Archive - May 31, 2012

While stocks, gold, and the dollar are generally in sync, Treasuries appear modestly more bearish now (for stocks) but it is the high-yield bond ETFs that is making a few people nervous as they plunge on heavy volume (and well below their intrinsic value). Obviously no-one really knows what i going on at JPM, but fort some more color we note that IG9 10Y is trading wider once again offered at 169bps - so one wonders if the liquidity in HYG is allowing some unwinds (or more hedges to be laid out). Certainly stocks remain ignorant of it for now - though month-end may be impacting both.

If it appears like it was only yesterday that Goldman was advising clients to short the 10 Year Treasury, it is because it was... give or take a few months: From January: "Since the end of last August, we have argued that 10-yr US Treasury yields would not be able to sustain levels much below 2% in this cycle. Yields have traded in a tight range around an average 2% since September, including so far into 2012. We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00." We added the following: "As a reminder, don't do what Goldman says, do what it does, especially when one looks the firm's Top 6 trades for 2012, of which 5 are losing money, and 2 have been stopped out less than a month into the year." Sure enough, as we tabulated last night, those who had listened to this call, and also gone long stocks as Goldman urged on March 21, have lost nearly 30% in about 2 months. Those who listened to us and did the opposite, well, didn't. Which is why the just released note from the very same Garzarelli who 4 months ago was so gung ho on shorting bonds, just cut his bond yield forecast for the entire world, US Treasurys included: "We now see 10-year US Treasuries ending this year at 2.00% (from 2.50% previously, and 30bp above current forwards), rising to 2.50% (previously 3.25%, and 60bp above the forwards) by December 2013. The corresponding numbers for German Bunds are 1.75% and 2.25%." In other words, it is now that Doug Kass should have made his short bonds call: not when he did it, a month ago and got his face bathsalted right off. For those asking - yes: Goldman is now selling bonds to clients.

While it will be no surprise to any ZH reader (with our attention to Swiss 2Y rates) the world is undergoing a massive capital flight to safety. Rick Santelli gave this topic his special treatment today, pointing out that "capital is detouring - to avoid risk", and outlining just how big a 'crash' lower in yields we have seen among many of the supposedly safest sovereigns as money floods to safe-havens (including UK, US, Japan, Germany, and Holland). What is most important is that Rick outlines why we should care - when all around are yawning on about how cheap 'dividend' stocks must be given low interest rates - since it changes the nature of capital (the life-blood of our markets) from risk-taking to absolute safety-seeking - as he points out that "it isn't necessarily about our own economy's numbers, it isn't even about who we export to; it's the fact that if capital continues to get somewhat impaired, you'll have more data points as investors not only rethink about their capital but everybody rethinks everything in the capital structure that makes business go round."

"Elevator to the gallows."--Miles Davis

With any possible majority likely to be quite weak, and about two weeks to go, the outcome of this second election remains highly uncertain. While we're happy to leave the ever-changing chances of all the possible government combinations to the Greek political commentators (or media pollsters asking 1000 people), we think that the chances of a pro-bailout majority in parliament – at least for a short while – are slightly less than even at best. Morgan Stanley recently opined on the four possibilities with all centered on Syriza's actions.

This is the state of affairs in Europe: bankrupt nations trying to bailout bankrupt banks or looking for bailouts from funds that are backed by other bankrupt nations.What could go wrong?

By now, the bubble in student loans is becoming more widely understood. The absolute level continues to rise significantly and growth is accelerating with 8% YoY growth just reported, via the WSJ. Of course the reasons are anathema but attending college on the back of hope of a better-paying job when everyone else is also attending college in that hope (thanks to endless student-loan funding from your helpful government) seems to be self-defeating as the supply of supposedly better-qualified workers into a stagnant economy will do nothing but reduce higher-end wages further? Of course this is over-simplified but as the rest of the country delevers, pays down credit cards, or BKs, those that remain jobless heading to college for a way out are now struggling also - as is clear from WaPo this last weekend where dropout rates are increasingly dramatically. What is more worrisome is that while every other class of debt, according to the New York Fed's data, is seeing delinquency rates dropping, Student Loans 90+ days delinquent surged in Q1 to 8.7% - near its peak crisis highs and remains above peak mortgage delinquency rates.

Even the strongest and toughest creature out there, and maybe the smartest one, that no one has been able to subdue yet....

Update: as expected, "IMF Says Spain Discussions Internal, No Talks With Spain"

Wondering what prompted the most recent "month end mark up" ramp in stocks? Look no further than the IMF, which one month after failing miserably to procure a much needed targeted amount of European bailout funds as part of Lagarde's whirlwind panhandling tour, hopes that markets are truly made up of idiots who have no idea how to use google and look up events that happened 4 weeks ago. So here it is: the Spanish bail out courtesy of the IMF. Well, not really. Because according to other headlines the IMF claims no plans are being drafted for a bailout. Why? Simple - if the IMF admits it is even considering a bailout, it will launch a bank run that will make the Bankia one seem like child's play, as the cat will truly be out of the bag. So instead it has no choice, but to wink wink at markets telling them even though it has been locked out from additional funding by the US, UK, Canada and even China, it still has access to funding from... Spain.

Three years of anti-Goldman bashing and exposing the company's legal and illegal dirty laundry have clearly had an impact on society:

*COHN SAYS SUMMER PROGRAM APPLICATION POOL WAS BIGGEST EVER

The Borg zombification shall continue until everyone wants to work solely at "The Goldman Sachs"

It seemed the 'but but but we're oversold' argument was holding up in early trading in Europe as EURUSD, sovereign bonds, corporate and financial credit, and stocks rallied out of the gate. It didn't take long however for the technicals from CDS-Cash traders to wear off and Spain and Italy sovereign debt started to leak back wider. This accelerated pushing everything off the edge as European stocks and financials & investment grade credit fell to recent lows. Interestingly high-yield credit (XOVER) remains an outperformer. By the close, credit markets were pretty much unchanged from last night's close having given back all the knee-jerk improvements on the day but equities remained lower - with a late day surge saving them from total chaos. EURUSD gave back all of its early gains to end the European day lower once again - though off its lows - even as Germany 2Y trades with 0.2bps of negative and Swiss 2Y rates plunge below -25bps. For the month, EMEA stocks were a disaster - Italy and Spain down 12 and 13% and the broad Euro-Stoxx -8.3% (-8.7% YTD).

There is much hand-wringing about the vast income disparity in the U.S. between the top 5% and the bottom 25%, and precious little offered as a solution. Once again we are told the problem is "complex" and thus by inference, insoluble. Actually, it's easily addressed with one simple act: restore the minimum wage to its 1969 level, and adjust it for the inflation that has been officially under-reported. If you go to the Bureau of Labor Statistics Inflation Calculator and plug in $1.60 (the minimum wage in 1969 when I started working summers in high school) and select the year 1969, you find that in 2012 dollars the minimum wage should be $10 per hour if it were to match the rate considered "reasonable" 43 years ago, when the nation was significantly less wealthy and much less productive. The current Federal minimum wage is $7.25, though states can raise it at their discretion. State rates runs from $7.25 to $8.25, with Washington state the one outlier at $9.04/hour. In 40 years of unparalleled wealth and income creation, the U.S. minimum wage has declined by roughly a third in real terms. "Official" measures of inflation have been gamed and massaged for decades to artificially lower the rate, for a variety of reasons: to mask the destructiveness to purchasing power of Federal Reserve policy, to lower the annual cost-of-living increases to Social Security recipients, and to generally make inept politicians look more competent than reality would allow.

It's blood in the streets out there: nobody wants Euros because nobody knows if Greece will be in the EMU on Monday... Or Spain for that matter, which is now fresh out of towels. You just happen to have the position of an FX trader at the SNB and everyone wants your money. What do you do? What do you do?

Presented with little comment - except to note the increasingly tight relationship between the price of the long bond and the USD as we see 30Y Treasuries up 4.40% YTD vs ES +3.7% YTD

Just in case there's somebody left who still believes so, Spain is not going to make it. In addition, Spain will crack the EU and bring the art of true fundamental analysis back into the fold.  Here's mucho evidence!