Home Morning Commentary

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This coming Thursday will have a great deal of traders sitting nervously by their computers.  They will all be wondering “What will the ECB do and what will Draghi say?”  The European Central Bank will meet on the 26th to actually discuss their own version of QE Tapering.

The main predictions as of today are for a large slash in its current bond buying from to go from €60BN per month to €30BN per month and last another 3 quarters.  When this time period is over, the ECBs balance sheet is expected to have swelled to €2.5 trillion.

Bloomberg wrote a good piece on this: “such an outcome for quantitative easing would soothe the concerns of policymakers who want a definite signal that the program will end, while giving succor to those who want to keep stimulus flowing as long as the inflation outlook remains lackluster. It doesn’t resolve the question of what happens in a year if consumer-price growth still isn’t on track to the ECB’s goal.”

Then added: “The Governing Council seems concerned that a more aggressive tapering plan could harm financial conditions, especially by letting the euro appreciate even more,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt.  “It seems that the hawks want a definitive end-date while the doves want it open-ended,” Alan McQuaid, an economist at an economist at Merrion Capital in Dublin. “I think we will get a compromise, with the ECB saying that it intends to end its QE scheme in September 2018, but if things take a dramatic turn for the worse on the economic or inflation front in the meantime, it will extend its scheme further until things have stabilized.”

This will be a very important day indeed, as seemingly unending QE may be cleaved in half, with an actual end date.  If this is true, and the with the US already hiking interest rates, volatility should increase.  On the other hand, however, with the strife in Catalonia and now two regions in Italy contemplating succession, this could provide cover for Draghi and the ECB do actually do less than what is currently expected.

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On this date, 30 years ago, the stock market crashed and was thereafter known as Black Monday.  On 10-20-87, the Dow collapsed -22.61%.  Because Thursday shared the same date, and because – suddenly – there was added volatility in the S&P500, many people on financial television were wondering if there would be another crash today.

The idea is laughable, since the global central bankers are rigging the markets to go higher forever, and that wasn’t the case in 1929, 1987, 2000, and 2008.

Perhaps there’s more to it though?  After all, the chart below shows an eerily-close price pattern between 1987 and now, with today’s prices on the would-be precipice.

Due to the aforementioned global rigging of the stock markets, there would need to be something huge and truly scary to knock this market lower to resemble anything like the 1987 crash.  Like a war.  But don’t worry, after a day or two of a scary slide, the market would remember that the central planners “will do whatever it takes” (Mario Draghi) to make the market go up.

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Economic reports are usually scheduled to be released in the morning; however, some will be released at 2pm ET.  If the report is important enough, like the end of a 2-day FOMC meeting, the afternoon report can be a major market mover.  Wednesday had an afternoon Fed report scheduled to be released and traders across the country were hoping that it could breathe some life (volatility) into the market.

That didn’t happen.

A summary of the Beige Book was released at 2pm ET.

Overall Economic Activity

Reports from all 12 Federal Reserve Districts indicated that economic activity increased in September through early October, with the pace of growth split between modest and moderate. The Richmond, Atlanta, and Dallas Districts reported major disruptions from Hurricanes Harvey and Irma in some areas and sectors, including transportation, energy, and agriculture. Manufacturing activity and nonfinancial services expanded modestly to moderately in most Districts. Retail spending rose slowly, while vehicle sales and tourism increased in most Districts. Residential construction continued to increase, and growth in commercial construction was up slightly on balance. Low home inventory levels continued to constrain residential sales in many areas, while nonresidential real estate activity increased slightly overall. Loan demand was generally stable to modestly higher. Growth in the energy sector eased slightly. Agricultural conditions were mixed; while some regions were reporting better-than-expected harvests, low commodity prices continued to weigh down farm incomes.

Employment and Wages

Employment growth was modest on balance, with most Districts reporting flat to moderate increases. Labor markets were widely described as tight. Many Districts noted that employers were having difficulty finding qualified workers, particularly in construction, transportation, skilled manufacturing, and some health care and service positions. These shortages were also restraining business growth. Firms in several Districts reported that scarcity of labor, particularly related to construction, would be exacerbated by hurricane recovery efforts. Despite widespread labor tightness, the majority of Districts reported only modest to moderate wage pressures. However, some Districts reported stronger wage pressures in certain sectors, including transportation and construction. Growing use of sign-on bonuses, overtime, and other nonwage efforts to attract and retain workers were also reported.


Price pressures remained modest since the previous report. Several Districts noted increased manufacturing input costs, but in most cases these weren’t passed through to selling prices. Retail prices generally increased slightly. Transportation, energy, and construction materials prices increased more rapidly, with some Districts citing effects from hurricanes.

This report was ignored in favor of more of the same: nothing.  Nothing much happened in the equity indices Wednesday, with another day of miserably low volume.

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The US equities markets have been clearly bullish since the election of President Trump, as he has been rife to point out. However, although the financial markets clearly are anticipating passage of pro-business policies, including a lower corporate tax rate, there are other factors which have helped support the markets. Both of these are tied to quantitative easing.

When quantitative easing finally ended in late 2014, the markets clearly began to falter as the momentum they had enjoyed since bottoming in 2009 began to taper off. The years 2015 and 2016 mostly saw flat performances for the equity indexes, with summer 2015 marked by strong volatility and sharp declines due primarily to market uncertainties in China. But China’s situation aside, the main reason for the slowdown in the markets at that time was the end of easy credit and zero interest rate policy from the Federal Reserve, which had encouraged companies to buyback shares as well and binge on mergers and buyouts as corporate leaders sought to increase share value and inflate EPS figures by reducing the number of shares in the open market. This ploy helped to inflate the market despite stagnant GDP which averaged roughly 3.33% per year between 2009 and 2016. In other words, companies showed on paper greater earnings per share and higher stock prices despite no significant (if at all) improvements in actual productivity or sheer profitability. It was even noted that many companies paid more towards stock buybacks than they actually generated in profits, with a good number of companies borrowing at near zero interest in order to buy back their own shares, a practice known as a leveraged buyback.

But in the end, all that this did was create a false impression of economic growth. The economy was not improving much beyond where it was within one year after the start of the Great Recession. However, since the election of President Trump, GDP has surged surprisingly, clocking in nearly 3.7% over the first half of 2017. If this continues, we could see GDP pass 6% for 2017, a feat that we haven’t seen since the best years of the last decade, or since the bull market of the 1980s and 1990s. Mergers and acquisitions, as well as stock buybacks, have fallen sharply as companies clearly are moving into expansionary mode and hiring more workers as others have continued to move back into the United States due to rising wages abroad. However, unless Congress passes legislation that will sustain this environment and deliver on market expectations for a pro-business environment, the current rally is likely to stall and sharply retrace as there is not QE to support it. We’ll monitor legislative progress closely to see if things begin to move forward.

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Emmanuel Macron has been a topic of mine since just before his election. As you may recall, I mentioned yesterday how his rise to power was greatly assisted by timely endorsements from other world leaders, including former president Obama, as well as positive coverage from the european press. Now that he is in office, I’ve noted his clear drive to steer the European Union in the direction of making a more pro-business environment, with particular focus on labour reforms and Brexit negotiations in this regard. He has also joined some of his EU counterparts in pivoting towards a tougher stance on illegal immigration, in an obvious attempt to shore up support of a european public who has clearly been less than pleased by the recent large  influx of economic migrants into the region.

Macron spoke with Theresa may this week to discuss Brexit negotiations. May appealed to Macron to to broaden negotiations on the matter, in particular appealing to him to help in negotiating a transitional period for Brexit. May had appealed to other EU leaders including Angela Merkel of Germany on this matter, but has reportedly failed to gain a sympathetic ear so far. With Macron’s growing status in the EU, this move by May serves as perhaps her last hope to achieve her goal of establishing a transitional period, seeing that most observers to the matter have all but concluded that the matter is essentially closed. Macron also is pushing for the EU to take a tougher stance on free trade negotiations, highlighting his pivot towards establishing some degree of protectionist policies for French agriculture. Overall, as I stated yesterday, I expect these moves to be favorable for european business, and we will keep an eye on Brexit negotiations to see how they play out.

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Emmanuel Macron has continued to enrage workers as well as the far-left and right political wings of French politics as he presses on with his labour agenda. During his campaign, Macron presented himself as an alternative to traditional politics, arguing that his approach represented a new political ideal. The French media immediately rallied to his side as the comparably far-right candidate Marine Le Pen pushed for a much more conservative France, particular with regard to mass immigration policy and a reduction in French involvement in the European Union, including a potential withdrawal from the EU altogether. The idea of a withdrawal from the EU caused political, business and media forces to unite in a push to assure Le Pen’s defeat, clearly favoring Macron. To this end, Macron easily won the election.

However, now that he is in office, the French public and press appear to realize that he is not the candidate they believed him to be. Although he is still pro-European Union and focused on continuing to increase French commitment to the EU, it now seems that the public finally understands what this actually looks like in reality. The concerns voiced by other candidates during the previous election, including Le Pen, regarding the erosion of national sovereignty and its threats to the working class in France now seem apparent to the public as Macron and his majority party are able to sweep through legislation, particularly with regards to labour reform. Macron seems committed to labour reforms that explicitly benefit larger companies by making it easier for them to fire employees, give them greater power to negotiate wages, and allow them lower barriers to hiring new employees by lower qualification standards. While these things in and of themselves are not necessarily bad, they appear to be implemented in a such as way as to not simply rebalance potential inefficiencies, but rather to give companies more power over their workers. To this end, protests continue against Macron’s legislation, but his control over the government by means of his majority party has allowed him to pass legislation quickly.

In the end, Macron may become the new standard of European politics, showing pro-EU leaders an apparently more efficient way to achieve their goals. We can expect other politicians to follow his lead in the near future. While I believe his reforms will certainly benefit investors, it will also deepen divisions between workers and government in France and Europe as a whole. It remains to be seen what the aftermath will be.

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Yesterday we discussed the amazing lack of both volume and volatility… “We have written about it in the past and probably will again in the future, but Wednesday’s volatility and volume were so unbelievably low, it boggled the mind.  Volume was 50% less than the average and there was no volatility as the market’s total range was surely a joke.  Yet, all of the major stock indices notched new all-time highs…as if nothing was out of the ordinary.”

We are writing about it again because today was no better than the last.  Today, however, we put a spin on this ridiculously low volatility: humans trade well in this environment, while the HFT “robots” do not.  As it turns out, many of the newly formed 100% algo-driven hedge funds are performing rather poorly lately.

It was recently reported by Bloomberg that the average equity was up 9.7%, while the so-called super traders (quant funds) were up an embarrassing 0.6%.

Bloomberg reports: The environment that lifts stock pickers – steady markets that enable their long-term trades – is not so friendly to quants. They do best in periods of volatility and dispersion, when their algorithms can find small price disparities to exploit. But the U.S. stock market has been unusually tranquil since last year’s presidential race. At an average level of 11.6 since Election Day, the CBOE Volatility Index has hovered about 40 percent below its lifetime average.

“To a certain extent they are lowly correlated,” Tim Ng, chief investment officer of Clearbrook Global Advisors, said of the two strategies. “The factors that drive positive returns in each are different, so what helps one doesn’t necessarily help another.” His firm invests in hedge funds.

So if you can’t stand trading against the Terminator, or a HAL-9000 type of robot, you can now take solace in the fact that they are doing poorly.  So you better make hay while your sun is shining, because as sure as the sun will set, volatility will return and those robots will come alive once again.

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We have written about it in the past and probably will again in the future, but Wednesday’s volatility and volume were so unbelievably low, it boggled the mind.  Volume was 50% less than the average and there was no volatility as the market’s total range was surely a joke.  Yet, all of the major stock indices notched new all-time highs…as if nothing was out of the ordinary.

As it turns out, we’re not the only ones to find it odd…


“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping. I admit to not understanding it.’

–Dr. Richard Thaler, Nobel Prize winner


“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,” Nobel Laureate Richard Thaler said, in an interview with Bloomberg. “I admit to not understanding it.”  Additionally he said, “I don’t know about you, but I’m nervous, and it seems like when investors are nervous, they’re prone to being spooked,” (but) “Nothing seems to spook the market.”

True.  So just how ridiculously low is the volatility?  It was recently reported that the average October volatility, since the beginning of record keeping, has been 17.0%.  This month it is a minuscule 5.2%, which is the lowest in 90 YEARS!

Want more proof of just how crazy this all is?  OK, we’re game.  The chart below shows that the S&P500 price-to-sales ratio is just 4% under its all-time high before the 2000 crash.

It’s probably nothing.

Is that fire I smell or smoldering embers that are about to ignite another Flash Crash?

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The Trump administration will present controversial proposals for NAFTA negotiations that are expected to attract vehement opposition from Congress, large sections of the U.S. business community and leaders in Canada and Mexico, according to sources with knowledge of the arrangements.

Trade experts on and off Capitol Hill are worried that the Trump demands — which many on the Hill regard as unreasonable and inflexible — will torpedo the NAFTA negotiations and will ultimately give Trump the justification he’s been searching for to withdraw.

The proposals come as the Trump administration — led by chief trade negotiator Robert Lighthizer — enter the fourth round of NAFTA negotiations with Canada and Mexico, which begin today. A senior congressional aide said the administration is pushing to include the following issues, which are troublesome to large sections of Congress and the business community:

We’ll see how this plays out in the markets, if at all, since we seem to be doing nothing but continuing to move up, across the board.  However some individual sectors may be more affected others.

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The US equities markets were quiet on Columbus Day as would be expected. Trading volumes were relatively low overall for equities indexes, and S&P 500 managed a very modest -0.18% decline of 4.60 points. Unfortunately, many days in the markets have clocked in subpar volumes and trading ranges of less than plus or minus 1%, many recently only seeing swings of less than 0.5%. Meanwhile, the VIX volatility index has spent much of its time below 10.00 recently, although it did climb above this level on Monday to settle slightly higher. However, it is still hovering near record lows.

It seems we find ourselves in an era of stagnant legislative activity in Washington. From the Obama administration into the new Trump administration, we have seen a political environment characterised by congressional deadlock and policy changes that are mostly achieved via executive orders. And most of these policies are focused on social issues as opposed to economic. Overall, this has helped to focus the attention of companies on creating growth by acquisition of other companies, or expanding into the territory of existing businesses. Amazon is a prime example of this approach, both acquiring established companies such as Whole Foods as well as entering into new markets such as the pharmacy distribution business. In the end, it seems we will see more of this low volatility at least until the beginning of next year. Hopefully I’ll be wrong and more activity will arrive sooner.