Archive - May 2, 2012

Europe's VIX broke back above 28% today, sending it to its highest level relative to US VIX since 2003 and almost three standard-deviations above its long-run norm. So what, we hear you cry - didn't you see European PMI and unemployment and the glorious ISM data in the US yesterday? To which we counter, US equities and European equities are not diverging dramatically, US investment grade credit and European investment grade credit are not diverging dramatically, and macro-economically the two regions have been trending down together in terms of negative surprises. We assume that VIX is holding relatively low to V2X (Europe's VIX) due to market expectations that The Fed will be first to flinch in the game of global thermonuclear money-printing war; however, until we see a significant drop in US equities (and therefore the implicit risk flare and rise in VIX), we suspect Bernanke is cornered. With VIX relatively 'cheap' to its realized vol (as we noted here), perhaps Europe-US Vol-compression trade (ahead of NFP at least) is worth a look - or more simply if you are bullish Europe, sell vol (as its the richest asset) or bearish US, buy vol (as its the most out of line).

“I walked along the road with two friends...Suddenly the sky became blood … I heard a huge extraordinary scream pass through nature.” Edvard Munch

Everyone's favorite perma-bullish stand-in for Cramer, Fast Money's Scott Wapner, seemed lost for words when Boston Properties CEO Mort Zuckerman laid down some basic truthiness on the state of the US economy "We have the most stimulative fiscal and monetary policy in the history of this country and here we are three years into the recession and it's not ended. I think we may be heading for an even weaker economy this year than people expect." The righteous REIT ruler went on to note that it is not just the US but Europe (ridiculously high unemployment rates) where he analogizes (rather picturesquely) that it reminds him of "the man who jumps off a 25-story building and as he's hurtling by the sixth floor he says 'don't worry, nothing has happened yet'." Wapner is silenced and changes the topic as we suspect he is stunned at the honest sentiment given the nominal three-year-highs in REIT indices. Truth is indeed stranger than fiat-fiction.

More troubles for the nat gas world, as flashing red headlines confirm the inexorable trend which started years ago with the departure of more and more hedge fund titans who no longer have an advantage in a world where only liquidity matters.

• NATURAL GAS HEDGE FUND MANAGER JOHN ARNOLD TELLS INVESTORS HE IS CLOSING CENTAURUS ENERGY MASTER FUND - RTRS

Why is this not a surprise? Simple. As the FT reported earlier, take virtually everything you know about the nuances, the complexities, the intricacies of commodity trading... and shove it. But don't forget to thank the Chairman first, because the last bastion of "veteran advantage" in what used to be a rational trading arena, is now gone.

The last two nights we have been bombarded with headline data on manufacturing in China - one good and getting better and one bad and consistently contracting. Credit Suisse digs into the reality underlying these indices and notes three reasons why they feel the positive PMI trend is unsustainable as cutting through the "baffle-'em-with-bullshit" macro data is critical in understanding the sad reality we face. Critically, as CS conculdes, the bifurcation implies the economy is not doing entirely badly and hence the hopes of a substantial stimulus should be tempered in the near future - as should the market's optimism of a quick rebound in Chinese demand.

Modern economics is obsessed with modelling. An overwhelming majority of academic papers on the subject work like so: they take data, and use data to construct formal mathematical models of economic processes. Models mostly describe a situation, and describe how that situation would be changed by a given set of events; a very simple example is that as the supply of a good diminishes, its price will increase. Another is that deficit spending increases the national income. A mathematical model is a predictive tool created to demonstrate the outcome of events in a massively simplified alternate universe. As someone who rather enjoys voyages of the imagination, the use of mathematical models in economics is intriguing. The pretension that through using formal mathematical techniques and process  we can not only accurately understand, but accurately predict the result of changes in the economy is highly seductive. After all, we can accurately predict the future, right?

Wrong.

These sturdy ECB LTRO launch vessels are designed to save the European economy...

After a peaceful relaxing public disturbance or two during yesterday's May-Day holidays in Europe, the overnight data was disastrous and European risk markets responded in kind. Spain's IBEX traded below the March 2009 closing lows (though shy of the intraday lows) as it is almost back to levels not seen since Q3 2003 (with an intraday low today of 6776.5 versus 3/9/09's low of 6702.6) with its biggest drop in 2 weeks. Spanish and Italian bond yields (and spreads) pushed notably higher - back near last week's worst levels as the whole of the sovereign complex leaked wider today and financials, in their entirely consumed and joined-at-the-hip manner fell the most in 2 weeks - also near recent lows which would take EU bank stock values back beyond March 2009 levels to mid 1998 lows incredibly. It would appear some profit-taking in the LTRO-Stigma trade is occurring, rightfully so after a more than double, but non-LTRO banks outperformed today as LTRO-encumbered banks leaked back wider. European credit markets were open yesterday (since UK was not on vacation where the bulk of CDS market-making occurs) and we note that today saw investment grade credit (along with stocks) underperform (below Monday's close) - as we suspect 'cheap' hedges were grabbed while crossover credit and financials remain modestly tighter than Monday's close (even as their stocks are worse). Whether this is an up-in-capital-structure rotation on the back of hopes for new capital or merely a reflection of liquidity this week is unclear but it is worth watching as subordinated financial spreads are the outperformer off the 4/23 lows now.

The phrase “New World Order” is so loaded with explosive assumptions and perceptions that its very usage has become a kind of journalistic landmine.  Many analysts (some in the mainstream) have attempted to write about and discuss this very real sociopolitical ideology in a plain and exploratory manner, using a fair hand and supporting data, only to be attacked, ridiculed, or completely ignored before they get a chance to put forward their work.  The reason is quite simple; much of the general public has been mentally inoculated against the very whisper of the terminology.  That is to say, they have been conditioned to exhibit a negative reaction to such discussion instinctively without even knowing why....  The Liberty Movement has always defined the NWO as a concerted effort by elitist organizations using political manipulation, economic subversion, and even war, to centralize global power into the hands of an unelected and unaccountable governing body.  The goal; to one day completely dismantle individual, state, and national sovereignty.  However, what I and many others hold as fact on the New World Order is not enough.  We must examine the original source and how we came to our mutual conclusions.      

That the market is merely yet another transitory sugar high bubble creation of the Chairsatan and his central planning colleagues in various marble buildings around the world is no surprising to anyone, at least not anyone who maintains a pretense of objectivity, is not desperate to sell a weekly newsletter, and has a frontal lobe. What however is not only surprising, but outright shocking, is that such embedded members of the aristocratic status quo elite as Martin Feldstein - a professor of economics at that bastion of Keynesianism Harvard as well as president emeritus of the NBER - the folks who tell us when recessions start and end, are starting to get it. To wit: "The economy is slow and weak. We are not doing very well. The economy is just coming along at a snail's pace. The first quarter numbers that we just got last week were not very good at all" and warns "if we are going to see that jump in taxes, that is going to push the economy next year into a serious recession" but the punchline: "The stock market is, I think, responding to the Fed. I think the real danger is that this is a bubble in the stock market created by low long-term interest rates that the Fed has engineered....The danger is, like all bubbles, they burst at some point" Well, uh... if it is now common knowledge that everything is manipulated, and that the economy is collapsing, and would be outright imploding if it weren't for the Fed's goosing of the stock market, does that mean it is time for Zero Hedge to hang up our hat?

At The Milken Institute conference yesterday, Hugh Hendry delivered his usual eloquent and critical insights on the state of Europe. Beginning with the statement that "All of Europe has defaulted", the canny-wee-fella (translation: shrewd and cautious young chap) explained that "The political economy in Europe is such that the politicians chose to default on their spending obligations to their citizens in order to honor the pact with their financial creditors and so as time goes on, the politicians are being rejected." Between France's election of Mr. Hollande and Luxembourg's 'when times get tough you have to lie' Juncker, Hendry says the only inspiration for Europe is fiction as "you just can't make up how bad it is" as he goes on to discuss the precedent for a way forward, the grotesque distortions of fixed exchange rate regimes, why Wiemar happened, why the transfer union will never happen, Ayn Rand's reality, and fear politicians are feeling - ending with his view that "we are single-digit years away from the most profound market clearing moment".

Every quarter as part of its refunding announcement, the Office of Debt Management together with the all important Treasury Borrowing Advisory Committee, which as noted previously is basically Wall Street's conduit telling the Treasury what to do, releases its Fiscal Quarterly Report which is for all intents and purposes the most important presentation of any 3 month period, containing not only 70 slides worth of critical charts about the fiscal status of the country, America's debt issuance, its funding needs, the structure of the Treasury portfolio, but more importantly what future debt supply and demand needs look like, as well as various sundry topics which will shape the debate between Wall Street and Treasury execs for the next 3 months: some of the fascinating topics touched upon are fixed income ETFs, algo trading in Treasurys, and finally the implications of High Frequency trading - a topic which has finally made it to the highest levels of executive discussion. It is presented in its entirety below (in a non-click bait fashion as we respect readers' intelligence), although we find the following statement absolutely priceless: "Anticipation of central bank behavior has become a significant driver of market sentiment." This is coming from the banks and Treasury. Q.E.D.

The dispersion across European nations in terms of growth and unemployment (as we noted earlier) are just two indications of the dramatic amount of economic hubris, as JP Morgan's Michael Cembalest describes it, associated with the belief in a sustainable European monetary union. Using the World Economic Forum's multitude of competitive factors (across economic, social, and political characteristics), the JPM CIO notes that compared to hypothetical and actual monetary unions in the world that the EMU exhibits the largest differences between member nations of any (current or historical), and still Europe soldiers on. "Countries in the European Monetary Union are more different than just about any other monetary union you could imagine" so it’s hard to know how it will turn out. It’s a tough road, and this data helps explain why. Europe’s problem is not just one of public sector deficit spending differences, but also of deeper, more fundamental differences across its various private sector economies. Whether it’s equities, credit or real estate, EMU valuations need to be considerably more attractive than US counterparts to justify investment given the challenges of the European project.