Archive - Dec 19, 2012

It's rather ridiculous that today's sell-off of around 0.6% (in the S&P) is the largest plungefest in five weeks. Volumes were high, though not as high as yesterday's with average trade size also relatively high. S&P futures peaked right before the US day-session open today and dropped all day long (with a slight bump higher into the European close) retracing most of yesterday's gains with decent blocks going through in the last few minutes push to lows. VIX led the weakness all day and stocks' selling pressure ignored relative underperformance in Treasuries (yields ended the day around unch), modest USD weakness close-to-close (though the day session saw USD strength return), and a spike in WTI (+3.1% on the week). Even trying to lever HYG didn't work to keep stocks up today. Gold and silver cliff-ledged early but gold recovered and stabilized while Silver slid to lows of the day (-3.5% on the week). Trading was relatively orderly until the last few minutes which saw a typical push for VWAP fail and the sell orders piled up into the close (and beyond in futures).

In key news that may well be the missing puzzle piece to explain some of the very odd market moves in the past week, we just learned courtesy of CNBC, that Morgan Stanley's Wealth platform unit has finally, after months and months of considerations, pulled the plug on the fund that for the second year in a row is one of the three worst performing in the weekly HSBC report and is now redeeming. That in itself is not unexpected. What however is notable is that MS withdrawing hundreds of millions in feeder capital may well explain why gold has seen such a dramatic dislocation in the past week. Recall that at Paulson & Co, gold is not simply an investment - the bulk of direct gold investments at the once legendary investor are in the form of (largely underperforming) gold mining stocks - but an actual investment class. In other words, instead of being denominated in USD, investors are actually denominated in (paper) gold, with a fixed conversion into GLD at inception. This means that upon liquidation of gold-denominated shares, any gold-denominated shares, he has no choice but to sell GLD, and by virtue of this being the most liquid paper instrument in the PM space, gold. Does the massive gold dislocation in the chart below now make more sense especially since Paulson was aware of MS' intentions days in advance and traded, or in this case liquidated, appropriately)?

In today's 'fast money'-inspired, everyone's-a-winner, there's-a-bull-market-somewhere world of investing, the old school remains stoic in their buy-and-hold mantra that the Fed has your back and over the long-term retirement is assured and 'holding-hands as you walk along golden beaches with your loved one' is a mere few percent of your salary tithed away every month away... Well, sorry to steal the jam from their donut, but across a massive 568 IPOs in the last few years, Bloomberg's Chart of the Day shows that, in fact, buying and dumping within one-day is massively more profitable than buying-and-holding in the new 'capitalism'. As the mainstream media can't help but notice every uptick in China's share prices as a sign that all-is-well in the world, the local fund managers live by a different meme: "It’s weird that in China the longer you hold new shares, the bigger losses you’ll take."

Treasuries have sold off aggressively over the past 2 weeks.  Is it time for that trade to reverse to New Years??

The markets, as most people reading this should now well know, no longer reflect in any way the true economic health of our country.  If one was to measure the financial “recovery” of this nation by the strength of global stocks alone, he would probably come to the conclusion that the collapse of 2008 was a mere hiccup in the overall success of the worldwide economic system.  However, electronically traded equities with little more to back their value than scraps of receipt paper and numbers on a screen have no bearing on what is going to happen to you, and to me, over the course of the coming year.  The stock market is a sideshow, a popcorn movie, a façade.  The real drama is going on behind the scenes and revealed in fundamentals that mainstream analysts no longer discuss...

Our Interests Are - Of Course - STRICTLY Academic

Yesterday, while the market was absolutely euphoric that a Fiscal Cliff deal was imminent in the aftermath of the release of PR theatrics also known as "Plan B" we said:

GOP plan passes Congress, is blocked in Senate and Boehner can say it is the Democrats fault US is going over the Cliff

— zerohedge (@zerohedge) December 18, 2012

Moments ago, Boehner confirmed that, at least as of this moment, this is precisely the plan, when he said that tomorrow the House will pass legislation extending tax cuts on those with incomes over $1 MM. He added next that Obama can either convince the Senate to pass "Plan B" (which won't happen) or be responsible for the largest tax hike in history. And now the ball is in Obama's court, where things look increasingly bleak that any further compromises are imminent, and the only thing that Obama will retort with is a veto to the House's vote.

After spending a few seconds earlier discussing gun law, President Obama discussed at length how Plan B is a no-go, how he has come more than half-way, and how Boehner seems happy to allow those earning $800k or $900k to 'get away' without paying more taxes. Speaker Boehner's rebuttal is due at 215ET... ES at 1437.5

Back in May, Herbalife stock got monkeyhammered when one of the best performing hedge fund managers of the past few years, David Einhorn expressed a bearish thesis in the company. Today, the stock just got the double tap following no new information, but merely the second part of the Einhorn-Ackman-Loeb activist triangle (who most of the time operate as an informal cartel), as it plunged by over 10% when William Ackman, smarting from the hundreds of millions lost in JCPenney just piggybacked on Einhorn's thesis, as reported by CNBC, said he is short Herbalife, calling it a pyramid scheme, and saying he has done fundamental research for a year (it takes a year to read Einhorn's presentation?). Essentially, nothing new here. All we await now is that 13F chaser Whitney Tilson to finally jump on board what is becoming the world's biggest hedge fund short, and get a catalyst, any catalyst that scrambles the shorts into covering, and sends the stock in the triple digit range.

The last 10 days have seen some remarkable moves across asset classes. None less so than the US equity markets where despite weak macro developments, AAPL's collapse, and the overhang of Fiscal Cliff uncertainty, stocks have gone from strength to strength on the back of the ubiquitous (and apparently oh so easy to trade) Santa Claus rally. However, a scratch below the surface, as indicated in these 3 charts, suggests that perhaps the US trading public is not allowed to participate - as the great majority of the gains have occurred only when the rest of the world is playing (and the worst performance is when only US residents are active).

Ever wondered whether the Fed actually has/had a plan? Gluskin-Sheff's David Rosenberg attempts to overlay some intelligence to the last seven years to get a grasp for what the venerable institution is actually up to. To wit, the seven stages of Federal Reserve jiggery-pokery... Will the seven become twelve as the addicts take over the asylum? Seven-point plan or seven-year dud?

Today, Spain barely functions as a country. Basic services have shut down. The entire banking system is on life support. And yet banks and the stock market are ralling.

When we commented on yesterday's 5 year auction, most remarkable for a surge in 5 Year Direct awards to a stunning 30%, which in turn followed a record low Indirect takedown, we wondered if "there some major shift in the underlying dynamics for US paper based on these recent results? You bet. What is said shift? We hope to find out soon enough." Today, we still can't confirm what the reason for said shift is, but we can certainly confirm that the same pattern continues, as the US Treasury just sold its monthly $29 billion allotment of 7 Year paper, at a high yield of 1.233%, well above November's 1.05%, and a bid to cover of 2.72, just below the TTM average of 2.75, but the most notable feature was that just like yesterday, the Direct award was the highest in series history, at a whopping 23.11%, and above last month's 19.71%, which also was a record. There is a distinct shift in awards to Direct bidders, especially with PDs getting just 37%, the lowest since December 2010. Just who these bidders are, and is this merely a year end window dressing phenomenon, seen periodically when money managers need quality collateral for year end purposes, remains unclear. Keep an eye on the Direct bid in the January auction to see if the trend persists. If it does, it may be time to ask some questions.

EU confidence sparks a Euro bull run. Both the EU’s strongest and weakest economies are positively shifting. The S&P has lifted Greece’s credit rating by 5 notches to a “B minus”, and Germany’s IFO survey came in strong for the second month running indicating that business sentiment is on the rise.