Archive - Jan 2013

FX markets and precious metals are continuing to trade weaker after hours along with Treasury yields (in some very gappy and unhappy ways) - but the S&P 500 futures are flatlining for now (as NKY futures push higher - merely playing catch up to ES since New Year's Eve). Odder and odderer...

With Spanish 10Y yields hovering at a 'relatively' healthy 5%, having been driven inexorably lower on the promise of ECB assistance at some time in the future, the market has become increasingly unsure of just who it is that keeps bidding for this stuff. Well, wonder no longer. As the WSJ notes, Spain has been quietly tapping the country's richest piggy bank, the Social Security Reserve Fund, as a buyer of last resort for Spanish government bonds - with at least 90% of the €65 billion ($85.7 billion) fund has been invested in increasingly risky Spanish debt. Of course, this is nothing new, the US (and the Irish) have been using quasi-government entities to fund themselves in a mutually-destructive circle-jerk for years - the only difference being there are other buyers in the Treasury market, whereas in Spain the marginal buyer is critical to support the sinking ship. The Spanish defend the use of pension funds to buy bonds as sustainable as long as it can issue bonds - and yet the only way it can actually get the bonds off in the public markets is through using the pension fund assets. The pensioners sum it up perfectly "We are very worried about this, we just don't know who's going to pay for the pensions of those who are younger now," or those who are older we would add.

Despite all the rancor about seasonally-adjusted ad hoc beats of holiday week retail sales (amid burgeoning discounts), the trend (post the Hurricane Sandy-driven surge) in GAFO (General Merchandise, Apparel and Accessories, Furniture and Other Sales) retail sales is most explicitly lower. As Bloomberg Brief notes, consumer incomes are in a fragile state and between the ATRA deal and a 'stable' at best unemployment picture, it seems that the YoY change in retail sales is indicating per capita disposable income is set to decline further. As Rich Yamarone concludes: it appears "You can't spend what you don't have." It seems 'tax-the-rich' is also misfiring as those making over $90k per year report recent spending at its lowest for this time of year since 2008.

The chart below illustrates why the U.S. economy is so dependent on the wealth effect generated by asset bubbles.   It’s stunning to think that average real earnings in the U.S. are almost 11 percent lower than where they were in 1973. Policymakers’ focus should be on increasing worker productivity through: 1) reforming the country’s education system;  2) unleashing entrepreneurship;  and 3) in the words of ECB chief, Mario Draghi, “doing whatever it takes” to empower small businesses. But, this is tough political business, however, so we take the easy way out.   The political pandering increases budget deficits, forcing the Fed to repress interest rates and print money to drive up asset prices.   The boom side of the cycle is sustained longer than most expect because of the reserve currency status of the dollar.  This temporarily generates artificially inflated demand (i.e, fake) through the wealth effect, which eventually collapses when asset markets crash. This is not a good long term economic strategy and sustainable path for permanent wealth creation

The Big Winners:  Big Banks and Big Companies

The short-squeeze rip extended through the middle of the day today but on considerably lower volume as we tested up to QE3 highs and sucked in just a few more traders. It seems retail sales (and outlooks) disappointing, higher taxes for 77% of us, debt ceiling and spending cuts to come, and earnings outlooks being slashed en masse was not enough to break the market's spirit... But, when the FOMC minutes hinted at the punchbowl being removed (even modestly), the bid disappeared and S&P 500 futures dropped 10 points and Treasury yields spiked (with 10Y pushing to 8 month highs). USD strength (+1% on the week) and commodity weakness (though gold and silver remain marginally higher on the week) weighed on risk assets in general but algos went quiet and ES depth-of-market plunged as correlations broke. The usual e-bay style close saw ES ramp off the lows of the day to test VWAP and end the day-session there (-4pts or so close to close) as VIX was held lower (sub-15% at 2-month lows). We said yesterday this feels fragile and sure enough today showed its brittleness - as AAPL clung to yesterday's lows staring into the gap. Now the bulls await NFP hoping for a bad print, we assume?

Overnight, Frank Partnoy and Jesse Eisinger released an epic magnum opus titled "What's Inside America's Banks", in which they use over 9000 words, including spot on references to Wells Fargo, JPM, Andy Haldane, Kevin Warsh, Basel II, Basel III (whose regulatory framework is now 509 pages and includes a ridiculous 78 calculus equations to suggest that banks have to delever by some $3 trillion, which is why it will never pass) to give their answer: "Nobody knows." Of course, while this yeoman's effort may come as news to a broader cross-section of the population, is it well known by anyone who has even a passing interest in the loan-loss reserve release earnings generating black boxes formerly known as banks (which once upon a time made their money using Net Interest margin, and actually lending out money to make a profit), and now simply known as FDIC insured Bank Holding Company hedge funds. This also happens to be the second sentence in the lead paragraph of the story: "Sophisticated investors describe big banks as “black boxes” that may still be concealing enormous risks—the sort that could again take down the economy." So far so good, and again - not truly news. What however may come as news to none other than the author is that the first sentence of the lead-in: 'Some four years after the 2008 financial crisis, public trust in banks is as low as ever" is, sadly, wrong.

It took the WSJ's Jon Hilsenrath, who one more time is modestly relevant in a world in which QE is implied until infinity or until the Fed loses all control of the money creation process, 12 whopping minutes to release a 589-word article analyzing the FOMC minutes. At least we know one of the people who had the embargoed version hours ago. We are confident he did not leak their content to anyone. Hilsenrath's prepared take: "A new fault line has opened up at the often-divided Federal Reserve: When to halt the bond-buying programs that are adding $85 billion a month of Treasury and mortgage securities to the central bank's assets. Minutes of the Fed's Dec. 11-12 policy meeting showed that officials were divided about when to halt the programs, with a few wanting to continue them until year-end, several others wanting to end the programs well before then and some wanting to halt them right away. While exposing the rift, the minutes left little clear indication which course the central bank would choose. In its official policy statement, it has been saying since September that it would continue the bond-buying programs until the job market substantially improves...  It is a hugely consequential decision for the Fed and likely the next big challenge for Ben Bernanke in what could be his final year at the helm of the central bank, where he has been chairman since 2006."

Shit breaks again.  It's been covered plenty of times.  The fragmentation within the US equities market its beyond management.  It gets old repeating the same tune.  The SEC is inept, the HFT industry is selfish, and the Academic research on the topic is conflicted and corrupted.  The exchanges offer unpublished orders to top bidders and the integrity of the market has vanished. 

While some were concerned at the Fed's new quantitative targets as suggesting early tightening, it appears (from the FOMC Minutes) that those fears were somewhat warranted (with most seeing QE ending in 2013):

• *FED SAYS A FEW ON FOMC WANTED QE UNTIL ABOUT THE END OF 2013
• *FED: SEVERAL ON FOMC BACKED QE HALT OR CUT WELL BEFORE 2013 END
• *ALMOST ALL FOMC MEMBERS SAW POTENTIAL QE COSTS AS INCREASING

The punchline: "several" means more than just QE4 hater Jeff Lacker are turning hawkish. Though, even with the risks, they want moar. Pre-FOMC Minutes: ES 1460, 10Y 1.86%, EUR 1.3108, Gold $1674. Post: ES -6pts, 10Y +5bps, EUR -40 pips, Gold -$10.

Truly ironic - anyone receiving a REAL business/finance education would be able to run these rudimentary calculations themselves, thereby invalidating the very diploma they are seeking

Presented with no comment - but come on!!!

• *NASDAQ: UTP SIP PROBING AN ISSUE WITH STALE DATA ON UQDF/UTDF

BATS has declared self-help against another market center, or is actively investigating an issue. AAPL, GOOG, etc. all dead...

lots of crossed quotes from EDGE at Nasdaq spins back up

— Eric Scott Hunsader (@nanexllc) January 3, 2013

Stunning Nanex charts below

FOMC Minutes are due in 20 minutes and we find that investors are not paying much attention (yet). Recall, however, that asset markets rallied when the FOMC released the Statement and then sold off on fears that the FOMC was hinting at a quicker than expected pullback of Fed stimulus. The pullback logic was based on how rapidly the US economy is approaching 6.5%  or a read of the Statement/Press Conference comments that suggested that we might see some pullback from QE in 2013. The question is whether the Fed really meant to convey that type of hard conditionality or incipient stimulus withdrawal.

It seems that despite a plethora of posturing and rancorous rhetoric from splinter-group after splinter-group questioning every aspect of Boehner's banality; the Republican managed to squeeze through with no real problems (as even an apparent nemesis - Cantor - stood by his man's side).

• *BOEHNER HAS ENOUGH VOTES TO BE RE-ELECTED SPEAKER OF HOUSE

No 'secret ballot' this time, full "viva voce" roll call to follow - Boehner 220, Pelosi 192, Other (including Colin Powell) 15.