Erdogan: "Europeans Would Revive The Gas Chambers If They Weren't Ashamed"

Six months ago, it was virtually assured that as part of his daily out at the West, Philippines" president Duterte would accuse then-president Obama of being a "son of a bitch (or whore)." Now, a similar dynamic is playing out between Turkish president Erdogan and Angela Merkel, and/or the German (and Dutch) people, whom he now accuses on an almost daily basis of being Nazis, as a result of the escalating diplomatic spat between Turkey and Europe. And while some have grown accustomed to Erdogan"s daily verbal diarrhea, today the Turkish president took it to the next level: while on Sunday Erdogan once again compared Europe with the Nazis, and accused Angela Merkel of engaging “Nazi practices", he escalated dramatically when he said that Europeans “would revive gas chambers” if they weren"t ashamed."

Speaking at yet another demonstration in Istanbul on Sunday, where he rallied support for a "Yes" vote in Turkey"s upcoming constitutional referendum, Erdogan said Europe’s “masquerade ball” is over: saying the “struggle” against his country has reached a new level, Erdogan slammed European nations, particularly Germany and the Netherlands, for their “Nazi regulations” as they revealed “the hatred they have accumulated for years against our country, our nation or even against all Muslims on TV screens and newspaper headlines every day.”

Erdogan then stunned listeners when he compared treatment of Turks to Jews during the Second World War, when he said “if [Europeans] weren’t ashamed, they would revive the gas chambers,” he said quoted by the Hurriyet Daily News.

Predictably, the Turkish president then turned his sights on Angela Merkel. "When we call them Nazis they [European politicians] get uncomfortable. They rally together in solidarity. Especially Merkel," Erdogan said as cited by AFP. “Merkel. She backs [the Netherlands] too. You too are practicing Nazi practices. To whom? To my Turkish brothers and sisters in Germany,” the Turkish leader also said as quoted by the AP. Erdogan said that the current policy of a number of European states is based on fear of Turkey’s power.

“[The European states] do not have the urge to hide their intentions and cannot hide the discomfort they feel from Turkey, which is growing stronger," Erdogan said, as cited by Reuters.

Erdogan"s comments come as Turkey"s Foreign Ministry summoned the German ambassador to express Ankara"s anger over a Kurdish rally held in Frankfurt on Saturday. The Turkish president’s spokesman Ibrahim Kalin also called Germany’s actions “a worst example of double standards.” Quoted by Deutsche Welle, Kalin said that “the German ambassador was invited, summoned, to the Foreign Ministry and this [rally] was condemned in the strongest way." The spokesperson added that the “scandalous” event in Frankfurt shows that European countries are in fact actively campaigning against Turkey"s constitutional reform, which of course is merely a pretext to give Erdogan near-supreme executive and legislative power.

Scheduled for April 16, the plebiscite proposes amendments to the constitution that will make Erdogan the sole executive head of state, with the authority to choose his own cabinet ministers, enact laws, call elections, and declare states of emergency. Turkish officials have been seeking meetings with Turks living in Europe ahead of the referendum hoping to get the support of the strong diaspora — in Germany alone, there are 1.5 million people with Turkish citizenship. But these plans did not go down well with the European authorities.

“It is unacceptable to see the symbols and slogans of the [outlawed Kurdistan Workers" Party] PKK [at a rally in Frankfurt] while Turkish ministers and politicians are barred from meeting with their fellow citizens,” Kalin told in an interview to CNN Turk. Around 30,000 Kurdish supporters took to the streets in Frankfurt on Saturday to denounce the Turkish president and the upcoming referendum which seeks to expand his presidential powers.

Kalin wasn"t finished, and in the day"s final assault on Germany, Erdogan"s spokesman said Turkey accused Germany of backing last summer"s Turkish "coup" plotters.Kalin responds to remarks by Bruno Kahl, head of Germany’s federal intelligence agency, who said Turkey failed to convince Gulen was responsible for coup attempt, in Der Spiegel interview published Saturday. According to Kalin, "Kahl’s comments were proof of Germany’s support to Gulen network."

“Why are they protecting them? Because these are handy instruments that can be used against Turkey,” Kalin asked and answered.

How The FBI Laid A Trap For A Financial Scandal’s Mastermind

How did authorities zero in on Tom Hayes, the disheveled, socially awkward mastermind of the Libor scandal? An excerpt from David Enrich"s new must read book ‘The Spider Network’

A Trap for a Trader

On a mild, damp March afternoon in 2011, Sarah Tighe and her husband Tom Hayes arrived in the prenatal wing of London’s University College Hospital. They were there for Ms. Tighe’s 12-week pregnancy scan.

The pregnancy was off to a difficult start. Ms. Tighe had suffered from severe morning sickness. Mr. Hayes, a disheveled, mildly autistic 32-year-old mathematician, hadn’t been helping matters. He didn’t seem especially concerned with her discomfort. Instead he was preoccupied with his favorite British soccer team, Queen’s Park Rangers, and his firing months earlier from Citigroup, which had accused him of trying to manipulate an important interest rate called Libor.

Rebuffed by several other banks where he’d sought jobs, Mr. Hayes was slowly coming to terms with the fact that his career as a wildly successful trader had come to an end. More troubling, he’d heard rumors that governments were investigating his conduct.

As a midwife moved an ultrasound wand over Ms. Tighe’s growing midsection, Mr. Hayes’s cellphone rang. The call was from a number—and country code—that he didn’t recognize. Anxiously lying on an examination table, Ms. Tighe told her husband to ignore the call.

Mr. Hayes stood up, walked out of the room and answered the phone.

The authorities were hunting for bankers to hold accountable for the industry’s many sins, and Mr. Hayes was blundering into an elaborate trap, cementing his status as their top target.

A couple of weeks earlier, on March 11, a violent earthquake had rumbled up from more than 15 miles beneath the surface of the ocean off Japan’s northeastern coast. It shook buildings all over the country, but the worst damage came from the sea. The shifting underwater plates unleashed a tsunami of biblical proportions, with a wall of water 30 feet high bulldozing Japan’s coastal prefectures. Thousands of people would perish.

In Tokyo, Mirhat Alykulov felt the quake and its aftershocks and then watched, awe-struck, as news reports showed the extent of the damage caused by the tsunami. He decided it was time to get out of town. He packed his bags and, without telling anyone, got on a plane to Washington.

Like Mr. Hayes, Mr. Alykulov was in trouble. He had grown up on a chicken farm in Kazakhstan, learned English while in high school in Pennsylvania, gone to college in Tokyo and then, finally, landed a job as a junior trader in the Tokyo office of Swiss bank UBS.

His co-workers had given him the nickname “Derka Derka” because of his hard-to-place accent and Eurasian looks. It derived from a refrain in the deliberately offensive 2004 movie “Team America: World Police.” The “Team America” puppets depicting Middle Eastern terrorists used the phrase “Derka derka Muhammad jihad” instead of speaking actual Arabic. “Ha ha, that’s great,” his boss said when he learned of the nickname.

Mr. Alykulov and Mr. Hayes sat next to each other in UBS’s Tokyo offices, where Mr. Hayes had a reputation as an elite, combustible and obsession-prone trader. (Each day, Mr. Hayes entered the building through a lucky turnstile, often wearing lucky bumblebee socks and toting a lucky keychain.)

Mr. Hayes soon became the younger man’s mentor, teaching Mr. Alykulov the tricks of the trade. Mr. Alykulov did his best to overlook Mr. Hayes’s social awkwardness, which garnered him the nicknames “Rain Man” and “Kid Asperger.” Once, at a dinner party, Mr. Hayes told Mr. Alykulov’s girlfriend all about his dandruff problem; she later sent Mr. Alykulov to work with a bottle of special shampoo to present to Mr. Hayes.

Despite Mr. Hayes’s propensity to explode at colleagues, Mr. Alykulov recognized that he was a brilliant trader. Mr. Hayes, not the best at reading interpersonal cues, concluded that he and Mr. Alykulov were pals.

Mr. Hayes jumped to Citigroup in 2009. After Citigroup fired him the following year, UBS opened an internal investigation into Mr. Hayes’s activities when he worked there. The Swiss bank uncovered evidence of a widespread campaign by Mr. Hayes, Mr. Alykulov and many others—including their managers and some executives—to skew the London interbank offered rate, or Libor. The scheme was designed to increase the profits that the traders reaped from instruments known as interest-rate derivatives whose values were based on Libor.

UBS shared its findings with governments all over the world, which then launched civil and criminal investigations. Before long, authorities in the U.S. had zeroed in on Mr. Hayes as the apparent ringleader.

UBS suspended Mr. Alykulov, although he was still getting paid—that way, the bank could ensure that he and others in similar situations would cooperate with the American officials who were leading the investigations. But his career prospects were in doubt. It was a jarring, embarrassing turn for someone who not long ago had thought he had a bright future as a trader.

After a few glum days lamenting his suspension, Mr. Alykulov started trying to figure out what to do with his life. He decided to learn another language. He set off for a monthslong trip to Spain, keeping in close touch all the while with Nate Muyskens, the tall Washington trial lawyer with a buzzcut whom UBS had hired to represent him. Mr. Muyskens told him that he was eventually going to need to come to Washington to meet with FBI agents and Justice Department prosecutors.

Mr. Alykulov returned to Japan in time for the earthquake—and then left Tokyo in such a blur that he forgot to pack a suit. On the car ride into Washington from Dulles International Airport, Mr. Alykulov stopped at a department store and dropped $500 on a new outfit so that he could look presentable when he showed up at the Justice Department. He charged the suit to UBS—the trip was on behalf of his employer, after all.

By the time he arrived in downtown Washington, Mr. Alykulov had worked himself into a lather. He was convinced that this trip would culminate with him in a jail cell. The easygoing Mr. Muyskens, whose clients ranged from bank traders to Justin Bieber, told him to chill: All that he had to do was cooperate, he explained, and the Justice Department would promise not to prosecute him.

But Mr. Alykulov wasn’t wild about that idea. He knew Mr. Hayes by now was one of the main targets. Mr. Alykulov didn’t much like Mr. Hayes, but he knew his former boss regarded him as a friend. The thought of knifing someone in that situation made Mr. Alykulov a little queasy. Plus, he was genuinely fond of Mr. Hayes’s wife.

When the time came for their appointment at the Justice Department’s Bond Building, Mr. Muyskens had to physically push Mr. Alykulov out the door to walk the few blocks down New York Avenue. When he got there, Mr. Alykulov seemed to have trouble explaining what he’d actually done wrong.

Gradually, though, he overcame his compunctions, telling himself that he had an obligation to UBS and its thousands of employees to help resolve this mess. He spent dozens of hours serving as a much-needed Sherpa for the prosecutors and FBI agents.

Mr. Hayes, Mr. Alykulov told the government investigators, had orchestrated the whole thing. What about current UBS employees and executives? Mr. Alykulov played down their involvement. Mr. Hayes, he made clear, was the mastermind.

As Mr. Muyskens had promised, Mr. Alykulov was granted a nonprosecution agreement that stated that Justice wouldn’t go after him as long as he cooperated fully. All he had to do was help to get the investigators closer to Mr. Hayes.

The FBI agents tried to convince Mr. Alykulov that they hadn’t been able to track down Mr. Hayes’s phone number. Mr. Alykulov would be doing everyone a big favor, they said, by reaching out to his former boss over Facebook to establish contact. The sooner the investigators got in touch with Mr. Hayes, the better it would be for him.

Mr. Alykulov typed out a Facebook message: “We need to talk.” He wrote that the Justice Department wanted to speak with him and that he wanted to get Mr. Hayes’s advice on what to do. Mr. Hayes still hadn’t spoken to any regulators, and he was eager for any scraps of information he could pick up about the course of the U.S. investigations. He sent Mr. Alykulov his cellphone number.

A couple of days later, the call came during Ms. Tighe’s pregnancy scan. Mr. Alykulov said that he was phoning from Kazakhstan, and FBI agents had devised an elaborate system to make it look like the call was coming from Mr. Alykulov’s native country—hence the long, strange phone number on Mr. Hayes’s screen.

Audio of the call was being recorded and piped live into a room at the Bond Building, where prosecutors and FBI agents sat around a conference table listening. They had prepared a list of questions for Mr. Alykulov to ask Mr. Hayes. The goal was to get him to acknowledge that what he’d been doing was wrong or to make some other sort of incriminating statement—perhaps encouraging Mr. Alykulov to lie or destroy evidence.

Mr. Alykulov—trying to fight back a debilitating sense of anxiety and betrayal and to contain his surging adrenaline—started the call by repeating what he’d said in the Facebook message: Justice wanted to schedule an interview.

“Should I talk to them? What should I tell them?”

“The U.S. Department of Justice, mate, you know, they’re like…the dudes who, you know…put people in jail,” Mr. Hayes answered. “Why the hell would you want to talk to them?”

Ms. Tighe finished her ultrasound. She walked into the prenatal wing’s waiting room, its walls covered with posters featuring cherubic babies and signs barring phone calls. Mr. Hayes was pacing and talking on his cell. Ms. Tighe could tell from his expression—his whole face was screwed up in a confused, agitated look—that something strange was going on.

Mr. Alykulov had just mentioned that he had printed out emails in which Mr. Hayes had asked his subordinate to help move Libor. “What should I do with them?” he asked.

“Why are you printing emails?” Mr. Hayes asked, furrowing his brow. Ms. Tighe started listening carefully to his end of the conversation. They were clearly talking about Libor and the Justice Department. She motioned for him to get off the phone; when that failed, she whispered, urgently, for him to tell Mr. Alykulov not to destroy evidence or to lie. One thing she had learned about Mr. Hayes during their four years together was that if you wanted him to do something, you needed to tell him in direct, unequivocal terms. Subtleties and shades of gray were lost on him. If this was a setup, she didn’t want her naive husband stumbling right into it.

Mr. Hayes complied, then asked Mr. Alykulov whether the Justice Department wanted to talk to him as well as to Mr. Alykulov. Mr. Alykulov said he didn’t know. Mr. Hayes, growing apprehensive about Mr. Alykulov’s carefully worded queries and nervous tone, asked whether he was recording the call.

“I did this, too,” Mr. Alykulov said, referring to his efforts to get Libor moved in favorable directions. “Why would I record it?”

With Mr. Hayes still on the phone, Ms. Tighe took an elevator downstairs to collect the test results that would show whether the fetus was at risk of Down syndrome. She couldn’t believe that she was going through this alone. The results showed virtually no risk of the syndrome. Angry despite the good news, she rode the elevator back up and found Mr. Hayes still on the phone. He was in the process of telling Mr. Alykulov to just blame his managers.

“That’s what I’m going to do,” Mr. Hayes said.

At the Bond Building, FBI agents thought that Mr. Hayes’s suggestion that Mr. Alykulov shouldn’t talk to the investigators might be enough for an obstruction-of-justice charge. A couple of days later, however, they decided to take another shot, hoping for cleaner evidence.

Mr. Hayes was finishing up lunch at the Cuckfield pub in East London with his stepbrother, who worked at a nearby hospital, when his phone rang. The Cuckfield, housed in a 19th-century stone inn, had a beer garden in the back, and Mr. Hayes stood there in the early-afternoon sunshine.

Mr. Alykulov started in with what struck him as a series of leading questions: “Should I tell them about your friend at RBS?” Mr. Hayes had a contact, Brent Davies, who used to work at Royal Bank of Scotland and whose help Mr. Hayes had sought in moving Libor.

“Brent? What’s he got to do with it?” Mr. Hayes asked.

“Should I tell them about your friend at Deutsche?” That was a Deutsche Bank trader named Guillaume Adolph.

“Well, I wouldn’t mention it,” Mr. Hayes said, “but if they ask, you should tell them.” In any case, he added, everything was done in writing, so it wasn’t much of a secret.

The phone call ended. Mr. Hayes and Mr. Alykulov would never speak again.

This piece is adapted from Mr. Enrich’s new book, “The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History,” to be published on March 21 by HarperCollins.

Russian Parliament Launches Investigation Of "CNN And Other American Media"

A few days ago Jeanne Shaheen, a Democratic Senator from New Hampshire, introduced a piece of legislation that would give the Department of Justice "new authority" to investigate potential violations of the Foreign Agents Registration Act by the "Russian Times".  Among other things, Shaheen said the legislation was necessary to determine whether "RT News is coordinating with the Russian government to spread misinformation and undermine our democratic process."  We won"t even bother to touch on the inherent hypocrisy of such a statement, but here is the press release from Shaheen"s website:

Following intelligence reports that RT News operates as a propaganda outlet for the Russian government, U.S. Senator Jeanne Shaheen (D-NH) has introduced legislation that gives the Department of Justice new authority to investigate potential violations of the Foreign Agents Registration Act by RT America.

“We have good reason to believe that RT News is coordinating with the Russian government to spread misinformation and undermine our democratic process,” said Shaheen. “The American public has a right to know if this is the case. RT News has made public statements boasting that it can dodge our laws with shell corporations, and it’s time for the Department of Justice to investigate. My bill provides the authority needed to request documentation of RT News and find out who they’re accountable to.”

The Director of National Intelligence’s recent report titled Assessing Russian Activities and Intentions in Recent US Elections concluded that RT News officials have structured their affiliate organizations to deliberately circumvent U.S. reporting and disclosure requirements under the Foreign Agents Registration Act.  Senator Shaheen’s Foreign Agents Registration Modernization and Enforcement Act gives the Department of Justice new authority to compel organizations like RT America to produce documentation on funding sources and foreign connections.

Well, as it turns out, Russian officials have the power to launch meaningless witch hunts in their country as well and have decided to demonstrate that power with the announcement today that they"ll launch a similar investigation into all U.S. media currently operating in Russia.  Per Reuters:

The Russian lower house of parliament, the State Duma, has approved a proposal to launch an investigation into U.S. media organizations that operate in Russia, it said in a statement posted on its web site late on Friday.

The investigation, which will be conducted by the Duma"s information policy, technologies and communications committee, will check whether CNN, the Voice of America, Radio Liberty and "other American media" are complying with Russian law.

Deputy Konstantin Zatulin, who initiated the move, calls it "a response to the actions of American politicians who have systematically accused Russian news media of interference in U.S. internal affairs," according to the Friday statement.

Shaheen"s legislation, of course, drew wide criticism from Russian agencies including the Russian Foreign Ministry whose spokesperson mocked the bill saying it should have included a clause defining a list of books that should be collected for burning.

The statement said the Duma backed the move on Friday evening after Konstantin Zatulin, an MP from the pro-Kremlin United Russia party, proposed an investigation to retaliate for what he called a "repressive" U.S. move against Russian state-funded broadcaster RT.

He said he was referring to an initiative by U.S. Senator Jeanne Shaheen, who has introduced a bill to empower the Justice Department to investigate possible violations of the Foreign Agents Registration Act by RT.

Foreign media in Russia are overseen by the Russian Foreign Ministry, whose spokeswoman Maria Zakharova this week singled out Shaheen"s demarche for criticism, quipping ironically that the senator should have included a clause drawing up a list of books for burning.

The U.S. move also solicited the ire of Margarita Simonyan, RT"s editor-in-chief, who on Wednesday told the daily Izvestia it had echoes of the activities of U.S. Senator Joseph McCarthy, who oversaw a campaign to expose people he regarded as communists in the 1950s.

Meanwhile, all of this comes even as top Democrats admitted on Friday that their investigation into Trump"s campaign was unlikely to yield any evidence of collusion with Russia (see "The Democrats" Trump-Russia Conspiracy Campaign Collapses").  Of course, not many politicians are willing to let facts get in the way of a good narrative.

Why Robert Shiller Is Worried About The Market

The last time Robert Shiller heard stock-market investors talk like this in 2000, it didn’t end well for the bulls.

As Bloomberg reports, Shiller says when markets are as buoyant as they are now, resisting the urge to pile in is hard regardless of what else might be happening in society.

“I was tempted to do it, too,” he says. “Trump keeps talking about a new spirit for America and so you could (A) believe that or (B) you could believe that other investors believe that.”

What Shiller will say now is that he’s refrained from adding to his own U.S. stock positions, emphasizing overseas markets instead. One factor that makes him cautious on American shares is the S&P 500’s cyclically-adjusted price-earnings ratio: While the metric is still about 30 percent below its high in 2000, it shows stocks are almost as expensive now as they were on the eve of the 1929 crash.

Shiller is not alone.

“I don’t generally call the entire market wrong -- investors are very smart, highly motivated individuals -- but I find it hard to say why stock markets are so un-volatile right now," says Nicholas Bloom, a Stanford University economist who co-designed the uncertainty gauge with colleagues from the University of Chicago and Northwestern University.

For Hersh Shefrin, a finance professor at Santa Clara University and author of a 2007 book on the role of psychology in markets, the rally is just another example of investors’ remarkable penchant for tunnel vision. Shefrin has a favorite analogy to illustrate his point: the great tulip-mania of 17th century Holland. Even the most casual students of financial history are familiar with the frenzy, during which a rare tulip bulb was worth enough money to buy a mansion. What often gets overlooked, though, is that the mania happened during an outbreak of bubonic plague.

“People were dying left and right,” Shefrin says. “So here you have financial markets sending signals completely at odds with the social mood of the time, with the degree of fear at the time.”

But while the academics can look back and study and reflect on the nature of bubbles, the Wall Street types will always find excuses:

“It’s been a period of repeated shocks, and I think people get toughened against that,” Ethan Harris, Bank of America Merrill Lynch’s global economist in New York, says. “It seems like uncertainty is the new norm, so you just learn to live with it.”

We leave it to Mr. Shiller to sum it all up...

“The market is way over-priced," he says. "It’s not as intellectual as people would think, or as economists would have you believe."

Trade accordingly.

Norway Wealth Fund Gains $53 Billion in 2016 On Trump Rally

After previously announcing plans to withdraw at least $15 billion to fund 2017 budget deficits, the $860 billion Norwegian sovereign wealth fund announced last December that it would change it"s portfolio allocations to try to make up for the withdrawals.  The change would eventually result in 75% of the fund"s capital being allocated to global equities, up from the previous 60% allocation...you know, because equities never go down so more is always better.

Now it seems that, at least for now, that bet has paid off to the tune of about $53 billion or 6.9% of the fund"s AUM.  Meanwhile, the fund"s CEO, Yngve Slyngstad, attributed the gain to the Trump rally saying that "after the presidential election in the U.S., markets priced in higher growth and inflation in the global economy."  Per Bloomberg:

The $900 billion Government Pension Fund Global returned 6.9 percent in 2016, after rising 2.7 percent the previous year, the Oslo-based investor said on Tuesday. Stocks gained 8.7 percent, bonds rose 4.3 percent, and real estate investment grew 0.8 percent.

“The fund returned 6.9 percent after a year of political events and uncertainty,” Chief Executive Officer Yngve Slyngstad said in the statement. “All of the fund’s asset classes generated positive returns, but it was the strong equity return in the second half of the year that drove the fund’s results.”

“After the presidential election in the U.S., markets priced in higher growth and inflation in the global economy,” Slyngstad said.

Of course, the gains came after the Norwegian government was forced to withdraw capital over the past two years to fund budget deficits that are expected to reach over 8% of GDP.

The withdrawals accelerated just as the heavily oil-dependent economy of Norway started to absorb the impact of lower oil prices.

In a previous interview with Bloomberg, Egil Matsen, the Deputy Governor at Norway’s Central Bank, said the withdrawals were starting to impact the manner in which the fund manages its risk profile.   

"Relevant for how we think about the risk-bearing capacity of the fund.  Say you have a decline in the equity market, and these returns have been partly funding the government, do you want variations in international financial markets to have a direct impact on fiscal policy?”

But Finance Minister Siv Jensen dismissed criticism of the withdrawals saying that the administration is using the fund as was intended noting that withdrawals remain below the fund"s annual return target of 4%.   

“Now that we are in an extraordinary situation, hit by the biggest oil price shock in 30 years, it would be crazy if we didn’t have an expansionary fiscal policy,” she told Bloomberg. Jensen rejected suggestions that the fund was “vulnerable.” She described it as “rock solid.”

The fund’s managers have warned it’s getting harder to live up to a real return target of 4 percent. It has returned 3.44 percent over the past 10 years. For now, planned withdrawals aren’t big enough to force the fund to sell assets. It estimates income from dividends, real estate and bonds will reach 207.5 billion kroner next year, almost double the amount the government plans to withdraw.

But there is no risk in equity investing, right?  In fact, we just found another $40 billion that will be pumped into the global equity bubble promptly.

How Does A Stock Market Operate In War? Syria - A Case Study

Submitted by Saxo Group"s Jack Davies, via TradingFloor.com,

• Last year was the Damascus Securities Exchange"s busiest on record


• The majority of shares traded on the exchange are in foreign-owned banks


• Those banks are grossly overvalued by "financial engineering"


• Increased activity could suggest improved confidence in the Syrian economy


• But it could also suggest Syrian investors" lack of alternatives

Forces loyal to the Assad regime have made considerable gains in recent months. On the surface this appears to be reflected on the Syrian stock exchange – but all is not as it seems.

Despite enduring more than half a decade of conflict leaving an estimated 400,000 dead and 11.4 million displaced, Syria retains an active stock market.

Established as part of a programme of economic reforms, the Damascus Securities Exchange opened its doors in 2009, two years before the onset of the crisis.

Not only does the market continue to function despite the conflict, if data published daily on the exchange’s website is to be believed, last year was its most active on record in terms of volume of trades and 2017 looks set to be busier still.

Source: Damascus Securities Exchange (2017 data only reflects the first month and half of trading, of course.)

While under ordinary circumstances, such data might be interpreted as suggesting renewed confidence in the economy; the circumstances in Syria are far from ordinary and analysts say activity on the exchange are largely the product of a fiction.

“Measured in the number of shares traded, the volume may be up but their value is down significantly, even when denoted in Syrian pounds,” Dr Reinoud Leenders of Lebanon and Syria Research Group tells TradingFloor by email. “Market capitalisation may seem to be on the rise but this hardly reflects real economic terms due to very high inflation and the steep fall in the exchange value of the Syrian pound.”

The Syrian pound has fallen dramatically since the start of the conflict. In 2010, you would have needed just shy of £50 to buy $1; today you would need more than £500 to get your hands on $1.

Subdued activity

Additionally, Leenders points out, there are only about half a dozen stocks that are actively traded on the exchange. Almost all of them are subsidiaries of foreign banks.

Rashad al-Kattan is a graduate of Damascus University. Now based in the UK, he works as a risk analyst and holds a fellowship at St Andrews University’s Centre for Syrian Study. Having previously worked for Lebanese-owned banks in Syria, the bulk of his academic research focuses on his homeland’s banking sector and stock exchange.

“If you look at the indices, banks are the most traded,” says al-Kattan. “I would be surprised if those investors are actually doing any due diligence because the banks – and this was acknowledged by the exchange’s general manager – although they appear profitable, they are engaged in financial engineering.”

Al-Kattan recounts how his former colleagues who were once employed by the corporate services department of their banks are now in the loan recovery department, which he says reflects the reality that – for the time being, at least – profit generation has all but ceased within the banks and in its place is loss reduction.

While attempting to identify their few remaining borrowers able to repay their loans is one way of attempting to reduce their losses, al-Kattan says a more efficient and insidious technique is also being employed.

“[The banks’] equity is paid in US dollars. What they’ve been doing each year is recognising those dollars in Syrian pounds, and because the pound is depreciating it seems their profits are going up,” says al-Kattan. “Of course, in order to do that you have to engage in a transaction; but the Central Bank has been very lenient with that because they don’t want to make the banks look loss making and generate panic.”

The banks in question are, of course, obliged to submit quarterly reports and statements, which contain these fictional profits.

“Their statements are endorsed by international auditing firms. They’re not saying anything because they know how the game is played. Looking at those banks, as an investor, I would not think they’re a good investment.”

But if the valuation of the banks is so inflated, why would anyone bother to invest in them? One answer, according to Kings College’s Dr Leenders is that both bankers and investors haven’t got anywhere else to go.

“Both are glued to the regime’s survival and/or are curtailed in their decisions by international sanctions,” he says in emailed remarks. “In this context, putting their money in either real estate or banks seems a sensible strategy, exactly because the rest of the economy fails (for now) to provide alternatives.”

Room for optimism

And while both Leenders and al-Kattan agree that the Syrian economy is in tatters, there are some causes for optimism for those who have bet their money on it recovering.

The rebound in trading on the Damascus Securities Exchange does coincide with the arrival of a large amount of Russian air and ground forces in Syria, and the re-capture of Aleppo by regime-aligned forces in December coincided with a massive uptick in trades on the exchange in the last quarter of 2016.

Source: Damascus Securities Exchange.

“But assuming that the banks are indeed banking on a regime victory (and henceforth in this context hoping for a likely influx of aid and remittances for recovery), this doesn’t mean the conflict is expected to come to an end,” says Leenders. “I guess from a banker’s perspective all that matters is that the regime captures and consolidates control in key economic areas; the rest of the country could still be under rebel control.”

Although hopes of an uptick in aid might be not be realised as soon as those banks would hope. The Syrian minister of economy announced recently that any reconstruction contracts awarded to foreign companies would be contingent upon apologies from Europe and the US for their role in the conflict, the Syria Report said this week.

Another indication that perhaps things may be on the verge of looking up for Syrian investors is that the construction of a 701 megawatt power station south of Damascus by Athens-headquartered international engineering firm Metka is reportedly nearing completion.

On Wednesday, Syriatel – one of the country"s two mobile phone service providers, headed by the president Bashar al-Assad"s maternal cousin Rami Makhlouf – signed an agreement with the exchange to list its shares publicly.

Al-Kattan, too, does not believe the economic situation is going to get any worse: “Generally speaking, I don’t think the Syrian pound will suffer more. I think in the next few months it will improve and might even go back to 400 [per dollar] with foreign cash injections,” he says.

But in terms of the stock exchange’s viability, he is not so optimistic. With 90% of the population dependent on foreign or government aid for survival and less than a fifth of the population even holding bank accounts, the exchange will continue to find itself with a limited base of investors, he says.

“How will it develop? Not a lot better than what we’ve seen before,” he says. “In terms of raising capital, we’re still a long way from that.”

Al-Kattan says that one of the reasons he chose to focus his research on the Syrian economy and in particular its banking sector is that “everyone is obsessed with ISIL and military balance of power and no one is focused on the economy.”

“I think this is important. While we’re talking about dealing with the regime, people believe the banks they dealt with before the conflict are the same, but I would argue they present very substantial risks.”

Representatives of the Damascus Securities Exchange acknowledged but did not respond to multiple requests for comment.

Syria"s stock exchange is far from being built on solid foundations.

Russian Airstrike Accidentally Kills Three Turkish Soldiers In Syria

A Russian airstrike accidentally killed three Turkish soldiers and wounded 11 others during an operation against the Islamic State in northern Syria on Thursday morning, Turkey"s military said in a statement and Moscow confirmed.The head of the Russian General Staff, Valery Gerasimov, said the warplanes were targeting Islamic State sites in the al-Bab area.

Whether indeed "accidental", or payback for the downing of a Russian jet over the Turkish-Syrian border in November 2015 is unclear, but according to Kremlin press secretary Dmitry Peskov, Russian President Vladimir Putin expressed condolences over the accidental loss of life in the airstrike, in a phone call with President Recep Tayyip Erdogan, 

“President Putin discussed… his recent phone conversation with Turkish President Erdogan. Among other things, he said that he expressed condolences to his colleague over the incident that took place early Thursday morning, when Turkish servicemen were killed as a result of incoordination in Russian Air Force airstrikes against terrorists during the joint operation to liberate al-Bab,” Peskov said.

Kremlin spokesman Dmitry Peskov said that Russia and Turkey will jointly investigate the deadly incident. The Kremlin spokesman told Sputnik that Putin told Erdogan that Turkish soldiers had died as a result of non-coordination of coordinates during Russian military jets" strikes in Syria. The Russian and Turkish presidents held a phone conversation earlier on Thursday. Putin expressed condolences to Erdogan over the deaths of Turkish soldiers near Syria"s al-Bab, the Kremlin said earlier. They also agreed to expand military coordination during the operation against militants from Daesh and other extremist groups in Syria.

The Russian Defense Ministry has also confirmed the unintentional strike, killing Turkish servicemen in Syria. The ministry said that Russian bombers had been on a mission to destroy Daesh terrorists" positions near al-Bab, where Turkish soldiers had been accidentally bombed. "Russian bombers have been carrying out a combat mission destroying Daesh positions in al-Bab area. The chiefs of the [Russian and Turkish] general staffs agreed to closer coordinate joint actions and exchange information about the situation on the ground."

Valery Gerasimov held telephone talks with his Turkish counterpart, during which the issues of the fight against international terrorist groups in Syria and the situation in the northeast of the province of Aleppo were discussed.

"Chief of the General Staff of the Armed Forces of the Russian Federation Army General Valery Gerasimov expressed condolences to [Turkish] General Hulusi Akar in connection with the death of three Turkish soldiers operating in the area of ??the city of al-Bab as a result of unintentional strike by a Russian aircraft."

Canadian Official On NAFTA Renegotiation: "Mexico Is In A Terrible, Terrible Position. We Are Not"

As reported yesterday, Mexico is not at all looking forward to starting the process of renegotiating NAFTA with Donald Trump, explicitly warning the US that "there are very clear red lines that must be drawn from the start." What these lines are will be explained by Economy Minister Ildefonso Guajardo and Foreign Affairs Secretary Luis Videgaray who are both meeting with US officials in Washington on Wednesday and Thursday, setting the stage with next week"s visit from Mexico President Enrique Pena Nieto.

Only, Enrique Pena Nieto may not even come, because according to an AP report late on Wednesday, the Mexican President is rethinking his scheduled meeting with President Trump next week. Peña Nieto may scrap the planned Jan. 31 huddle because of Trump’s executive order authorizing the construction of a wall along the U.S.-Mexico border, AP added. The AP confirmed with a Mexican official in Mexico City that Peña Nieto is “considering” cancelling the rendezvous.

And while subsequently Bloomberg reported that Nieto will visit the US as planned after all, the fury in Mexico is palpable and the Mexico News Daily reported that Trump’s border wall order sparked fierce backlash among Mexican lawmakers. The National Action Party’s Margareta Zavala called Trump’s order “an offense to Mexico” ahead of Peña Nieto’s trip. Jorge Castaneda, who served as secretary under former Mexican President Vicente Fox, also blasted the measure Wednesday. “This is an insult to those Mexican officials, to the president of Mexico and to all Mexicans,” he said, referencing two Mexican officials who met Trump administration staff on Wednesday.

“It’s a way of making them negotiate under threat, under insults, and it should lead Peña Nieto to cancel his trip next week,” Castaneda added during a television interview. "Peña [Nieto] is a weak president in a weak country at a weak moment, but he has to find a way to get some official backbone.”

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But while Mexico"s anger at the US is understandable, maybe the US" southern neighbor should be just as angry at the country that border the US to the north: the third member of NAFTA, Canada.

Canada will focus on preserving its U.S. trade ties during talks to renegotiate NAFTA and may not be able to help Mexico avoid being targeted by the Trump administration, Canadian government sources say.

"We love our Mexican friends. But our national interests come first and the friendship comes second," a source said on the sidelines of a cabinet retreat in Calgary, Alberta. "The two are not mutually exclusive," the source added.

In other words, when it comes to preserving NAFTA, it"s important, but what is more important is being on good enough terms with Trump to be able to cobble together a bilateral treaty should NAFTA fail.

As Reuters reports, the comments are some of the starkest yet by Canadian officials, "who are increasingly convinced Mexico will suffer the most damage from changes to the North American Free Trade Agreement."

* * *

Of course, the reason why both Mexico and Canada are on edge, and why their superficial friendship is about to collapse, is because on Sunday Trump said he planned talks soon to begin renegotiating NAFTA, under which Canada and Mexico send most of their exports to the United States. The Canadian sources stress Ottawa has not taken any final decision on how to approach the NAFTA talks, since Trump"s opening stance is largely unknown.

For now the government"s official stance is to dismiss the idea that Canada will formally abandon Mexico. Foreign Minister Chrystia Freeland said on Tuesday that Canada supported NAFTA as a trilateral agreement and noted that Trudeau had talked to Mexican President Enrique Pena Nieto over the weekend.

That said, Reuters" government sources note Mexico and Canada would appear to have little in common. Trump is unhappy about the large U.S. deficit with Mexico and has promised to punish firms with manufacturing bases there. "Our negotiating positions are totally different. Mexico is being hung out of an skyscraper window by its feet," said a second government source."Mexico is in a terrible, terrible position. We are not," said another Canadian person involved on the trade file.

Bilateral trade is critical for Canada, which sends 75 percent of its exports to the United States. Statistics Canada data for 2015 show two-way trade in goods with the United States totaled C$760 billion ($580 billion) compared to just C$26 billion with Mexico. Canada has a "very special status" and is unlikely to be hit hard by changes to NAFTA, the head of a business advisory council to Trump said on Monday.

And the punchline: Derek Burney, a former Canadian ambassador to Washington, told CTV News on Monday that Canada should distance itself from Mexico on NAFTA. "We have security agreements, both continental and multi-lateral -- Mexico does not. Mexico has a huge border problem with the United States in terms of immigration and drugs -- Canada does not," he said.

Officials familiar with diplomatic contacts between Mexico and Canada say there has been no talk of creating a joint front against the United States over NAFTA on the grounds that such a move would raise tensions and be counterproductive.

And that - by dividing and conquering his counterparts who are too afraid to unite against him - is how Trump"s "negotiating victory" is assured before the negotiations have even begun.

Why Ridiculous Official Propaganda Still Works

For students of official propaganda, manipulation of public opinion, psychological conditioning, and emotional coercion, it doesn’t get much better than this. As Trump and his army of Goldman Sachs guys, corporate CEOs, and Christian zealots slouch toward inauguration day, we are being treated to a master class in coordinated media manipulation that is making Goebbels look like an amateur. This may not be immediately apparent, given the seemingly risible nature of most of the garbage we are being barraged with, but once one understands the actual purpose of such official propaganda, everything starts to make more sense.

Chief among the common misconceptions about the way official propaganda works is the notion that its goal is to deceive the public into believing things that are not “the truth” (that Trump is a Russian agent, for example, or that Saddam had weapons of mass destruction, or that the terrorists hate us for our freedom, et cetera). However, while official propagandists are definitely pleased if anyone actually believes whatever lies they are selling, deception is not their primary aim.

The primary aim of official propaganda is to generate an “official narrative” that can be mindlessly repeated by the ruling classes and those who support and identify with them. This official narrative does not have to make sense, or to stand up to any sort of serious scrutiny. Its factualness is not the point. The point is to draw a Maginot line, a defensive ideological boundary, between “the truth” as defined by the ruling classes and any other “truth” that contradicts their narrative.

Imagine this Maginot line as a circular wall surrounded by inhospitable territory. Inside the wall is “normal” society, gainful employment, career advancement, and all the other considerable benefits of cooperating with the ruling classes. Outside the wall is poverty, anxiety, social and professional stigmatization, and various other forms of suffering. Which side of the wall do you want to be on? Every day, in countless ways, each of us are asked and have to answer this question. Conform, and there’s a place for you inside. Refuse, and … well, good luck out there.

In openly despotic societies, the stakes involved in making this choice (to conform or dissent) are often life and death. In our relatively liberal Western societies (for those of us who are not militant guerillas), the consequences of not conforming to the official narrative are usually subtler. Despite that, the pressure is still intense. Conforming to the consensus “reality” generated by these official narratives is price of admission to the inner sanctum, where the jobs, money, professional prestige, and the other rewards of Capitalism are. Conforming does not require belief. It requires allegiance and rote obedience. What one actually believes is completely irrelevant, as long as one parrots the official narrative.

In short, official propaganda is not designed to deceive the public (no more than the speeches in an actor’s script are intended to deceive the actor who speaks them). It is designed to be absorbed and repeated, no matter how implausible or preposterous it might be. Actually, it is often most effective when those who are forced to robotically repeat it know that it is utter nonsense, as the humiliation of having to do so cements their allegiance to the ruling classes (this phenomenon being a standard feature of the classic Stockholm Syndrome model, and authoritarian conditioning generally).

The current “Russian hacking” hysteria is a perfect example of how this works. No one aside from total morons actually believes this official narrative (the substance of which is beyond ridiculous), not even the stooges selling it to us. This, however, is not a problem, because it isn’t intended to be believed … it is intended to be accepted and repeated, more or less like religious dogma. (It doesn’t matter what actually happened, i.e., whether the “hack” was a hack or a leak, or who the hackers or leakers were, or who they may have been working for, or what whoever’s motives may have been. What matters is that the ruling classes have issued a new official narrative and are demanding that every “normal” American stand up and swear allegiance to it.)

The ruling classes are not exactly making it easy for their followers this time. Their new official narrative (let’s go ahead and call it “The Putinist Putsch to Destroy Democracy”) is so completely fatuous that it’s beyond embarrassing. The plot is more or less what you’d expect from a mediocre young adult novel or a Game of Thrones-type fantasy series. And if that wasn’t already humiliating enough for the liberals being asked to pretend to believe it, the PR folks in charge couldn’t even be bothered to assemble a new collection of liars to market their childish fairy tale for them. Not only are they insisting that liberals take the word of the “Intelligence Community” and the mainstream media that sold the world the “Saddam Has Secret WMDs” hoax, they actually dispatched James R. Clapper to sit there, in more or less the same spot he sat in the last time he lied to Congress, and do his dog and pony show again.

Meanwhile, the ruling classes’ papers of record, which cosmopolitan liberals rely on to provide a simulation of “serious journalism,” highbrow “arts and culture,” and so on, have descended to the level of the National Enquirer. Among the recent highlights was The Washington Post‘s “Russians Hacked the Vermont Power Grid” story, which it turned out involved neither Russians nor hackers, nor the Vermont power grid’s actual computers, and was basically just another made-up story, like the one about Putin’s Fake News Army. The New York Times, which has also been dutifully rolling out the new official narrative, has taken the leash off Charles M. Blow (aka “The Withering Gaze”), who is accusing Trump of being Russia’s appointment” and proclaiming his election “an act of war.” And now, as I was writing this piece, they hit us with the “Golden Showers” story, in which Trump paid a bunch of Russian hookers to pee on the bed where Obama slept. Any day now we are going to be told that Elvis is secretly working with Putin to deploy a Zhirinovskian gravitational weapon in a UFO disguised as Jesus that Assange and Snowden will personally pilot across the Atlantic to sink America. It’s like some kind of loyalty test in which the ruling classes are trying to determine just how far they can go with this crap before liberals refuse to salute any more of it.

The point of all this propaganda is to delegitimize Donald Trump, and to prophylactically reassert the neoliberal ruling classes’ monopoly on power, “reality,” and “truth.” In case this wasn’t already abundantly clear, the neoliberal ruling classes have no intention of giving up control of the global capitalist pseudo-empire they’ve been working to establish these last sixty years. They’re going to delegitimize and stigmatize Trump (and any other symbol of nationalist backlash or resistance to transnational Capitalism), bide their time for the next four years, and then install another of their loyal servants … after which life will go back to “normal,” and liberals will do their best to forget this unfortunate period where they pretended to believe this insipid neo-McCarthyite nonsense.

If I wasn’t worried that Trump is going to launch an all-out War on Islam, or that one of “our boys” in the tanks Obama has theatrically ordered to the Russian border was going to go bonkers and try to “git some” for Clinton, I’d be looking forward to seeing just how batshit crazy it’s going to get.

Banks In Drag - The Russell 2000 Exposed

Submitted by 720Global"s Michael Lebowitz via RealInvestmentAdvice.com,

In “Passive Negligence”, we highlighted how investors, on the margin, have been shifting from an active investment style to a more passive approach by favoring index and sector ETFs and mutual funds over individual holdings. We raised a concern that, in this mad dash towards the latest fad, many investors are falling prey to complacency by failing to properly analyze the underlying companies in which they are ultimately investing.

Since Donald Trump won the election, the Russell 2000 (R2K) has been the darling of the market, increasing approximately 15%. There are many narratives that support investing in small cap stocks, as represented by the R2K, and some even have credence. That said, investors should look beyond these narratives and analyze the index’s current valuation and its underlying holdings to better judge if the R2K is a good investment.

This article was written in conjunction with J. Brett Freeze, CFA from Global Technical Analysis.

The Russell 2000

Passive investors looking to diversify their equity holdings frequently hold a number of ETFs and mutual funds that blindly follow an index or sector. Many investment professionals employ a similar approach called “closet indexing”. In other words, they own a portfolio of different equity indices and some specific sectors as a decoy to their clients. They want the appearance of providing real value by generating alpha through security selection and not simply buying the “market”. Typically such strategies, over time, provide market-like returns and little diversification.

The R2K, in the words of Wikipedia, is “by far the most common benchmark for mutual funds that identify themselves as small cap”. Therefore, the R2K is a favorite among “closet indexers” looking to diversify their portfolios with small-cap holdings.

Like many broad-based indices, the R2K is composed of a diverse group of companies from varying industries. Currently, technology, services, healthcare and financials account for approximately 75% of the market capitalization of the index.

The following aggregate analysis of the R2K decomposes the index into nine industry classifications as well as a small catch-all category for unclassified companies. The current index constituents were held constant over the 13 year period that we reviewed. In other words, the data analyzed assumes the companies currently in the R2K, were in it for the last 13 years. This method allows for a more consistent evaluation of the index as it is currently composed. Note that 34 of the index constituents were excluded from this analysis as no data was available. The data used in this analysis is courtesy of www.gurufocus.com.

Net Income

Over the last five years, the R2K’s aggregate annual net income has shrunk from $33.6 billion to $9.7 billion, a 73% decline. That compares with nominal GDP growth of +18% and a 1% decline in S&P 500 earnings growth over the same period. Of the nine industries and the catch-all category that comprise the R2K, only four have experienced income growth over the last five years. Even more interesting is that 83% of the R2K’s earnings growth over the last five years is from one sector, financials.  Exclude financial companies from the index, aggregate earnings have been negative in each of the last two years. The chart below highlights the declining trend in R2K earnings since 2003, which marks the start of the market’s recovery from the Technology crash.

R2K earnings, as highlighted above, have declined at an annualized rate of 7.81% despite the 4.15% annualized earnings growth of financial companies.

Market Capitalization

Market Capitalization, also known as market cap, is the aggregate value of the equity shares underlying the index at a specific point in time. Currently, the R2K’s market cap stands at $2.311 trillion. Financial companies comprise the largest share at 25.4%, followed by technology (17.5%) and services (16.8%). Over the last five years, as shown in the graph below, the market cap of the R2K has nearly doubled, rising 91% despite declining earnings over the same period.

As the R2K’s market cap steadily increases and earnings fail to follow, the valuation of the index naturally richens. In particular, note the last two years in which the market cap increased despite a sharp decline in earnings. Currently, the ratio of market cap to net income is at an astronomical 237x, significantly above the post-2003 average of 33x. Holding earnings constant and regressing the index back to its post-2003 mean, market cap to earnings ratio would produce an 86% decline in the R2K. Even in an optimistic scenario, where earnings rebound to the high water mark of $40.90 billion set in 2013, the R2K would need to decline by 42% from its current level to produce a market cap to earnings ratio of 33x.

As a point of comparison, the widely reported P/E ratio of 46 for the R2K appears to be much lower than our value (237x). Unlike, the market benchmark S&P 500, the reported Russell P/E ratio excludes companies with negative earnings. Our analysis appropriately includes both positive and negative earnings.

What is the Russell?

Thus far, we have shown the paltry earnings growth of the R2K and the unsubstantiated rise in its market cap. To try to make more sense of this conflict we return to a point made earlier:  financial companies have provided 83% of all the earnings in the R2K over the last five years. From a fundamental perspective, an investor in the R2K has relied almost entirely upon earnings from financial companies, but has retained exposure to three-quarters of the index which have produced negligible aggregate earnings. In other words, investors are paying a steep premium for what amounts to earnings exposure from financial stocks.

The KBW bank index is a popular benchmark for the performance of domestic regional banks. Unlike the major national banks, such as J.P. Morgan and Bank of America, these banks are smaller in size, have less global exposure, and do a majority of their business in specific regions of the country. The largest banks in the index are household names such as KeyCorp, M&T Bank and BB&T Corporation. Some of the lesser-known banks are Berkshire Hills Bancorp, Hanmi Financial Corporation, and Cardinal Financial Corporation. Nearly 65% of the stocks in the KBW index are included in the R2K index.

Passive investors could have extracted a large portion of the fundamental benefits of owning the R2K by purchasing the KBW index. In substituting KBW for R2K, they would have retained similar exposure to financials while avoiding a portfolio of additional stocks trading at extreme valuations. The financial stocks within the R2K currently have a market cap to income ratio of 22.2, well below the 237.4 ratio of the entire index.

The table below compares the results of R2K and KBW. We used popular ETF’s to replicate investor performance of the two indices – IWM (R2K) and KRE (KBW).

KBW outperformed the R2K on an annualized return basis over the last two and five year periods and provided better risk-adjusted returns.

Having identified a meaningful anomaly, the next question is how can an investor or portfolio manager capitalize on it? For those who already own the R2K and are comfortable with market valuations, the recommendation would be to replace the R2K with a combination of the S&P 500, Wilshire 5000 and the KBW banking index. The Wilshire 5000 also provides some small cap exposure, but at comparatively reasonable valuations.  For those looking to exploit what seems like a mispricing of the R2K, we recommend a paired trade approach whereby one shorts the R2K and goes long the KBW and the S&P 500.

Summary

Much of the recent post-election price appreciation in the R2K has been based on the performance of financial stocks. The KBW index, again solely a financial stock portfolio, is up approximately 25% since the election, compared with 15% for the broader R2K.  The recent appreciation in financials is apparently a response to the new administration’s planned policies that are generally viewed as beneficial for the financial sector.  Given the regulatory oppression of the past eight years, this may very well be a sound reason to own bank stocks. However, the R2K index is trading at grossly elevated levels. Owning the index for anything other than pure speculative trading is ridiculous. Owning the index for its bank exposure is insane.

Active investment may not be in style, but that is certainly no reason to ignore sound analytical rigor and proper logic in making prudent investment allocation decisions.

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Just for a little more color on how insane this move has been... here are speculative longs in Russell 2000 futures...

h/t Loic S.