Europe closed uneventfully with equities mildly outperforming credit (diverging for much of the day) as sovereign spreads were mixed with BTPs higher in yield (and spread), Belgium lower in yield/spread, and Spain unch. Volumes were obviously very light and bond markets went dead in the afternoon - especially gappy post BTP's break of 7% as bid-offer spreads cracked wider. Interestingly, cable (GBPUSD) slid relatively significantly into the close (GBP weaker, USD stronger) - losing around 100 pips from its earlier highs to close at pre-LTRO levels extending losses from the earlier weak data print. US markets have traded quietly all morning with most risk assets in line (credit and equities in sync) but TSYs are completely divergent on the day (from the start of the US day session). Stocks managed to pull back to CONTEXT but amid low volumes they are oscillating around VWAP and jumping a few pts on any flow. Credit looks to be simply reracked on ES moves - as we hear very little actual flow. Much is being made of the drop in VIX today but we suspect this is much more simply explained by vol steepeners across the holiday period - a very seasonal pattern that benefits from normally lower realized vols across the year-end - perhaps Greece's bond maturities next week will upset that plan this year?
One thing becomes apparent when looking at the price range breakdown in the just released latest New Home Sales breakdown - the quality, or rather price, of homes sold continues to deteriorate. As can be seen on the chart below, November is the 4th month in a row in which there was (Z), or less than 500 houses sold in the $750,000 category. And while there has been a consistent deterioration in virtually all other price buckets, one is stable: that of the under $150,000. Luckily, the banks keep on leaking out those foreclosed upon properties with the regularity of Old Faithful. Now if only they could releases the 6 million in shadow inventory homes so the housing market could finally clear, thing may actually be optimistic. Alas, as long as they are held on the books, and buyers, who it just happens are not idiots, refuse to pay top dollar knowing well tomorrow a far better deal may hit the market, there is no hope for either the housing market rebounding, or by implication job creation finally picking up. Thank you Centrally Planning Ben. May we have another?
As the rest of the world enjoys Festivus or whatever celebration one indulges in, Iran is launching a "massive" 10 day war games naval exercise right in the belly of the beast. From Xinhua: "Iranian Navy Commander Rear Admiral Habibollah Sayyari on Thursday announced the upcoming launch of ten-day massive naval exercises in the international waters, the local satellite Press TV reported. Sayyari said at a press conference on Thursday that the naval maneuvers dubbed Velayat 90 will start on Saturday and will cover an area of 2,000 (1,250-mile) km stretching from the east of the Strait of Hormuz in the Persian Gulf to the Gulf of Aden, the report said. This is the first time that Iran's Navy carries out naval drills in such a vast area, he was quoted as saying. He said that the exercises will manifest Iran's military prowess and defense capabilities in the international waters, convey a message of peace and friendship to regional countries and test the newest military equipment among other objectives, said the report. He added that the newest missile systems and torpedoes will be employed in the maneuvers, adding that the most recent tactics used in subsurface battles will also be demonstrated. Iranian destroyers, missile-launching vessels, logistic vessels, drones and coastal missiles will also be tested, said the Iranian commander, according to the report." And while conventional wisdom is that the market is focused on what the upcoming closure of the Straits of Hormuz means for tanker routs and oil prices, there is another more disturbing possibility: with all those Iranian canoes, and soapboxes floating around, one wonders if one is bound to have a close encounter with USS CVN-74 John Stennis, which as the updated naval map below from Stratfor shows, will be smack in the middle of the action.
While we just noted the insanity of chaotic market shifts in the face of the broad market's lackluster performance, Nic Colas, of ConvergeX Group, goes one step further. Dismantling the 592 point rally in the archaic (yet seemingly so important to mom and pop) Dow, Nic shows that the majority of this move was simply thanks to just two stocks (IBM and MCD). The 5.1% outperformance of the Dow, in the face of the S&P's blank, is the seventh year of the last twelve (we suppose thanks to the lower financial exposure) but the weighting scheme seems to be so rife for 'help' - especially with blue-chip names so easy to defend for every long-only manager in the world, that it seems we should all thank Mr. Buffett for another good year on the Dow. On a less tin-foil-hat basis, Nic points out that confidence in the business models of the Dow names may have something to do with the remarkably sanguine perspective the sell side has on the earnings predictability of the companies in the index.
In a must read Op-Ed in the WSJ, Mark Spitznagel, founder of "fat tail" focused hedge fund Universa, where Nassim Taleb has been known to dabble on occasion, explains the fundamental flaw with central planning, and specifically why "moral hazard" or the attempt to avoid the destructive part of natural cycles, is the greatest unnatural abomination ever conceived by man. His visual explanation should be sufficient for even such grizzled academics who have no clue how the real world works, as the Chairsatan, to comprehend why what he is doing is an epic abomination of every law of nature: "Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire." Another way of calling this, is what we have been warning about for years: delaying mean reversion does nothing but that. And when the Fed finally fails to offset the inevitable, and it will - it is a 100% certainty - the collapse and destruction will be unprecedented. Ironically, the only way the system could have been saved would be by letting it fail in 2008. Now, we are sorry to say, it is too late.
Presented with little comment...10Y BTP yields just broke above 7% once again. It would appear the MtM on those LTRO-funded BTP purchases is hurting already. Cue LCH margin hikes...
We have previously described the change in market structure post the mid-year USA ratings downgrade as the impossible was suddenly made possible. Nowhere is this more evident than in the huge difference in cumulative distance traveled by the S&P 500. Considering close-to-close changes from the beginning of the year, we see that the average shift of 6 points per day (pre-USA-downgrade) has more than doubled post the downgrade to 12.6 points per day. The S&P 500 has traveled, close-to-close only an incredible 3193 points on the year while from the 12/31/10 close, the index itself has moved a mere 3.64 points. At this rate, should the US be downgraded another notch, we will see 25 point per day ranges and the broken market that we described post-downgrade will become more of a farce than it already is.
Core Durable, Capital Goods Orders Miss Despite Inventory Stuffing, To Push Q4 GDP Lower; Savings Rate DeclinesSubmitted by Tyler Durden on 12/23/2011 - 08:46
So much for ending the year on a positive economic tone: today's November durable goods number, while better than expected on a headline basis including volatile transportation data coming at 3.8% on expectations of 2.2%, was a big disappointment when looking at the core economic indicators such as Durables ex-transportation and non-defense capital goods orders ex-transportation, both of which missed, 0.3 vs 0.4% in the former case, and a whopping 11st devs for the latter: at -1.2% on expectations of 1.0% (Joe LaVorgna was +1.2%... of course), the worst since January 2011. Simply said the trend of downward GDP revisions is now coming to Q4 GDP which will likely see the consensus dip below 3.0%. While we are at it, why not stuff channels a little more: "Inventories of manufactured durable goods in November, up twenty three consecutive months, increased $2.0 billion or 0.6 percent to $368.8 billion. This was at the highest level since the series was first published on a NAICS basis and followed a 0.4 percent October increase. Transportation equipment, also up twenty three consecutive months, had the largest increase, $1.0 billion or 0.9 percent to $114.3 billion." And in other news, both consumer income (0.1%, exp 0.2%) and spending (0.1%, exp 0.3%) missed, pushing the savings rate lower again from an upward revised 3.6% in October to 3.5% in November. The reason consumers had to rely on their savings? "Private wage and salary disbursements decreased $7.1 billion in November, in contrast to an increase of $37.2 billion in October." And yet, "Government wage and salary disbursements increased $0.1 billion in November, the same increase as in October." But that's ok - for a slow motion economic trainwreck there is Obama and fudged labor data from the BLS; for everything else's there's Mastercard and soon to be unlimited lines of credit for everyone drawn straight from the Discount Window.
On the day of the 3 Year European LTRO, in a whim of fancy we wondered if contrary to all expectations, the European banks would not instead of using the money for any real releveraging (carry Trade) or deleveraging (switching out of expensive into cheaper debt) purposes, just park it with the ECB's deposit facility, an outcome which would be the worst possible case as it simply recycles ECB cash from on pocket into another without any incremental velocity. As it turns out, we were only half kidding: as of yesterday, the day after the LTRO, European banks parked almost half of the free €210 billion (recall that while gross LTRO proceeds were €489 billion, only €210 billion was net), or €82 billion, with the ECB's deposit facility, which incidentally brought the cumulative total to a new 2011 record of €347 billion, from €265 the day before. And that is what monetary policy failure is all about.
It was just a little footnote to the LTRO announcement. Just a little statement that 40 billion of the collateral received by the ECB was newly issued, newly guaranteed Italian debt. The more I think about it, the more uncomfortable I get. The ECB claims they have 40 billion of Italian government bonds on their books from the LTRO. The banks say they pledged 40 billion of Italian government debt. The Italian government doesn't acknowledge it as debt. Is this just a ploy to inextricably link the Italian banks to the government. The banks could have borrowed direct from the ECB. Bizarrely enough they may have even been able to post their own non government guaranteed debt directly but that was too obviously Enronesque? We are scared that as these contingent liabilities hit the spotlight we will find that the sovereign debt problem is far far bigger than we have realized.
- Volumes remained thin across various asset classes ahead of market holidays related to Christmas and the New Year, together with a light economic calendar
- Moody’s maintained the US’s sovereign credit rating at Aaa, adding that the US rating outlook is negative on federal government debt ratio risks, and the US rating could move down if debt ratios and interest costs continue rising
- Outperformance was observed in Gilt futures partly helped by lacklustre economic data from the UK, which resulted in the UK 10-year yield falling below the 2% level and printing record lows
- According to European government sources, the S&P ratings report on 15 Eurozone members is expected in January
- Fed’s Once-Secret Data Released to Public (Bloomberg) - full excel spreadsheet link
- Call for QE to stave off euro deflation (FT)
- King Says Crisis Threatens Europe’s Economy as Stability Outlook Worsens (Bloomberg)
- Russia’s Medvedev calls for reforms, but protesters not satisfied (WaPo)
- EU's carbon tax meets turbulence (China Daily)
- IMF May Delay Boosting China’s Role as Members Fail to Back Quota Changes (Bloomberg)
- China's 2012 social housing target at 7 million (Reuters)
- Bini Smaghi Says ECB Should Use QE If Deflation Risk Arises (Bloomberg)
- Italy to Kick the Cash Habit as Monti Cracks Down (Bloomberg)
- U.S. House Speaker Boehner Signs On to Tax Deal (Bloomberg)
If you are looking to fill 20 minutes on this low volume pre-holiday 'trading' day with some sanity (away from the low correlation markets), look no further than the following interview between CMC Market's Michael Hewson and Roubini Global Economics' Megan Greene. From the evolution of the European sovereign debt crisis to a financial and political firestorm, the growing divergence between Merkel's demands and the rest of Europe's needs, to the band-aid plugs to practically unsolvable fiscal differences, she does an excellent job summarizing not just the problems, but the solutions' efficacy so far, and the troublesome future ahead. Furthermore, her perspective on the 3Y LTRO 'carry-trade' that it exacerbates the crisis and is a terrifying prospect fits with our view that while the prospect of this silver bullet is timely for year-end thin markets, the reality is far different (as we see in ITA and ESP bonds today). She notes that this effort will just strengthen the negative feedback loop between sovereign and banking systems. Expecting multiple Euro exits, she sees more can-kicking with jolts from mini-crisis to mini-crisis as the political will is just not there for Germany - ever. Monetary union is really a political choice, and with as many countries dropping out as she expects (as austerity fatigue increases), there will simply not be the political will to keep the Euro project going any longer.