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Margin Call: You Were Warned Of The Risk

Margin Call: You Were Warned Of The Risk

I have been slammed with emails over the last couple of days asking the following questions:

“What just happened to my bonds?”

“What happened to my gold position, shouldn’t it be going up?”

“Why are all my stocks being flushed at the same time?”

As noted by Zerohedge:

“Stocks down, Bonds down, credit down, gold down, oil down, copper down, crypto down, global systemically important banks down, and liquidity down

Today was the worst day for a combined equity/bond portfolio… ever…”

This Is What A “Margin Call,” Looks Like.

In December 2018, we warned of the risk. At that time, the market was dropping sharply, and Mark Hulbert wrote an article dismissing the risk of margin debt. To wit:

“Plunging margin debt may not doom the bull market after all, reports to the contrary notwithstanding.

According to research conducted in the 1970s by Norman Fosback, then the president of the Institute for Econometric Research, there is an 85% probability that a bull market is in progress when margin debt is above its 12-month moving average, in contrast to just a 41% probability when it’s below.

Why, then, do I suggest not becoming overly pessimistic? For several reasons:

1) The margin debt indicator issues many false signals

2) There is insufficient data

3) Margin debt is a strong coincident indicator.”

I disagreed with Mark on several points at the time. But fortunately the Federal Reserve’s reversal on monetary policy kept the stock market from sinking to levels that would trigger “margin calls.”

As I noted then, margin debt is not a technical indicator that can be used to trade markets. Margin debt is the “gasoline,” which drives markets higher as the leverage provides for the additional purchasing power of assets. However, that “leverage” also works in reverse as it provides the accelerant for larger declines as lenders “force” the sale of assets to cover credit lines without regard to the borrower’s position.

…click on the above link to read the rest of the article…

Black Thursday: “One Giant Margin Call” Drags Dow Down 10%

Black Thursday: “One Giant Margin Call” Drags Dow Down 10%

“The fact that Treasuries, munis, and gold are getting hit tells me that everything is for sale right now. One giant margin call where even the safe-havens aren’t safe anymore. Except for cash.”

The  Fed unveiled an unprecedented liquidity facility to rescue malfunction Treasury markets from themselves.. but it failed terribly.

Mark Sebastian Calls Monday’s Limit Down

For a few brief moments, as Dow futs exploded 1500 points higher, it looked like it might just work… but no…

Stocks puked into the close! Look at Small Caps!!! The Dow was down 10%! This was utter carnage today…

This was the biggest daily drop since 1987.

Additionally, the last four days have seen an 18% crash in the equal-weight S&P – that is more aggressive than during the peak of the financial crisis…

As one veteran trader said:

“this is the market telling The Fed it has to buy stocks.”

This is what it looks like when what shred of Fed liquidity that was left finally evaporates…

Investors are at the most-extreme fear level on record…

…click on the above link to read the rest of the article…

Japanese Bond Crash, Margin Call Sends Shockwaves Around The Globe

Japanese Bond Crash, Margin Call Sends Shockwaves Around The Globe

For a dramatic preview of what will happen in a flash to all those record low interest rates without the backstop of central banks and ravenous pension fund, look no further than what happened in Japan overnight, where bond futures suffered the biggest one-day crash since August 2, 2016, sliding as much as 0.97 yen to 154.05, and triggering margin calls for investors after the worst 10-year debt auction in three years.

More ominously, once the rout started it quickly spread outside of Japan, because as yields jumped, the sell-off spilled into US Treasuries and European debt.

There were three things behind the swift collapse: the first catalyst was the Bank of Japan’s Monday decision to slash bond purchases in October for the four major maturity buckets in order to steepen the curve and avoid further flattening which Kuroda has repeatedly expressed concern about in the past; the BOJ had indicated it may even stop buying debt of more than 25 years. It also sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October.

“The BOJ is showing its clear intention to correct distortions in the curve through flexible adjustments in market operations,” said Mari Iwashita, chief market economist at Daiwa. “While cutting the lower end of purchases in bonds maturing over 25 years to zero looks shocking, the BOJ will probably cut buying in this zone slowly.”

“The BOJ’s operation change had a huge psychological impact,” said Eiji Dohke, chief bond strategist at SBI Securities in Tokyo. “Investors are reluctant to buy given the risk of the BOJ skipping a purchase.”

 …click on the above link to read the rest of the article…

Forecast 2019: Ding Ding ! Margin Call USA


Welcome to the American hall of mirrors… and mind the broken glass all over the floor. That’s Nature’s way of saying the country has run out room to punk itself. 2018 was the consolidation of bad faith in everything we do: politics, the news media, economics & finance, show biz, regular biz, jurisprudence, medicine, education, and relations between men and women — the year of peak dishonesty and self-deception. Of course, the trouble with dishonesty is that it doesn’t comport with Reality, and Reality being Mother Nature’s husband, bats in the cleanup position. Entering 2019, the bases are loaded with delusions, misdirections, and turpitudes. I shall get right to it without further throat-clearing.

Trumpology

The nation’s focus remains clamped to the mercurial character in the White House. If you subscribe to Strauss and Howe’s theories about The Fourth Turning, then you might see president Donald J. Trump playing the archetypal role they call “The Gray Champion,” an elder figure of the “transcendental” Boomer generation sent by fate to rescue a floundering society at a grave moment in the seasons of history. Yes, I know: we might have been better off calling Ghostbusters. A cardinal precept at this blog is that fate is a trickster. You order a Gray Champion and room service sends up a Golden Golem of Greatness.

To put it mildly, Mr. Trump has failed to charm at least half the country. They are embarrassed at his physical presence: his lumbering gait, like unto a behemoth land mammal of the Oligocene; that swaying bay window stomach half-concealed by the flaps of his suit-jacket and bisected by the oddly elongated necktie; the pained smile he puts on for the photo-ops; his man-spreading when seated with the world’s poohbahs, and that strange confection of sculpted hair, like the spun sugar on a Croquembouche, or the pouf on some horrifying plastic dashboard figurine.

…click on the above link to read the rest of the article…

Chinese Verbal Intervention In The Market Fails As Stock Rout Accelerates

This morning, when we reported that the latest flood of margin calls, resulting from $600 billion in shares pledged as collateral for loans and representing a whopping 11% of China’s market cap, sent the Shanghai Composite tumbling 3% to the lowest level since November 2014, we noted that local government efforts to shore up confidence in smaller companies had, quite obviously, failed to boost sentiment… or stem the selling.

So, as many expected, just before Beijing announced the latest batch of stagflationary economic data including retail sales, industrial production and fixed asset investment, of which the most important was Q3 GDP which printed at 6.5%, the lowest level since Q1 2009, and missing consensus expectations even as inflation has continued to creep higher…

… the central bank delivered another round of massive verbal intervention, telling investors stocks are undervalued, the economy is sound, the central bank will use prudent, neutral monetary policy and keep reasonable, stable liquidity. Additionally, according to a Q&A statement with Governor Yi Gang posted on the PBOC website:

  • the PBOC will use monetary policy tools including MLF lending to support banks’ credit expansion
  • the PBOC to push forward bond financing by private cos.
  • the PBOC says recent stock market turmoil was caused by investors’ sentiment
  • the PBOC is studying measures to ease cos.’s financing difficulties
  • the PBOC to push forward bond financing by non-state firms; calls for private equity funds to support cos. with financing difficulties

In other words, the central bank’s “got this.”

And just to make sure the “all clear” message is heard loud and clear, also this morning the China Securities Regulatory Commission (CSRC) encouraged various funds backed by local government to help ease pressure on listed companies from share-pledge risks…

…click on the above link to read the rest of the article…

Margin Call: Burst Of Sell Orders At 2:43PM Was Highest Since The Flash Crash

Earlier today, when looking at yesterday’s dramatic market plunge, we highlighted a note from BMO technical analyst Russ Visch who showed that, according go the NYSE “ARMS” Index which is a means of determining market strength or weakness by analyzing the relationship between advancing stocks and declining stocks and their respective volumes, Wednesday’s selling pressure was actually not that high despite the seemingly relentless push lower in stocks in the afternoon.

In other words, there was no “selling panic”, and no legitimate liquidation as the selloff was largely a function of coordinated deleveraging by both hedge funds and systematic traders.

Which is why as of Thursday morning, Visch had a simple, and correct, conclusion based on yesterday’s market action: “Expect more downside.”

Today was different, because shortly after 2:40pm when a massive selling program emerged as if out of nowhere and sent the Dow Jones plummeting by over 600 points in a manner of minutes, the selling volume was indeed one for the ages.

According to the NYSE TICK, or uptick minus downtick, index, at precisely 2:43pm, the selling order flood was so big it not only surpassed the acute liquidation that was observed around 3PM on Wednesday, but the -1,793 print was one that had not been seen for 8 years: as Bay Crest Partners technical analyst Jonathan Krinsky wrote, the sudden and violent surge in selling as measured by the TICK index, when downtick volume overpowered upticks, was the lowest reading since the May 6, 2010 “flash crash” when liquidity dried up in markets, sending the market plummeting for a few minutes, as HFT briefly went haywire (or when a spoofer outsmarted the algos, depending on what version of events one believes).

…click on the above link to read the rest of the article…

Stocks Drop As Trade War Returns; Japanese Bond Rout Leads To Emergency Margin Call

The latest trade war truce lasted less than a day, and after stocks jumped yesterday following an early report that Mnuchin had resumed trade talks with his Chinese counterpart, a late Tuesday report that the Trump admin is planning to increase the tariff rate on some $200BN of Chinese imports from 10% to 25% led to an immediate slide in risk assets around the globe, and this morning global stocks and futures were a sea of red despite Apple’s stellar results which helped lift the Nasdaq.

In response, China again warned the U.S. against “blackmailing and pressuring” it over trade. China’s Ministry of Foreign Affairs said it will fight back if the U.S. further increases tariffs as it now contemplated. “If the U.S. takes measures to further escalate the situation, we will surely take countermeasures to uphold our legitimate rights and interests,” spokesman Geng Shuang said at a regular press conference on Wednesday.

The return of trade war tensions initially sent the dollar higher across the board, while the Yuan tumbled, with the offshore Yuan tumbling to a one year low of 6.8642 against the dollar, before the PBOC intervened again, and the onshore Yuan reversed losses mid-afternoon after a large Chinese bank was seen selling dollars. According to Bloomberg, at least one big Chinese bank started to sell dollars aggressively around 6.83 yuan per USD, and those flows disappeared after rate went to 6.82. A large Chinese bank also sold dollars onshore earlier in the day, spurring other banks to follow.

The big overnight move, however, wasn’t in China but in Japan, where one day after the BOJ tweaked its monetary policy while leaving its YCC largely intact, bond traders tried to find the new tolerance breaking point for 10Y JGB.

…click on the above link to read the rest of the article…

China Threatened By “Vicious Circle Of Panic Selling” From Marketwide Margin Call

Two weeks ago, when commenting on the PBOC’s latest required reserve ratio cut, we pointed out that one of the more prominent risks facing the Chinese stock market, and potentially explaining why the Shanghai Composite simply can’t catch a bid during the recent rout, is the risk of a wave of margin calls resulting in forced selling of stocks pledged as collateral for loans.

The pledging of shares as loan collateral – a practice that has gotten increasingly more popular over the years – has been especially prevalent among smaller companies as we observed in February and initially, last June. Unlike in the U.S., where institutional shareholders are a big market presence, private Chinese firms are often controlled by a major shareholders, who often own more than half of company. These big stakes are the most convenient tool for such big shareholders to raise their own funds.

Here, the risk for other shareholders is that when major investors take out such share-backed loans is that stocks can plunge sharply when the borrowers run into trouble, and are forced to liquidate stocks to repay the loan. Hong Kong-listed China Huishan Dairy fell 85% in one day in March 2017: It is unclear what triggered the selloff in the first place, but the fact that Huishan’s chairman had pledged almost all of his majority shareholding in the company to creditors was likely a key factor.

Small caps aside, the marketwide numbers are staggering: about $1 trillion worth of stocks listed in China’s two main markets, Shanghai or Shenzhen, are being pledged as collateral for loans, according to data from the China Securities Depository and ChinaClear. More ominously, this trends has exploded in the past three years, and according to Bank of America, some 23% of all market positions were leveraged in some way by the end of last year in China, double from the start of 2015.

Source: WSJ

…click on the above link to read the rest of the article…

Collapsing CDS Market Will Lead To Global Bond Market Margin Call

Collapsing CDS Market Will Lead To Global Bond Market Margin Call 

As Zero Hedge previously notedliquidity is there when you don’t need it, and it promptly disappears once it is in demand. Consider it “cocktease capitalism.” If liquidity lasts longer than 4 hours, call the CFTC because you may be experiencing a spoof. Right now, the ultimate spoof is setting up as the credit default swap market collapses, and a global bond market margin call is just around the corner.

The most serious risk at the moment is the lack of bond market liquidity. This problem was created by the Federal Reserve. By flooding the market with liquidity, the Federal Reserve paradoxically destroyed the liquidity it sought to create. Initially, the Federal Reserve’s actions helped stem the panic selling when it stepped in as the buyer of last resort. However, the Fed is quickly becoming the buyer of first resort. The CME even has a Central Bank Incentive Program to encourage foreign central banks to buy S&P 500 futures. It’s not a stretch of the imagination to presume the Federal Reserve is buying S&P 500 futures alongside the foreign banks.

As the Fed’s balance sheet expanded ever larger, they transformed from being a mere market participant to becoming the market itself. The Federal Reserve, along with the rest of the world’s central banks, are essentially engaging in a multi-year effort to corner the global bond market. As we have seen in every case, no one has ever successfully cornered a market indefinitely. From the Hunt Brothers in the 1980 silver market to the Saudi royal family in the modern fractured oil market to the Duke brothers in the frozen concentrated orange juice market, it simply has not worked. Running a monopoly is an uphill battle that eventually results in a spectacular blowup. Why would the central banks be any different?

As Zero Hedge pointed out recently, the run on the central banks has already begun. For the first time ever, QE failed. The first casualty was the Riksbank in Sweden.

Swedish 10 year yield

…click on the above link to read the rest of the article…

 

 

Steen Jakobsen: Get Ready For The Biggest Margin Call In History

Steen Jakobsen: Get Ready For The Biggest Margin Call In History

A recommendation to move to cash

Economist Steen Jakobsen, Chief Investment Officer of Saxo Bank, believes 2015 will be another “lost year” for the economy. And he predicts the Federal Reserve will indeed start to raise rates later this year, surprising the market and taking the wind of out asset prices.

He recommends building cash and waiting to see how the coming storm — which he calls the “greatest margin call in history” — plays out:

0% interest rates at $0 down has not created the additional momentum to the economy The Fed was hoping for. The trickle down effect, the wealth effect, has instead made for bigger inequality in society. So I think we’re set for a rate hike in either in June or in September. I think this will be the biggest margin call in history on the asset inflation created by the Fed .

That’s where I differ from most Fed watchers. Everyone else is looking at employment, inflation targeting. I don’t think Fed is at all looking at those. They are saying “Listen, the 0% interest rate is getting us absolutely nowhere, we think it’s very, very important for us to move to a more neutral place”. At the same time we will communicate that we are open-minded to additional programs or whatever needs to be done to secure the long term growth of the economy. But that will be on the down side, not on the up side. And as year has progressed, and I’ve said this publicly, I think 2015 is already lost in terms of recovery here. And that will take the market by surprise.

The market will ask in September when the Fed hikes: “Why are you hiking interest rate when growth is below target, inflation below target”? Well, the Fed’s response will be “Because this is the biggest asset inflation we’ve seen in human history and we need to address it”.

…..

 

…click on the above link to read the rest of the article and/or listen to the podcast…

The Global Dollar Funding Shortage Is Back With A Vengeance And “This Time It’s Different”

The Global Dollar Funding Shortage Is Back With A Vengeance And “This Time It’s Different”

The last time the world was sliding into a US dollar shortage as rapidly as it is right now, was following the collapse of Lehman Brothers in 2008. The response by the Fed: the issuance of an unprecedented amount of FX liquidity lines in the form of swaps to foreign Central Banks. The “swapped” amount went from practically zero to a peak of $582 billion on December 10, 2008.

The USD shortage back, and the Fed’s subsequent response, was the topic of one of our most read articles of mid-2009, “How The Federal Reserve Bailed Out The World.”

As we discussed back then, this systemic dollar shortage was primarily the result of imbalanced FX funding at the global commercial banks, arising from first Japanese, and then European banks’ abuse of a USD-denominated asset-liability mismatch, in which the dollar being the funding currency of choice, resulted in a massive matched synthetic “Dollar short” on the books of commercial bank desks around the globe: a shortage which in the aftermath of the Lehman failure manifested itself in what was the largest global USD margin call in history. This is how the BIS described first the mechanics of the shortage:

 

…click on the above link to read the rest of the article…

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