The last week has seen quite dramatic drops in the prices of a little-discussed but oh-so-critical asset-class in the last housing bubble's 'pop'. Having just crossed above 'Lehman' levels, ABX (residential) and CMBX (commercial) credit indices have seen their biggest weekly drop in 20 months as both rates and credit concerns appear to be on the rise. Perhaps it is this price action that has spooked Fitch's structured products team, or simply the un-sustainability (as we discussed here, here and here most recently) that has the ratings agency on the defensive, noting that, "the recent home price gains recorded in several residential markets are outpacing improvements in fundamentals and could stall or possibly reverse." Simply put, "demand is artificially high... and supply is artificially low."
Canadian Natural Resources Minister Joe Oliver said natural resources are the cornerstone of the federal and provincial economies. The U.S. economy, on the road to modest recovery, remains central to a Canadian oil market that relies heavily on exports. Oliver said at an investment conference in Quebec that the natural resources sector represents about 20 percent of the gross domestic product. The Canadian economy has suffered, however, because there aren't many new conduits to get oil exports to foreign markets. The potential to reach Asian could provide a relief valve for the Canadian economy, while the option still exists to ship oil through the United States for exports. With opposition mounting along the borders, however, Canada's export-driven economy may become landlocked.
Because sometimes you just have to laugh...
The Japanese-bond-stuffed banks of the world (and the collateralizers-of-last-resort) are breathing a sigh of relief at the larger-than-average open-market-operation from the BoJ today (JOMO). From what looked like certain doom and a limit-down open, the JGB market rallied magnificently (along with stocks) out of the gate - almost as if someone 'knew' (which they did here) that the BoJ would come to the rescue today. Remember, as we noted earlier, that unlike the Fed, the BoJ does not have a set size and time schedule (for the full-month in advance aside from broad brush estimates) for its bond-monetization (though we suspect the BoJ will rapidly evolve to a smaller more frequent intervention); which likely accounts for the explosive rise in volatility that is being witnessed on a daily basis in the quadrillion JPY market. Japanese stocks, after an exuberant BTFD opening, have gone one-way - down - and are now testing towards negative on the day. USDJPY tested up over 102.50 in a vain attempt to spark the green equity open but that is fading now too - breaking 102.00. It looks like being another night of correlation trading for Japanese bond and stock investors as Kuroda unleashes a Trillion-JPY-JOMO...
While the world is vigorously searching for what Fed "Tapering" means, it seems the professionals in the financial markets are just as intrigued. With equity bulls yelling "buy" and bond bulls screaming "bye", it seems the story count within Bloomberg for the word "taper" is as close a proxy for bond market volatility as anything else we can find.
For most people, the collapse of civilizations is a subject much more appetizingly viewed in the rear-view mirror than straight ahead down whatever path or roadway we are on. Jared Diamond wrote about the collapse of earlier civilizations to great acclaim and brisk sales, in a nimbus of unimpeachable respectability. The stories he told about bygone cultures gone to seed were, above all, dramatic. No reviewers or other intellectual auditors dissed him for suggesting that empires inevitably run aground on the shoals of resource depletion, population overshoot, changes in the weather, and the diminishing returns of complexity. Yet these are exactly the same problems that industrial-technocratic societies face today, and those of us who venture to discuss them are consigned to a tin-foil-hat brigade, along with the UFO abductees and Bigfoot trackers.
"We continue to maintain a long equity risk exposure through companies least exposed to the business cycle, whilst favouring receiving rates in developed countries most prone to a loss of economic momentum as other countries, notably Japan, weaken their currencies through the pursuit of QE. We also retain a structural long position in the US dollar and remain long yen assets [currency hedged] via the Japanese stock market.... One of our core investment themes remains the fight against deflation launched by Japanese authorities through QE of historic proportions. We believe that such radical QE creates the perfect recipe for a weaker yen and booming Japanese equities. The Nikkei rallied by 11.8% in yen terms in April 2013, the best monthly return since December 2009, and has now gained 61% from the November 2012 low. Against this background, the Fund recorded a gain of 30 bps from Japanese equities."
While the annual Harvard senior survey of graduating students always provides an informative glimpse into the past, present and future of graduates from the US' most prestigious (whether or not this is deserved is a different question) institution, the topics most interesting for us and our readers revolve, not surprisingly, around money. Here are the key observations of what students in all "non-Harvard" universities across the nation may be missing (or not).
With everything else in uncharted territory: central bank balance sheets, the stock market, global debt, it was only a matter of time before that old-school indicator of exuberance - margin debt - also joined the ranks of things that are "off the charts." Never one to disappoint (except when Waddell and Reed dumps a "massive" 75,000 ES trade which promptly kills its liquidity replenishment points of course), the NYSE has reported that April margin debt, as expected, hit all time records, just in time for the S&P's own all time high fireworks spectacular. Rising from the just shy of summer of 2007 levels posted in March, or $380 billion, April margin debt not surprisingly rose to a record high of $384 billion. Additionally, even when netting out account credit metrics, such as Free Credit Cash and Credit Balances in margin accounts, total investor net worth just hit an all time record low of ($106) billion.
In a world of shrinking 'quality' collateral to back the ever-increasing leverage and reach-for-yield practicalities of a centrally-repressed market, it seems the actions of the BoJ (as we warned over a month ago) may have just removed the last best hope for keeping Japanese rates stable. As the chart below shows, JGB volatility is simply off-the-scale relative to the other major bond markets. Sustainable? How much return (yield) would you demand for such risk (volatility) before just jettisoning the position?
Ron Paul kept a sign on his desk during his time in Congress that read: "Don't steal. The government hates competition." These days, perhaps a more appropriate saying would be – "Don’t violate people's civil liberties. The government hates competition." In the Land of the Free, it would appear they actually want to make this a law with the introiduction of bill S1057, "prohibiting the use of unmanned aircraft systems by private individuals to conduct surveillance of other private persons." So what the esteemed Senators are telling us is that it’s bad (and hence should be unlawful) to invade people’s privacy. Unless the government is doing it, in which case it’s just fine. Simply put, "No Drones for you."
Syria Goes Hot: Russia To Deliver Weapons, Deploys Air Defense; Israel Warns Russia; Obama Demands No Fly ZoneSubmitted by Tyler Durden on 05/28/2013 - 16:32
Those who were intently following the USDJPY pair formerly known as the stock market today missed the biggest news of the day: the proxy war in Syria just went hot, following a confluence of news, first that Russia insisted "it would deliver anti-aircraft missiles to Syria despite international criticism, as fears of spillover from the conflict grew" and in logical retaliation to yesterday's decision by Europe to lift an arms embargo to the Al Qaeda-supported, Qatari mercenaries operating in Syria, also known as "rebels. This lead Israel's defense minister Moshe Yaalon to immediately signal that "its military is prepared to strike shipments of advanced Russian weapons to Syria." Meanwhile back in the US "the White House has asked the Pentagon to draw up plans for a no-fly zone inside Syria that would be enforced by the U.S. and other countries such as France and Great Britain, two administration officials told The Daily Beast." And just to make it very clear that Russia is not bluffing, it announced overnight that its four regiments of S-300 air defense systems have been deployed at the Ashuluk firing range in southern Russia as part of another snap combat readiness check of the Russian armed forces "The missions will be carried out in conditions of heavy electronic warfare to test the capabilities of the air defense units to the highest limit." And to think: yet another threat of a global war over some natgas pipelines from Qatar to Europe, and a threat to Gazprom's monopoly.
UPDATE: S&P 500 futures plunged back to the lows of the day as soon as cash closed.
The streak is alive. For the 20th Tuesday in a row, The Dow Jones Industrials have closed green. With an average gain of 80 points, since 1/25, the Dow is up an impressive 11% but absent Tuesdays is merely unchanged at +0.2%. Today saw significantly volatility in stocks though with Nikkei and S&P futures giving up all their gains at one point only to bounce back into the close for a glorious victory. Volatility was everywhere as the collapse of the JGB market spills over. VIX rose 0.5 vols to 14.5% (disagreeing with stocks). FX markets jerked and gapped with JPY ending down around 1% from Friday's close. Commodities diverged today with Copper and Oil rising and Gold and Silver sliding even with the 0.75% gain on the USD this week. High yield credit slid lower all day but we suspect this was dominated by rate risk as Treasury volatility exploded. 10Y yields rose by their most (+16.5bps or 5-sigma) since Oct 2011 to close at their highest since April 2012.
Remember the face on the left: it belongs to Mike Hedlund, and it will become much more popular in the coming months and years, because following a historic court decision, Mike just saw the bulk of his student loans discharged following a 10 year battle with the US legal system and his student loan lenders. A decision that will open the floodgates for countless cases just like his, leading to yet another taxpayer funded bailout amounting to hundreds of billions in deferred dollars (read government debt that has to be inflated away) and for which the final bill will again be footed by... you dear US taxpayer.
We must have discovered a new bug in excel, because when we took median new home prices (which a week ago hit an all time high) which we then divided by the average American's purchasing power expressed through real disposable income per capita, we got this chart...