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   Strategies & Market TrendsJohn Pitera's Market Laboratory

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To: Don Green who wrote (19203)5/11/2017 7:58:24 PM
From: John Pitera
1 Recommendation   of 33149
China Bonds Send Fresh Stress Signal
For the first time since records began, five-year government-bond yield breaks above the 10-year

By Shen Hong

May 11, 2017 7:08 a.m. ET

SHANGHAI—China’s $1.7 trillion government-bond market is exhibiting a new sign of stress: The yield on longer-term debt has fallen below that on shorter-term debt—an anomaly that some traders are blaming on Beijing’s efforts to reduce financial risk.

Early on Thursday, the five-year yield rose to 3.71%, breaking above the 10-year yield for the first time since records began—even though the latter, at 3.68%, was near a 25-month high. Yields rise as bond prices fall.

Such a “yield-curve inversion” defies normal market logic that bonds requiring a longer commitment should compensate investors with a higher return. Inversion usually reflects investor pessimism about a country’s long-term growth and inflation prospects. When the U.S. Treasury yield curve inverted in 2006 and 2007, most analysts cited Asian central banks’ heavy buying of longer-dated U.S. government debt.

But in China, while growth has been slowing and inflation has been relatively subdued, few are predicting prolonged deflation or a recession.

“Many of us are scratching our heads for an explanation because this kind of curve inversion is absolutely not normal,” said Wang Ming, a partner at Shanghai Yaozhi Asset Management Co., a bond fund that manages 2 billion yuan ($290 million) in assets.

The answer seems to lie in Beijing’s recent campaign to tamp down the burgeoning shadow-banking sector, whose growth is due in large part to so-called wealth-management products; the amount of such products outstanding has ballooned to $4.2 trillion in the first quarter of 2017, Moody’s Investors Service says, which is more than a third of China’s annual gross domestic product. That is up from $72 billion in 2007, according to Chinese financial data firm Wind Info. Banks sell these products to customers by offering much higher returns than ordinary deposits bring.

But in pursuit of these outsize returns, they often make highly leveraged bets on assets from bonds to stocks to commodities, and that has alarmed authorities. In recent weeks China’s central bank has raised the cost of short-term borrowing while the banking regulator has warned against market “irregularities” such as the explosion of these highly leveraged products.

The crackdown has prompted many issuers to sell bonds in their portfolios to repay investors. While the selling has been broad-based, investors have been ditching five-year government bonds, where the market is less liquid, faster than 10-year bonds, where the market is more actively traded but also cushioned by demand from long-term investors.

“The inversion is a form of mispricing in the bond market,” said Liu Dongliang, senior analyst at China Merchants Bank . “The fact that no one is taking the bargain despite the higher yield on the five-year bond just shows how depressed investors’ mood is.”

The narrowing of the 10-year bond’s yield premium has been particularly conspicuous since April 12, when The Wall Street Journal reported that China’s banking regulator had made a fresh warning to lenders not to engage in speculation that creates asset bubbles and prevents money from flowing to more-productive parts of the economy.

Weak demand for a five-year government bond issued Wednesday further damped interest, traders said. Total bids amounted to 1.8 times the new bond’s 36 billion yuan issue size, lower than the normal ratio of around two times.

“It’s really difficult to predict when the selloff or such anomalies will end because China’s bond market is reacting to the regulatory crackdown only and is no longer reflecting economic fundamentals,” said China Merchants Bank’s Mr. Liu.


China1. Asset selloff in China has accelerated in response to tight monetary conditions.

The overnight interbank rate (similar to the Fed Funds rate in the US) remains elevated.

Yields are rising quite quickly – we haven’t seen daily moves like these in a while.

• The stock market continues to slump.

2. Fiscal stimulus projects are expected to offset (at least partially) the economic drag from PBoC’s tight monetary stance. The chart below shows “excavator hours,” which is a decent proxy for construction activity.

Source: Goldman Sachs, @joshdigga

3. China’s public firms with large cash balances and no efficient ways to deploy them have been loading up on wealth management products (WMPs). The goal, supposedly, is to boost “returns” to shareholders. The stock market, therefore, has exposure to WMPs, which in turn are exposed to corporate bonds (using leverage). This setup and the possible implications are undoubtedly causing some headaches in Bejing.

Source: Caixin Global; h/t Kent; Read full article

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From: Don Green5/12/2017 10:14:05 AM
3 Recommendations   of 33149
The most profitable short trade in town has been a gift that keeps giving. To be precise, it’s had an eye-popping surge of more than 4,000 percent since the start of the bull run in 2009. That allure has been enticing investors to jump on the gravy train.

That gift -- selling volatility -- is so crowded now that when everyone reaches for the exit, it’s bound not to end well.

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To: Elroy who wrote (19201)5/12/2017 2:28:23 PM
From: John Pitera
2 Recommendations   of 33149
And a Bitcoin Is Now Worth...
by Lorcan Roche Kelly
May 12, 2017, 10:47 AM EDT

With a 94 percent year-to-date gain, and a single "coin" now worth $1,843, bitcoin has been on a helluva run lately.

The increase in the cost of the massively-volatile electronic tokens has led to many comparisons with that other favorite outsider ``currency'' -- gold -- recently.

True, a unit of Bitcoin passed the dollar value of one troy ounce of gold this year, and is now more than $600 higher.

But the daily swings in the digitally created asset have been vast. Even during the huge run up this year, it has moved more than five percent on 21 different days, with nine of those being moves lower. Gold on the other hand, has been much more stable.

Volatility aside, there is a major problem with gold as a comparator for the software-based unit.

Nobody thinks comparing one share of Apple Inc. -- current price around $155 -- with one share of, for example, outdoor lighting company Acuity Brands Inc. -- current price around $178 -- is valid. It certainly does not show that Acuity (market cap $7.9 billion) is worth more than Apple (market cap $814 billion).

By the time the supply of new bitcoins ends, sometime after the year 2110, there will be 21 million bitcoins in (digital) existence, meaning the total value of all of the electronic tokens that will ever exist, at today's market price, is just under $39 billion. According to the World Gold Council, total gold stocks amount to approximately six billion troy ounces, or $7.3 trillion at today's price.

To put it another way, in order for bitcoin to be worth more than gold, a one 'coin' would have to trade at $347,000 in order for 'bitcoin worth more than gold' to be a defensible statement.

Must dash now, one bitcoin is about be worth more than one aluminum future...


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To: Elroy who wrote (19201)5/12/2017 2:50:29 PM
From: John Pitera
1 Recommendation   of 33149
Risk-Wary Banks Chill Bitcoin Market
At least three exchanges have said in recent weeks they can’t process transactions in dollars
By Gregor Stuart Hunter and Julie Steinberg

(This article is 3 weeks old but it illustrates some of the stresses and controversy associated with BITCOIN

April 26, 2017 7:31 a.m. ET

At least three bitcoin exchanges have said in recent weeks that they can’t process transactions in dollars, as global banks pull back from sectors they deem too risky.

Hong Kong-based Bitfinex, the largest cryptocurrency exchange by market share, said last week its customers couldn’t withdraw or deposit any currencies because the Taiwanese banks that handle its transactions were blocking all requests. OKCoin International, the Hong Kong-based arm of one of China’s biggest bitcoin exchanges, and BTC-e have warned users of disruptions in U.S.-dollar transactions.

Earlier this month, Bitfinex sued Wells Fargo & Co., alleging it had refused to process some bitcoin-related transactions through the Taiwanese banks. A week later Bitfinex withdrew the suit, acknowledging that Wells Fargo has no legal obligation to serve every customer, said Philip Potter, the exchange’s chief strategy officer, in an interview. Wells Fargo declined to comment.

Bitcoin, a digital currency launched in 2009, runs on a decentralized network of computers and isn’t backed or controlled by any government. Users purchase bitcoin with U.S. dollars or other currencies.

Many bitcoin exchanges have accounts with local banks that rely on larger “correspondent banks” to facilitate wire transfers and process transactions that involve foreign currencies. But global banks have long been wary of even indirect interactions with bitcoin exchanges, for fear of being held liable if bitcoin users—who are difficult to identify—are involved in illegal or shady activities, said Ross Delston, a former U.S. banking regulator and anti-money-laundering consultant.

J.P. Morgan Chase & Co. prohibits banks it transacts with from dealing with virtual-currency exchanges, according to an internal document seen by The Wall Street Journal. Standard Chartered PLC also doesn’t process such transactions, according to a spokesman.

To be able to transact with the wider financial system, bitcoin exchanges must play cat-and-mouse, said Bitfinex’s Mr. Potter, continually switching bank accounts.

“They close one account, we open another somewhere else,” Mr. Potter said. “It’s a battle, but it looks like one that we appear to be losing, largely because we’re the largest such exchange in the world and we’ve got the biggest target painted on our back.”

Bitcoin is also drawing more regulatory scrutiny. The U.S. Securities and Exchange Commission last month rejected two separate proposals for bitcoin-based exchange-traded funds, saying the lack of transparency could leave investors open to fraud and manipulation. The agency this week said it would review one of the rejections. China’s central bank is considering requiring bitcoin exchanges to verify a client’s identity and adhere to banking regulations, The Wall Street Journal reported last month.

The market value of all cryptocurrencies this month hit a record $30 billion, two-thirds in bitcoin, according CoinMarketCap. But trading has plummeted this year as regulatory pressure has risen in China—which accounted for 90% of volume last year, according to research site CryptoCompare. Over the past month China’s share of the much-diminished total has averaged just 11.2%, the site says.

In response to scrutiny from regulators, global banks over the past year to 18 months have ratcheted up their “know-your-customer” checks by re-examining existing clients, said Benjamin Quinlan, chief executive officer of Hong Kong-based financial services consultancy Quinlan & Associates.

Bitcoin exchanges barred from transacting in U.S. dollars or other currencies effectively forgo their most common function, as places to buy cryptocurrencies with money stored in the traditional financial system—though users can still convert bitcoin into other virtual currencies such as Monero or Zcash.

Bitfinex’s difficulties in the past year include the loss of around 120,000 bitcoin, worth some $65 million, to hackers last August. The exchange has since reimbursed customers. It was also fined $75,000 by the U.S. Commodity Futures Trading Commission last June after failing to register as a commodities exchange.

Other cryptocurrency exchanges have reported disruptions in recent weeks. OKCoin International said on its website on April 18 that it would temporarily suspend deposits in U.S. dollars because of unspecified “issues with intermediary banks.” It said it was seeking alternatives to resume usual service.

Bitcoin exchange BTC-e, whose location isn’t clear, said in a tweet on April 14 that as a result of changing its bank account, it wouldn’t be able to accept U.S.-dollar wire transfers until the end of the month. The exchange didn’t respond to requests for comment.

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To: Don Green who wrote (19214)5/12/2017 5:06:53 PM
From: Don Green
1 Recommendation   of 33149
Is Shorting Volatility a Free Lunch?

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To: Elroy who wrote (19201)5/13/2017 4:50:57 AM
From: John Pitera
1 Recommendation   of 33149
CryptoCurrency Market Capitalizations

Elroy, why not make even more money by buying Ethereum instead of BitCoin.... and also maybe we should be acquiring a portfolio of all 835 of the Cryptocurrencies..... (food for thought)..

the whole arena is beyond westworld..... I would keep an eye on Ethereum and what they are doing with their new technology


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