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Will Seasonal Slump Drive Derisking?

The so-called January-Effect is almost at an end and if the market closes near these levels, the S&P 500 will have managed a 4.4% gain or its 20th best January since 1928 (84 years) and best since 1997. The outperformance of banks and sovereigns (LTRO) and the worst-of-the-worst quality names (most-shorted Russell 3000 stocks +9% YTD vs Russell 3000 +5.2%), as Morgan Stanley noted recently, is not entirely surprising since the January effect is considerably larger in mid-cap and junk quality names than any other size or quality cohorts. We have pointed to the seasonal positives in high-yield credit and volatility and along with the obvious short squeeze in S&P futures (which has seen net spec shorts come back to balance recently), we, like MS, are concerned that the tailwinds of exuberance that virtuously reflect from seemingly pivotal securities (such as short-dated BTPs now or Greek Cash-CDS basis previously) very quickly revert to a sense of reality (earnings and outlook changes) and perhaps the slowing rally and rising volatility of the last few days is the start of that turbulence.



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No Housing Bottom: Home Prices Decline For 7th Consecutive Month, Lowest Since 2003

The November Case Shiller is out and while not surprising to most, some of those calling for a near-term housing bottom may be advised to reassess (for the 5th year in a row). According to the Top 20 City index composite, prices declined in 17 of 20 MSAs, with gains posted only in Phoenix, Denver and Minneapolis. At 137.52, the Seasonally Adjusted composite dropped to the lowest since February 2003, and is now a third lower than the housing peak in April 2006. Yet the worst news is that, even with a 2 month delay, the housing drop accelerated into the end of the year, and the sequential drop of 0.7% was the biggest decline since March 2011. Which means that except for that errant spike in home prices in April 2011, we have now seen 18 consecutive months of housing price declines since that "rebound" in late 2009. "Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall," David Blitzer, chairman of the index committee at Standard & Poor's, said in a statement. "The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand." Yet just like in Europe, the improvement is coming. Aaaaany minute now.



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The Market Says CYA LTRO To Yesterday's Negativity

The market is back to being excited and bullish. Yesterday’s announcement out of Europe was underwhelming, but no one cares as a Greek PSI announcement is expected any moment.  It will be interesting to finally find out how many bonds sign on at the time of the agreement and who the potential holdouts are. More importantly, once again LTRO is the talk of the town.  Talk is that the demand will be €1 trillion or more (as ZeroHedge discussed here first over two weeks ago).  It will be interesting to see if the number approaches that or is far smaller.  We continue to believe that banks are using it to prefund redemptions and not as cheap financing to start a new round of asset gathering.  All the talk about the “carry” trade makes it sound like something new that the banks have just figured out, when it is the exact trade that got them in trouble in the first place.  Why did banks sell naked CDS on companies and countries (write protection)?  Because they got carry with no funding worries. Listening to the “chatter” you would think the market is on fire, yet S&P is barely up in almost 2 weeks (it closed 1308 on the 18th).  For the past couple of weeks, fading rallies has been working well, and we don’t see that changing as more and more people become convinced that “Europe is priced in” and ignore that strong earnings were priced in and aren’t really materializing.



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Socialist Hollande, Who Wants Full European Treaty Renegotiation, Increases Lead Over Sarkozy

With under 3 months left until the first round of the French presidential election on April 22, it maybe prudent to start paying attention to France, where socialist presidential candidate Francois Hollande has just widened his lead over President Nicolas Sarkozy despite a flurry of measures being advanced by the conservative leader to boost employment and competitiveness, a poll showed on Tuesday. This is quite relevant for Europe, as Hollande has made it very clear that none of the recent treaties and agreements would stand in their current version if elected, in the process overturning austerity and the position of the ECB in Europe's bailout org chart, and will gradually add an element of uncertainty to the second most important country in Europe's core, even if no longer AAA-rated. And for those who say there is no chance Hollande could take over, according to IFOP Hollande would trash Sarkozy in a runoff election by a whopping 58% to 42%, a result that even Romney and Diebold would be envious of.



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Venezuela Completes Repatriation Of 160 Tons Of Gold, Gold At 2012 Highs

Slowly but surely, ever more physical gold is being removed from circulation in conventional channels. Yesterday, it was Sprott who a week after doing a follow on offering in his PSLV ETF (i.e., adding more physical), reported that he was going to buy an as of yet undisclosed amount of gold for PHYS. This came just as Venezuela completed the rapatriation of its gold from European vaults, which means that it is substantially ahead of all of its other international peers who confidently continue to hold their gold stashed away in vaults situated primarily in London and NY. From Bloomberg: "Venezuela today received the last shipment of gold bars in an operation that repatriated 160 tons of the South American country’s reserves of the metal held abroad, said Nelson Merentes, president of the country’s central bank. Fourteen tons of gold arrived at the Caracas airport today on a flight from Europe, Merentes said. The gold bars were transported in a caravan, broadcast on state television, to vaults at the central bank where street banners proclaimed “Mission Complete.”" So now that the defections in the golden game theory equilibrium have commenced, the question is: who is next?



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Preview Of Today's Key Events: Chicago PMI And Case Shiller

Busy day for headline chasers (which these days is everyone) with the ISM-leading Chicago PMI taking center stage at 9:45 am. At some point the economy will have to start 'confirming' the Bernanke Bear case or else one may get the impression that the Chairman was merely posturing with providing a perpetual LSAP open backstop to the Russell 2000. Also, the Case Shiller index which will report the 7th consecutive home price drop will likely not get a whole lot of attention.



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Goldman Stopped Out Of Short 10 Year Trade

Back on January 23 we first reported that Goldman had opened a new trade whereby it was shorting 10 Year bonds. To wit: As of a few hours ago, Goldman's Francesco Garzarelli has officially told the firm's clients to go ahead and short 10 Year Treasurys via March 2012 futures, with a 126-00 target. While Garzarelli is hardly Stolper, the fact that Goldman is now openly buying Treasurys two days ahead of this week's FOMC statement makes us wonder just how much of a rates positive statement will the Fed make on Wednesday at 2:15 pm. From Goldman: "Since the end of last August, we have argued that 10-yr US Treasury yields would not be able to sustain levels much below 2% in this cycle. Yields have traded in a tight range around an average 2% since September, including so far into 2012. We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00." As a reminder, don't do what Goldman says, do what it does, especially when one looks the firm's Top 6 trades for 2012, of which 5 are losing money, and 2 have been stopped out less than a month into the year." Sure enough, we just got this: "On January 23, we recommended going short 10-yr US Treasuries using Mar-12 futures, for a target of 126-00 (roughly corresponding to 2.5% on the 10-yr rate). At yesterday’s close, we hit our stop loss set at a close above 132-00. We reiterate our fundamental conviction in this directional stance, and would look for opportunities to re-engage. With a large structural deficit, rising trailing inflation and a central bank emphasizing job creation, longer-maturity US Treasury bonds do not rest on solid foundations."



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Guest Post: Confidence And Ruin Amongst The PIIGS

For today's installment we'll take a look at the debt:gold ratio for the PIIGS countries to see who puts the IG in PIIGS (perhaps you've already guessed). the ratio represents the multiple by which the country's debt exceeds its gold holdings. To an optimist, a high ratio means that the rest of the world has great confidence in the economy of the country in question. To a pessimist, a high ratio means the country is ruined. At a quick glance, it appears that Italy is no worse off than America--assuming that both countries actually have the gold the World Gold Council claims they have. Italy may have trouble getting theirs from New York, if that is where it is. Notice the decline in the ratio over the past decade--that is a reflection of the rising price of gold, not a decline in these nations' debts. Debt has increased over the past decade. The price of gold has apparently risen more. So does this mean these countries are becoming solvent? Can a rising price of gold solve our economic woes? Historically, a decline in this ratio can been used by governments to justify monetary expansion, particularly if it happened during an episode of such expansion. Why not? The improvement of the ratio suggests that the government isn't printing enough. The destruction of the value of the currency (and the country's debt) begins to occur faster than the rate of monetary creation (thus the label in the US graph "Ben proposes, the Market disposes"). The government counters this by printing faster, but the destruction of the currency's value is faster still.



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Silver Surges 21% in January - Silver Demand Is “Diminishing A Supply Surplus”

There continues to be no coverage of silver in the non specialist financial media and little coverage of silver in the specialist financial media. However, both the Financial Times and Bloomberg cover silver today which might be a harbinger of short term weakness. The majority of articles on silver are bearish and most bank analysts remain bearish on silver again in 2012 – as they have been in recent years. Prices will average $37.50/ounce in Q4, according to a survey of 13 analysts by Bloomberg. The lack of coverage of silver and consequent “animal spirits” in the silver market is of course bullish from a contrarian perspective. Analysts look set to get the silver market wrong again as recent rocketing industrial demand for silver, from solar panels to batteries to medical applications and growing investor demand for coins, and small & large bars is “diminishing a supply surplus” according to Nicholas Larkin of Bloomberg.  This has led to silver’s best January gains in 30 years with silver up over 20% from below $28/oz to nearly $34/oz. Barclay's estimates that manufacturers will need a 2.5% increase of the metric tons used last year and investment demand continues to grow due to risks posed by both inflation and systemic risks. Silver supply shortages are something we and other analysts who are bullish on silver have been warning of for some time. This is because the silver market is small versus the gold market and tiny versus equity, bond, currency and derivative markets.  This is why we believe silver should rise to well over its nominal recent and 1980 high of $50/oz in the coming months.



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Market Sentiment And Overnight Summary

Below are some of the key events to have transpired in the overnight session. According to Bloomberg's TJ Marta, sentiment is broadly higher, with stocks, bond yields, FX higher, EU sovereign spreads tighter as markets focus on German unemployment, ebbing EU concerns, shrug off German retail sales, Greek debt.  Whereas German retail sales unexpectedly fell -1.4%M/m vs est. +0.8%, unemployment fell more than expected -34k vs est. -10k. Italy December unemployment climbed to 8.9%, highest since the data series began in Jan. 2004, from a revised 8.8% in November. Commodities mostly higher, led by WTI +1.5%, 1.0 std. devs. EU leaders agreed to accelerate rescue fund, deficit control treaty . Greek debt negotiations remain in flux with Greece reporting progress, Germany expressing frustration over Greece’s failure to carry out economic. Portugal 10-yr yields fell after earlier touching euro-era record; yields of AAA-rated Finland, Norway, Sweden and Germany higher even as Coelho Says Portugal’s Debt Is 'Perfectly Sustainable.' Treasuries decline for first time in five days; 5-yrs yields yesterday touched record-low 0.7157%. SNB Says Currency Reserves Declined to 257.5 Billion Francs. Foreign Investment in Spain Shows EU38.6 Bln Outflow in Jan-Nov. ECB’s Nowotny Says ‘Can’t Be Sure’ Greece Will Stay in Euro. Belgium Borrowing Costs Rise at 105-Day, 168-Day Bill Auction. Finally, according to KBC, Irish Consumer Confidence Up As ‘Armageddon’ Averted. So every day the world does not end consumer confidence should be higher. Brilliant.



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Frontrunning: January 31

  • Victory for Merkel Over Fiscal Treaty (FT)
  • Everyone wants a mediterranean colony: China's NDRC Delegation Visit Greece to Boost Economic Ties (Xinhua)
  • As Florida votes, Romney seems in driver's seat (Reuters)
  • Greece’s Papademos Seek On Debt Deal by End of Week (Reuters)
  • Banks Set to Double Crisis Loans From ECB (FT) - as Zero Hedge predicted two weeks ago
  • S&P: Doubling Sales Tax Won’t Help Japan Enough (Bloomberg)
  • Toshiba cuts outlook after Q3 profit tumbles (Reuters)
  • Blackrock’s Doll says Fed’s QE3 is Unlikely, In Contrast to Pimco’s Gross (Bloomberg)


Tyler Durden's picture

Super Bowl Sentiment - Inflation And The High-End Consumer

ConvergEx's annual analysis of Super Bowl economics shows that, when the time and place is right, prices can soar like a Hail Mary pass to clinch the playoffs.  Yes, the face value for tickets is unchanged in the last year - $800 to $1,200.  But the street price for a ticket to the big game will set you back at least $2,000, and the average ticket is running closer to $4,000.  The good news, sort of, is that there has been no inflation for the “Cheapest” seats since last year, when they were also two grand.  And that is despite a smaller stadium this time around (68,000 versus +80,000).  A signal about the stagnating confidence of the high end consumer?  Perhaps. Nic Colas goes to note that to get into Super Bowl #1 would have cost you all of $12.  That was in Los Angeles in 1967.  And the best seat in the house.  From there stated ticket prices went to $50 in 1984, $100 in 1988 and $500 in 2003.  Now, the prices printed on the ticket for the Indianapolis game this Sunday are between $800 and $1,200.  As the accompanying chart shows, this is an inflation rate of around 8,900% for the period, versus 687% for the Consumer Price Index. One thing we know – next year it won’t be a problem to set a new street price for the Super Bowl, regardless of whatever the economy may bring.  It is in New Orleans.



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European Bailout Infographic: Presenting The Truckloads Of Cash Needed To Rescue The Insolvent PIIGS

...No, literally truckloads. Our friends at demonocracy.info have been kind enough to put together an infographic that explains the European bailout in simple, visual terms, that even the most innocent of FTL truckers can grasp without much exertion, for the simple reason that it shows all the bailouts amounts in terms of trucks of cash. And here is the kicker: one would need a 13 lane highway, filled with trucks bumper to bumper, stretching for about 3 kilometers to represent the €2.91 trillion in total amounts owed by the PIIGS and their citizens (whether voluntarily or not... actually make that involuntarily) to  Europe's largest banks. What is most frightening is what is not shown: just how it is that the world's central banks are keeping all of these banks propped up. Because sooner or later all this money will be discovered to have been fatally misallocated. Then the real bailout cost will become all too evident, and just like in the US, it will be in the double digit trillions. Which means the metaphorical highway of trucks full of cash will stretch on for kilometers and kilometers and so on (or miles, for the naive US-based truckers). But since that day is in the future, there is no reason to worry about it.



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Guest Post: The Price of Growth

Growth. It's what every economist and politician wants. If we get 'back to growth', servicing debts both private and sovereign become much easier. And life will return to normal (for a few more years). There is growing evidence that a major US policy shift is underway to boost growth. Growth that will create millions of new jobs and raise real GDP. While that's welcome news to just about everyone, the story is much less appealing when one understands the cost at which such growth comes. Are we better off if a near-term recovery comes at the expense of our future security? The prudent among us would disagree.



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