Rule #1 that is cast in stone is "Preservation of Capital." There is certainly a place for some speculation at the edges but you do not, ever, put the core of your capital at risk. You may believe what you like about Europe. You may be wildly optimistic or incredibly pessimistic but what cannot be denied is that tremendous risk is currently present and that things could go wildly erratic in one direction or another. Economics, outside of the classroom, never exists without its cousin politics but the political considerations are now so huge and the money at stake is now so large that the sheer size of the capital on the table should and ultimately will give everyone pause. We are about to arrive at moments where the notion of "muddling through" will no longer be possible.
Tuesday has see little in the way of macroeconomic data, and much focus so far has remained on speculation over whether the ECB will buy periphery debt. Comments from the German ECB representative Jorge Asmussen overnight that he backs the ECB buying periphery debt as a means to prevent the "disintegration of the Euro", a seeming change in stance given that the Bundesbank continues to opposed such measures, lifted risk assets in early trade. As such, the Spanish and Italian spreads over the benchmark Bund are seen tighter by 12.9bps and 14.4bps on the day. Spain's 12- and 18-month T-bill was also well received, the country selling slightly more than the indicative range at EUR 4.512bln, with lower yields, though only the 18-month had a stronger bid/cover. Both the Spanish and the Italian 2-year yields have declined to lows last seen in May of this year. Similarly, two separate comments from German Christian Democratic Union (CDU) lawmakers concerning Greece and the possibility of making "small concessions" for the country so long as they lie within the existing programme also boosted risk appetite, as the probability of a Greek exit looks much less likely if it has the full support of Germany. Elsewhere, the UK unexpectedly posted a budget deficit in July as corporation tax receipts plunged, though this was slightly skewed due to the closure of Total's Elgin gas field in the North Sea. Today also saw UK CBI orders for August plunge, with the industrial order book balance at its lowest this year led by a weakening in the consumer goods sector.
A month ago, RBS' Nomura's permarealist Bob Janjuah wrnd tht mrtks r set 4 a squeeze breakout. He was right. Today, he has sent out an update, saying the party is over, the ramp is finished, and the time to sohrt ahead of a "major risk off phase" is here: "my stop loss on the risk off call effective immediately is a consecutive weekly close on the S&P500 at or above 1450. As the Global Macro Strategy team is looking for Mr Bernanke to disappoint markets at Jackson Hole next week, and also because we are confident that markets will soon discover that neither the ECB nor Eurozone politicians will actually be able to deliver on their ‘promises’, we are hopeful that our stop losses will not be triggered. For now we are happy to risk 30 S&P points against us, in order to potentially pick up 300 S&P points in our favour."
- German central bank warns country’s financial health not a given (WaPo)
- Secret Libor Committee Clings to Anonymity After Rigging Scandal (Bloomberg)
- Peru Declares State of Emergency to Quell Violent Mining Protests (Dow Jones)
- Euro-Area Economic Adjustment Only Half Complete, Moody’s Says (Bloomberg)
- Wall Street Leaderless in Rules Fight as Dimon Diminished (Bloomberg)
- China Swaps Drop From Three-Month High as PBOC Adds Record Cash (Bloomberg)
- China invest $1 billion in U.S. Cheniere's LNG plant, Blackstone to act as intermediary buffer (FT, Reuters)
- Romney Offers Lukewarm Support for Fed Audit - Hilsenrath (WSJ)
- U.K. Unexpectedly Posts Deficit as Corporation Taxes Plunge (Bloomberg)
- Obama issues military threat to Syria (FT)
- Merkel Allies Signal Concessions on Greece Before Samaras Visit (Bloomberg)
- Chinese banks warned of foreign exchange risks (China Daily)
By now it should be painfully clear to involved that the Greek economy is nothing but a zombie, whose funding shortfalls and other deficit needs are sustained each month only courtesy of constantly new and improved "financial engineering" ponzi creations out of the ECB, the ELA, and other interlinked funding mechanisms which are merely a transfer of German cash into empty peripheral coffers. And while the attention of the world has moved on, at least for the time being, from the small country which has been left for dead with the assumption that Europe will do the bare minimum to keep it alive, but not more, Greece once again reminds us that not only does it still pretend to be alive, but that the zombie is getting hungry, and want to eat.
This month marks the 50th anniversary of Thomas Kuhn’s The Structure of Scientific Revolutions, one of the landmark philosophical texts of the last century. The central thesis of the book is that science advances in fits and starts, clustered around the advent of new 'Paradigms' - a term that Kuhn introduced in the book and much of academia subsequently coopted as their own. This was a novel thought for the times, since the conventional philosophy held that science advanced through the ages in plodding but rigorous steps. Kuhn’s observation about science is equally applicable to capital markets, for the range of 'Paradigm shifts' underway goes a long way to explaining everything from why companies refuse to invest to why earnings multiples on U.S. stocks remain so low. Today, in celebration of Kuhn's opus, ConvergEx's Nick Colas offers up a list of the 'Top 10 Paradigm Shifts' currently underway; and notes that new paradigms don't often have as much to them as the old ideas they replace. They are often actually inferior. Over time they get their bearings, yes. But the transition is rough.
Back on March 7, 2011, when discussing the phenomenon of Zero Hedge, prominent tech blogger and recent Bloomberg paid content expansion Paul Kedrosky had this to say: "After prolonged exposure [to Zero Hedge] I have to turn off my wi-fi not to sell all my U.S. dollars for physical gold, start an anti–Goldman Sachs blog and buy a Kansas soybean farm protected by a moat. But here is the crazy thing: Zero Hedge — a morning zoo of pessimistic financial blogging — is fun. Granted, you (O.K., I) can't read it for long without the aforementioned soybean-farmer effect, but the downbeat site has found an entertaining niche at the intersection of The X-Files, finance and tireless anti–Goldman Sachs–ishness. So while I don't read Zero Hedge regularly — it's too bearish, too conspiratorial and too much of an intellectual monoculture — I like knowing that it exists." This is all poetically ironic. Because in the 15 months since this statement made the public record, gold has returned 13.24% (after hitting an all time record high) while Goldman has declined by 33.85%. But most entertaining is that moments ago soybean futures just hit an all time high, and are now up 35.89% since March 7, 2011.
Buffett Joins Team Whitney; Sees Muni Pain Ahead As He Unwinds Half Of His Bullish CDS Exposure PrematurelySubmitted by Tyler Durden on 08/20/2012 - 21:42
Just under two years ago, Meredith Whitney made a much maligned, if very vocal call, that hundreds of US municipalities will file for bankruptcy. She also put a timestamp on the call, which in retrospect was her downfall, because while she will ultimately proven 100% correct about the actual event, the fact that she was off temporally (making it seem like a trading call instead of a fundamental observation) merely had a dilutive impact of the statement. As a result she was initially taken seriously, causing a big hit to the muni market, only to be largely ignored subsequently even following several prominent California bankruptcies. This is all about to change as none other than Warren Buffett has slashed half of his entire municipal exposure, in what the WSJ has dubbed a "red flag" for the municipal-bond market. Perhaps another way of calling it is the second coming of Meredith Whitney's muni call, this time however from an institutionalized permabull.
The data suggests that relative to other tech companies AAPL is significantly overvalued. And going forward there is no guarantee that AAPL can justify today’s value by keeping up its dominance of the sector. Tech is an extremely fickle and fast-changing sector where one year’s turkey can be next year’s prize pig. And AAPL’s product lineup is still dominated by products developed under the charge of Steve Jobs — it will take a while longer to fully assess whether or not AAPL can succeed at the same magnitude over the entire product cycle from conception to sales without his leadership.
The S&P500 may be soaring to new 2012 highs, and has its all time highs within short squeeze distance, yet paradoxically this is arguably the worst possible news to the cadre of US hedge fund managers used to beating the market year after year, thus justifying their (increasingly more unsustainable) 2 and 20 fees. The reason: according to just a released report quantifying hedge fund performance so far in 2012, with an average return of 4.6% as of August 3 compared to a 12% return for the S&P, a pathetic 11% of all hedge funds are beating S&P year to date. This is the worst yearly aggregate S&P 500 underperformance by the hedge fund industry in history, and also explains why the smooth sailing in the S&P500 belies the fact that nearly every single hedge fund manager (and at least 89% of all) is currently panicking like never before knowing very well there are only 4 more months left to beat the S&P or face terminal redemption requests. And with $1.2 trillion in gross equity positions, the day of redemption reckoning at the end of the year (and just after September 30 for that matter as well) could be the most painful yet. it also explains why, just like every other quarter in which career risk is at all time highs, HFs are dumping everything not nailed down and buying up AAPL, which as of June 30 was held by an all time high 230 hedge funds (more on that later).
As Bill Gross has been more than happy to demonstrate on several recent occasions, the recent sell off in US Treasurys has been sharp and violent, wiping out all year to date capital gains in the 10 Year in a few short weeks. The flipside to that is that this is not the first such headfake in the bond market, and it certainly will not be the last as David Rosenberg shows today with a chart summarizing all the "spasms" experienced in the 10 year Treasury since 2007. In fact, based on the average duration and move severity, the 10 Year sell off may not only continue for twice as long (on average it has been 49 days, and we are only 19 days in in the current sell off episode), but the final tally may be a further selloff well into the 2% range (the average decline in yield is 88 bps, double the 43 bps widening to date). At the end of the day will it make much of a difference? Very likely not: after all the deflationary implosion has far more to go before all the central banks engage in coordinated easing, and as a result superglue the CTRL and P buttons in the on position, leading to the final round in the global currency devaluation race.
In just four short years, our “enlightened” policy-makers have slowed money velocity to depths never seen in the Great Depression. Hard to believe, but the guy who made a career out of Monday-morning quarterbacking the Great Depression has already proven himself a bigger idiot than all of his predecessors (and in less than half the time!!). During the Great Depression, monetary base was expanded in response to slowing economic activity, in other words it was reactive (here’s a graph) . They waited until the forest was ablaze before breaking out the hoses, and for that they’ve been rightly criticized. Our “proactive” Fed elected to hose down a forest that wasn’t actually on fire, with gasoline, and the results speak for themselves. With the IMF recently lowering its 2012 US GDP growth forecast to 2%, while the monetary base is expanding at about a 5% clip, know that velocity of money is grinding lower every time you breathe.
UPDATE: AAPL cracked the demonic $666 level after-hours
For a moment this morning some were even thinking this would be the day, this could be the one where volumes come back, ranges expand, and some level of risk sensitivity returns; but alas, despite all the AAPL pumping and Silver surging, Equities ended the day unch on weak volumes (actually cash equities ended very small down for the 16th of the last 17 Monday red closes). The S&P 500 e-mini future (ES) intraday range was a remarkably low 8.5pts, volume at its new post-Knight normal (half-normal), average trade-size lower than average, and risk-assets in general were highly correlated during the day-session as Treasuries also closed unchanged, USD down very modestly and Oil unch. Financials and Tech & Healthcare and Utilities were the only sectors in the green on the day (in an awkward risk on and off way). Copper dumped as Silver surged 2.6% on the day to two-month highs. AAPL also surged 2.6% (up 7% in the last 6 days - a level that has repeatedly been followed by pullbacks this year) as everyone's new favorite IPO (MANU) lost 2.6% (even as FB gained almost 5% closing just below $20). VIX gained 0.6 vols ending above 14% (but drifted lower from the open). While the markets main seem zombie-like, there were some intraday moves in FX and Treasury markets - but these were dominant during Europe's open and faded into the US day-session.
It is hard to find fiscal situations that are worse than Japan's. The gross government debt/GDP ratio, at more than 200%, is the worst among the major developed economies. Yet yields on Japanese government bonds (JGBs) have not only been among the lowest, they have also been stable, even during the recent deterioration during the European debt crisis. This apparent contravention of the laws of economics is both an enigma for foreign investors and the reason for them to expect fiscal collapse as a result of a sharp rise in selling pressure in the JGB market. As Goldman notes, the European debt crisis has led to an increase in market sensitivity to sovereign risk in general and questions remain on when to expect the tensions in the JGB market and the fiscal deficit to reach a breaking point in Japan. In the following 14 charts, we explore the sustainability of fiscal deficit financing in Japan and Goldman addresses the JGB puzzles.