Archive - Mar 2012

'The current rally is running long; equities are due for a 3-5% pull-back' is how Deutsche Bank begins to give some context to the scale of the performance of stocks over the last four months. Whether it be liquidity-fueled optimism, optically-pleasing macro data, crisis-fatigue, or just good old-fashioned back-up-the-truck-we're-all-in buying since the last 10% correction in November, the S&P 500 has rallied 22% - essentially unimpeded for 80 days without a drawdown. In between 5% selloffs, the median rise in the S&P 500 is 10% and the duration is 56 days so this current rally is indeed getting long in the tooth (with a 2.5% retracement the best the bears have managed in 2012). To get a better sense of how equities may perform after such a big rally, Deutsche identifies 8 similar cases to the current one when a 10%+ drawdown was followed by a 15%+ recovery: Jul-50, May-70, Dec-74, Aug-98, Sep-01, Oct-02, Feb-03 and Mar-09. At the same point in the rally (i.e. after 3mo), the market continued to grind higher the next 3 months by 4% on average. So a move of this size and velocity (and smoothness) has only occurred 7 times in the history of the S&P 500 and a quick glance at some of those dates marks some notable periods in US economics (and global geopolitics).

Have you wondered what really drives consumer confidence? The answer is simple. Jobs. If consumers are to be confident about their future, they need to feel secure in the present and future employment. The chart shows (gold bar) the confidence gap, which is the difference between the present situation index and the future expectations index. The red and blue lines are the number of individuals surveyed who feel that jobs are currently hard to get or plentiful. When confidence is high, so are the number of people who feel that jobs are plentiful. This is generally because they are currently employed and feel like they could get another job if they wanted one. The opposite is true today. This gap between jobs being hard to get and plentiful has closed slightly in the last couple of years; however, we are a long way from getting back to levels that are more normally associated with recoveries.

A relatively quiet day after the excitement of the last few as T+3 settlement day into Quarter-end bought little action until the last hour or so. Two main themes appeared for the whole day - VIX pushed higher all day - notably more than the equity move would suggest (which is interesting given our comments on the capitulative normalization of the short-end volatility term structure yesterday) though some looked like catch up to yesterday's blow-off, and Treasuries rallied consistently all day long (with the short-end notably outperforming - as 5Y also down through its 200DMA and saw its largest percentage drop in yield in 2 months). Stocks leaked lower from an early morning spike on German Ifo (stuck in a very narrow range for much of the US day session), FX markets were dull with JPY stable at its lows while the USD rallied very modestly (dragging FX carry off a little and not supporting risk), Oil wavered around with the USD once again (ending up a little) as metal traded lower with a bigger gap down into the last hour or so. Stocks remain notably rich to credit which underperformed once again today. The last hour saw financials and Discretionary stocks start to rollover and then Tech (mainly the majors as GOOG showed the biggest drop top-to-bottom but most did not close strong - though AAPL made new highs once again). Certainly did not seem like a confirming move today of the 35pt rally off Friday's lows as perhaps Quarter-End sees some chips coming off the table - though hard to read too much into today's action.

During February and the first week or two of March, Individual Tax Refunds were running notably ahead of 2011 comparable data. More importantly, after a slow start, the rapid increase in refunds could have perhaps helped buffer the initial gas-price-related 'tax-hike' consumers were concerned about and yet not showing up in retail sales. However, as Stone & McCarthy notes today, the IRS reports that the dollar volume of individual income tax refund issuance lost ground once again to last-year's pace - now down 1% YoY (compared to being up 5.2% in mid-February). 4.3% more tax returns have been received and 2.6% more have been processed at this time compared to last year - and yet the average size of tax refunds are down 2.9% YoY even as the number of refunds is higher. It is perhaps a little premature to forecast the entire tax season, but, for now, what looked like a promising fillip for the consumer as tax refunds provided some extra spending power, appears to be slowing rapidly and removing yet another albeit small bowl of stimulus grool from the consumer's bowl.

Although not quite there yet, it will soon be time to go shopping...

While much has been made of the public side the ECB's money-printing facade whereby any and every piece of junk collateral can be lodged with the lender-of-first-last-and-only-resort in return for shiny new Euros to spend on government bonds (or save as the case seems to be), there is another facility - the Emergency Liquidity Assistance program (ELA) - that skirts under the radar. As Goldman notes today, the ELA enables the National Central Banks (NCBs) to provide 'liquidity' beyond and above the regular refinancing operations. While the amounts are not quite on the scale of the LTRO, they are large and continue to play a crucial role in stabilizing certain segments of the Euro area banking sector. But, of course, as seems always to be the case, the unintended consequence of this temporary emergency facility is that it appears to have become a permanent facility. This consequence has two rather ugly consequences, it removes still further collateral (assets encumbered) from bank balance sheets and further delays the needed adjustment process (read deleveraging) across the banking sector.

While the previous two lectures have had a clear message - Central Banks good, Gold Standard bad, Stability Only Through Central Planning - today's lecture, while unequivocally net positive for the staggering power of the Fed to do what it wants, was less focused. With only one use of the words 'CDO' and 'Save'-the-world, Bernanke focused on the threat of Depression (14 times) and the world-ending 'M.A.D.-bringing' event that would have been the end of AIG (29 times!). With the word mortgage dominant (75 times) and 'Fail' bandied around 33 times, it is clear where Bernanke sees the blame and how the saving of AIG truly was a Flash Gordon moment. Nowhere is this bias better indicated than the 9 uses of the 'People' compared to the 104 uses of the word 'Bank' and should you feel that this was a 'save' by the Fed, the word 'Rescue' does not appear once during the 11,431 word diatribe.

And what rough beast, its hour come round at last, Slouches towards Maiden Lane to be reborn?

This chart tells millions of stories. That’s right: since 1984 (surely an appropriate year) while the elderly have grown their wealth in nominal terms, the young are much worse off both in inflation-adjusted terms, as well as nominal terms (pretty hard to believe given that the money supply has expanded eightfold in the intervening years). So why are the elderly doing over fifty times better than the young when they were only doing ten times better before? There is enough money to keep the economy flowing so long as there are opportunities for people to make themselves useful in a way that pays. With the crushing burden of overregulation and the problem of barriers to entry, these opportunities are often restricted to large corporations. These issues of youth unemployment and growing inequality between the generations are critically important. Unemployed and poor swathes of youth have a habit of creating volatility in response to restricted economic opportunity.

John Taylor, of the Taylor-Rule, who has not been sheepish with his views towards the Fed openly questioned the Fed's independence during a speech to the Joint Economic Committee today. During his testimony at the hearing on the 'Sound Dollar Act of 2012', Taylor noted: "The discretionary interventions of the Federal Reserve have been ratcheted up in such unprecedented ways in recent years that they raise fundamental questions about the future of monetary policy." Perhaps more pointedly, especially given Bernanke's speech today on the Fed's extreme actions and given the hope for a constant interventionist role for the Fed to keep our economy market afloat "The fact that the Fed can, if it chooses, intervene without limit into any credit market - raises more uncertainty, and of course raises questions about why an independent agency of government should have such power."

Much has been made of the lack of retail participation in the casino equity market rally of the last few months (and few years for that matter). Whether it is a signal of the individual investor's overly anxious nature and only the pros 'get it' or more likely this is the end of the baby-boomer-driven secular savings and investment bonanza is perhaps more likely as a nation of soon-to-be-retirees rotate from massive-drawdown-inducing stocks (no matter how diversified your group of trees, when the tornado hits the forest, they all fall down) to the relative (low-drawdown) safety (and steady income) of fixed income. Nowhere is this 'its different this time' secular shift more evident than in cumulative fund flows.

The labor data since last fall has been rather encouraging, writes UBS' Art Cashin in a note today. However, he is skeptical at this reality, agreeing with "lots of folks [who] think it may be the warm winter weather that accounts for it." The warm weather allows for construction (and other outdoor industries) to start p[rojects earlier than planned and also avoids the short shutdowns that winter storms often cause in Jan and Feb. While Art believes the weather could be a significant impact on the positivity, and suspects the follow-through will be disappointing (a la Bernanke), he also notes (as we have commented numerous times) that perhaps it is the distortions in seasonal adjustments that have become warped in the post-Lehman collapse era.

Everything worked...

Italy has issued €157 billion of debt between November of last year and the end of last week.  This is direct Italian government issuance and doesn’t include any of the debt the government has guaranteed in the meantime, which seems to be at least €70 billion more, but hey, who counts guaranteed debt. Of the €157 billion that has been issued, about €122 billion matures within the lifetime of LTRO.  So over 77.5% of Italian new debt is 3 years and in.  In fact, at least 56% was issued with maturities of less than a year.  So in spite of LTRO, in spite of a big rally in Italian yields, in spite of having a technocrat in charge of the country, they continue to issue well over half their debt so that it will mature within a year from now.  That means they will be continuously rolling over debt.  The prudent country would be trying to extend maturity, not shrink it. The market celebrates each “successful” auction, but we should be focusing on what they are actually issuing.  If Germany is serious about a firewall, they or the ECB, should be encouraging countries to pay up and borrow longer.