The VIX, Auto Bubble & Bitcoin

In this article, I will focus on a few separate issues I have previously discussed. The first point is about how low the VIX is. Even though the market was broadly down, albeit modestly, the VIX fell to 10.58 which is very low. So far, earnings season has been filled with earnings adjustments beating expectations while GAAP earnings haven’t looked as great. Secondly, I will discuss the weakness in the auto market which is set to come in 2017. Finally, I will talk about the outflows China is experiencing and review the price action in bitcoin which has been stabilizing.

VIX & Earnings

            The VIX being low isn’t a new phenomenon for this bull market, but the 10 handle is bordering on historically low levels. I’ve discussed the possible catalysts for an increase in volatility in the past. It can be political risk in Europe, overvaluation, the weak economy, earnings misses, or fiscal policy mistakes which cause the volatility to increase. I’ve seen headlines claiming the market is climbing a ‘wall of worry’ because the Trump administration’s policies are uncertain. I think the VIX being near the all-time low of 8.89 says otherwise. (I mistakenly mentioned the all-time low in the VIX was 9.97 in an earlier article.) There have been only 9 trading days where the VIX closed below 10 going back to 1990. The chart below shows the future positioning in the VIX. It’s the most negative it has ever been which means speculators think the VIX will go lower and the stock market will go higher. The amount of trading in the VIX clearly has increased over the years, so I wouldn’t say this is the least volatile market ever, but it is close to being that.

VIXSPEC

Earnings season is currently in full force. The chart below shows the average results thus far. Heading into earnings season, earnings were expected to grow 3.1%, so growing at 3.4% is a moderate increase in pace. Because of this increase in pace the earnings growth rate is now expected to be 4.2%. The average earnings beat has only been 2.7% which is below the 5-year average beat of 4.5%. My conclusion is that earnings growth is a step in the right direction. However, the beats signal that earnings aren’t ready to accelerate higher. The expectations for 2017 may have the be ratcheted down a few pegs like has happened in the past few years.

q4earnings

Auto Market

            The auto market is at peak sales, yet inventories are rising. This is unexpected because you’d think being able to sell cars wouldn’t cause inventories to increase to near record levels. Not only are automakers discounting cars/trucks to make their earnings metrics, but they also are doing it out necessity because inventory is so high. The chart below shows there are now 3.911 million total vehicles in inventory. This means if sales fall slightly, production must fall dramatically because there are already so many cars in inventory.

vehicleinv

            The inventory to sales ratio is high which is interesting because you’d think record sales wouldn’t allow this to occur. One third of the inventory is older model vehicles which up from the usual level of less than a quarter. This is a problem for automakers as older cars get discounted at a higher rate than other consumer goods.

autoinv

China & Bitcoin

            China’s capital outflows have been part of why bitcoin prices have soared as it has been used a liaison to skirt capital restrictions. The chart below shows the breakdown of where the capital outflows are coming from. As you can see, the residents are the main culprit of capital outflows. Outflows are being caused by the weak Yuan. The Yuan has strengthened slightly this year, so we may see a moderating of the pace of outflows.

outflowschina

The three largest bitcoin exchanges in China, BTCC, OKCoin, and Huobi announced jointly that they were ending zero fee bitcoin trading to stop speculation and lower volatility. The firms introduced a 0.2% fixed rate fee on all buy and sell orders starting on January 24th. The announcement is likely in response to pressure from the People’s Bank of China to rein in speculation to prevent a major crash. In other words, high frequency trading by bots is being significantly cut down as they can’t afford to pay the fee.

The move has had awe-inspiring results. The chart below shows the volume in bitcoin trading by currency. This used to show over 95% of the trading occurring in China. Now China is only at about 25% which is more in line with the size of its economy relative to others. I say it’s awe inspiring because the price of bitcoin has not fallen even though all this trading is gone. Bitcoin is at about $920 which is a nice rebound from the crash earlier this year. As someone who is a free market person, you’d be surprised to hear that I think this change is good news. It has made bitcoin less volatile so far. More importantly, it has made the volume of trading in China more reflective of the size of China’s economy. I think when someone who doesn’t know much about bitcoin sees that 95% of trading occurs in Yuan, they may get nervous because they may think it’s too speculative or that if the Chinese government tries to outlaw bitcoin the price will crater by 95%.

top10bit

Conclusion

            This article is a mixture of a few points. The first was that the VIX being this low can be an ominous signal for the market. The earnings beats this season have been relatively tepid. The second point was the auto market is about to experience pain because the inventory level is so high while sales are at best plateauing. The final point is that bitcoin traders appears to be happy with the new plan to end zero fees trading because the price has stabilized above $900. A repeat of the 2013 crash looks unlikely.

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