The Next Shoe Awaits

I have been very busy the past several days, finding trade setups, doing the 30-day blogging challenge at BitPost and the day job. That's my caveat for this observation: the market has declined steadily in September, but this sell-off feels different. The word that comes to mind for this pullback is quiet. There has been no major spike in the VIX. The prior dips all saw some bearish bravado, bulls whining about "why won't the market go up" or crowing about buying the dip. For myself, I was mostly breaking even in the prior dips because gains were given back. Maybe I'll see my profits get blown up by a face-ripping rebound, but right now my whole options portfolio is up about 50 percent in the past few days, far more than I was in prior pullbacks and I'm more aggressively short than I have ever been in nominal terms and percentage terms. A week ago I was thinking about throwing in the towel and I will probably throw in the towel if this rally reverses because if that happens, my hunch is the "real" correction or the bear market itself won't start until after the taper begins. I know myself thoguh, and when I'm ready to give up is usually when the turn is finally at hand.

Additionally, the quiet means there are still great setups. A lot of stocks have broken key support levels, but have not started cascading lower. I bought a slightly out of the money puts on Chipotle this morning. The stock is above trendline support, but only about 2 percent away. Last time it lost its 50-day moving average in May 2021, it quickly shed 10 percent in a couple of weeks. There's a gap down around $1600 that is only about 12 percent away. Back on September 8, I posted Shorting High Value Stocks. I revisited the topic on September 24 in Looking for the New RCAs.

I accumulated more puts on ASML as the stock bounced a bit. There are some like CMG that only recently broke their 50-day moving averages. The FANGs aside from FB and APPL are high priced, as are stocks such as SHOP, MELI, ALGN, IDXX, ISRG, HUBS, RH, etc. Not all of these are great short candidates, but they are examples of "The stock is too damn high!" More seriously, when the VIX eventually rises, some of these high prices stocks will quickly drop. Their put options are cheap if timed correctly. Speaking of which, one of the market leaders busted its March 2020 trendline today. I will post it tomorrow after the open.

China Using Prices to Curb Electricity Demand

Caixin: Regional China Utilities Get Nod to Raise Prices in Hope of Easing Outages

Electric utilities in a handful of Chinese provinces are raising power prices after a nod from the nation’s top economic planner, which is grappling with the contribution of record-high coal prices and withering stockpiles to a worsening power crunch.

Coal-fired power plants in Ningxia, Shanghai, Shandong, Guangdong and parts of Inner Mongolia have increased their fixed rates charged to grid operators by 10%, the maximum allowed under national regulations, a Caixin analysis shows.

...The agency said on Monday it will start a new mechanism in October that will link the coal market to industrial power prices. Once prices for coal bought by power plants surpass 1,300 yuan ($201) per ton, for every 50 yuan increase, electricity sale prices will increase by 0.015 yuan per kilowatt-hour (kWh).

China's policy response is the right one. This is a good illustration of why I am both bearish on China, while remaining long-term bullisho their rise as a nation because they apply common sense solutions. Using common sense in the West will get you branded a racist, extremist, transphobic terorist.

I can't call it a wager yet because I don't have a trade on, but I'm watching the forex markets like a hawk for a sign of spillover. I am currently long calls on DXY, but that is not a China-specific trade.

Gold-Copper Spikes But No Breakout Yet

Maybe the bear is waking up, but he hasn't emerged from his cave yet.

Thanks China

This broke out yesterday, China fueling it today. These stocks have plenty of room to run in a bull market and you will have months and maybe years to front-run all the ESG yoyos.

China to Secure Energy At All Costs

Bloomberg: China Orders Top Energy Firms to Secure Supplies at All Cost
China’s central government officials ordered the country’s top state-owned energy companies -- from coal to electricity and oil -- to secure supplies for this winter at all costs, according to people familiar with the matter. The order came directly from Vice Premier Han Zheng, who supervises the nation’s energy sector and industrial production, and was delivered during an emergency meeting earlier this week with officials from Beijing’s state-owned assets regulator and economic planning agency, the people said, asking not to be named discussing a private matter. Blackouts won’t be tolerated, the people said.
The Federal Reserve along with all central bankers and all governments implementing idiotic lockdown policies had better hope inflation is transitory because if it is not, China may have just fired the first real shot in competitive currency devaluations.

Ten UK Energy Suppliers Already Bankrupt Since August

Bloomberg: Three More U.K. Power Suppliers Collapse as Energy Crisis Deepens
Igloo Energy Supply Ltd, Enstroga and Symbio Energy announced their collapse on Wednesday, taking the number of U.K. utilities that have gone under to ten in the past two months amid a broader energy crisis.

Burrito Bomb

Like many stocks, CMG has lost its 50-day moving average. Support is slightly below $1800 per share. If the market tanks, this once could really tumble. It trades for 50 times next year's earnings. Same as Netflix...

Taper Repeat: The 10yr/2yr Ratio Falls Like in 2014

Last time it accompanied a new U.S. dollar bull market that started in July 2014. The ratio broke down in October. The ratio is breaking down again and DXY has made a small breakout from a base...


Clown Economy Comes to the UK

electrek: The British have a gas shortage, so they’re Googling electric cars like crazy
September 29 update: UK car-buying comparison website carwow reached out to Electrek today to let us know that it, too, like Carguide (see below), has experienced a huge surge in site searches for electric cars.

Compared to the previous week, carwow says EV searches increased 28% on Friday, 43% on Saturday, and 56% by Sunday September 26.

They will go from a gasoline shortage to an electricity shortage.

USDJPY: Massive Base Pattern Progressing

My sense is most of the market has no idea how stagflation works and another big segment that thinks it knows, is running off of lessons learned in the 1970s that don't all apply anymore. The 1970s saw the rise of the Japanese and German economies back to parity with the United States. The U.S. was a major energy importer, had very low debt and low imports. Today, the U.S. might be the least exposed of the major economies, including China, should stagflation erupt.

As for the chart, if this were to complete it calls for a massive depreciation of the yen. The neckline of this inverted head-and-shoulders isn't that far away, less than 15 percent, but the yen has been slow-moving in the past. This could be several years away or one bad year away.

Follow the Science

Many of the vaccine refusers have skipped ahead.

Out of Dollars: Chinese Airlines Blocked from Buying Boeing Planes

Only a couple of hours ago I posted What If China Can't Afford Imported Coal. Now I get back from a run and what headline comes across?

ZH: China Is Blocking Its Airlines From Buying "Tens Of Billions Of Dollars" In U.S. Made Boeing Airplanes

In what should serve as a wakeup call for the Biden administration about the climate of trade between the U.S. and China (but won't), China is reportedly blocking its domestic airlines from doing business with Boeing.

U.S. Commerce Secretary Gina Raimondo made the revelation on Tuesday, according to Reuters, stating that Chinese airlines were being prevented from buying "tens of billions of dollars" in U.S. made airplanes.

Raimondo also pointed out that China wasn't living up to its promises made in 2020 to buy U.S. goods.

They think its a trade spat. Maybe it is. Or maybe there is smoke billowing from the Chinese side of the global economy.

ARKK Ready to Tumble

I just put on a bearish position. Tight stops because I'm looking for a major breakdown immediately. Will close out if it doesn't happen because I put on a highly aggressive trade with options.

What If China Can't Afford Imported Coal

What is the most likely explanation for why China is handicapping its economy after spending more than a decade bailing out various zombie industries. The first answer is the reform moment is actually here. All the attacks on corporations and wealthy CEOs over the past 18 months is part of a political consolidation ahead of letting the bottom drop out on the economy. Pop the credit bubble, ease the pain for the average Chinese citizen, but retain full political power by breaking the wealthy via recession and bankruptcies.

That doedsn't explain why they'd shut power on ordinary Chinese citizens though. We know the CCP doesn't care about climate change (nor should they, the best science argues against draconinan policies). The most likely explanation is central planning, which always fails in some new and spectacular way. The local officials have no idea how to apportion energy demand. They are now given electricity quotas, like the lending quotas in the prior decade, and once they hit the quota they shut the lights off. The power goes off at Mr. Zhang's apartment and Mr. Liu's factory.

What if that doesn't explain it though. What is the next most likely explanation? Given the existence of strict capital controls and recent total ban on cryptocurrency, plus everything we know about their reserve position and shortage of U.S. dollars, the current situation with Evergrade, the next most likely explanation is they can't afford it.

ZH: More Than Half Of China's Provinces Are Now 'Rationing' Electricity, Governors Demand More Coal Imports To Resolve Crisis

Reuters spoke with Han Jun, governor of the northeastern province of Jilin, who said new coal suppliers are needed from Russia, Mongolia, and Indonesia. He added the province would also need to acquire coal mining contracts in the neighboring region of Inner Mongolia to ensure adequate supply.

Jilin is one of the ten provinces that have been hit hard by the power crunch. The government has rationed power to energy-intensive heavy industries like steel, cement, and aluminum plants to solve the problem, but that has yet to work. Power plants are also facing a surge in thermal coal prices and are unwilling to pass on to consumers.

I have been discussing the potential for a major devaluation in the yuan for years. What I have repeated often is the following: the direction of the dollar is the key. Global macro forces are the key. If capital is flowing into China, if dollars are flowing into China, there is a near zero risk of currency devaluation in the short-term. The yuan will rally against the dollar. The same way that a highly indebted person or business has zero bankruptcy risk as long as their income exceeds their costs and interest payments, as long as their stock portfolio or whatever asset they have pledged against the debt is rising. The most bearish theory you can possibly imagine for the most incompetently run corporation will come to nothing so long as there is a positive trend. Enron, Lehman Brothers, Indy Mac were done in by the turn in the economy and markets. If the economy kept roaring along these past 20 years, Enron might be a $1 trillion company. Evergrande is going bankrupt now for a reason, one that we may learn more about in the coming months.

I spent countless hours studying charting as a way to filter down macro ideas. The chart of USDCNY looks like it has bottomed and will turn higher. That means pressure on China's reserves is rising. That means they are holding dollars more tightly. Evergrande is not repaying foreign borrowers. Power is being turned off as coal prices soar and the governors are asking for more coal imports...imports that cost foreign currency.

If I'm right, we're in for a steady stream of negative economic and financial shocks. If I'm wrong, we'll find out really soon because charts like USDCNY that are close to long-term support (or resistance in other cases) will move opposite to my expectation. I will adjust accordingly. I certainly could be wrong. Market turns are often clouded in uncertainty, a crisis is defined as "a crucial or decisive point or situation, especially a difficult or unstable situation involving an impending change. We often think of a crisis as negative, but really it is peak uncertainty. It can go either way. What drives the fear is that it could go the wrong way.

The Final Bailout

I discuss the plan to tax unrealized capital gains here: The Final Bailout.

Many people hear that the Baizuo Admin wants to tax unrealized capital gains and think it is a wealth confiscation or tax scheme. But what if it is really the final bailout, a way for the government to send trillions upon trillions of dollars directly to the wealthiest Americans in the event of a major bear market? It sounds unbelievable on the surface, but look at everything done over the past 12 years. Non-stop bailouts for the rich, the incompetent, the bankrupt, the failed, the losers. America's failed elites remain wealthy thanks to government handouts and the failures (see Afghanistan and coroanvirus response as the latest debacles) who send the cash are kept in power by said wealthy. It's a great scheme to ensure that there is never another recession or bankruptcy wave that could threaten their wealth, status and power.


Next Shoe: BTC Bitcoin

Lots of break downs on the charts today. BTC looks ready to follow. I would take a breakdown here as a generally bearish signal for markets tomorrow.

All About Interest Rates


The Waiting is the Hardest Part

Oops The Fed Did It Again

Energy Getting Hyper

Two weeks ago I posted, Aggressively Shorting Energy. That didn't work out as a trade, but WTI crude oil is still below the fibonacci level as long as it doesn't clear $77.25. XLE clared an old support line today, but there's still a possibility of a symmetrical head and shuodlers top.
Long-terrim readers will know I have been a long-time bull on SWN. The stock climbed 21 percent today and exploded higher along with the rest of the natural gas sector.
One of two things is going to happen. Either energy will correct along with the rest of the stock market, or energy is about to signal inflation is accelerating quickly, in which case the Nasdaq is going to ggo skydiving without a parachute. I still prefer natural gas as an energy play for myself. An alternative, derivative play is fertilizer. I opened a position in this stock today.

China's Energy Mess

China is cutting power to export industries again. Incompetence? Climate change goals? Rising coal and natural gas prices hitting currency reserves?


Diversity Blows Up

Among unvaccinated black voters, Biden has an abysmal approval rating of 18 percent. In some states, around 60 percent of blacks are still unvaccinated.
BLM may protest vaccine passports in NY. Nicki Minaj fans invite Trump supporters to anti-Fauci, anti-CDC, anti-vaxx protest in Atlanta.

There isn't a new politial alliance brewing so much as diversity is blowing up all the existing political coalitions. At least for the GOP and Democrat parties as they exist today, America is about to become ungovernable.

People Don't Dream of Utopian Cities in the Desert in Bear Markets

MSN: Walmart Billionaire Marc Lore Is Planning a $500 Billion “City of the Future”
While other billionaires are jockeying to get into space, Marc Lore has his eyes on planet Earth: The former Walmart exec has announced plans to create a new utopian city in the American desert, featuring self-driving cars and energy-efficient skyscrapers.

Telosa—named after the Greek word telos, meaning “higher purpose”—comes with a $500 billion price tag but would eventually house some five million people over the next 30 years.

In 20 years, people like Marc Lore will be happy to have survived the Fourth Turning.

Here We Go Again, Again: China's Housing Market Freezes

ZH: “The Housing Market Is Almost Frozen" - An Even Bigger Problem Emerges For China
In a letter to the Shaoxing municipal government in eastern Zhejiang province, the local office of developer Sunac China appealed for “policy assistance” as it was struggling through what it called a "turning point in China’s real estate industry."

"We have never experienced such a radical change in the external environment," Sunac’s Shaoxing office said, pointing to a 60% year-on-year fall in home sales over the summer.

"The market is almost frozen," it added in the letter, which was first reported by the Financial Times. “The radical change in policy and environment has seriously disrupted our business and made it very difficult to maintain normal operations.”

In September 2014 (the Fed's taper ended in October) I posted the following over a period of a few days. In chronological order:

Handan Residents Afraid to Buy Homes; Market Frozen With Developers on the Brink

Credit Bubble Collapses in Handan; Arrests Made; Developers Repaying Suppliers With Property

Handan Credit Bubble Affects Entire City Economy

Handan Developers Try to Repay Debts With Homes

Third Tier Cities Bottoming, Handan Collapse Exaggerated (headline pulled from quoted Chinese article)

A month later, I posted: Liaoning Sounds Warning on Chinese Economy. Handan is not in Liaoning, but Liaoning was an even more industrial province than Handan's Hebei. Liaoning suffered with commodities peaking in 2011. It had turned to real estate to lift economic growth. Much as China has done to the whole nation at various times in the past decade.

The next summer, China stopped defending the yuan and allowed a "shock" depreciation in the currency.

Last time, the Fed was almost finished with its taper when the wheels starting coming off the Chinese economy. This time they haven't even tapered yet. A difference is the U.S. Dollar Index hasn't shot higher yet, but if that is coming...another difference is China's credit bubble is far larger, with less room for support...and U.S. stocks and Chinese homes are at an incredible apex. It sure looks like a major cyclical turn is coming. The only question I have is whether global currency depreciation against commodities (most importantly gold) is in the cards.

Tech Stocks are Doomed

Either way tech stocks will be getting a lot cheaper.

China Prioritizing Homeowners Over Bondholders

Similar to how foreign investors didn't realize China was serious about no major stimulus back around 2014, they do not yet understand that the CCP doesn't care if wealthy and foreign investors go bankrupt.

ZH: China Steps In To Ensure Evergrande Funds Used To Complete Housing Project, Not Pay Creditors

With Evergrande's foreign bondholders saying they have yet to receive a closely watched $83.5 million interest payment that was due at midnight in New York on Thursday, or noon on Friday in Hong Kong, in effect starting a 30 day grace period before a hard default is triggered, Bloomberg reports that China’s housing regulator has "stepped up oversight of China Evergrande Group’s bank accounts to ensure funds are used to complete housing projects and not diverted to pay creditors."

In other words, China is now not only deciding how the insolvent developer distributes its cash flow and, but is also forcing it to prioritize operational outlays over payments to creditors, a step which companies traditionally take after they have filed for bankruptcy. The move is a confirmation that homeowners come first on Beijing’s priority list for managing the Evergrande crisis - in hopes of preventing a major hit to China's property sector - even as bondholders, banks and other creditors seek repayments on more than $300 billion in liabilities from the world’s most indebted developer.

The stock market is not the economy. Highly financialized economies such as the USA are made weaker by their reliance on equity production and trading as an industry. The CCP understands that it doesn't really matter what price stocks trade at as long as the factories are open, people are employed and can afford a rising standard of living. At extremes, stock prices will affect operations. Bond markets are more important, but also expendable. If bond holders are wiped out, the factory is still there. If it can keep operations going, well sucks to be an economically-superfluous bondholder. For the CCP, the threat of instabiliy and loss of economic control is a reason to bring the market to heel rather than to let it take over more of the economy.

It's crystal clear to me who will be taking 100 percent losses should the credit bubble pop. That's not to say China is a unique risk. Many Western investors will probably lose more on their U.S. investments in a global bust. Yet there's still this mystique around the CCP, as if "to get rich is glorious" is still the motto. Anyone who thinks China will control the fallout to the benefit of foreigners, or even its own wealthy citizens, should look again at everything that has happened this past year. My read is that China is preparing for a bust by consolidating political power. Laying waste to an entire class of people who threatened CCP authority, even if indirectly, is one benefit of a major financial crisis.

The difference between China and the USA is that the CCP is very clearly the political authority in China, responsible for whatever happens. It cares for the people because if it does not, the people will come for them. In the USA, democracy has been delegitimized. No one is actually in charge. No one takes responsibility for anything. USG blames the Federal Reserve, the Federal Reserve blames the government or natural forces. No one is fired for any failure because there is no check on authority. Corporations and government run roughshod over the citizens. People are forced to stay at home under pandemic lockdown orders while illegal migrants enter the country and roam free. The unelected New York Governor (she took over after Cuomo resigned) threated to replace New York hospital workers with foreigners if they don't take the mRNA terapy shots. America is a decapitated democracy run by rogue bureaucrats, with Dr. Fauci an example of how quickly a lower level incompetent with tyrannical tendencies can take over the entire U.S.A. by pushing the bureaucracy in his direction. If the American people do not revolt or a strong leader doesn't step up and restore order, investors in the USA will eventually lose far more than investors in China because whereas China will arrest a crisis with bold action, the U.S. could spiral into chaos will basic social order breaking down.

Looking for the New RCAs

I've been going through various charts looking for high-priced stocks that could tumble. Google looks like a blowoff top to me. There are lots more, but I didn't want to make too long of a post. I also looked at the largest stocks in the Russell 2000 and found a few of those with bearish potential. The Russell 2000 being the weakest of the major indexes.