Archive - Oct 19, 2012

Earlier this week two former Merrill colleagues, since separated, were reunited on several media occasions, and allowed to spar over their conflicting views of the world. The two people in question, of course, are Gluskin Sheff's David Rosenberg, best known during the past 3 years for not drinking the propaganda Kool-Aid, and systematically deconstructing every "bullish" macroeconomic datapoint into its far more downbeat constituent parts, and his ebullient ex-coworker, Richard Bernstein, formerly head of equity strategy at a firm that had to be rescued by none other than Bank of America and currently head of RBA advisors, who just happens to be bullish on, well, everything. And since any attempt at holding an intelligent conversation on CNBC is ultimately futile (as can be seen here) and is constantly broken up by both ads, and interjecting anchors and show producers who care far less about facts than keeping the presentation 'engaging' (and going to such lengths to even allow Jim Cramer to have his own TV show), Rosenberg decided to dedicate his entire letter to clients today to "providing a rebuttal" of the slate of reasons why according to Bernstein the "we are on the precipice of a 1982-2000 style of secular market." What follows is one of the most comprehensive "white papers" debunking the bullish view we have seen in a while. Read on.

Situation “too uncertain,” but for 2013, “we’re pessimistic.”

Greg Smith's "tell all" book about Goldman is out, and as a result Smith, Goldman, and the infamous muppets are about to get their second half-life of 15 minute fame, starting with Smith's interview by the just as dramatic Anderson Cooper in this weekend's episode of 60 Minutes. The result is that after having to write a memo to his employees once already providing marching orders on how to handle the first iteration of muppetgate, a few hours ago Goldman again released a "briefing toolkit" titled "Media Interest in Greg Smith's Book" in which it prepares its employees for the coming brief if acute storm of renewed public criticism as a result of Goldman once again being in the headlines, if only for another 15 or so minutes.

Of the current stack of 30 'Blue-Chip' stocks that comprise the Dow Jones Industrial Average, Alcoa has managed to do the worst over the past 25 years - gaining a cumulative 63% in the last 25 years (or 2.2% annually). The Dow itself, based on Bloomberg's Chart of the Day, has risen 627% since the crash in 1987 (or 8.6% annually) - almost 10x that of Alcoa; while McDonald's (perhaps perfectly summarizing what America is all about) has risen on average 12.8% per year for a 1620% gain since Black Monday. But who has impacted the Dow the most since its highs in October of 2007? (Hint: they disappointed this week!)

As market participants ponder the disappointing post-QEtc. performance on their 'Bernanke/Draghi-Put'-floored equities, perhaps these three charts will help in comprehending just how much hope there is in the world's equity markets. The disconnect from macro-fundamental is not unique, but has had significant and extremely rapid repercussions in the past. It seems, however, that just like AAPL, everyone believes everyone else to be the greater fool - and this time is different.

What kind of batter crowds the plate after a pitcher has aimed a fastball at his head? “Batters” have been doing it routinely on Wall Street lately — most recently yesterday, when they held the broad averages buoyant while Google shares were getting pasted for 80 points. During this single-stock onslaught, the Dow Industrials were never down more than 50 points and closed off only slightly with GOOG still $53 in the hole. This wasn’t the first time bulls have leaned into the plate while “dusters” whizzed past their ears.

Congratulations Mario Draghi, you promised unlimited bond buying and you bought less than one month’s worth of gains for Spain. If you want proof positive that Central Banks are losing their grip on things, the above chart is it. The moment we take out that trendline again, it’s GAME OVER (what more can the ECB promise?)

Back to support levels. What's next?

Whether it is hope, greed, fear, repression, systemic correlation, volatility suppression, or sheer unadulterated idiocy; the smart money has been desperately underperforming the 'index' in US equity markets since Ben Bernanke unwrapped a can of QE2 on us all. Are the smart-money 'realists' playing the long-term game and the dumb-money index-trackers herding into whatever worked yesterday? Who knows? One thing is for sure, Bernanke is no friend of the hedge fund community - anymore.

Whether its AAPL, GOOG, or the broad equity indices, today saw the bulls 'Baumgartnered'. Despite a valiant attempt to rally into the close, because Bernanke forbid the Dow close the week red, the NASDAQ is 4% off its Wednesday lows (-1.3% on the week) as AAPL suffers its largest 3-week decline since the March 2009 lows (closing with a $609 handle -3.6% today!) and Tech is -5.7% from QEtc. The weakness was absolutely systemic as cross-asset-class correlations were extremely high and CONTEXT (our broad risk-asset proxy) tracked lower and stabilized into the close. Gold, Copper, and Oil all ended the week clustered together down around 1.7% as the USD ended practically unchanged. Credit's mid-week epic short-squeeze lingers in traders' minds as equities underperformed. Treasury yields end the week up 9-11bps. VIX jumped back above 17% suggesting further weakness for stocks. S&P futures are dropping after-hours - closing at lows of the day - disregarding the late-day cash ramp.

There is practical, everyday common sense... and then there is economics. Because when it comes to explaining why a square peg won't fit into a round hole, only an economist will tell you, over and over, that it will eventually happen, one must just tweak the theory a little first, and then reality will promptly follow. And while even economists have enough of a frontal lobe (and realize there is little grant money) to pursue intractable pegs and hole problems, when it comes to the theory at the heart of their beloved Keynesian voodoo religion, namely Quantitative Easing, the answer is always one, and it is very simple: we need more! Yet even economists are not naive enough to not recognize that QE has not worked in any of its 4 previous iterations (logically, as if it had there would be no need for a fifth, open-ended one). Where it gets fun is watching them come up with amusing yet convoluted, involved and outright demented explanations, some even in chart format, why QE keeps on failing. Below, we present just such a graphic explanation which only an economist could love, or care about.

Ladies and Gentlemen, hedgefund managers, boys and girls...here comes Chia...

When you are out this evening at your cocktail party, discussing the state of the world, how everyone should be buying GOOG on the dips, how AAPL looks cheap (and the mini-iPad is coming soon), all that cash-on-the-sidelines, and how sentiment is so low; perhaps this handy little global economic scorecard will help bring a sense of reality back to the conversation. Barclays' Julian Callow provides everything you need to know about financial balances and economic performance (but were afraid to look) in one handy table.

The circular rationale for believing that Spain is anything other than a basket case is remarkable. As we pointed out last night, in context the market-based signals that so many are basing their opinion on (including Rajoy, Van Rompuy, and Hollande it seems) are extremely misleading. Fundamentally, as UBS explains, the hope that Spain will request a bailout anytime soon is misplaced as there is no immediate pressure to do so and the government would prefer to negotiate a more favorable MoU. However, two major issues stand in the way of that delayed reality - an insufficient bank recap; and the federal nature of Spanish government creating obstacles to deficit reduction.

One of these days is not like the other...