Over the last three weeks, 10-year US government bond yields increased from under 1.4% to over 1.81% while 30-year went up from 2.44% to 2.96%. The 20+ year Treasury bond ETF (TLT) declined 8.2% from the top. That's more than three years worth of interest, gone in just three weeks. Yes, there is a flip side to central bankers artificially depressing bond yields. And you thought you were smart, not falling for Bernanke’s siren songs to push you into "risky" investments.
When observing the trends in the housing market, one has two choices: i) listen to the bulls who keep repeating that "housing has bottomed", a common refrain which has been repeated every single year for the past four, or ii) look at the facts. We touched briefly on the facts earlier today when we presented the latest housing starts data:construction of single family residences remains 46 percent below the long-term trend; the more volatile multifamily houses is 15 percent below trend and demand for new homes 47 percent below. This is indicative of reluctance by households to make long-term investments due to fear of another downturn in housing prices. Bloomberg summarizes this succinctly: "This historically weak demand for new homes is inhibiting the recovery of demand for construction workers as well, about 2.3 million of whom remain without work." But the best visual representation of the housing "non-bottom" comes courtesy of the following chart of homes in negative or near-negative equity, which via Bloomberg Brief, is soared in Q4, and is now back to Q1 2010 level at over 13.5 million. What this means is that the foreclosure backlog and the shadow inventory of houses on the market could be as large as 13.5 million in the future, which translates into one simple word: supply.
As Twitter and CNBC come alive with European banks ripping higher (short-sale-ban and trading a pennies will do that), Spanish and Italian equity markets ramping (to recent swing highs and the top of a four-month range on de minimus volume), while EGBs basically stagnate; we thought a little cooling reality on this white-hot exuberance was necessary. Without really wanting to steal the jam out of Draghi's donut, since LTRO2, Spain and Italy 10Y are 175bps and 71bps wider; Europe's VIX is unchanged at 23%, France's CAC and Germany's DAX equity indices are +1-2%; and Spain's IBEX and Italy's MIB equity indices are -13% and 8.5% respectively. Recency bias, summer doldrums, and an incessant hope that the status quo can really re-emerge (be printed back into existence) among what is increasingly a global balance-sheet-recession (and shadow-banking collapse) among advanced economies is indeed a powerful driver but context is key.
What do the following have in common? LIBOR, Bernie Madoff, MF Global, Peregrine Financial, zero-percent interest rates, the Social Security and Medicare entitlement funds, many state and municipal pension funds, mark-to-model asset values, quote stuffing and high frequency trading (HFT), and debt-based money? The answer is that every single thing in that list is an example of market rigging, fraud, or both. How are we supposed to make decisions in today’s rigged and often fraudulent market environment? Where should you put your money if you don’t know where the risks lie? How does one control risk when control fraud runs rampant? Unfortunately, there are no perfect answers to these questions. Instead, the task is to recognize what sort of world we happen to live in today and adjust one’s actions to the realities as they happen to be. The purpose of this report is not to stir up resentment or anger -- although those are perfectly valid responses to the abuses we are forced to live with -- but to simply acknowledge the landscape as it is so that we can make informed decisions.
Between a weaker EUR and Middle-East tensions, Europe faces a very significant (and real) drag on its economic performance. Forget the 'grow our way out of it' or 'believe-me' memes, the crude reality (that we warned about last week) is that the cost of buying spot Brent Crude in Euros is very close to record highs, above 2008 highs and most worryingly, has seen the biggest rise on record in the last two months. For those wondering what the trade-off is to Mario Monti's pointless blustering and scorched-earth hostage tactics at the June 29 Summit, just look at the 'Total' line item, the next time you gas up.
The market is so beyond broken. No point in commenting any more. Here is what happened with Natgas in slow motion animation courtesy of Nanex... And here is what just happened to recently public Manchester United on no news as the $14.00 IPO price defense finally failed:
"Business has gone from great to terrible in a matter of months. The sad truth is that most of my clients have already sold all of their gold rings," is anecdotal evidence of a growing trend that Bloomberg reports in Portugal. The central bank holds more gold relative to the size of the country’s economy than any euro country, mostly accumulated during former dictator Antonio de Oliveira Salazar’s 36 years in power, based on data compiled by the World Gold Council. The law prevents proceeds from selling any gold reserves from going toward the government’s budget. With the Portuguese unemployment rate at a euro-era record of 15 percent in the second quarter, citizens are wondering who will help bail them out now that their job and gold are gone: "We have no more gold to save us from being kicked out this month," encapsulates a growing trend in debt crisis-stricken Europe as household gold supplies dry up after record prices and a deepening recession prompts a proliferation of places to exchange the metal for money.
We have discussed this somewhat obscure indicator of our obese nation's spending comfort-factor in the past, but just as divergences from economic and non-equity market realities seem de rigeur currently, we though we'd dust it off. The percentage of disposable income spent on eating-out has plunged dramatically in the last two months (the biggest drop since Lehman!) - after running up in a well-correlated manner with stocks - from the 2009 lows. It would seem that once again, equity hopefulness-divergence is writ large here and yet consumers are not buying the hype/hope.
Even though in a centrally-planned world nobody cares about fundamental data anymore, and high frequency economics can't hold a candle to high frequency trading, today's Philly Fed was not good, missing expectations for the 5th month in a row, and printing in negative territory for the 4 month in a row, coming at -7.1 on expectations of -5.0, and down from -12.9. Sadly for the market, the data was not horrible enough to suggest that despite the seasonally adjusted economic data euphoria from earlier this wee, that the Chairsatan would surprise to the upside and preannounce MOAR NEW QE in 2 weeks. The data, however, was quite realistic, in that unlike BLS data which lately only keep track of part-time jobs, the Employment index in the Philly Fed printed at -8.6, the lowest since September 2009, and likely the most realistic indication of the jobs picture possible. And with prices paid soaring far over priced received, margins got crushed even more, as US companies continue to discover with every passing day.
Since over the past five years hedge funds are better known for coming up with ingenious names, than for actually outperforming the market (recall that "the aggregate hedge fund index is now significantly underperforming the S&P 500 (from both the top in 2007 and the lows in 2009"), we hereby wish to do the Honorable Jon Corzine a favor, and save him the money he would otherwise spend on an expensive naming consultant, by offering up the creative services of our audience in conjuring the name for his future hedge fund. So dear ZH readers, take it away, although keep in mind Long-Term Capital Vaporization LP appears to already have been taken by a patent troll (soon to be likely sued by YHOO).
But, but, but... the freeing up of 271.1 million of FaceBerg's shares today, boosting by 60 percent the number that could be traded (freed up from lock-up), was all priced in? It appears not as the share price plunges over 5.5% back into the teens once again. Have no fear though, when they figure out 'social' (and cold-fusion), the 33 analysts who have it as a Buy or Hold will be proven right... only a another billion or two more shares to come...
What's the opposite of bloodbath? Italian and Spanish stock markets are surging today - after lying S&P-like for a few days - with IBEX up over 2% and FTSEMIB up almost 1.5%, both back up to four-month highs. Now up 9% and 12% respectively since the EU Summit, they appear to be reconnecting with post-EU Summit strength from the rest of core-Europe and breaking resistance at the early July highs. Will this mark the top of the range? Who knows. Swiss 2Y rates are still negative - but well off their lowest levels - but what is most interesting is that on a day when these two nations no-short-selling-allowed equity markets are pushing to multi-month highs, their sovereign bonds (which for all intent and purpose represent the critical fulcrum security in the world) are leaking back higher in yield and not enjoying all that enthusiasm. Just as in the US, equity trading volumes have stagnated in Europe as these markets have levitated and bonds stagnated - and the bullish curve moves have retraced more than 40% of their gains post-Draghi.
In what should be the biggst non-news of the day, the NYT is reporting that not only will Jon Corzine not face any criminal prosecution for vaporizing hundreds of millions in client money (which subsequently condensed in the JPM middle office), but will in fact be launching ... wait for it... a hedge fund. "A criminal investigation into the collapse of the brokerage firm MF Global and the disappearance of about $1 billion in customer money is now heading into its final stage without charges expected against any top executives. After 10 months of stitching together evidence on the firm’s demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people involved in the case." And algos... And glitches... And faulty software installs... And some junior person who has long since left the company... and, and, and, lots and lots of passive voice... Because in the Banana republic of the crave, no bundles can ever go to jail, no matter how heinous the crime, which is not to say other places are better: in Thailand you shoot your secretary in the stomach during dinner with an Uzi and you don't even pay a $600 fine. But at least it puts things in perspective. So what is next in store for this former man of power? "Mr. Corzine, in a bid to rebuild his image and engage his passion for trading, is weighing whether to start a hedge fund, according to people with knowledge of his plans. He is currently trading with his family’s wealth. If he is successful as a hedge fund manager, it would be the latest career comeback for a man who was ousted from both the top seat at Goldman Sachs and the New Jersey governor’s mansion." So will Jon will be buying Italian bonds? We don't know. Ask him yourself.
Are we about to see a mini-war on UK soil, if and when Britain decides to storm the Ecuadorian embassy, which moments ago announced it has granted asylum to Julian Assange? From Reuters: "Ecuador granted political asylum to Julian Assange on Thursday, ratcheting up tension in a standoff with Britain which has warned it could revoke the diplomatic status of Quito's embassy in London to allow the extradition of the WikiLeaks founder. The high-profile Australian former hacker has been holed up inside the red-brick embassy in central London for eight weeks since he lost a legal battle to avoid extradition to Sweden, where he is wanted for questioning over rape allegations. Ecuadorean Foreign Minister Ricardo Patino said he feared for the safety and rights of Assange which is why he said his country had decided to grant him asylum. "Ecuador has decided to grant political asylum to Julian Assange," Patino told a news conference in Quito. Ecuador's decision takes what has become an international soap opera to new heights since Assange first angered the United States and its allies by publishing secret U.S. diplomatic cables on his WikiLeaks website." The UK, needless to say, is not happy, and the UK foreign ministry has said it will carry out binding obligation to extradite Assange to Sweden. Looks like posturing is about to hit a crescendo and someone will have to do something. Because foreign politics and diplomacy is (luckily) not central planning.