The gap between the truth vs. the lies that pass for truth in the media has never been so wide. But living a lie is very destructive, so it’s important to cross this gap. Today I want to clear up one of the most important lies reinforced by the media–the idea that we have sovereign countries.
No doubt most of you have heard of the sovereign debt crisis that so many countries are facing. We hear endless economists, reporters, and billionaire hedge fund raiders talk about it. But the phrase they use is fictitious. It is a fabrication of the Ivy League, Wall Street, and erudite periodicals like the Financial Times of London. Sovereign debt is an impossibility. It cannot exist.
"I posit that the invention of the corporation made the progress of our civilization—and the explosion of humanity’s numbers—possible. I would argue that without corporations, the Enlightenment would not have happened, and the civilization we currently enjoy would not have come into existence. I would further argue that, without the concept and practice of the corporation, today we would be living the bad bits of the Middle Ages."
- Gonzalo Lira
Asset prices staged a healthy rebound across a broad swath on Wednesday, with a strong finish by the DJIA at 10018.28, up 274.66 on the day. Commodities were also being added to investors’ portfolios again, with gold, copper and oil all staging powerful advances on the day. Only natural gas prices, which decided to ignore the best fundamentals in weeks, were lower on Wednesday. The euro was also fractionally higher, although it no longer seems to be synchronised with anything else. For months, it was the leading factor in higher oil prices and then its weakness helped push both equities and commodities lower. Now, it seems to be marching on its own flank, across the river. Crude oil prices broke a six?day skein of lower prices, and traders seem to have been following equities for
the most part yesterday. There were reports that some traders were buying oil futures as an early attempt to get long in front of major support, in anticipation of a possible shortcovering rally in front or immediately after this week’s reports. Many more observers cited some encouraging quarterly earnings forecasts (State Street was mentioned by Dow Jones) and there was merger activity reported in the technology sector, which has continued to attract investor attention throughout the recession.
ICI reports that topping off the underperforming H1 market action was yet another equity market outflow, this one to the tune of ($227) million. This represented the ninth sequential domestic equity mutual fund outflow in a row, and accounts for fund flows of over ($30) billion YTD. This follows on the heels of last week's once again deteriorating AMG/Lipper HY fund outflow report. Retail investors are not only not participating in the market, but are actively continuing to redeem capital out of any form of equity, transferring it into taxable bond funds. Mutual funds continue to not only be low on cash, but facing ongoing redemptions. Luckily, HFTs have none of these problems: all they need is to sniff out a major block bid from a dealer with discount window access, front run it while blowing up the NBBO via subpennying, accelerate the momentum, without needing any actual material capital, and end flat on the day. Mutual Funds will of course take the pick up in price levels and thank HFTs kindly, knowing full well they are unable to be marginal price setters any longer. So aside from the logistics of ramping the market on capital liquidations and margin calls, 4% market surges such as those seen in the past two days make perfect sense.
Bank of America, via economist Ethan Harris, has joined the chorus of large banks reducing economic forecasts, and as a result has reduced its GDP projections for 2010 and 2011 to 3.0% and 2.6%, from 3.2% and 3.3% respectively. The inflection in 2011 is notable as now the bank sees a material slow down in the economy where before it saw growth. Also, BofA is now expecting that the Fed will leave the Fed Fund language unchanged unchanged for 18 months, until March 2012. This is not surprising: with QE2.0 around the corner, it means that the Fed will soon be implicitly lowering rates. Of course, should the Fed find some naughty pictures of Barney and Chris, it may soon pass laws that allow negative interest rates for the first time. Of course, nothing at this point would be surprising.
It looks as though we are getting the over due bounce in the stock market everyone has been anticipating. The large rally today (Wednesday) has covered most of the ground as it has moved up over 3% today. Overhead resistance looks to be only 2% away before sellers step back in and try to pull the market back down.
If the market goes up for another couple days then gold should have a small pullback to test support. When the equities market starts to drop again money should flow back into gold and send it higher as the safe haven of choice.
Long White Candlesticks On Ever Declining Volume, Or Melt-Ups On Ten Shares Or Less Coming To A Busted Stock Market Near YouSubmitted by Tyler Durden on 07/07/2010 - 17:20
As the chart below indicates, the past two months have seen some dramatic moves in the market, beginning obviously with May 6, and continuing through today. As the highlighted long white candlesticks demonstrate, which are basically the 4 huge meltup days in the last 45 days, the volume associated with said melt ups has been occurring on increasingly lower volume. Of course, this is not surprising, and is occurring as a consequence of two trends i) ever fewer stocks determining the general direction of the market as pointed out yesterday, ii) implied correlation and stock dispersion at all time records or the "no alpha all beta" trade and, iii) generally declining volume with the bulk of it driven by HFT-dominated positive gamma ETFs such as top market volume SPY. As for those interested the actual numbers, the volume associated with the candlesticks left to right was 500.9 million, 395.5 million, 240 million and 248 million today. At this rate the next 300 move in the administration favorite Dow, or the next 40 moves in the ES will be on half the last melt up, then half of that, etc. Of course, all this means that very few if any retail investors benefited from today's move which, as always, was purely beta, and thus leverage, driven.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 07/07/10
When stocks go straight up as they did in the last 20 minutes of trading (and pretty much all day, see chart) all sorts of broken things happen. In this particular case, the AUDJPY - ES correlation is presenting a clear opportunity to pick almost 10 ES points. For all who enjoy making virtually guaranteed money (10 out of 10 past decoupling has converged), the time has come to short ES and to buy the AUDJPY, which is in fact the leading indicator of the carry-driven secondary dataset known as the equity market.Also, please ignore the market's straight vertical line all day. That's certainly part of Bernanke's new normal.
Remember the Fed economist who said all bloggers are idiots, and only Ph.D's are smart enough to understand why the market can go up 4% on double dip depression news? Neither do we. But the following obliteration of the Richmond Fed's errand boy by GMO's James Montier, who is once again back to posting on his blog http://behaviouralinvesting.blogspot.com, is completely worth the read.
There are probably a few words available to describe just how "forward looking" the market is, as it has just taken out the horrendous June 29 NFP number, and the plethora of ISM and other assorted negative news since then. Fundamentals don't matter, just carry and leverage. With alpha now dead, we hope at least massively leveraged beta plays continue to provide some benefits to whoever is left trading.
Will The Unwind Of One GDP's Worth Of Impaired Foreign Loans Cause The Swiss Franc To Surge And Trash The Swiss Economy?Submitted by Tyler Durden on 07/07/2010 - 15:13
The UBS Private Wealth Management team seems to think so. In a report titled "Franc loans might become a threat for Switzerland" the UBS economists analyze the impact of the surging EURCHF (last at 1.33, not to mention the USDCHF which is quickly going to parity), combined with the over $500 billion in Swiss franc loans lent abroad to banks and non-banks, that "The franc's rapid appreciation remains painful for foreign borrowers, as the amount of their franc-denominated debt has increased remarkably in their local currencies. The franc would receive further support if borrowers were to switch their loans into local currencies at some point in the future, as they would have to unwind their franc short positions." In other words, should a positive feedback loop be activated, the already dramatic squeeze in the covering of CHF positions will accelerate dramatically, likely pushing the CHF far beyond parity and causing major pain for both the local Swiss manufacturing industry and offshore lenders who join the unwind party late. Quote UBS: "At some point, franc borrowers might realize that the franc might stay strong for longer, which could induce them to switch their loans. While the franc is affected by many factors, should the borrowers of franc loans at some point decide to switch their loans into local currencies, it could support the franc further, as the borrowers have to unwind their franc short positions. We therefore conclude that the large amount of outstanding Swiss franc loans to foreign countries remains a threat for the Swiss economy."
CEBS Releases Details On Stress Tests For 91 Banks, Adverse Scenario Assumes 3% Cut Vs GDP Forecast, Cajas To Be IncludedSubmitted by Tyler Durden on 07/07/2010 - 14:04
The Council of European Banking Supervisors has released the much anticipated detail on the stress test farce, whose results are to be announced on July 23. On the most relevant topic of sovereign impact, here is what the press release says: "The sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010." In other words there is no detail whatsoever and once again it is more than likely that not even JPM's downside expectation of a 25% haircut on Greek bonds will be met. Since "early May" excludes those days right after the $1 trillion bailout package, when spreads actually got even worse, to say that this will be an objective test is, as usual, a Tim Geithner inspired joke. Interestingly, the CEBS will include Spain's Cajas clusterfuck in the test, which puts the last nail in the coffin of any credibility this test may have had, as an objective analysis will promptly result in the shuttering of over 40% of Spanish lenders, as we discussed previously. As for the core assumption: "On aggregate, the adverse scenario assumes a 3 percentage point deviation of GDP for the EU compared to the European Commission’s forecasts over the two-year time horizon" we wonder whether this will also account for the fudged GDP numbers previously presented to Eurostat, courtesy of Goldman Sachs' financial innovation division.
OECD Secretary-General: Austerity Versus Stimulus - A "False Dilemma"... And The Krugman Bloomberg InterviewSubmitted by Tyler Durden on 07/07/2010 - 13:20
The Secretary-General of the OECD Angel Gurria shares some surprisingly candid observations on the suddenly overpopular debate over austerity versus perpetual stimulus, saying it does not have to be one or the other, a choice he calls a "false dilemma" but instead you need one and the other, to be able to achieve any form of economic recovery. "Today's numbers are absolutely unsustainable, not only are they going to spook the market, they are simply not financeable. Whether the market is spooked or not it is almost secondary, you just can not hold it up for too long because you won't be able to finance these deficits, and they are creating a confidence crisis also." We hope that part about the market being "held up" is merely a Freudian slip, because we know that nobody does that - after all the market finds its natural level of supply and demand, and any purported "holding up" would involve central bank intervention... and we all know that's pure conspiracy theory. As to the solution: "Spain and Greece and Portugal are countries which have to start an earlier process of adjustment. It's not going to happen overnight. There has to be a clear path of where they are going. When you are cutting budgets, you have to cut those things that would not affect growth like education, research and development, the things that will move the economies in the years to come." On how to convince Germans to stop saving and start spending: "No reason why one should do that, and there is no possibility of success. Germans are reacting to a situation that was unsustainable. Medium and long-term there is no way that the speed and accumulation of debt can be sustained." And yes, "short term growth" will inevitably be impacted. Gurria can only hope the markets would cut these countries some slack when growth comes in far below expected... Which it won't.
Alpha Is Dead: Barclays Says With Stock Dispersion At All Time Lows, It Is "Not A Stock Pickers' Market"Submitted by Tyler Durden on 07/07/2010 - 12:18
There is a simple reason why all hedge funds with "relative value" or "deep value" in their names will soon be looking to change their moniker: stock picking no longer works, with the only strategy that matters, as implied correlation is now at the second highest level in history, is picking the time to leverage beta exposure and riding the broader market up or down. Alpha is now dead. as Barclay's head of quantitative strategies Matt Rothman says, "Indeed, it was hard to be a stock picker in the market for the last two months as the last two months have seen historically low levels of dispersion in stock returns. As shown in Figure 2, the cross-sectional correlation across all stocks in the market was at its second highest level last month (measured back to July 1950) and recorded its third highest level this month; there have never been to two months back-to-back with anything approaching these levels. To belabor the obvious and put this in perspective, current levels of correlation are higher than in October 1987, anytime during the Fall of 2008, either the run-up or the bursting of the Internet Bubble, or after 9/11. The reason this matters to all stock pickers — fundamental or
quantitative — is because with stock return dispersions at all-time
lows, it is extraordinarily difficult to be picking stocks." In other words, the danger of yet another systemic meltdown (or up), now that everyone is on the same side of the trade (and whoever isn't, is getting steamrolled), is higher than ever in history, up to and including May 6. And he, who has the greatest access to (risk free) leverage wins. Therefore look for all the "investment bank" hedge funds with prop desks and discount window access to once again post record trading days for the current and all future quarters until even they blow themselves up eventually and the Fed can do nothing to prevent it.