IB Traders Insight


1 2 3 4 5 2 1108


Macro

China's Latest Bubble Is in Bonds


China’s bond market has been on a tear but Beijing has started cracking down and reining in speculators.

 

Harvard’s Carmen Reinhart knows a thing or two about the four most dangerous words in economics. In fact, “This Time Is Different” is the title of her 2009 book looking at the common threads between eight centuries of booms and busts.

But in a new op-ed, even Reinhart can’t help but sense something truly divergent is afoot in the central banking world. While humankind has seen easy-money eras before, the magnitude of today’s “easy-money contagion,” and epic race to the interest-rate bottom from Tokyo to Washington, makes restoring normalcy virtually impossible. When it comes to ending quantitative easing, why would the Federal Reserve or peers “want the dubious honor” of exiting first?

To Reinhart, the pressing question for officials gathered in Jackson Hole, Wyoming, for the Fed’s annual retreat is whether domestic QE policies are now too interdependent to end. The other, of course, is how this semi-permanent monetary onslaught in the developed world imperils the emerging one. In other words, China.

As she points out, “top Chinese officials have recently begun to call for the People’s Bank of China to cut interest rates and lower reserve requirements.” All of which sounds perfectly reasonable given the global financial zeitgeist - until you consider how markets are way ahead of the PBOC in ways that should worry the Jackson Hole set.

China’s bond market has been on such an epic tear in recent weeks that the central bank is scrambling to curb speculation. The first sign came Wednesday, when the PBOC injected pricier 14-day repurchase agreements into the financial system for the first time since February. It also clamped down on unruly peer-to-peer lending. The steps are aimed at mopping up excess credit - especially the cheap, short-term kind - to refocus punters on longer-term investments. It’s a tacit confirmation that China has joined U.S. Treasuries, German debt and Japanese government bonds in bubble territory.

Dynamics in China could be the most troubling of all. At first, China’s debt boom seemed a piece of a global trend, one that picked up pace in January when the Bank of Japan joined the European Central Bank in engineering negative rates. Yet a rising number of mainland defaults should be driving credit spreads in the opposite direction. The same goes for regulatory crackdowns on credit and wealth-management products, moves that suggest growing alarm over threats to the national balance sheet.

Increasingly, though, banks have been plowing short-term borrowings normally used for daily cash needs into markets and offering it to investors. Much of it has flowed into bonds amid concerns about shaky stock values. The upshot has been a ramping up of leverage in the $8.5 trillion bond arena, as evidenced by 10-year yields in the neighborhood of 2.6%.

The bond bubble is another reminder of how painfully slow President Xi Jinping has been to recalibrate growth engines. While moves to swap debt for equity and securitizing bad loans garnered banner headlines, in practice they’ve just enabled politically-connected highly-indebted companies and local governments with bailouts. That also helps keep corporate yields down. Moral hazard risks, in other words, have only increased this year.

Bulls may counter that the PBOC hasn’t been slashing rates, and is therefore acting more prudently than peers. “All this may sound a bit boring,” notes Chen Long of Gavekal Dragonomics. “But as [former Bank of England head] Mervyn King once said, a successful central bank should be boring.” And in the PBOC’s case, he says, “the quiet can last for a bit longer.”

Chinese officials, though, have found stealthier ways to feed bubbles. Debt is being nationalized a second time as state-run banks and enterprises that already distort asset prices help the government cap bond yields. As of June, for example, more than 90% of outstanding corporate issues were from state-backed entities. Much of that total is held by other state-backed entities. The financial equivalent of a Salvatore Dali painting, obscuring reason and reality.

Opacity doesn’t help. If the U.S. debt market hit a wall, investors would know it’s coming, as in 2008. Yields would surge, credit spreads would blow out and government auctions would become lonely places. Ditto for Japan. But no one would see real trouble brewing in China until it’s too late. To borrow from the 2009 book Reinhart penned with Kenneth Rogoff, Beijing virtually ensured that this time is different. China is the world’s second biggest economy and its equity markets, capitalization-wise, just surpassed Europe’s. A debt crisis there would change everything in the global economy.

Many analysts, from Charlene Chu of Autonomous Research to Logan Wright at Rhodium Group to Rogoff, have warned that China’s debt and credit explosions look eerily similar to the U.S., circa 2008. Others worry China’s success in keeping growth above 6%, avoiding a currency crisis and maintaining social stability is making investors - and China’s leaders - complacent about mushrooming risks to the nation’s future.

Normally, a bond market’s dynamics tells the outside world all it needs to know. The fact China’s isn’t may tell officials gathering in the Wyoming mountains that things really are different this time around.

William Pesek is Executive Editor of Barron’s Asia. Based in Tokyo, he writes Barron’s Asia’s lead column “Up & Down Asia,” which covers economics, politics, markets and social issues throughout the Asia-Pacific region. He is the author of the 2014 book “Japanization: What the World Can Learn from Japan’s Lost Decades.” Before joining Barron’s, Mr. Pesek was Bloomberg View’s Asia columnist. His columns have appeared in the International Herald Tribune, the Sydney Morning Herald, the New York Post, the Straits Times, and many other publications. Follow him on Twitter @WilliamPesek.

Get investing analysis that moves stocks and markets—Subscribe to Barron’s for just $1 a week.

This article is from Barron's and is being posted with Barron’s permission. The views expressed in this article are solely those of the author and/or Barron's and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


10651




Securities Lending

A Look at Tesla, Fitbit and Under Armour





The analysis in this video is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


10652




Options

It's Time to Hedge Bets on Gold Positions


With gold ETFs finally showing signs of weakness, it’s worth considering a few exit strategies.

 

The gold trade is showing signs of weakness. Two key gold mining exchange-traded funds fell 7% Wednesday -- at a time when circumstances indicate their values should rise or at least stay steady.

The declines in the VanEck Vectors Gold Miners ETF (ticker: GDX ), and the more volatile VanEck Junior Gold Miners ETF ( GDXJ ) may signal that some investors are rearranging portfolio allocations ahead of an event-heavy central bank calendar.

The moves coincide with strength in beaten-down, rate-sensitive sectors, including the financials, which have been trending higher.

In totality, the multi-sector trading action is a potential indicator that some investors are preparing for U.S. interest rates to rise by year’s end.

Those two exchange-traded funds are up 122%, and 160%, respectively, so far this year, but profit-taking tends to be less disruptive than what happened on Wednesday.

The VanEck funds traded Wednesday in a fury that often coincides with institutional investor groupthink. When word spreads from one desk to another that a major fund is doing something, it often is acted upon as a leading indicator. It is an admittedly soft data point, but it is deeply rooted in the financial industry.

https://si.wsj.net/public/resources/images/ON-BU101_gdx082_G_20160825150116.png

Though we advised investors in June to secure profits, locking in triple-digit gains and maintaining exposure with upside calls, it is hard for many to give up great trades. They would rather maintain a bullish position -- especially when it is outperforming everything else in the market -- until it actually weakens. Then, and only then, do they make a move. Investors who were rattled by Wednesday trading can simply buy puts to hedge.

With the VanEck Gold Miners trading recently at $27.68, investors can buy the December $23 put for 73 cents. If GDX drops to $20, the put is worth $3.

Wednesday’s volatility is an indication of how violent this ETF can behave in a downspin. Rather than “spreading” to create a trading range, it is arguably better to pay full-freight to hedge. This simple trade now seems best. Who knows if the fund will try to retest the bottom of its trading range. The 52-week range is $12.40 to $31.79.

Investors concerned about the stability of the VanEck Junior Gold Miners should sell their positions and lock in the extraordinary gain. The liquidity in the options market seems to lack the robustness needed to effectively hedge.

Hedging after a sharp decline is like buying insurance during a fire. A fear premium has already lifted options prices, and investors will pay top-dollar to buy puts. But if you are concerned that the downside is just beginning, or that you need to lock in the bulk of your profits, the added friction is the cost of business.

In candor, interpreting trading flows is difficult. It is like palm reading, but it is one of the mainstays on Wall Street. To make the analysis more meaningful, you have to consider broader issues in other sectors.

We know many institutional investors entered second-quarter earnings season by buying calls, and then shares, on beaten-down, high-growth stocks.

This led to a quiet rotation away from slow-growth, high-dividend sectors into sectors like technology and banking

The trades anticipated that corporate earnings would be better than expected and that economic growth would improve, thus securing profits in the stock and options market. That scenario mostly occurred, and it is not unreasonable to conclude that this is leading to a rearranging of portfolio allocations for reasons ranging from relative value to anticipating a rate hike. After all, constructive economic conditions are a prerequisite to a rate hike.

If the Federal Reserve raises rates, the gold sector trade is not as attractive as financial stocks. Banks make more money off higher rates.

An anti-rotation thesis can also be argued. It is hard to see the Fed significantly raising rates when the global economy is weak, but the event calendar represents risk to the gold thesis.

Even if the Fed does nothing at its next three meetings, the risk to gold is high. Bank governors can be counted upon to talk about how conditions favor a rate hike. Sell-side banks, so desperate for trading volumes, can be counted upon to gin-up rationales for event-driven trading. You can fade the near future, and let your profits ride in GDX and other areas of the gold sector. If you do, though, recognize that you are gambling, not investing, and definitely not trading.

Steven M. Sears is a Senior Editor and Columnist with Barron's. He is the author of "The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails." Mr. Sears previously reported for Dow Jones Newswires and The Wall Street Journal. He has reported upon most major modern financial events, including the Asian Contagion, the bursting of the Internet Bubble, the Credit Crisis, and Europe's sovereign debt crisis. He also was part of exchange executive teams that modernized the U.S. options market, and introduced electronic trading. Interact with him on Twitter @sm_sears.

Get investing analysis that moves stocks and markets—Subscribe to Barron’s for just $1 a week.

This article is from Barron's and is being posted with Barron’s permission. The views expressed in this article are solely those of the author and/or Barron's and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


10650




Securities Lending

SLB Update: Largest Short Value per Sector


The following table shows the securities with the largest short value per sector on 8/24/2016.

The analysis in this article is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


10649




Stocks

Nasdaq Market Intelligence Desk - Equity Market Insight August 26, 2016


Market Update: As of 11:00 AM EDT

NASDAQ Composite +0.63 Dow +0.51% S&P 500 +0.54% Russell 2000 +0.58%
NASDAQ Advancers: 1523 / Decliners: 601
Today’s Volume:  +18%

The markets are modestly higher this morning with the Russell 2000 briefly hitting an intraday all-time high.  All ten sectors are in the green led by materials (+0.7%), energy (+0.7%), healthcare (+0.6%) and IT (+0.6%).  First hour volumes are up about 18% over yesterday. Fed Chair Yellen provided no guidance on the timing of a rate hike, and with that the VIX Volatility Index is down 6%. The dollar is lower, the 2yr note yield is down two basis points and gold is 0.9% higher. Crude oil trades 1.8% higher on hopes of an output freeze.   

  • Speaking at Jackson Hole this morning, Fed Chair Janet Yellen commented “I believe the case for an increase in the federal funds rate has strengthened in recent months.” She did not provide more specifics on timing, but implied probabilities of a September hike now stands at 32% and jumps to nearly 59% by the December meeting.
  • U.S. GDP (the broadest measure of goods and services produced across the economy) grew less than previously forecast, coming in at +1.1%. The Commerce Department said the sluggish growth was due to declining inventories, lack of business investment in equipment and residential investments falling more than expected. The bright spot was consumer spending, which makes up more two-thirds of U.S. economic activity, was revised up to 4.4% vs the previous forecast of +4.2%. Consumer spending accounted for the bulk of the rise in output last quarter.
  • University of Michigan Consumer Sentiment came in slightly lower than consensus at 89.8 (90.8 was the median Bloomberg economist projection). This is still a strong number and coincides with U.S. GDP showing strong consumer spending last month.

Technical Take:

Today marks the 35th consecutive session where the S&P 500 has moved less than 1%. Over this time the average daily percentage move has been just 0.29% which saw the VIX index bottom at 11.02 on 8/9/16, a level it has not seen since 8/5/15. Interestingly last summer’s low in the VIX was followed two weeks later by an 11% decline in the S&P 500 and a 390% gain in the VIX over just four sessions. So far today the initial reaction to Yellen’s remarks has been positive with the SPX +14pts, or 0.62%, however it still remains range bound.  The key resistance range above is 2,194 – 2,200. The VIX Index has recently been in its own range mostly between 11.40 and 13.90, as seen in the below daily period chart. Early in today’s session the VIX was testing the top of this range, above which would likely signal a risk-off sentiment in the broader markets, but the index has already pulled back towards the midpoint of the range at 12.70. Investors anticipating a pullback in the broader equity markets may want to focus on the 14 level in the VIX. A sustainable move above that resistance could be the signal to pare risk. Until then markets may continue to drift higher. 
 

Nasdaq's Market Intelligence Desk (MID) Team includes:  

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.
Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT has 16 years of trading desk experience. Prior to joining Nasdaq Brian executed equity orders and provided trading ideas to institutional clients. He also contributed technical analysis to a fundamental research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Airline companies among others understand the trading in their stock. Brian is a Chartered Market Technician.

This article is from Nasdaq and is being posted with Nasdaq’s permission. The views expressed in this article are solely those of the author and/or Nasdaq and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


10648




1 2 3 4 5 2 1108

Disclosures

We appreciate your feedback. If you have any questions or comments about IB Traders' Insight please contact ibti@ibkr.com.

The material (including articles and commentary) provided on IB Traders' Insight is offered for informational purposes only. The posted material is NOT a recommendation by Interactive Brokers (IB) that you or your clients should contract for the services of or invest with any of the independent advisors or hedge funds or others who may post on IB Traders' Insight or invest with any advisors or hedge funds. The advisors, hedge funds and other analysts who may post on IB Traders' Insight are independent of IB and IB does not make any representations or warranties concerning the past or future performance of these advisors, hedge funds and others or the accuracy of the information they provide. Interactive Brokers does not conduct a "suitability review" to make sure the trading of any advisor or hedge fund or other party is suitable for you.

Securities or other financial instruments mentioned in the material posted are not suitable for all investors. The material posted does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before making any investment or trade, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Past performance is no guarantee of future results.

Any information provided by third parties has been obtained from sources believed to be reliable and accurate; however, IB does not warrant its accuracy and assumes no responsibility for any errors or omissions.

Any information posted by employees of IB or an affiliated company is based upon information that is believed to be reliable. However, neither IB nor its affiliates warrant its completeness, accuracy or adequacy. IB does not make any representations or warranties concerning the past or future performance of any financial instrument. By posting material on IB Traders' Insight, IB is not representing that any particular financial instrument or trading strategy is appropriate for you.