Archive - Feb 2012

The EURUSD just went apeshit surging by 50 pips as the robots merely read the favorable tone in the headlines as released by Bloomberg, while completely missing the point that absolutely nothing is done yet. Here there are, via BBG:

• JUNKER SAYS SUBSTANTIAL FURTHER PROGRESS HAS BEEN MADE - EURUSD spikes 20 pips
  
• JUNCKER SAYS CONFIDENT EUROGROUP TO MAKE DECISIONS ON MONDAY -EURUSD unchanged
• JUNCKER SAYS TROIKA HAS PRESENTED DEBT SUSTAINABILITY REPORT - EURUSD spikes another 20 pips
• JUNCKER SAYS GREECE, TROIKA HAVE IDENTIFIED EXTRA BUDGET MOVES -EURUSD unchanged
• JUNCKER SAYS HE'S CONFIDENT OF FEB. 20 DECISIONS ON GREECE - it was supposed to be Feb 15 remember...
• JUNCKER SAYS GREECE SETS EU325 MLN IN EXTRA BUDGET MEASURES -EURUSD unchanged
• JUNCKER SAYS STRONG ASSURANCES FROM LEADERS OF 2 GREEK PARTIES - EURUSD says: "OOOPS"
  

And the one the robots have so far missed:

• JUNCKER SAYS FURTHER CONSIDERATIONS NEEDED ON SPECIFICS

Translating the last one: NOTHING HAS CHANGED!

Pandora's Box?

Some of the key headlines from the just released FOMC minutes via Bloomberg, which however don't show anything out of the ordinary:

• A FEW FED OFFICIALS SAID MORE BOND BUYING MAY BECOME NECESSARY. So (1-Few) did not see it as necessary
• FOMC PARTICIPANTS SAW `GRADUAL’ IMPROVEMENT IN LABOR MARKET
• FOMC OFFICIALS SAW `MODERATE’ IMPROVEMENT IN HOUSEHOLD SPENDING
• FOMC PARTICIPANTS SAW `DEPRESSED’ HOUSING SECTOR
• FOMC OFFICIALS SAID GLOBAL FINANCIAL STRAINS POSED BIG RISKS
• FOMC PARTICIPANTS FORECAST INFLATION WOULD REMAIN `SUBDUED’
• SOME FED OFFICIALS FAVORED QE IF INFLATION FALLS, GROWTH SLOWS

Last week we discussed the gradual unraveling of a topic we had been following for the past 3 years, namely the brazen and criminal manipulation in the Libor market, which directly and indirectly impacts a stunning $350 trillion worth of securities (and thus, their implied risk, and hence, prices). Today we are delighted to learn that the retribution against these banks who have been artificially representing to the market that they are in better condition than in reality (courtesy of Libor's "strict" self-reporting approach), are beginning to see lawsuits filed against them, with Schwab merely the latest out of the gate. And just as fraudclosure was the litigation topic of 2010 and 2011, sit down and watch as Li(E)borgate explodes into the biggest litigation pain for banks, with litigation expenses that could easily surpass both the robosigning scandal (and its robo-settlement) and the escalating banks Reps and Warranties scandal. Because as recent evidence confirms, there are likely emails proving manipulation exists black on white, as discussed last week. Which means that the case of Schwab, noted last summer by Reuters, is about to become a pandemic.

While headlines yesterday crowed and complained of the small rise in the budget and the focus on taxing the wealthy - which admittedly given the peak polarization in political parties is unlikely to actually move into legislation anytime soon - JPMorgan's Michael Cembalest finds perhaps the most controversial part of the proposal hidden deep in the report. While the JPM CIO notes the CBO baseline and alternative scenarios, it is the difference between the $293bn benefit (CBO estimate from last year) and the Administration's new estimate of $584bn that caught his eye as buried on Page 73 of the Green Book were three new taxes on existing tax-efficient 'benefits'. Tax the mass-affluent (>$250k) seems indeed the new motto of this presidency.

UPDATE 2: AAPL bouncing from the lows even as Mac Rumors now reports that iPad 2 has been pulled from Amazon China. Recall this story on the recently contentious relationship between Apple and China. 

UPDATE: AAPL now $502.08 lows for day -$24 from highs

Chatter of a QQQQ rebalance (Apple is up ~50% from the last rebalance compared to 10% for NASDAQ) seems to be stumbling the iEconomy as AAPL goes red. Now, which of the 209 funds will be first out of the door? and which last? Volume is picking up for sure and options (especially short-dated) are getting very excited. Of course, broad indices are losing their bid implicitly as ES drops below the pre-China rumor and post-Samaras pop levels. Perhaps it is the recognition that we sold off 7% in a week after the last QQQQ rebalance (April 2011) and the pre-move was nothing compared to this...

Anyone who has dared question the infinite strength of the Apple juggernaut has had their liver eaten daily by a hawk. (My own view last week that Apple would get a little above $500 then reverse didn't quite work out, although I'm willing to give myself a little wiggle room here). But it really seems to me we are just about at the peak of how high the QQQs are going to be able to go.

The complacency of the markets is amazing given the risks at hand. I don't think I'm that smart, so is it that so many others are that stupid? It can't be, can it?

Clint Eastwood drew a lot of ire, rhetoric, and subsequent explanations as to the real motives behind his Superbowl halftime commercial. Frankly, the commercial could and should have been much better. One proposal for what a less cynical and thus far more sincere "Halftime in America" commercial should be comes from Omid Malekan, creator of the original Bears (explaining QE for the "rest of us") cartoon. We believe this is what should have been shown during the superbowl. And certainly not presented under a Chrysler, pardon Fiat, umbrella.

Ladies and gentlemen: we bring you.... 9 our of 9. That would be the number of times (at least since we have started counting) that Goldman FX maven Thomas Stolper has capitulated on his calls. IN A ROW.

The divergence between credit markets and equities accelerated today in Europe (and the US) as Senior and Subordinated financial credit spreads have increased dramatically in the last week. While risk has risen over 25% in financials, European stocks have gone sideways since the NFP print. The Subordinated financials spread has risen the most (in percentage terms) over the last 4 days since Nov2010 - and of course the broad equity markets are flat. It would seem that every trader and their mom is selling European financials and buying AAPL.

Equity markets are dislocating from credit and volatility risk. "Real " risk markets suggest something bigger could be happening sooner than later. We see some similarities to the famous 2008 Lehman week.

A certain flavor of econometric model dominates conventional portfolio management and financial analysis. This model can be paraphrased thusly: seasonally adjusted economic data such as the unemployment rate and financially derived data such as forward earnings and price-earnings ratios are reliable guides to future economic growth and future stock prices....If this model is so accurate and reliable, why did it fail so completely in 2008 when a visibly imploding debt-bubble brought down the entire global economy and crashed stock valuations? Of the tens of thousands of fund managers and financial analysts who made their living off various iterations of this econometric model, how many correctly called the implosion in the economy and stock prices? How many articles in Barrons, BusinessWeek, The Economist or the Wall Street Journal correctly predicted the rollover of stocks and how low they would fall? Of the tens of thousands of managers and analysts, perhaps a few dozen got it right (and that is a guess--it may have been more like a handful). In any event, the number who got it right using any econometric model was statistical noise, i.e. random flecks of accuracy. The entire econometric model of relying on P-E ratios, forward earnings, the unemployment rate, etc. to predict future economic trends and future stock valuations was proven catastrophically inadequate. The problem is these models are detached from the actual drivers of growth and stock valuations.

UBS' economics research group do not believe that Greece is saved but hope that it is at best ring-fenced. In an excellent Q&A follow up, Stephane Deo and his team address the role of the EFSF, the IMF package and its austerity measures, the ECB's participation, and finally the likelihood of the PSI being successful and its fallout. As Greek 2Y yields break 200% (obviously price is the critical part but these yields are stupendous) and bridge loan discussions appear for the March 20th maturity, perhaps UBS view of the IMF 'walking away' is more credible if they manage to ring-fence a recap of the banking sector. We would be surprised if contagion was contained and, as we have seen before, that risk leaks out somewhere and unintended consequences (or unknown unknowns) tend to pop up just when we least expect them. Perhaps the FT's note this morning (which incidentally confirms the everything that Zero Hedge warned about almost a month earlier) that deadlines are slipping rapidly is the bright yellow canary in the Piraeus coal-mine as 'time is running out' for a solution here very quickly (as seemingly is the desire).