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November
15
2017

Invest like 1987 is about to happen again - because it is, warns hedge fund manager
Shawn Langlois

Every time the market bends but doesn’t break, bears pop up to remind everyone it’s just a matter of time before this thing finally falls apart. We saw it again on Friday, as multiweek winning streaks came to an end on major indexes — yet no real panic ensued. 

But could this be the rare dip that doesn’t find a buyer? That’s the question investors are chewing on as we push into mid-November. 

In our call of the day, Eric Peters, chief investment officer of One River Asset Management, says “people are no longer investing, they’re speculating” — duh — and he is convinced history is about to repeat itself. 

That spells all sorts of trouble for those unprepared. 

“We are investing as if 1987 will happen tomorrow, because it will,” Peters writes in a note to clients published on Zero Hedge. He’s referring, of course, to the year “Dirty Dancing” hit theaters, ”Walk Like an Egyptian” topped the charts and, oh yeah, stocks dropped 22% in a single day. 

Even in the precarious market position we currently find ourselves in, Peters reminds us of the fund-manager dilemma: “We need to be long, or we’ll be out of business,” he says. “So we construct option trades that are binary bets.” 

By that he means it would be wise to buy investment plays that pay X profit if stocks rally and cost Y if markets fall. No more, no less. Limit exposure. 

“What you do not want is a portfolio whose losses multiply depending on the severity of a decline,” Peters writes, adding that most people, especially the inexperienced, unnecessarily run this risk at times like these. 

“At the last stage of the cycle, you want lots of binary bets. Many small wins. Before the big loss,” he says.

The only ”truly cheap asset” left, according to Peters, appears to be implied volatility VIX, +4.78% but even that has shown signs of changing. 

More on that in our chart of the day below.

Key market gauges

Cryptocurrency action was more insane than usual over the weekend, punctuated by massive swings in both bitcoin BTCUSD, +0.17%  and bitcoin cash. At one point, Ethereum was overtaken by bitcoin cash as the world’s second-most valuable digital currency. You can probably expect more of the same in cryptos this week.

Bitcoin on Monday was in rally mode, getting back above $6,400 but staying well below last week’s high.

Read: Embrace cryptocurrencies or get laughed at, warns the venture capitalist who made an absolute killing on bitcoin.

There looks to be more weakness for stocks in the works on Monday with Dow YMZ7, -0.49%  and S&P ESZ7, -0.32%  futures down a bit premarket. Gold GCZ7, -0.05%  and crude oil CLZ7, -1.87%  are slightly in the green. In Asia ADOW, -0.38% stocks were mostly mixed while Europe SXXP, -0.69%  is lower in the early going. 

The chart

Sven Henrich of the Northman Trader blog says there’s a “great void” in awareness and price discovery. And that’s giving investors a false sense of security when it comes to the dangers “lurking underneath the current bubble.”

He rightly points out that there’s an “unprecedented phase of volatility compression” at the moment with the VIX VIX, +4.78% closing Friday above 10 for the first time in eight weeks. He warned it’s often the subtle signs that lead to the big shifts.

In the chart below, Henrich gives a longer-term view of the downward trend in the VIX and how the weekly close put it above its 200-day moving average for the first time in a long while. It’s still at a low level, historically, but there could be a breakout brewing. 

“Great voids have a way of filling. Perhaps not in space, but here on earth they generally do. It’s just a matter of time. Remember: Tops are processes,” Henrich writes. “What I can say with affirmation is that investors appear utter oblivious as to the historic and technical context in which they allocate cash to the long side.”

The buzz

Mattel MAT, +5.41%  shares are soaring after a report late Friday that rival toymaker Hasbro HAS, -0.55% has made a takeover offer.

GE GE, -5.14%  is cutting its dividend by 50% as the new CEO gets ready to wield his broom, refocusing the business on three lines, but stopping short of a breakup. 

Alibaba’s BABA, -1.16%  Singles Day was a record-setting success, as expected. And it wasn’t even a close call. That online shopping sale apparently surpassed last year’s total of 120.7 billion yuan (about $18 billion) by 1:09 p.m. in Beijing on Saturday. 

Dispatches from Trump in Asia, where the president touted his “very good” mediation skills after some silly Twitter jabs aimed at Kim Jong Un. Trump also teased a “major statement” on trade, coming Wednesday.

Roy Moore is suddenly trailing in the latest polls following allegations that he molested a 14-year-old girl. Democrat Doug Jones, who trailed by a fairly wide margin last month, is now in the lead. 

Tesla’s TSLA, -1.53%  Elon Musk is getting his fans all charged up again:

The quote

“I think he’s giving Putin a pass. It demonstrates to Mr. Putin that Donald Trump can be played by foreign leaders who are going to appeal to his ego and to try to play upon his insecurities, which is very, very worrisome from a national-security standpoint” — John Brennan, CIA director under Obama, in a CNN interview Sunday.

The stat

Lest there be any doubt, this year has been all about one sector, and one sector alone. This chart pretty much sums it all up:

The economy

Nothing of note today in terms of data, but investors will get a look at retail sales for October the consumer price index midweek, with housing starts hitting on Friday. Read:With hurricane noise softening, focus turns to Fedspeak

Random reads

An earthquake on the Iran-Iraq border has killed at least 335 people and left thousands injured

Microsoft’s MSFT, -0.16%  Bill Gates is about to build his own ‘smart city.

Marriage for life? Such an outdated concept

The letter in which Prince Charles blamed the Jews

Quartz’s editor tackles Louis C.K.’s “apology,” and fixes it for him

When did America first become untethered from reality?

Speaking of... Sponsors are pulling ads from Hannity’s show. And Hannity fans are responding by — what else? — breaking their Keurigs?

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I toil mirthfully for MarketWatch/WSJ Digital in So Cal. I COULD crush it in the market, but it's much more gratifying writing about it.

 

 

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