>>> Zeke Ashton Closing Down His Hedge Fund

Whitney Tilson’s email to investors discussing Zeke Ashton closing down his fund.

Speaking of smart investors, my friend Zeke Ashton of Centaur Capital in Dallas decided to close his fund recently. The investing world is poorer for having lost a great investor, writer and teacher – and a true class act. Here’s a picture of us at Guy Spier’s wedding in Mexico in 2003:
Zeke Ashton and I met in the crazy days of the internet bubble nearly two decades ago when we were among the few value guys writing for the Motley Fool. When he decided to launch a fund in 2002, I was one of his seed investors (my single greatest investment of all time on an IRR basis!) and later backed him to start and manage the Tilson Dividend Fund under our umbrella when we got into the mutual fund business.
Zeke is a conservative value investor who nevertheless, far sooner than I, was able to see value in tech stocks and other sectors usually shunned by value investors. Over nearly 17 years, he earned his investors a total return of 423.3% vs. 313.7% for the S&P500. His best year was 2008, when he was down a mere 6.9% vs. -37.0% for the S&P.
While he didn’t keep up with the long bull market since then, on a risk-adjusted basis, he did well until the very end, as you can see in this beautiful final letter that he sent to his investors yesterday. In it, he makes a very important point about the value of a fund like his, which managed volatility well, vs. a passive index like the S&P:
Despite the buy and hold returns of the S&P500 for the period, my view is that Centaur added considerable value for many investors that is not captured in the cumulative returns above. The reason for my belief is simply due to recognizing the behavioral realities of investor decision making. What I can tell you from personal experience is that very few investors, and particularly those in passive broad market index products, did not get shaken out of the market at some point in two bear markets of 2000-2002 and then again in 2008-2009, or even at any one of several other junctures over the years.
Let’s look at an actual real world “worst case” experience for Centaur Value Fund investors versus that of the S&P500 Total Return index fund. CVF investors had only to endure one peak-to-trough decline in value of greater than 25% throughout the Fund’s entire tenure, that being a mark-to-market loss of 29.9% running from July of 2008 through March of 2009. However, CVF recovered fully from these losses and reached a new high within twelve months. Additionally, CVF had generated a greater than 30% return in the twelve months immediately prior to July 2008, offering CVF investors a bit of extra “emotional buffer” to draw upon during the period of intense fear and uncertainty that was to follow. A number of CVF investors actually found the conviction to add to their investments when markets were at their scariest point in late 2008 and almost all CVF investors at least held tight and came through the period with both capital and psyche fully intact.
The S&P500 Index, by contrast, declined by more than 50% from November 2007 to February of 2009, and it then took 53 months for the index to recover those losses (and 58 months to sustainably surpass the old November 2007 high). I can assure you that many (and maybe most) “buy and hold” investors struggled to hold on during this very long and very difficult period. And not only did many investors capitulate and sell during this time, but many also likely paid taxes on accumulated gains from prior years - or at least they did if they had any gains left. Finally, of course, these same investors would be left struggling with the difficult decision of when or if to jump back into the markets again as the stock market eventually recovered.
I won’t say that Centaur Value Fund investors were unaffected by occasional market turbulence, but I can confidently say that very few were shaken out at the worst times.
I believe that Centaur’s biggest value-add was protection against the extremes of the market, particularly the defense against deep losses, that prevented CVF investors from the classic behavioral mistakes of buying high and bailing at the lows.
Zeke Ashton also wrote some wise words in his September 2017 letter (at the exact time I closed my funds), which I think capture well what I call “the lament of the value investor” in this long, complacent (until recently anyway!) bull market:
This is probably a good time to make it clear that we find ourselves slowly and carefully moving the acceptability lines at the margins of our buy and sell discipline in our efforts to keep capital productively deployed in this very expensive market. We are doing our best to be both thoughtful and prudent about how much we do so. We know that the temptation to change one’s valuation standards in and of itself is probably a late market cycle indicator. However, I do think that some accommodation and adjustment to our discipline on the sell side was probably somewhat overdue. I think we’ve historically been too quick to pull the sell trigger and accept a good outcome on certain investments when we could have held on longer and gotten a great outcome.
…First of all, let me say that I personally am not convinced that the lack of any overt signs of euphoria or wild speculative participation on the part of retail investors means that stocks cannot suffer either a material correction or a bear market given the current valuation levels.
… One of the reasons I’m writing this letter now that I believe most investors systematically underestimate how they will be affected when a correction or a bull market comes. Stocks have been going mostly up for nine years now, and it feels like they will never – and maybe even can never – come back down. When thinking about it in the abstract (if they think about it at all) most people naturally believe that in times of stress that they will behave rationally, and that they won’t be among those who panic and sell at the worst possible time. The reality, of course, is that most investors aren’t so rational when the time comes, because when stocks are going down they feel like they might never go back up.
… We also want to remind you now that the Fund’s strategy is designed to be resilient and to handle stormy weather, and it has weathered corrections and even bear markets in the past and come out the other side reasonably well intact. Also, I’d like to remind you that to some extent ours is a strategy that needs a certain amount of volatility and the occasional market correction in order to re-stock the portfolio with bargain securities in order to produce the returns we are seeking. The really great investing opportunities are almost always found in environments of fear and doubt, and it is critical to our strategy to have strong hands during such times. It’s for this reason that we won’t be lulled into complacency by the market’s recent strength or the current low volatility levels.

NYT : These 5 Numbers Explain Why the French Are in the Streets

These 5 Numbers Explain Why the French Are in the Streets

Graffiti equating President Emmanuel Macron to the king during the French Revolution, on the Palais Garnier opera house in Paris this week.CreditKamil Zihnioglu/Associated Press

President Emmanuel Macron of France is facing the toughest crisis of his leadership after three weeks of violent protests across the country. “Yellow Vest” demonstrators have demanded that the government give financial relief to large parts of the population that are struggling to make ends meet.
Prime Minister Edouard Philippe sought to calm the furor on Tuesday by suspending a planned fuel tax increase for six months, reversing a policy that had set off the revolt.
But it’s not apparent that this single concession can clear the streets.
The Yellow Vest movement — whose followers wear or display high-visibility vests used in emergencies — has morphed into a collective outcry over deeper problems that have plagued France for years: declining living standards and eroding purchasing power. Both of which have worsened in the aftermath of Europe’s long-running financial crisis.
Here are some numbers that explain why France has erupted.


€1,700: Median monthly income in France
France, like other Western countries, has seen a deep gap grow between its richest and poorest citizens. The top 20 percent of the population earns nearly five times as much as the bottom 20 percent.
France’s richest 1 percent represent over 20 percent of the economy’s wealth. Yet the median monthly disposable income is about 1,700 euros, or $1,930, meaning that half of French workers are paid less than that.
Many of the Yellow Vest demonstrators are protesting how difficult it is to pay rent, feed their families and simply scrape by as living costs — most notably fuel prices — keep rising while their household incomes barely budge.
It wasn’t always this way.
Living standards and wages rose in France after World War II during a 30-year growth stretch known as “Les Trentes Glorieuses.” Pay gains for low- and middle-income earners continued through the early 1980s, thanks to labor union collective bargaining agreements.
But those dynamics unraveled as successive left-leaning French governments sought to improve competitiveness in part by compressing wage gains, according to the French economist Thomas Piketty. Average incomes for low- and middle-income earners stagnated, growing by around 1 percent a year or less.
The rich got richer, as top earners saw income gains of around 3 percent a year. Increasingly generous executive pay for very high earners has helped tip the scale.
French workers are still better off than those in Italy, where real wage growth has been negative since 2016. Real wages there fell 1.1 percent between the fourth quarters of 2016 and 2017, according to the Organization for Economic Cooperation and Development.
But while real hourly wages are rising in France, that growth has come slowly, even more so since the end of the eurozone debt crisis in 2012.

1.8 percent: Economic growth
France is the third biggest economy in Europe after Britain and Germany, and the world’s sixth largest before adjusting for inflation. Visitors to Paris can come away with the impression that the glitz of the French capital means the rest of the nation is just as well off.
But French economic growth was stagnant for nearly a decade during Europe’s long-running debt crisis and had only recently begun to improve.
The quality of the recovery has been uneven. Large numbers of permanent jobs were wiped out, especially in rural and former industrial areas. And many of the new jobs being created are precarious temporary contracts.
Growth is key to improving working conditions for those who have been protesting. But while a nascent economic recovery before Mr. Macron took office has helped generate jobs, growth has cooled to a 1.8 percent annual pace, in tandem with a slowdown in the rest of the eurozone.

Above 9 percent: Unemployment
The growth slowdown makes it harder to resolve another French problem: the large numbers of people out of work.
Unemployment in France has been stuck between 9 percent and 11 percent since 2009, when the debt crisis hit Europe. Joblessness has drifted back down to 9.1 percent today from 10.1 percent when Mr. Macron was elected. But it is still more than double the level in Germany.
Mr. Macron promised to lower unemployment to 7 percent by the next presidential election in 2022, and has acknowledged that a failure to do so could fan the flames of populism.
But to achieve that, the economy would have to grow by at least 1.7 percent in each of the next four years, which is by no means certain, according to the French Economic Observatory, an independent research group.
Mr. Macron has tried to re-energize the French economy.
This year, he demanded an aggressive overhaul of the nation’s rigid labor code to help employers set the rules on hiring and firing, and bypass longstanding restraints that discourage employers from hiring new workers. The provisions also limit unions’ ability to delay change, by allowing individual agreements to be negotiated at the company or industry level between bosses and workers.
Those reforms have helped draw companies like Facebook and Google to France. But they could take years to show results for average workers. And the reforms have angered workers who see a plot to strip them of hard-won labor rights in favor of big business.

€3.2 billion: Tax cut for the rich
As part of his plan to stimulate the economy, Mr. Macron cut taxes for France’s wealthiest taxpayers during his first year in office, including by creating a flat tax for capital income.
But the centerpiece of the tax package, and the one that has drawn the most ire from protesters, did away with a wealth tax that applied to many assets of France’s richest households, replacing it with one that applied only to their real estate holdings.
That lowered by €3.2 billion, or $3.6 billion, the amount of revenue the state received this year.
There has been little evidence of a stimulus effect. Instead, Mr. Macron has earned a reputation for favoring the rich — one of the biggest sources of anger among the Yellow Vest protesters.
While high earners have enjoyed tax breaks under Mr. Macron’s fiscal plan, purchasing power fell last year for the bottom 5 percent of households. The majority in the middle, about 70 percent, saw no gain or pain either way, according to the French Economic Observatory.
Even before the Yellow Vests took to the streets, Mr. Macron realized that support was withering, and his government tried to pivot toward those left behind in the previous round of tax cuts.
His 2019 budget, unveiled in October, will grant breaks next year worth €6 billion for middle- and low-income earners. It also includes an €18.8 billion reduction in payroll and other business taxes to encourage hiring and investment.

€715 billion: The social safety net
While polls show that the Yellow Vests have the backing of three-quarters of the population, questions have swirled about how much pain the protesters are really experiencing — or how much of the outpouring can be chalked up to a centuries-old culture of demonstrating against change.
France protects citizens with one of the most generous social safety nets in the world, with over one-third of its economic output spent on welfare protection, more than any other country in Europe.
In 2016, France spent around €715 billion on health care, family benefits and unemployment, among other support.
To get that help, French workers pay some of the highest taxes in Europe.
While taxes are greatest on upper-income earners, France also has a value added tax of 20 percent on most goods and services. Together with the fuel tax that Mr. Macron’s government just vowed to suppress temporarily, such measures tend to hurt the poor, while the wealthy barely notice them.

>>> US Close Dow -3.10% S&P -3.24% NAsdaq -3.80% Russell -4.40% VIX 20.7 +26%

Stocks Fall on Concerns Over Trade, Economic Growth 

The S&P 500 tumbled 3.2% on Tuesday, catalyzed by waning optimism in trade negotiations between the U.S. and China and concern over future economic growth, which was signaled by the drop in U.S. Treasury yields. A technical breach of the S&P 500's 200-day moving average (2762.32) also contributed to some selling.

Meanwhile, the Dow Jones Industrial Average lost 3.0%, the Nasdaq Composite lost 3.8%, and the Russell 2000 lost 4.4%.

Monday's trade-relief rally was under pressure from the onset as market participants reoriented their mindset to concerns that the U.S. and China won't be able to settle differences over major trading issues in the next 90 days. President Trump seemed to stoke those concerns with a tweet that acknowledged the possibility of getting a deal done with China, but which also carried the reminder that he is a "Tariff Man," implying that he would revert to further tariff action if a deal doesn't get done.

Beyond that factor, today's sell-off was really sparked by economic growth concerns, which manifested themselves in a decisive curve-flattening trade in the Treasury market that also featured an inversion of the 2-yr note yield (2.80%) and 3-yr note yield (2.80%) over the 5-yr note yield (2.79%).  The 10-2 spread narrowed to 12 basis points, which is the narrowest spread since 2007.

The benchmark 10-yr yield dropped seven basis points to 2.92% while the 30-yr yield dropped 10 basis points to 3.17%.  Those moves were exacerbated by a "pain trade," as short sellers expecting higher rates were compelled to cover their bearish bets.

It was telling, too, that the drop in interest rates wasn't a catalyst for increased buying interest in the stock market. The reason being is that the drop in rates was grounded in concerns over future economic growth, which in turn drove concerns about future earnings growth.

Concerns over future economic growth were reflected in the poor performances from the cyclical sectors, as well as the domestically-oriented Russell 2000 (-4.4%). The financials (-4.4%), industrials (-4.3%), consumer discretionary (-3.9%), and information technology sectors (-3.8%) underperformed the broader market.

The rate-sensitive financial sector was undermined by the flattening yield curve, which raised concerns about a compression in net interest margins.

Regional banks were notable laggards as worries about lower mortgage loan demand stemmed from home builder Toll Brothers (TOL 33.00, -0.53, -1.6%) acknowledging that it saw a moderation in demand in its fiscal fourth quarter ended Oct. 31 and that it saw the market soften further in November. The SPDR S&P Regional Bank ETF (KRE 52.63, -3.05) fell 5.5%.

Other laggards included the cyclical transport and chip stocks, which respectively weighed on the industrial and tech sectors. Notable underperformers included industrials UPS (UPS 106.80, -8.47, -7.4%) and American Airlines (AAL 36.69, -2.96, -7.5%); and chipmakers Advanced Micro (AMD 21.12, -2.59, -10.9%) and NVIDIA (NVDA 157.11, -12.93, -7.6%). The Dow Jones Transportation Average lost 4.0%.  The Philadelphia Semiconductor Index lost 5.0%.

Apple (AAPL 176.69, -8.13) fell 4.4% after HSBC Securities downgraded the stock to Hold from Buy and another supplier issued a guidance warning. Chip supplier Cirrus Logic (CRUS 37.95, -0.72, -1.9%) lowered its revenue guidance due to recent weaknesses in the smartphone market. The other FANG stocks, Facebook (FB 137.93, -3.16, -2.2%), Netflix (NFLX 275.33, -14.97, -5.2%), Alphabet (GOOG 1050.82, -55.61, -5.0%), and Amazon (AMZN 1668.40, -103.96, -5.9%), also showed considerable losses.

On the other hand, the utilities sector (+0.2%) was the only group that finished in the green. The defensive-oriented real estate (-1.3%) and consumer staples (-1.6%) sectors were the only other groups to finish with losses under 2.0%. 

In other corporate news, AutoZone (AZO 888.07, +55.61, +6.8%) led the S&P 500 in gains after it beat earnings expectations, while Dollar General (DG 104.10, -7.60, -6.8%) fell after it missed earnings estimates and lowered its fiscal 2019 outlook.

Separately, the CBOE Volatility Index (VIX) spiked 25.3% to 20.60 amid the market downturn, and WTI crude rose 0.1% to $53.13/bbl. 

Investors did not receive any notable economic data on Tuesday.

Looking ahead, investors will receive the weekly MBA Mortgage Applications Index and the Fed's Beige Book for November on Wednesday. On Thursday, investors will receive the ADP Employment Change Report for November, Q3 Nonfarm Productivity and Unit Labor Costs, Trade Balance for October, weekly Initial and Continuing Claims, Factory Orders for October, and ISM Services for November. 

As a reminder the stock market will be closed on Wednesday in honor of the late George H.W. Bush, the 41st President of the United States.

  • Nasdaq Composite +3.7% YTD
  • Dow Jones Industrial Average +1.3% YTD
  • S&P 500 +1.0% YTD
  • Russell 2000 -3.6% YTD

>>> Big OPEC meeting coming up on Thursday, December 6

Big OPEC meeting coming up on Thursday, December 6

On Thursday, December 6, OPEC will hold its 175th (Ordinary) OPEC Meeting, as they call it. Basically, they are meeting to discuss the oil market.

Joining OPEC in Vienna will be other key non-OPEC producers, namely Russia.

The importance of this meeting is to see whether key producers (mainly Saudi Arabia and Russia) will agree to extend prior, globally coordinated, oil output cuts.

Saudi Arabia and Russia did already agree to extend the cuts over the weekend at the G-20 conference. However, this was not quantified and there's no guarantee that they will all stick with cutting. They probably will, but don't get too excited just yet.

U.S. President Trump opposes a production cut, so if there is a cut on December 6, it will be interesting to see how President Trump responds.

Recently, the OPEC advisory committee recommended an oil production cut of 1.3 million barrels per day (bpd) from October 2018 levels to bring the oil market back into balance.

In general, some of this can be really confusing.

Specifically, why would OPEC and other nations such as Russia implement/continue a coordinated oil production cut when the U.S. continues to boost oil production higher and higher?

Maybe this is why there's some hesitance coming out of Russia regarding this. Yes, OPEC and Saudi Arabia recently increased production too, but that was just to offset losses of oil volumes that were being sent from Iran (post-sanctions) to key user of Iranian oil.

Currently, OPEC and its non-OPEC allies that they are working with are still talking. They are trying to work towards a deal to cut at least 1.3 mln bpd, but so far, they are still going over the deal.

Don't forget, the provincial government of Alberta, Canada surprised the market yesterday with oil production cuts of 325K bpd (Alberta market was oversupplied by ~200K bpd, so the cut more than makes up the oversupply there). So, the OPEC/non-OPEC cut, if there is one, would be added to this 325K reduction that's happening in Canada.

Following the unwinding in the oil market that began in early October, which caused WTI crude oil to tank $26.12, or 34.2%, to as low as $50.29/barrel seen on November 28, oil has settled down at least a little bit. Jan WTI crude oil is now -$0.03 at $52.92/barrel.

(ZH) "Make Volatility Your New Best Friend" in 2019, But Not Before "One Last Hu

"Make Volatility Your New Best Friend" in 2019, But Not Before "One Last Hurrah": BofA

While not quite as bearish as Morgan Stanley which last week downgraded US stocks to a Sell, in its year ahead outlook for markets and the economy in 2019, Bank of America writes that "the long bull market cycle of excess stock and bond returns is expected to finally wind down next year, but not before one last hurrah."
The bear market vibe at the end of 2018 is expected to continue, with asset prices finding their lows in the first half of the 2019 once rate expectations peak and global earnings expectations trough; however, BofA Merrill Lynch also forecasts a record high peak in earnings for the S&P 500 next year and plenty of upside potential for investors who make volatility their new best friend.
In short, just like Gartman, the bank is covering all bases being both bearish (near-term), bullish (medium-term) and again bearish to close the year, predicting a "baby bear" market in the early part of 2019, or as Michael Hartnett called it - "big lows" - two weeks ago, before rebounding and rising as high as 3,000 before and closing the year around 2,900, officially a decline from the bank's 2018 year-end forecast of 3,000.
“In our view, the current weakness in the markets is not a reflection of poor fundamentals. Rather, it’s caused by a confluence of idiosyncratic shocks that create very real risks for investors to be concerned about but also opportunities for vigilant, well-positioned investors to pursue,” said Candace Browning, head of BofA Merrill Lynch Global Research.
For the year ahead, the Research team forecasts modest gains in equities and credit, a weaker dollar, widening credit spreads, and a flattening to inverted yield curve, signaling a tighter squeeze on liquidity that calls for higher levels of volatility. This comes against a backdrop of slowing, but still-healthy economic growth; mild inflation, except in the U.S. where inflationary pressures are building; and a notable slowing in global EPS growth from the torrid pace of 2017 and 2018.
Two big themes are expected to affect asset returns and the pace of economic growth in 2019:
  1. An unprecedented level of global monetary policy divergence as the U.S. Federal Reserve continues to hike interest rates and other major central banks don’t; and
  2. whether a strong U.S. economy decoupled from the rest of the world, particularly Europe and China, can be sustained. The answer to that question could depend on big wild card risks in 2019: resolution of the trade war between China and the U.S., an EU political/economic crisis, and political gridlock in the U.S. that could slow capital investments and deteriorate investor sentiment.
The bank's 2019 macro and market forecasts are summarized below:
BofA analysts summarized their views on the market and made the following 10 macro calls for the year ahead:
  1. Global profit growth declines: Earnings growth is expected to decline sharply next year, from >15 percent to <5 percent on a year-over-year basis. The BofA Merrill Lynch Research team is bearish stocks, bonds, and the U.S. dollar; bullish cash and commodities; and long on volatility. We expect to turn tactically risk-on in late spring, but to start 2019 with a bearish asset allocation of 50 percent stocks, 25 percent bonds and 25 percent cash.
  2. S&P 500 Index peaks: Earnings growth also is likely to slow in the U.S., though the near-term outlook remains somewhat positive. The Standard and Poor’s 500 Index is expected to peak at or slightly above 3,000 before settling in at a year-end target of 2,900. We forecast earnings per share (EPS) growth of 5 percent, which would put the S&P 500 EPS at a record high of $170 next year. Our U.S. equity strategists are overweight health care, technology, utilities, financials and industrials, and underweight consumer discretionary, communication services and real estate.
  3. Cash gets competitive: For most of this long cycle, cash yields couldn’t hold a candle to more compelling asset class alternatives like stocks and bonds; with cash yields higher than dividend yields for 60 percent of the S&P 500 already, cash becomes even more competitive in 2019. Our Fed call puts short rates close to 3.5 percent by the end of 2019, well above the S&P 500’s 1.9 percent dividend yield. Moreover, in a rising-rate environment, cash-generative investments have outperformed credit-sensitive assets. Given cash’s re-rating, 2019 boils down to a strategy of buying sources of cash and selling users of cash.
  4. U.S. economy slows as fiscal stimulus fades: Real U.S. GDP growth of 2.7 percent is forecast for 2019, slowing in the second half of the year as the effects of fiscal stimulus begin to fade. The unemployment rate could reach a 65-year low of 3.2 percent by year-end, pushing wage growth of 3.5 percent in aggregate. Consequently, core price inflation should gradually rise to 2.2 percent through 2019 and hold as rates continue to rise. The housing market is no longer a tailwind for the U.S. economy: we believe housing sales have peaked and home price appreciation is forecast to slow.
  5. Global economic growth decelerates: The global economy is forecast to grow 3.6 percent in 2019, down slightly from 3.8 percent in 2018, with inflation hovering around 3 percent. Most major economies are likely to see decelerating activity, with real GDP growth of 1.4 percent in both Europe and Japan, and 4.6 percent growth in aggregate among the emerging markets. Chinese growth is likely to further weaken early next year as a result of still-tight financial conditions and the U.S.-China trade conflict; however, a steady stream of monetary and fiscal stimulus measures to turn the economy around is expected.
  6. Global monetary policy divergence: Global monetary policy is expected to become less friendly in 2019. A divided government means that additional fiscal stimulus in the U.S. seems unlikely. Europe is largely frozen in place by its budget rules, and Japan appears ready to implement yet another ill-timed consumption tax hike, in our view. Further divergence in monetary policy between the Fed and other major central banks is expected to continue. We forecast the Fed will hike rates four times in 2019, reaching a terminal funds rate of 3.25-3.50 percent by year-end. Meanwhile, the European Central Bank and Bank of Japan are unlikely to raise policy rates meaningfully above zero for at least another two years.
  7. Credit cycle continues despite widening spreads and flattening curves: Globally, the credit markets face high levels of episodic volatility in 2019 with shrinking supply and quantitative tightening putting 25 to 50 basis points of upward pressure on investment grade and high-yield bond spreads. In the U.S., total returns of 1.42 percent are forecast for high-grade corporate bonds and 2.4 percent for high yield. The U.S.-leveraged loan market remains a bright spot in the credit spectrum, with total returns of between 4 and 5 percent. High-grade and high-yield corporate credit are expected to deliver total returns of 1 percent in Europe and, in Asia, 3 percent and 4.9 percent, respectively.
  8. Emerging markets: After a major sell-off in 2018, emerging market assets are cheap and under-owned and could be a big winner in 2019 as the dollar weakens, yet EM remains highly vulnerable to spillover effects of U.S.-China trade tensions. We are bullish Brazil and expect its post-election rally to continue, and Russia is expected to improve as we believe sanction risk is priced in. Meanwhile, the outlook is bearish for Mexico, where credit rating downgrades are a concern and volatility surrounds policy changes under its new president.
  9. Foreign exchange volatility on a weaker dollar: The U.S. dollar was the best performing asset class in 2018, however, most of the dollar gains appear to be in the past. A weaker dollar is expected in 2019, against a stronger euro and Japanese yen. We forecast the EUR/USD and USD/JPY to reach 1.25 and 105, respectively at year-end. The strength of the dollar will depend heavily on evolution of the trade relationship between China and the U.S., which in the short term may mean selling the dollar against a currency insulated from trade war rhetoric, such as the British pound and Swiss franc.
  10. Commodities modestly positive: The outlook for commodities is modestly positive despite a challenging global macro environment. We forecast Brent and WTI crude oil prices to average $70 and $59 per barrel, respectively in 2019; weather-induced volatility is expected in the near term for U.S. natural gas, as cold weather could propel winter natural gas over $5/MMbtu, yet we remain bearish longer term on strong supply growth. In metals, we remain cautious about copper because of Chinese downside risk. We forecast gold prices will rise to an average of $1,296 per ounce, but could rally to as high as $1,400, driven by U.S. twin deficits and Chinese stimulus.
Which leads us to the following "9 Trades" for 2019 from Michael Hartnett:
  1. Long VXX (IPATH S&P 500): Q1 long volatility play on liquidity withdrawal, policy impotence & uncertainty, rising recession odds.
  2. Long US 2s10s flatteners: H1 play on US yield curve inversion, Fed's intention to hike 4 times in 2019.
  3. Short LQD (iShares iBoxx $ I): 2019 play on excess leverage, shadow banking & credit contagion risk
  4. Long KBWB (KBW Bank ETF), short IAI (iShares-DJ BR DL) and PSP (Invesco Global List): 2019 "long liquidity, short leverage" play...long Main St banks, short Wall St banks & Private Equity.
  5. Long BRIC vs. short FAANG vs. QQQ (Inv QQQ Trust Ser 1): Long BRIC (Brazil, Russia, India and China), short FAANG (Facebook, Apple, Amazon, Netflix, Google) play on value outperforming growth.
  6. Long AUD/USD, long EMB (Ishares): Q2'19 play on China growth inflection, bullish commodities, inflation hedge.
  7. Long XHB (S&P Homebuilders): Play on H2'19 peak yields once Fed hikes fully priced in.
  8. Long USSWIT5: Play on global policy populism driving fiscal stimulus, infrastructure spending, wage growth.
  9. Long SX7E: The most contrarian bull trade of 2019; highest beta to "The Big Low"; ECB rate hike Dec'19.

(ZH) "Everybody's Miserable": Why Hedge Fund Analysts Suddenly Find Themselves I

"Everybody's Miserable": Why Hedge Fund Analysts Suddenly Find Themselves In An Existential Crisis

As hedge funds continue their 'monumental struggle' to outperform passive investments and market indices that have provided impressive and steady double-digit returns over the last decade to earn their modest billions in fees, analysts in the industry - especially those at the mid- and senior-level – are having trouble finding, and keeping, work.
A prime example is David Goldburg, the title character in a Bloomberg profileof the deteriorating hedge fund environment. After working on Goldman Sachs' prop desk, managing money for Michael Milken and failing at his own attempt to start a hedge fund, he couldn’t even find a job for one simple reason: at the not-so-tender age of 55, and with his experience, he was just too expensive.

That's why instead of spending high 7-digits (or more) to retain "experienced" talent, hedge funds are instead hiring several younger analysts for the same price of one senior analyst, a process being called "juniorfication".
There is a good reason for that: despite the S&P rising modestly in 2018, hedge funds have posted deplorable returns this year. In fact, as the Deutsche Bank chart below shows, hedge funds have generated no alpha (or beta for that matter) over the past 4 years.
Goldburg has been swept up by the turmoil gripping the hedge fund space, where analysts as young as 30 are facing an existential crisis in a changing Wall Street where capital markets no longer function without HFTs and central bank intervention. He told Bloomberg:
"It’s pretty brutal out there. If you have more than 15 years experience, and you want to transition to something else or want that next level of opportunity, there’s never been a worse time."
He has a point: in addition to miserable returns, Bloomberg adds that automated trading, a world awash in data and passive investing have made stock pickers less influential. Hedge fund fees are down, making analysts targets for cuts. European regulations (thanks MiFid) have put researchers out of work. And in a 10-year bull market juiced by the Federal Reserve’s low rates and bond buying, insights more expensive than “buy the dip’’ simply cost too much.
In short, the industry is starting to contract, and analysts - those middlemen who make the 2 and 20 model possible - have no idea how to respond, especially as the growing prominence of (cheap) machines, makes some of their once key tasks no longer important enough to guarantee them work.
Meanwhile, in the last three years, nearly 400 more hedge funds around the world have closed than opened, according to Hedge Fund Research. That means not only are there more people looking for work, there’s little or no movement in existing jobs according to Bloomberg. This means that senior analysts who in years past would’ve gone on to start their own funds suddenly find themselves stuck (assuming they avoid getting fired) so there’s stagnation on the organizational chart.
The surviving so-called single-manager firms, even the ones managing tens of billions, are running leaner, said Ilana Weinstein, founder and chief executive officer of IDW Group, a hedge fund recruiter.
“If we think about the death of the analyst, I think you have to go up one level and talk about the death of most hedge funds,’’ Weinstein said.
To be sure, few analysts are in dire straits. Many of the senior ones were, or still are, making mid-to-high six figures, with plenty of upside in a good year, although 2018 is shaping up as the worst years since 2015 when the global stock market - if not the S&P - experienced a bear market.
But, as Bloomberg notes, many analysts also facing something worse: the panic that comes with realizing their career aspirations will never be attained. They may never make partner or run their own firm. They’re stuck.
And then there is the greatest shame of all: getting laid off, as Balyasny just did when as we reported last night, it laid off 20% of its employees after losing $4 billion in 2018 between poor performance and redemptions.
Those lucky ones who do keep their jobs, are starting to come to terms with the fact that they may not wind up progressing by starting their own firms - which is where the big money has always been - or making partner at their current job.
As if they didn't have enough to worry about, offshore competition has been increasingly pressuring hedge fund workers, offering far cheaper alternatives half way around the globe. Software companies stocked with former analysts, like Linedata, are popping up and making an impact on the industry.
Jonathan Shapiro, a Linedata senior director said: “They’ve let people go due to their assets shrinking. We provide them with someone who’s just as qualified and is ready and eager to do that work for a fraction of the cost.”
As for Goldburg, who finally found a job outside of the hedge fund world (ironically, inside the "hot, hot, hot" du jour pot industry), he decided to project his personal sentiment to all his former co-workers : "everybody’s miserable and everybody’s trying to grind it out. Everyone wants that better opportunity and that better job, but they don’t exist. And no one wants to leave their existing seat because if you leave your existing seat, it’s like musical chairs - you might not be able to get another seat."

(ZH) Here Is What Triggered Today's Sudden Stock Liquidation

Here Is What Triggered Today's Sudden Stock Liquidation

Earlier this morning, Nomura's Charlie McElligott noted something which in retrospect was quite prophetic: the cross-asset strategist highlighted that his Risk Parity model showed that the market's most important strategy is in "de-risking" mode as the economic cycle turns sharply:
In a positioning confirmation / “nod” then to this growth- and inflation- slowdown scenario, it is finally worth noting that we see our Risk Parity model having added enormous notional size in global Government Bonds (USTs and JGBs) over the past month, against very large selling of global Equities and Credit.
The implication - and confirmation - judging by today's market, is that the trade was a long way from finished, looking at the recent risk parity deleveraging in equities...
... offset by buying of gov't bonds.

But while ongoing (relatively slow) risk parity deleveraging may explain the pressure on the market over the past month, the reason for the sharp waterfall in US stocks just after 12pm ET...
... has to do with another systematic "trader" type in the market: namely the much faster CTAs, or managed futures funds, which do nothing but chase market momentum once it has been established.
As McElligott writes in a follow-up note the Nomura CTA Trend model "is again deleveraging massive notional in long US Equities expressions across SPX, RTY and NDX live."
This is more about performance and year-end timing than the curve inversion / “growth scare” story…but that certainly is not helping the sentiment here either, as stops are being triggered across fundamental and rules-based strats.
More importantly, McElligott identifies the specific deleveraging "trigger" behind the S&P waterfall liquidation, which was due to a massive CTA selling order, which was unleashed once deleveraging stops were hit in the S&P. Specifically, the SPX model was triggered to sell down at 2,763 - the S&P's 200DMA - with $32.8B notional for sale, reducing CTAs from "+100% Max Long" down to "+65% Long."
One the selling program hit, it was lights out and the number of stocks that were sold off all at once, as measured by the NYSE Uptick-Downtick index, reached a negative 1,459, which was among the 10 worst readings of the year. Meanwhile, as Bloomberg's Andrew Cinko writes, the breadth of the S&P 500's decline sits at 88% currently, ranking it among the worst of the year, though remember that in February and April it was well north of 95%. So there's plenty of room for it to get uglier...
... and it very well might: if the S&P drops another 20 or so points, as the next sell point just under 2,711, where -$32.4B additional notional for sale, with “Max Short” level now lower at 2574, at which point the market would be flooded with -$122B notional in selling volume.
And here are the CTA trigger points visually.

>>> April Group draws BC Partners and CVC for final bids – sources

April Group draws BC Partners and CVC for final bids – sources

  • At least some bids value target at EUR 20-EUR 25/share
  • Unclear if KKR remains in the hunt

The auction for French listed insurance broker and carrier April Group [EPA:APR] is in the home stretch as CVC has submitted a binding offer for the company, one source close and three sources familiar said. BC Partners also placed a bid, the source close and the first source familiar added.
It is not clear when exclusivity will be awarded as the review of the submitted offers remains underway, the source close added.
KKR was previously reported by this news service to be in the running for the asset. KKR declined to comment on whether it was still involved in the auction.
The final bids are offering between EUR 20 and EUR 25 for each April Group share, the source close and the first two sources familiar said, thus implying a EUR 800m-EUR 1bn market capitalization for the company. One source doubted whether such offers would meet April Group’s price expectations.
At market close on 4 December 2018, the company’s stock traded at EUR 16.4, and the company’s market cap stood at EUR 671m.
In 2017, the company generated a EUR 69.4m EBIT on EUR 928.4m sales, according to the company’s financial documentation.
On 23 October, the French insurer announced it was discussing its strategic options with its majority shareholder and had received preliminary expressions of interest from third parties. Bruno Rousset, founder of April, holds 65.1% of the company through vehicle Evolem.
Rothschild is handling the transaction, as reported.
BC Partners, CVC, April and Rothschild declined to comment.
BC Partners is the majority owner of Acuris, the publisher of this news service.