Archive - Mar 13, 2012

While he does have some new philosophy (at X% off MSRP of course, coming to a Kindle near you) to preach, Nassim Taleb's re-emergence from the darkness of the media spotlight starts with a bang: "I realized that something wrong is going on, and only one candidate 'Ron Paul' seems to have grasped the issues and is offering the right remedies". He was given quite a lengthy period to proselytize as he outlines the Big Four problems he sees with the USA (and for that matter the world): Deficits (metastatic governments), The Fed, Militarism, and non-Bailouts (what is fragile should break early). As Ron Paul notes, "It's an illusion that the USD can bailout the world", Taleb makes many interesting, though a little murmur-some for our liking, points like "you don't gamble with hyperinflation" and his comparison between the US and the Soviet Union will surely raise some headlines as he rants of the growing divide between public and private employees standards of living, our "need to do something drastic about it" and on Obama/Government and deficit reduction that "the whole thing is rotten".

CDS is once again (still) in the spotlight. We have moved on from debating whether or not a Credit Event has occurred in the Hellenic Republic, to concerns about whether the CDS market will settle without a problem. There is a lot of talk about “net” and “gross” notionals and counterparty risk.  What I will attempt to do here, is build a CDS world for you. We will look at various counterparties, the trades they do, and the residual risks in the system. It will be loosely based on Greek CDS but some liberties will be taken. None of the institutions are real world institutions (in spite of how much they sound like some people we know). It is a simplification, but to make it useful, it has to be robust enough to give a realistic picture of the CDS market/system.

The continual restatement by endless talking heads of the compression in Italian bond spreads/yields as some indicator of success and recovery in Europe is becoming nonsensical. Short-end rates have become anchored, and as UBS notes today, the huge liquidity injections have caused structural breaks between curve slop and spread levels (curve now at its steepest since EUR inception). However, what makes the nonsense-speak greatest is the disappointment in terms of market reaction post LTRO2. After the previous two major liquidity injections (LTRO1 and the Reserve Requirement shift) we saw a considerable spread compression very soon after. However, in the two weeks since LTRO2, Italian spreads have gone nowhere (and have in fact seen notably larger volatility and intraday decompression in the last few days post-Greece). With theeconomics of the carry trade diminished, and the market fully priced in LTRO's impact, expectations of further improvement in Italy's bond curve seem entirely dependent on more surprise liquidity (unlikely short-term) as the carry-trade engine appears to have run out of fuel (or collateral maybe?)

If there is one thing that can be said about Obama's previously noted announcement at 11 am Eastern highlighting "new efforts" to enforce our "trade rights" with China (aka launch the stray inaugural .22 calibre bullet into the China-US DMZ) is that the algos in charge of the market will love it and send stocks soaring just because. Oh, and if China were to just incidentally make live for FoxConn products that little bit more difficult in retaliation, so be it. That will be bullish as well, certainly for the NASDAPPLE.

Portugal is near guaranteed to default/restructure, so why is everybody so tolerant of so-called "smart people" saying otherwise? OK, let's do this math thingy...

Last month, the world's biggest hedge fund, Bridgewater, issued a fascinating analysis of deleveraging case studies through the history of the world, grouped by final outcome (good, bad and ugly). As Dalio's analysts note: "the differences between deleveragings depend on the amounts and paces of 1) debt reduction, 2) austerity, 3) transferring wealth from the haves to the have-nots, and 4) debt  monetization. Each one of these four paths reduces debt/income ratios, but they have different effects on inflation and growth. Debt reduction (i.e., defaults and restructurings) and austerity are both deflationary and depressing while debt monetization is inflationary and stimulative. Ugly deleveragings get these out of balance while beautiful ones properly balance them. In other words, the key is in getting the mix right." Of these the most interesting one always has been that of the Weimar republic, as it certainly got the mix wrong.

Courtesy of central planning, all is now well - market complacency is back to 2007 levels, when the market hit its all time highs, and nothing, absolutely nothing, could go wrong.

As Apple gaps open by another 1% at $558, it stands less than $14bn (in market cap) away from being larger than the entire US retail sector. The good news: it still has a ways to go before eclipsing the retail and the semi sectors combined.

Yesterday we presented the view of JPM's Michael Feroli of what today's FOMC statement may say (one word: inflation). Here is what Goldman believes: "Today's FOMC statement should be relatively uneventful. The committee is likely to acknowledge the stronger labor market data and the upward pressure on headline inflation, which will undoubtedly be characterized as temporary. We also expect a softening of the phrase that “[s]trains in global financial markets continue to pose significant downside risks to the economic outlook,” although we do not expect it to disappear entirely. At the meeting, the staff is likely to give a presentation on additional easing options, followed by an extensive committee discussion. (This will not show up in the statement and will only become visible to the outside world when the FOMC minutes are released three weeks later.) We still think that the committee will announce further easing before the end of the second quarter, when Operation Twist concludes. However, our confidence in this view has fallen on net, partly because of the stronger labor market and slightly higher inflation data and partly because Chairman Bernanke chose not to repeat his very dovish comments from the January 25 FOMC press conference at the February 29 Monetary Policy Testimony." Remember: admitting inflation means no QE any time soon (and also admission that all the other central banks have succeeded in staving off deflation for a few more months courtesy of $2.5 trillion in excess liquidity injections in under 2 quarters).

What do European credit markets know that equities don't? For the 3rd day in a row, credit markets snapped higher at the open and have then sold off considerably - diverging bearishly from European equities. At the same time, European sovereigns (most notably the pivot securities of Italy and Spain) are now 20-25bps wider (in spread) from Friday's Greece 'deal' announcement. European financials are underperforming dramatically.

I just finished reading the best-selling Coming Apart by Charles Murray. I confess to not having heard of the book until I saw it in the store, but the cover of a champagne glass and a crumbled beer can instantly suggested to me that I was going to enjoy this new examination of the United States and its sociological disintegration of the past half-century.

There has been a lot of talk lately about “seasonal adjustments” and what they actually mean and do for the data. Reporting today’s forecast in “seasonally adjusted” terms would not be incorrect. Seasonality isn’t bad, and is useful in many ways, but so is the raw data and trying to figure out if the adjustments make sense or need to be modified a lot due to the particular circumstances at the time (like great warm weather). The markets are almost all doing well so far this morning, aside from European sovereign spreads which continue to leak wider (Spain now +20bps post-Greece and Italy +24bps).

Following several months of retail sales misses, the market was hoping for blow out data- after all consumers have been largely releveraging. What it got was a normal that was in line with expectations at the seasonally adjusted headline level (+1.1%), following an upward revised 0.6% increase in January (0.4% before), and a stripped number ex autos and sales of +0.6%, on expectations of +0.5%. The latter was revised as a decline from the previous 0.6% which was in turn hiked up to 1.0%. Motor vehicle sales, courtesy of the already noted soaring channel stuffing by Government Motors, rose 1.6% in February sequentially. Gasoline stations saw a 3.3% jump sequentially, and 10.3% compared to last year. This even as demand for gas has plunged to all time lows: maybe it has something to do with price. At least people are still eating (+0.8%), and are clothed (+1.8%) even if they are shopping less at General Merchandise Stores (-0.1%) and have less furniture (-1.2%). According to Bloomberg economist Rich Yamarone, the report reflects "broad-based strength," may show "commodity inflation, with building materials sales up 1.4% and gasoline stations up 3.3%." And BBG's Joe Brusuelas adds: "Two-thirds of growth in retail sales due to rising gasoline & auto sales. Gen merch declines 0.1%, due to subs effects caused by inflation." Thank you inflation - may we have another.

Second day of trading in the new Greek bonds (GGB2). It took a whopping 24 hours for the selling to resume. Per BNP "Market heavy."

Even as futures cruise happily along well in positive territory, the EURUSD has once again decoupled from risk (funny how that always happens when the EURUSD is sliding, rarely if ever when it is surging on short covering). What is the reason for this latest schism? According to Citi's Steven Englander it has all to do with Europe once again aligning itself with Obama, and against China, which the market has recently been viewing as a white knight for Europe (contrary to repeated evidence otherwise). As a reminder, China made it very clear last September that it will (somehow) save Europe, if however Europe no longer pursues trade actions against it. Well, Europe just announced it would join the US in the WTO case against China on rare earth metals. Sure enough, China is about to pull the carpet from under Europe all over again. End result: EURUSD under 1.3100 and sliding.