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By Tyler Durden

“Being short those names was a really good trade during the second half of 2015. This is the flip side of that,” said Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors. “All these names which had been doing really bad have turned around and started performing. I would say a lot of it is people getting short squeezed.”

Indeed it did…

An investment approach that profits from the divergent paths of high- and low- momentum stocks over time, a strategy that had one of its biggest gains on record in 2015, seized up in the last three months, posting the worst quarter in six years. The plunge helped zap returns among a big category of quantitative hedge funds, the so-called market neutral group, whose year-to-date decline of 2.3 percent is the largest since 2012.

While the tactic may be esoteric, the force that pummeled it is not: a growing revulsion among investors to shares whose main claim to fame in the past few years was that they kept going up. Anyone pursuing the strategy got into particular trouble shorting companies with the lowest price momentum, a section of the market that ended up being the quarter’s biggest winner.

“Momentum was the dominant factor really significantly last year, more so than I can recall any time in my career. When market neutral performs like that, when it breaks, it breaks hard,” said Benjamin Dunn, president of Alpha Theory Advisors, which works with hedge funds overseeing about $6 billion. “All the returns to momentum that were generated, you saw that reverse this year.”

And here is the reason why – mid-February (as Carney and Draghi bid stocks off the lows), it was weak momo stocks that massively outperformed strong momentum stocks…

Entirely breaking the models…

As Bloomeberg concludes,

One cause of the momentum breakdown was “mean reversion,” according to JPMorgan strategist Marko Kolanovic, who predicted in January investors would rotate into value assets, seeking out shares priced at deep discounts to things like earnings and assets. Using long-short proxies, value beat momentum by 40 percent this year, buoyed by systematic strategies covering short positions, Kolanovic said in a March 17 note to clients.

That turnaround may have roiled returns for hedge funds. While they were snapping up the best-performing stocks, hedge funds also reduced value stock holdings in every quarter of last year, making it the least popular of the 10 styles tracked by Evercore ISI.

This did not end well the last time, as detailed at the time, during the week of August 6, 2007, a number of high-profile and highly successful quantitative long/short equity hedge funds experienced unprecedented losses.

The losses at the time were initiated by the rapid unwinding of one or more sizable quantitative equity market-neutral portfolios.

Given the speed and price impact with which this occurred, it was likely the …read more

Source: Q1 Slams Hedgies ‘Most Popular Trade’ – Momo Crashes Most Since 2009

    

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By Tyler Durden

In the past few months, the Bureau of Labor Statistics has gone out of its way to show that U.S. worker compensation is finally rising. There is one problem with that: while that may be true on an hourly basis…

… on a weekly basis, the picture is vastly different. What is happening is that weekly wage growth have gone nowhere in years, but because the average hours worked per week has declined and today hit a 2 year low of 34.4, it translates into more money per hour worked.

But let’s assume that wages, or at least the perception thereof, is indeed rising – is this helping the average American? Well, as we showed earlier this week, the net “after expense” income of average Americans measured in real dollars has declined from $17K in 2004 to $6,000 in 2014 because as wages have declined dramatically, expenses have surged. In fact, according to the recent Pew study, by 2014, median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent, As such a 2.5%, or 3.5% or even 10% increases in wages will not manage to offset the surging expenditures, mostly on rent.

All of this you will never see discussed in a sellside research report, which instead relies on the basic hourly earnings headline numbers. Instead, you will see charts like this from Wells Capital’s Jim Paulsen.

And yet, even the analysts who are only looking at the most rudimentary data are now warning that a new problem is emerging for the US economy, a problem which is always present whenever wages are rising, while overall economic growth is stalling (as it is currently according to the Atlanta Fed with a 0.7% Q1 GDP) and corporate profits are about to plunge by the most since the financial crisis: stagflation.

In a note earlier today, Deutsche Bank laid out the following ominous warning:

Worry not about the eight per cent drop in forecast earnings in the upcoming quarter reporting season. That aggregate figure is well telegraphed. Instead, pay attention to those companies with wafer-thin margins. Every year since the crisis, S&P500 stocks in the lowest quartile of ebitda margins have outperformed the market. Until, that is, last year when these least profitable companies trailed by 11 per cent. That is because after holding steady for six years, their already low margins nearly halved to 4.5 per cent while the median for S&P500 companies barely budged from 20 per cent. Benign cost pressures in recent years have allowed even the laggards to keep up. But if commodity prices start to rally, for example, or low unemployment finally gives employees some bargaining power, those companies living on minuscule margins may really start to sweat.

What Deutsche Bank is referring to is the following chart which shows the …read more

Source: The Next Big Problem: "Stagflation Is Starting To Show Across The Economy"

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By Tyler Durden

Via InternationalMan.com,

(This is Doug Casey’s foreword to Casey Research’s Handbook for Surviving the Coming Financial Crisis.)

Right now, we are exiting the eye of the giant financial hurricane that we entered in 2007, and we’re going into its trailing edge.

It’s going to be much more severe, different, and longer lasting than what we saw in 2008 and 2009.

In a desperate attempt to stave off a day of financial reckoning during the 2008 financial crisis, global central banks began printing trillions of new currency units. The printing continues to this day.

It’s not just the Federal Reserve that’s printing. The Fed is just the leader of the pack. The U.S., Japan, Europe, China… all major central banks… are participating in the biggest increase in global monetary units in history.

These reckless policies have produced not just billions but trillions in malinvestment that will inevitably be liquidated. This will lead us to an economic disaster that will, in many ways, dwarf the Great Depression of 1929–1946. Paper currencies will fall apart, as they have many times throughout history.

This isn’t some vague prediction about the future. It’s happening right now. The Canadian dollar has lost 25% of its value since 2013. The Australian dollar has lost 30% of its value during the same time. The Japanese yen and the euro have crashed in value. And the U.S. dollar is currently just the healthiest horse on its way to the glue factory.

These are gigantic losses for major currencies. After all, we’re not talking about small volatile stocks. We’re talking about the value of money in peoples’ bank accounts. These moves show we’re in the early stages of a currency crisis.

At this point, it’s a lock cinch that the world’s premier paper currency – the U.S. dollar – will lose nearly all its value. I just don’t see any realistic way around it. Since the financial crisis began eight years ago, the U.S. government has created 3.5 trillion new dollars. In that same eight years, the U.S. government has borrowed $9 trillion – as much as it has borrowed in the previous 232-year history of the United States.

Though politicians would like us to believe otherwise, actions have consequences. You simply cannot quadruple the money supply and double the national debt in eight years without catastrophic results.

As this unfolds, your biggest risk isn’t the crashing stock market or the crashing bond market. Your biggest problem, and also the one most people just don’t see, is political. Your government is by far the most serious threat to your money and wellbeing.

Why do I say that? Like any organism, the prime directive of a government is to survive. When faced with a threat to its survival, a broke government will do anything it can to stay alive. President Roosevelt confiscated Americans’ gold in 1933. And in just the last few years, we’ve seen broke governments raid private pensions and confiscate cash directly from people’s bank accounts.

…read more

Source: Doug Casey Warns "We’re Exiting The Eye Of The Giant Financial Hurricane"

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By Tyler Durden

Believe it or not, the Iraqi army is on the verge of launching an attack on ISIS-held Mosul.

The city – home to millions of Iraqis – is Bakr al-Baghdadi’s most important urban stronghold.

Raqqa is the ISIS “capital”, but it’s easier to command. Mosul is a major city with a population that numbers in the millions. If ISIS were to lose its grip there, it would almost surely mark the beginning of the end for the self-styled “caliphate.”

Over the past three weeks, Mosul has come under pressure from Russian-backed Shiite militias, US-supported Iraqi regulars, and Kurdish Peshmerga fighters who at this point have no idea who is on their side and who isn’t.

Below, find excerpts from a new WSJ piece that outlines the pressure Islamic State faces from an international intelligence community that no longer finds them useful.

Last week, the Pentagon said the U.S. military had killed a man they identified as one of Islamic State’s top military officials. It didn’t give any further information, but Gen. Magsosi said the man, known as Abu Eman, was the top expert at the Mosul bomb lab.

When Islamic State captured Mosul, Iraq’s second-largest city, in the summer of 2014, the university was one of the spoils. The university had a strong reputation around Iraq for its science departments, alumni say.

By March 2015, dozens of Islamic State engineers and scientists had set up a research hub in the chemistry lab, which was full of equipment and chemicals, according to the people with knowledge of the university.

Many of the regular staff, including professors specialized in organic, industrial and analytical chemistry, remained in the city at the time, but the new laboratories were staffed by Islamic State’s own men, according to one of those people.

At least since August, dozens of individuals—presumed to be foreigners because they didn’t speak Iraqi Arabic—were seen moving through the labs, the two people said. They said they were told specialized units had been set up there for chemical explosives and weapons research as well as suicide-bomb construction.

A separate group at the university’s technical college was dedicated to building suicide-bomb components, one of the two said.

Of course it’s a little late to be getting that kind of feedback. Sure, ISIS is now in control of Mosul’s intellectual community and that includes the bombmakers.

The question is whether these individuals will fold under pressure from the IRGC and admit what they know to the Ayatollah.

…read more

Source: Iran Moves To Take Key City From ISIS In Critical Sectarian Feud

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By Tyler Durden

Earlier his week, California paved the way for a $15/hour minimum wage, in a move that essentially communicated the following message: “..to hell with economics.”

The living wage issue is one of the most controversial debates playing out in America today and it goes right to the heart of partisan politics.

Anyone who’s “feeling the Bern” so to speak, believes they’re entitled to make enough flipping burgers to feed their family. And you know what? They’re wrong. Dead wrong.

Either, i) they don’t have the skill set they need to find a job that pays a decent wage, ii) they have other personal problems that keep them from securing gainful employment, or iii) the US economy has simply become a service sector, minimum wage job creation machine that severely limits job seekers’ opportunities and forever relegates the vast majority of society to the bottom of the pyramid in what is increasingly becoming a feudal system.

Note that our rather harsh assessment doesn’t actually put the blame on workers.

Sorry, but society doesn’t value a dollar menu cheeseburger as much as it values a porcelain cavity filling. So the guy (or girl) putting the burger in a bag makes $8/hour while the dentist makes $100. That doesn’t mean the burger flipper is “worth” less of a person than the dentist in metaphysical terms. Sure, sometimes the people handing you a Taco Bell bag at the drive-through might have spit in your burrito, but you know what? the dentist who fills your cavity might be having an affair with the hygienist who just cleaned your teeth. In the back of the office. Just before you signed in and got comfortable in the chair.

The point is that what’s missing in this equation are the breadwinner, skilled labor jobs that allow everyday people who i) have attained a decent education and acquired a skill that’s useful to society, and ii) are willing to work hard 10 hours a day, to get a job where they can simultaneously benefit the global economy while making enough money to support their families.

Raising the minimum wage to $15 or $20 or even $30/hour isn’t going to fix that. And neither are labor unions. This is an existential problem that needs to be addressed at the highest possible levels. Of course it won’t. The good folks that inhabit the Eccles building will point to record low unemployment to justify rate hikes (when they want to, but when they don’t they’ll point to China and subpar inflation to justify keeping things on hold) and to support the contention that the US economy is on solid footing.

Here’s a bit of color on the New York mandatory minimum issue via Reuters:

Governor Andrew Cuomo and state legislative leaders reached a deal on Thursday to raise New York state’s minimum wage towards $15 per hour, but fell short of a uniform state-wide increase.

The deal …read more

Source: New York Follows California, Will Raise Minimum Wage To $15/Hour

    

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