Archive - Aug 16, 2012

It must be election season because moment ago Reuters just reported that the White House is "dusting off old plans on a potential SPR release as prices rise" according to a source with knowledge of the situation. This too, just like the earlier Corzine news, should not be a surprise. Obama made it expressly clear that with the election fast approaching, he would either force the CME to hike margins, which is also coming, or would proceed with the far dumber step of an SPR release, just so China can full up its own strategic release faster and at a lower cost. The spun version, of course, has to do with Iran, and the fear of "undermining" Iran sanction success. The same sanctions which the US granted key Iran client China a compliance waiver...

There was a time when retail stock outflows were considered a bullish catalyst: after all, retail was always considered the dumb money (not "two and twenty" hedge funds which continue to underperform the stock market, and have done so for the past five years), and would pull money at the bottom and add money at the top. This is no longer the case for the simple reason that while persistent outflows from domestic equity funds continue (and as the recent shuttering of levered ETFs by Direxion shows the infatuation with synthetic mutual fund replacements is now over), for the inverse to be true there have to be inflows, which are now non-existent. In the past two years, or 106 weeks of market data, there here been 17 weeks of inflows, or 16% of the total, amounting to $31 billion. The remainder? Outflows for a total of $300 billion. In the 32 weeks of YTD 2012 money flows, there have been 5 weeks of inflows for a total of $3.6 billion (which was also equal to the outflow in the last week alone) none of which coincided with market tops, and in fact the biggest outflows occurred just as the market hit interim highs. The most recent inflow, as tiny as it may have been, curious occurred during the May lows, proving retail is if anything, the smart money now. In other words, those looking for hints about the market based on retail flows are advised to look elsewhere. What this data does show is that no matter what happens in the stock market, the outflows will persist and are unlikely to reverse direction. Because if the S&P at fresh 2012 (and multi-year) highs is unable to draw retail out of hibernation, nothing will. Where is the money flowing? Why into fixed income of course, proving that as far as the now extinct investor class is concerned, return of capital is the only thing that matters, while HFTs and prop trading desks can fight over all the return on capital scraps provided courtesy of the Chairman. Curious where the volume has gone? Now you know.

In a stunning and shocking turn of events at Lonmin's Marikana platinum mine in South Africa, Reuters shows this extremely graphic clip of police opening fire on striking miners. A Reuters cameraman says he saw at least seven bodies after the shooting, which occurred when police laying out barricades of barbed wire were outflanked by some of an estimated 3,000 miners massed on a rocky outcrop near the mine, northwest of Johannesburg. Marx is not dead. In fact, far from it.

Tyranny, true tyranny, thrives on our selective awareness, and our ability to bend our minds and our vision to avoid seeing that which is really there.  In the end, victory over tyranny is less about guns, bombs, mass dissent, and civil fury; it instead requires an acceptance of the dark side of the world, and the unwavering will of honorable men ready to face it.  That is to say, the defeat of tyranny begins and ends in the mind.  In America today, many minds are not ready to handle the trials ahead.  Maybe it’s the ease of several generations of uninterrupted prosperity.  Maybe it’s the Babyboomers.  Maybe it’s Generation X.  Maybe it’s the public education system.  Maybe it’s the water.  Maybe it’s all of the above and more.  At this point, we have little time to debate symptomatic culprits.  It is time to go to the root of the problem, and cut it out. What we need is a foundation, a set of “personal rules for combat” when engaging a tyrannical establishment.  This “code” should above all else provide a way of mentally and spiritually confronting one’s own weaknesses and presumptions.  Dictators and oligarchs are not our primary concern.  Our inner state is.

A price massacre, a power-generation technology, and Congress - a toxic brew....

Over the last three weeks, 10-year US government bond yields increased from under 1.4% to over 1.81% while 30-year went up from 2.44% to 2.96%. The 20+ year Treasury bond ETF (TLT) declined 8.2% from the top. That's more than three years worth of interest, gone in just three weeks. Yes, there is a flip side to central bankers artificially depressing bond yields. And you thought you were smart, not falling for Bernanke’s siren songs to push you into "risky" investments.

When observing the trends in the housing market, one has two choices: i) listen to the bulls who keep repeating that "housing has bottomed", a common refrain which has been repeated every single year for the past four, or ii) look at the facts. We touched briefly on the facts earlier today when we presented the latest housing starts data:construction of single family residences remains 46 percent below the long-term trend; the more volatile multifamily houses is 15 percent below trend and demand for new homes 47 percent below. This is indicative of reluctance by households to make long-term investments due to fear of another downturn in housing prices. Bloomberg summarizes this succinctly: "This historically weak demand for new homes is inhibiting the recovery of demand for construction workers as well, about 2.3 million of whom remain without work." But the best visual representation of the housing "non-bottom" comes courtesy of the following chart of homes in negative or near-negative equity, which via Bloomberg Brief, is soared in Q4, and is now back to Q1 2010 level at over 13.5 million. What this means is that the foreclosure backlog and the shadow inventory of houses on the market could be as large as 13.5 million in the future, which translates into one simple word: supply.

As Twitter and CNBC come alive with European banks ripping higher (short-sale-ban and trading a pennies will do that), Spanish and Italian equity markets ramping (to recent swing highs and the top of a four-month range on de minimus volume), while EGBs basically stagnate; we thought a little cooling reality on this white-hot exuberance was necessary. Without really wanting to steal the jam out of Draghi's donut, since LTRO2, Spain and Italy 10Y are 175bps and 71bps wider; Europe's VIX is unchanged at 23%, France's CAC and Germany's DAX equity indices are +1-2%; and Spain's IBEX and Italy's MIB equity indices are -13% and 8.5% respectively. Recency bias, summer doldrums, and an incessant hope that the status quo can really re-emerge (be printed back into existence) among what is increasingly a global balance-sheet-recession (and shadow-banking collapse) among advanced economies is indeed a powerful driver but context is key.

Organic growth is slow and painful (Boo!), central bank money fast, cheap and with few strings attached (Yes!)…And anyway, QE and other supports have already been priced in… Can’t change the programme.

What do the following have in common? LIBOR, Bernie Madoff, MF Global, Peregrine Financial, zero-percent interest rates, the Social Security and Medicare entitlement funds, many state and municipal pension funds, mark-to-model asset values, quote stuffing and high frequency trading (HFT), and debt-based money? The answer is that every single thing in that list is an example of market rigging, fraud, or both. How are we supposed to make decisions in today’s rigged and often fraudulent market environment? Where should you put your money if you don’t know where the risks lie? How does one control risk when control fraud runs rampant? Unfortunately, there are no perfect answers to these questions. Instead, the task is to recognize what sort of world we happen to live in today and adjust one’s actions to the realities as they happen to be. The purpose of this report is not to stir up resentment or anger -- although those are perfectly valid responses to the abuses we are forced to live with -- but to simply acknowledge the landscape as it is so that we can make informed decisions.

Between a weaker EUR and Middle-East tensions, Europe faces a very significant (and real) drag on its economic performance. Forget the 'grow our way out of it' or 'believe-me' memes, the crude reality (that we warned about last week) is that the cost of buying spot Brent Crude in Euros is very close to record highs, above 2008 highs and most worryingly, has seen the biggest rise on record in the last two months. For those wondering what the trade-off is to Mario Monti's pointless blustering and scorched-earth hostage tactics at the June 29 Summit, just look at the 'Total' line item, the next time you gas up.

The market is so beyond broken. No point in commenting any more. Here is what happened with Natgas in slow motion animation courtesy of Nanex... And here is what just happened to recently public Manchester United on no news as the $14.00 IPO price defense finally failed:

Rehypothecate this!

"Business has gone from great to terrible in a matter of months. The sad truth is that most of my clients have already sold all of their gold rings," is anecdotal evidence of a growing trend that Bloomberg reports in Portugal. The central bank holds more gold relative to the size of the country’s economy than any euro country, mostly accumulated during former dictator Antonio de Oliveira Salazar’s 36 years in power, based on data compiled by the World Gold Council. The law prevents proceeds from selling any gold reserves from going toward the government’s budget. With the Portuguese unemployment rate at a euro-era record of 15 percent in the second quarter, citizens are wondering who will help bail them out now that their job and gold are gone: "We have no more gold to save us from being kicked out this month," encapsulates a growing trend in debt crisis-stricken Europe as household gold supplies dry up after record prices and a deepening recession prompts a proliferation of places to exchange the metal for money.

We have discussed this somewhat obscure indicator of our obese nation's spending comfort-factor in the past, but just as divergences from economic and non-equity market realities seem de rigeur currently, we though we'd dust it off. The percentage of disposable income spent on eating-out has plunged dramatically in the last two months (the biggest drop since Lehman!) - after running up in a well-correlated manner with stocks - from the 2009 lows. It would seem that once again, equity hopefulness-divergence is writ large here and yet consumers are not buying the hype/hope.