Archive - Nov 28, 2011

Following the market drop in early November, it was widely expected by most, us included, that stock shorts would pile in once again, only to be burned by moves like today's, which is more of an attempt to flush out even more shorts by hitting limit pain thresholds, than buying on any actual fundamental improvements. Curiously, as the just released NYSE data, the short interest at November 15, not only did not increase in the previous two week period, it dropped to a 3 month low of 14.1 billion shares, just down from October 31. Which means that there were no new weak hands, and that all the algos who are pushing the market higher on hopes that short covering will take it even higher once a limit waterfall begins are likely to be disappointed. And with fundamentals completely irrelevant, this data update also likely means that shorts will take this opportunity to reshort the market.

I am expecting a bounce of 5-10% if all goes as planned.

It appears that #FineWine is trending, because barely 30 minutes have passed since we posted the correlation chart between wine and gold, that Newedge sends out a comparable correlation chart showing that if one uses Wine as a leading, or even coincident, indicator for overall risk and (alcohol infused) liquidity, then the bottom is about to fallout of stocks. From NewEdge: "Bottoms up! One of our "fringe" indicators, the Fine Wine Index (based on the 100 most actively traded wines at global auctions) continues to sag here, making a fresh 1 year low for October.... Adding to the long list of indicators failing to corroborate the recent "risk on" animal spirits."

Since just before the US equity day session open, ES has diverged dramatically from what was a highly correlated trajectory with global risk assets with ES now 13pts higher than the broad basket of risk assets would suggest. European credit markets are rolling over - notably off their highs, European sovereigns are leaking wider (BTPs from -25bps to -10bps now and Portugal +75bps), US TSYs are 6bps off high yields of the day and 2s10s30s is dropping fast, Oil has cracked back through $99 (2.5% off highs), and AUDJPY is losing steam. European financials were underperforming in credit-land and now we see US financials drop from best performer to sixth (admittedly still +3%) as EURUSD starts to leak back into the EUR close.

One may not be able to eat gold, and one can certainly drink wine (in fact, in moderation it is encouraged by the surgeon general), yet when it comes to the age-old competition of which one makes a better wealth-preserving investment, we finally have a clear winner.

Today's new annualized home sales print was 307k, below expectations of 315k (yet oddly better than last month's downward revised which moved from 313k to 303k, wink wink nudge nudge Census bureau). This is not to be confused with the actual number of houses sold which came at a whopping 25k, and the third month in a row in which under 500 homes sold in the over $750,000 category. Yet the most notable data point was the average new house sale price which dropped to $242,300. This is the lowest price since 2003! Something tells us that an MBS LSAP is pretty much guaranteed at this point.

Within days of the  of the MF Global bankruptcy, the court approved a motion granting what is essentially authorization to continue commingle and use customer funds held at the broker unit.

For a bank that everyone is bashing for "doing nothing" the ECB sure continues not only to be active in the open market but monetize well more than the Fed: in the past week the ECB's SMP program announced it purchased €8.581 billion in PIIGS bonds in the open market, which brings total notional purchases to €209.1 billion over the life of the program since inception on May 14, 2010. However, due to interim maturities, about €5.5 billion have matured from the total holdings, which means that on a net basis, total purchases have only now passed €200 billion for the first time, and are now at EUR 203.5 billion. More importantly, since the resumption of the SMP program in August, the ECB has bought €131 billion in PIIGS bonds, or about $176 billion. This works out to just under $60 billion per month (and no, it is not sterilized when the sterilizing banks exist solely courtesy to ECB funding as noted before) and is just modestly less than what the Fed monetized on a monthly basis at its peak QE, and about 30% more than what the Fed does now during Operation Twist! ($45 billion monthly at last check) So... Who was it that said the ECB needs to print more?

Guess the date of this frenzied Black Friday action description...

Forget any overly complex and meandering explanation you have heard about today's market action. The real reason for the bounce is simple: oversold market coupled with yet another short squeeze (NYSE Group biweekly short interest data showing shorts spiking in the first two weeks of November due out today). Art Cashin explains.

European equity markets began to rally around 830ET on Friday. Credit bottomed around 1130ET Friday with XOver and Sub financials the worst performers. Since then, equities have soared - almost entirely recovering last week's loss on the back of officially denied bazookas among other failed rumors. Corporate credit markets are outperforming financials (which are only back to Thursday levels) but the credit markets in general are massively less sanguine than the over-excited equity market for now.

Reuters reports the first shipment of gold bars arrived home in Venezuela on Friday “amid wild celebrations.” Excited crowds lined the roadside waving big Venezuelan flags and chanting "It's returned! It's returned!" as a convoy of soldiers and armored cars carried the gold ingots from Maiquetia airport to the central bank in Caracas. The President of the central bank, Nelson Merentes traveled into the city at the head of the convoy. He did not say how much gold bullion was brought back in Friday's shipment but said the bullion came from several European countries. "Our gold is being stored in the vaults," Merentes told the cheering crowds, sporting a baseball cap that read "The Central Bank of Venezuela with the People." "It has historic value. It has symbolic value. And it has financial value," bank chief Merentes said about the first shipment. "Each box of gold weighs 500 kilograms and is worth about $30 million,” Merentes said before cheering crowds. “We’ll bring the rest back little by little.” Merentes is in favor of the move and said, "The country's finances will be backed by autonomous wealth, so we are not subject to pressure from anyone," UPI reported. “This guarantees that if there are financial problems in the international markets our gold will be safe here at home,” Merentes said. Drums and sirens sounded out across the square as many in the crowd sang "Forward comandante!" in support of the president. Some waved homemade signs that said: "The gold has returned thanks to Chavez!" and "Long live our sovereignty!"

On October 27th we rallied 40 points in SPX and hit 1285.  So far today we are up 32 points and are at 1185.  About the only positive thing I have to say is that 1185 is cheaper than 1285. The reasons for the rally are largely based on headlines and rumors out of Europe and being too pessimistic about what happens if there is no “solution”. The IMF bazooka does not seem to be there (offically denied), the EFSF is nothing like what was promised, Euro-bonds seem practically impossible in any time-frame and 'fast-treaty-ing' remains a pipe-dream, Greece is closer to actual restructuring as it starts direct negotiating, and while Thanksgiving Sales were up it seems the main reason for a market rally is the amrageddon-like scenario of the break-up and the typical belief that 'the-worse-it-gets, the-better-it-will-be-in-the-end', so buy.

If all it takes for the ES to soar by over 30 points is some propaganda about US consumer spending (pretty much ridiculed by all at this point), and two outright lies about Europe being fixed, the following factual statement by Moody's should certainly send risk soaring now that bizarro mode is fully on: "over the past few weeks, the likelihood of even more negative scenarios has risen. This reflects, among other factors, the political uncertainties in Greece and Italy, uncertainty around the final haircut imposed on holders of Greek debt, the emphasis in the recent Euro Summit statement on the conditional nature of the existing support programmes and the further worsening of the economic outlook across the euro area. Alternative outcomes fall into two broad categories: those involving one or more defaults by euro area countries (in addition to Greece's PSI programme); and those additionally involving exits from the euro area. The probability of multiple defaults (in addition to Greece's private sector involvement programme) by euro area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise." Oddly enough, for once Moody's is not alone.

Wonder why futures are up over 2%? It appears all it takes is two strategically placed and false rumors, since denied. That and of course the fact that US consumers are literally spending as if there was no tomorrow. Because for a whole lot of consumer there may not be once the bill comes in. Ironically, the same can be said about European banks, only they never even got a 10% of iPad. Because while stocks may be doing their usual oversold Manic Monday thing which surprises no one at this point, European liquidity is as bad as it ever was. As the ECB reported, cash deposited by risk averse banks soared by €19 billion overnight to a December 7 3M ECB USD repo pre-reset high €256 billion. And what is worse, that all important metric of the 3 month EUR/USD basis swap not only did not improve but has continued to deteriorate, dropping 1.9 bps to -148, the worst since October 10, 2008. What is ironic is that while we know banks have a USD funding problem, they also seem to be having a EUR sourcing issue, despite being able to pull as much cash from the ECB as they want. That is of course assuming they have sufficient collateral for the repo market. Which then begs the question: is the European liquidity crisis shifting to one of evaporating repoable assets? And if the repo market is drying up, that means that the ECB will soon be forced to accept staplers are worthwhile collateral before it all falls apart.