While there were few nuggets worth mentioning in yesterday's H.4.1 update, one item is certainly worth noting. After we pointed out last week when we noted that there was a record monthly dump of Treasury paper from the Fed's custodial account amounting to some $69 billion, the week ended January 4 has seen yet another outflow, this time amounting to $9 billion in US Treasurys. This is the 5th week in a row of foreigners selling US paper, and while it has yet to match the record 6 weeks of outflows from October (discussed here), the consolidated outflow notional is now a record high at $77 bilion, higher than the previous record of $52 billion. Needless to say banks from around the world are repatriating dollars. The question is what they are converting the USD into, and how much longer will the go on for: the last thin the US can afford is a wholesale dumping of its Treasurys. Because as the chart below vividly demonstrates, the traditional diagonal rise in foreign holdings of US paper has not only pleateaued, but it is in fact declining: a first in the history of the post globalization world.
Equities traded their lowest volume of the week (-19% from yesterday alone). The NFP print this morning provided ammunition for some vol early on but as we drifted into the European close, risk assets in general were pushing lower. Unlike the last few days the circa-Europe-close dip-and-rip only occurred in the equity market today as the USD stayed near its highs and TSYs near their low yields of the day (and high yield credit near its wides of the day) as stocks took off back into the green and meandered either side of VWAP for the afternoon. It seems odd that the afternoon's divergence between TSYs and stocks was not accompanied by Gold or USD weakness (QE hopes) and in fact as we got into the last few minutes, stocks started to push back lower on much larger average trade size but was trapped between VWAP and unchanged on the day. Gold outperformed on the week (+3.4%) just inching out Silver and Oil as they appeared to converge on a 3x beta of the USD 'appreciation' of around 1.2% this week. Treasuries rallied 4-6bps and the curve flattened overall as we saw duration reduction in corporate bonds (with highest quality names (Aaa-Aa3) being net sold). DXY stayed above 81 as the EURUSD scrambled back above 1.27 (down an impressive 1.85% on the week). AUD was the only major to gain relative to the USD on the week (and very marginally). Finally, we saw VIX dropping and stabilize and implied correlation diverged and rose this afternoon which combined with the divergence in risk assets suggests stocks are short-term overdone at best.
The trend of relentless shorting of the Euro currency in the form of non-commercial spec contracts, and as reported by the Commitment of Traders, continues for one more week. As of January 3, EUR shorts rose by another 9%, hitting an unprecedented 138,909 net contracts short - a fresh all time record. What is curious that unlike previously, when an increase in EUR bearishness implicitly meant a increase in USD bullishness, this time that is no longer the case as net spec USD contracts actually declined, and are trading at relatively subdued levels. Overall, this means that FX specs are not playing relative currencies off each other, but are piling into a global European short. Which leads us to the following precautionary observation: just like when a price collapse in gold is required, usually enacted by the reflexive relationship between futures and the underlying, in the form of a margin hike, we wonder how long before Europe, or even the Fed which most certainly does not want a strong dollar, directs the CME to hike EC maintenance margins by some ungodly amount. Because whatever works to keep paper gold weak will most certainly help to keep the dollar even weaker. And with a net drawdown of nearly 250,000 contracts from EUR highs in April to current lows, a EUR margin hike may have as profound an impact as QE, considering the massive amount of shorts currently holed up and demanding the collapse of Europe.
We discussed the start of a new breed of bond issuance in Europe earlier in the week. The Ponzi Bond was born and today Banco Espirito Santo, of Portugal, came to the market (was there really an external demand?) and issued EUR1bn of three-year debt guaranteed by none other than the 16.4% yielding-equivalent three-year Portuguese government. Peter Tchir notes that "If the Japanese created the 'zombie' banks, the Europeans are perfecting them." On the bright side, the ECB has saved itself the effort of creating a "bad bank" and has just become one.
One of the main reasons why we have been not so focused on paper representations of real currencies (i.e., gold and silver) is that ever since the MF Global debacle, in which it became all too clear that if physical gold can be "hypothecated" via conflicting ownership, then there is no way that paper versions of precious metals are viable and indeed credible. After all, the only real owner at the end of the day is the certificate holder, which as we have explained before, is none other than DTCC's Cede & Co. Good luck collecting when the daisy chain of counterparties starts falling. Which leaves physical. And for a good sense of what the "real" price of the metal is, not one determined by institutions whose interest it is to preserve the hegemony of paper, one can either try to procure gold and silver at a retail merchant, or one can look to the premium of a dedicated physical ETF over spot. Such as Eric Sprott's PSLV which as of today is trading at an all time high premium of 30%! In other words, someone is willing to pay up to 30% over spot for the right to be closer to the physical metal than merely have a paper claim on a paper claim (pre hyper rehypothecation and what not). Incidentally the last NAV premium over spot record was back in April 2011 just as silver went parabolic and the entire commodity complex experienced the infamous May 1 takedown when it collapsed by $8 dollars in milliseconds on glaringly obvious coordinated intervention. Said otherwise, like back then, so now there is an actual shortage, manifesting itself in the premium. And while last time its was the price plunge which eased supply needs, we are not so sure how one will be able to spin a collapse of the current, far lower paper silver price.
We have previously eschewed the constant refrain of any and every talking head who pounds the table on adding to equity risk on the basis of 'low' interest rates - why wouldn't you earn the higher dividend? or how much lower can rates go? However, aside from the drawdown-risk and empirical failure of the stocks-bonds arguments, there are three very pressing reasons currently for reconsidering the status quo of bonds against equities. Volatility in equity markets has been considerably higher than bonds and even at elevated earnings yields, it is no surprise that risk-savvy investors prefer a 'safer' lower-vol yield. Furthermore, when compared to a long-run modeling of business cycle shifts in stocks and high yield credit markets, stocks remain notably expensive to the credit cycle. Simply put, corporate bonds are at best offering better value than stocks if your macro position is bullish (and are forced to put money to work) and at worst suggest being beta-hedged is the best idea (or market-neutral) or in Treasuries.
Commodities such as copper have led the market for years; recently they've rolled over while the stock market surges higher. Once again, either historic correlations have been decisively severed or there is a gargantuan divergence that's about to be resolved. Sentiment readings are firmly in extreme bullish territory, but hey, maybe the market will reward the majority with a rally that feeds on rising complacency. And maybe the truism "volume is the weapon of the bull" is also voided, as low volume rallies may well lead to lower-volume rallies. The market has been acting as if all these signs are bullish. Maybe, maybe not. Meanwhile, the witches are cackling quietly over their bubbling brew, and it certainly sounds like some evil is being conjured up.
If there was one analogy for the failing artificial Eurozone system we had not heard so far, was one comparing it to Hogwarts (thank you Harry Potter). Now, courtesy of Tullet Prebon that is no longer the case: "Albus Mario Dumbledore and Harry Constancio Potter are due to assemble next Thursday for the next episode of the sovereign Voldemort saga. It is foretold that during the press conference the headmaster will unveil his wand and deliver an almighty spell, ‘Expelliarmus Debtus’, whereupon the dreaded Troika Dementors will be vaporised disappearing into the austerity vortex, leaving the Muggles to live happily ever after."
Last month, global equity markets fairly demanded that the ECB hurry up and print, through buying euro zone debt. Effete euro elites publicly demurred at first, insisting that unlike crass Anglo-Saxons, they didn’t let financial markets push them around. Shortly thereafter, to markets’ thrill, LTRO was launched, i.e. backdoor money printing, since any sentient investor realizes that the debt being bought by the ECB is effectively like a loan to a family member: One should only expect repayment if the recipient has a chance encounter with a winning lottery ticket. Market euphoria over this intensely desired outcome was briefly interrupted a week later, when investors had a look at the shockingly bloated ECB balance sheet, causing a Euro chart breakdown, with a concomitant breakout for the dollar. This now unremitting dollar strength will doubtless temper company outlooks due to be delivered in the next few weeks. Ironically, it is the most crowded trade of late, the Dow Dividend Darlings, whose earnings are likely to be singularly impacted by this newfound dollar strength, as at current rates the dollar is looking to be ~10% higher in H1/12 vs. H1/11.
At least the altitude, but certainly not attitude, challenged French president has finally jumped the shark when it comes to fire and brimstone pronouncements of mutual assured destruction:
- SARKOZY "END OF EURO WOULD MEAN END OF EUROPE, END OF PEACE" - BBG
Or... it would mean the end of the current generation of crony, corrupt, and criminally stupid leaders. Because last we checked, the Euro just celebrated its 10th birthday (with a vast majority wishing said anniversary had never occurred), and Europe was quite "war free" in the days before the globalist wet dream currency. But what do we know.
Despite the barrage of geopolitical headlines involving Iran, and as of today, the US and Israel, especially as pertains to wargame exercises in the Straits of Hormuz, a different, and potentially much more important story is to be found in the country's capital markets, and specifically its currency, which has continued to tumble ever since Obama signed the Iran financial boycott on New Year's Day as reported here. And, as we predicted, it is the aftershocks of the boycott which may have the most adverse impact on geopolitics. Because if the Iran regime finds itself in a lose-lose situation with its economy imploding and its currency crashing, the opportunity cost of doing something very irrational, from a military standpoint or otherwise, gets lower and lower. Then again, something tells us the US administration has been well aware of this sequence of events all along. Here is Art Cashing explaining it all.
It just may turn out that Europe's strategic "plan" of kicking the can down the road indefinitely, or at least until aliens can come down and bail out the global central banking cabal - aka the Deus Ex Alpha Centauri plan - may have worked! In a rather curious announcement, the SETI website of UC Berkeley has announced that it has found signals that "look similar to what we think might be produced from an extraterrestrial technology. They are narrow in frequency, much narrower than would be produced by any known astrophysical phenomena, and they drift in frequency with time, as we would expect because of the doppler effect imposed by the relative motion of the transmitter and the receiving radio telescope." And in the off case that said aliens prove to have an atavism to rude European waiters, at least Paul Krugman will be delighted: after all there is nothing better for the economic voodoo shamans out there than intergallactic warfare. Then again, since Keynesianism appears to be a popular universal delusion, we wouldn't be surprised if it is us who ends up having to bailout them...
"What we have on our hands is a good old fashioned quagmire" is how Morgan Stanley's Mike Wilson sets up his surprisingly non-sheep-like perspective on the troubles that US equity investors may be about to face. Expanding on MS's bearish strategic (fundamental) forecast, that we discussed earlier in the week, Wilson combines the 'liquidity vs negative-real-rate' thesis (that the Fed's liquidity is perhaps no longer 'good' for stocks) with his own views on ECRI's weakness (very 2008-like in relation to ECO surprises), household debt deleveraging (more and longer), how much QE3 is already priced in and what will its effect be when it comes (less and less positive in nominal and real terms), investor sentiment (very bullish), long-term technicals (weak breadth), and short-term earnings expectations (deteriorating and weighted to 'weak' financials to end with the pragmatic realist perspective that perhaps 'the gig is up'.
Looks like the Anonymous hackers continue having fun at the expense of Stratfor's George Friedman... and its clients. In an mass email sent out earlier spoofing the account of Friedman and blasted to all the Stratfor clients, the hacked account stated that going forward all Stratfor premium content would be free, and further, would "like to hear from our loyal client base as to our handling of the recent intrusion by those deranged, sexually deviant criminal hacker terrorist masterminds." Unfortunately, now that the email addresses of thousands of highly placed individuals are out in the open, we believe this is merely the start of comparable spoofing, which will likely end up with disturbing results. In the meantime, Stratfor's website continues to be down.