November 2, 2017
Apparently Bitcoin has a future, CME Group announced today that they will be offering a Bitcoin based futures product in Q4 2017. We mentioned or rather made a notion to the fact that the CME Group started keeping track of the price of Bitcoin on their website, awhile back in our past letter. As our readers know, we saw the writing on the wall long, long, ago. We figured the space was attracting too much attention in the land of speculation and the CME simply, couldn't resist. We can only speculate, but we figure the higher ups at the CME fought long and hard trying their best to resist delving into such a known "nefarious product," but as always, the prospect of losing money, or rather not making money off of all this trading, most likely led to them finally caving in.
Hopefully someone at CNBC or Bloomberg asks Terry Duffy, what took them so long to offer such a product and why now?
Do they think that Jaime Dimon is right, or do they feel there is a place in this fiat infested world for an alternative crypto currency? Finally, we think he should be asked, does this mean the CME Group recognizes the space as a legitimate commodity and will it be offering Ether and Litecoin futures as well?
For all us spreaders out there, we dream of the prospect of new and exciting markets to intertwine and mince. In fact we already have our spreads named Blither and Blite, so let's get to it…the press release can be found HERE The futures are going to be cash settled so this will allow for real longs to hedge their positions, lock spreads and make future assumptions as to the price. We can't wait for the speculators to decide whether or not contango or backwardization will be the norm, then again, we tend to think this will usher in a new paradigm toward pricing futures because unlike gold, Bitcoin doesn't need to be physically stored in the real world and the naked short selling should make for some interesting moves in the real Bitcoin market. We applaud the CME for this step, we are surprised their fee salivating glands took so long! We suppose Bill Miller will be happy for this development. The long time Legg Mason titan, now running his own firm Miller Value Partners, has been an outspoken advocate of Bitcoin and has certainly put his money where his mouth is. His MVP1 Fund has around 30% of its assets in Bitcoin ($45m) according to a recent article in the WSJ.
Also out in the news is merger talks between CVS and Aetna, some valuing it at $66 Billion. Speculation is that the threat of Amazon is driving consolidation, we agree and we feel every industry may be under a huge deflationary threat that is now becoming known as the behemoth, Amazon. What's next Healthcare Services Corp and Walgreens?
Speaking of Amazon, they beat their earnings estimates posting 52 cents, beating EPS estimates by 4 cents. Net sales of $43.7 Billion about $1.5 Bn over estimates. All this good news crushed any shorts as Amazon shot to new highs touching $1100 per share. However, all was not rosy or should we say Alexa, as operating margins have begun to shrink again and this was the 3rd quarter in a row which saw LTM free cash flow fall. Investors were stumbling over themselves and the buying caused a massive outperformance by the Nasdaq over the other broader indexes. The Nasdaq added over $200 Billion in market cap on a single day, second only to the buying done in Q2 2009. We will display charts later in the letter. Just to show you how insane these valuations have become, ZH had this data posted of market caps:
The FED has the audacity to say inflation is below their mandates, hogwash, any one looking at these numbers would get the picture of inflation very quickly!
3rd Quarter GDP was released on Friday and it showed a decent 3% annual rate, which would make it two consecutive 3% or higher figures. This lead to the equity markets outperforming the bond market, in particular the short end which continues to lose ground to the longer duration bonds or what has been a continuing trend of a flatter US treasury yield curve.
The Fed meets this week and its widely expected to keep rates unchanged. The Dec meeting will be the one to watch as there stands a 96% chance of a 25bp hike in the Fed Funds range. As we have stated time and time again in our letters, rate hikes aren't the olden days of yore style, IOER changes the dynamics of the hike and makes it more akin to a cut, so we won't be surprised if they do indeed raise next month. However and a big however is how the FED will continue to warrant such low rates, with equity markets making 100 handle moves higher seemingly on a regular and linear basis. In fact we don't even know if raising rates is the right course of action, nor do we know if the FED truly thinks it’s the right course of action, sound confusing? Heck yeah and we have no idea how they tight rope themselves out of this.
We read a nice piece on QE by Daniel Nevins, basically he displayed in a nice visual format how all QE did was it changed the lender to the economy from banks and broker dealers, to the FED or as he termed it just "substituted lenders." The net effect on the economy was seemingly credit growth that would have been the same with or without QE, so maybe all this inflation in asset prices is just psychological, based loosely on the FED put we assume. That is our assumption and it fits with the fact that global macro fundamentals aren't corroborating with the valuation growth story.
However, we take such fervent market speculation with a grain of salt, rather a central bank provided ton of it. For we know the truth, the Central Banks are working in unison to buy decades at a time, swapping one continents debt for the other and supplanting stagnant velocity of money, with more money(debt). However their equation has only one solution, or shall we say beneficiary and that is the very, very upper echelons of income. That disparity that we so actively speak of, will continue as long as the QE printers continue, that we are certain. No tax plan, no budget resolution, no political party affiliation will ever change that.
We have had at length discussions about this topic of market valuations and we commonly use the term value is in the eye of the beholder, or what we distinctly mean is all value is relative. Take yourself out of the equation and ask if I was a 1 percenter (maybe you are) what would I be doing and then you will have your answer. The FED and the central banks told us long ago when they were sitting at that card table in 2008 staring at two choices, either push all their chips forward and go "All In" or fold and let the house of Wall Street cards go with them. Well TARP, was that all in and the QE1,2,3 afterwards was their endless Treasury funded rebuy's which only they enjoy the luxury of having.
So now some $15 Trillion in global Central Bank, massive equity, bond and real estate valuation expansions later, the same dilemma still exists. Continue to allow the canyons of income to divide further via continued artificial demand via central banks? Or reduce balance sheets and artificial stimulus and let the cards fall where they may. Well, we aren't stupid and we know who rules the roost and playing chicken with the central banks is a losing proposition. So when the time comes and when the bond yield curves tell us that the FEDs back is against the wall with nowhere to turn, then and only then will we have a legitimate conversation about valuations, until then, its status quo.
For we would be fools to think that the following chart displaying the kind of power a central bank has, the BOJ in this case, can't happen here, you want to be a short seller against this, be our guest, we will have the hearse waiting for you idling in the parking lot!
(Courtesy ZH)
Here is another force to be reckoned with, as long as interest rates are suppressed, expect a continued balance sheet swap via debt for equity by non financial corporations. If your corporate treasurer hasn't figured out by now, this fool proof way to get rich, then you should fire him or her, it's simple, issue stock options, issue debt to buy back stock, exercise options, rinse-recycle-repeat and no the debt doesn't matter:
(Courtesy ZH)
Moving over to the technical's, let's begin with the equities. First up let's look at those large moves out of the FAANGs and Nasdaq as Bezos overtakes Gates in the race for ultimate financial supremacy:
The FAANGs have been lagging the SP, but that all changed on Friday:
As far as the SP500 future, well we continue to expect a run to 2640 by year end:
Moving to the US treasuries let's look at the 2s30 yield curve which saw some profit taking which led it to steepen this week, but the overall trend remains flatter:
The US 30yr Bond continues to defy the 3% level and is now back into its downward sloping trend channel. Munchin was out this week wondering why the lack of interest in the ultra long end, well silly, we know the mathematics and they tell us, rates in the future will be lower, much lower, especially when the next downturn comes and ohh yes, it will come. Has he not seen the Europe or Japan?
The Euro currency lost ground this week as Draghi and company hinted at removing €30 billion a month starting in Jan 2018 from their monthly QE. Below 116-32 seems very bearish and a potential H & S top may be confirmed here:
When we look at Crude, we feel the $54/$55 level seems formidable and we may see a reversal from this area, especially if we get a quick sharp rejection in the coming days:
Onto a commodity we don't really cover, but thought the chart was worthy of a post, none other than RBOB the favorite of a few HFTs we know. We couldn't help but notice the nice bull run its enjoyed for the last few months:
Ok, that's all she wrote! We look forward to the upcoming winter season as weather here in Chicago has turned and has easily reminded us why it's called the "Windy City." Once again we have enjoyed this year's World Series as both the Astros and the Dodgers are playing as if they are 12 year old All Stars all over again, playing like money doesn't matter, like no matter what the score there's always a chance. It reminds us of a quote by James Earl Jones's character Terence Mann, when he tries to convince Ray not to sell the farm, "The one constant through all the years, Ray, has been baseball. America has rolled by like an army of steamrollers. It has been erased like a blackboard, rebuilt and erased again. But baseball has marked the time. This field, this game: it's a part of our past, Ray. It reminds of us of all that once was good and it could be again. Oh... people will come Ray. People will most definitely come. (Field of Dreams 1989)
Among the constant barrage of scandal, deceit, impropriety and moral decay that media tends to push, we often find its best to pay more attention to the lighter sides of life if and when you can. We know the struggles that everyone faces on a daily basis and we hope that our writing eases some of these inconsistencies, these distractions and allows you to find some clarity among all the confusion. Thank you for reading. Cheers and we look forward to watching game 7, the way this series has gone, it's anyone's game!
As usual the weekly settles are below:
Finally, we will decidedly end our notes with our reaffirmation of the growing need for alternative strategies. We would like to think that our alternative view on markets is consistent with our preference for alternative risk and alpha driven strategies. Alternatives offer the investor a unique opportunity at non correlated returns and overall risk diversification. We believe combining traditional strategies with an alternative solution gives an investor a well-rounded approach to managing their long term portfolio. With the growing concentration of risk involved in passive index funds, with newly created artificial intelligence led investing and overall market illiquidity in times of market stress, alternatives can offset some of these risks.
It is our goal to keep you abreast of all the growing market risks as well as keep you aligned with potential alternative strategies to combat such risks. We hope you stay the course with us, ask more questions and become accustomed to looking at the markets from the same scope we do. Feel free to point out any inconsistencies, any questions that relate to the topics we talk about or even suggest certain markets that you may want more color upon.
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Capital Trading Group, LLLP ("CTG") is an investment firm that believes safety and trust are the two most sought after attributes among investors and money managers alike. For over 30 years we have built our business and reputation in efforts to mitigate risk through diversification. We forge long-term relationships with both investors and money managers otherwise known as Commodity Trading Advisors (CTAs).
We are a firm with an important distinction: It is our belief that building strong relationships require more than offering a well-rounded set of investment vehicles; a first-hand understanding of the instruments and the organization behind those instruments is needed as well.
Futures trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results. Futures trading is not suitable for all investors.
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This newsletter is published by Capital Trading Group, LLLP and Nell Sloane is the editor of this publication. The information contained herein was taken from financial information sources deemed to be reliable and accurate at the time it was published, but changes in the marketplace may cause this information to become out dated and obsolete. It should be noted that Capital Trading Group, LLLP nor Nell Sloane has verified the completeness of the information contained herein. Statements of opinion and recommendations, will be introduced as such, and generally reflect the judgment and opinions of Nell Sloane, these opinions may change at any time without written notice, and Capital Trading Group, LLLP assumes no duty or responsibility to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Capital Trading Group, LLLP are not a solicitation for any investment. Readers are urged to contact your account representative for more information about the unique risks associated with futures trading and we encourage you to review all disclosures before making any decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Nell Sloane, Capital Trading Group, LLLP and their officers, directors, and/or employees may or may not have investments in markets or programs mentioned herein.
