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April 26,  2017

 
 



 

       Sector Allocation Changes Sold Oil Trust                                      Models Rolling Over

                                  Avoid Bond Funds                                                       Financials  Have To Hold

        Gold Imports Into China via Hong Kong Double



Gold bullion imports into China via main conduit Hong Kong more than doubled month-on-month in March, data showed on Tuesday as reported by Reuters.


China's net-gold imports via Hong Kong more than doubled in March to 111.6 tonnes. Chart not updated as official data not publicly available yet. Source: Goldchartsrus.com 

Net-gold imports by the world's top gold consumer through the port of Hong Kong rose to 111.647 tonnes in March from 47.931 tonnes in February, according to data emailed to Reuters by the Hong Kong Census and Statistics Department.







China's net-gold imports rose to its best since May 2016. Total gold imports rose to 116.68 tonnes in March from 49.026 tonnes in February.

Both total and net imports in March rose for a second straight month.

Gold has risen over 10 percent so far this year, driven by geopolitical worries.



Goldchartsrus.com 

Gold bullion is often seen as an alternative investment during times of political and financial uncertainty.

Gold prices eased on Tuesday as investor sentiment remained skewed towards riskier assets in the wake of the French election results last weekend, though concerns over tensions on the Korean peninsula limited the safe-haven metal's losses.              



Canada's Housing Bubble Explodes As Its Biggest Mortgage Lender Crashes Most In History



Call it Canada's "New Century" moment.

We first introduced readers to the company we said was the "tip of the iceberg in Canada's magnificent housing bubble" nearly two years ago, in July 2015 when we exposed a major problem that we predicted would haunt Home Capital Group, Canada's largest non-bank mortgage lender: liar loans in particular, and a generally overzealous lending business model with little regard for fundamentals. In the interim period, many other voices - most prominently noted short-seller Marc Cohodes - would constantly remind traders and investors about the threat posed by HCG.

Today, all those warnings came true, when the stock of Home Capital Group cratered by over 60%, its biggest drop on record, after the company disclosed that it struck an emergency liquidity arrangement for a C$2 billion ($1.5 billion) credit line to counter evaporating deposits at terms that will leave the alternative mortgage lender unable to meet financial targets, and worse, may leave it insolvent in very short notice.

As part of this inevitable outcome, one which presages the company's eventual disintegration and likely liquidation, Bloomberg reports that the non-binding rescue loan with an unnamed counterparty will be secured by a portfolio of mortgage loans originated by Home Trust, the Toronto-based firm said in a statement Wednesday. Home Capital shares dropped by 61% in Toronto to the lowest since 2003, dragging down other home lenders. Equitable Group Inc. fell 17 percent, Street Capital Group Inc. fell 13 percent, while First National Financial Corp. declined 7.6 percent. In short, the Canadian mortgage bubble has finally burst.


Some more details on HCG's emergency source of funding: Home Capital will pay 10% interest on outstanding balances and a non-refundable commitment fee of C$100 million, while standby fee on undrawn funds is 2.5%. The initial draw must be C$1 billion. The loan has an effective - and very much distressed - interest rate of 22.5% on the first C$1 billion, declining to 15% if fully utilized, according to a note from Jaeme Gloyn, an analyst at National Bank of Canada.

Home Capital said the credit line is intended to “mitigate” a sharp drop in Home Trust’s high-interest savings account balances, which sank by $591 million from March 28 to April 24, at which point the total balance was $1.4 billion. Home Capital warned on Wednesday that further outflows are anticipated.

Translated: what until last night was a depositor bank jog just became a sprint.

The loan will provide Home Capital with more than C$3.5 billion in total funding, more than twice the C$1.5 billion in liquid assets it held as at April 24. It also has C$200 million in securities available for sale, and high interest savings account balances fell about 25% to C$1.4 billion over the past month. Home Capital relies on deposits to fund their mortgage loans; following today's announcement the company's liquidity is certain to get even worse as all non-distressed sources of cash are pulled.


Cited by Bloomberg, Andrew Torres, founding partner and chief investment officer at Toronto-based Lawrence Park Asset Management said that "The company is facing a bit of a liquidity crunch and they felt they needed to resolve it quickly." He said the "steep" commitment fee and the interest rate on the loan "are surprising numbers for a company that was ostensibly investment-grade."

Well, it was only investment grade because as usual the rating agencies never did their homework. For a real hint into the company's rating, look at the 22.5% interest rate, suggesting the company's days outside of bankruptcy are numbered.

Home Capital Group's sudden collapse was actually visible from a distance. While in the summer of 2015, the termination of HCG was still debate, in recent months the company’s woes stemmed from allegations by the Ontario Securities Commission that Home Capital misled investors and broke securities laws.

In other words engaged in those "liar loans" which we first warned about back in the summer of 2015.

Meanwhile, founder Gerald Soloway will step down from the board when a replacement is named and Robert Blowes will assume the role of interim chief financial officer, the company said Monday.

"The company anticipates that further declines will occur, and that the credit line would also mitigate the impact of those," Home Capital said.

Amusingly, it was just two months ago when the company set new performance goals after reporting quarterly results, targeting revenue growth of 5% or greater, diluted earnings-per-share of 7% or greater and a return on equity of 15 percent or more over the long term, according to Bloomberg. It should add one more "performance goal" - stay out of bankruptcy for at least 3 months.

"They did what appears to be to us a very expensive deal," said David Baskin, president and founder of Baskin Wealth Management in Toronto, a former investor in Home Capital stock. "Basically they blew up the income statement in order to save the balance sheet, which I guess if you’re facing an existential crisis is what you have to do."

The Office of the Superintendent of Financial Institutions (OSFI) told Canada's BNN it does not comment on specific institutions it supervises, but that it maintains ongoing relationships with those institutions and is monitoring the Home Capital situation "closely."



Chinese Stocks Are Plunging




SHARES

Despite a liquidity injection and the rest of the world in 'risk-on' mode over the French election results, Chinese markets are tumbling...

On Friday, we asked "Is China Trying To (Slowly) Burst Another Stock Market Bubble?" as Chinese monetray conditions were tightening dramatically...






And, as Bloomberg reports, it seems the catalyst is further crackdowns on shadow-banking.

China’s banking regulator, which said late Friday it will focus on guarding against financial risks, has ordered local units to assess cross-guaranteed loans, according to a Caixin report.

Having gone 86 trading days without a loss of more than 1% on a closing basis, the longest stretch since the market’s infancy in 1992...





It seems they might be... (or The National Team is going to have to work very hard today)...


 



As Shanghai Composite breaks below ist 200-day moving-average withe the biggest intraday drop since Dec 12th...


 



CHINEXT (China's Nasdaq) is also getting hammered - testing its lowest levels since February 2015....



Hedge Fund CIO Asks If We Have Reached The "Capitulation" Point


Excerpted from the latest weekly note from Eric Peters, CIO of One River Asset Management



Capitulation 

 

“He was extremely intelligent, high-profile, and operated with data and models that people didn’t understand back then,” said the historian. “But nine days before the 1929 Crash, Irving Fisher abandoned his long-held bull market skepticism and said that stock prices had reached a permanently high plateau.” Irving went all in, leveraged up, and was eventually bankrupted. 

 

“On the first leg down, he claimed the market was simply shaking out the lunatic fringe.” It kept falling. “Thoroughly discredited, he wrote about debt-deflation. No one listened.” 

 

“Are we at that point yet?” asked the same historian. “Are we at the point in the cycle where people conclude that it’s been going on for so long that it can’t possibly ever end?” 

 

The Shiller P/E ratio was 32 at the 1929 peak. It was 44 in 1999. Those were the only other times in history when it’s been higher than today’s level of 29 (it’s now 73% above the 135yr mean of 16.8). 

“It’s hard to argue that we’re there yet. Valuations are high, but investors still seem to be concerned. They remain obsessed about the unsustainability and fragility of this bull market.” 

 

“I’m going to make an educated guess,” said the historian, lifting his head from a book and walking to his looking glass. “This cycle ends not because things go wrong, but rather, because they go right.” 

 

Every great bull market ends in fabulous fashion. And this one started in 1981 - with a Shiller P/E of 6.7 - and after decades of declining bond yields it’s been turbo-charged by $14trln in central bank purchases.

 

“Financial asset prices finally crack once economies heat up, skeptical investors fall in love, capitulate, and we get an interest rate shock.” 

And some bonus thoughts on today's French election outcome though the eyes of traders vs investors:


“Traders trade prices, investors trade outcomes,” said the trader. “You may love the Patriots, but there’s a spread where you can no longer be in that trade.” 

 

Lose sight of the line, and you lose your grasp of risk-reward. 

 


 

 The Last Time This Happened, The Market Crashed



S

Authored by Simon Black via SovereignMan.com,

A few days ago Charles Schwab, the investment brokerage firm, announced that the number of new brokerage accounts soared 44% during the first quarter of 2017.

More specifically, Schwab stated that individual investors are opening up stock trading accounts at the fastest pace the company has seen in 17 years.

17 years.

Anyone remember what happened 17 years ago?


Oh right. The Dot-com bubble burst.

After years of unbelievable gains in the 1990s, the NASDAQ Composite index peaked at 5,132.52 on March 10, 2000.

Simultaneously, during the first quarter of 2000, investors were rushing to open new brokerage accounts invest their savings in the stock market.

The NASDAQ Composite subsequently fell nearly 80% over the next 2 ½ years, wiping out trillions of dollars of wealth from retail investors.

The last phase of any bubble is almost invariably the euphoric shopping spree of an irrational public that buys stocks, real estate, etc. at record highs, foolishly believing that prices will keep rising indefinitely.

That’s what happened in 2000.

And that’s what seems to be happening today.

Investors are once again clamoring to buy expensive, popular stocks at price levels never before seen in the history of the stock market.

Company valuations are sky-high.

At 26.44, the S&P 500’s Price/Earnings ratio is the highest EVER, except for two occasions: the 2008 crash, and the 2000 crash.

At 28.93, the “Shiller P/E ratio”, which looks at company valuations over a longer-term, 10-year period and adjusts for inflation, is at the highest level EVER, except for two occasions: the 2000 crash, and the 1929 crash.

Price to sales ratios are near the highest levels in at least 50 years.

Price to book ratios haven’t been at this level since the 2008 crash.

And the stock market cap to GDP ratio is the highest since the 2000 crash.

(If you don’t understand those terms, I would highly encourage you to read this book. This small investment in your education might be the best you’ll ever make.)

Billionaire investor Paul Tudor Jones described these expensive stock market valuations as “terrifying” earlier this month at a closed-door asset management conference hosted by Goldman Sachs.

Yet for some reason individual retail investors still believe that stock prices will continue to rise.

According to Yale University’s Stock Market Confidence Index, for example, over 90% of individual investors believe that the stock market will rise in the next 12 months.

This sentiment isn’t actually based on any data; it’s simply how people -feel-.

These are classic bubble conditions: record-high prices, unsustainable valuations, baseless euphoria, and a surge in activity from retail investors.

In fairness, it’s possible that corporate profits surge by unimaginable rates; this would bring stock valuations back to reality.

But that’s unlikely.

Corporate profits are more or less tethered to the overall economy. If GDP growth is flat, corporate profits will be flat.

Real GDP growth in the US basically went flat in 2016 at just 1.6%.

And the Federal Reserve Bank of Atlanta estimates that the US economy grew at a pitiful 0.5% annualized rate in the first quarter of 2017.

Consumer spending, the mainstay of the US economy, slumped in the first three months of this year.

Plus, interest rates are starting to rise, which increases borrowing costs for both businesses and individuals.

Given such anemic conditions it seems a risky to bet everything on a sudden shock-and-awe surge in corporate profits.

So we’re right back where we started– an overvalued market exhibiting classic signs of a bubble.

I’m not suggesting that some major crash is imminent.

It’s entirely possible that this bubble can get even bigger; the stock market might rise another 10%, 20%, or more.

But it’s also possible we’ll see a drop of 40%+ from these levels. Remember, the NASDAQ Composite fell 78% from its peak in 2000.

Rational individuals always consider their downside first. Fear of loss should be far greater than the fear of missing out.

Quite simply if the reward isn’t worth the risk, don’t do it. Find something else. Or do nothing and simply wait on the sidelines.

The universe of options is a lot bigger than simply “US stocks”, and there’s an abundance of great opportunity outside of the mainstream.

Lately I’ve been involved in a number of secured lending deals where I’m able to earn between 10% to 12% per year with almost zero risk.

This strikes me as a great alternative to the stock market; I’d rather make a fixed 10% with minimal risk than potentially make 15% or 20%, but risk a 50% loss.

I’ve also been buying cash-producing royalties, which in my view is one of the most undervalued asset classes in the world. (More on that another time…)

Bottom line, there’s no sense in taking on enormous risks to make a few bucks.

The world is a big place. And with so much technology and connectivity at our disposal, there are plenty of safe, lucrative alternatives out there to consider.


Stock Markets Sit Blithely On A Powerful Time Bomb



Authored by Wolf Richter via WolfStreet.com,

No one knows the full magnitude, but it’s huge.

How big is margin debt really, and how much of a threat is it to the stock market and to “financial stability,” as central banks like to call their concerns about crashes? Turns out, no one really knows.

What we do know: Margin debt, as reported monthly by the New York Stock Exchange, spiked to another record high of $528 billion. But it’s only part of the total outstanding margin debt – which is when investors borrow money from their broker, pledging their portfolio as collateral.

An example of unreported margin debt: Robo-advisory Wealthfront, a so-called fintech startup overseeing nearly $6 billion, announced that it would offer its clients loans against their portfolios.

“The dream house. The dream wedding. The dream kitchen. The dream vacation.” That’s how it introduced it in a blog post this week. “We want you to have your cake and eat it too,” it said.

Instant debt “without the hassle of paperwork,” it said. “We want our clients to be able to borrow what they need, when they need it, directly from their smartphones.” Secured by “your own investments.”

It’s a great deal as long as stocks are soaring. Clients with at least $100,000 in their account can borrow up to 30% of the account value. It’s seductive: No required monthly payments and no payoff date, though interest accrues and is added to the monthly balance. The rate is as low as 3.25%. “How’s that for flexibility?” it says.

That’s how margin debt is being pushed at the end of the cycle.

This borrowed money can be drawn out of the account to fund vacations or a down-payment of a house. But when stocks spiral down, as they’re known to do in highly leveraged markets, and fall below the margin requirement, clients get a margin call. They either have to put cash into the account to make up for the losses or they have to start liquidating their portfolio at the worst possible time.

This forced selling occurs across the spectrum during a sharp market downturn and drives prices down further and begets more forced selling. Margin debt is the great accelerator on the way up, and it’s the great accelerator on the way down. Crashes feed on margin debt.

So how much margin debt is out there? We know only the $528 billion reported by NYSE. Then there are companies like Wealthfront. But it’s just small fry. Big players have been doing this for a long time. These securities-based loans (SBLs) are called “shadow margin,” and no one knows how much of it is out there. But it’s a lot.

The New York Post took a look at it:



Finra, the brokerage regulator, doesn’t track it, nor does the Securities and Exchange Commission — even though both have warned investors about the risks.

 

However, several advisers surveyed by The Post estimated there is between $100 billion and $250 billion in outstanding SBLs among all brokerages.

 

Morgan Stanley is one of the few firms that says how much in SBLs it’s sold – $36 billion, as of Dec. 31, a 26-percent increase from the year before.

 

Other major sellers of the loans are UBS, Bank of America, Wells Fargo, Raymond James, and Stifel Nicolaus, sources said.

If this “shadow margin” is $250 billion, it would bring total margin debt to $778 billion. That would make for a lot of forced selling.

Margin debt is in an uncanny relationship with the stock market. It soars when stocks soar, and it crashes when stocks crash. They feed on each other.

This chart by Doug Short at Advisor Perspectives overlays margin debt as reported by the NYSE (red line, left scale) and the S&P 500 (blue line), both adjusted for inflation, with margin debt expressed in current dollars. In February, the latest reporting month, margin debt surged 2.9% to a new high of $528 billion:
































And the chart below shows growth in percentage terms of the S&P 500 (blue line) and margin debt (red line), adjusted for inflation, since 1995. Two things become brutally clear: Just how leveraged the stock market has become, and how peaks of leverage are unwound by crashes (via Doug Short at Advisor Perspectives):


But the charts only depict the $528 billion in margin debt reported by the NYSE. Now add the current spike in “shadow margin” of perhaps $250 billion in SBLs. This “shadow margin” might raise current leverage by nearly 50%!

Leverage speaks of investor confidence. A lot of leverage signifies exuberance. Borrowing money to buy stocks creates demand and drives up prices. Higher prices encourage players to borrow even more. And when prices rise for long enough, the notion that they could actually return to some prior levels disappears. That’s the beauty of leverage. It’s free money. Nothing can ever go wrong.

But margin debt, as the charts show, has the unnerving habit of peaking right around the time the bubble turns into a sell-off. While it’s a terrible predictor of a crash – no one knows if February was the peak or just another stage on the way to an even more dazzling peak – it is associated with enormous risks. And the fact that much of it occurs in the shadows, and that the total leverage of the stock market remains unknown, makes this a powerful time bomb that stock markets are sitting on in blithe spirits.

This is what companies in the S&P 500 index have become really good at: Railroads slash capital spending, but plow more money into buying back their own shares, after two years of Freight Recession. Read…  This Vicious Cycle is What Bedevils the US Economy



Stock Doc


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