Archive - Nov 2012

Perhaps those sage English philosophers 'The Vapors' were on to something 32 years ago when they asked if we were "Turning Japanese" for it seems the following charts from Nomura certainly suggest the US bond market is heading in that direction. From demographics to monetary policy; from investor allocations to flows; and from bond bubbles and volatility to long-term interest-rate paths, it seems we share a lot more than a love for sushi and pachinko with our neigbours across the ocean as we seem to be chasing after many Japanese models (of asset allocation and macro-economics).

The losers in elections often take the loss badly. Just as some Gore supporters in 2000 shouted about moving to Canada, some Romney supporters have taken the loss particularly badly too. All the Republican rage made me think about the origins of America. For those who want to strike out into the unknown in the pursuit of self-governance, such options don’t exist anymore. There is no great sparsely inhabited continent spread out (except perhaps Antarctica which is already claimed-for). Where is the next America? Where is the next land that people seeking self-governance can emigrate to? The hunger for self-governance led to the birth of America. It seems highly likely, in the very long run, that the hunger for self-governance will be the force that leads not only to local space colonisation. Powerful central government drives nonconformists to find ways to escape it. If the only road to self-governance left is up into space, then that is the road that will be taken.

While there was clarity in the recent election results -  there will not be any impending vote recounts that would leave control of the country hanging in the balance - Tuesday night’s results did nothing to change the basic dysfunctional dynamic between the two political parties. Now the fiscal cliff will have to be addressed in the coming lame duck session, and it won’t be easy to find a solution... Victory guarantees the president nothing more than the headache of building consensus in a gridlocked capital on behalf of a polarized public, that has become tired of struggling with heightened uncertainty. In Abe Gulkowitz's latest 'The Punchline' note below, reiterates his concerns regarding the growing gulf between the behavior of investors enamored with monetary largess and the realities on the ground of globally weak economies... Add the risk of more corporate-earnings disappointments and we have a situation that needs remedying. His 17-page one-stop-shop of unvarnish everything everywhere truthiness is a must-read.

At some point or another, anyone who is even remotely paying attention to reality will likely reach two critical moments of awakening in their lives. The first is what I call the “Aha! moment”. The ‘Aha! moment’ is usually brought about by something you learn or read… When you talk to your friends and family, most of them don’t want to hear about your ideas. They think you’re nuts. They haven’t had their ‘Aha! moment’ yet. Eventually, you learn to keep it all inside. But then, at some point down the road, the second critical moment occurs– the Breaking Point.

Yesterday, we were offered 'hopes and prayers' by Gluskin Sheff's David Rosenberg. However, as he warned then, there are some things to be worried about. From the wide gaps in voting patterns across socio-economic lines and the expectations that populist policies will be the hallmark of Obama's second term to the mixed-to-negative data across employment data, consumer spending indications, housing, and Europe; it appears the market is starting to price in some positive probability of a fiscal cliff and these macro data do nothing to subsidize that reality. While the President does not face the Great Recession of four years ago, he does confront the "Not So Great Recovery" nonetheless.

UPDATE: GRPN discounted by 13% after-hours on sales-staff and outlook cut

Market watchers are stunned, stunned we tell you, that we didn't bounce today after yesterday's 1-year record plunge in stocks. Whether AAPL led the market or the market led AAPL is irrelevant, there is one clear fact, everyone and their pet rabbit Clive is looking to reduce exposure to that anchor-like alpha-destroyer. Gold once again outperformed every other asset class today as it has seemingly reaffirmed since the election that "buying gold is just buying a put against the idiocy of the political cycle." S&P 500 futures plunged into the close to end on their lows (-60 points from yesterday's highs); AAPL closed at its lows (-3.7% on the day - through its 55-week average); financials dropped further; Treasury yields plunged (30Y -16bps on the week); while the USD generally tracked sideways to higher; high-yield credit closed at its lowest price in over two months (don't tell Tom Lee). VIX compressed modestly (and steepened) as we suspect election hedges are lifted (and also AAPL overlays discarded).

From the mayor who made owning an 18oz+ container of coke a summary offense, comes this:

Effective 6 am 11/9: drivers in NYC whose license plates end in an even number or zero will be able to buy gas only on even-numbered days

— Mike Bloomberg (@MikeBloomberg) November 8, 2012

It would appear Mark Twain's infamous quote that "history does not repeat, but it does rhyme" has never been so apt. The following eight charts suggest the rhythm is getting louder and louder. How is it possible? It's nonsense? Well at the heart of the markets, it is still us humans and our endearing greed, fear, and heuristic biases that drive the flows... trade accordingly. “Everything that needs to be said has already been said. But since no one was listening, everything must be said again.” — André Gide

A week ago we explained how, after completely destroying the equity and commodity space, and make serious inroads into bond trading (and soon very likely into OTC interest rate derivatives, where a flash crash will literally be the end), HFT algos had taken over FX trading to the point where they have now been caught manipulating the market using Reuters' FX trading platform. Now we get prima facie evidence of just how this destruction is manifesting itself. According to Reuters, which has compiled the data on its own FX dealing platforms, "daily spot foreign exchange trading volumes... fell by 23 percent in October from a year earlier. The average daily volume traded in October was $120 billion, down from $155 billion in October 2011 and a decrease from the $133 billion recorded in September." As to the reasons: they should be quite obvious. On one hand, we have the old tried and true vacuum tubes, and Reuters reports that the decline was to a major extent driven by "frustration with high-speed computer algorithms operating on the major dealing platforms." In other words, as more and more FX trading is merely robots competing with other robots to outarb each other on press releases, in the process completely crushing retail traders, and generating outsized kneejerk reactions to the tiniest of signals, any humans left are quietly shutting down their terminals and turning off the lights.

Yesterday’s price action offered a messy preview of what lies around the corner, for the U.S. economy confronts its own Biblical demise, otherwise known as the fiscal cliff, when it slips past its own (Asteroid-less Armageddon-like) zero barrier which we estimate as the December 21 triple witch expiration. To be sure, I do not equate a near guaranteed recession and significant pullback in equities as calamitous as what Mr. Willis et al faced; but in short, the two sides are as far apart as ever as the Democrats will be emboldened by the Election while the GOP will point to roughly 50% of the country, exemplified by the popular vote, who agree with its views. Politicians fail to understand that the markets project forward such that as each faction drags its feet, the damage done to stocks could be substantial. The 12.5% expected earnings estimates for the S&P 500 for the next 12 months remain highly optimistic such that an inevitable reduction would weigh on shares.

Year-to-Date, the S&P 500 has just dropped back below Gold...Gold's performance year-to-date just surpassed that of the S&P 500 once again. If this remains the case into year-end, this will be the third year in a row that Gold has outperformed stocks. Looking forward, which 'asset' would you choose - Stocks with an implied volatility of 17% or Gold at 15.75% to the end of the year? Sharpe Ratio anyone? Perhaps asking your 'asset allocator' what his weighting is based on will be a worthwhile conversation - with the outperforming returns (past is not a predictor of the future - and noone knows) but lower forward risk expectations?

Long Apple. 

Since Mario Draghi's first ECB meeting in November 2011, the ECB balance sheet has expanded by 30% (including two rounds of LTRO which funneled $1.3tn into banks). What did we get for all that money? As Bloomberg's Chart of the Day shows, not much. Critically, as some European banks look to return that stigmatizing encumbrance, it is the banks that have benefited massively from Draghi's exuberance while the people (of Spain for example) have suffered. Using the spread between EURIBOR and OIS as a proxy for short-term liquidity (funding costs), since Draghi began his ex-Goldman stint, bank funding costs have plunged (as also shown below with CDS spreads). Meanwhile, European governments' funding costs have gone nowhere - and in most cases are considerably higher. Draghi even admitted that LTRO was not expected to reach 'the people' when he dismissed inflationary fears this morning on the back of expectations that the banks haven't used the cash - is it any wonder Nigel Farage is fuming and Greeks and Spaniards are rioting? Just wait til the Irish are told 'no' to retroactive OMT...

Do we have what it takes to get from here to there? This apparently simple question offers profound insights into the dynamics of individuals, households, enterprises and nation-states. If we answer this question honestly, it establishes a "road map" of what must be in place before a progression from here to a more sustainable future ("there") can take place. For most of the world's economies and societies, the answer is a resounding "no." The U.S. Status Quo is as intellectually bankrupt as it is financially bankrupt. Our "leadership" cluelessly clings to the only model they know: incentivize "consumers" into borrowing more money to buy more "stuff" from China, in the magical-thinking belief this churn will somehow lead to sustainable "growth." This is akin to handing a parched alcoholic a fresh bottle of whiskey to wean him of his addiction. There are more than a few lessons to be learned from Japan...

While the citizens of Athens rioted and threw Molotov Cocktails outside of their Parliament the elected officials narrowly passed the new austerity measures demanded by the Troika last night. They have a budget vote left, likely to be passed, and then the focus will shift to the IMF and the European Union and whether they will fund and how it will be done. The Greek government says it will run out of money on November 16 and the country has debt payments to be made on November 21. Last night’s vote in Athens was only the first page in the current chapter and there are a number of open questions left. Make no mistake; we are caught between three cliffs at present.