Archive - Apr 2013

We started off the overnight session with various pseudo-pundits doing the count-up to a 100 in the USDJPY. It was only logical then that moments before the 4 year old threshold was breached, the Yen resumed strengthening following comments from various Japanese politicians who made it appear that the recent weakening in the currency may suffice for now. This culminated moments ago when Koichi Hamada, a former Yale professor and adviser to Japanese Prime Minister Shinzo Abe, told Reuters that level of 100 yen to dollar is suitable level from the perspective of competitiveness. The result has been a nearly 100 pip move lower in the USDJPY which puts into question the sustainability of the recent equity rally now that the primary carry funding pair has resumed its downward trajectory. Another result is that the rally in the Nikkei225 was finally halted, closing trading unchanged, and bringing cumulative gains since the morning before the BoJ’s announcement last Thursday to 8.9%. Over that the same time period, the TOPIX Real Estate Index is up an incredible 24%, no doubt reflecting the prospect of renewed buying of REIT stocks from the BoJ’s asset purchasing program.

The news surrounding Bitcoin is now coming in so hard and fast it is virtually (pun intended) impossible to keep track of it all.  It was just this past weekend that I highlighted a website that shows some of the various retail locations around the world where you can spend your BTC.  Just today, w discovered that New York property management company, Alvic Property Management, is accepting Bitcoin for rent and maintenance payments at all of its properties. Guess someone forgot to tell them it’s a bubble...

RIN is the mechanism for enforcing the Renewable Fuel Standards (RFS) - Suppliers can either blend their own to meet standards OR buy RINs from other blenders... due to weather issues last year 2012 RINs were in short supply - and with Feb as the last date to pay for them we saw prices surge. These RIN prices were passed on to customers at the pump. The problem is there is now not enough for 2013 (and even less for 2014) which means that instead of $0.03, RINs for 2013 could stay high in the $0.75 to $1.00 range (depending on ethanol production) and higher for 2014. This could mean the implementation of several possible alternatives - dependent on exogenous factors such as the supply of feedstock (corn, soybeans, sugar and palm oil) and spare biofuel production and blending capacity - supporting corn prices but the higher prices, we suspect, will lead Congress to revise (lower) its RFS mandates. At current levels, given the weighting of renewable fuels, RINs are adding around 7c to each gallon at the pump; should the RINs rise to $3, then that will mean a 10% rise in the price at the pump implying a 0.9% drag of GDP growth - something our Congress won't accept.

Austerity is under attack again, with Cyprus about to enter a program. Critics charge that austerity is self-defeating because it depresses growth, pushing up the debt/GDP ratio. However, austerity is a necessary (although far from sufficient) condition for countries with low national savings Indeed, there is some evidence that austerity is beginning to have positive effects. The only way to raise net savings is to cut consumption, which is much more difficult than cutting investment. Higher savings have improved market perceptions of debt sustainability, making countries more resilient to shocks (Cyprus, Italian politics). To be sure, European governments have been guilty of false advertising. They claimed that fiscal austerity would not hurt growth. But in order to raise savings, it is necessary to consume or invest less (unless a country is lucky enough to enjoy an export or productivity boom). As a result, growth will suffer as a country raises savings. But once savings begin to recover, elements of a "virtuous circle" begin to fall into place.

The circus continues. For this evening's entertainment, the country's Deputy PM Taro Aso explains the "excessive JPY gain has been corrected," upon which USDJPY instantly strengthens 40 pips reversing all the post-US0-close JPY weakness. Of course, the market reaction was evidently enough for him to swallow his words and 'retract' his comments mere moments later. At the same time, the BOJ declares:

*BOJ MEMBERS AGREED JAPAN'S ECONOMY STOPPED WEAKENING

While their optimism is welcome, facts (as they often do) stand tall in the face of their rhetoric as Japan's Macro index and manufacturing new orders (to name just two recent data points) do not even show second-derivative green shoots. And for the third and final act of this evening's early debacle, 30Y JGB yields have slammed 9bps higher (as JGB Futures prices look set for another halt).

It has been well known for years that PIMCO's Dr. Jekyll and Mr. Gross, the original bond king in charge of Allianz' $1+ trillion bond portfolio, has been a vocal critic of QE even in the face of his daily tweet barrage, which often recommends positions in complete contradiction to what said king opined on in his expansive monthly essays. What will come a great surprise, however, is that the "other" fund, which is just as big, is run by Wall Street's shadow king Larry Fink, and which has been advocating to go all in stocks for over a year (preferably using ETFs) interim drawdowns be damned (after all everyone by now should have an infinite balance sheet) - BlackRock - just went all out against QE.  As the FT reports, BlackRock's fixed income guru, formerly at Lehman Brothers, Rick Reider, "has called on the Federal Reserve to rein in its programme of quantitative easing, saying its bond-buying tactics are a “large and dull hammer” that have distorted markets and risk stoking inflation." Why, it is almost as if we wrote that... Oh wait, we did. Back in 2009.

By now it should be a surprise to no one that there is an increasingly visible hand that decides at 330pm ET stocks need to be bought 'aggressively'. This phantom - and of course entirely efficient - savior of the markets has been dominating market performance since the Cyprus situation hotted up. It is as if a team of people were protecting the market from the plunge that Treasuries have been so clearly signaling in the last 3 weeks. We have shown the 'up-down-up' nature of the last 14 days but since the close on 3/14 (before Cyprus), the S&P 500 futures are down 5 points. In that same period, the cunning strategist who bought at 330ET and sold at the close (in S&P 500 futures) a stupendous 21.75 points (absent slippage of course) outperforming the market by 170bps (for an annualized outperformance of 26.6%) with no overnight margin payments and 30 minutes attention per day (just think of the leveraged performance!!). Of course we bring this to the attention of the reader because the farcical rhymthicity of the market's behavior is better in the light of day for all to enjoy than just Johhny-5 and his algo friends.

The odds of winning were slim and none. Avoiding embarrassment was the real objective, but then something happened. Momentum changed and the rag-tag bunch of American college hockey players shocked not only the Soviets and their 1980 Big Red Machine, but the entire sports World. When seemingly faced with the impossible, America always perseveres and finds a way to win. After winning the global economic game for the better part of 100 years, America is once again on the ropes and no one is giving her any hopes at winning, or even surviving for that matter. America’s debt levels are disastrous. It has no money to pay future pensions and healthcare. Economic growth is anemic. Meanwhile, more Americans than at any other time in history reply upon food stamps. And to make matters even more dire, it is only the decision to print trillions of new dollar bills that is holding everything together. Just as America’s rock is about to hit its American bottom, you must ask “Do you believe in miracles”? And, the short answer is – yes.

From counties with a 50%-plus poverty rate to counties with over 20% of household incomes over $200,000, the United States is increasingly becoming a divided union. But all the time American Idol is on, and the iPad is still running, Aldous Huxley's vision of a 'numb' society (as opposed to an Orwellian 1984 'imposed' utopia) seems more and more realistic.

So much for the "transformational" CEO, poached from AAPL and credited with creating the AAPL retail mystique. As per CNBC, he now effectively "out":

J.C. PENNEY TO OUST RON JOHNSON AS CEO: CNBC
J.C. PENNEY'S CEO JOHNSON `IS OUT': CNBC

At least he lasted just a bit longer than the former JCP president Mike Francis, who came, saw, collected $10 million, and quit nine months later.

Thanks to yet another JPYgasm (which saw the currency lose 1.8% against the USD on the day), stocks were levitated off early weakness amid the lowest non-holiday volume day and lowest average trade size. The message we are supposed to garner is "we don't need no stinkin' jobs" as all the cash indices were lifted to fill the non-farm payroll gap. Treasury yields rose 2-3bps but the 30Y remains massively off pre-NFP levels (as opposed to stocks) suggestive of the JPY rotation bid. Homebuilders were the high-beta ramp of choice, gaining almost 2% (why not?) on absolutely no news whatsoever (and are 2.6% higher than pre-NFP! Copper and Oil rose around 0.9% on the day even with the USD gaining 0.25% broadly. Silver and Gold leaked 0.4% lower from Friday's close. VIX dropped around 0.5 vols holding at 13.5% (below its pre-NFP level). So stocks back to pre-NFP levels (as is the USD) on dismal volume, VIX better than that, but safety is bid with Swiss rates, US Treasuries, and Gold in demand. JPY remains the story - now 7% weaker against the USD since the BoJ news - orderly?

In the last 20 years, Silver shorts (in Silver futures, based on the Commitment of Traders data) has only been as high as it is currently for five periods. Four of those five periods were followed by considerable rallies in silver prices. The one period where prices flatlined (fell modestly) was a slow and steady rise in shorts (as opposed to the spike-like move currently). Of course, with near record amounts on the short side of the boat, it would seem clear where Silver should go next but this time is different we will be told.

The provincial government in Alberta is mulling new rules that would require the oil industry to cut greenhouse gas emissions tied to oil sands production by as much as 40 percent per barrel. The measure may be part of the federal government's push to allay Washington's concerns about the Keystone XL pipeline. Some of the concern surrounding the production of oil sands, the type of oil designated for the controversial pipeline, is that it's more carbon intensive to produce than conventional oil. Alberta's government has expressed concern that it won't be able to meet its emission targets without new rules, though some in the oil industry may be already ahead of the game. While emissions may be part of the debate over the controversial cross-border pipeline, a financial analysis suggests the Canadian government is looking in the wrong direction.

Though Australia’s national balance sheet is comparatively quite strong, the government has been running at a net deficit for years... and they’re under intense pressure to balance the budget. The good news is that Australia now has a goodly number of investor-friendly immigration programs designed to bring productive foreigners into the country, similar to the trend we’re seeing across Europe. On the flip side, though, the Australian government has just announced new rules which penalize citizens who have responsibly set aside savings for their own retirement. If the Australian government can unilaterally change the rules and start double-taxing retirement accounts, so can the US. And the trillions of dollars in retirement savings in the Land of the Free is far too irresistible for them to ignore.