Articles About Trading & Investing

Shah Predicted the IPO – Now He Shows You How to Cash In

0 | By Shah Gilani

Every so often, in sharing a story about a “Disruptor” catalyst making waves around us, I’ll recommend a story-related stock.

One recent example was IAC/InterActiveCorp (Nasdaq: IACI), which I recommended in my June 12 report “Today We’re Going to ‘Fix You Up’ With a Winner.

It’s only been two weeks, but IAC is already following my storyline.

Of course I was trying to be funny with the “Fix You Up” reference in the title, as the story was about online dating in general. But I was quite serious in predicting that Barry Diller’s IAC/InterActiveCorp would spin its Match Group of properties into a separate company and issue shares to existing IAC stockholders.

Well, it didn’t take long. Sure enough, last week IAC said it was going to do just that, and spin out the Match Group into a separate company.

In my report, I accompanied my recommendation with a specific “Buy” strategy.

I still like the company, but today’s markets are fluid – meaning the strategy I detailed needs refining.

Today I’m going to do just that. And you don’t want to ignore it…

After all, online dating is a $2 billion business…

A “Golden” Game Plan

At the time I penned my report – on account of the market wobbling a bit – I recommended buying IAC – but trying to get it lower if the market dipped and took IAC down with it. In a perfect world, the market would have dipped and IAC would have gone down to the $70 level – where I said to buy it – and gone lower to $65, where I said you should buy more.

But it’s not a perfect world – which is actually a good thing since it means the overall market didn’t tank (at least for now). So we didn’t get to load up on IAC at level much lower than where it was trading when I made the recommendation.

Even so, I’m betting at least some of you folks bought some shares that day – especially since I concluded by saying: “The only thing is, if you wait to pick up shares a lot lower, you may not get a chance. The market could climb the current ‘Wall of Worry’ and go a lot higher before it eventually ‘corrects.’ Barring a Match Group spin-off, smartly buying IAC shares and adding to your position on dips could be a great way for you to fall in love with online dating. And if that happens, just remember: We were the matchmaker that ‘fixed you up’ with this big-profit Disruptor.”

If you listened – and acted – you’re at least a little in love this week.

If you waited until the end of the day (June 12), and bought IAC, you’d own the shares at roughly $75.93. It made a new high of $82.40 last week, and closed at $80.48.

So where’s what you should do now.

If you bought IAC shares, hold onto them to get the Match shares when that company is spun out.

Whether you bought IAC shares or not, I recommend buying more shares (or opening a new position) if IAC dips to $77. I’d buy more if it dips to $75, or $70, and I’d definitely be buying more shares if the stock drops to $65.

On a position that I like, I view “averaging down” like this: By accumulating shares at lower prices, I’m bringing down my average cost. What I do then is take my average cost and figure out from there how much I’m willing to lose – and not cry – if the trade goes against me.

In the case of IAC I’d get out of my shares if the stock falls below $60. It shouldn’t go down there. If it does, something’s really wrong, and I’d take my loss and move on.

Sure, I’d cry a little. I’m pretty good at making money – and I hate losing it.

I don’t expect IAC to dip anywhere near that low on its own. But if the market takes a dive on account of Greece defaulting – which is still a possibility – then all stocks could take a hit.

But just because they take a hit doesn’t mean they won’t rebound.

And IAC/Interactive is one of those shares – that over the long haul – I believe will rebound… a lot.

During that same long-run time frame, a “cheap” (low-stock-price) date with IAC/Interactive and Match Group will turn into a meaningful relationship.

We started today’s visit by talking about “stories.” And the scenario I’ve sketched out for you today will turn into one of those “how we met” tales that will be retold over and over again at family gatherings… for years to come.

One day, in fact, you’ll be telling this story at your “Golden Anniversary” … literally.

[Editor’s Note: My colleague, Michael Robinson, has found a tiny company that could be the next big biotech. For the past year he’s been investigating a new technology that’s based on a Nobel Prize winning discovery. This technology could critically impact the lives of 16.2 million Americans. Here’s the best part, though. It could generate $29.8 billion a year in new revenue for one small company that’s dominating the market. And by getting in right now, you could be positioned to see quadruple-digit gains as this breakthrough takes hold. Click here for details.]

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We Told You the Bond Crash Was Coming – and Now Wall Street’s Scared, Too

1 | By Shah Gilani

Bond market volatility in the face of serious liquidity issues is making front-page news.

That’s no surprise to us: We’ve been talking about the dangers of low market liquidity for some time. That dwindling liquidity is a “Disruptor,” or catalyst, that will eventually destabilize first bonds – and then stocks.

Suddenly, others are discovering this danger. There’s a rising cautionary chorus from such luminaries as doomsdayer economist Nouriel Roubini; the always-smiling (look and you’ll see that it’s true) Goldman Sachs Group Inc. (NYSE: GS) president and COO, Gary Cohn; departing (because his bank’s been fined billions) Deutsche Bank AG (NYSE: DB) Co-CEO Anshu Jain; and JPMorgan Chase (NYSE: JPM) CEO (and self-appointed bank-sector cheerleader) Jamie Dimon.

Those leaders – and others – are openly voicing the same warning: The bond markets are headed for trouble.

Big trouble.

And a new “fix” that’s being “worked up” only makes the calamitous scenario I’ve sketched out for you all the more likely.

It also boosts the success probability and the payoff potential of the liquidity-crisis profit opportunities I’ve been sharing with you here…

Blood Suckers

Let’s take another look at the triggers for this crisis in the making. Then let me show you how a solution that Wall Street is working on even as I write this will shove the bond market even deeper into the danger zone.

The whole U.S Federal Reserve quantitative-easing (QE) push took trillions of dollars of U.S. Treasury securities out of circulation. At the same time, tougher restrictions on the once-swashbuckling trading operations at big banks reduced the number of deep-pocketed bond-trading desks.

Nestled between the mattress of QE and the soft linen of big-time bond traders, high-frequency trading (HFT) desks were like bond-market bed bugs living off the blood of their hosts.

The result, of course, is a serious lack of liquidity. And because less liquidity means greater volatility, we now face a greater likelihood of flash crashes and other disruptions for fair and stable trading.

We’re now at the point, though, where even Wall Street admits there’s a problem.

Prompted by embedded Wall Street “fixers” – I’m talking about the temporarily ex-investment bankers you’ll find at Washington lobbying firms and even within the ranks of regulators overseeing the Street – the Financial Industry Regulatory Authority (FINRA) is holding two crucial meetings to tackle the bond market liquidity mess.

The first meeting – a closed-door session at FINRA’s offices in Lower Manhattan – was held Thursday and was supposed to address the lack of depth in the $7.8 trillion market for U.S. corporate bonds. The second meeting – set for July 1 – is supposed to be a forum for proposing fixes.

FINRA is a private corporation and a self-regulator, meaning it polices its own. So I predicted the first meeting would be a waste of time – a bunch of self-serving bond blowhards reading canned speeches, whining about their problems and calling for action to save the world.

Then, remarkably, on July 1, a fix will be brought up and everyone will say: “That’s it!”

The “fix is in” because the alleged market fix is already being pushed. To fix the problem of volatility, the biggest players in bond trading want less transparency in trading, not more.

To fix volatility, as they’ve framed the problem, the fixers want to post bond-trading data (the prices bonds are bought and sold for) not right away – and not within the 15-minute “window” current rules give them for disclosing prices on some bonds – but by the next day…

Because, you know, they’re busy.

We’re Getting You Ready

I’m not kidding about the “solution” Wall Street is proposing.

That’s Wall Street’s answer to the volatility and liquidity threat: Don’t report until tomorrow the trades you’ve made today.

As big bond traders see it, that’s the proper fix. In fact, from their self-serving point of view, it’s positively brilliant.

Think about it. Big traders see prices falling. But because they don’t have to post those prices until the next day, they won’t create a panic that would be exacerbated by increasingly illiquid and volatile markets.

So they’ll be able to sell all their inventory to unsuspecting institutions, mutual funds, you and me – indeed, anybody they can sell them to under the guise of a free market that’s actually rigged in Wall Street’s favor.

The panic will come the next day.

If this isn’t the most egregiously vulgar fix to a problem the fixers caused themselves, I don’t know what is. In fact, it’s downright frightening.

And precisely because it’s so frightening where we’re headed, the profit scenarios I’ve shared with you are gaining even greater upsides. I’ve detailed trades (some long and some short) in bonds and in banks. And I’m also looking at big opportunities in certain currencies.

This growing cacophony of concern about low liquidity and how that could hammer the bond market isn’t a surprise to us. When this crash finally happens, most investors – both institutions and individuals – will panic.

But thanks to the preparations we’re making together, you’ll not only be positioned to lessen the personal fallout of the eventual crash… you’ll even be able to cash in.

And I will continue to watch this for you.

[Editor’s Note: Shah recently sat down with Money Morning Executive Editor Bill Patalon to record a battle plan for the coming big crash in the global bond market. Bill and Shah discuss the worrisome lack of liquidity in the markets and how that threatens bonds and stocks. Then they detail a profit-making strategy you can use to play this crisis. You can listen to their conversation now. Let us know if you like it.]

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Chipotle Is an “Avoid” – What About Netflix?

0 | By Wall Street Insights and Indictments Staff

Earlier this week on Fox Business, Stuart Varney grilled Shah about which stocks he would buy – and which ones he won’t touch.

Chipotle Mexican Grill Inc. (NYSE: CMG) is one company Shah says he’ll happily avoid. The stock, he says, is hugely overpriced, and increasing difficulties sourcing its organic products will create financial problems for the company. In line with his thinking, Chipotle’s stock price is fading – and Shah’s glad neither he nor his subscribers are shareholders.

Tune in to the video below to find out whether Shah is or isn’t buying Netflix Inc. (Nasdaq: NFLX) as well as several other big names.



The Global Bond Market Could Be “Ground Zero” for the Biggest Financial Crisis Ever

2 | By Shah Gilani

Let’s start with a surprising truth.

Though not many folks know this, the credit crisis-spawned stock market crash of 2007-’09 created a hefty number of millionaires

There’s a reason for this, and that reason sits inside the simple market maxim that every crisis is accompanied by big opportunities.

As I’ve been telling you, thanks to the mess that’s been created in Europe, the global bond market – which dwarfs the stock market – is careening toward a major crash that governments and central bankers will be powerless to stop. And that bond-market collapse will serve as “Ground Zero” for freefalls in stocks and other financial assets.

However, if you act quickly, you won’t need to panic.

Today, I’m talking with Money Map Press Executive Editor William Patalon III about just us what to expect – and about what you should be doing… including specific investments you should be making.

The Moves to Make Now

For a savvy few, this crisis will turn into the greatest wealth creator of our lifetimes.

In this conversation with Bill Patalon, we go into thorough detail on the coming bond market crash – and I give you a personal tour of the moves to make now.

And don’t worry if you can’t catch everything.

After our conversation is over, I’ll deliver to you a free briefing that details my strategy – and even identifies the specific investments to make now.


Click Here Button

[Editor’s Note: If you like what Bill Patalon has to say and you’re interested in making a triple-digit return over the next 30 to 60 days, then he has a unique way for you to get updates on this fast-moving situation – and to profit every day. Details here.]

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Today We’re Going to “Fix You Up” With a Winner

3 | By Shah Gilani

In last week’s report on Social Disruptors, I told you about my foray into online dating.

I appreciated all the comments, stories and advice that you shared, and I promised to tell you how my own experience turned out.

The “hot date” I told you about ended up being lukewarm. (The photos she’d posted of herself were about 10 years old – from a “happier” time in her life, she told me.)

But that’s okay… that’s the great thing about online dating – it’s easy to meet other people.

In fact, this reminded me of my days in the trading pits: If a promising opportunity didn’t work out as hoped, you took the loss quickly and moved on – knowing there were lots of other opportunities out there.

In a world where folks are busier than ever, that ability to find new opportunities – to easily meet new people – is the big attraction to online dating. That’s why it’s become a $2 billion business.

And that leads me to an online site that might be a really good investment, LLC

Barry the Billionaire

When it comes to online dating, is the biggest player in the game and may be worth a date with some of your investing dollars.

One reason I like is that the venture has already been matched up itself. is part of the Match Group. The Match Group includes the free online dating service OkCupid and Tinder, the newest and hottest dating service in the market.

But you can’t buy shares in the Match Group – at least not yet (I’ll explain that in a minute) – because the Match Group isn’t an independent company.

You can, however, invest in the company that owns the Match Group. That company is billionaire Barry Diller‘s conglomeration of Internet-media assets that goes by the name IAC/InterActiveCorp (Nasdaq: IACI).

IAC/Interactive has a lot of brands you know, including HomeAdvisor,,, Investopedia,, The Daily Beast, Vimeo and lots of others.

But it is IAC’s Match Group that I’m “in like” with. The Match Group within IAC includes, OkCupid, and Tinder., on its own, operates in 24 countries and 15 languages. It’s one of the brightest stars in the IAC portfolio. But Tinder is coming up fast and management thinks it’s going to be a huge revenue generator down the road.

A Heck of a Track Record

One reason I like the Match Group is that according to the last 2014 Pew Internet Survey, 59% of respondents considered online dating a “good way” to meet people. That’s up from 44% in 2005.

Another reason I like the Match Group is that it’s the big revenue source at IAC. While IAC’s stock has done well in 2014 and 2015, and is a whisper away from its 52-week highs, it’s the Match Group that interests me. And the fact that the Match Group is set up within the company as an almost self-contained business with its own management leads me to believe it might be in Diller’s best interest to have IAC spin off the Match Group.

Diller’s no stranger to piecing together and splitting up assets. He spun Ticketmaster out of IAC, and it later merged with Live Nation Entertainment Inc. (NYSE: LYV). And he spun Expedia Inc. (Nasdaq: EXPE) out of IAC, which has and it’s been a grand slam for investors in that stock.

I would love to see the Match Group spun out of IAC and become an independently traded company. If that happens – and the possibility exists for sure – I’d be a big buyer of the stock. If that happens, you might want to pick up some shares, too.

(If you already own shares of IAC, there’s also a chance the Match Group gets spun out to existing IAC shareholders.)

In the meantime, you can buy shares of IAC/Interactive. I like the company, mostly because of the Match Group. But with more than $3.14 billion in revenue and a net profit of more than $440 million, Diller’s company is worth buying.

The Way to Play

While I like buying IAC, I’m nervous about the stock market here. That means I’d study IAC and see where the shares might drop to if the market swoons and takes all stocks down with it.

I’ve talked about that. I hope you’re in tune with what’s going on out there.

Given everything we’ve talked about, here’s what I would recommend.

I’d be looking to pick up some IAC shares if I can get them at $70. But because I think we’re headed for a rough few months ahead, I’d recommend buying more IAC if it drops to $65 – and loading up if the stock drops to $60, which it could do if the market takes a hit.

The only thing is, if you wait to pick up shares a lot lower, you may not get a chance. The market could climb the current “wall of worry” and go a lot higher before it eventually “corrects.”

Barring a Match Group spinoff, smartly buying IAC shares and adding to your position on dips could be a great way for you to fall in love with online dating.

And if that happens, just remember: We were the matchmaker that “fixed you up” with this big-profit Disruptor.

[Editor’s Note: Shah wants to hear from you. Whether we’re talking about comments, questions or suggestions, Shah sees everything. Feel free to post your submissions below.]

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Has Netflix Hit Nosebleed Territory?

0 | By Wall Street Insights and Indictments Staff

How far can this stock go? That’s what Shah wants to know. Between rising costs, great momentum and controversial growth, Shah says Netflix Inc. (Nasdaq: NFLX) may have finally reached its peak.

That’s not the only topic Shah dug into on Fox Business today. Before he left, Shah forecast just how high Apple Inc. (Nasdaq: AAPL) stock is going to go – and let us know what he thinks the latest announcement from Boeing Co. (NYSE: BA) means for stockholders.

For that and more, just check out the video below.

You Asked, Shah Delivers – Another Way to Play the Bond Market Crash

0 | By Shah Gilani

A week ago, in a strategy piece detailing ways to handle the looming bond-market crash, I recommended shorting the iShares PLC Markit iBoxx Euro High Yield Bond ETF (LON: IHYG).

Several readers wrote in to say that “not every brokerage lets you buy this.” Some do, in fact: In this day and age, many brokerages let you buy any shares, anywhere. But for those of you whose brokerages won’t let you, I wanted to give you an alternative.

We want a trade that gives us the exposure we want, which is a bet on falling bond prices – both sovereign and corporate – across Europe.

It’s hard to find an exchange-traded fund (ETF) that gives us this type of exposure. Some of the instruments that come close don’t have the liquidity we need to be able to get in and out easily.

And the rest don’t fit the trade profile we want.

However, there’s another way to play falling bond prices across Europe…

Averaging Up

If bond prices fall, banks and financial institutions holding them will take a tumble, too.

So, if you want exposure to falling European bond prices, I recommend shorting the iShares Trust iShares MSCI Europe Financials ETF (Nasdaq: EUFN).

My recommendation would be to short EUFN here at $23.25 or higher. Personally, I have a high tolerance for risk (that’s because I have the capital to risk), so I would short an equal additional amount at $24.50, more at $25.50 and more at $26.50, which is the ETF’s 52-week high.

If you “average up” on this short, you’d be short at an average price of $25. I’d cover my shares at $27.50 if the ETF makes a new high there. I’d accept a 10% loss – with a frown, for sure. But a 10% loss is acceptable to me.

Another way to play a drop in this ETF would be to buy the October $21 Puts options. I’d pay 50 cents apiece for them. However, because timing is a lot tougher with options – and because if the puts expire worthless you’ll lose everything you invest in this trade – I’d risk a lot less than what I’d be willing to put down to short the stock.

Of course, if EUFN drops like a stone and ends up below $20 by expiration, the put options will have a much higher return.

You also don’t have to wait until expiration to sell your puts. If you want to cut your loss in the case the trade goes against you, you can sell them at any time. And you can sell them before expiration to potentially make a killing if EUFN drops a lot before expiration.

Have at it – and good luck to us!

[Editor’s Note: Today’s column was a response to a reader question. Shah likes to hear from you, and welcomes your questions and comments.]

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The Coming Bond Collapse: Make a Killing – While Everyone Else Gets Killed

9 | By Shah Gilani

We’re hurtling toward the biggest bond bubble the world has ever seen.

It’s going to start leaking.

Then it’s going to pop.

Today I’m going to tell you what to look for – because I’m all over this.

I’m also going to share four handpicked recommendations that will soar when the bond bubble bursts.

With these four trades, you’ll do more than just survive this fixed-income-market freeze-up.

Lots more.

When the bond market craters – and it will – you’ll make a killing… while everyone else is getting killed.

Now I’m going to pull this all together for you …and show you how, why and when key global bond markets are going to tip over – and splatter their poison across the world’s stock markets…

The Lay of the Land

What I’m sharing today isn’t rocket science. This is a matter of understanding basic economics and what the study of market Disruptors is telling us about the future.

And this is a peek at the future you need to have: If you don’t understand what’s in store for bonds, you won’t know what’s going to happen to stocks.

With this prediction of what’s ahead, you’ll avoid the fate of everyone else as they lose what they have to the coming carnage.

And with the strategy I’ve created for you (keeping a promise I made in our last talk), you’ll actually cash in.

So let’s get started – with a very quick bond-market lesson.

The bond market – meaning the market for all bonds all around the world – dwarfs the size of all the stock markets in the world combined. If you look at the averages over the past quarter century, the bond market has been 79% larger than the stock market (and in 2012, it was 104% larger).

For the most part – and most people who aren’t economists or capital-markets specialists don’t know this – stocks trade off bonds. That’s because (as we’ve shown you in past reports here) when interest rates rise and bond prices fall, bonds become more competitive with stocks. Generally speaking, an investor would rather own a promissory note that pays a good interest rate over more speculative stocks.

Over the last eight years, because central banks have manipulated interest rates down to artificially low levels, bond prices have been on the march. Higher bond prices and low interest rates have prompted investors to move out of bonds and into stocks.

In fact, bond prices have risen so high that trillions of dollars’ worth of bonds actually have negative yields, or interest rates.

According to the BlackRock Investment Institute, there are $5.3 trillion worth of bonds today with a negative yield; 60% of those bonds, or $3.18 trillion worth, are European bonds.

Negative interest rates are insane.

That means the investors who hold these bonds don’t get paid interest; they have to pay interest – for instance, paying the government for the right to loan it money.

Bond Market Math

Europe is Ground Zero for the bond bubble because most of those negative-yielding bonds are bonds issued by European Economic and Monetary Union (EMU) nations.

Yields on outstanding bonds became negative because buyers of those bonds kept paying higher and higher prices to own them. And as we’ve already seen here, as prices for bonds rise, their yields fall.

Why have banks, institutions and speculators been bidding up the prices of bonds issued by European governments to the point where these investors are paying such a high price that the yields they are getting are actually negative? Because, back in January, the European Central Bank (ECB) announced it was going to play the quantitative-easing (QE) game and buy more than a trillion dollars’ worth of bonds issued by EMU members.

In a classic “front running” move, speculators – knowing the ECB was going to start buying bonds – paid higher prices for trillions of dollars’ worth of bonds, which drove yields into negative territory. It wasn’t that investors were willing to accept negative yields; they believed the ECB would eventually buy them at those inflated prices. In March, the ECB started buying about $60 billion worth of those bonds a month.

On paper, that’s a nice trade.

But there’s a problem.

To see it, just do the math.

If the ECB buys $60 billion of bonds a month from the banks and speculators who bid them up and have nice paper profits on their inventory, we’re talking about central-bank purchases of about $720 billion a year.

Say the ECB ends up buying $1 trillion worth of bonds at the current “bubble prices” it is paying.

That would still leave about $2.18 trillion worth of negative-yielding bonds in the hands of the banks and speculators who bid them up and are now sitting on paper profits.

It’s called a “paper profit” because these investors still own the bonds, meaning the gains they have are “on paper” – are accounting gains.

Until the traders actually sell the bonds and “realize” (lock in) them in, they are profits on paper only.

So as the ECB drops $60 billion a month on bonds whose prices are grossly inflated, all the holders of all the rest of the trillions of dollars’ worth of bonds have to sit on their inventories of bonds, hoping and praying nothing goes wrong.

And there’s a lot that can go wrong.

First, almost all of these bonds were bought with borrowed money, meaning all the holders are leveraged to a huge degree.

Then there are the central banks.

The ECB, like all monetary authorities – the U.S. Federal Reserve included – is a paper tiger.

It’s not a “real” bank with real capital, buying bonds with its money. The ECB has no significant capital; in fact, it really doesn’t have any capital.

The capital that central banks supposedly have is the capital they need – if they need it – to be supplied by the taxing power of the governments that authorize central banks to play their games. Or they simply print money and say, “Look, we have capital.”

With the ECB, it’s the EMU members – and, theoretically, all European Union (EU) members – who are supposed to provide the backing. Germany, for one, isn’t always keen on central-bank money printing, given its visceral fear that such policies will ignite inflation (something the country has a lot of history with).

Voters in Germany and other parts of the EU can say “no” to the ECB – undermining its credibility by doing so.

The United Kingdom is going to hold a referendum on whether its citizens want to stay in the EU.

So there are seeds of discontent – a lot having to do with the ECB spending wildly to prop up some grossly over-indebted and underperforming member nations.

Then there’s the specter of inflation. Sure, there’s none right now. But that can change.

Any big uptick in inflation would send a chill throughout the entire bond market, as the prospect of higher future rates would devastate current bond prices.

There are also concerns about interest rates themselves.

And those concerns are real.

The Going Rate(s)

To start with, at some point, the Fed is going to raise domestic rates.

And that move will have observable impacts.

The world is connected both economically and via the global capital markets. When rates rise in the United States, U.S. investment capital currently planted overseas will join with foreign investment flows to stream back to American shores to take advantage of higher interest rates. The “capital flight” out of countries that need that money will wreak havoc on their markets and economies. To steam that outflow of money seeking higher rates of return, those countries will raise their own interest rates.

How’s that going to work out for all those speculators holding high-priced, negative-yielding bonds?

Not well.

Bond prices will fall, and leveraged players will panic and dump bonds, further tanking prices.

Nothing goes up forever. As I predicted at the outset of today’s talk, we’re now looking at the biggest bond bubble the world has ever seen.

The only thing that’s not assured is the timing of the explosion.

But now you know how it’s going to end. And you know what to look for.

I’m not the only one who’s predicting a bond-market debacle.

Back in late April, Bill Gross, who cofounded Pacific Investment Management Co. (PIMCO) and is now a bond-portfolio manager with Janus Capital Group, tweeted that “German 10-year bunds [are the] short of a lifetime. Better than the pound in 1993. Only question is the timing.”

Doubleline Capital founder Jeff Gundlach, the other bond king, agrees and is betting on an EU bond implosion.

Billionaire Paul Elliott Singer, founder of the massive hedge fund Elliott Management Corp., calls the opportunity to make money on the European bond market collapse “The Bigger Short.”

“The Big Short” refers to the billions made by a handful of hedge-fund managers who shorted wildly when the subprime bubble collapsed into the credit crisis. The Bigger Short is Singer saying this implosion – and the shorting opportunity is represents – represents an even bigger investment play than what we saw in 2008.

A Profitable “Promise”

Over the last several sessions, as we’ve talked about bonds, the art of “shorting” and the recent bond-market “Flash Crash,” I promised I’d round out this series of talks with strategic recommendations that would protect you from looming bond-market debacle – and let you profit from it.

I keep my promises. And today I’m delivering.

When the European bond bubble breaks, you want to be short European bonds, short European stocks and short the euro against the U.S. dollar. You’ll also want to buy U.S. Treasuries, as their price will skyrocket in a “flight to quality” trade.

To short European bonds, I like buying “puts” on the iShares PLC Markit iBoxx Euro High Yield Bond ETF (LON: IHYG). There aren’t good, liquid exchange-traded funds (ETFs) that give us the direct exposure we want to short European government bonds. And shorting IHYG is a problem because it has a 4.29% dividend yield. That’s why I like buying long-term puts on IHYG here, but especially if its price is above $110.

To profit from falling European stocks, I recommend shorting the iShares MSCI EMU ETF (NYSE: EZU), which holds stocks in all the EMU countries.

When the collapse happens, the EMU’s currency – the euro – will collapse, too. I recommend buying the ProShares UltraShort Euro (NYSE: EUO). This is a “leveraged” ETF, meaning it moves two times as fast as the euro trades against the U.S. dollar. Buy it when interest rates start ticking up in Europe.

Lastly, in a panic based on a European bond-market implosion, money that comes out of European bonds and exits panicked markets will rush into the safe haven of U.S. Treasuries. I expect Treasuries to soar on a European implosion. A great way to play rising Treasury prices is by buying the iShares 20+ Year Treasury Bond ETF (NYSE: TLT).

The timing on this Disruptor-triggered trade will be tricky. But the hefty payoff will make it worth the wait.

We’ll watch together as it unfolds.

And we’ll talk about it here as it does…

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If The California Drought Has You Worried, Wait’ll You See This

6 | By Shah Gilani

Water doesn’t flow uphill.

It’s a lesson in physics so basic that even schoolkids know it.

In fact, everyone knows it…

Everyone except – apparently – the world’s central bankers.

In their rush to provide liquidity to banks through experimental stimulus programs like “quantitative easing,” central banks have failed to create the usual cascade of liquidity normally associated with massive money-printing shenanigans.

Indeed, by attempting to force-flow money uphill, liquidity in the all-important bond markets essentially has been drying up. Central banks have been taking bonds out of circulation, warehousing them on their own balance sheets.

As a result of this attempt to defy the laws of financial physics, we’re now frighteningly vulnerable to a bond-market crash. And the best potential remedy – opening the sluice gates – can’t be employed because liquidity isn’t in the reservoirs where it’s needed.

Today I’m going to show you how this financial-market Disruptor came into being. I’m also going to explain how ruinous it could be to the economy, to the bond market, to the stock market and to you.

I’m also going to show you how to turn this expected “Disruption” to your advantage – to make money from it…

Upending the System

Quantitative easing (QE) is a special Disruptor.

In fact, it’s the biggest financial Disruptor ever.

In the past, when the U.S. Federal Reserve wanted to do its part to stimulate the economy, it might first announce its intention to lower interest rates – and might even announce a “target rate.” The interest rate they targeted was the “repo” rate.

Repos, short for repurchase agreements, are very-short-term interbank loans where one bank offers up U.S. Treasury bills, notes or bonds as collateral for an overnight loan from another bank – and repurchases (buys back) that collateral the next day, or a few days later, depending on the term of the repo agreement.

When that first bank buys back its collateral, it pays a little more than it borrowed – which is the “interest” the lending bank earns.

That interest, when expressed in percentage terms as a “rate,” is the overnight rate, or the “repo rate” – and serves as the base rate for all banking loans.

If banks can borrow cheaply from each other because the repo rate is low, they will borrow a lot and use that money to make loans throughout the banking system.

The Fed doesn’t directly control the repo rate by mandating what it is. The repo market is a free market where the repo rate is set by traders engaged in repurchase agreements every day. All big banks have repo desks.

If Fed central bankers want to lower the repo rate, they can announce what they want it to be. But that doesn’t always cause repo traders to adjust the rates they charge for overnight loans.

So, the Fed has its New York Bank – which conducts all the U.S. central bank’s “open-market operations” – actually go into the repo market and offer loans at cheaper rates than other banks are offering. In other words, it’s effectively trading overnight money by making it more available in order to bring down the cost of overnight borrowing by big banks.

That Old Profit Model

In theory, that cheaper base-borrowing rate for banks that I just described for you is supposed to work its way through the financial system. By that I mean it’s supposed to get translated all down the line into cheaper loans for banks’ commercial and retail customers.

During the financial crisis, big banks weren’t lending to each other. They were actually afraid that their “counterparties” – the other big banks – would go out of business… meaning the money they loaned might not be repaid.

The repo market essentially seized up.

And that left America’s central bankers with a big challenge.

The Fed, you see, needed to jump-start the system. It had to create “liquidity programs” that would flood banks with money so they could meet depositors’ withdrawal requests, meet their reserve requirements and continue to fund their outstanding loans, most of which have to be “rolled over.”

Banks have to constantly roll over the short-term loans they’ve taken – and for a very good reason. While banks actually “lend long” in their core business, they obtain the money they use to make those loans in short-term markets – like the repo market.

That makes their “cost of money” cheap. And it boosts the profits they make on those loans by widening the “spread” between what they paid on the money and what they earned by lending it out at higher rates.

That spread is known as the “net interest margin,” or NIM.

Backed Into a Corner

That brings us back to the struggles of the U.S. economy during the Great Recession.

There wasn’t any real loan demand because the economy was flat on its back. And that already precarious situation was heightened by the fact that interest rates were still relatively high because banks didn’t want to make loans, period.

The Fed had to act.

And it did.

The U.S. central bank started by flooding big banks – which were already on life support – with the liquidity needed to stay alive.

But that was just the beginning.

The Fed then started lending money to big banks – first by doing direct, longer-term repos and taking their U.S. Treasuries as collateral… and later by taking nontraditional assets like mortgage-backed securities (MBS) as collateral.

When that wasn’t enough to ensure the future of the banks and stimulate the economy, the Fed came up with quantitative easing – known colloquially as “QE.”

Quantitative easing simply means interest rates are as low as the market can push them. To achieve further progress – and lower rates more – the Fed now has to engineer “quantitative purchases” of banks’ assets.

By buying Treasuries and MBS from banks in massive quantities, the Fed was flooding banks with cash.

That central bank move achieved two objectives. First and foremost, it healed banks’ balance sheets. Second, it infused those banks with cash to make loan money available at cheap, economy-igniting interest rates.

If you think that sounds like the happy ending to an economic-crisis tale, think again.

It’s actually the beginning of an ugly story – even a horror story – that details the situation we face right now.

The Bloodbath to Come

In all, the Fed purchased more than $4 trillion worth of banks’ Treasury bills, notes, bonds and mortgage-backed securities.

While the Fed was taking Treasury inventory off the market – and warehousing it on its own balance sheet – stricter capital requirements were being levied on banks.

That brings us to the topic of bond-market liquidity – which is really all about Treasury inventory.

Banks use U.S. Treasuries as liquid instruments, which they point to when they calculate what they are holding in capital reserves. Banks have to hold reserves on everything. They even have to hold reserves against the cash they hold.

When banks need money overnight to meet their reserve requirements, they usually go into the repo market and lend their Treasuries as collateral for overnight loans.

But those banks don’t have as many Treasuries as they used to. There aren’t as many in circulation.

Those Treasuries are sitting in the vaults of the U.S. Federal Reserve.

Hedge funds, including “funds of funds,” which currently hold more than $3 trillion in assets, use Treasuries as collateral to borrow from banks and prime brokers to finance their risky bets. There aren’t enough Treasuries for them, either.

The $2.5 trillion money-market-fund industry buys Treasuries as liquid investments with the cash investors deposit with its funds. But they’re having a hard time finding enough inventory.

At the same time, America’s annual federal budget deficit is shrinking and tax receipts are picking up. That means the government won’t have to issue as many Treasuries as it’s been issuing in the past. That’s going to further reduce the inventory of Treasuries.

And this dearth of Treasuries poses a serious liquidity problem.

Very serious…

In a panic, the “flight to quality” trade is into Treasuries. Only in the next panic, there won’t be enough. There just aren’t enough Treasuries out there.

In a panic, asset prices plummet, and holders need to meet margin calls with Treasuries as collateral. Bond prices fall because sellers can’t put up liquid Treasuries as collateral to hold their positions. Falling prices of financial assets fall – creating buyable bargains – but speculators can’t put their hands on Treasuries to use as the collateral needed to grab those “distressed” assets.

When that happens, what’s going to save us?

The Fed can’t just sell the Treasuries they have.

It’s going to be ruinous. It’s going to make 2008 look like a day at the beach.

And massive numbers of investors will be clobbered when that scenario I’ve sketched out plays out.

You could be, too.

Or you could make a fortune.

Next time, I’ll show you how…

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It’s the “Real Flash Crash” … And It Will Scare You to Death

4 | By Shah Gilani

Just about every investor knows about the stock-market “Flash Crash.”

Even though it happened all the way back on May 6, 2010, this historic sell-off has been all over the news lately as U.S. regulators try to extradite a small-time London-based trader they’ve identified as the cause.

That’s rubbish. Stocks don’t crash because one trader put down bunches of “sell” orders.

But today I want to tell you a story… about another Flash Crash.

It was bigger and more frightening than the 2010 Flash Crash.

It happened a lot more recently – in October 2014.

But most investors know nothing about it.

And they need to.

This “other” Flash Crash is another example of the lack of market liquidity we’ve been telling you about lately.

It’s a market Disruptor – one that can sting you badly if you don’t know about it… or make you rich if you do….

Once Every 3 Billion Years

This “other” Flash Crash hit the U.S. Treasury bond market back on Oct. 15.

Bond yields plummeted in an “unprecedented” manner, said JPMorgan Chase & Co. (NYSE: JPM) CEO Jamie Dimon – who described it as “an event that is supposed to happen only once in every 3 billion years.”

I’ll tell you what really happened, why it happened and what’s so frightening about it.

In the 2010 Flash Crash, the Dow Jones Industrial Average plunged 998 points, or about 9%, in 36 minutes. That was the biggest intraday decline in the Dow’s entire history.

Then, last Oct. 15, some not-so-good economic news came out in the morning. Retail sales for September fell 0.3%. The producer price index (PPI) declined 0.1%. And the Empire State Manufacturing Survey showed “the pace of growth slowed significantly from last month.”

Because bad economic news means the U.S. Federal Reserve likely won’t dare raise interest rates, we were in a “bad-news-is-good-news” period for bonds. (We’re still there today.)

When the bad news came out, bond prices rallied. Prices for the Treasury’s 10-year maturity bonds didn’t crash, they shot up. What crashed was bond yields, not bond prices.

Let me show you with a simple lesson you’ll never forget.

Bonds, as you know, pay interest. And for bonds, price and yield are inversely correlated. That’s important to understand.

Let’s say you bought a 10-year bond with a 2% “coupon” (that’s the interest) and paid $100 ($100 is “par”) for it.

Sometime later, the issuer of your bond sells the same 10-year bond with attached interest of 3% and a price of $100.

That means the price of your bond will change.

Here’s why. Someone who comes along and wants to buy a 10-year bond now has a choice: to buy your bond or to buy the new 10-year with the higher coupon.

Obviously, he’d buy the new bond for $100 to get more interest. So, in order for you to be able to sell your bond, you will have to lower the price to some level where the amount someone pays is so much less than $100 (in other words, a discount from par) that the amount he pays (invests) turns the 2% yield into a 3% yield.

To give you some perspective, the price we’re talking about here is around $66.67.

Bonding With Bonds

Now the bonds are essentially the same to any buyer. The discount is a mathematical formula. That’s why bond prices go down when interest rates go up. Similarly, if interest rates go down, the price of your bond would go up, because it pays more interest than new bonds coming out. And because it pays more, the price someone will pay you is higher than par. That’s the same mathematical formula.

Now that you understand that when bond prices rise, bond yields fall, we can talk about the Treasury Flash Crash. Because what actually happened was a huge price rally – meaning the crash was in yields.

From 9:33 a.m. to 9:45 a.m. the morning of Oct. 15 – a scant 12 minutes – the yield on the 10-year plunged from 2.15% to 1.86%.

That’s huge.

Thanks to the “bad-news-in-the-economy-is-good-news-for-bonds” backdrop, the disappointing economic reports meant the Fed wasn’t going to lift rates, which meant it made sense for investors to buy existing bonds.

At the same time, the 10-year yield was at “support,” meaning the yield had come down enough that traders were betting it wouldn’t go any lower. In fact, traders were expecting better economic news and yields to start rising.

Treasury bonds are traded by every big bank in the world: The market is gigantic – about $12.5 trillion, according to a recent Bloomberg analysis.

The job of traders is to make money. Because a lot of them expected yields to rise and prices to fall, there were a lot of “short” positions. Shorting bonds is the same as shorting stocks: You short them expecting the price to go down, so you can buy them back cheaper for a nice profit.

Just at the moment when traders – most of them watch the same metrics and use the same support and resistance and trend lines by way of technical analysis – were short at the 2.25% yield level, the bad economic news caused buyers to come into the market. As prices rose quickly (and yields fell), shorts had to start covering quickly in order to not lose massive amounts of money on their short positions.

That’s what caused bond prices to spike – causing the Flash Crash in bond yields.

That’s what happened.

But it’s not the story.

Less Liquidity Than the Atacama?

The U.S. Treasury bond market is considered, by far, the most “liquid” market in the world.

What’s frightening is that bond prices could move so much, so fast, in that market.

It’s never happened before.

Mathematically, it was close to an eight-standard-deviation (eight sigma) move.

That’s insane…

While it’s an exaggeration to say it’s a “one-in-3-billion-year event” (the bond market hasn’t been around that long, nor have traders), it’s not crazy to say the move was… well… crazy.

In fact, it’s actually crazy-frightening: If it can happen on a “rally” in prices, meaning yields fell, it can just as easily happen in reverse.

Why is that crazy-frightening? Because banks and institutions and hedge funds and governments own trillions of dollars of bonds.

If prices fall instead of rise – as quickly as we now know they can – they all lose money on a mark-to-market basis (meaning on-paper, if they don’t actually sell). They could all lose hundreds of billions of dollars.

What the bond-market Flash Crash showed us is there isn’t the same old liquidity in the bond markets that there used to be. Like the stock market now, bonds can crash.

We’re hearing a lot of worried voices about bonds being vulnerable these days – both from some of the biggest players in the bond market and from Fed Chair Janet Yellen.

(In that recent Bloomberg analysis we referenced, big traders said the U.S. government debt market has lost a significant amount of its “depth,” or ability to handle big trades without having prices move. A year ago, traders said they could move about $280 million worth of Treasuries without causing prices to move. Now it’s only $80 million, JPMorgan Chase says.)

The risk is actually even higher than most people know.

Between computerized trading machines now wreaking havoc on the bond market and the global – yes, I said global – lack of liquidity in bond markets, something will happen.

We’ve been talking a great deal lately about market Disruptors – including, of late, market liquidity.

When it comes to Disruptors, there are lots of them. And when it comes to markets, there’s one giant disruptor, liquidity, specifically the lack of it and how bad that is for markets.

If the lack of market liquidity was a Disruptor category, it would be the biggest of them all.

I’ll tell you the full extent of the liquidity crisis in the bond markets next time. I’ll also tell you what to look for to know when the bottom is about to fall out – and how you can make a ton of money if you play it right.

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