Russia’s Putin Defense of Syria: Why the US is Against it and Why Putin Acted

Well the war against the ISIS has taken a dramatic twist. 

Russia’s Putin has joined the war by initially by conducting airstrikes against ISIS targets. But they are doing this independently from US and the latter’s allies. 

Russia has reportedly expanded air operations to cover other Syrian rebels which includes those supported by the US. 

The Chinese government reportedly will be sending warplanes in support of Russia’s campaign as Russia’s warplanes will be allowed access to Iraq’s air base. Finally, Iran and the Hezbollah have reportedly been preparing to launch ground troops on Syria.

In short, Russia and her allies have launched a coordinated campaign not only to flush out the ISIS but also to secure Syria’s Assad regime. 

And it’s not that Russia has been trying to get the goat of the US. Russia’s reportedly earlier asked for the “America and its allies to agree to coordinate their campaign against the terrorist group with Russia, Iran and the Syrian army, but according to Bloomberg, the Obama administration has so far resisted.”

Now why the US government is against Russia

From Daniel McAdam’s at the Lew Rockwell Blog offers an explanation: (bold mine)

The Obama Administration is not happy about this development.

The US has been bombing Syria for a year without permission from the Syrian government and without a UN Security Council resolution authorizing an attack on a sovereign nation. That means US strikes on Syrian soil are illegal according to international law. However the first US response to the Russian strikes against ISIS in Syria was to condemn the Russian government for not coordinating its strikes with the US.

Unsurprisingly, the US mainstream media once again rushed to carry water for the US administration, with CNN’s Christiane Amanpour pondering whether Russia answering the legitimate Syrian government’s request for assistance would open itself up to war crimes charges! In Amanpour’s world there is no crime in a year of bombing a sovereign state with not even a fig leaf UN resolution to back it up. The only crime is to resist the US empire. No wonder in a world of media austerity, Amanpour is a well-compensated regime propagandist.

Rather than welcoming Russian efforts against ISIS and al-Qaeda, the US claims that unless Russia also focuses on removing the Assad government from power its efforts are “doomed to failure.” The US claims to be concerned that the Russians are attacking the “moderate” Syrian rebels trained by the United States — but even US generals have admitted that group consists of a grand total of four or five individuals. So it’s hard to understand the sudden concern. Each new batch of “moderates” the US churns out seems to defect to al-Qaeda or ISIS within minutes of deployment in Syria.

What is interesting is that the US-led coalition dropping bombs on Syria for the past year has yet to even consider the mounting civilian body count from its attacks. Not a word from the US government about large numbers of civilians it has killed in Syria. Yet there is plenty of evidence that the civilian toll taken by American bombs is exceedingly high. The moment the Russians join the fight against ISIS and al-Qaeda in Syria, however, the US suddenly becomes obsessed with civilian deaths — even as no evidence has arisen aside from suspicious reports from opposition-friendly “human rights” organizations that any civilians have been killed in the first day of Russian strikes.

What “evidence” exists of civilian casualties in the Russian strikes comes from the war machine funded Institute for the Study of War (ISW), headed by Victoria Nuland‘s sister-in-law Kimberly Kagan. ISW’s Genevieve Casagrande — a former dolphin expert who quite frankly does not look like a seasoned foreign policy expert —  claimed to know that Russia’s airstrikes “did not hit ISIS militants and rather resulted in a large number of civilian casualties.” Based on what? Only the unquestioning mainstream media could tell us. But of course they do not.

The bottom line is this: the US is opposing Russia’s attacks on ISIS and al-Qaeda — two branches of the same tree that are a proven threat to the US homeland — because Russia is not also attacking the Assad government, which could never be a threat to the United States.

Who really is protecting us? Obama with his ongoing Assad obsession?

Danger ahead!

Meanwhile, conservative author Pat Buchanan says that Russia’s Putin has only been adroitly responding to the interventionist US foreign policy predicated on the latter's aversion to national self-determination.

From Lew Rockwell.com (bold mine)

So Vladimir Putin in his U.N. address summarized his indictment of a U.S. foreign policy that has produced a series of disasters in the Middle East that we did not need the Russian leader to describe for us.

Fourteen years after we invaded Afghanistan, Afghan troops are once again fighting Taliban forces for control of Kunduz. Only 10,000 U.S. troops still in that ravaged country prevent the Taliban’s triumphal return to power.

A dozen years after George W. Bush invaded Iraq, ISIS occupies its second city, Mosul, controls its largest province, Anbar, and holds Anbar’s capital, Ramadi, as Baghdad turns away from us — to Tehran.

The cost to Iraqis of their “liberation”? A hundred thousand dead, half a million widows and fatherless children, millions gone from the country and, still, unending war.

How has Libya fared since we “liberated” that land? A failed state, it is torn apart by a civil war between an Islamist “Libya Dawn” in Tripoli and a Tobruk regime backed by Egypt’s dictator.

Then there is Yemen. Since March, when Houthi rebels chased a Saudi sock puppet from power, Riyadh, backed by U.S. ordinance and intel, has been bombing that poorest of nations in the Arab world.

Five thousand are dead and 25,000 wounded since March. And as the 25 million Yemeni depend on imports for food, which have been largely cut off, what is happening is described by one U.N. official as a “humanitarian catastrophe.”

“Yemen after five months looks like Syria after five years,” said the international head of the Red Cross on his return.

On Monday, the wedding party of a Houthi fighter was struck by air-launched missiles with 130 guests dead. Did we help to produce that?

What does Putin see as the ideological root of these disasters?

“After the end of the Cold War, a single center of domination emerged in the world, and then those who found themselves at the top of the pyramid were tempted to think they were strong and exceptional, they knew better.”

Then, adopting policies “based on self-conceit and belief in one’s exceptionality and impunity,” this “single center of domination,” the United States, began to export “so-called democratic” revolutions.

How did it all turn out? Says Putin:

“An aggressive foreign interference has resulted in a brazen destruction of national institutions. … Instead of the triumph of democracy and progress, we got violence, poverty and social disaster.

Nobody cares a bit about human rights, including the right to life.”

Is Putin wrong in his depiction of what happened to the Middle East after we plunged in? Or does his summary of what American interventions have wrought echo the warnings made against them for years by American dissenters?

Putin concept of “state sovereignty” is this: “We are all different, and we should respect that. No one has to conform to a single development model that someone has once and for all recognized as the right one.”

The Soviet Union tried that way, said Putin, and failed. Now the Americans are trying the same thing, and they will reach the same end.

Unlike most U.N. speeches, Putin’s merits study. For he not only identifies the U.S. mindset that helped to produce the new world disorder, he identifies a primary cause of the emerging second Cold War.

To Putin, the West’s exploitation of its Cold War victory to move NATO onto Russia’s doorstep caused the visceral Russian recoil. The U.S.-backed coup in Ukraine that overthrew the elected pro-Russian government led straight to the violent reaction in the pro-Russian Donbas.

What Putin seems to be saying to us is this:

If America’s elites continue to assert their right to intervene in the internal affairs of nations, to make them conform to a U.S. ideal of what is a good society and legitimate government, then we are headed for endless conflict. And, one day, this will inevitably result in war, as more and more nations resist America’s moral imperialism.

Nations have a right to be themselves, Putin is saying.

They have the right to reflect in their institutions their own histories, beliefs, values and traditions, even if that results in what Americans regard as illiberal democracies or authoritarian capitalism or even Muslim theocracies.

There was a time, not so long ago, when Americans had no problem with this, when Americans accepted a diversity of regimes abroad. Indeed, a belief in nonintervention abroad was once the very cornerstone of American foreign policy.

Wednesday and Thursday, Putin’s forces in Syria bombed the camps of U.S.-backed rebels seeking to overthrow Assad. Putin is sending a signal: Russia is willing to ride the escalator up to a collision with the United States to prevent us and our Sunni Arab and Turkish allies from dumping over Assad, which could bring ISIS to power in Damascus.

Perhaps it is time to climb down off our ideological high horse and start respecting the vital interests of other sovereign nations, even as we protect and defend our own.

The Syrian war has already spawned a Syrian refugee crisis

Importantly, cross your fingers that these two major opposing alliances won’t cross each other's path, because this may be worse than a global stock market crash or economic/financial crisis, as the Syrian war may be the trigger to World War III. 

Example of Gambler’s Fallacy: The US Stock Market’s Rip on a Traditionally Down Day of September 30

I reiterate here that neither statistics nor seasonality determines the market’s outcome. 

The Bespoke Invest notes that one of the trading sessions with a notorious bias for negative performance has been September 30^th

While March 30th has traditionally been the day where the S&P 500 has been up the least, 9/30 is tied for fifth at 38%.  Since 1945, the S&P 500 has declined an average of 0.15% (median: -0.25%) with positive returns just 38% of the time on 9/30.  While the long-term performance of the S&P 500 on the last day of September has been poor, in recent years it has been even worse.  In the current bull market, if the stock market has been open on 9/30, it has traded down

Well, it turns out that positive returns of just 38% of the time on 9/30 prevailed last night…

Even more, US stocks came out strongly…

Why? According to this CNBC report which quotes an expert:"Nothing has changed fundamentally from yesterday to today except that most of the globe is rallying with weaker-than-expected data points, with the hope of more stimulus from central banks," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management.

Ah there you have it again…stimulus. So expectations of stimulus may have partly powered last night’s bounce.

The basic premise: Each session is different from any other session in the past. And all past sessions have different factors of influences in shaping the day’s outcome. So unless these sessions share same influences, those ‘trending’ numbers can be seen as just coincidental. 

This fascination with “trending” numbers, most especially applied to seasonality, in projecting future outcomes can be seen as the Gambler’s Fallacy

Investopedia explains: When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future.

As example, again Investopedia: Consider a series of 20 coin flips that have all landed with the "heads" side up. Under the gambler's fallacy, a person might predict that the next coin flip is more likely to land with the "tails" side up.This line of thinking represents an inaccurate understanding of probability because the likelihood of a fair coin turning up heads is always 50%. Each coin flip is an independent event, which means that any and all previous flips have no bearing on future flips.

IMF Warns on $18 Trillion in Emerging-Market Corporate Debt, Saudi Arabian Government Sells Equity Holdings

Yet again even the mainstream can see the world’s most vulnerable spots. And the surging dollar will continue to expose this weak link.

From the Wall Street Journal Real Time Economics Blog, (bold mine)

Emerging markets should brace for a rise in corporate failures as a debt-bloated firms struggle with souring growth and climbing borrowing costs, the International Monetary Fund warned Tuesday in a new report.

From sugar firms in Brazil to pipe makers in Russia, firms in developing countries bulked up on cheap debt as central banks gassed the easy-money pedal in the wake of the financial crisis.

Then, emerging markets were the drivers of global growth. Developing-country firms quadrupled their borrowing from around $4 trillion in 2004 to well over $18 trillion last year, with China accounting for a major share.

Now, prospects in industrializing economies are weakening fast even as the U.S. Federal Reserve is getting set to raise interest rates for the first time in nearly a decade, a move that will raise borrowing costs around the world. The burden of 26% larger average corporate debt ratios and higher interest rates come as commodity prices plummet, a staple export for many emerging-market economies. Compounding problems, many firms borrowed heavily in dollars. As the greenback surges against the value of local currency revenues, it makes repaying those loans increasingly difficult.

That massive debt build-up means it is “vital” for authorities to be increasingly vigilant, especially to threats to systemically important companies and the firms they have links to, including banks and other financial firms, the IMF said.

“Monitoring vulnerable and systemically important firms, as well as banks and other sectors closely linked to them, is crucial,” said Gaston Gelos, head of the fund’s global financial stability division.

Shocks to the corporate sector could quickly spill over to the financial sector “and generate a vicious cycle as banks curtail lending,” the IMF said.

And emerging markets should also be prepared for the eventuality of corporate failures, it warned: “Where needed, insolvency regimes should be reformed to enable rapid resolution of both failed and salvageable firms.”

Oh by the way the IMF reported substantial outflows from emerging markets last quarter

From the same report

The Institute of International Finance on Tuesday estimated global investors have sold roughly $40 billion worth of emerging-market assets in the third quarter of the year, which would make it the worst quarter of net-capital outflows since late 2008. The IIF represents around 500 of the world’s largest banks, hedge funds and other financial firms.

Besides the petroleum sector, where borrowing didn’t anticipate the nosedive in prices, the construction industry is particularly exposed to the changing business climate, the IMF said.

Worried about the building risks, investors have been selling out of many emerging markets, pushing down equity and exchange-rate prices, and pushing up borrowing costs. That market turmoil is exacerbating their economic woes.

In Latin America’s six largest economies, for example, the average growth rate has fallen from 6% in 2010 to around 1% this year. Brazil’s central bank last week said the country’s recession is far worse than expected.

China’s recent market turmoil and faster-than-expected economic slowdown is in large part fed by worries over the massive rise in China’s borrowing and whether the economy is vulnerable to a host of credit-driven bubbles in real estate, construction and other sectors.

Rapid credit growth has been a harbinger of previous emerging market crises. While economists say many countries have learned from the past by building up currency reserves and allowing flexible exchange rates to buffer against downturns, the mounting risks for many emerging markets are fueling worries across the globe.

Further complicating emerging market problems, the changing structure of financial markets leaves many developing economies exposed to major outflows of capital as investors scramble to exit. That can lead to fire sales and a breakdown in markets.

And to compound to the stream of emerging market outflows, pressured by how low oil prices has been impacting their fiscal conditions, the Saudi government has not only been selling forex reserves, they have reportedly been pulling out its money from global equities.

From the Financial Times

Saudi Arabia has withdrawn tens of billions of dollars from global asset managers as the oil-rich kingdom seeks to cut its widening deficit and reduce exposure to volatile equities markets amid the sustained slump in oil prices.

The Saudi Arabian Monetary Agency’s foreign reserves have slumped by nearly $73bn since oil prices started to decline last year as the kingdom keeps spending to sustain the economy and fund its military campaign in Yemen.

The central bank is also turning to domestic banks to finance a bond programme to offset the rapid decline in reserves.

This month, several managers were hit by a new wave of redemptions, which came on top of an initial round of withdrawals this year, people aware of the matter said.

“It was our Black Monday,” said one fund manager, referring to the large number of assets withdrawn by Saudi Arabia last week.

Institutions benefited from years of rising assets under management from oil-rich Gulf states, but are now feeling the pinch after oil prices collapsed last year.

Nigel Sillitoe, chief executive of financial services market intelligence company Insight Discovery, said fund managers estimate that Sama has pulled out $50bn-$70bn over the past six months.

Step by step, the obverse side of a credit fueled mania is a crash-bust.

Quotes of the Day: How Four Popes Viewed Socialism

From AEI’s Mark Perry: (bold and italics original)

Some historical perspective on what four of the last five previous popes had to say about socialism over the last 50 years (emphasis added)……

1. Pope John XXIII (1958-1963)

Pope Pius XI further emphasized the fundamental opposition between Communism and Christianity, and made it clear that no Catholic could subscribe even to moderate Socialism. The reason is that Socialism is founded on a doctrine of human society which is bounded by time and takes no account of any objective other than that of material well-being. Since, therefore, it proposes a form of social organization which aims solely at production; it places too severe a restraint on human liberty, at the same time flouting the true notion of social authority.

~Radio message to the Katholikentag of Vienna, September 14, 1952 in Discorsi e Radiomessaggi, Vol. XIV, p. 314

2. Pope Paul VI (1963-1978)

Too often Christians attracted by socialism tend to idealize it in terms which, apart from anything else, are very general: a will for justice, solidarity and equality. They refuse to recognize the limitations of the historical socialist movements, which remain conditioned by the ideologies from which they originated.

~Apostolic Letter Octogesima Adveniens, May 14, 1971, n. 31

3. Pope John Paul II (1978-2005)

The fundamental error of socialism is anthropological in nature. Socialism considers the individual person simply as an element, a molecule within the social organism, so that the good of the individual is completely subordinated to the functioning of the socio-economic mechanism. Socialism likewise maintains that the good of the individual can be realized without reference to his free choice, to the unique and exclusive responsibility which he exercises in the face of good or evil. Man is thus reduced to a series of social relationships, and the concept of the person as the autonomous subject of moral decision disappears, the very subject whose decisions build the social order. From this mistaken conception of the person there arise both a distortion of law, which defines the sphere of the exercise of freedom, and an opposition to private property. A person who is deprived of something he can call “his own,” and of the possibility of earning a living through his own initiative, comes to depend on the social machine and on those who control it. This makes it much more difficult for him to recognize his dignity as a person, and hinders progress towards the building up of an authentic human community.

Encyclical Centesimus Annus − On the 100^th anniversary of Pope Leo XIII’s Rerum Novarum, May 1, 1991, n. 12

4. Pope Benedict XVI (2005 – 2013)

The State which would provide everything, absorbing everything into itself, would ultimately become a mere bureaucracy incapable of guaranteeing the very thing which the suffering person—every person—needs: namely, loving personal concern. We do not need a State which regulates and controls everything, but a State which, in accordance with the principle of subsidiarity, generously acknowledges and supports initiatives arising from the different social forces and combines spontaneity with closeness to those in need. The Church is one of those living forces.

~Encyclical Letter of Pope Benedict XVI

Bonus..

Cato Institute’s graph comparing Pope Francis’ Argentina and the US. Writes Cato’s  Ian Vasquez 

It shows that in 1896, income per person in the United States and Argentina, two of the richest countries in the world, was about identical. Argentina subsequently eschewed the free market, replacing it with trade protectionism and other corporatist policies intended to help the poor by redistributing wealth. By 2010, Argentine income was a third of that of the United States.

Phisix 6,900: 7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion; Manipulators Lose Significance

Man is free to choose not to be conscious, but not free to escape the penalty of unconsciousness: destruction. Man is the only living species that has the power to act as his own destroyer—and that is the way he has acted through most of his history. –Ayn Rand, The Objectivist Ethics

In this Issue:

Phisix 6,900: 7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion; Manipulators Lose Significance

-Phisix Round Trips Back to 6,900, The Eroding Significance of Market Manipulators

-7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion

Note: I am not supposed to be writing today. However I changed my mind and opted instead to make an abridged version from my regular weekly ‘tomes’.

Phisix 6,900: 7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion; Manipulators Lose Significance

Phisix Round Trips Back to 6,900, The Eroding Significance of Market Manipulators

Wow. That was incredibly fast! Just like that, almost all of the other week’s furious low volume panic pumping and pushing of the index, evaporated like vapor.

This week’s 3.01% loss by the Phisix virtually erased the other week’s 3.19% advance. 94% of gains just went pfft!

The weekly losses would have been a lot larger, perhaps at 3.5% or more, but thanks to the index managers, Friday’s fantastic “marking the close” pump virtually expunged 80-85% of the day’s losses which shaved off the weekly loss to just 3.01%.

Friday’s “marking the close” could have most likely been designed to defend the 6,900 level which may have some technical significance.

Index managers are probably concerned that a breakdown of the 6,890 (green) support level would lead to a test of the August 24 low of 6,790. And a subsequent failure to hold 6,790 would mean dire straits for them.

Presently, the PSEi seem to be moving in a “rectangle” continuation pattern. Current actions appear to replicate the pre-August 24 crash conditions.

And since an approach towards 6,790 could mean a repeat of August 24, index managers pulled an orchestrated massive last minute move to keep a safe distance.

Said differently, an approach towards the 6,790 makes the PSEi highly vulnerable to another market crash, hence the marking the close.

As I have pointed out in the past, market crashes have hardly been isolated events. During the taper tantrum of 2013, there were two occurrences where the PSEi suffered 6%+ meltdowns. So index managers are doing their darn best to prevent this from happening.

Unfortunately, they fail to realize that their very actions have been part of the cause of the developing or progressing bursting phase of the domestic stock market bubble.

By destroying the stock market’s fundamental price discovery function, they have spawned massive ‘misalignment of asset prices’.

Even at 6,900, those ridiculously high PERs of PSEi composite members, which were all justified in the name of delusional G-R-O-W-T-H, have signified as manifestations of such deeply embedded maladjustments.

Yet changes have been happening at the margins. 

The ‘E’ in the PER or the ‘earnings’ were arrived in an environment where the USD-Php traded at a range of 44-45. The USD-PHP was quoted last Friday at 46.86. Since the ascendant US dollar implies of the tightening of systemic liquidity, then those earnings will likely come under strain. And a fall in earnings will even balloon PERs (at present price levels), therefore magnifying valuation excesses. The high PER curse.

And a risk aversion landscape will magnify on the unsustainability of speculative excesses.

The above also reveals that contra media’s frequent drivels; there is NO bargain to HUNT.

Moreover, given the downswing in the headline index, the PSEi, speculative mania has enveloped some of the third tier stocks. 

Explosive price actions can be seen in Ionics (ION), Minerales Industrias (MIC), Doubledragon (DD) and MEDCO Holdings (MED)! Their respective PERs (as of September 23) have similarly rocketed to the galaxy at 62.4, 91.1, 75.5 and -65.5!

This reminds me of the terminal phase of the 2007 mania where the “basura queen” was even featured in a TV documentary!

This exposes on how PSE has been transformed into a virtual casino! These desperation pumps also reveals of the terminal phase of the rapidly decaying Philippine stock market bubble boom cycle.

And naturally, since financial misalignment represents critical deviations on valuations based on claims on the stream of future cash flows, as well as from the market’s long term earnings trajectory, a major realignment of prices should be expected. In short, financial misalignment will impel for a market clearing process. And such process has already been in motion!

And considering the severity of mispricing, the market clearing phase will most likely entail several incidents of VIOLENT price actions! Yes, August 24 represents the appetizer.

So this only reveals that the more the manipulations, the greater the risk of violent price actions from the amplification of asset price misalignments!

Media will portray downside price actions as “volatility”, while project upside actions as “stability”. In other words, for media and their beloved bubble apologists, stock markets represent a ONE way street! In reality, ‘volatility’ represents severe price action in BOTH directions (“tending to fluctuate sharply and regularly” as defined by dictionary.com).

Also stock markets operate on cycles…an inconvenient truth that has to be vehemently denied by the establishment.

Curiously, from last week’s actions, manipulators seem to be significantly losing resources or ammunition for them to mount their previous maneuvers: the afternoon delight and panic buy day pumps. So they have been left with marking the close.

But marking the close wouldn’t be enough.

Aside from the U-turn or the roundtrip of the key equity index, signs that these manipulators have been losing access to support the index can be seen in the peso volume.

Last week, daily peso volume (averaged weekly) traded was at Php 7.154 billion.

Since June, the daily peso volume (averaged weekly) traded have ranged at Php 6.5 to Php 7.5 billion. This excludes the outliers like last week’s Php 18.8 billion (due to AEV’s special block sales) and two accounts of below Php 6 billion trades (one in August and another in September).

So the lack of peso volume in support of the bids at 7,000-7,100 caused sellers to find volume only at 6,900. Yet at Php 7 billion, volume remains thin...and has been thinning. And diminishing volume bolsters the odds and the risks of another big downside move. All it takes for this to happen would be another major headline event.

A dear friend had an anecdote last week of a client loudly protesting to a bank officer of the reduced value of an equity fund acquired from the same bank. While this may be hearsay, such incidences should be expected to swell.

A feedback mechanism will plague on stock market losses and the public’s exposure on equity. Deepening of losses will prompt for fund withdrawals. On the other hand, fund withdrawals will lead to further losses.

So indirect exposure on domestic equity markets through various funds, such as UITF, ETFs, mutual funds and insurance-fund hybrids, will likely see significant downsizing. And a reduction of fund exposure means lesser access to resources to pump up the markets.

Moreover if credit has been involved in the carving of the recent string of index record (false) highs, then margin calls or increase in collateral will be required to maintain such positions. Failure to add collateral will likely lead to liquidations, which should compound on the stock market’s woes.

Of course, losses will not just entail fund withdrawals and liquidations to satisfy credit requirements, they are likely to provoke increased instances of acrimonious finger pointing. Given what seems as hard selling techniques employed by some banks/financial institutions in the marketing their various funds, such may even lead to legal proceedings.

So a sustained market downturn will not only translate to losses, social frictions will likely follow.

All these tell us why manipulators and complicit media will likely become even more desperate in their attempts to support a fast fading mirage.

The noose on the false boom is tightening.

7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion

For those afflicted by the hopium and have been pining or yearning for a Santa Claus rally, I have bad news. The bad news: It is NOT statistics or seasonality which drives market action. Rather it is the market’s risk appetite or risk aversion that ultimately determines the outcome. 

I made the same case in 2013 and had been validated: The last quarter delivered -4.88% for the PSEi in 2013. In 2014, the last quarter was also a negative (-).72 (see left).

General impressions can be fatal.

Seven reasons why risk aversion will likely dominate through the yearend and thereby frustrate any expectations of a Santa Claus rally.

First, serious technical chart damage.

The first Phisix chart above has already been a revelation of the massive technical damage from the recent selloff.

Add the following the analysis of MSCI Philippines from a point and figure chart perspective (right). The Gavekal team wrote, “EPHE is our first ETF showing a topping formation. EPHE was in a nice uptrend from 2011 to 2014. However, it has since broken through the bullish support line and that line looks like it has now become resistance. Unless EPHE can consolidate and push higher, EPHE is in the early stages of a downtrend.” (italics mine)

In other words, the odds for more downside seem greater than the odds for a recovery.

Moreover, it takes time for the market to heal as 2013 episode teaches us. That’s if there should be any recovery at all in the current cycle.

Second, as discussed above, volume in support of the bids at present levels continues to substantially attenuate. Unless there will be extensive improvements in peso volume, the risks is for volume to be found at significantly lower, rather than from upper, price levels of the index.

Lower volume implies, not only reduced liquidity, but heightened risk aversion as well.

Third, despite the wild pumps on SOME third tier issues, general market breadth remains tilted towards risk aversion!

For this week, all sectoral indices closed lower (left). This implies that the majors supporting these indices dragged these lower.

The property sector which led last week’s rally also spearheaded the reversal.

SMPH’s previous scintillating record breaking 14.03% run prompted for a near complete reversal with an -11.23% loss for this week. The service sector placed second where both telecom titans had been hammered (TEL -2.99% and GLO -5.85%) along with the crash in port operator giant ICT -9.31%.

When the PSEi rallied 3.19% the other week, advancers led decliners 19 against 9 with 2 unchanged issues. This week, decliners led advancers on a 21-7 differential with 2 unchanged issues. In short, selling have remained the dominant sentiment.

Sentiment has radically been altered even at the broad markets. Decliners led advancers with an aggregate margin of 128, a U-turn from last week’s 164 margin in favor of advancers.

From the start of the year going to record highs, the PSE universe has already been diverging from the headline index. Record highs were made via a rotational pump on 10 out of the top 15 issues. The pseudo record highs came about with about half of the PSE issues in bear markets!

Current developments have even widened the lead of decliners relative to advancers on a weekly basis. From the record April 10 high through last Friday, there had been 18 weeks were losers dominated as against 6 weeks in favor of gainers with one week unchanged. The accrued advance decline spread during the past 25 weeks is NEGATIVE 1,807! 

Bear markets have dominated the PSEi index. 16 issues are in bear markets. 5 of the top 15 are in bear markets. 5 issues seem to be approaching the bear market zone. Overall, bears have ruled the PSEi. The PSEi has been kept afloat through selective pumps on a narrowing window of big cap issues.

Previous divergent forces have been converging. Or conflicting internal forces are being resolved into a single force.

Risk aversion has clearly been in charge.

Fourth, overall market liquidity has been shrinking.

Low volume and other stock market trading indicators have been declining.

And it’s not just stock markets, even Philippine bonds have been continually exposing signs of a flattening yield curve.

Despite persistent pumps to steepen the curve, this week through pumps on the 1, 3 and 6 months bills, domestic bond markets have remained porous as to reveal of built-in imbalances. 

The spread of the major benchmark 2 year and 10 year (ADB’s favorite) has been narrowing significantly, again.

This implies of a tightening of net interest margins for banks which also suggests of reduced credit activities. Consequently these should translate to diminished G-R-O-W-T-H (especially for an economy hooked on credit)!

Perhaps next week someone will attempt to widen the spread.

This brings us to the fifth factor, receding liquidity entails that the headlines will unlikely be supportive of a major upside move

Less rosy headlines in the face of foundering markets will hardly restore C-O-N-F-I-D-E-N-C-E or the animal spirits. Journalistic spin will unlikely mask all the deteriorating data.

Sixth, a significant domestic stock market rally will unlikely occur if Asian currencies continue to get clobbered.

Whatever big gains by the Malaysian ringgit last week had been more than entirely erased. The USD ringgit soared by a shocking 4.5%!

The Indonesian rupiah remains under pressure. The USD rupiah soared by 2.2%! The Indonesian central bank has reportedly been slated to unveil new measures in support of the rupiah. This won’t be the first time. They have recently imposed capital or forex controls which evidently didn’t work.

Taiwan’s central bank also panicked. The central bank cut rate for the first time since 2009 as exports faltered. The result was for the USD-Taiwan dollar to surge by 1.84%. The Korean won and Singapore dollar had also been battered. [As a side note Norway’s central bank also panicked, they cut rates to a record low]

Official rates saw the USD PHP (peso) climb by 1% to 46.86. Like the Phisix, USD-PHP losses had been almost entirely reversed.

Seventh, a significant domestic stock market rally will unlikely occur if global stocks will remain under selling pressure.

Surging USD or tumbling Asian currencies have been transmitted into stock market pricing. It’s has not just been the Phisix but most of Asian have been bleeding. (right)

In an apparent realization of the faux pas from not having to raise rates, US Federal Reserve Janet Yellen backpedaled to speak of a rate hike at the end of the year (bold mine): Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

So once again Ms Yellen straddles the fence by saying one thing but also suggesting another.

US stocks have been under pressure. Apparently the US Fed didn’t expect this from its recent decision to stay the course. So the half spirited volte face by Ms. Yellen…tacitly premised in the hope to rekindle the stock market animal spirits.

Unfortunately instead of just energy, biotechs (left) and small caps (right) have been smoked lately. 

And not only that, Ms Yellen now continues to mention negative rates: (bold mine) “As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low. This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace. For this reason, pursuing too low an inflation objective or otherwise tolerating persistently very low inflation would be inconsistent with the other leg of the FOMC's mandate, to promote maximum employment

It is as if the Fed has been conditioning the public to a prospective negative interest rate regime.

All these mixed or confused messages have been increasing uncertainty on the marketplace, thereby aggravating on the diminishing US dollar liquidity.

And it’s not just the US, despite Friday’s monster rally, the German Dax has now fallen into the clasps of the bear market.

Hence, if global stocks remain under pressure then the belief that the PSEi can decouple should represent a hallucination, balderdash, if not propaganda.

Unless all or most of the above issues will be resolved, a Santa Claus rally will hardly occur. Instead, all the above suggest for us to batten down the hatches.

A belief in a Santa Claus rally under the current conditions should imply “a fool and his money are soon parted”.

Caveat emptor.

Infographics: 'Probability' in the Eyes of an Investment Banker

This graph shows of a probability distribution...

And this is how the above graphic applies to the "probability of destroying the economy"  as seen from the eyes of an investment banker...

(hat tip Econolog's Prof B. Caplan)

How incredibly true.

Proof? Here is a quote from a domestic banker on the rapidly deflating Philippine casino bubble as I previously posted here.

Says a domestic bank fund manager “The chain reaction from Macau hit everyone…Expectations VIP players will come in large numbers didn’t happen. The stocks have fallen quite significantly but not everyone is rushing back in, and there’s no clear light at the end of the tunnel.” 

"The chain reaction...hit everyone" and "expectations...didn't happen" equals "no one could have foreseen this". 

This resonates with JM Keynes' "sound banker" strategy:

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him

Expect more of this kind of Keynesian escape hatch gibberish to become the norm.  
 

See more splendid graphics on how probability applies to different professions from the source: Math with Bad Drawings.

Venezuela’s Socialist Disaster: Stock Market Crashes as Recession Deepens, Heightened Risk of War with Columbia

While updating on the end of week quotes of global stocks, I discovered that the once sizzling hot Venezuelan stock market has recently crashed.

The Caracas Stock Exchange Index cratered 8.61% this week. But the benchmark remains up for 214.13% for the year! From end 2012, the index has returned a fantastic 25.7 times!

Of course, the Venezuelan stock market episode isn’t what it seems.

Venezuela interests me, not only because of their gorgeous looking women, but because the nation have been a modern day or real-time epitome of the socialist disaster currently being manifested as hyperinflation. And the other symptoms of hyperinflation can be seen in the previous streak of record breaking stock market index and a crashing currency.

As previously discussed, unlike the popular establishment myth that sees rising stocks as equivalent only to G-R-O-W-T-H, since stocks are titles to capital goods, they also serve as safehaven to a system benighted by monetary abuse. And the Venezuela experience represents an extreme account of such dynamic.

So my guess was that the crash in Venezuelan stocks must have also reflected on the currency and CPI.

Well yes, the charts of implied inflation (top) and the bolivar (bottom) from Cato’s troubled currency project have coincided with the recent stock market crash.

This means the Maduro regime’s easy money has now transformed into tight money!

Perhaps Venezuela’s deepening economic downturn may be offsetting the hyperinflationary environment.

Bloomberg has an article on Barclay’s take on the Venezuelan economy:

Venezuela is suffering the deepest economic crisis in its history with output expected to contract 9.1 percent this year, Barclays Plc said Friday.

The economic contraction will likely reach 16.5 percent between 2014 and 2016, while inflation over that period will exceed 1,000 percent, Barclays wrote in a note to clients.

Moreover, the government may be relying more on asset sales than from more money pumping.

Instead of taking fiscal measures, the government is selling all its liquid assets to maintain an “extremely inefficient” exchange rate system and pay the external debt, Barclays said, adding that it would likely have enough money to pay its foreign debt at least through the first quarter of next year with a moderate increase in oil prices and further cut in imports.

If the above is true, then this could likely mean a hiatus in Venezuela’s hyperinflationary chapter.

Asset liquidations have limits. So unless the government overhauls its political system which has led to the deepening fiscal woes, those balance sheet problems will resurface again and spur more reliance by the government on the printing press or its digital equivalent.

But Venezuela’s socialist disaster doesn’t just stop with CPI, the bolivar, stocks and the economy. Since everything is interconnected, her economic woes has spread to escalate or drum up tensions with her neighbor Colombia, which has raised the risk of war. 

That’s partly because subsidized gasoline prices in Venezuela has found its way to be commercially sold in Colombia. And as previously pointed out, aside from gas, many of the other free or subsidized goodies that the Venezuelan government imported to give to her constituents has only flowed out into Colombia. Also, the deepening economic crisis may impel Venezuelans to emigrate to her neighbor.

So these has prompted the Venezuelan government mount a crackdown on smuggling, close its borders, tighten people (social mobility) movements and deport Colombians that has worsened diplomatic relations with the Colombian government.

So Venezuela’s socialist made economic crisis may even lead to war!

(updated to add: there has been ongoing peace talks between the two nations, which includes plans to reopen the border, as well as, to send their ambassadors  back into respective posts. The question is, given Venezuela's deteriorating economic conditions, will such peace agreement hold or last?)