Leverage - It works in both directions

As you likely heard, hedge fund Archegos could not maintain margin requirements.  The result is their creditors, primarily Credit Suisse and Nomura are expected to lose billions.  The market is still in an epic bull run and stocks are near an all-time high, so what could have possibly forced the banks to do a margin call?   

I suspect the pending expiration of the SLR rule forced banks to return to expected margin requirements for their loans.  This would have forced the banks to request Archegos to become stricter with margin requirements.    The question I have for you is, how many highly leveraged positions if unwound would cut stocks by 50% like Archegos did?  Are there any other positions out there that will have new margin requirements by its lenders after this event or with the SLR rule expiring on the 31st?

This is NOT a moment like 2008 failure of Lehman Brothers, but sometimes history repeats in a similar manner.   To learn more about The Macro market considerations, click here.

I view this event as exposed to what I have been concerned over since January 25th.  Even if we have no market downside, I have a hard time understanding the catalyst for a material upside in this environment.  There is likely now more than ever upside in Bitcoin as younger people will exit market games and go to the 'safe bet'.  This of course won't be safe, but it may provide a counter play to the markets for a bit before that also hits a maximum.  Buying Bitcoin right now is a calculated risk that may pay off very well.

To hear more about why Archegos failure is potentially a systemic risk, watch this video, he does a great job to explain.

The MACRO market considerations

 I want to understand the macro environment in hopes that any short term investments eventually align with the macro view.  For example, if you purchased Apple at the iPhone announcement, although that day didn't yield epic Apple earnings, the macro view changed and eventually stocks align to this new reality.

So lets take a look at the MACRO environment.

1) When COVID hits, USA alone shed 20 million jobs, and a year later its about 19 million unemployed.  It is going to take 5 to 10 years to get back to employment levels in January 2020.  If you have a good analysis, not flippant opinion, to the contrary PLEASE post in the comments!

2) Due to the reality of #1, the entire US economy is trading off of free money, easy loans, near zero loans, and a falling US dollar.  Part of the free money was the suspension of the SLR rule that is set to expire in March 31st.     This is what rallied the market over the past year.  The question is if these factors change, would you expect the same market acceleration over the past year?

3) Interest rates have been seeing pressure, and odd things have been happening like the REPO market yielding negative interest rates.  

4) As posted in January 24th, the amount of leverage in the stock market is staggering, this is great to advance prices but if things turn it will caused sustained pressure on the downside. An example of a hedge fund failure due to leverage was announced.  This is potentially one of many leveraged accounts.

5) The leading FANG stocks are all off their highs, and have been in a flat-ish trading range for months.  the NASDAQ is materially off it's highs.  I don't think an overall market boom can happen with tech going lower.

6) Insiders are selling is at high levels. On aggregate level the current selling level is what is a normal peak in selling, and has been relatively sustained in 2021. 

There has been large selling by Bill Gates Foundation in Q4 2020,  selling 100% of their UBER stock, 100% of BXP Boston Properties, 100% of Ali Baba, 50% Goog and 50% of Googl, 50% of Amazon, 50% of AAPL, 50% of Liberty LILAC, 10.6% of Berkshire.

Warren Buffet has sold 117 Billion of Apple stock, 3 billion of GM, 58% reduction in Wells Fargo,  sold off last of his JP Morgan,   

Buffet was a buyer into medical ,insurance, and some consumer companies in Q4 2020. buying into Merck, AbbVie,  Kroger,  Marsh & McLennan,  Chevron,  and Verizon.

In my opinion the first 5 items is pause for concern, what the market position in end of January to today, there is no new news expected.  Everyone knew with Biden elected free money is coming.  We are waiting for new taxes and other drags on businesses that have shed 19 million workers.  Its simply on a maco level looking pessimistic.    Until I see NASDAQ hitting new highs, I am a skeptic of going long this market.

Bank Statutory Liquidity Ratio (SLR)

 This video does an excellent job at explaining the change in the financial system that will occur on March 31st, due to the Federal Reserve has stated they cannot extend the SLR exception put into place 1 year ago.

The important aspect is banks that are a GSIP (Globally Systemically Important Banks) must become compliant to normal GAP accounting.  The SLR rule was suspended for a reason, to enable banks to have more ability to loan money in the downturn.

However, now that the SLR rule is being put back, people are questioning how to do do accounting related to this rule.  Depending what is determined to be the right way to enforce the SLR rule, it could have substantial consequences for bank liquidity.

The theory is the banks will take cash deposits and buy treasuries to improve their balance sheet.  Assuming this is true, it will drive bond rates down, which by the way may help markets appreciate.

Another view is banks refuse to buy treasuries, causing rates to spike hard.

Skip to 36 minutes in to see the potential impacts.

Market Update, a bear is stirring

 Just yesterday I called out from previous posts, SPX 3892, and today into the close the S&P raced down below that, closing at 3890.

I added  a new dashed green line, 3722, a close below that CONFIRMS we are in a new pattern, lower lows rather than higher lows.  Again doesn't mean a market collapse, but makes a very strong case for a bear downturn.  I think the market is a buy at 3242.

Here is a long view that I think will happen.  There is two things to change this view, one is the FED announces a new program, or two economic data surprises materially to the upside.  Target is net neutral or a little bit of a loss for 2021.  It is possible we see a huge down, but with free money giving to people, I have a hard time believing we will tank that bad.  The price action of interest rates will be key if the S&P 500 hits 3242 range.

Market Update

 So Bitcoin failed on the same day as my last post.  I am not a big buyer right now of Bitcoin.

This past Friday was a huge event, the Federal Reserve bank announced the suspended bank SLR rule will go back into effect March 31st.   This is important, as this affects banks reserve requirements.  So for the last year banks could lend more money and have deposits with higher risk (less reserves).  For the last years banks could make more money by extending credit with less cost.  This party is about to end.

The market rallied to a new high leading up to the SLR announcement, now that it has been made, and the 2 trillion budget passed, there is not any free money news.  In effect the market has priced in everything we now have, and the SLR rule being re-instated maybe viewed as 'new news'.

First a large view of S&P 500.  The dark green rising line represents an uptrend since March 2020.  If the market breaks through it, it is an indicator that we are changing a pattern.  This happened in February 2021, but since the market recovered I adjusted the line to include that downturn in the 'uptrend' line.

So now lets pull into March 4th to today.  We can see that uptrend line touching on March 4th, and the market is re-approaching the 3892 level, the red dashed line.  If we hit that line on a closing basis its looking more bearish.  When is it time to panic? a close below 3693, the second red line.  We will have closed below the last low on March 4th and the low on January 29th.  It would indicate we are likely seeing a failing market.

 Interest rates are falling, and until this past Friday that indicated a market rally.  Now with interest rates falling, market is falling, that is also a change.  I expect if we have a market correction we can look back and know that rates fell as big money moved into bonds ahead of the public, to preserve their capital.  Its important, on a market failure, you do not try to catch falling knives, it is no secret the market is over-valued and over-leveraged.   My target for a downside is SPX 3000, which is a little over 20% lower from here.  We could go lower, but I suspect the FED would come to the rescue.

Good luck!

Bitcoin looking good

 I think Bitcoin is looking good, there is a range that the price action has created since Feb 28th.

A break out up is bullish, down bearish.  We are getting close to decision time.

Chart below shows the low on Feb 28th to today.

Don't invest in the old companies

I have lived my entire life in the 'wake' of the baby boomers. Unfortunately for me, the entire economy will flip in favor of the boomers to the millinials and younger, skipping over Generation X. Companies, like Exxon (old industry), Oracle (old tech), are not a good bet on the future. For example, we have seen peak demand for gas in 2019 in our lifetime. Electric cars or hybrids are here to stay. The costs make it cheaper than a normal gas car. In 2020 Exxon wrote down 20 billion dollars, and slashing spending to lowest level in 15 years.  In November 2020, analysts say that Exxon requires to increase debt by 8 billion to pay dividends in 2021.

The combination of looking at future growth, combined with current expectations required to be a favorable stock (dividends) makes Exxon a low probability of successful valuations.

The last year has been one of buying on emotion, not value, and Exxon is one of these stocks.

But lets assume I am wrong, as you always should do.  What else can we do to confirm my theory?

One way is to use price charts, look for a key level that will indicate the stock is declining and is likely to have additional declines.

Below are two charts, first is the MACRO view, why certain price points have meeting from a historic view.  The second chart is the close up view of the near-term price action price points to watch.

Above shows clearly there is good support for Exxon stock at about $31 dollars, if the stock falls to this level it is more likely to rebound than fail.  However if it breaks down to $29 for more than 1 day, I would expect the stock to move to 10-15 over time rather than 45.   Meaning it is more likely to  lose 50% of value than gain 50% in value.

Conversely the price Exxon is at right now is at the level of being bullish.  If it can break above this level for a few days and hold it, I'd expect it to rise to the purple line.  The purple line would be the next test for being bullish to make a run to new highs.

Lastly, the purple lines represent a 'channel', and this is the price area it is expected to trade in. 

Bottom line, a break DOWN below the first green dashed line should be a signal to sell ASAP, a break below the purple line is also of great concern as it shows accelerating price decline than history has shown.

A break above the upper purple line is quite bullish, and a new high is potentially ahead.

So there you have it, two ways to look at Exxon stock, future prospects, less gas purchases, debt spending to pay dividends.  Exxon used to give dividends out due to great profits over its 135 years, now it gives dividends by borrowing money.  Its not a net cash company, something has changed, my guess is gas is becoming less profitable.

The other way is to ignore the big picture and look at price, and know what is good and bad for Exxon.  This logic can be applied to any long term buy and hold, especially for older companies.

In general, look forward for growth sectors to invest in, not sectors that are shrinking.  At least the MACRO view will help increase likelihood of success.

Good luck!

One final look at Exxon, in the past week.

Exxon did BREAK above the red line for 20 days, Monday we will see if it can bounce off the red line.  If it does that is bullish, next move to purple line.  If breaks down, its a failure and I expect further declines.  Notice the two moving averages (red/green lines) the red line is above the green, that indicates more down to come.

How to Maximize Investing Profits

There are many investment vehicles such as stocks, bonds, real estate, and scarce resources.

Scare resources are gold, silver, or now cryptos (Bitcoin).

The short answer on how to maximize in investing.

Step 1  - The bottom (buy low)

Buy Bitcoin (prior to 2020 buy Gold miners) at the bottom of the stock market 

On the snap back (like bitcoin going from 5K to 10K or GDX going from 16 to 45) and sell. (100-300%)

Step 2  - Diversify into stocks

Buy stocks with the quick snap profits.

Step 3  - When rates rise buy bonds

Ride the stocks to a toppish area, and start to take profits and put it into bonds once you see interest rates rising.  Rising rates will be the catalyst for the feedback that the risk is getting too high.

Step 4  - Market decline

On a market decline, enjoy your bond holdings.

With an extreme bond profit (20-40%) sell bonds and go step 1.

I know life isn't as simple as above, but each of the assets have a purpose, when and what to invest in.  

Due to this new view, I am going to go to almost no gold stocks.  It seems quite insane as I always had some.  But with Bitcoin as the new gold, I am having a harder time than ever on gold.  I recognize that this may be the exact bottom in gold and this post will be an epic joke that follows me.  

I believe we are in step 3, and I will change investments accordingly.

As for bitcoin, there is a really good discussion on why in the downturn bitcoin will likely get hurt.

Click this link to listen on the case for a Bitcoin fall.

Below is the full video, a great discussion.

The Party Pooper

There is always a Party Pooper, and for the market, its interest rates.  The market believes with free money from Democrats we will have inflation.  I agree free money will inflate some prices, and depress others, as any government intervention does.  

The market 'shows' this expectation by raising interest rates required for someone to 'risk' buying US federal bonds.  If the interest rates rising ever gets away from the FED, that would spell draconian reactions by the US government and the FED.  The US society is built on debt, and rolling that debt forward rather than paying it down.  It can't tolerate interest rates that rise too much.

But what is too much?  If you find a great whitepaper that can calculate the exact 'too much' please share in the comments!  For now, best I can do is look at what is relative to our near past.  The chart below is US bond values, and the lower the value the higher the interest rates.  Bond values have an inverse relationship to rising interest rates.  To learn more, watch this.

I drew a red line that caused markets to fall a couple of weeks ago creating a panic.  Overnight rates spiked below that line and markets are poised to open lower.  Yesterday the Nasdaq failed to come close to new highs, the S&P 500 failed to close at a new high.  Bitcoin failed to make new highs.  The VIX spiked (volatility).  So the market is NOT in a confirmed bull mode.

Interest rates ARE the story! Without rates complying, the market will not advance.  One way to make them comply is to simply go Zimbabwe and the Fed announce they will buy infinite bonds to keep rates low.  If you don't know why that's bad, read about Zimbabwe currency.  So I highly doubt the fed will do this unless there is a market crisis beyond 2008.

Today with this confirmed market weakness, and seeing how badly the market reacts to interest rates, I will not flip to bull mode until I see the Nasdaq, the S&P 500, bitcoin all make new highs and either rates falling OR the dollar dropping.  That was what we had over the last year with this bull, easy money.

To the charts! Interest rates overnight broke the red line I drew going back to July 2019.  The second chart is a close up of last nights action, talk about a big money setup!

Closer look

Recent interest rate and NASDAQ action  since NASDAQ high.

Interesting Chart Today

I have been leaning more heavily on charting recently, as I believe we maybe at a top.  It is also possible this is just a pullback with a market ready to explode higher.

To try to navigate the emotions "buy it all" and "sell it all", I am trying to use charting to help.

Its partially helpful.

But today I want to share with you a chart that has emerged, it is quite insane on how that charting demonstrated the market hitting chart resistance.

I bring you two charts of the S&P 500, the first is back to March of last year to today.

Notice the red line in the upper right hand corner trending down.  I drew that line a week or so ago using price action to show the resistance since Feb 12th.  The second chart, shows TODAYS price action and I did NOT touch the red line, it showed the actual resistance the chart showed.

In the days ahead if we can break through on a CLOSING basis above the red line is bullish.  And if we can go above Feb 12th high, we will be in a full all out bull market.

For now, appreciate todays price action, and how the market hit a 'glass ceiling' giving way on the close.  The magic SPX number I have stated to friends is 3897, and yes, we closed below it.

I put my shorts back on, and I am prepared for a rejection, but quick to end my shorts if we close above that red line. My bear market will be confirmed somewhat with a close below SPX 3721, first level of support is 3693.  I think there is a good chance we will finally get a counter rally there.  This may then fail, with a target of 3250.  If we hit that, I will need to reassess the bottom target.

The last 5 days price action, quite amazing today!

The Bull is back?

Stock Market

Friday was a POWERFUL reversal, it looks like it could be a short term low with the bull returning.

However, as per my new focus on charting, what the chart say?

The downtrend hasn't been broken yet, and the bull hasn't yet been fully killed either.
For the BEAR case, what I can say is, the uptrend from  March 23, 2020 til March 2nd 2021 has been breached.  This doesn't mean a bear market is here, but it does mean caution.  Avoid leverage in either direction.

In my opinion a market close above 3864 is bullish, and a close above 3892 even more so. A TRUE bull is on if we make new highs, set Feb 12th at ~3950 only  3 weeks ago.

Each step I get more bullish and a new high, there is zero disputing the bear will be dead.

But how do we know the bear has won? a Break BELOW 3690 on a market close is pretty bad, it will solidify a new lower low.  If we do, the target I have for a potential near term bottom is about 3250.

Bitcoin

I have to admit, bitcoin is looking quite good, excellent really.  It has NOT broken a major uptrend.  It isn't in full bull mode either.  A full bull is new highs, and bullish is staying above 53180 for a day.  I say for a day since Bitcoin has no close.  A bear for bitcoin is any sustained (not for a 15 minutes) breaking below 39000.  On the downside levels are 42K, 38K, 30K(ish) then 22j.

Overall there is really nothing to not love about bitcoin.

There are two risks I see for bitcoin, one an overall stock market decline.  We haven't yet seen bitcoin be able to buck a market decline.  And until we can witness this, my assumption is if the market declines so will bitcoin.

The second one is some sort of Federal Reserve Announcement issuing their own crypto currency.  In the scheme of life this isn't a big deal, as, US dollars is already electronic.  Shifting to a crypto dollar is spectacular for financial institutions to reduce costs.  But it isn't a substitution for a deflationary collectable. (bitcoin).

Bottom line is a hard day below 39k, I'd be pretty worried.  Until then , bitcoin will gain and lose  up to 25% is normal.

I don't want to minimize the risks here, but so far, I can't say it is a must sell.

Gold

Just stay away from Gold, it may have bottomed, but if the bull is back in the market, gold will get absolutely killed.  Care is warranted.  With that said, gold is right now at a major support level.  If this fails we are talking losing 15% before the next level.  If the market takes off I expect energy to go nuts, and that's bad for Gold profits.  Frankly, I am starting to really hate gold.

Bonds

I expect rates may continue to rise.  Owning bonds is a near term loser.....until its not.  At some point interest rates will hit something terrifying and the government will need to choose stocks or bonds to rescue but not both.  That could be a week or a year away. I own some bonds to learn with the pain.

Buying Bonds

 Although I have traded since 1999, and owned stocks for over 30 years, today I bought in bulk Federal Bonds, specifically 7 year and longer dated 20 year bonds.

Why?  If the market falls, I expect people flooding to bonds for protection.  Yields should plummet to potentially negative territory.   I will sell these bonds if this happens.

Federal bonds yield 10x leverage, so you can buy 400K federal bonds with as little as 40k!The result will be if I am right, there is a multiplier effect that will happen.

I sold off all my extra crypto, reduced my gold miner positions, leveraged up my short positions.
I may sell the rest of my positions and buy more bonds and go into cash.

After hours the S&P 500 broke to the DOWNSIDE.  Although it isn't official a bear until we break a bit lower.

A break below 3787 is really bad for the S&P 500.  A close below that I believe we have begun a multi month, if not multi-year bear.  All assets will go down EXCEPT bonds, which should appreciate as people run to bonds.

Good luck!

Some chart analysis 

Boom or Bust?

 I watch and read quite a few financial sources, and at hand is the argument is boom or bust.  Almost universally it is agreed this ends with a bust, but is that very soon or a year out?

Most of the boom argument is about the free money about to be unleashed onto Americans by the democrats.  The argument goes last years free money produced the market boom in 2020, so its time to repeat it in 2021.  Its a good argument. 

The Federal Reserve wants to keep this party going too, with their recent change to no longer include new money in savings accounts as money expansion.  See Federal Reserve Changing Reporting on M2 Money .  And last night Bitcoin is trying very hard to enter bull territory.

The Green line represents the long term trend line for bitcoin, and it just crossed above it.  For me to believe this rally I need to see bitcoin 53,200, and of course once it crosses the previous high we are back into full bull. I even added A LITTLE of bitcoin on Monday on the open.

So what's the problem ? (Scroll down)

The problem I have is free money for everyone in the next 3-6 months is everyone's play.   But being a skeptic isn't evidence or a reason.    There is only two 'masters' of the markets that can take it down, value of USD and bond yields.    Too much free money could bring the USD into new lows and the US could lose control of the dollar.  Bond rates could rise until triggering a market run to force the rates down in a panic run.    Gamestop had a short against it of 135%.  US treasuries have a short against it of 200%.   What would happen if the shorts got scared?  We got a taste of a small scare among the shorts last week with rates rising in the 7 year, and the market corrected.  Mortgage rates are very low, but could that change also?  The rates are stabilizing, but is that it for the year ahead?

With a full bond short panic we would see yields on the secondary market go negative.  That right, people paying 1, 3, and maybe even 5 year a negative return to own a US treasury.  

So other than USD breaking down, or bond market short squeeze, I agree the markets are set to double from here with all the free money, and Bitcoin to go to 200K with ease.

Watch TLT on your favorite chart.  Below is a 7-10 year treasury graph.  Fun fact, over 50% of US treasuries in the 7-10 year changed hands last week.  That means there was a buyer as others sold.  Is those buyers stupid or expecting a return?  Look at the two LARGE volume candles, one red, one green, all being bought.

Since we are in a market the FED tries to control, its hard to say what the market does AND what the FED does.  To learn more about this bond theory, listen to 'the bond king'.

Another analyst who doesn't see the bond squeeze ahead, runs with the free money run, but see's a housing bust if it does.

Federal Reserve Changing reporting on M2 Money

The money supply is actively watched by economists to try to understand the impact of 'too much money' being injected into the system. One of these money supply metrics is called M2, and goes back to 1980 on the Federal Reserve Bank. The change is to no longer count 'savings accounts' as part of the money supply. History will tell us if this wasa mistake and ends up under reporting money supply. The timing is interesting, as the government is about to give large amounts of money to the public, deposited to people's savings accounts. Below is an image I took of the Fed site today, 3/2/2021, you can see it here: The new M2 without season adjustment is here, and seasonally here.