Yes, Virginia, There Is A "Santa Rally"

Authord by Lance Roberts via RealInvestmentAdvice.com,

Yes, Virgina, There Is A Santa Claus

Every year, at this time, I republish the story of 8-year Virginia O’Hanlon who asked the most important of questions. I encourage you to read it as it reminds us of the importance, meaning and the “Spirit” of the Christmas season. 

*  *  *

Eight-year-old Virginia O’Hanlon wrote a letter to the editor of New York’s Sun, and the quick response was printed as an unsigned editorial Sept. 21, 1897. The work of veteran newsman Francis Pharcellus Church has since become history’s most reprinted newspaper editorial, appearing in part or whole in dozens of languages in books, movies, and other editorials, and on posters and stamps

THE EDITORIAL

DEAR EDITOR:

I am 8 years old.
Some of my little friends say there is no Santa Claus.
Papa says, ‘If you see it in THE SUN it’s so.’
Please tell me the truth; is there a Santa Claus?

VIRGINIA O’HANLON.
115 WEST NINETY-FIFTH STREET.

“VIRGINIA, your little friends are wrong. They have been affected by the skepticism of a skeptical age. They do not believe except they see. They think that nothing can be which is not comprehensible to their little minds. All minds, Virginia, whether they be men’s or children’s, are little. In this great universe of ours, man is a mere insect, an ant, in his intellect, as compared with the boundless world about him, as measured by the intelligence capable of grasping the whole of truth and knowledge.

 

Yes, VIRGINIA, there is a Santa Claus. He exists as certainly as love and generosity and devotion exist, and you know that they abound and give to your life its highest beauty and joy. Alas! how dreary would be the world if there were no Santa Claus? It would be as dreary as if there were no VIRGINIAS. There would be no childlike faith then, no poetry, no romance to make tolerable this existence. We should have no enjoyment, except in sense and sight. The eternal light with which childhood fills the world would be extinguished.

 

Not believe in Santa Claus! You might as well not believe in fairies! You might get your papa to hire men to watch in all the chimneys on Christmas Eve to catch Santa Claus, but even if they did not see Santa Claus coming down, what would that prove? Nobody sees Santa Claus, but that is no sign that there is no Santa Claus. The most real things in the world are those that neither children nor men can see. Did you ever see fairies dancing on the lawn? Of course not, but that’s no proof that they are not there. Nobody can conceive or imagine all the wonders there are unseen and unseeable in the world.

 

You may tear apart the baby’s rattle and see what makes the noise inside, but there is a veil covering the unseen world which not the strongest man, nor even the united strength of all the strongest men that ever lived, could tear apart. Only faith, fancy, poetry, love, romance, can push aside that curtain and view and picture the supernal beauty and glory beyond. Is it all real? Ah, VIRGINIA, in all this world there is nothing else real and abiding.

No Santa Claus! Thank God he lives, and he lives forever. A thousand years from now, Virginia, nay, ten times ten thousand years from now, he will continue to make glad the heart of childhood.”

Merry Christmas, and may this new year bring you joy, laughter, and prosperity.

From all of us at Real Investment Advice, Real Investment News, and Clarity Financial.

*  *  *

Santa Rally?

With the market now back to overbought conditions, it is now or never for the traditional “Santa Rally” between Christmas and New Year’s Day.

If we go back to 1990, the month of December has had average returns of 2.02% with positive returns 81% of the time. Over the past 100 years, those numbers fall slightly to a 1.39% average return with positive returns 73% of the time.

For the month of December, so far, the market has risen 1.33% which is in-line with the historical norm.

As discussed over the last couple of weeks, this is not to be unexpected as portfolio managers and hedge funds “Stuff Their Stockings” of highly visible positions to have them reflected in year-end statements. 

However, come January, it is potentially a different story. As I have been laying out over the last several weeks, the “tax cut” rally may well come to an end as portfolio managers, being reluctant to sell before year-end which would put them under the 2017 tax code, will likely sell in January to lock in gains under the new tax code when they pay taxes in 2019.

While “this time” is never exactly like the “last time,” there is a reasonable precedent that a sell-off in January is a likelihood. With the outside gains this past year, and now extreme overbought conditions as discussed last week, the odds of a correction are high.

This next week, as close to the end of the year as possible, we will likely be adding two positions to portfolios to hedge against a potential “tax gain” related sell off.  The first position will be a short-S&P 500 index combined with an intermediate-duration bond position.

Given that IF a sell-off occurs money will rotate from “risk” to “safety.” In this case, the S&P 500 should fall while bond prices rise as rates head lower. As shown below, with the stock-bond ratio at extremes, this trade is fairly low risk.

(The current stock/bond ratio is at the highest level in history. Also, note that the correlation “broke” in 2013 with QE 3. That gap will likely be filled at some point.)

If I am wrong, and the markets continue to rise, our existing long-positions, which outweigh the hedges by a large percentage, will continue to advance with the hedge only slightly inhibiting performance. If a sell-off does occur, the hedges will mitigate some of the downside risk while we evaluate our next potential moves.

We will keep you apprised of our actions next week.

Dot Com 2.0

by Michael Lebowitz, CFA

On May 20, 1999, eToys.com became a publically traded stock, offering shares to the public at a price of $20 per share. Lurching to $76 per share on the first day of trading and then over $80 a share by mid-August of that same year, investors were blindly optimistic about the prospects for this internet retailer. In early January 2001, after a weaker than expected holiday season, the company laid off half of its staff. By late February, eToys.com stock traded at meager 0.09 cents per share and filed for bankruptcy in March. The bubble had burst on eToys.com and hundreds of other tech companies selling investors on the promise of a new economic paradigm and internet fantasies.

By late 1999, when eToys.com was flourishing, the NASDAQ stock market was in the midst of a ten-year run in which it gained over 2,700%. Valuations, especially those in the tech sector but also in the broader-based markets, rose well above every prior instance. Caution and conservatism were thrown out the window in place of greed and rampant speculation. A decade of impressive market gains resulted in a high level of complacency.

We are now 18 years beyond the tech bubble, and we find ourselves in similar shoes. Most measures of equity valuation are currently higher than just about every other equity market peak including even some from 1999. The market has produced a constant stream of winners seemingly coming in waves over the last few years. Among the more popular is the FANG stocks and their valuations that assume perfection in perpetuity.

Further reminding us of the late 90’s tech bubble and the eToys.com era are Bitcoin and blockchain related stocks. Longfin Corp. (LFIN) for instance, just completed an initial public offering (IPO) at $5 per share on December 13th. On December 18th LFIN announced the purchase of Ziddu Coin a business lender dealing in crypto-currency loans. Following the announcement, the stock rose as high as $136 a share producing a 2620% gain for those investors that sold at the highs. As we pen this note, the stock trades at $41.

Instead of using “dot com,” companies like LFIN, Overstock, Riot Blockchain and other companies are seizing on investor greed by telling a grand story of Bitcoin and blockchain riches. It is, to be sure, the new-new paradigm.

Another recent example is Long Island Iced Tea Corp. which was a purveyor of bottled drinks with a stock price languishing around the $2 range. Well, that is until the company changed its name to Long “Blockchain” Corp. which sent investors into a buying frenzy running the stock price up nearly 500% in one day.

The instances where anything related to Bitcoin and blockchain is instantly deserving of massive valuations is a mirage; here today and gone tomorrow. The current era serves as a gentle reminder of the greed and wild speculation of the latest bubble. In early 2000, the markets topped with no-name (and no-profit) companies capturing the wild hopes of investors. The NASDAQ took over 16 years to re-capture the prior high water mark representing precious years that investors lost.

Whether LFIN and the like are signaling that we are in the bottom of the ninth of the latest bubble or still have a few innings to go is up for debate. What is important, however, is to retell yourself the story of the tech bubble and how investors ignored the glaring signals. Does today’s price action sound familiar? If so we recommend that you continue to remain cognizant of the patterns of prior market bubble episodes and proceed accordingly.

Rules For The Road

If you are long equities in the current market, we continue to recommend following some basic rules of portfolio management.

“It is through following these basic rules that, with the markets overbought, underlying fundamentals stretched, we continue to suggest some portfolio actions be taken to reduce, not eliminate, overall risk.

1. Tighten up stop-loss levels to current support levels for each position.


2. Hedge portfolios against major market declines.


3. Take profits in positions that have been big winners


4. Sell laggards and losers


5. Raise cash and rebalance portfolios to target weightings.

Notice, nothing in there says “sell everything and go to cash.”

As I noted in last week’s missive on the current bubble, our job as investors is pretty simple – protect our investment capital from short-term destruction so we can play the long-term investment game.

In case you missed it, let me repeat for you the most important lines:

Our job as investors is actually quite simple. We must focus on:

• Capital preservation


• A rate of return sufficient to keep pace with the rate of inflation.


• Expectations based on realistic objectives.  (The market does not compound at 8%, 6% or 4%)


• Higher rates of return require an exponential increase in the underlying risk profile.  This tends to not work out well.


• You can replace lost capital – but you can’t replace lost time.  Time is a precious commodity that you cannot afford to waste.


• Portfolios are time-frame specific. If you have a 5-years to retirement but build a portfolio with a 20-year time horizon (taking on more risk) the results will likely be disastrous.

With forward returns likely to be lower and more volatile than what was witnessed in the 80-90’s, the need for a more conservative approach is rising. Controlling risk, reducing emotional investment mistakes and limiting the destruction of investment capital will likely be the real formula for investment success in the decade ahead.

This brings up some very important investment guidelines that I have learned over the last 30 years.

• Investing is not a competition. There are no prizes for winning but there are severe penalties for losing.


• Emotions have no place in investing.You are generally better off doing the opposite of what you “feel” you should be doing.


• The ONLY investments that you can “buy and hold” are those that provide an income stream with a return of principal function.


• Market valuations (except at extremes) are very poor market timing devices.


• Fundamentals and Economics drive long-term investment decisions – “Greed and Fear” drive short-term trading. Knowing what type of investor you are determines the basis of your strategy.


• “Market timing” is impossible– managing exposure to risk is both logical and possible.


• Investment is about discipline and patience. Lacking either one can be destructive to your investment goals.


• There is no value in daily media commentary– turn off the television and save yourself the mental capital.


• Investing is no different than gambling– both are “guesses” about future outcomes based on probabilities.  The winner is the one who knows when to “fold” and when to go “all in”.


• No investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that is temporarily out of favor.

As an investment manager, I am neither bullish or bearish. I simply view the world through the lens of statistics and probabilities. My job is to manage the inherent risk to investment capital. If I protect the investment capital in the short term – the long-term capital appreciation will take of itself.

Forget The Phony Pension Accounting, Here"s How Much Your State Pension Is Really Underfunded

The phony assumptions that go into calculating public pension underfundings in the United States are a frequent topic for us.  As our readers are aware, state pension administrators are given fairly wide leeway to simply pick a discount rate out of thin air.  Of course, since pensions are nothing but a massive stream of future liabilities that stretch out into perpetuity, every 100 bps increase can substantially, and artificially, lower the fund"s reported underfunded level. 

In fact, we estimated the impact of higher discount rates on underfunding levels in a post entitled "An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion"...here was the result:

Fortunately, we"re not the only ones that see through the ridiculously phony assumptions that go into duping retirees and taxpayers as the team at American Legislative Exchange Council (ALEC) has just dropped a report which reviews the financial health of public pensions all over the country if you toss out their 7.5% discount rate and replace it with a risk free rate...

Faulty accounting and reporting methods obscure the magnitude of unfunded liabilities. Partly in response to the devastating impact of the Great Recession, the Governmental Accounting Standards Board (GASB) made two significant changes in 2012 (Statement No. 67, Financial Reporting for Pension Plans and Statement No. 68, Accounting and Financial Reporting for Pensions) to the methods used for measuring the financial health of pension plans. GASB intended these changes to increase transparency, consistency, and comparability of pension information. Public pensions are now required to report their assets and liabilities using a standardized actuarial cost method, to disclose investment returns, and to include unfunded pension liabilities on state balance sheets.

 

Unfortunately, states have found ways to work around these requirements and paint an unrealistically rosy picture of their pension funding status.

 

The Center for State Fiscal Reform at ALEC analyzes the annual official financial documents of more than 280 state-administered pension plans using more realistic investment return assumptions in order to gain a clearer picture of the pension problem. The unfunded liabilities of each pension plan are revalued using a discount rate equal to a risk-free rate of return, best represented by debt instruments issued by the United States government. This year"s study uses a risk-free rate of 2.142 percent, derived from an average of the 10- and 20-year U.S. Treasury bond yields over the course of 12 months spanning April 2016 to March 2017. Based on these revised investment return assumptions, we report on total unfunded pension liability, unfunded pension liabilities per capita, and the funding ratio of these plans.

...and as you might expect, the results are fairly bleak.  In terms on aggregate underfunding, ALEC figures our taxpayer-funded pension ponzis are roughly $6 trillion underfunded, or roughly 2-3x worse that the often-quoted $2-$3 trillion underfunding calculated by state pension administrators.  Meanwhile, using ALEC"s discount rates, the state of California is nearly $1 trillion underfunded by itself.

So, what is your personal share of these massive public liabilities?  Well, if you"re in one of the 10 bottom states it"s anywhere from $25,000 to $45,000.  Of course, that"s the liability for every man, woman and child so the typical American household (with 2.57 residents) in those states is on the hook for $67,500 - $115,650.

Finally, and perhaps most shocking of all, ALEC found that when using a risk-free discount rate only 1 state pension in the entire country was more than 50% funded.

ALEC"s full report can be reviewed here:

Is It 1999? 2007? Or Both?

Authored by Lance Roberts via RealInvestmentAdvice.com,

In last week’s Technical Update, I discussed the potential for the S&P 500 to hit 2700 by Christmas. To wit:

“The current momentum behind the market advance is clearly bullish, and with the ‘smell of tax reform’ in the air, there is little to derail the bulls before year-end.

 

However, in the meantime, there seems to be nothing stopping the market from going higher. As stated in the title, the current push higher puts 2700 in sight by the time Santa fills the ‘stockings hung by the chimney with care."”

With the markets within striking distance of that target, the run to Nasdaq 7000, Dow 25000 and S&P 2700 are all but guaranteed at this juncture. More interestingly, all three will be ticking off milestone gains at some of the fastest paces in market history. In fact, the Dow has posted three all-time records just this year:

• 70 new highs,


• A 5000-point advance in a single year, and;


• 12-straight months of gains.

Just as a reminder of previous market bubbles, here is what they looked like.

As I discussed with Danielle Dimartino-Booth this morning. Not only is the current rally reminiscent of 1999, but to 2007 as well. In fact, the current bubble, as she states, is a combination of both.

As Danielle and I discussed, it seems eerily familiar.

In 1999:

• Fed was hiking rates as worries about inflationary pressures were present.


• Economic growth was improving 


• Interest and inflation rates were rising


• Earnings were rising through the use of “new metrics,” share buybacks and an M&A spree. (Who can forget the market greats of Enron, Worldcom & Global Crossing)


• Margin-debt / leverage was at the highest level on record. 


• Stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”


• Speculative asset of choice: Dot.com stocks

In 2007:

• Fed was hiking rates as worries about inflationary pressures were present.


• Economic growth was improving 


• Interest and inflation rates were rising


• Debt and leverage provided a massive “buying” binge in real estate creating a “wealth effect” for consumers and high-valuations were justified because of the “Goldilocks economy.” 


• Margin-debt / leverage was at the highest level on record. 


• Stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”


• Speculative asset of choice: Real Estate

In 2017:

• Fed was hiking rates as worries about inflationary pressures were present.


• Economic growth is improving because of 3-hurricanes and 2-wild fires.


• Interest and inflation rates are expected to rise


• Earnings were rising through the use of “new metrics,” share buybacks and an M&A spree. 


• Margin-debt / leverage is at the highest level on record. 


• Stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”


• Speculative asset of choice: Bitcoin

Of course, those are just some of the similarities.

Valuations in all three cases exceeded the long-term market peaks of 23x reported earnings. Investor confidence was pushing extremes and deviations from long-term means in prices, relative-strength and moving-averages were all present.

The chart below shows the S&P 500 from 1993-present. As shown, the 100-period RSI, 3-standard deviations above the 200-dma and the 50/200 day moving average MACD line are all at historical extremes. While such readings do NOT suggest a downturn is imminent, it does suggest that risk is elevated and potential upside from current levels is likely limited.

I have combined the three periods below, scaled to 100, so you can see just how far we have currently gone.

Sure. This time could be different. It just probably isn’t.

Our Job As Investors

Again, none of this suggests the market is going to crash tomorrow. But a massive mean reversion process is coming, it is inevitable, the only question is of the timing.

As I noted last week in “The Exit Problem,” it is time to start considering sitting a little closer to the “exit.” To wit:

“Am I sounding an ‘alarm bell’ and calling for the end of the known world? Should you be buying ammo and food? Of course, not.

 

However, I am suggesting that remaining fully invested in the financial markets without a thorough understanding of your ‘risk exposure’ will likely not have the desired end result you have been promised.

 

As I stated often, my job is to participate in the markets while keeping a measured approach to capital preservation. Since it is considered ‘bearish’ to point out the potential ‘risks’ that could lead to rapid capital destruction; then I guess you can call me a ‘bear.’

 

Just make sure you understand I am still in ‘theater,’ I am just moving much closer to the ‘exit.’”

What does that mean?

I have now been in the financial markets in some capacity since prior to the crash of 1987.

Yes, I am that old.

During that time I have watched investors repeat the same mistakes over and over again. From exuberance to fear, buying high to selling low, chasing returns, and always believing this time is different, only to once again be reminded it’s not. 

As the old saying goes:

“The more things change, the more they remain the same.”

If you have been around the markets for any length of time, you can quickly spot the “pigeons at the poker table.” These are the ones that continually rationalize why prices can only go higher, why this time is different than the last, and only focus on the bullish supports. Trying to “draw to an inside straight” is not impossible, it just leads to losses more often than not. 

But therein lies an important point.

As investors, our job is NOT making the case for why markets will go up.

Read that again.

Making the case for why markets will rise is a pointless endeavor because we are already invested.

If the markets rise, terrific. We all made money, and we are the better for it. However, that is not our job.

Our job, is to analyze, understand, measure, and prepare for what will reduce the value of our invested capital. 

Period.

If we are to accumulate capital over the time-span that we have available, from today until we reach retirement, the most important thing we can do to ensure our success is not suffering a large loss of capital. 

Therefore, our job as investors is actually quite simple:

• Capital preservation


• A rate of return sufficient to keep pace with the rate of inflation.


• Expectations based on realistic objectives.  (The market does not compound at 8%, 6% or 4%)


• Higher rates of return require an exponential increase in the underlying risk profile.  This tends to not work out well.


• You can replace lost capital – but you can’t replace lost time.  Time is a precious commodity that you cannot afford to waste.


• Portfolios are time-frame specific. If you have a 5-years to retirement but build a portfolio with a 20-year time horizon (taking on more risk) the results will likely be disastrous.

With forward returns likely to be lower and more volatile than what was witnessed in the 80-90’s, the need for a more conservative approach is rising. Controlling risk, reducing emotional investment mistakes and limiting the destruction of investment capital will likely be the real formula for investment success in the decade ahead.

This brings up some very important investment guidelines that I have learned over the last 30 years.

• Investing is not a competition. There are no prizes for winning but there are severe penalties for losing.


• Emotions have no place in investing.You are generally better off doing the opposite of what you “feel” you should be doing.


• The ONLY investments that you can “buy and hold” are those that provide an income stream with a return of principal function.


• Market valuations (except at extremes) are very poor market timing devices.


• Fundamentals and Economics drive long-term investment decisions – “Greed and Fear” drive short-term trading. Knowing what type of investor you are determines the basis of your strategy.


• “Market timing” is impossible– managing exposure to risk is both logical and possible.


• Investment is about discipline and patience. Lacking either one can be destructive to your investment goals.


• There is no value in daily media commentary– turn off the television and save yourself the mental capital.


• Investing is no different than gambling– both are “guesses” about future outcomes based on probabilities.  The winner is the one who knows when to “fold” and when to go “all in”.


• No investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that is temporarily out of favor.

As an investment manager, I am neither bullish or bearish. I simply view the world through the lens of statistics and probabilities. My job is to manage the inherent risk to investment capital. If I protect the investment capital in the short term – the long-term capital appreciation will take of itself.

CalPERS Goes All-In On Pension Accounting Scam; Boosts Stock Allocation To 50%

Starting July 1, 2018 stock markets around the world are going to get yet another artificial boost courtesy of a decision by the $350 billion California Public Employees" Retirement System (CalPERS) to allocate another $15 billion in capital to already bubbly equities.  Of course, if this decision doesn"t make sense to you that"s because it"s not really meant to make sense. 

As Pensions & Investments notes, CalPERS" decision to hike their equity allocation had absolutely nothing to do with their opinion of relative value between assets classes and nothing to do with traditional valuation metrics that a rational investor might like to see before buying a stake in a business but rather had everything to do with gaming pension accounting rules to make their insolvent fund look a bit better.  You see, making the rational decision to lower their exposure to the massive equity bubble could have resulted in CalPERS having to also lower their discount rate for future liabilities...a move which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down. 

The new allocation, which goes into effect July 1, 2018, supports CalPERS" 7% annualized assumed rate of return. The investment committee was considering four options, including one that lowered the rate of return to 6.5% by slashing equity exposure and another that increased it to 7.25% by increasing the exposure to almost 60% of the portfolio.

 

The lower the rate of rate means more contributions from cities, towns and school districts to CalPERS. Those governmental units are already facing large contribution increases — and have complained loudly at CalPERS meetings — because a decision by the $345.1 billion pension fund"s board in December 2016 to lower the rate of return over three years to 7% from 7.5% by July, 1, 2019.

Meanwhile, there was only one dissenting vote on the decision to hike the fund"s equity exposure.  Ironically, the dissent did not come from a rational investor looking to preserve the fund"s assets, but rather from a board member named J.J. Jelincic who wanted to go all-in on the pension accounting scam and hike the fund"s equity allocations to 60% so that discount rates could be raised even higher than the current 7%.

Of course, this is hardly a new topic for us. As we pointed out a year ago in a post entitled "CalPERS Board Votes To Maintain Ponzi Scheme With Only 50bps Reduction Of Discount Rate," each year CalPERS has to weigh mathematical realities against the risk of disrupting the ponzi scheme and forcing several California cities to the brink of bankruptcy with lower discount rates..."mathematical realities" rarely win that fight.

But a CalPERS return reduction would just move the burden to other government units. Groups representing municipal governments in California warn that some cities could be forced to make layoffs and major cuts in city services as well as face the risk of bankruptcy if they have to absorb the decline through higher contributions to CalPERS.

 

“This is big for us,” Dane Hutchings, a lobbyist with the League of California Cities, said in an interview. “We"ve got cities out there with half their general fund obligated to pension liabilities. How do you run a city with half a budget?”

 

CalPERS documents show that some governmental units could see their contributions more than double if the rate of return was lowered to 6%. Mr. Hutchings said bankruptcies might occur if cities had a major hike without it being phased in over a period of years. CalPERS" annual report in September on funding levels and risks also warned of potential bankruptcies by governmental units if the rate of return was decreased.

Under the plan adopted Monday, in addition to their 50% equity allocation, CalPERS will have a 28% weighting to fixed income, up from 20%.  Real assets, which includes real estate, will keep its 13% allocation, while private equity will remain at 8% and CalPERS" liquid portfolio, made up of cash and other short-term instruments, will fall to 1% from 4%.

SEC Suspends Trading In Crypto Company Which Soared To $11 Billion Amid Bitcoin Mania

Following last night"s chaotic appearance of LongFin CEO on CNBC"s FastMoney, it appears The SEC has finally had enough of the unusually explosive price gains of previously tranquil publicly-traded companies adding the word "blockchain" to their names (or mission statements). In what we suspect will be the first of many, The SEC has suspended trading of shares in "The Crypto Company" - a name we"re familiar with - due to "potentially manipulative transactions in the company’s stock."

The Securities and Exchange Commission cites concerns regarding the accuracy and adequacy of information about compensation paid for promotion of the company, and statements in Commission filings about the plans of the company’s insiders to sell their shares of The Crypto Company’s common stock.

As Bloomberg reports, through Monday, Crypto’s market value had surged to more $11.9 billion. The company invests in digital assets, and is developing source code for managing them, according to its regulatory filings.

 James Gilbert, the company’s president, held a stake valued at nearly $4.2 billion based on Monday’s closing price.

The SEC said its concerns include the compensation paid for promotion of Crypto and statements made in regulatory filings about plans for insiders to sell their shares.

Full SEC Statement:

The Securities and Exchange Commission (“Commission”) announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the “Exchange Act”), of trading in the securities of The Crypto Company (“CRCW”), of Malibu, California at 9:30 a.m. EST on December 19, 2017, and terminating at 11:59 p.m. EST on January 3, 2018.

 

The Commission temporarily suspended trading in the securities of The Crypto Company because of concerns regarding the accuracy and adequacy of information in the marketplace about, among other things, the compensation paid for promotion of the company, and statements in Commission filings about the plans of the company’s insiders to sell their shares of The Crypto Company’s common stock. Questions have also arisen concerning potentially manipulative transactions in the company’s stock in November 2017. This order was entered pursuant to Section 12(k) of the Exchange Act.

 

The Commission cautions broker-dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the company.

 

Further, brokers and dealers should be alert to the fact that, pursuant to Rule 15c2-11 under the Exchange Act, at the termination of the trading suspension, no quotation may be entered unless and until they have strictly complied with all of the provisions of the rule. If any broker or dealer has any questions as to whether or not he has complied with the rule, he should not enter any quotation but immediately contact the staff in the Division of Trading and Markets, Office of Interpretation and Guidance, at (202) 551-5777. If any broker or dealer is uncertain as to what is required by Rule 15c2-11, he should refrain from entering quotations relating to The Crypto Company’s securities until such time as he has familiarized himself with the rule and is certain that all of its provisions have been met.

 

If any broker or dealer enters any quotation which is in violation of the rule, the Commission will consider the need for prompt enforcement action. If any broker-dealer or other person has any information which may relate to this matter, contact Katharine Zoladz, Assistant Regional Director, Los Angeles Regional Office, at (323) 965-3998 or Roberto A. Tercero, Senior Counsel, Los Angeles Regional Office, at (323) 965-3891. The Commission appreciates the assistance of the Financial Industry Regulatory Authority and OTC Markets Group, Inc.

When it was halted, The Crypto Company had a market cap of around $11 Billion...

Bitcoin trading algos were a little shocked by the misleading headline from Bloomberg:SEC: TEMPORARY SUSPENSION OF TRADING OF CRYPTO SECURITIES

But we clarified...

No, the SEC isn"t banning trading in bitcoin and cryptos. a) it can"t. b) Crypto Company is just that, a company https://t.co/ssQ1t7w1SN

— zerohedge (@zerohedge) December 19, 2017

Nasdaq Tops 7,000 For First Time Ever As VIX Crashes

Having passed 6,000 for the first time in April, Nasdaq has now soared 17% since then to surpass 7,000 today...

 

As soon as cash markets closed last Friday (quad witch), US equity futures spiked... then spiked again on Sunday night"s open, and again at the US equity cash open this morning...

 

And VIX has been crushed this morning...

Gold: Isn’t the Whole Idea to Buy Low and Sell High?

Isn’t the Whole Idea to Buy Low and Sell High?

Authored by Adam Baratta

When it comes to the gold market, perhaps the old saying should be changed to “buy low and sell high-if ever.” That is likely the mentality behind gold investors at this point, as the yellow metal remains stuck in a trading range.

The gold market has some issues working against it currently. Higher stocks, a stronger economy and overall robust appetite for risk are all playing a role in the market’s current lack of upside follow through. In the absence of any fresh, bullish catalyst, gold could remain on the weaker side of the ledger going into the New Year.

Such a view is, however, dangerous as it does not really examine the bigger picture. If there were no significant reasons for gold to eventually start moving higher, the market would likely have sunk far below its recent lows by this point. Despite short sellers and others taking a bearish view of the metal currently, the market has held its ground. This is undeniably a sign of underlying strength.

Investors have an interesting tendency to view gold very differently from other asset classes such as stocks, for example. But in many ways, some of the same investment principles still apply. For example, if you were a long-term investor in Microsoft, would you rather buy shares at $25 per share or $30 per share? Obviously, buying the stock at $25 per share would be preferable, allowing the investor to potentially realize more gains if the price goes up while also possibly making better overall use of investment capital.

The gold market is no different in this regard. While many investors seemingly want to wait and see the market moving higher before taking action, the savvy investors realize that the old notion of buy low and sell high still applies. This is exactly why the market has not been able to really breakdown-the buyers have met and neutralized any significant selling pressure.

For the investor that is interested in value, and is taking more of a long-term view rather than a short-term view, the current range in the gold market could represent an excellent long-term buying opportunity. The market has shown time and time again that it has the ability to move sharply higher in a short period of time, and the next upside breakout could see such price action once again. Would you rather buy gold at $1250 per ounce or $5000 per ounce?

Now is the ideal time to add to a gold portfolio, and if you don’t already have an allocation in this key asset class, now is the ideal time to get started.

Adding physical gold to your holdings has never been easier than it is today, and you can get started by simply picking up the phone. Speak with an Advantage Gold account executive today about the potential benefits of gold ownership. Our associates are here to answer any questions you may have, and can even show you how to make this asset class a key part of your portfolio using an IRA account.

 Read more from Adam at Advantage Gold

Eric Peters: Today"s Opportunities Include Negative Convexity, Complexity, Illiquidity, Leverage, Or All The Above

From the latest Weekend Notes by Eric Peters, CIO of One River Asset Management

Anecdote

“What are the odds we come across an opportunity in the coming 4yrs to earn 20%?” the investor asked his team.

“High,” they answered. “The odds are 100%,” he said, having seen this movie a few times. “So our cost of capital is 5% per year (20% divided by 4yrs), plus the 1% we earn on cash,” he said. His team nodded.

“Under no circumstances should we deploy capital unless it earns well more than 6% per year from here on out.” It made sense.

“What do we see that earns more than this hurdle?” he asked. His team’s list was as short today as it was long in 2016, 2011, 2009, 2003, 1998, 1997, 1994, 1992, 1990, 1987, etc. Today’s few opportunities have much in common with previous peaks: negative convexity, complexity, illiquidity, leverage, and/or all the above.

“Investors confuse a 7.5% average annualized return target with a 7.5% annual return target,” he explained. “They’re entirely different things.”

Targeting average annualized returns allows you to accept what the market gives you, while targeting annual returns forces you to leverage investments near peak valuations to hit your bogey. “Typical pension and endowment boards want incoming investment returns to consistently exceed outgoing flows.”

So most investors attempt to produce the highest return every year, no matter what it takes. “But that’s the wrong objective. Never underestimate the value of cash and patience in achieving the real goal; superior returns over the complete cycle,” he explained.

“Markets tell you what to do if you listen,” he said. “Near the highs, few opportunities exist to earn substantial returns, so you should take little risk. Near the lows, opportunities to earn attractive returns are abundant.” You should take a lot of risk. “This sounds simple because it is. It’s obvious. But obvious is not easy.”

The Seven Questions Goldman"s Clients Have About "Rational Exuberance"

In mid-November, just days after Barclays released its 2018 equity outlook with the title "Rational Exuberance"...

... Goldman"s David Kostin decided that imitation was the sincerest form of unveiling a non-contrarian year-end forecast, and in presenting his revised S&P price target for 2018 of 2,850 - which accounts for GOP tax reform - "borrowed" the Barclays title for his own year ahead preview...

... despite admitting that valuations have never been higher, thus suggesting that contrary to the title, the exuberance is anything but rational.

To be sure, despite their hyperbolic titles, both Barclays and Goldman simply went with the sellside flow: in fact, in addition to Barclays and Goldman, Wall Street strategists polled by Barron"s said they expect about a 7% S&P gain for 2018 same as basically every single year, according to Sentiment Trader who points out that "they"re not stupid, they go with the base rate." Indeed, there is power in numbers, because if everyone is wrong about the year ahead, it is the same as nobody being wrong, something Wall Street discovered in 2007.

And yet, with not one but two banks mangling Alan Greenspan"s infamous words to justify their late cycle bullish outlook which both admit is not deserved on a fundamental basis, Goldman"s clients remain confused, and in his Weekly Kickstart, Goldman"s chief equity strategjst David Kostin writes that he has spent the last two weeks meeting with investors to discuss his outlook for US equities in 2018, including the impact of tax reform.

"Our Nov. 21 report, entitled Rational Exuberance, describes our expectation that 14% EPS growth, driven by healthy economic growth and a 5% boost from tax reform, will lift the S&P 500 index to 2850 by year-end 2018 (+8%)."

While it will hardly come as a surprise, Kostin confirms that as we reported last week most investors remain exceptionally bullish despite the all time high in the S&P and despite record valuations, instead betting that the Fed will always step in to keep the upward mometum in risk assets; still while "most clients agree with our bullish sentiment but they questioned several of our specific views."

Below Kostin addresses seven of the most common investor questions prompted by his forecast, or specifically the things Goldman"s clients think is irrational about "rational exuberance.":

1. How can you be “rationally exuberant” about the path of US stocks in 2018 when equity valuations are so high? Although the median S&P 500 stock trades in the 99th historical valuation percentile, valuations are typically poor indicators of short-term returns. Moreover, in contrast to the “irrationally exuberant” market of the late 1990s, today’s equity valuations are justified by a macro environment of extremely low rates, modest inflation, high corporate profitability, and a stable economy. Nonetheless, earnings growth, rather than higher valuation, drives our 2018 forecast. 

 

 

2. If the out-of-consensus US Economics forecast for the Treasury yield curve is wrong and rates stay low in 2018, could equity valuations rise further? The “melt-up” scenario of a forward P/E that rises to 19x or 20x is possible, but unlikely. Our forecast for a stable 18x forward P/E multiple at year-end 2018 assumes the economic expansion continues, ROE rises, and the equity risk premium (ERP) narrows. However, in contrast with market pricing (2 hikes) and almost every client we have met (2 or 3 hikes), our economists expect the Fed will raise rates four times next year as the labor market tightens and inflation firms. A rising term premium should lift the 10-year Treasury yield to 3.0% and restrain further P/E multiple expansion.

 

3. Why did you downgrade the Information Technology sector when it has twice the sales growth and twice the margins of the rest of the S&P 500? The Tech sector’s low effective tax rate (19% vs. 26% for the S&P 500) means it has little to gain from tax reform. Recent performance supports our view. Regulatory risk is another reason for our downgrade. However, we recommend a Neutral weight (24%) in the sector due to strong fundamentals. Investors with sufficiently long investment horizons may find policy-driven weakness an opportunity to add to positions in the sector’s strongest secular growth constituents, which we believe remain attractive. We recommend overweight positions in Financials and Industrials. Both sectors pay above-average effective tax rates and are likely beneficiaries of tax reform. In addition, each sector has fundamental tailwinds such as deregulation and rising capex spending that should boost earnings in 2018.

 

4. Following value stock outperformance during recent weeks, do you still recommend growth as a style in 2018? Concentrated positioning and correlation with the Technology sector are clearly short-term headwinds to growth stocks. In fact, the  acceleration in already-strong US economic activity should have led value stocks to perform even better than they have during the past several months (Exhibit 2). However, our economists’ forecast of 2.5% US GDP growth in 2018 portrays an economic environment typically conducive to growth stock outperformance and suggests that our sector-neutral growth factor should fare well during the course of the year.

 

 

5. Is the equity market already pricing the full impact of tax reform? The prediction market shows roughly 80% odds of passage. Equity market indicators such as Altaba (AABA) and our High Tax Rate basket (GSTHHTAX) send broadly similar signals. However, lingering uncertainty regarding both the provisions that will be included in the final legislation as well as the potential impact of several proposals, such as limiting interest deductibility and the treatment of cross-border transactions, suggest more rotation at the industry and stock levels remains in store.

 

 

6. What does the Senate proposal to delay the tax rate cut until 2019 mean for S&P 500 earnings and performance? The delay in rate cut until 2019 will save roughly $140 billion in government revenue but weigh on 2018 EPS as firms face several base-broadening provisions without the offsetting benefit of the rate cut. However, we expect the net 5% boost to future earnings will be unaffected, as would our 2019 EPS estimate of $158. The likelihood that companies pull forward capex and other expenses into the higher-tax year of 2018 may even boost economic activity and provide a net 2019 earnings benefit to S&P 500 companies beyond our current f orecast. In total, particularly against a backdrop of low discount rates, we expect little impact on stock performance from a potential delay in tax cut.

 

7. How big a risk to EPS is the Senate’s proposal to limit interest deductibility at 30% of EBIT? The proposal would have a minor impact on S&P 500 firms but pose a greater risk to more highly-levered small-caps. Consensus 2018 estimates show 5% of S&P 500 constituents but 15% of the Russell 2000 paying interest expense above 30% of EBIT. However, the proposal suggests incremental downside risk to buybacks and credit issuance as companies adjust corporate structures in response. In addition, the pro-cyclical proposal would have a much greater potential effect on US firms in environments of higher rates or weaker earnings; the current ratio of S&P 500 interest expense to EBIT is nearly the lowest in at least 35 years.

 

Finally, for those who have missed the barrage of year-ahead outlooks from Goldman in the past two weeks, here is a summary of what the world"s most influential bank believes will happen in the next 12 months: "We forecast the S&P 500 index will rise by 8% to 2850 by year-end 2018. EPS will benefit from tax reform and climb by 14% to $150 while the forward P/E multiple remains stable near 18x. Growth style will prevail over value and Industrials and Financials will outperform while Consumer stocks lag. Thematically, we prefer firms that prioritize investing for growth via capex and R&D. Most clients agree with our bullish sentiment but they questioned several of our specific views. Investors have a less hawkish view than Goldman Sachs economics on the bear flattening of the yield curve and implications for equity valuation and continue to focus on the implications of tax reform."

Gold Hangs Above 2016 Low Despite BTC (Now in BitCon Futures), Brexit Deal,Tax Bill, and Fund Pukers

The only thing that truly trends is humans extrapolating their rates of return emotionally. Everything else will regress to the mean at some point.  

Investors are being given a gift and do not see it. Every rally in stocks should be used to lighten exposure to a crash  and every corresponding dip in gold should be bought from a balanced portfolio approach.  You should be peeling back equity exposure on every new high and adjusting your risk into something that is stable, holds buying power, and is liquid. That is the point of investing. Your home, your art, and your bitcoin will not fit those guidelines. Gold and silver do.

Do you think the millennials will be buying your 401k shares in 5 Years? Don’t be naive. No one went broke banking profits. And the Fed is handing you an opportunity retire with enough money now as they have moved the housing bubble back into the stock market. It took 10 years. Do you have another 10 years to wait if we crap out again? Protect your profits now. 

 

Admittedly the title sounds like a Gold Bull rationalizing a losing position, as so many gold salesmen do, and we are long and are not selling you Gold. We are also swing trading from the short side. So it is what it is.

It"s jobs day and noone really thnks that matters to Fed policy anymore,  Brexit breakthrough agreed, and shutdown avoided for now. A couple points before getting to the reason for our title. Let’s first count the ways in which Gold has had to deal with bad news these past 2 months. 

Counting the Ways Gold is Bashed

Fund liquidation, Trump Tax Bill, Bitcoin, Brexit deal, Venezuela default (bearish for gold as they had to sell), and the usual short side players with deeper Fed sponsored  pockets than the longs woth which they do battle. These are a few of Gold’s obstacles these past couple months. And yet here we are $100 above last years lows. 

Kicking Gold Today’s Edition

The Brexit deal and Govt shutdown avoidance alluded to above, along with the end of year puke-age and Trump’s Tax Bill (as we have written about here extensively) have all been major negatives for Gold the past few weeks. And yet gold sells off (again) before the news comes out.. strange... 

To be fair, we are seeing more longs with end of year hopes dashed selling these last couple days. There are some shorts getting in now however. Just not enough to spur  a sustainable  a rally we think. 

Banks and The Fed in Bed Again And Gold Suffers for It

Post 2008 banks have been on the outs with The Fed as risk managers. The Fed had mandated more risk be cleared through exchanges. And they have succeeded somewhat.

In doing so, the border collies that run our monetary system have herded much derivative risk into a larger basket. TBTF became Bigger and more centralized (like Fannie Mae..).Their reason is this basket is more easily watched, and since they regulate exchanges, can be “advised” on policy.

But along comes an existential threat not just to global fiat backed governments, but to the US Banks that are their overlords. And boom! They have a common enemy. And that Enemy is Bitcoin.

Gold is suffering real collateral damage now as the banks pitch their new wonderful product to replace gold.. and it’s having an effect. 

BTC Futures: Regulation and Repression to Follow

Note the complete banking industry turnabout to hailing BTC as the new gold on the coincidental heels of new futures contracts approved by the CFTC. Banks and brokers have a new product to sell you folks, and they are actually calling it a store of value, a new gold, if you will. This is in complete contrast not just to BTC behavior (volatile and a wealth generating currency, but don’t call it money yet), but to gold itself (low volatility, wealth preserver, money but not currency)  Line up suckers for a new product to be castrated, regulated, and repressed by banks through exchanges with government blessing and oversight. People not long  Bitcoins will be buying futures on margin while banks long BTC  will be hedging and killing their much shallower pocketed but greedy clients. Let the fleecing begin in the NEW GOLD.  JPM Calls BTC “New Gold”; Spoofing Starts Monday

Love Michael, Hate it When he’s Right

Michael Moor has been spot-on in handicapping market moves given price triggers. Read UPDATE: “Bear Trend with a $1700 Target” Has Problems for more. He saw for different reasons than us, a large bull move fermenting last month. He gave a level where that was negated. That level was breached. Now,to our chagrin, he’s called this sell-off from the $1272 area very nicely. In the process, he stopped us from buying dips for now. But we wish he’d see the end.. for our sake! 

UPDATING OUR LEVELS

1-Our macro trade system says we should be out If the market is here come December 31.

2-The VBS indicator has yet to be triggered for a longer term volatility expansion. So according to that indicator we are still in a trading range, hard as that is to feel when you are long as we are. 

 

Point being; Nothing has Changed

We made the observation that funds like to get in above the 12 month MA for punts. They did and they are now puking. We have a long position based on this and are swing trading around it. 

We secondly stated that volatility would be expanding in 90 days. We are 45 into that and things are starting to percolate. We did say November would be one to remember. So that was a bit premature.

We believed a $50 move one way was coming which would cause  a spike in volatility and a follow up move anywhere between $50 and $200.

All of this is in play and lining up from our original statements to today’s activity.

The only thing you have to ask yourself is will you be in a position to buy gold if it drops another $50 and then another $100 from there. Because that is what gold is for. It is to be bought when it gets cheaper. We will be buying to hold for 12-18 months at least as we roll equity profits into wealth preservation vehicles. We will also be trading it from both sides of the table. But this is what we do professionally. 

You should be peeling back equity exposure on every new high and adjusting risk into something that is stable, holds buying power, and is liquid. Your home, your art, and your bitcoin will not fit those guidelines. Gold and silver do.

On combination, Michael says we may have another $30 or so of downside coming. This would trigger the VBS indicating a $50-$200 move relatively quickly in one or the other direction. 

Which brings us back to our original post a month ago declaring volatility is soon to expand in about 90 days. We also stated then a $50 move in either direction will yield another $200 in continuation or reversal of that first move. 

VBS Trading Algo Levels for Gold Oct 25th

Notes From a call today on potential gold trades.

1. It looks like we will be seeing a move of $50 to $75 in either direction in the next 90 days. 


2. That move could be slow and orderly, or fits and starts, that is not handicappable  or important to the system


3. If a move like above occurs, then we will most definitely get a signal to be long Vol. on a risk reward basis as the monthly indicator will expand


4.  Directionally, our first play would be to go with the direction at time of the trigger. Our second would be to stop and reverse at a predetermined level.


5. this is a longer term play than usual for the VBAS so we will most likely express the position traditional way via long straddles. 


6. Direction would then be expressed by NOT hedging gamma on daily break evens but more like every 2 weeks, and then only half of accumulated deltas. In this way we would remain long/ short in direction of the trend.

Monthly:

1. Buy straddles or hedged call spreads on a monthly settlement above 1305 or below 1191 [Edit- now $1338 and $1192 per chart below]


2. early entry- put on 1/2 position on a day signal as described above.


3. exit everything on 3 bars if not profitable. 


4. Gamma hedging TBD.

Monthly chart updated today. Gold has dropped approximately $35 thus far from that call. A $75 drop from Oct 25th"s level would be in shouting distance of $1192 and likely trigger the indicator of even higher volatility.

The plan is: Gold drops $50 from that post date, triggering the VBS for expanding volatility. 

At that point one either goes with the trend, or waits for a quick exhaustive selloff and reversal for a major rally. In simple terms: of Gold trades $1192, it will not sir there long. We will sell if it hits there, initiating a short. But that is only to keep our finger on the pulse. Having a position in a market heightens your radar and forces you to respect your discipline. Doing so will tell us if being short is wrong. This will in turn mean being long is right. And we will reverse hard. 

So, here’s to a market dump to $1193 and what could be the beginning of a new run higher. Yes, VBS also implies lower is equally possible from $1193, but given the seasonal nature of Gold and it’s tendency to make lows at end of the year as funds sell, we’re optimistic that the buy low and sell high rule of investment will replace our current swing trading behavior of selling weakness and buying it lower. This as we described all part of trading around a core long position. We’d love to start swing- trading from the long side with a core long position. Stay tuned.

Previously:

• 
  

  Gold Spoiler? Tax Bill Revives Trump Trade



• 
  

  Gold’s 2017 Unwind: Are We There Yet?

  
  


• Why We"re Buying Physical Gold with a $1700 Target - SKG
  

About the author:Vince Lanci has 27 years’ experience trading Commodity Derivatives. Retired from active trading in 2008 after netting $90MM in an Energy arbitrage strategy he devised for a NY hedge fund; Vince now manages personal investments through his Echobay entity and advises natural resource firms on market risk. Over the years, his expertise and testimony have been requested in energy, precious metals, and derivative fraud cases. Lanci is known for his passion in identifying unfairness in market structure and uneven playing fields going back to his first anonymous Zerohedge post on Silver. He remains a contributor to Kitco, Zerohedge, and Marketslant on such topics. Vince contributes to Bloomberg and Reuters finance articles as well. He continues to lead the Soren K. Group of writers on Marketslant. 

Bloomberg reports:

Progress

An early-morning breakthrough on Brexit first-round negotiations takes the process toward the next stage of forging the U.K.’s post-exit relationship with the European Union. The thorny issue of the Irish border was effectively parked while outline agreements on citizen rights and the divorce bill were achieved.  Leading Brexit campaigner Nigel Farage labeled the deal a “humiliation.” Gilts dropped and the pound remained relatively unchanged in the wake of the deal. 

Bank rally

Shares in European lenders are soaring this morning, with the Stoxx 600 Banks Index climbing as much as 3 percent, after Basel III capital rules will see “no significant increase” in provisioning for the institutions. The final batch of post-crisis regulations announced yesterday will see requirements decline for some large banks. The agreement and culmination of intense lobbying removes a regulatory risk which had been hanging over the sector for almost a decade. 

Markets rise

Overnight, the MSCI Asia Pacific Index added 0.6 percent, while Japan’s Topix index closed 1 percent higher following data showing the country’s economy expanded faster than expected. In Europe, the surge in bank shares is lifting the Stoxx 600 Index, which was trading 0.9 percent higher at 5:45 a.m. S&P 500 futures added 0.3 percent, the 10-year Treasury yield was at 2.389 percent and gold continued its recent slide. 

Shutdown

Congress sent President Donald Trump a bill extending federal funding for government spending to Dec. 22, avoiding a shutdown which was scheduled to begin today. Lawmakers, who already have a busy schedule coming into the year end, will seek to resolve issues on spending limits in the next couple of weeks which would allow for agreement on a longer-term budget.

One Of Bank of America"s "Guaranteed Bear Market" Indicators Was Just Triggered

It is undisputed that the last 2 quarters have demonstrated an impressive jump in corporate earnings growth, if mostly due to a beneficial base effect from plunging 2016 earnings which pushed them below levels reached in 2014. And naturally, this rebound has been more than priced into a market which has seen substantial multiple expansion since the Trump election to boot. But what is much more important for the market is what corporate earnings look like in the future, and it is here that Bank of America has just raised a very troubling red flag.

According to BofA"s Savita Subramanian, in November the S&P 500"s three-month earnings estimate revision ratio (ERR) fell for the fourth consecutive month to 0.99 (from 1.03), indicating that for the first time in seven months, there were more negative than positive earnings revisions, needless to say a major negative inflection point in the recent surge in profits. The bank"s more volatile one-month ERR also weakened to 0.94 (from 1.16).

A breakdown of EER by sector showed a sudden and broad-based deterioration, as the three-month ERR weakened across eight of the 11 sectors, with Materials, Health Care, and Financials seeing the biggest declines while, not surprisingly, Tech and Energy have the highest three-month ERRs, with Energy"s ERR expanding the most on the back of rallying oil prices. Meanwhile, Telecom, Real Estate, and Discretionary have the weakest ratios, and November saw a drop in the Health Care and Industrials" EER ratio below 1.0 (meaning more cuts than raises to earnings forecasts) for the first time since March. Furthermore, while two sectors have been "improving" in recent months: namely Energy and Tech whose ERRs have been rising; all other sectors have seen their ERRs roll over.

Why is this significant?

As BofA explains, the three-month S&P 500 ERR is used by the bank as one of its 19 key "bear market signposts", and with the one-month ERR falling below 1.0 for the second time in six months, this marks the trigger for the 11th bear market signpost. BofA"s ERR rule is triggered when, over a six-month window, all of the following criteria are met: 1) the one-month ERR falls from above 1.0 to below 1.0; 2) the one-month ERR is below 1.0 for two or more months; and 3) the three-month ERR falls below 1.1 for at least one month.

Incidentaqlly, the hit rate of the "ERR" bear market indicator, meaning its historical accuracy in predicting a bear market is 100%, the only question is how long it takes. The last time this trigger was set was mid-2003, and here is the punchline from Bank of America:

Since 1986, a bear market has followed each time that the ERR rule has been triggered. While individual signposts may not be useful for market timing (this one was triggered several years too early in the last two cycles), prior bear markets were preceded by a broader array of signals having been triggered.

This is shown in the chart below:

Ok so one indicator out of 19 now is flashing "bear market" dead ahead. That"s hardly bad if the rest are all green, right? Well, they aren"t.

As discussed two weeks ago, Bank of America recently compiled a list of bear market signposts that have always occurred ahead of bear markets. No single indicator is perfect, and as Subramanian wrote, "in this cycle, several will undoubtedly lag or not occur at all." And while single indicators may not be useful for market timing, they can be viewed as conservative preconditions for a bear market. In this context, the suddenly "triggered" ERR indicator is one of the bank"s 19 bear market signposts.

Here a caveat is warranted: in the last two cycles, the ERR rule was triggered several years too early (Chart 3 above), although a bear market followed each time that the ERR rule has been triggered. As for timing, the more signposts triggered, the greater the risk of an imminent bear market, in BofA"s view. And in November, the one-month ERR falling below 1.0 for the second time in six month marked the 11th trigger (out of 19). This is shown in the table below.

It also means that nearly two-thirds of Bank of America"s bear market indicators have now been triggered. As Subramanian concludes "every cycle is different, but we expect to see more signposts triggered before the eventual market peak."

Then again, this remains a "market" where even if 12 out of the 11 indicators are triggered, it may just send the S&P limit up as there is no point in selling if all that does is guarantee another central bank bailout.