One wonders: at what price does the squeeze of the collateral-scarce (as per today's ongoing negative GOFO) yellow metal begin now that Bernanke has made it clear (supposedly) that the new gameplan is just more of the same old?
Let us be blunt: Our capitalist system is approaching failure. Or, perhaps better said: Our marginally capitalist, partly-free market systems are approaching a massive collapse. Not because of what capitalism is, mind you, but because the powers that be have bastardized it. Capitalism can bear many distortions and abuses, but it is not indestructible. And, make no mistake, the ‘capitalist’ system we have today has been massively corrupted, so much so that it’s sagging under the load... and will continue to do so until the proverbial straw breaks its back.
Commenting on the divergence between the bond market's Taper-On reaction and the equity markets Taper-off reaction amid the total lack of clarity from the FOMC, CNBC's Rick Santelli asks the (rhetorical) question that everyone should ask: "[What the Fed minutes said] is, listen, we have to wait for bigger confirmation that the economy is doing better; and for that, we're going to look at the employment side. [At the same time] we have the fewest people working that can work in 30 years, and all-time-record-high profits for corporations. Now, does that strategy sound rational to you?" It seems, now that Bernanke has seemingly promised that it will really never end, that Santelli's question will become increasingly critical in this country.
The punchline (as far as markets are concerned) of Bernanke's Q&A appears to be: Inflation and jobs signal more Fed stimulus needed and that Tapering does not end stimulus. In other words - highly accomodative policy needed for foreseeable future:
BERNANKE: 'TOO EARLY' TO SAY U.S. 'WEATHERED FISCAL' RESTRAINT
BERNANKE SAYS INFLATION, JOBS SIGNAL MORE FED STIMULUS NEEDED
So on one hand Bernanke admitted he had to pop the HY bubble with the Hilsenrath leaks a few weeks ago (talk the market down), but is happy to take the equity gains in hopes they will trickle down to wealth effect, inflation and employment even if credit is spooked (and the bond market technically corrupted).
So keep buying (anything) - they'll always be a greater fool (The Fed) to sell to, no matter how much we destroy the markets (yes, collateral is short) until the economy is entirely back on its feet (inflation, jobs, or anything we decide).
On Monday it was Alcoa, now it is Yum! Brands' turn. The food company, best known for its KFC mystery meat, and over-reliance on a suddenly careening China just reported results which were mixed. Revenue of $2.904 billion was less than the expected $2.92 billion and was 8% lower than the $3.2 billion reported a year ago. Operating profit excluding refranchising gains and losses was $358MM, below expectations of $375MM, leading to a EBIT margin of 12.5% also substantially less than the 14.5% reported a year ago. In short, worldwide operating profit crashed 20% including a 63% drop in China. But thanks to various below the line adjustments, including a tax rate of 22.1% or lower compared to the 23.9% a year ago, the company's EPS of $0.56 beat expectations of $0.54.
Bonds and silver ended the day lower, gold and stocks unch, and WTI crude (and RBOB - back over $3.00) notably higher. While the Nasdaq, Russell, and Trannies are comfortably above the FOMC meeting levels (from 6/19), the Dow and S&P struggled to hold it into the close after the extreme swings that the FOMC minutes dragged through the markets. Maria B might say 'off the lows', others may say 'off the highs', but it seems the machines had it all under control as the S&P 500 closed at VWAP (amid the total lack of clarity that the minutes provided). Financials underperformed (but remain green from FOMC 6/19) along with energy - as Brent-WTI was crushed to below $2, historically average around $1.
After the angst that he created when he last spoke, and today's shenanigans after the Minutes, we can only imagine how his presentation at the NBER's Boston conference will impact the markets. We would be surprised if anything new came from Bernanke's presentation on "The Last 100 Years of The Federal Reserve" but the following Q&A (as we noted here) will be trial-balloon after trial-balloon we suspect as he prepares for next week's Humphrey-Hawkins.
Bernanke gives a speech today in Boston beginning at 4:10 PM entitled “The First 100 Years of the Federal Reserve: The Policy Record, Lessons Learned, and Prospects for the Future”. There will be a post-speech ‘Question & Answer’ period. This is an ideal time for him to fine-tune the Fed’s complicated message to markets. He can use this opportunity to send up a trial balloon for next week’s semi-annual report to Congress. We suspect Bernanke could even have his staffers leak questions to ask to those in the audience in order to frame and direct the conversation. We believe the Fed has drifted toward acceptance of tapering because of concerns about: 1) financial instability, 2) asset bubbles and 3) amassing difficulties for its exit strategies, not because economic nirvana has been reached. Therefore, we believe the decision to taper at one of the next two meeting is almost a certainty.
The Fed may have finally taken speaking out of all sides of its mouth a step too far. Enter GMP's Adrian Miller with the best roundup of the sheer indecipherable gibberish just excreted by the Fed:
- "We are not sure how you can go from ‘many’ needing to see labor gains before tapering begins to half seeing bond buying ending by year end. At the same time, ‘many’ other Fed officials saw bond buying into 2014”
- "We are pretty good at math, but we are having trouble adding up the ‘many,’ ‘several’ and ‘about half’ to equal 100%
- FOMC members appear to have ‘‘decided to cover every possible scenario," and "left us with no clear picture as to what the group is thinking”
Great absurdist summary of a centrally-planned world that has been taken out straight from the pages of the Onion, but honestly, at this point who even cares anymore.
UPDATE: All Change; now the knee-jerk rally in bonds and stocks is fading rapidly (and the USD is bid). S&P 500 and EURUSD have now retraced all gains.
It seems the markets are as confused as the Fed members. The initial knee-jerk bid for bonds, stocks, and gold was retraced soon after; only to be ignored for another push higher as we post. Interestingly FX markets are 'less' undecided - it is taper-off as the USD is being offered everywhere with little retrace. As the Russell 2000 hits an all-time intrday high, equities still feel unstable (and VIX dropped to 14.06%). It seems the "if confused buy" meme may just hit a wall today?
Discord appears to be the best word to describe the FOMC minutes but the baffle 'em with bullshit seems like the order of the day:
- FED SAYS SEVERAL ON FOMC SAW QE TAPERING LIKELY WARRANTED SOON
- FED SAYS MANY ON FOMC SAID LABOR GAINS NEEDED BEFORE QE TAPER
- FED SAYS FOMC SAW FISCAL POLICY RESTRAINING ECONOMIC GROWTH
As a reminder, uberdove Charles Evans wanted 200K or more in job gains in the past two quarters. Here's the thing - the average monthly job gain in the past 6 months is... 201,000. As for the punchline:
- HALF OF THE FED INDICATED IT LIKELY WOULD BE APPROPRIATE TO END ASSET PURCHASES LATE THIS YEAR - NOT SLOW END
- A FEW PARTICIPANTS INDICATED THAT THE COMMITTEE SHOULD SLOW OR STOP ITS PURCHASES AT THE JUNE MEETING - "OR STOP"
Communication matters apparently. But the key is that taper appears (forget about an all out stop) to be coming soon - and as usual - it's all data-dependent. Aside from that, it is the usual baffle with BS schtick. Most importantly, with half the Fed saying not just taper, but flat out end to QE by 2014, we now have a full blown mutiny in the Fed.
From 'Tapering' to concluding asset-purchases, and from rate-hike-expectations to exit strategies (and what other indicators may be worth watching), BofAML previews the all-important release of the FOMC's last meeting minutes.
Just like yesterday's 3 Year $32 billion bond auction, so today's 9-year 10-month $21 billion re-reopening of Cusip VB3 was largely much better than last month's auction, if not quite stellar, driven likely by the jump in rates, which rose from 1.81% in May, to 2.21% in June to 2.67% today, which was on top of the 2.669% When Issued, and the highest auction yield since July 2011 or right before the first debt ceiling crisis. Today's Bid To Cover, while better than last month's ugly 2.53, was still the second worst since August's 2.49. Finally, the internals were uninspiring, with Dealers taking down $9.5 billion of the precious collateral (10 Year was once again special today at -0.30%) or 45.2% of the total meaning Bernanke can proceed to monetize another $10 or so billion in the 15 Year range for one more month, slightly higher than the LTM average, while Indirects left with 38.6% (in light with the average), and Directs got 16.3% of the auction. Altogether a forgettable auction that was just good enough to relieve the now monthly collateral shortage that gets worst just before auctions.
Nanex thinks this is blatant manipulation. We don't: we think the following rollercoastering, fractalized charts (shown both zoomed out and zoomed in) of intraday trading in AAPL stock merely confirm what happens when the only trading is that done by momentum ignition algos desperate to force stop cascades in a world devoid of actual volume, when the smallest trading burst leads to a complete collapse of the bid/ask stack. Although who knows: it may well be both...