Archive - May 2013

Today saw the largest high to low drop intraday (down over 2.3%) in the S&P 500 for five weeks as it fell back to the 'Tepper Top'. Volume was the 3rd highest of the year. As expected, high-beta muppets were hurt most; Trannies were the worst performer in the major equity indices (down 1.6% on the day and 2.5% from the Bernanke highs early on); homebuilders dropped 3.7% from their earlier highs, and Morgan Stanley slumped 4% from its earlier highs. VIX (up most in 5 weeks at 14.0%) and credit markets (biggest widening in 4 weeks and HYG dropped by its most in 6 months from its intraday highs) saw major weakness (extending the bearish divergence with stocks). The USD rallied back to unchanged on the week and commodities slipped lower (gold and silver end the day slightly higher on the week). What's so special about today? The S&P 500 dividend yield just equilibrated with the 10Y yield for the first time since April 2012... where would you rather 'reach for yield'...

As the global equity and bond markets grind ever higher, abundant signs exist that we are once again living through an asset bubble – or rather a whole series of bubbles in a variety of markets. This makes this period quite interesting, but also quite dangerous. This can be summarized in one sentence:  How could this be happening again so soon?

As the world of equity asset-gatherers is desparate to point out the 'bubble' talk must mean bonds, we offer a few charts as a gentle reminder of reality... And as Doug Kass noted the last two times the S&P 500 hit all-time high and closed down more than 1% from that high were 10/11/07 & 3/24/00... 330 Ramp Capital has their work cut out today with volume already near the highest of the year in the S&P 500 e-minis.

What is 410 words and is released precisely 180 seconds after the FOMC's minutes? Why Jon Hilsenrath's FOMC minute-parsing piece of course. Which we can only assume means Jon was on the "preapproved" list for early distribution and pre-analysis, because not even we can analyze and type that fast. We are confident he did not breach the embargo. Because that would not look good for the Fed already being investigated by the Inspector General for last month's humilating breach.

Well that escalated quickly... the S&P is now 30 points off its earlier highs and it seems (for once) that it is stocks and none of the other risk-assets that are taking the brunt of the disappointment. And no, it wasn't the mention of a June taper that spooked markets: as the Fed itself said that will be a function of the economy, and as everyone knows there bad news and good news are both goods news. What spooked the market is that finally someone on the FOMC is not only acknowledging asset bubbles, but putting it in writing: "a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant.... One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability." Now this is a problem because unlike the economy where QE may or may not trickle down to the unemployment rate (it won't as QE is causing it but fear not - more QE is just around the corner to fix a problem caused by QE) asset bubbles only get bigger and bigger and bigger, until QE has to be not only tapered, not only stopped, but actually unwound. And with some finally on the record, the blame will be cast squarely at those who ignored the first warnings.

It appears (as we noted here) that the size of the balance sheet, difficulty of the exit, frothiness of markets, and not-totally-dismal labor headlines have even the doves a little more hawkish about the possibility of an exit at some point - though obviously the minutes are clear that the 'flow' can increase (as well as decrease) based on the data.

• FOMC MINUTES: MANY SAID MORE PROGRESS NEEDED BEFORE SLOWING QE
• FED'S BROAD PRINCIPLES ON EXIT `STILL VALID,' FOMC MINUTES SHOW
• SOME ON FOMC WILLING TO SLOW ASSET PURCHASES AS EARLY AS JUNE
• SOME SAID "CONDITIONS IN CERTAIN FINANCIAL MARKETS WERE BECOMING TOO BUOYANT"
  

Two things seem clear: 1) the Fed is explicitly forcing the market to hope for bad data to maintain gains as the gap between market and reality is now too large for a soft-landing; and 2) the Fed has explicitly admitted that it is the 'flow' not the 'stock' that matters - as we have been vociferous about for years. But what is worst, is that now that some at the FOMC are openly seeing asset bubbles, Bernanke is facing a mutiny on his hands!

There appears to be only three words that matter any more and they all begin with the letter 'T' - Tepper, Tuesdays, and Tapering. It seems today, the apparent start of Bernanke's gentle communication policy that he might possibly maybe one day will remove the punchbowl is being modestly priced out of stocks. The S&P and Nasdaq are now down 1% from post-Bernanke 'Moar' euphoria.

With part two of today's Fed-a-palooza due out shortly in the form of the May 1 FOMC meeting minutes, here is an informative recap of the current roster of assorted birds at the FOMC via Bank of America. Of course, since every decision always begins and ends with Ben, and soon his replacement Janet, all of below is largely meaningless.

Protect America, report all market contrarian activities!

Following the first quarter rout in AAPL stock, some wondered if there would finally be rotation at the top floor of the hedge fund hotel of stocks held by most hedge funds. The answer is no: as of March 31, AAPL still retains the title of stock with the largest number of hedge fund investors at 188, more than GOOG with 184 and above AIG with 180.

Inflation is hot property today, hyperinflation is even hotter! We think we are modern, contemporary, smart and ready to deal with anything. We’ve got that seen-it-all-before, been-there-done-it attitude. But, we are not a patch on what some countries have been through in the worst cases of hyperinflation in history.

It seems that the recent rise in interest rates, instead of the typical (pre-depression) behavioral tendency to make people nervous and rush to lock in low rates, has once again stalled any hope of an organic housing recovery occurring. While the reams of hard data show that the housing recovery remains a fast-money investment-driven enigma (here, here, and here) - as opposed to real confidence-driven house-buying; we are still told day after day that housing is the backbone of the economy (despite construction jobs languishing and affordability plunging again). The fact of the matter is that the last 2 weeks have seen mortgage applications plunge at their fastest rate for this time of year (a typically busy time) since the financial crisis began. But that doesn't matter because housing must be recovering because the homebuilder ETF is up 2% today...

But 34.9%?

"The most notable statement made by Bernanke during the Q&A session was that the FOMC could potentially cut the pace of QE purchases "in the next few meetings," although this was predicated on a continued improvement in the outlook for the economy and confidence in the sustainability of that improvement. He also stated that the purchase pace will depend on incoming data and that the FOMC could either raise or lower the pace of purchases in the future. Our view continues to be that the December meeting and subsequent press conference is the most likely time that the Committee would announce QE tapering, although September is a possibility if the economy picks up more than we expect in coming months."

The last time Hilsenrath was relevant was two weeks ago (in a flashback to those days before QEternity when infinite QE was not assured and Jon's input was actually relevant), when following an article of his, and due to his "proximity" with the New York Fed, many assumed that the Tapering suggested by Hilsenrath was being telegraphed by Bernanke to the market. Turns out it was nothing but yet another baffle with bullshit headfake by a central planning regime that is now merely engaged in observing market responses to indirect stimuli: if reduce monthly flow by $20 billion then X (-1%); if cut QE off entirely then Y (-50%?), and so on. Moments ago the same Hilsenrath just released another piece, which effectively refuted everything his previous piece suggested, and in fact made his position as Fed mouthpiece absolutely irrelevant, courtesy of the following disclosure: "this time, when the Fed shuts off bond buying, it won't be... predictable." He goes so far as to say that the term "tapering" is no longer even applicable! Funny that, considering on May 11, none other than Hilsenrath said: "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy."