Archive - Mar 2012

Credit markets closed at their best levels of yesterday and traded in a very narrow (much less risk hungry mode) range as stocks zoomed 1% higher than yesterday's best levels on volumes considerably less than the year's average so far. With tonight's PSI 'news' unlikely to be a surprise (and certainly not unexpectedly bullish as CACs are enacted and likely to trigger CDS), overnight China inflation, and tomorrow's NFP print seemingly priced into the market for perfection, it is apparent the marginal equity trader is far more comfortable with uncertainty (remember participation does not mean agreement still) than the marginal credit trader. The usual suspects did well with Materials, Industrials, and Financials all outperforming (and the majors bouncing back) but we do note that the average contract size in ES (the e-mini S&P 500 futures contract) was its highest in five weeks (even if it was roll week). Treasuries melted slowly higher in yield all day continuing yesterday's trend to complete the largest two-day rise in 30Y yields in six weeks. This de-risking along with JPY weakness and AUD/EUR strength supported risk but we do note that CONTEXT (our broad risk asset proxy) lagged Equity's excitement all day even as it leaked higher. Commodities benefited from USD weakness with WTI managing to get back over $107 briefly and back to positive for the week, Gold getting above $1700 and a wild ride in Silver leaving it in line with Copper -2.5% on the week so far.

It must be a day ending in Y because Texas Instruments just cut its guidance again, or rather, as usual. The reason: "lower demand for Wireless products." Uhm, such as those that the company with the fruit logo makes?

While anyone (as we did) with an abacus and five-minutes of spare time from hitting the buy-button could have figured out that post-PSI 'new' GGBs would trade down hard, it is perhaps worth looking at some sensitivity analysis on both the shape of the Greek curve and the level (as well as the value of GDP warrants) before jumping on any bid from BNP in the grey. Of course, excitement over 80-90% participation rate rumors are somewhat irrelevant as CACs are as inevitable as hearing the phrase 'money-on-the-sidelines' on CNBC every day and whether its 77% or 97% is largely irrelevant - despite our equity market's ebullience. Morgan Stanley provides some color on the new GGBs, which they expect to trade at least 200bps wide of Portugal and with an inverted curve expecting prices to stabilize in the mid-20s (with technicals in the short-term pushing prices below 20). The GDP warrants are estimated at a fair-value around 1c and if the Argentine framework is any evidence, this will be heavily discounted (read ignored) by the market. All-in-all, not exactly positive but still buy stocks because 90% sounds like a good number!

And this is what the market is now seeing for Fresh Start Greek bond pricing (all 20 CUSIPs) via BNP.

Today the Fed released its quarterly Flow of Funds report, also known as the Z.1., which is mostly tracked to show quarterly changes in consumer net worth (and which we find far more valuable to show changes in shadow banking liabilities - more in that in a later post). So while in Q4 household net worth did increase by $1.2 trillion to $58.5 trillion, all of this change, and then some, was purely driven by the central bank induced ramp in the stock market: $1.3 trillion of the $1.2 trillion increase in Net Worth was from the change of value in equity shares at market value which at December 31 was $17.3 trillion. In other words, the illusion of wealth is and continues to be merely a iCTRL+P keystroke away. Yet the one finding that is truly surprising is that in Q4 for the first time since Q1 2008, debt across all holder classes increased: debt held by Households, Nonfinancial corporate business, nonfinancial noncorporate business, state and local governments and of course the Federal government, all rose in the quarter. In other words, the US deleveraging is now over as everyone adds debt for the first time since before the crash. The credit bubble is now officially back.

Update: as expected, the SKAI number which ramped the market was sheer idiocy, and was based on the assumption of a CAC trigger, which obviously means that all bonds should accept following the trigger of the coercive clause.

The time to submit one's response to the Greek PSI has now ended. The next milestone is 8 am local (1am Eastern), when the full results will be announced. But why wait: according to Greek SKAI, participation is now over 90%. That Greece has been known to adjust numbers even more than the BLS is well known, but who cares: the market has taken this rumor and is running with it. Whether this also means that there will be no need to even bother with CDS remains to be seen, as participation, i.e., responding to the exchange offer, does not mean agreeing with the terms of the exchange offer, but market always shoots first and asks questions later. Finally, since UK law bonds are 13% (not to mention Swiss and Japanese-law) of the total it is amusing that once again nobody can do simple math. Incidentally, SKAI appears to be pulling numbers out of glutes. From the Guardian live blog: "Whoever gives percentage rates now is naive. There are only four or five people on the planet who know the exact percentage and those who claim to know are just guessing." And just out from Dow Jones: Government official tells us debt swap participation rate hovering around 80%.

While we have unapologetically highlighted some of the incredible taxpayer-funded research undertaken by the Fed such as "Why water is wet?" and "Why the sky is blue?", this little gem from the Atlanta Fed takes the proverbial biscuit: "Playing the Field: Geomagnetic Storms and the Stock Market". While there are undoubtedly correlations and the physics of tidal and geomagnetic effects are clear on human brains that are 78% water, the advice is fascinating: "Specifically, people affected by geomagnetic storms may be more inclined to sell stocks on stormy days because they incorrectly attribute their bad mood to negative economic prospects rather than bad environmental conditions." History sometimes repeats, history often rhymes. Unusually high levels of geomagnetic activity have a negative, statistically and economically significant effect on the following week's stock returns for all U.S. stock market indices. Trade accordingly.

As 'news' breaks of over 80% participation in the Greek PSI deal and the apparent optimism that this is somehow a good thing, we note that our analysis of what would happen from two months ago was exactly spot on. As the FT reports, "financial markets were already betting Greece would default again in the future. Grey market “when issued” pricing for the 20 new bonds were ranging from 17 to 28 cents on the euro, a highly distressed level, according to indicative quotes", which just happens to almost perfectly coincide with our view:"Which means that according to a generic bond yield calc, the price on the fresh start bonds post reorg will be... 17.9 cents of par, or immediate losses of over 80% the second these bonds break for trading from par." Given grey market bond and CDS pricing, this would imply a 98% probability of Greece redefaulting within the next few years.

Even With Back Dated Deals Featuring Only One Party, One Can't Escape Greece's Problem Shared By Much Of The EU. Let's look at some nasty consequences...

As we head into tomorrow's all-important NFP print, that will make or break the next month's market action and political posturing, we thought it worth highlighting just how statistically farcical the accuracy bias is in this data. As we pointed out in January, this time of year is prone to extreme seasonal adjustments and moreover, this year has seen these adjustments breaking records in their relative scale. As TrimTabs notes the seasonal adjustment for February is likely to exceed 1.5 million jobs, which is many times greater than the job growth the BLS is trying to measure. They expect a 149k add, down from their 180k add forecast for January, which is well below the 210k consensus estimate but we note that the difference between the highest analyst estimate (+275k and no its not Joe LaVorgna) and the lowest (+125k) is entirely covered by a mere 10% disturbance in the BLS-'force' of adjustment. Critically, this means that whatever they need the number to be, it will be though we hesitantly point out the sad reality that while we have added jobs for 17 consecutive months (apparently), the average 133k addition is still insufficient to absorb all the new entrants to the labor force, suggesting the unemployment rate is likely to remain above 8%.

Obama Expanding Program Started by Cheney

When it comes to economic data, there is the BLS's seasonally-adjusted, Birth/Death-ed, Arima-factored, goal-seeked, election year propaganda, or there is real time polling such as that conducted every month by Gallup. And while there is no doubt tomorrow's NFP number will be just better than expected (after all it is an election year for the Derpartment of Truth), the reality is that in February unemployment, that measured by the impartial polling agency Gallup, soared by 0.5%, the most since late 2010, from 8.6% to 9.1%, and back to August 2011 levels. As for the U-6 BLS equivalent, Gallup's underemployment metric rose to 19.1% from 18.7% in January, and a 18% low in mid 2011. The good news, it is just modestly better than the 19.9% in February 2011. Gallup's conclusion, which should be pretty obvious: "Regardless of what the government reports, Gallup's unemployment and underemployment measures show a substantial deterioration since mid-January. In this context, the increase in unemployment as measured by Gallup may, at least partly, reflect growth in the workforce, as more Americans who had given up looking for work become slightly more optimistic and start looking for work again. So while there may be positive signs, the reality Gallup finds is that more Americans are looking for work now than were doing so just six weeks ago....In mid-February, Gallup reported that its U.S. unemployment rate had increased to 9.0% from 8.3% in mid-January. The mid-month reading normally provides a relatively good estimate of the government's unadjusted unemployment rate for the month." Ahh.. Unadjusted. As for tomorrow, expect the BLS to continue in treating seasonally-adjusted Americans like idiots, and pushing the disconnect between the economy as seen by DC bureaucrats and Joe Sixpack to record spreads.

Since Draghi's second savior LTRO, European markets have been flip-flopping gradually lower. These four charts do not seem to suggest a market that is confident about tail-risk containment, sovereign firewalls, or an orderly restructuring by Greece. Sovereign spreads are broadly higher (Spain, France, and Portugal the most), CDS spreads are underperforming (as protection is sought and CDS seen having value as a hedge), non-financial and financial credit is notably weaker, LTRO Stigma remains notably wide, stocks are broadly lower, and the EURUSD is back at 'fair' with its swap spreads (removing its over-pessimism). There has been no change in the price trends for UK-law versus Greek-law GGBs (i.e. noone believes this is over) and even if it were, a renewed focus on growth is hardly a market positive given lending trends and macro prints in Europe recently.