18x to 23x - and accounted for nearly all of the index return. Furthermore, amid global economic turmoil - also just like now - investors flocked to US stocks. Back then, Russia defaulted on its sovereign debt and the hedge fund LTCM collapsed, as Treasury yields fell from 5.8% to 4.7%. And yes, just like now, Info Tech was also the best-performing sector (+77%) and accounted for 35% of index return.

Looking ahead, Goldman writes that "given the parallels between 1998 and 2019, many investors are looking to history as a potential guide for the future." Specifically, in 1999, the S&P 500 rallied by 20%, a number which Goldman thinks may actually be conservative because unlike late 1990’s, the current forward P/E of 19x is well below the 23x P/E at the start of 1999. Relative to interest rates, the current earnings yield of 5.3% is 341 bp above the 10-year yield of 1.9%. At the start of 1999, the earnings yield of 4.4% was 26 bp below the Treasury yield of 4.7%.

In short, Goldman expects at least another year of superstar returns before the late 1990s comp ends... and everyone remembers what happened in 2000.

What may catalyze the second tech bubble bursting? Perhaps it will be the key political event of 2020 - the November presidential elections. As Goldman concludes, "looking ahead to 2020, politics will be the key focus for investors."

Following the recent rally, we expect S&P 500 will hover around 3250 until November. Prediction markets currently imply that a divided government is the most likely election outcome. Democrats are expected to maintain control of the House (71%), and are slight favorites to win the presidency (52% probability), but appear unlikely to regain control of the Senate (30% likelihood). A divided government would limit the prospect that legislation is passed reversing the 2017 corporate tax cut."

And while Goldman expects the election to resolve policy uncertainty and lift S&P 500 by 5% to 3400 by year end, should there be a surprise and Democrats succeed in sweeping Washington, and eventually reversing the Trump tax cuts, under a higher corporate tax rate regime, 2021 estimated EPS would equal $162 (v. Goldman's baseline estimate of $183), the P/E would compress to 16x, and S&P 500 would end at 2600.

Of course, now that Trump knows just how to manipulate the market, stocks may soon explode higher as the president dangles "optimism" over a Phase 2 deal, which may potentially push the S&P as high as 3,600 - 4,000 by the election, before the Fed finally admits it has blown the world's biggest ever asset bubble and everything comes crashing down. The only question is whether Powell will follow the advice of Bill Dudley and burst the bubble before the election, or does so just after.

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Thursday, January 9, 2020

FOMO... By Executive Order: It's Time For A Reality Check

Disgraced Connecticut Hedge Fund Manager Bilked Investors Out Of $20M In "Ponzi-Like Fraud"

Citadel Securities Sues Quant Who Stole Its "ABC Strategy" Algo Which Made $50MM A Year

Monday, January 6, 2020

JPMorgan Silver Criminal Charges & Not QE4 REPO Loan Fiasco Timing

JPMorgan Silver Manipulation Saga 2008-2020

Saturday, January 4, 2020

Just Two Companies Accounted For Nearly 20% Of The Market's Entire 2019 Return