Thursday, May 3, 2018

Gregory Mannarino “5/3/18 Post Market Wrap Up: Weaponized Market: DOW Swings 400 Points”

Gregory Mannarino “5/3/18 Post Market Wrap Up: 
Weaponized Market: DOW Swings 400 Points”
Related:
"Has Stagflation Arrived in the US?"
by Phoenix Capital

"The Fed is fast approaching its worst nightmare. Stag-flation. Stagflation is when inflation is rising at the same time that the economy is weakening, if not contracting. The Fed has always argued that low levels of inflation (2%) were acceptable provided the economy was also growing. Indeed, this is the very gimmick the Fed has utilized to mask the fact that quality of life has been falling in the US since the early ‘70s (by understating inflation, the Fed has overstated economic/ income growth).

All of the negative effects of inflation (wealth inequality, higher costs of living, increased debt required to maintain living standards) are “masked” by the Fed’s argument, “look how well the economy is doing! If we weren’t running things everything would be much worse. A little inflation isn’t a bad thing after all!”

Not with stagflation. With stagflation you’ve got the economy shrinking, meaning people are losing their jobs and incomes are falling at the SAME time that the cost of living is exploding higher and thing are getting more expensive.

Cue yesterday’s Fed FOMC statement in which the Fed REMOVED its claim that the “economy outlook has strengthened.” So the Fed has noticed that the economy is slowing and no longer has a great outlook. And this is happening at a time when the Fed’s official inflation measure,the CPI, is clocking in at 2.36% year over year (which incidentally the Fed is trying to ignore)."
"Hedge Funds Liquidating: Goldman HF VIP Basket Gets Crushed"
by Tyler Durden

"Two months ago, when we last looked at the 50 most popular long hedge fund positions as compiled by Goldman Sachs, which the bank calls its Hedge Fund VIP list, and which we have frequently dubbed the "Hedge fund Hotel California" for various obvious reasons, we offered the following observations: "What is notable about this basket, is that it tends to outperform the S&P in most periods, and did so by 170 bp YTD (3.5% vs. 1.9%) and in 64% of quarters since 2001. But this outperformance comes at a cost: if and when the selling begins, as it did in the spring of 2016 when Valeant imploded and blew up the "pharma trade."

Well, it appears that the latest cycle of outperformance is now over, because as the following sloping head-and-shoulders chart in the GS HF VIP index shows, the bottom is about to fall out for the 50 most popular hedge fund names, as suddenly instead of frontrunning purchases, hedge funds will scramble to liquidate first before everyone else. And not to make a too fine point of it, Bloomberg also adds that "today feels like a liquidation day from popular hedge fund holdings" - because the HF VIP index is tumbling by 1.8%, its biggest drop in months, and set for the lowest close since December, wiping out all 2018 gains. Needless to say, its correlation with the S&P is almost 100%.

This means that the market's most important leadership group is now on the verge of collapse, a group which includes in the Top 5 positions names like Amazon, Facebook, Time Warner, Alphabet and Microsoft. The full list of what to short is at the link below.

Finally for those who believe the market is indeed facing a major hedge fund liquidation event, a convenient pair trade would be to go short the entire VIP basket, while at the same time buying the 50 most shorted names as funds, facing an avalanche of collateral-driven margin calls, are stopped out on their favorite shorts. The 50 most shorted names are shown at the link below.”

"Margin Trading: The Dreaded Margin Call"
https://www.investopedia.com/university/margin/margin2.asp

"Margin Calls Explained"
http://coyoteprime-runningcauseicantfly.blogspot.com/
"The issue of liquidity is not a small one. Investors mistakenly assume there is ALWAYS a buyer at the price at which they wish to sell. This is wrong. While the answer is “yes,” as there is always a buyer for every seller, the question is always “at what price?” 

At some point, that reversion process will take hold. It is at that point where the storms all collide into a massive wave of panic driving selling. It will not be a slow and methodical process, but rather a stampede with little regard to price, valuation or fundamental measures. It will be the equivalent of striking a match, lighting a stick of dynamite and throwing it into a tanker full of gasoline.

Importantly, as prices decline it will trigger margin calls which will induce more indiscriminate selling. The forced redemption cycle will cause catastrophic spreads between the current bid and ask pricing for ETF’s, junk bonds, and option pricing. As investors are forced to dump positions to meet margin calls, the lack of buyers will form a vacuum causing rapid price declines which leave investors helpless on the sidelines watching years of capital appreciation vanish in moments.

Don’t believe me? It happened in 2008 as the “Lehman Moment” left investors helpless watching the crash. Over a 3-week span, investors lost 29% of their capital and 44% over the entire 3-month period. This is what happens during a margin liquidation event. It is fast, furious and without remorse."
Anyone care for "an avalanche of collateral-driven margin calls?"
It's coming, whether we want it or not... with consequences unimaginably bad...
Do not delude yourself that this won't affect you directly! It will...

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