Macro and Markets
The next Fed Chair was the speculation of the week — more precisely it reached a fevered pitch after brewing for months. Jeff “I’ll make 400% on my S&P puts” Gundlach predicted Neel Kashkari would be the choice, causing his odds to soar in the prediction market. Kashkari is another giant squiddy who ran TARP back in the day. He also ran for the CA governorship in 2014 before becoming the President of the MN Fed in 2016 where he has taken on a very dovish policy slant. I can definitely see Gundlach’s point. The MarcoTourist, Kevin Muir, had something to say about the leading contender Kevin Warsh, in There are no atheists in foxholes that’s well worth a read. The choice of the Fed Chair will impact monetary policy but probably only in the long term. In the short to medium term the path for Fed balance sheet reduction has already been set and global money supply is more in the hands of foreign central banks who are still engaging in QE.
The NDX finally broke through 6000 to new highs following most other indices. Those who have been following my weekly wrap shouldn’t be surprised in the least. Rotating sector leadership is a classic pattern in bull markets and this one just got started. The CNN money Fear and Greed index reached as high as 95 this week, there may be a short-term pull back but any dip will likely be shallow and brief.
The Script for Cryptocurrencies
Cryptos have been quiet all week with lower than usual trading volumes. LTC daily volume has been under $100MM when it was routinely several hundred million or over a billion not too long ago (Coinmarketcap data). I’ll reiterate my take on this space. It was a bubble and it popped in September just like the previous five or six crypto bubbles. However; a bitcoin month is equivalent to a stock market year so the next bubble will be here sooner than most think. The miners have invested enormous capital into their mining equipment that they can’t let go to waste so they’re propping up prices (lest the whole idea go cold) along with hedge funds who are accumulating in anticipation of a public trading vehicle. Meanwhile, there are plenty of public who wants to get in but can’t or don’t know how. Once the public vehicle becomes available it’s lambs to the slaughter time. Hedge funds will dump their coins on the public and the slow-moving institutions and miners will sell forward years of supply. It will end like every other bubble, when it finally runs out of buyers. Then out of the ashes of this burnt that the future winners will emerge, many years after the end of this next bubble.
The last time bitcoin prices started ramping up two weeks before the Aug 1st hard fork. So let’s see if organic buying interest materialize in the next week or so. As for me personally, there is no change to my managed withdrawal plan. YMMV.
Gold remained weak last week. The reversal on Friday may have finally kicked it into a bounce; nonetheless, the intermediate trend is still down and I stand by my view that it will test $1240-50. Seeing how much time it has taken the bounce to arrive, that low may have to be pushed into November. In the COT, Commercial net short positions have seen a fourth week of decline but still at elevated levels which is conducive to further downside.
On the fundamental front, China will soon launch a crude oil futures contract priced in yuan and convertible into gold. I suppose a lot of yuan will be kept to facilitate trade with China but some amount will be off-taken as gold from London. Those who think it’s a needlessly roundabout way to get paid in gold or US$ need to think from the POV of a country that may be subject to US sanctions. At the root of it all is the shale revolution that has turned US into a significant oil exporter (though still a net importer, see EIA data). That’s the lens with which we need to view the warming between Saudi and Russia, and the coming IPO of Aramco, etc. There should be plenty of takers for this oil-for-yuan-for-gold scheme. It remains to be seen how well that launch of this futures product line up with the January bottom mentioned above.
The figure is the return of my main taxable account vs. SPX/EFA/VT for the last 30 days. Due to leverage my return was more volatile and started pulling ahead of the benchmarks now that NDX had broken out. This was the week that I dropped all pretense to contain capital gains. There was a flurry of activity in the options department. I took losses in Disney ($DIS), but most trades were to roll-up the short put legs of synthetic equity type of positions — to move the strike price from below the underlying to above since gamma peaks there. I did this for Gilead ($GILD), Alphabet ($GOOGL) and the Q’s and got about 48 delta all told.
Afterwards I increased my tax withholding which got me thinking. If SALT were to be eliminated next year, and it’s a big IF, I would expect state tax refund not count toward federal taxable income, in which case overpaying my CA taxes this year is not so bad. — I must emphatically point out that I’m not a tax professional and you should consult your tax adviser about this!
- When Does Volatility Equal Risk? by Gary Mishuris from Enterprising Investor. Warren Buffet has permanent capital — the structure of Berkshire gives him a constant stream of insurance free float. For everyone else who needs to sell, volatility = risk.
- Market Briefing: S&P 500 Bull & Bear Markets & Corrections by Ed Yardeni et al. S&P 500 1929-2017
None of the above is investment advice, the standard disclaimer applies.