AdvisorShares Weekly Market Review – Week Ending 11/10/2017
Highlights of the Prior Week
Very Odd And Unfamiliar Crimson Hue On My Screens
So tweeted @todd_harrison about what he saw on his monitor during the week as domestic equity markets were on their way to a negative five day run. The Dow Jones Industrial Average fell 0.49%, the S&P 500 gave up 21 basis points, the NASDAQ declined the same 21 basis points and the Russell 2000 slid 1.30%. There were plenty of reasons cited for why equities might have declined including being at the how the sausage is made part of the tax reform legislation to the decline in high yield (more below on that) and if you scour your favorite social media feed you might find a few other reasons but sometimes, markets just go down for no real reason at all, they just do.
Gold hit an air pocket on Friday after a widely reported sale of futures that had a notional value of $4 billion. This equates to about 10% of average daily volume in one trade. Although we found nothing to support this, our first inclination is to think we might subsequently hear it was a fat finger situation, a trade error. Bitcoin also hit an air pocket on Friday dropping more than 7% at its low, continue to fall over the weekend. Zerohedge blamed comments from Dennis Gartman as being the catalyst for the drop. The cancellation of a “fork” which is akin to a split played a role? Maybe the 25% increase the week before might have contributed to some over exuberance leaving it ripe for some sort of decline or correction. As we write this morning, it has come roaring back, taking much of the ground it lost over the weekend. The Wall Street Journal posited that Bitcoin might be the Most Dramatic Bubble Ever. Take it easy everyone. As we said a couple of weeks ago, at $200 billion for all the cryptocurrencies it is still just a tiny fraction of the size of the internet bubble. For some perspective, here’s a link from November 2000 headlining a $1.7 trillion decline in market cap for the dot coms and that was only a few months after the peak, there was still a long way to go.
High yield debt has taken a bit of a slide lately which has people on the lookout for a repeat of 2015 when the energy sector, then the largest sector, imploded causing double digit declines in some of the bigger index funds. While we don’t minimize the anguish of that large of a decline in a fixed income proxy, that is nothing compared to owning the wrong closed end fund at the wrong time. Looking for other possibilities to account for the decline, Reuters’ coverage noted two companies pulling deals because of market volatility and a steepening curve as contributing to the decline. Also noted is that the space has seen withdrawals from the larger ETFs, to the tune of $621 million in the past week after twice that amount the week before. Barron’s attributed the decline, at least in part, to the failed cell phone carrier merger and proposed limits on interest rate deductibility in the new tax plan.
There is a lot to look at elsewhere in the income markets. While most eyes are on possible FOMC policy changes, the the action in LIBOR is arguably more important as more capital market activity prices off LIBOR as opposed to the Fed’s overnight rate. LIBOR has been headed higher at a steady and depending on who ask, dramatic rate with 12 month LIBOR closing at 1.86% last week. A lot of attention has been paid lately to the spread between two year treasuries and ten year treasuries. The trend this year has been to flatten. Friday the spread was at 75 basis points but has spent some time lately below 70. This plays into concerns of bank profitability and whether the curve is on its way to inverting. If the curve actually inverts we will make a big deal out of it but taking the stoic position, it’s not inverted until it inverts.
A recent article by Eric Balchunas from Bloomberg made the rounds last week looking at and trying to debunk the idea the ETFs are untested during market stress. Balchunas brings plenty of data to the table that mostly centers on what is a tiny percentage of ‘bad trades in times of crisis versus the massive number of trades that occur with ETFs. A couple of key points we would add is to realize a flash crash for what it is as it is occurring and avoid trading during that hour or two. Also, understand the drawbacks of stop orders in the context of a flash crash, you might have to live with a seemingly bad print $80 below the IIV in the face of one of these 90 minute panics as was the case in the last two flash crashes.
Social media caught fire over the news that users could now expand to 280 characters. It has drawn a lot of criticism and over analysis like this from Lance Ulanoff writing for Mashable. Our take, 140 characters plus room for a link would have been good.
There were times over the last decade where I wished I had just one more tweet character, let alone another 140, but in those times, I usually took a deep breath and dove back into my tweet, hacking away at needless words and replacing “ands” with plus signs. There was always a way to get my point across in 140 characters. And if I failed, it was my failure, not the system’s.
Two time Cy Young Award winner Roy Halladay was killed in a plane crash last week. Halladay had a profound impact on Daniel Norris, another major league pitcher we have profiled here before.
After the two finished talking baseball, they talked about life. Both were men with a diverse array of interests. Halladay told Norris how stoked he was to get his pilot’s license to fly his new plane, a topic of conversation that feels eerie now for Norris. But he also talked about his family, how they were his world, and about how much he loved coaching his sons’ baseball teams.
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, CME Group, Mashable, The Atlantic