“Something Had To Give”

  • MSM seeks “catalyst” for market drop, throws up its hands
  • The big drop of August 2015, and the parallels to now
  • Why this drop (probably) isn’t the end of the world
  • Making sense of the crypto sell-off
  • New York’s gold bucket thief speaks out!

On its current trajectory, the Dow will take all of seven trading days to enter “correction” territory — a drop of 10% from its peak.

When we left you yesterday, panic selling was underway and the Dow was down 1,500 points on the day. In the end the loss was pared to “only” 1,175. That was more than enough to set a record in terms of the sheer number of points. In terms of percentages, however, the one-day drop of 4.6% doesn’t even rank in the top 20.

The selling spread westward. The Hang Seng index in Hong Kong dropped 5% overnight. The Nikkei in Tokyo fell nearly as much. In Europe, the main indexes in Germany, France and the U.K. each took a spill of about 2%. Stateside, the Dow opened down 500 points, and then swung 800 points higher. At last check, it’s down 120 from yesterday’s close.

“There wasn’t an obvious catalyst for the market’s jarring move,” says the front page of this morning’s Wall Street Journal — a refreshing departure from the mainstream’s penchant to conjure an explanation for every minor blip in the market.

The last time the market dropped this sharply in such a short amount of time was August 2015 — an 11% plunge in six trading days. Explanations abounded — mostly about Federal Reserve policy and about a shock devaluation of the Chinese yuan.

But at the time — on a day the Dow plunged 1,000 points in the first five minutes of trading — we gently suggested the market was simply overdue for a pullback. If it weren’t the Fed or China, the pundits would’ve pinned it on something else.

What’s past is prologue. Really, the chatter on Friday about “renewed inflation worries” never rang true — and it sure wouldn’t have touched off yesterday’s bloodbath.

“The truth is the market has grinded higher without a correction for too long,” writes our Greg Guenthner in today’s Rude Awakening. “Stocks were too hot. Volatility was dead. Something had to give.

Too far too fast

“You can clearly see the upward channel the S&P 500 carved out during 2017. It was a historically smooth run, with no significant shakeouts spooking investors — just a slow, orderly grind higher.

“But look how the trend accelerated in January. Stocks went parabolic as they blasted through the roof almost every single day. Toward the end of the month, the major averages were all higher by at least 7%. That’s clearly unsustainable.”

As Greg’s trading buddy Jonas Elmerraji emailed me last night: “A week and a half ago, we were staring down a stock market that was on track for annualized total returns of around 100%, which is totally berserk.”

Indeed. The other takeaway from that chart is that as long as the S&P 500 holds above 2,600, the post-Election Day rally remains intact. As we check our screens, it’s at 2,629.

OK, but what about the speed of the drop? Well…


There’s something to that. The selling accelerated yesterday afternoon when the S&P 500 broke below the 2,700 level. There were surely many computer models and automated sell orders kicking in at that moment.

Of course, volatility went off the charts — at least by recent standards. Here’s the VIX, otherwise known as the market’s “fear gauge,” based on the action in S&P 500 index options. As we write this morning, it stands at 46.6. Again, the most recent analogue is August 2015…


Back to Greg Guenthner: “The unusually smooth rally has encouraged big bets against volatility using inverse VIX funds such as the VelocityShares Daily Inverse VIX Short Term ETN (XIV). These trading vehicles go up when the volatility index goes lower. Naturally, many traders have viewed this as a ‘sure thing’ trade every time the market drops. They simply bet against volatility, the market bounces and they collect their winnings.”

But not yesterday. Volatility spiked. And the real panic set in during after-hours trading. “XIV traders slammed the sell button as fears of a volatility event spread,” says Greg. “XIV was eventually halted, down a staggering 80% after-hours after dropping just 14% during Monday’s session.”

This morning brings word that XIV’s creator, the Swiss banking giant Credit Suisse, will shut down XIV in two more weeks. As it happens, Credit Suisse is also XIV’s biggest holder — with $550 million worth as of yesterday’s close. Obviously, that figure is much smaller now; the losses amount to two quarters’ worth of Credit Suisse profit. CS shares are down 3% as we write.

Here’s something we can say with reasonable confidence: This drop does not signal impending economic doom.

If you’re a really long-term reader, you might be shocked to hear us say that. We haven’t forgotten how Time labeled our executive publisher and 5 founder Addison Wiggin as part of “the Armageddon gang” in 2007. Given what happened in 2007–08, it’s a badge we wear with a certain amount of pride.

But we’re trying to look at things as dispassionately as possible. So here goes: A healthy economy can withstand market shocks better than a sickly one. And while the post-2008 recovery has been anything but rip-roaring, we’re clearly experiencing the boom phase of the boom-bust cycle.

The world didn’t end on Black Monday in October 1987 — when the Dow crashed 22.6% in a day. The economy at large was in decent shape and the Dow recouped all those losses within 15 months.

Nor did the world end in late summer 1998 — when the Russian government defaulted, setting off a domino effect that took down the hedge fund Long Term Capital Management. Yes, the Dow took a 6.4% spill in a single day, part of a near-20% plunge in the space of six weeks. But the 1990s boom was in full swing… so all those losses were recouped by Thanksgiving and the Dow went on to set record after record as the dot-com bubble expanded throughout 1999.

It is true that none of the problems that led up to the Panic of 2008 has been fixed. And they’ll end up biting us all in the hind end — eventually. But it’s less likely while the boom phase remains in force.

Meanwhile, as irony would have it, one of the alleged drivers behind the sell-off is now reversing.

Treasury yields spiked on Friday, the 10-year note reaching 2.85%. But buyers swooped in yesterday, sending prices up and yields down. The 10-year yield notched the steepest one-day decline in five months, and at last check the yield was down to 2.75%.

Gold was holding up nicely amid the rout — until about 8:00 a.m. EST this morning. Now the bid is back to $1,331. Sometimes when markets get squirrelly, the big boys have to get liquid in a hurry. So they sell assets that have a bidder, not necessarily assets they want to part with.

Crude is now below $64 for the first time in two weeks.

And the cryptocurrency markets, you ask? They were selling off hard overnight, but at this time they appear to be stabilizing, with bitcoin holding the line on $7,000.

Among the seemingly negative developments in recent days has been the cryptocurrency firm Tether cutting off its relationship with its U.S.-based auditors.

“Tether is considered by many to be an important part of the digital currency markets,” explains James Altucher. “That is, because of its role in helping exchanges circumvent the traditional banking system. Each tether represents one U.S. dollar, held in an account controlled by Tether.

“However, in recent months, many have questioned if Tether was improperly printing tethers for its own benefit. This led many to speculate that major cryptocurrency exchange Bitfinex (which owns Tether) may have been engaging in market manipulation over the past several months.” A week ago today, the feds subpoenaed both Tether and Bitfinex.

Meanwhile, India’s government is talking about new measures to regulate digital assets.

“This news may sound scary,” James goes on. “But it represents an important turning point in the maturation of digital currency markets.

“As I’ve stated in the past, there are many scams and illegitimate services out there. Although digital currencies have enormous potential, the biggest opportunity (by far) will come when mainstream investors begin to use — and trust — digital currency.

“From an investor’s perspective, the sooner digital currency markets are cleaned up, the better. In fact, part of the reason why cryptocurrencies have not yet reached their potential is because of the uncertainty on how regulators will react.

“However, these short-term growing pains create major buying opportunities — not only for experienced cryptocurrency investors, but also people looking to invest in digital currencies for the first time.”

James remains bullish on bitcoin and ethereum. “I believe investors should ignore short-term panics and focus on the longer-term investment theme.”

[As we go to virtual press, we understand several big banks have banned credit card purchases of cryptos. More tomorrow…]

“I’m going to come and get you,” said Detective Martin Pastor of the NYPD. “He can run as far as he can, and we will find him.”

At the time — September 2016 — the good detective was speaking to the brazen thief who stole a bucket of gold off the back of an armored truck in Manhattan… The 5 followed the story.

Video of the shocking (and amusing, let’s be honest) gold heist was broadcast on news programs across the country. Grainy security-camera footage showed an ordinary-looking man approach the back of an unattended armored truck and lift a bucket off the platform… and then he just walked away. Well, really, waddled away because the bucket was filled with about 90 pounds of gold worth $1.6 million!

Source: The New York Police Department

The story at the time is it was gold flakes, shavings from the work jewelers do with gold.

Fast-forward 16 months and New York’s WNBC-TV has tracked down the guy with the bucket. In Ecuador. “What flakes?… It was bars,” he says. “Two main bars.”

Julio Nivelo fled to Ecuador and was arrested there in January 2017. Though not extradited to the U.S. for the crime, he served nine months of a one-year sentence in the South American country. Nivelo accepted his sentence with unusual sangfroid: “Listen, if you commit crime, you gotta pay. So I didn’t complain about that,” he says.

So what happened to the gold bars? Nivelo says he bought a power saw from Home Depot and cut the two foot-long bars into sections. To test the market, he took a section to a jeweler friend who paid $200,000 for the gold. When Mr. Nivelo offered to sell more, the jeweler got cold feet but said, “I know a guy…”

The rest of the gold sold on the black market for $1.2 million — cash — that Nivelo stored in shoe boxes and bank bags. He left most of the money with his fiancée in New Jersey, planning to launder the stash later.

Make that ex-fiancée now. He says she kept the money and won’t give it back. “I was very sure I was in safe hands. She loves me. I love her. So nobody can get in our relationship. So I feel betrayed.”

Heh… no honor among thieves.

Best regards,

David Gonigam

Dave Gonigam

The 5 Min. Forecast

P.S. Hmmm… At midday, the Dow has wandered back into positive territory.

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Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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