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02Feb2018 Market Close: Wall Street Starts Its Long Awaited 'correction', Dow Drops Nearly 700 Points, Nothing To See Here, Move Along

Written by Gary

US equities markets trended sharply down today (SPY -2.2%) with the DOW closing nearly 700 points down. This only a correction. The World is NOT about to end; now back to our regularly scheduled program.

Todays S&P 500 Chart

The Market in Perspective

Here are the headlines moving the markets.

S&P 500, Dow on track for worst week in two years

(Reuters) - Wall Street extended losses on Friday after a round of weak earnings and on the back of robust payrolls data that sent bond yields higher, vexing all three major U.S. stock indexes.

U.S. hiring accelerates; annual wage growth strongest since 2009

WASHINGTON (Reuters) - U.S. job growth surged in January and wages increased further, recording their largest annual gain in more than 8-1/2 years, bolstering expectations that inflation will push higher this year as the labor market hits full employment.

Exclusive: Merck's consumer health sale at risk as Nestle bows out - sources

LONDON/FRANKFURT (Reuters) - The sale of Merck KGaA's consumer health unit has been thrown off track after Nestle has pulled out, leaving the race to buy the maker of Seven Seas vitamins without its main contender, sources familiar with the matter told Reuters.

Dell explores IPO or potential merger with VMware

(Reuters) - Computer maker Dell Technologies Inc said on Friday it was considering a public offering of its common stock or a combination with business software maker VMware Inc , its publicly held subsidiary, as it seeks new avenues for growth.

Exxon, Chevron shares plunge after weak results spook Street

HOUSTON (Reuters) - Exxon Mobil Corp and Chevron Corp posted rare quarterly earnings misses on Friday as cost cuts and rising oil prices failed to offset weakness in international refining operations, sending shares of both companies plunging.

Allergan completes restructuring, pushes hard in China

PARIS (Reuters) - Botox-maker Allergan has embarked on a big push in China where it plans to hire 200 additional staff this year and will also be on the lookout for potential acquisitions in the country, a senior executive told Reuters on Friday.

Boeing proposes Embraer tie-up excluding defense unit: source

BRASILIA (Reuters) - Boeing Co has sought the Brazilian government's approval of a partnership with planemaker Embraer SA that would create a new company focused on commercial aviation, a person familiar with the matter said on Friday.

Wynn stock drop forces question: when to disclose misconduct?

WILMINGTON, Del. (Reuters) - The steep drop in the stock price of Wynn Resorts Ltd following a report that chairman Steve Wynn subjected female staff to unwanted sexual advances offers an illustration of how such allegations may now be "material" information that public companies need to disclose.

Ontario revokes mortgage broker BDMC license over risky investments

TORONTO (Reuters) - Ontario's financial regulator said on Friday it has revoked the license of mortgage brokerage Building Development and Mortgages Canada Inc (BDMC) and Vince Petrozza, a co-founder of a related firm, Fortress Real Developments, following an investigation into risky syndicated mortgage investments.

Is The VIX-'Tail' Wagging The Bitcoin-'Dog'?

While Bitcoin has bounced back above $9,000 miraculously today, after its early collapse, if Deutsche Bank's Masao Muraki is right, VIX's spike is signaling cryptocurrencies have a lot further to fall...

The recent 'triple-low environment' of low interest rates, low spreads, and low volatility gave birth to new asset classes like implied volatility (ETFs selling volatility), and cryptocurrencies. Deutsche Bank has begun to monitor these indices closely as new frontiers of risk-taking.

The prices of both asset classes have plummeted and rebounded simultaneously, and in 2018, correlation between Bitcoin and VIX has increased dramatically.

Besides them being a new frontier of risk-taking, Deutsche see another similarity between these two new asset classes: "the tail wagging the dog."

First, implied volatility. Implied volatility is an index calculated from the price of a derivative product (options) of an underlying marketable security. However, we now have a "tail wagging the dog" situation where the price of the derivative product is feeding back into the price of the underling marketable security.

Next, cryptocurren ...

To Jeff Gundlach, This Is The "Chart Of Death"

That high-yield bonds have decoupled from stocks (despite both their valuation-bases being driven from underlying business volatility) is not a new factor in the melt-up manic-manipulated markets we experience every day.

But, as DoubleLine's Jeffrey Gundlach notes, the size of the divergence is becoming extreme to say the least.

"JNK chart looks like death. No way to win here, folks..."

JNK chart looks like death. No way to win here, folks.

— Jeffrey Gundlach (@TruthGundlach) February 2, 2018

It sure does! Medium-term...

Short-term...

And Long-Term...

Bank Of America, JP Morgan Bar Crypto Purchases On Credit Card

The latest crackdown against cryptos was unveiled on Thursday when the largest US bitcoin exchange, Coinbase, sent out notices to clients, informing them that purchasing cryptocurrencies on credit would now be prohibitively expensive, if not impossible, as banks have started to process payments for bitcoin et al as "cash advances", which tend to come with extremely high interest rates:

Dear Coinbase Customer

We're writing because you have a credit card on file and want to inform you of a recent change that may increase the cost of purchasing digital currency with a credit card.

Recently, the MCC code for digital currency purchases was changed by a number of the major credit card networks. The new code will allow banks and card issuers to charge additional "cash advance" fees. These fees are not charged or collected by Coinbase. These additional fees will show up as a separate line item on your card statement.

The move came as a number of bank and card issuers announced that they would be reviewing changes to their policies around the purchases of crypto assets using credit cards.

Then, last Thursday the Wall Street Journal reported that Capital One banned customers from using credit cards to purchase bitcoin or coins on the Ethereum blockchain, citing "limiting mainstream acceptance and the elevated risks of fraud, loss and volatility." Discover Financial announced it would likewise block bitcoin transactions.

Then yesterday, MarketWatch reported that Bank of America and other major lenders are assessing the use of credit cards to purchase bitcoin and other virtual currencies, which could result in restrictions or limits.

...

Just Three Charts

Forget valuations...

(because they can always be shrugged off by using 10Y forward estimates with some hockey-stick extrapolation)

These three charts are the real worries for anyone about to play the 'greater fool' and pile the remaining cash in their retirement savings into stocks...

Deutsche Bank's Binky Chadha notes that US equity positioning is extreme (+1.5sd above average levels). Mutual fund positioning has risen in tandem with the rebound in growth to a 6-year high, with cash balances well below the historical normal range...

Aggregate shorts in cash equities and ETFs, led by cuts in Tech shorts, have for the first time fallen below the elevated range they have been in since the financial crisis...

Margin debt in brokerage accounts has risen to extremes...

No Bill Yet for Facebook's Fixes

The social network's changes slow user growth but financials stay strong.

5G Coming Sooner, But Who Will Reap Benefits?

Silicon Valley companies have reaped most of the benefits of the smartphone revolution, leaving network builders and operators running to stand still. It seems unfair, but the 5G era might not be any different.

How Alibaba Built Its Way to Record Sales

China's e-commerce giant Alibaba delivered another record quarter, though investors should worry about how it got there.

What We Read Today 02 February 2018

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

This feature is published Monday, Wednesday, and Friday in the late afternoon New York time. For early morning review of headlines see "The Early Bird" published Monday through Friday in the early am at GEI News (membership not required for access to "The Early Bird".).

BECOME A GEI MEMBER - IT's FREE!

Most of this column ("What We Read Today") is available only to GEI members.

To become a GEI Member simply subscribe to our FREE daily newsletter.

February 2018 Economic Forecast: Relapse This Month

Written by Steven Hansen

Econintersect's Economic Index (EEI) declined and returned to territory associated with modest economic growth.

Top Ten: Weekend roundup: Bragging about your 401(k) million | What not to do with that million | Stock trends to pay off in any market

A little humility maybe in order; trends for investors to follow through any market.

Deep Dive: Managers of this outperforming tech fund say we're still in 'early innings' for cloud and IoT

Brad Slingerlend and Denny Fish, co-managers of the Janus Henderson Global Technology Fund, share some of their favorite stock plays.

Deep Dive: This stock might be your best bargain investment in China's growth

Decline in Ctrip shares sets up a long-term opportunity, says Di Zhou of the Thornburg International Value Fund.

Summary of Economic Releases this Week

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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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