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27Aug2015 Market Close: Oil Soars 10%, DOW Closes Up 2.27%, Volatility Rules Today

Written by Gary

Wow, what a ride today. Markets opened higher, moved to +2%, then took a nose dive back to the unchanged line and before you could say, 'what happened' the averages climbed back up and closed at the high of the day. DOW closed at +369, Nasdaq closed up almost 2.5% and oil closed higher in the high 42's. Most likely short covering caused the market rise this afternoon as some traders covered their shorts, before they had to change them.

Todays S&P 500 Chart

Fed's Plosser: Fundamentals of US economy haven't changed yet the SP500, the Dow rose strongly and the Nasdaq turned positive for the year as better economic news buoyed trading say some analysts. O.K., who is lying? U.S. oil prices soared 10% market turmoil has cast doubt on the Fed's September intentions. But a rate increase remains very much on the table.

Have your seat belt on - tomorrow could be a hell of a ride. Be prepared.

The Market in Perspective

Here are the headlines moving the markets.

China official blames Fed for global market rout, not yuan

BEIJING (Reuters) - The global stock market rout of the past week was sparked by concerns over a possible interest rate rise by the U.S. Federal Reserve and not by the devaluation of China's yuan currency, a senior Chinese central bank official told Reuters on Thursday.

Wall St. ends near highs after strong data

NEW YORK (Reuters) - Wall Street rallied in a volatile session on Thursday, fueled by optimism after strong U.S. economic data and by hints that a September interest-rate hike was unlikely.

Caterpillar Inc plans to cut 475 more jobs amid revenue decline

(Reuters) - Heavy machinery manufacturer Caterpillar Inc said it plans a new round of layoffs to cut costs as declining revenues from global mining and construction activities erodes its bottom line.

Margin Calls Mount On Loans Against Stock Portfolios Used To Buy Homes, Boats, "Pretty Much Everything"

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

In a securities-based loan, the customer pledges all or part of a portfolio of stocks, bonds, mutual funds and/or other securities as collateral. But unlike traditional margin loans, in which the client uses the credit to buy more securities, the borrowing is for other purchases such as real estate, a boat or education.

The result was "dangerously high margin balances," said Jeff Sica, president at Morristown, N.J.-based Circle Squared Alternative Investments, which oversees $1.5 billion of mostly alternative investments. He said the products became "the vehicle of choice for investors looking to get cash for anything." Mr. Sica and others say the products were aggressively marketed to investors by banks and brokerages.

From the Wall Street Journal article: Margin Calls Bite Investors, Banks

Today's article from the Wall Street Journal on investors taking out large loans backed by portfolios of stocks and bonds is one of the most concerning and troubling finance/economics related articles I have read all year.

Many of you will already be aware of this practice, but many of you will not. In a nutshell, brokers are permitting investors to take out loans of as much as 40% of the value from a portfolio of equities, and up to a terrifying 80% from a bond portfolio. The interest rates are often minuscule, as low as 2%, ...

Air Conditioner Failure At CenturyLink Data Center Takes ITG Dark Pool Offline

Earlier today, we first reported that the massive CenturyLink NJ2 data center in Weehawken was in shut down mode as a result of a critical failure in its HVAC system. This promptly led BATS to issue a warning that "the cage will not have cooling over the next couple of hours at a minimum, so BATS would like to advise Members utilizing the BATS NJ2 PoP of potential impact that could result from overheating of equipment. BATS has shutdown all non-critical infrastructure at the NJ2 PoP at this time and will continue to monitor the situation."

We commented that "while BATS may be safely offline and trading out of a redundant location, one wonders just how many other "wealth effect" mission critical HFTs clients of CenturyLink are about to go offline, and whether the entire market is about to go down with them?"

Moments ago we found at least one, appropriately enough the company whose dark pool was recently busted in the biggest criminal scam involving a private trading company's dark pool: ITG, which announced minuets ago that it would shut down its dark pool POSIT for the rest of the day.

NEW JERSEY DATA CENTER WHERE ITG OPERATES HAS HVAC ISSUE

ITG SHUTDOWN INCLUDES POSIT DARK POOL

ITG SAYS IT WON'T BE TRADING FOR REMAINDER OF DAY

Whether or not this added to the market tumble that resulted from the JPM note, first and so far only posted here, is unclear but the fact that many are wondering if the market may be crashing as a result of a blown air conditioner should tell you all you need to know about the current state of the so-called market.

VIX ETF Surges After Serious Short Squeeze For 5th Day In A Row

That's what happens Larry when you have 64.08mm shares short against 59.5mm shares outstanding... and traders read this (and the VIX is stuck in backwardation).

as backlwardation remains...

Charts: Bloomberg

< ...

Rutgers University Warns Students - "There Is No Such Thing As Free Speech"

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Ironically, U.S. college campuses are rapidly becoming the least free, most censored places in the country. Many people have commented on this, including high profile, enormously talented comedians such as Chris Rock and Jerry Seinfeld. In fact, Chris Rock was so appalled that he stopped playing colleges because audiences had become "too conservative" Before getting all bent out of shape, this is what he meant:

Not in their political views — not like they're voting Republican — but in their social views and their willingness not to offend anybody. Kids raised on a culture of "We're not going to keep score in the game because we don't want anybody to lose." Or just ignoring race to a fault. You can't say "the black kid over there." No, it's "the guy with the red shoes." You can't even be offensive on your way to being inoffensive.

Although I've touched upon this subject before, I haven't given it nearly the amount of attention it deserves. That said, I would suggest rereading a powerful post published earlier this summer, A Professor Spea ...

It's Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington

On Tuesday evening, we asked what would happen if emerging markets joined China in dumping US Treasurys. For months we've documented the PBoC's liquidation of its vast stack of US paper. Back in July for instance, we noted that China had dumped a record $143 billion in US Treasurys in three months via Belgium, leaving Goldman speechless for once.

We followed all of this up this week by noting that thanks to the new FX regime (which, in theory anyway, should have required less intervention), China has likely sold somewhere on the order of $100 billion in US Treasurys in the past two weeks alone in open FX ops to steady the yuan. Put simply, as part of China's devaluation and subsequent attempts to contain said devaluation, China has been purging an epic amount of Treasurys.

But even as the cat was out of the bag for Zero Hedge readers and even as, to mix colorful escape metaphors, the genie has been out of the bottle since mid-August for China which, thanks to a steadfast refusal to just float the yuan and be done with it, will have to continue selling USTs by the hundreds of billions, the world at large was slow to wake up to what China's FX interventions actually implied until Wednesday when two things happened: i) Bloomberg, citing fixed income desks in New York, noted "substantial selling pressure" in long-term USTs em ...

Tiffany earnings fall as high costs, strong dollar bite

(Reuters) - Tiffany & Co posted a 15 percent drop in quarterly earnings due to a strong dollar and the cost of developing and bringing out new products, sending shares of the luxury jeweler to an 18-month low.

AIG seeking $1.76 billion in 'life settlements' trial in New York

NEW YORK (Reuters) - An American International Group Inc unit on Thursday asked a federal judge to order a Pennsylvania firm to pay it $1.76 billion in damages for allegedly overcharging for life insurance policies acquired from elderly individuals.

U.S. leaning against regulatory relief for three banks in Libor scandal

WASHINGTON (Reuters) - The U.S. Labor Department is leaning toward denying requests for regulatory relief by three big foreign banks that pleaded guilty to manipulating Libor interest rates but want to keep managing retirement accounts for clients.

JPM Head Quant Warns Second Market Crash May Be Imminent: Violent Selling Could Return On Thursday

Last Friday, when the market was down only 2%, we presented readers with a note which promptly became the most read piece across Wall Street trading desks, which was written by JPM's head quant Marko Kolanovic, who correctly calculated the option gamma hedging imbalance into the close, and just as correctly predicted the closing dump on Friday which according to many catalyzed Monday's "limit down" open.

Recall:

Given that the market is already down ~2%, we expect the market selloff to accelerate after 3:30PM into the close with peak hedging pressure ~3:45PM. The magnitude of the negative price impact could be ~30-60bps in the absence of any other fundamental buying or selling pressure into the close.

We bring it up because Kolanovic is out with another note, one which may be even more unpleasant for bulls who, looking at nothing but price action, were convinced that after the biggest two day market jump in history, the worst is behind us.

In the just released note, the head JPM quant warns that a large pool of assets controlled by price-insensitive managers including derivatives hedgers, Trend Following strategies (CTAs), Risk Parity portfolios and Volatility Managed strategies, which is programmatically trading equities regardless of underlying fundamentals, is about to start selling equ ...

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To contact me with questions, comments or constructive criticism is always encouraged and appreciated:

gary@econintersect.com

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