Sell Everything before Market Crash !

Will there be another market crash in 2017?

The unlucky 7

Whenever there is a year ending with 7, the stock market will collapse and have a crisis.

For example, the name for the 1987 stock market crisis is Black Monday. Interest parity arbitrage trading and currency war fueled the 

Asian Crisis in 1997. It involves borrowing a cheap currency with low yields and investing in a stable currency with higher yields to earn spread income, known as positive carry. Hence the name, carry trades.

Concept explained: Currency Carry Trade : by Investopedia

What is a 'Currency Carry Trade'

A currency carry trade is a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

 In theory, rates and prices should reach an equilibrium so there is no arbitrage. But this was a special time in financial markets. Japan wanted to manage the yen to promote its export-oriented economy. Other Asian countries with currencies pegged to the dollar had just opened their capital accounts and were attracting foreign investors with higher yields. The money poured in and strained utilization capacity until local authorities interceded in late 1998, and the party ended.

The GFC (Global Financial Crisis ) surfaced first in 2007 with the collapse of the U.S. subprime market. In 2008, it turned into full-scale crisis when Lehman Brothers fell. This time was also a carry-trade, the one involving credit ratings rather than currencies. Banks could buy impaired loans and make them into RMBS with inflated ratings provided by willing rating agencies. 

These securities were then refinanced in CDOs. The CDO ratings were based on original ratings on the RMBS-they were not updated with real performance information-so if the rating on an RMBS was inflated, it would flow through to the CDO.

What are RMBS and CDO?

What is a 'Residential Mortgage-Backed Security (RMBS)'

Residential mortgage-backed securities (RMBS) are a type of mortgage-backed debt obligation whose cash flows come from residential debt, such as mortgages, home-equity loans and subprime mortgages. A residential mortgage-backed security is comprised of a pool of mortgage loans created by banks and other financial institutions. The cash flows from each of the pooled mortgages is packaged by a special-purpose entity into classes and tranches, which then issues securities and can be purchased by investors.

What is a 'Collateralized Debt Obligation - CDO'

A structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors. A collateralized debt obligation (CDO) is so-called because the pooled assets – such as mortgages, bonds and loans – are essentially debt obligations that serve as collateral for the CDO. The tranches in a CDO vary substantially in their risk profile.

 The senior tranches are relatively safer because they have first priority on the collateral in the event of default. As a result, the senior tranches of a CDO generally have a higher credit rating and offer lower coupon rates than the junior tranches, which offer higher coupon rates to compensate for their higher default risk.

Still don’t believe? Look at “ Samsung Galaxy Note 7 “ ! which has made the News Headline recently.

Samsung is recalling the Galaxy Note 7 worldwide over battery problem

Samsung, safety regulators officially recall about 1 million Galaxy Note 7 phones

Ok, Ok,, but then how about iPhone 7?

Quoted below from USA Today :

“On Friday, the glass was half-empty. Investors dumped shares on heavy volume after a market research firm in Germany, GfK, reportedly showed soft sales in Europe for iPhone 7. Apple shares (AAPL), which had climbed 6% since the company's Sept. 7 launch event, lost 1.7% to $112.71 and dragged on the Dow Jones Industrial Average. “

Still don’t believe? Look at the below chart on so-called "Megaphone Pattern"!

image credit to businessinsider.com

So, what will be the trigger point of the crash in 2017? Commodity (oil ) crash? China shadow banking problem? Geopolitical tensions ( North Korea / Middle East )  or iPhone 7? etc ….

Chotto Matte

How about below news and chart from MarketWatch?

Sell everything ahead of the stock market crash, say RBS economists in Jan 2016

In a note, to its clients, the bank said: “Sell everything except high-quality bonds. This is about the return of capital, not return on capital. In a crowded hall, exit doors are small.” It said the current situation was reminiscent of 2008 when the collapse of the Lehman Brothers investment bank led to the global financial crisis. This time China could be a crisis point.

The result :

In the 10 months since Royal Bank of Scotland analyst, Andrew Roberts issued his headline-making call to “sell everything,” most assets have soared.

So, now what? Will market crash in 2017  or not?  I think the best answer still the same: “ I don’t know! “

Cheers!

< Disclaimer: this is not a call to act or sell your stocks, please DYODD prior making any decision and it is nothing to do with Samsung Notes 7 or iPhone 7 if the market really crashes in 2017. >


Quote Of The Day :

" I Don’t Know the Key to success, but the key to failure is trying to please everyone.” By Bill Cosby