The Participant 9/2/15: Crash-O-Saurus Rex

by Jason Kelly

Wednesday, September 2, 2015




Stock markets around the world resumed crashing this week. From last Friday’s close, China’s Shanghai Composite is down another 2.2%, Japan’s Nikkei 225 is down 5.4%, London’s FTSE 100 is down 3.5% (as of 9:40am today London time), and the S&P 500 is down 3.8%.

The price of oil has been even more volatile than stock prices. In the three trading sessions from last Thursday to Monday, crude rose 27%, its biggest surge in 25 years. Then, it dropped 8% just yesterday. The DTO Oil -2x hedge we recently sold fell 29.7% Thursday-Monday, then spiked 13.2% yesterday. The UCO Oil +2x vehicle we’re watching to buy popped 27.3% and dropped 13.7% in the same time frames, respectively.

What’s roiling the financial markets? China’s slowdown. The recent accumulation of evidence showing the Chinese economy to be cooling off will not relent. The latest report from its manufacturing sector showed output stuck at a three-year low last month, a time frame consistent with the US stock market delivering its worst August performance in three years. Some analysts view the correlation as an indicator of how intricately connected global markets are these days.

Speaking in Indonesia, the head of the International Monetary Fund, Christine Lagarde, said global growth is coming in weaker than expected. She worried that the rapid rise in “global risk aversion and financial market volatility” could crimp Asian growth. The phrase “risk aversion and financial market volatility” is fund-speak for stock market crash. Lagarde is worried about the knock-on effects of China’s slowdown on other emerging economies. This is expected to influence demand for commodities, including oil.

Views on where the market will go from here vary widely, as usual.

On the shrill side, Michael Snyder of The Economic Collapse blog asks if this month is “going to be one of the most important months in modern American history” because the intel he’s received is “absolutely screaming that big trouble is ahead.” He quotes John Hussman (this week’s z-val, below) expecting a 40-55% market loss, then claims “a convergence of events during the month of September that is pretty much unprecedented.” They are September 13 as the last day of the Shemitah year, September 15 as the beginning of the 70th session of the UN General Assembly, September 25-27 as the launch of the UN’s plan of action called the 2030 Agenda, and September 28 as the last of a four-blood-moon series that began last year.

The Shemitah is an ancient Jewish observance in the seventh year of a cycle culminating in the forgiveness of debt, or release of money. Some people claim the seven-year cycle has influenced markets for more than a century, with the seventh year, the Shemitah, bringing calamity. The mysterious name, combined with the dot-com crash happening fourteen years ago and the subprime mortgage crash happening seven years ago, has more people than usual paying attention to this notion.

As for the other events, I don’t see the relevance of the UN schedule starting this month. The 2030 Agenda is a plan of action to kick off fifteen years of sustainable development to eradicate poverty, with no connection to financial markets whatsoever. “Blood moon” is another term for harvest moon and hunter moon, which are the full moons closest to the autumnal equinox (September 22 or 23) and the one after it. They appear orange due to their proximity to the horizon. Blood moon can also refer to full moons that become a deeper orange due to lunar eclipses. What the moon’s hue has to do with stock prices eludes me.

On the rational side, Ron Insana at CNBC reminds investors that re-tests of lows are fairly typical, and writes that as long as internal strength doesn’t deteriorate on the second wave down, a rebound is likely. So far “we haven’t seen any sign” of such deterioration “so panic would be premature.” Other analysts, such as Stephanie Link of TIAA-CREF and Jim Lebenthal of Lebenthal Asset Management, think this volatility should be used to put cash to work or upgrade your portfolio to quality companies on sale.

What do I think? That this is what price fluctuation looks like. It’s always explained in frightening terms when the arrows point down, but all past periods of arrows pointing down in the US stock market were followed by the arrows going back up again. Invest in a way that expects this and reacts appropriately to it. That’s what I do, and it feels great. Don’t bother figuring when to buy or sell, or how much. Let a simple formula handle that while you tend to more important things — like observing blood moons. They’re beautiful.



From Note 30 sent to subscribers last Sunday morning, with data as of Friday, August 28:

A group of Chinese state-owned stock investing groups called the “national team” waded in to buy stocks in the final hour of trading on Thursday. That effort alone lifted the index from a minor loss to a gain of more than 5%. The index rose again on Friday. Political analysts said the reason the stops were pulled out was that party leaders want markets to be rising when they host a military parade this week to commemorate the 70th anniversary of what’s being called the “Victory of the Chinese People’s War of Resistance Against Japanese Aggression.” The Shanghai Composite fell 16.5% for the week through Wednesday’s close, then rebounded 10.4% over Thursday and Friday for a one-week performance of -7.9% to close at 3232.

The z-vals struck again, doing their usual disservice of scaring people out of the stock market at precisely the wrong time. Bank of America Merrill Lynch called it “Total Risk Surrender” in a research note reporting that equity funds watched $29.5B walk out the door in the week ended Wednesday, the biggest weekly outflow on record in data going back to 2002. On Tuesday alone, investors pulled $19B from stock funds, more than on any other day of the past eight years. When did stock prices begin recovering? On Wednesday, the very next trading session. Way to go, fear mongers.

Have stocks bottomed? I don’t know. What I do know is that, technically, we hope not. We hope they bottom on Monday, October 5, just after we place our quarterly rebalancing buy orders the day before. That would enable us to buy into the recovery at the best moment. It’s hard to get used to this way of looking at the market, but it’s mathematically sound and a relief, once you embrace it.

So, welcome the prospect of more volatility on the way, or at least gird your loins for it. In the next section, we’ll look at one more pressure that might deliver big price fluctuations: the Fed’s first rate hike.

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The following excerpt is from John Hussman’s August 31 Weekly Market Comment.

“It’s important to recognize that the S&P 500 is down only about 6% from its record high, while the most historically reliable valuation measures are double their historical norms; a level that we still associate with expected 10-year S&P 500 nominal total returns of approximately zero. We fully expect a 40-55% market loss over the completion of the present market cycle. …

“As I noted early this year, market crashes ‘have tended to unfold after the market has already lost 10-14% and the recovery from that low fails.’ Prior pre-crash bounces have generally been in the 6-7% range, which is what we observed last week, so I certainly don’t see that bounce as having removed any of our concerns. We remain extremely alert to the prospect for much more extended market losses.”

To see this call in The Z-val Zone, please visit:

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Background: The term “z-val” is a shorthand introduced in the book, “The 3% Signal,” for “zero-validity forecasters” and “zero-validity environment.” The latter phrase was coined by Nobel Prize winner Daniel Kahneman in his book, “Thinking, Fast and Slow,” where he wrote that “stock pickers and political scientists who make long-term forecasts operate in a zero-validity environment. Their failures reflect the basic unpredictability of the events that they try to forecast.” This is why stock market forecasters are proven to sport an accuracy rate of about 50%, same as a coin toss, yet they continue forecasting.

You can peruse the growing collection of tracked forecasts in The Z-val Zone at:

Seen a forecast I should track? Send me the link in a reply to this note.



In the spirit of Michael Snyder’s worries about blood moons, below is my concluding comment from last year’s Kelly Letter Note 39, sent to subscribers on October 12, 2014. I wrote it after enjoying one of last year’s blood moons.

There was a hunter’s moon on Wednesday. It’s the full moon following the harvest moon, which is the full moon nearest the autumnal equinox (either September 22nd or 23rd; this year it was the 23rd). It’s recently become popular to call a hunter’s moon a blood moon. Most people assume this is because the moon becomes reddish orange on the horizon when sunlight hits it after filtering through Earth’s atmosphere, but this has always been the case for hunter’s moons and only recently did the term blood moon appear.

It may be due to the popularity of pastor John Hagee’s 2013 book, “Four Blood Moons,” which contends, “God is controlling the sun, the moon, and the stars to send our generation a signal that something big is about to happen.” I haven’t read the book, but assume the four in the title refers to the lunar tetrad of 2014-2015. A tetrad is four successive total lunar eclipses, with no partial lunar eclipse between them, each separated by six lunar months. This year’s two happened on April 14-15 and October 7-8; next year’s will happen on April 4 and September 28. In a total lunar eclipse, the moon becomes much redder than usual as it passes through Earth’s shadow and the filtered light of its atmosphere, making “blood” an easy description.

If a lunar tetrad is God’s way of sending a message to Earth, He’s persistent and apparently agnostic as to what type of civilization is here to receive it. In the first century through the end of our current 21st century, there are 62 tetrads. In this century alone, there are eight. However, in the 17th, 18th, and 19th centuries there were none, which makes getting four of them over this year and next another reason to appreciate being alive now, regardless of what other significance you attach to the events, if any.

Last week’s Mars-like full moon was visible from Japan at moonrise on Wednesday evening; from North America at moonset on Wednesday morning. Listening to Pink Floyd’s “Dark Side of the Moon” album — an obvious choice for the inclusion of track ten, “Eclipse” — I drove to a shrine atop a nearby mountain to see the event. I figured it would be quiet up there, and it was. With some snacks and drinks, I made my way past a walkway lit by lanterns, over a moon bridge, and onto an unlit forest path up the mountain to the shrine. I spread out the picnic on a rock. I got myself situated after greeting a few cats that came out of nowhere to see what was going on, then I looked up and saw … clouds.

Clouds! Of all the nights to get clouds. In the distance, I could see the lights of Tokyo and thought they weren’t a bad consolation prize, so began working my way through the snacks and drinks. Crickets and cats kept me company, but so did the clouds. I finally stood up to walk around and see if by chance I could find a better vantage point. Suddenly, through the tops of bamboo trees, the clouds cleared and there was the moon, early in the cycle, pinkish with a white gleam on one edge and a gradation to coppery orange on the opposite side. The crickets kept singing, but the cats stilled when they sensed my feet take root. I couldn’t turn away. Our usual moon had donned a reverent robe. It looked ancient, mysterious, and otherworldly.

The clouds ended up enhancing my view, not ruining it. The moon changed colors as it progressed through the eclipse, and did so through a swirling mix of cloud cover. It occasionally disappeared entirely, but then reemerged in a new hue. I thought of taking pictures, but skipped it in favor of staring mesmerized. Some may have seen a message from God, others a different kind of magic. As for me, I drew the deepest awe from thinking that sometimes stunningly beautiful things just happen, and then joy from the blind luck of being there when this one did. It’s not a small observation. The cats and crickets didn’t seem to care all that much about the red moon in the sky. I did, and so did other humans in their own ways. That’s a wonderful part of us.

Yours very truly,
Jason Kelly

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