Volumes picked up for most of the day as US equity markets jerked lower - back to pre-QEternity levels - and AAPL slide ever so gently all day to touch its 50DMA. With about an hour to go, it was clear something had to be done and AAPL levitated on small-lots (as opposed to the bigger lots on the selling) as it pushed back up to VWAP automagically - and dragged the S&P futures back above its VWAP and into the green. Highest AAPL volume in almost a month but trade-size was average as S&P futures levitated 8 points in a straight line and VIX was banged back from 16.5% to 15.7% (down 0.6vols on the day). Stocks were in a world of their own in this liftathon - as Treasuries wiggled along at the low yields of the day and the USD rose all afternoon (from Europe's close). Oil tumbled under $92 and commodities in general slid slightly lower (though intraday vol was high). Staples and HealthCare remain the only post-QEternity sectors in the green. Finally, today's S&P futures action looked more like a EKG than equity trading and with volume leaking badly, things feel a little W&R-like.
U.S. Rep. John Boehner, speaker of the House of Representatives, received nearly twice as much financial support from donors tied to the energy sector than did the next-closest recipient, a report from the National Wildlife Federation finds. The 20-page report highlights the role it says oil companies play in U.S. politics, stating energy companies are working behind the scenes on Capitol Hill to influence legislation in favour of oil, natural gas and coal policies. The NWF's report, however, is non-partisan in its effort to showcase the energy sector's monetary influence over U.S. politics. Sen. Joe Manchin, D-W.Va., who serves on the Senate Energy and Natural Resources Committee, ranked No. 2 on the NWF's list. Of the top 10 lawmakers listed in the NWF report, however, Manchin is the only Democrat and received $480,050 compared to Boehner's $814,060.
It seems the underground economy in Spain is picking up. Hand-crafted T-Shirts have become all the rage as the youth of the country send a subtle message to their leaders... The good news - the shirts are still priced in EURs, likely signifying ongoing confidence in the failed monetary experiment. Although we are confident pricing in New Pesetas is available upon request.
The problem we are going to face at some point as a nation and in fact as a civilization is this: there is no well-developed economic theory inside the corridors of power that will explain to the administrators of a failed system what they should do after the system collapses. This was true in the Eastern bloc in 1991. There was no plan of action, no program of institutional reform. This is true in banking. This is true in politics. This is true in every aspect of the welfare-warfare state. The people at the top are going to be presiding over a complete disaster, and they will not be able to admit to themselves or anybody else that their system is what produced the disaster. So, they will not make fundamental changes. They will not restructure the system, by decentralizing power, and by drastically reducing government spending. They will be forced to decentralize by the collapsed capital markets. The welfare-warfare state, Keynesian economics, and the Council on Foreign Relations are going to suffer major defeats when the economic system finally goes down. The system will go down. It is not clear what will pull the trigger, but it is obvious that the banking system is fragile, and the only thing capable of bailing it out is fiat money. The system is sapping the productivity of the nation, because the Federal Reserve's purchases of debt are siphoning productivity and capital out of the private sector and into those sectors subsidized by the federal government.
It seems that every commission-taking talking-head with a voice-box is espousing the 'truth' that equity portfolio managers will be forced to chase performance into year-end for fear of career-risk (we presume) in order to merely catch-up. In high-yield markets, however, where performance has been outstanding, things are quite different. As Barclays notes, performance among HY mutual funds is tightly clustered this year (especially relative to recent years). This leaves a HY credit market that is tightly call-constrained on capital appreciation (thanks to Bernanke's ZIRP), starting to see inflows fade post-QEternity (and shares outstanding drop in the ETFs), with managers anxious about their relative performance in a tightly correlated and crowded world of illiquidity away from ETFs. As is clear by recent performance, high-yield market participants are less sanguine on the future than their equity counterparts - just as they were in April.
In April of 2009 we warned very explicitly that reliance on the fake "liquidity" (which was never liquidity per se but merely volume and churn) by the HFT algos that stuff quotes, frontrun each other, spoof, layer, and generally make a mockery out of the thing fomerly known as the market (which is now more than anything a policy vehicle for central planners but that's a different story) would result in tears. A year later the first flash crash happened, and ever since then more and more people have finally realized how our 3+ year long crusade against HFT (which sadly is now a minor distraction against the far greater evil which is central bank dominance of capital markets) was spot on, confirmed by the recent segments (here, here and here) on CNBC which effectively confirmed the markets are not only a joke, but without any real depth, i.e. fake. What is amusing is that people still don't understand why the exchanges, and the regulators (coopted by the exchanges) allow HFT to continue. Here is the answer: in 2011 the CME made 31.5% of all its revenues from HFT, the ICE: 25.1%, the NYSE: 21.4%, the Nasdaq: 17.1%, the CBOE: 22.4%, and so on.
While we already know how Spain's Prime Minister is celebrating the country's brand new austerity budget (From Bloomberg: "The premier and five staff drank 10 beers and seven bottles of wine with a dinner of filet steak and turbot on their flight back from a European championship soccer match the day after Spain asked its European partners for a 100 billion-euro bailout to recapitalize its banks, the weekly reported, citing catering bills from the Spanish Air Force.") there was little color on how the "other" country undergoing austerity (not really) for the common man was enacting belt-tightening and spending reductions. We say "not really" because as we have shown, Europe has yet to actually implement austerity. And yet the people suffer. Or rather, once again, it is the common man who suffers, and because of that is convinced that the government is spending less. It certainly isn't as we showed in the case of Spain whose tax revenues have increased even as spending has increased, promises to the contrary notwithstanding. But where is the money going then? Surely if the common man is suffering, everyone else must be too. Turns out the answer is no. As the following picture below shows, where previously a simple Lancia with the license plate "ITA1" once stood, the car that is now proudly parked in the same spot and drives around Italy's ambassador to the UK, Alain Giorgio Maria Economides (read his heartfelt message to all here), is a new Maserati Quattroporte.
If history is a guide, the rest of the year is destined to be a winner. As Barclays points out, thew typical election-year cycle is a first half of range-bound trading followed by a second half of acceleration higher. 2012 has followed this pattern but on a much higher beta scale, with the current year's performance more than 50% above typical election-year full-year performance. Of course, we have never had a debt-ceiling and fiscal cliff debacle that needs to be resolved between the election and year-end. What's more interesting to us, given the surge in P/E multiple expansion driven by central-bank largesse, is that P/E multiples have contracted notably in the latter half of election years in the last 40 years. So when your long-only manager says - you have to buy because of the election year cycle, maybe ask him about the election year 'valuation' cycle.
The policy of the Status Quo since 2008 boils down to this assumption: if we prop up an artificial economy long enough, it will magically become real. This is an extraordinary assumption: that the process of artifice will result in artifice becoming real. This is the equivalent of a dysfunctional family presenting an artificial facade of happiness to the external world and expecting that fraud to conjure up real happiness. We all know it doesn't work that way; rather, the dysfunctional family that expends its resources supporting a phony facade is living a lie that only increases its instability. The U.S. economy is riddled with artifice: millions of people who recently generated income from their labor have gamed the system and are now "disabled for life." Millions more are living in a bank-enabled fantasy of free housing. Millions more are living off borrowed money: student loans, money the government has borrowed and dispensed as transfer payments, etc. Assets are artificially propped up lest a banking sector with insufficient collateral be revealed as structurally insolvent. It's not difficult to predict an eventual spike of instability in such a system; the only difficulty is predicting the date of the instability. Hiding a broken, dysfunctional economy behind a facade of artifice and illusion can't fix what's broken, it only adds to the system's systemic instability as resources that could have gone to actually fix things are squandered on propping up phony facades of "growth" and "health."
In order to avoid social unrest and absorb the world's young people entering the global workforce, the World Bank Development Report states that 600 million jobs must be created from 2005 to 2020. As Bloomberg BusinessWeek reports, jobs should be at the top of governments' agendas or they could face further uprisings such as toppled leaders in Egypt and Tunisia. "Demographic shifts, technological progress, and the lasting effects of the international financial crisis are reshaping the employment landscape in countries around the world, and those that successfully adapt to these changes and meet their jobs challenges can achieve dramatic gains in living standards, productivity growth, and more cohesive societies." However, those countries that don't adapt, face the kind of social unrest we have warned of again and again - and are starting to see in more and more civilized Western nations. Their findings:- 90% of jobs are created in the private sector and so Governments must create an environment that encourages investment - especially in small- and medium-sized business. So - a mere 600 milion jobs and all is well - amazing!!!
At its most fundamental level, SocGen's Dylan Grice notes that economic activity is no more than an exchange between strangers. It depends, therefore, on a degree of trust between strangers. Since money is the agent of exchange, it is the agent of trust. Debasing money therefore debases trust. Grice emphasizes that history is replete with Great Disorders in which social cohesion has been undermined by currency debasements. The multi-decade credit inflation can now be seen to have had similarly corrosive effects. Yet central banks continue down the same route. The writing is on the wall. Further debasement of money will cause further debasement of society. Dylan, like us, fears a Great Disorder.
Just in case there are still any hopes that the FT, or any other credible media outlet, may come up with a story, like it used to do almost daily back in 2011 and early 2012, that China, whose stock market continues to plumb 3 year lows, has some capacity to inject cash (that it doesn't have) into a broke continent (which would never repay said cash even if it existed), here comes none other than China's Sovereign Wealth Fund to make sure there is never again a rumor that China will bail out Europe. From Reuters: "China would be interested in buying into a Eurobond backed by core euro zone countries and considers investment in bonds issued by heavily indebted European countries unrealistic, a senior official with China's $480 billion sovereign wealth fund said. Jin Liqun, chairman of the supervisory board of the China Investment Corporation (CIC), said until fundamental problems of fiscal, social and monetary policies in euro zone countries burdened by debt are solved, there could be no investment." They never will be so scratch that possibility out. Now we can limit the universe of idiotic Europe is saved (it isn't - it is only a matter of time now before the ship sinks) rumors to at least one less.
GM's stock is not enjoying news that its September sales rose 1.5% from last year, on expectations of a 2.8% increase. And while this is surprising considering the government is now in the business of funding not only the student loan bubble but Government Motors' NINJA purchasers (someone has to make those labor union votes happy) making the cost of new vehicles essentially zero when netting out the debt, what is not surprising is that GM management has once again resorted to the age old gimmick which never fails to provide an artificial boost to the true condition of GM car sales, i.e., Channel Stuffing. Because after moderating in the past few months after peaking in March, dealer inventory has once again resumed rising, and is now higher for the third month in a row, increasing to 689,334 units in September. Expect this number to continue ramping into year end as less and less GM cars are sold as we enter the dead winter season.
"QE-whatever has created artificial numbers that the underlying won't support" is how Sam Zell sums up his view of the Fed's actions, adding that the Dow should be more like 9000, not 14000. The typically optimistic bottom-feeding real-estate magnate says he is not buying here, is gravely concerned about liquidity needs, and in his assessment "everything is massively too expensive." This epic CNBC interview-fest, where the less-than-cheer-leading Zell was allowed to speak, includes his views on a pending recession (as he sees capex planned projects being delayed) and while trying not to play the political card too strongly, he asks that we "stop this class warfare crap" and that the animal spirits are unleashed - as the game is being stacked against him. "We're kicking the can down the road... and with QE, there is now too much capital chasing too few opportunities - even when nobody has confidence in the future!"