Slow Day. S&P 500 e-mini futures, stumbled early on by some 'reality' from Merkel, recovered to the magical 1315 level that has seemed so important in the last few weeks. Broadly speaking risk-drivers were either weaker or went sideways in narrow ranges as Energy, Financials, and Discretionary high beta pulled stocks higher. From yesterday's equity day-session close, oil is unch, copper down modestly, Gold down more and Silver down the most as the USD limped very quietly lower on the day (interestingly divergent as AUD and GBP strength was enough to balance the EUR weakness). Treasuries went sideways to modestly higher in yields by 2-3bps. Stocks outperformed (once again) from around the European close - pulling notably away higher from CONTEXT-based broad risk perspective but, just as with the last few days, financial weakness into the close led the broad indices into a decent nose-dive back towards VWAP right into and beyond the bell (on heavy volume and larger average trade size). It's getting old. VIX fell less than 0.5 vols and surged up to nearly 20% at the close (as stocks dumped giving up almost half its day-session gains) as total day volume was weak, average trade size low, and intraday range the lowest in 2 months. HY and HYG underperformed stocks (we suspect as the LT convergence reduces the push into HYG) and we are seeing IG-HY decompression pick up a little.
In the aftermath of the recent escalation in tensions between Turkey and Syria, whereby Syria was accused of hostile behavior for firing and taking down a Turkish fighter jet that supposedly spent at least 5 minutes in its airspace, today was a quiet day. At least until recently we saw the following footage in a clip uploaded to YouTube. Supposedly, Turkey has sent troop reinforcement to the Syrian border, after Erdogan's warning that soldiers approaching the border will be treated as targets, the clip explains, citing Turkish daily Zaman reported citing the Cihan news agency. This is unverified, nor is the statement that 15 military vehicles, including tanks and cannons, were dispatched to the border from Diyarbakir. We are skeptical of the validity of the above especially since earlier today Russia said that Tuesday's Syrian shooting down of a Turkish warplane should not be seen as a provocation and warned world powers against using the incident to push for stronger action against Damascus. It was Moscow's first official reaction which made it quite clear that Russia will not just stand idly by awaiting for NATO to unilaterally take a decision to punish the middle eastern nation for daring to defend itself. But then again, this may be merely misreading Russia's resolve, in collaboration with China, to defend its own national strategic interests.
Every time we get too bogged down by details, minutae, nuances, footnotes, rumors, lies, or, at the very bottom of the bullshit pyramid, Eurocrat promises, and think that maybe, just maybe, there is a way to fix the mess we are in, we take a quick look at what is in store (most recently recapped by Deutsche Bank in the form of the following two charts) and quickly realize that all concerns about a happy ending have been for nothing.
The American Chemistry Council's chief economist Kevin Swift created a 'Chemical Activity Barometer' which tracks chemical production and prices, hours worked at producers, and manufacturing output among other factors. As indicated in today's Bloomberg Chart-of-the-Day, this indicator, based on its 'earliness in the supply chain' provides a signal that "the outlook for the economy is slowing during the next six to nine months" since 96% of manufactured goods are derived in part from materials produced by the US chemical industry. Three-month declines of 3% or more have preceded all but one recession since 1947 and it is currently down over 2.5% from its highs in March suggesting sub-par growth is coming.
Things appear to be going from worse to worserer as the failure of Light-Squared appears to have been a 'harbinger' of pain to come for the man who was 188th richest in the US. As Bloomberg notes:
- *SEC SAID TO AUTHORIZE LAWSUIT AGAINST HARBINGER'S PHIL FALCONE
- *SEC SAID TO PLAN TO SUE FALCONE OVER TAX LOAN, GOLDMAN DEAL
- *SEC MAY FILE LAWSUIT AGAINST FALCONE AS EARLY AS THIS WEEK
- *FALCONE LAWSUIT MAY INCLUDE CLAIM OF MARKET MANIPULATION
Back in August 2010 we asked: "Is Phil Falcone's Mega Bet On SkyTerra Going To Be His Last?", turns out it was. Soon the only betting Phil may be doing is whether or not the soap slips in the common shower bathroom, or how many divorce attorneys might be waiting on patrol outside his multi-million dollar mansions; but we only have one thing to add now: "Got Pre-Nup?"
With any and every European leader talking unilaterally (and only one worth listening to, given the market's reactions), we ask and answer what should investors expect from the forthcoming EU Summit and what are the investment implications? Morgan Stanley's Arnaud Mares offers a succinct analysis of the three key axes being debated around the 'banking union' premise: a European Deposit Guarantee Scheme (DGS); a Common rule book and European level bank supervisor; and a federal resolution regime (and, in some proposals, a federal recapitalisation vehicle). The base-case view is that the current set of EU banking union proposals, whilst directionally helpful, are too long-term or too timid to address the 'crisis' with supervision stratified and insufficiently federal leading investment implications of little meaningful relief in Eurozone banking and sovereign credit markets. Recent comments from European ministers suggest that the path to federalized Banking Union will be far from an easy one, given the tightly interconnected federal debate.
There is a certain irony to the fact that John Taylor, he of the infamous 'Taylor Rule' policy tool, conjures Hayek and the need for policy-makers to base decisions on 'rules' as opposed to the whim of short-termist solutions and band-aids. In an excellent discussion starting from Hayek and the foundations of Austrian economics 'rules-based-policy', Santelli and Taylor opine that 'policy must be more predictable' as fiscal cliffs, monetary uncertainty, and policy confusion weighs on both sentiment and businesses willingness (or ability) to make plans. Critically, they point out the dilemma that the short-cuts to solve immediate problems are in and of themselves unpredictable and so a longer-term rules-based strategy - which empirically has led to re-election (which may come as a surprise to many who see palliatives as populist vote-buying) - is a far better solution both politically and economically. The two go on to discuss the inability (or unwillingness) to enforce existing legislation (as opposed to new regulatory pressures) and the Hakeyian suggestion that those in power feel the need to do something different (or 'fine-tune') as opposed to enforce and continue strong rules-based policy which leads to short-term 'confusing' interventions.
Hours ago, in addition to making Cypriot sovereign bonds no longer eligible as collateral at the ECB, the European Central Bank also announced something that received less attention, namely that its balance sheet rose by €31 billion in the past week (due to an increase in the MRO) to a new all time record high of €3.058 trillion. In other words, even as the Fed's balance sheet continues to be flat, or is even modestly declining, the ECB continues to pick up the monetary slack with all new fiat ending up to benefit the US capital markets. Now as frequent readers know, this latest shift in the relative size of the two critical CB balance sheets also means something else: that the fair value of thje EURUSD implied purely on balance sheet correlation, a relationship that historically worked perfectly, yet in recent months has broken down due to the market's conviction that more QE is coming any minute now, is now just above 1.16, or just shy of 900 pips lower from here.
With Operation Twist being extended for another 6 months, forcing Primary Dealers to buy up all the short-end bonds from the Fed, the last thing the Dealer community needed at today's 2 Year bond auction was to be stuck holding the bag. Which is precisely what happened: the Treasury sold $35 billion in fresh 2 year paper as the first auction of this week's trio of bond issuance, at a yield of 0.313%, the highest since March even if in line with the When Issued, and a Bid To Cover of 3.62, the lowest since February. But the key internal indicator was the distribution between the Primary Dealer take down and everyone else: at 60.4% of the entire offering or $21 billion, going to Dealers, this was the highest notional having to be stuffed in the channels of the Primary Dealer repo market since December 2011. Naturally, the offset, Direct and Indirect takedown, was quite low, with Indirect bidders holding just 31.69% of the auction, or the lowest since December as well. Unless the PDs can offload the bonds quickly and effectively, this means they are stuck with another product for $21 billion which will generate returns far lower than ROI and ROE breakevens, and force them to take even more risks with whatever other capital they have lying around courtesy of US depositors.
In a world desperate for any positive news, today's borderline idiotic rumor du jour, of course after Monti's gambit blew up in his face literally in minutes, comes from Germany where interested parties leaked that Germany is considering changing the seniority status of the ESM, obviously to ameloirate subordination concerns of Spanish and soon, Italian, bonds. To wit, the headline machine has focused on this part of the recent Reuters report: "A leading ally of German Chancellor Merkel told a closed-door meeting of her conservatives on Tuesday that euro zone governments were discussing removing the preferred creditor status of the bloc's new permanent rescue fund, sources told Reuters." What is very conveniently missed out is what actually matters: "Neither Merkel nor Finance Minister Wolfgang Schaeuble spoke out in favour of such a move at the meeting, the sources said, leaving it unclear whether the idea had the firm backing of the German government." And whatever Merkel (and Schauble, of course), wants Merkel (and Schauble, of course) gets. Because both of them realize that investing €500 billion of what will in the end be purely German cash as more and more countries move from ESM guarantors to ESM recipients, in addition to the hundreds of billions in sunk TARGET2 costs, amount to a number increasingly roughly the same size as German GDP, as we explained last July. Also, as we explained last July, lots of angry Germans are getting angrier by the day.
Between macro-economic 'religious' experiences, regulatory uncertainty, and legislative gyrations, the world appears to be a very different place now than before 2008. It seems that from the 'Lehman' moment (some might call it an 'epiphany' moment), and later the US downgrade, markets realized that the impossible was possible and while every long-only manager will try to convince you that nothing has changed, these four charts (via Barclays) will go a long way to proving that everything has changed. Whether it is policy uncertainty, the frequency of 'fat-tailed' events, market illiquidity, or the domination of correlated 'macro' risk over idiosyncratic diversification; trading (or investing) has profoundly changed since 2008.
Update: According to subsequent press reports, Monty has denied he threatened to resign. i.e., Monti just blinked. So now it is up to Merkel who will either have a very short life, or Monti will have to come up with a different professional suicide gambit.
Just when we thought the European drama couldn't get any more poignant following Merkel's statement earlier which boils down to "No eurobonds or death", here comes Italy's unelected PM and former Goldmanite, Mario Monti, threatening that the beggar will pull the trigger on his own political career if he is not allowed to be a chooser. From Il Giornale: "If the Chancellor does not give up I will tell you that I resign because if things do not change are not able to bring Italy out of the abyss", he suggested relying on the bogeyman of the crisis that would bring Italy under attack of speculators. On the other hand, Merkel knows all too well that the fall of Rome would mean the collapse of the definitive ' euros by prospects that would put the shivers even in Berlin." So one hand for Merkel Eurobonds are a matter of life or death, while an elected technocrat with no leverage at all, threatens to quit. Our money is on the German.
There are roughly 19 million vacant dwellings in the U.S., of which around 4 million are second homes and a million or two are on the market. Let's stipulate that several million more are in areas with very low demand (i.e. few want to live there year-round). Let's also stipulate that several million more are in the "shadow inventory" of homes that are neither on the market nor even officially in the foreclosure pipeline, i.e. zombie homes. Even if you account for 9 million of these homes, that still leaves 10 million vacant dwellings in the U.S. which could be occupied. That means 1 in 12 of all dwellings are vacant. Even if you discount this by half, that still leaves 5 million vacant dwellings that could be occupied. Given that the total rental market is 40 million households, that constitutes a very large inventory of supply that remains untapped. Lastly, it is important to note that the ratio of residents to dwellings is rather low in the U.S., with millions of single-person households and large homes occupied by one or two people. The potential pool of existing homeowners who could enter the "informal" rental market by offering bedrooms, basements and even enclosed garages for rent is extremely large, and that is a difficult-to-count "shadow" inventory of potential rentals.