Archive - Nov 2012

It seems the bond market was onto something today in its lack of exuberance. Following the after-hours FrAAnce downgrade, which very conveniently happened 2 minutes after the ES quiet period started, EURUSD has tumbled giving the day-session's gains back and retraced back to where Treasuries ended the day. This would infer S&P futures open down notably - around 1370-75 (note 1377 was closing VWAP and may be support).

Is the FB pop simply a short squeeze incited by desperate pre-IPO shareholders trying to hedge their massive gains?

After hours shots fired, with Moody's hitting the long overdue one notch gong on France:

• MOODY'S DOWNGRADES FRANCE'S GOVT BOND RATING TO Aa1 FROM Aaa
  
• FRANCE MAINTAINS NEGATIVE OUTLOOK BY MOODY'S

Euro tumbling. In other news, UK: AAA/Aaa; France: AA+/Aa1... Let the flame wars begin

The Hostess bankruptcy liquidation, the result of a bungled negotiation between the company, its equity sponsors, its striking workers, and the labor union, over what has been defined as unsustainable benefits and pension benefits, is rapidly becoming a Ding Ding farce. The latest news in what promises to be an epic Chapter 22 fight is that the judge, pressured by various impaired stakeholders, among which none other than the US trustee, is that the bankruptcy Judge Robert Drain has ordered the company and its unions to seek private mediation to attempt averting what the company has already said is an inevitable unwind of operations. More to the point, and as we predicted on Friday, if there is an outright purchase of the company, it will be a standalone entity, without its unions: Hostess will draw strategic buyers and private-equity investors for its brands, Rayburn said, without naming potential bidders. The company is “more attractive” to buyers without the unions, he said. In other words, if the Union had hoped that their workers would be retained by the purchasing entity, their dreams just got shattered. But while the Union may be sad, it is about to add another emotion to its arsenal: blind fury. Because it is here that things get truly surreal. As the US Trustee, a Justice Department official responsible for protecting creditors, disclosed, as part of the winddown of Hostess, wants to pay as much as $1.75 million in incentive bonuses to 19 senior managers during the liquidation.

Presenting 74 seconds of pure Krugmanism from the mouth of the man himself - Keynes 1939 (pre-war) radio address on the beginning of The Grand Experiment...

[And now it’s time for Mr. Obama to start paying for all those votes by reaching deep into our pockets. If you intend to avoid paying your “fair share,” however, please take note: There will be  few places to hide. For a gimlet-eyed view of what may lie in store for taxpayers and citizens of all political persuasions during the next four years, ponder the guest commentary below, from Wayne Siggard, a regular in the Rick’s Picks forum. RA]

Best day in 5 months for stocks. AAPL jumping to one-week highs with its 2nd biggest low to high swing in 3 years. Wherever you look, the worst came first and so the talking heads re-appeared saying the worst is over and all is rainbows, unicorns, and mountains are once again molehills. Unfortunately, while ETFs were smashed higher (HYG biggest move in a year on 2nd largest volume ever back above its 200DMA, VXX crushed -9%), risk assets broadly speaking were not playing along with Treasuries especially drifting lower in yield from the European close (and EURUSD) as stocks surged to the highs of the day. Commodities soared with Oil leading the way - though post-Europe everything flattened and leaked lower. VIX collapsed 1.2vols to end just above 15% (notably ahead of stocks relatively speaking) but equity volume on the day was dismally low as S&P 500 futures broke back above the 200DMA amid larger than average trade size.

Today's AAPL move, on no news, is as of this moment a $35+ move in one trading session, or a $30+ billion market cap move in one trading session, and a nearly $60 move from the Friday lows. As the histogram below shows, in absolute terms, this is the second largest intraday move up in the stock in the past two years, and a 4 sigma move for a stock which has moved 7% on a 1.7% standard deviation, for no other reason than the "stock is oversold" or whatever other narrative those who put narratives to stock moves have ascribed to it today. And with HFT's determining valuation based on momentum, RSI, Bollinger bands, and other meaningless New Normal technicals, we have just gone from massively oversold, to massively-er overbought.

Spoiled little investors feeling good today. 

They do it every time – i.e., they buy more junk debt than ever at precisely the riskiest points in the cycle. Naturally this can go swimmingly for a good while, but as a general rule of thumb it is far better to buy such risky paper when the compensation one gets for taking the risk is actually adequate. In spite of investors' bitter experiences with such exuberance, the cycle repeats over and over again. The driving force behind it is the central bank's easy money policy - which brings the sugar highs of today, but also the hangovers and steep losses of tomorrow. The markets have seen this movie before – long ago.

Corporate profits have been boosted unusually in recent years by fiscal support to the economy, the very heart of the risk posed by 'the cliff.' Despite all the political rhetoric, jawboning and pre-election bluster, corporations may or may not be people, but what they have turned out to be is the government's best friend as without corporations firing millions, the government would be unable to enslave everyone via a habituation to the government's "transfer payment" generosity. Since government has no 'choice' but to do its rightful duty and bail out those poor citizens crushed by the "evil" corporations, it allows the US Treasury to spend, spend, spend under the guise of another false conflict. The corporations (knowingly or unknowingly) are doing the government's bidding (and receiving the quid pro quo) even as the tentacles of uber-government reach everywhere and more than half the US population would exist in a state of learned helplessness if its weren't for Uncle Sam's weekly check, modest as it may be. To summarize: crony Capitalism for richest, socialism for the poorest; and the middle class goes the way of the Twinkie Dodo.

Is There a Better Way to Allocate Stocks?

It has been a while since broke Greece, which has been begging Europe for the 5 month delayed €31.5 billion tranche, which will be used to pay the ECB and other German banks, and not to enter the Greek economy, was a chooser. Today, the little country that could not, has once again stretched its feeble repo'ed muscles:

• GREEK OFFICIAL SAYS GOVERNMENT WON'T ACCEPT NEW TROIKA REQUEST
• GREEK OFFICIAL SAYS TROIKA WANTS 20,000 STATE EMPLOYEE SACKINGS 
• GREEK OFFICIAL SAYS COALITION PARTIES TO SET UP C'TEE FOR GOVT

Perhaps Greece forgot to clarify "by email" but certainly by fax, telex, or even carrier pigeon, because once the Troika calls it bluff, the "lost in translation" explanations will commence. Until then, the farce continues.

As many prepare for the imminent demise of the JPY (courtesy of Abe's aggression), Mike Krieger of Liberty Blitzkrieg reminds us of possibly the greatest (and most unbelievably hilarious) financial advertisement ever. From our friends across the ocean, "Men that own government bonds are popular with the ladies!" Don't believe its real? Bloomberg story here.

Austerity is coming our way, it's just a matter in what manner and by how much, and whether it becomes an orderly or disorderly process. The fiscal cliff is really a bit of a ruse in that respect, but the key here is that years of fiscal profligacy is coming to an end and the Fed at this point, having used its bazookas, is now down to firecrackers. The economic outlook as such is completely muddled and along with that the prospect for any turnaround in corporate earnings... Once we get past the Fiscal Cliff we will confront the inherent inability of the Democrats and the GOP to embark on any grand bargain to blaze the trail for true fiscal reforms. The U.S. has not had a rewrite of its tax code since 1986, which was the year Microsoft went public and a decade prior to Al Gore's invention of the Internet. The tax system is massively inefficient and leads to a gross misallocation of resources that impedes economic progress — rewarding conspicuous consumption at the expense of savings and investment. It is the lingering uncertainty over the road to meaningful fiscal reform that is really the mot cause of the angst — the fiscal cliff is really a side show because who doesn't know that we are going to have a Khrushchev moment?