It’s Lonely at the Top

The DOW made a new high all by itself on Friday while the other indices hit a wall on Thursday in what might be an interim top for the next few weeks. The Dow was up 1.16% for the week, but both the S&P 500 and the NASDAQ Composite closed lower. A sign of exhaustion and complacency that normally gets resolved with lower prices.


Speculative VIX Futures Exposure

One clear sign of complacency this year has been the volatility indexes which rise when danger is near. On Wednesday, the volatility index (VIX) dropped to a new all-time intraday low at 8.84 but then reversed and closed the day at a much higher price. Technical analysts call this a “key reversal” as it may signal a trend change and signal that the days of low volatility are over. Complacency and optimism are usually at their highest when a top and trend change is near so its time to wear our risk management hats and reduce risk until we get a better signal from the stock market.


Economic & Central Banking Snippets

  • Sales of previously-owned homes fell 1.8% in June from the previous month, to an annualized pace of 5.52m units, the National Association of Realtors said on Monday. (FT)
  • University of Michigan’s consumer confidence gauge rose 4 points in July to 121.1, the second highest reading since 2000. A surge to a new high in views of current labor market conditions helped lead the upside, a positive sign for next week’s employment report.
  • Durable goods orders surged 6.5% in June but mostly because of larger than expected 131% spike in volatile civilian aircraft orders. However, the key core gauge which excludes aircraft orders fell 0.1%. That was a disappointing result after positive indications coming out of company earnings reports and business surveys for continued gains.
  • Growth in the UK economy edged up 0.3% for Q2 which is slightly higher than Q1’s reading of 0.2%. Year-on-year growth slowed to 1.7% from 2%. The British economy has been showing signs of a slowdown this year, with output falling in the industrial and services sectors in 2017.
  • Brazil’s monetary policy committee slashed its benchmark interest rate (the Selic) by a full percentage point to 9.25% on Wednesday, after annual inflation fell to a decade low of 3%. The move marks the third time this year that the central bank has opted for a 100bps cut and continues an easing cycle that’s aimed at dragging Latin America’s economy out of its worst recession on record. (FT)
  • Mexico’s exports surged during the first six months of 2017, setting a new record high of $198B for the first half of the year, as the start of NAFTA renegotiations looms in mid-August. Mexican exports notched a 10.4% year-on-year increase, helped by strong growth in the manufacturing sector as well as a big jump in the value of oil exports.
  • Canada’s economy grew for a seventh straight month in May as GDP for May grew 0.6% from the previous month, according to Statistics Canada, well ahead of analyst expectations for a 0.2% rise.


Chart Time!

S&P 500 (SPY)
S&P 500 (SPY)


10 Year Treasury Yields - TNX
10 Year Treasury Yields – TNX


Russell 2000 - Small Caps (IWM ETF)
Russell 2000 – Small Caps (IWM ETF)




Dow Jones (DIA)
Dow Jones (DIA)


Market Snippets

  • Driven by a massive increase in the price of bitcoin, the market cap of all crypto-currencies passed $90 billion last Friday, a high not observed since early July. With the move, the market capitalization of the cryptocurrencies is again advancing toward $100B, a figure it first exceeded in June when it reached an all-time high of $115B. (CoinDesk)
  • Covenant-lite leveraged loans are dominating the market. These loans are a sign of complacency by the bond market and afford lesser protections to investors in a default scenario. When the economy slows and leverage spikes, creditors will find themselves without the rights they had in the past. But who is worried about an economic slowdown anyway? (WSJ)

U.S. leveraged loan share


  • Since 2008, the world’s five largest oil companies have seen a net debt increase 10x. (Bear Traps Report)
  • U.S. regulators have taken their first shot at deflating the bubble in socalled Initial Coin Offerings, declaring that many of the digital tokens behind the recent mania should fall under securities rules. “The SEC’s Report of Investigation found that tokens offered and sold by a ‘virtual’ organization known as ‘The DAO’ were securities and therefore subject to federal laws.” (Seeking Alpha)
  • Foxconn Technology, which helped turn China into the center of the global electronic supply chain, is setting up shop in the U.S., with plans for a $10 billion plant in Wisconsin to make display panels used in televisions and other products. The plan marks the first major U.S. investment for Foxconn, the world’s largest contract manufacturer of electronics and the maker of iPhones and other gadgets for Apple. The factory is the first in a series of U.S. investments planned by Foxconn.
  • Tesla hopes to persuade buyers of its Model 3 to pay as much as $59,500 for its first attempt at an affordable car for the mass market, as it tries to find a means of pushing electric cars into the mainstream while turning a profit. Pricing details for the car were disclosed on Friday night when the US electric carmaker officially released the first handful of the vehicles at a party at its factory on the east side of San Francisco Bay.


International Snippets

  • UK goes electric as all newly bought cars will have to be electric within a quarter of a century. Environment minister Michael Gove plans to ban the sale of new petrol and diesel cars by 2040 in the government’s long-awaited “air quality plan”. Whether governments follow through with the announced bans will largely depend on whether the expected prices of batteries, electric vehicles and electricity will make financial sense for middle- and working-class consumers. (FT)
  • Investors are dumping Venezuelan bonds amid looming default concerns as the 18-month government note yield hit 54% this week.

Venezuelan bonds


  • Greece has capped off its return to the bond market with a healthy fall in its borrowing costs as investors snapped up the country’s first bond issuance since 2014. Final pricing on a €3B five-year bond came in at a yield of 4.625% and attracted orders in excess of €6.5B. Greece’s left-wing Syriza government will hail the fall in borrowing costs as a sign of investor confidence that the country is back on the path of recovery after seven years of bailouts and a near-decade long recession.
  • Continuing to open up its capital markets, China’s securities regulator said it will regulate and expand access for all types of investors, while encouraging more long-term institutional participation. The China Securities Regulatory Commissions will also maintain “normalization” of initial public offerings and improve de-listing mechanisms. (FT)
  • In a continued process of downgrading Middle East countries, Moody’s downgraded Oman’s long-term bond ratings to two notches above junk territory citing limited progress in addressing the nation’s vulnerabilities to the weak oil price environment. (FT)

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.