MORNING THOUGHTS

September 14, 2015


Stocks closed higher on Friday - continuing to try and find some stability after the Aug 24th sell off - and while the trading does remain choppy - it begs the oblivious question:  What would you expect after all the global turmoil? 

The  rebound from the strong sell-off in late August has been fairly well controlled all while volatility has dominated the mood since the sell-off.  Now for most of the year - the mkt traded well within a broad channel - represented by support at 2000 and resistance at 2125 ish....yet August brought us a Tsunami of concerns.....causing mkts to implode 6 mins after the  opening bell rang on the morning of August 24th.  For months analysts/strategists had been divided on what the next move was going to be, What was going to be the catalyst to force the mkt out of this range? 

By now - we are well versed on what that was.....and after months of back and forth about a slowing China and concerns over FED policy - the bottom fell out as global asset managers decided to re-price the risk that seemed to be building... China devalues the Yuan and risk management software raised the flag around the world sending out SELL signals to anyone that would listen...Algo's kicked into high gear, and buyers took a breather - no longer willing to stand at the front of the line but instead choosing to stand on the sidelines and watch the show unfold.

Current mkt structure - being what it is - proved to be a disaster - to say the least.  Yes - the system is supposed to create stability - when in fact - so many will tell you that that is NOT what happened at all.....First of all - understand that although there are so many 'market makers' that are supposed to make the system more stable - (just listen to all the rhetoric spewing out of the mouths of all those HFT Liquidity Providers) that is not what happened at all.  All of those 'voluntary' market makers VOLUNTEERED to stay home that day and watch the bloodshed happen. 

The ONLY market makers that are obligated to stand there are the ones located on the NYSE - they can NOT choose to just sit it out and watch it unfold - as the others can and did.  And because mkt structure is so fragmented today - bids and offers no longer come together at one point to help create stability.  Now so many are ready to point the gun at the NYSE and the invocation of Rule 48 - a rule put in place exactly because all these high tech automated trading platforms did NOT want any humans slowing down the process - a rule that allows for stocks to open outside the normal band during times of stress (in either direction) without getting approval for such moves.  The only problem with that is that since the mkt is so fragmented and the only obligated market makers are those located here everyone else gets to sit home, watch the bloodshed and then begin the process of placing blame.....It is BS!  This event ONLY HIGHLIGHTS the failure of current mkt structure, fragmentation and lack of obligation on behalf of all those off floor automated market makers. 
  
 And guess what?  The ETF mkt got slammed - just take a look at the front page of the WSJ today -

"Wild Trading Exposed FLAWS in ETF's" -

although it is not an exhaustive piece by any stretch - it does highlight the risks associated with a product that has been sold as SAFE...

So I guess that needs a bit more work, no?  Once again - the products work when there is relative stability - but fail miserably when PANIC sets in..... Then all bets are OFF......

"The extreme stock market gyrations in August exposed  cracks that many critics had warned about in the booming business of exchange traded funds - cracks that fund managers such as Blackrock Inc. are now acknowledging as they work to figure out what went wrong". 

[Recall the global financial crisis ignited by the SAFETY of all of those complex sub-prime mortgage products and the leverage built into the system via CDS's, ABS's and the other complex derivative products designed to make everyone feel safe - yet all they did was just shift the risk to unwitting investors who were told by the ratings agencies that these were AAA+ products]  - How'd that work out? 

Ok...so now - back to the mkts - on Aug 24th - that long term support was broken - indexes fell and cut thru support like a hot knife thru butta........ and normally when a major support level (2000) is broken -  prices will back test the broken support before figuring out the next move......So far this has not happened yet....and since the break - we have seen  a couple of strong rebound days followed then by volatility and choppiness -  leaving us with higher lows and mostly lower highs, in a tapering wedge triangle, known as a 'bearish flag' to the technicians - and at some point - this too shall come to an end.  The big technical question:  Will prices break out in an advance and test broken support OR will prices break down, ignoring the back test of broken supports and re-test the bottom reached on that fateful day again?

It should not surprise us if prices attempted to re-test what was support and in fact has tried that twice so far.......but a look at volume, tells you that volume on rising days pales in comparison to volume on declining days....suggesting a level of angst and nervousness remains in the mkt.  September and October tend to be nervous months anyway....(Think 1929, 1987 - just to highlight a couple) - so a test of 1860 is completely possible - especially if the FED adds to the angst by raising rates this week.

The focus this week is about the FED......as they are due to announce their policy decision on Thursday, and nearly anyone you speak to - remains confused about what they will do....There is no consensus whatsoever.
And yet, we all know that a 25 bp increase is nothing really....but it is the first interest rate hike in 7 yrs - so it is about psychology  rather than financial or economic impact and it indicates that the Fed may now realize that years of QE have NOT accomplished the desired goal of price stability and healthy employment. 

Traders are now putting the odds at a 28% chance of any move at all.  Both the World Bank and the IMF have warned the FED that any rate rise 'could trigger panic and turmoil in emerging mkts'  (China is an emerging mkt - wink wink). 

Overnight Asian stocks moved in opposite directions.....China declines 2.5% - more bad macro news about industrial production.......suggesting more Chinese stimulus is around the corner....... Japan was down 1.6%, Hong Kong +0.27% and ASX +0.5%.

European mkts are all higher....ignoring the latest weaker Chinese data points.....as they also await FED action.   FTSE +0.31%, CAC 40 +0.2%, DAX + 0.26%, EUROSTOXX + 0.3%, SPAIN +0.25%  and ITALY -0.18%.

US Futures are up 4 pts....that is down a bit from the +11 pts overnight.... More hi profile investors - are now screaming that the mkt is in a bubble...... Even the academics are now chiming in......Yale University 'Market Scholar' Robert Shiller the latest to join the crowd......  told CNBC  

"The Nobel Laureate told the FT that his valuation confidence indices, based on investor surveys, showed greater fear that the mkt was overvalued than at any time since the peak of the dot com bubble in 2000"....
.. 
And imagine that - this after the mkt has sold off 8% from the highs of 2130.....What did his surveys suggest when the mkt was trading at those levels?   Just curious......

The wedge is now at the breaking point...either we break out and up or move lower.....1961 is the resistance line......1945 is the support line.....what will it be? 

There is NO eco data today at all....Tomorrow we get Retail Sales.   

And to those celebrating the Jewish New Year - Happy New Year. 
 

Take Good Care
KP


Potato and Veal Meatballs.


 

These are great as appetizer type cocktail party dish or can be paired with a mixed green salad and become a light lunch or dinner meal.  Unlike traditional meatballs – these do not go in the sauce…...Try these “polpette” (Italian for meatball)  and you will not be disappointed…..

For these you will need:  1 lemon, bag of frozen artichokes, 2 lg Idaho potatoes, 2 lbs of ground veal, finely chopped thyme, 2 lg egg yolks, fresh grated parmegiana cheese, whole milk, s&p, butter, olive oil, about 3 cups of beef broth, 4 med carrots – peeled, cut in half lengthwise and then cut into bite size chunks, 1 shallot diced, splash of dry white wine, ˝ c of heavy cream, and chopped parsley.  

 In a saucepan, bring beef broth to a simmer; remove from heat and cover to keep warm.

Next boil the quartered potatoes in salted boiling water until soft – maybe 15 mins?   Drain and then crush in a classic potato ricer into a large bowl.  Add veal, thyme, 1 egg yolk, cheese, milk and s&p.   Mix well with your hands -do not over mix.  Form into balls….now if you are using as an appetizer then make them small bite size balls…if you are using as a lunch or dinner – then make the more traditional “bigger than a golf ball but smaller than a baseball”  .

In a large nonstick high sided pan – heat a dollop of butter and a bit of olive oil over medium-high heat - fry meatballs, turning occasionally, until well browned and cooked through, - depending on the size will dictate the time….small balls – 4 mins or so…larger balls – maybe 7 mins or so….remove and set on a plate lined with a paper towel.   

Add a bit more olive oil in the nonstick pan and heat on med high.   Add shallots and sauté for 3 mins….now add artichokes & carrots. Cook, stirring frequently, for about 4 mins.   Add wine and broth - bring to a boil, reduce to a simmer and cook for 10 minutes. Now add meatballs (If you like – you can add in a bag of frozen peas at this point in the process)  and continue cooking for about 10 more mins….gently turning meatballs halfway through.  You want the veggies to be nice and tender.  

In a separate bowl - squeeze 1 teaspoon juice from the lemon. Whisk together with the remaining egg yolk and cream.  Carefully introduce this mixture into the pot with meatballs. Return broth to simmer and cook for 3 minutes.  Sprinkle with parsley.

 
Buon Appetito.
  
 
"The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates”


MORNING THOUGHTS

Photograph: Reuters/Lucas Jackson