Archive - May 2013

Overnight risk continues to ignore all newsflow (today the economic reporting finally picks up with advance retail sales due at 8:30 am as expectations for a second modest decline in a row of -0.3%) and is focused entirely on what the consensus decides to make of the Hilsenrath piece, even as the difficulty level was raised a notch following another late Sunday Hilsenrath piece, which puts more variable into the "tapering" equation, and whose focus is whether Bernanke will be replaced by Janet Yellen, Geithner or Summers, or anyone. With all three classified as permadoves, one does scratch their head how the market can be confused: worst case Fed tapers by $10/20 billion per month, market tumbles, then Bernanke's replacement or Ben himself ploughs on even more aggressively with QE. QED.

A look at the main drivers.

Another night; another Japanese government bond futures halt. The last 2 days have seen JGB prices plunge at the fastest rate since the post-Lehman debacles in Sept/Oct 2008 smashing back to 13 month highs. 5Y yields are surging even more - trading above 34bps now (up from 9.9bps on March 5th). These are simply astronomical moves in the context of JGB history and strongly suggest Abe & Kuroda are anything but in control of the quadrillion Yen domestic bond market as they jawbone inflation expectations into the psychology of the people. Of course, the Nikkei is surging (now up 9% in the last 5 days alone) amid JPY breaking above 102 (but for now it has rallied back to 101.80). Japnese interest rate implied volatility is surging once again also (after its epic collapse last week - which appears the worst-timed lifting of hedges ever, or more like a lifting of hedges into an unwind of actual long positions).

Following our last primer on the digital currency, prices have somewhat stabilized (despite the ongoing efforts of TPTB to regulate it out of existence). The following infographic provides a step-by-step illustration of how a bitcoin transaction occurs.

In a weekend dominated by discussion of the "Taper Tantrum", i.e., interpretations of what Hilsenrath "said" after the close on Friday, what the Fed wanted him to say, what the market's response to what he said or did not say would be, and what the next steps may be, we present this convenient annotation of Hilsenrath's complete recital courtesy of Mike O'Rourke from Jones Trading.

Currency wars are so pre-"QE eternity." At least that is the opinion of Indian multi-billionaire Lakshmi Mittal, and owner of the world's biggest steelmaker, who urged Europe to embrace protectionism and erect trade barriers to "protect" its manufacturers (benefiting one ArcelorMittal among others), while at the same time bashing austerity, saying "the futures of EU manufacturing depended on politicians in Brussels helping industry face what he said was unfair competition from China." In other words, it's time for Europe to escalate into full blown trade warfare with China. It is unclear if Mr. Mittal had any thoughts on how China would, in turn, escalate to this progression in trade warfare: whether with tariffs, subsidies, or outright dumping. What does appear quite clear is that the owner of ArcelorMittal, who on Friday posted a net loss of $345 million (down from a $92 million profit a year earlier) on Q1 sales plunging by 13%, whose stock is just off its 52 week lows, and who said he may close plants in Eastern Europe if the "economy continues to slump", may have some ulterior motives in asking that Europe fight his war for him.

In chapter 8 of David Stockman's new book The Great Deformation, the power-that-be-turned-anti-establishment-reality-seeker explains his perspective on the myths of the New Deal Recovery: "The new deal was a political gong show, not a golden era of enlightened economic policy. It shattered the foundation of sound money and inaugurated a régime of capricious fiscal and regulatory activism that inexorably fueled the growth of state power and the crony capitalism which thrives on it. But it did not end the Great Depression or save capitalism from the alleged shortcomings which led to the crash. In fact, the New Deal introduced a severe dose of economic nationalism and autarky at a time when the only hope for speedy recovery was a reopening of world trade and reestablishment of a stable international monetary régime.... in reality, the notion that the New Deal had pioneered a road map to recovery by means of countercyclical fiscal policy is mostly a postwar academic legend."

Erasing Friday's gains (and the well-documented VIX-driven melt-up into the close), S&P 500 futures have opened down 4.5 points (against JPY-carry for now), Treasuries are indicated 4-5bps higher in yield, and Gold is opening down 0.4%. Not in itself a large move but perhaps indicative of some concerns that Hilsenrath is on to something and the punchbowl is being ever so gradually pulled away (though, we suspect it is only a matter of time before this article is spun in a bullish light, suggesting that the Fed still does not have a firm timeline in mind, which by implication is bullish - no news is good news - and much more jawboning has to come before the real tapering talk begins). In the meantime, we are sure the clarion call to Buy-The-Feding-Dip will be heard and in the interest of balance, we offer some insight into 'valuations'.

Only 25, self-described 'risk-taker' Dylan Collins plays the markets with a pot of more than $1 million - $100,000 of his own money earned from trading over the past two years, the rest provided by his bosses and partners at AMR Capital Trading. As The Washington Post reports, Dylan exclaims, "trading is fun; for me this is the dream job;" but as they note, for most of us, day trading conjures up the image from the dot-com era of some dude in his pajamas with a two-day growth of beard logged on to a Charles Schwab account buying Nortel Networks and Pets.com on margin. But have no fear for - New York-based AMR, a division of G-2 Trading, is a lot more disciplined and sophisticated than that - specializing in “momentum trading,” riding hot stocks up and cold stocks down, taking advantage of the irrational herd behavior that characterizes financial markets. “I understand the idea that maybe you’d want to do something more meaningful, but I don’t think I need to worry about that at my age,” Dylan explains as he exploits momentary mispricings and sudden spikes in volume. The thing about this kind of trading is that you don’t have to know very much about the companies whose shares you are buying or selling.  “So much of trading is just about intuition,” he adds brushing off how quickly knife-catching turns to blood (as the BTFD strategy backfired on Sino-Forest and Digital Domain). History repeating or Darwinian justice?

Manufacturing data in the last several months has suggested that economic growth around the world is slowing. However, China’s export growth surprised the market this week and unexpectedly accelerated in April, even as shipments to the U.S. and Europe fell. This has created a conundrum for analysts and market watchers. How can China be growing while the countries that purchase its exports are slowing? As we noted earlier, the numbers don’t add up. Many analysts have attributed China’s increasing imports as signs of a healthy manufacturing sector, or increasing investments in infrastructure and property. Our simple analysis shows that more than one third of the increase in imports is due to China’s increasing gold consumption. This new gold buying could have a significant impact on Chinese import statistics and force analysts to reconsider the strength of the Chinese domestic economy.

Think the best paid public servant in your state is some tax-collecting bureaucrat with a commission-based comp structure, or some administrative apparatchik? Think again. As the following infographic from Deadspin shows, in 41 US states, the highest-paid public employee is either the football, basketball or hockey coach at the local state school. Whick takes cares of the "Circuses" part. For now, at least, public sector bakers did not make the list...

Niall Ferguson recently remarked, "[Europe] is a politicial experiment gone wrong. The experiment was to see if Europeans could be forced into an even closer union - despite their wishes - by economic means, because the political means failed." In this brief clip, Lars Seier Christensen, co-CEO and co-founder of Saxo Bank, tells an audience at the Saxo #FXDebates in London that the eurozone will eventually break up as Brussels claims even more power from nation states. He warns investors that Cyprus was indeed a template for bail ins and that outright confiscatory wealth taxes, disguised as solidarity payments, could be used to raise funds. "The governments of Europe need money, and the private sector has it. It is as simple as that. Be very paranoid," he said, warning investors that the mattress may be a safer place to deposit money over the weekend than their bank accounts. "Frankly, it is a complete mess. And it is a mess that gets worse and worse every day," is how the outspoken truthiness begins, adding, "anyone with a rational view of the world now sees the currency collaboration as a historic failure that can lead to even further fatal consequences for Europe and the continent’s competitiveness vis-à-vis the rest of the world."

By definition, exports from country A have to equal imports from country B. Unless country A is China. Then, central planning magic happens, as can be seen in the chart below showing the misreporting of Chinese exports to HK compared to HK's reported imports from China, which is just the latest nail in the coffin of Chinese economic data "integrity."

Put down the Sunday newspaper; grab a pot of coffee; and call 'mom' and tell her she has to read this. Doug Rudisch has written a far-reaching summary of the true state of the world and 'why policy has failed'. Simply put, there is no faith in the system; real underlying faith and trust in the system, as opposed to the confidence born from economic steroid injections or entitlements. There also is a subtle but important distinction between faith and trust versus confidence. Faith and trust are longer term and more powerful concepts.There is more going on than a temporary lull in animal spirits that current fiscal and monetary policy will cure. If that was the case, it would be working already... We have ended up with a system where the worst of the risk takers have the ability to take the most risk and are currently taking it at extreme levels. We wish we could be more prescriptive and offer more solutions for the problems. But in order to solve a problem, you must first realize you have one. With respect to the Fed, we don’t think the U.S. realizes it has a problem.

That CNN's news coverage has been nothing but comedy-(and cringe-)worthy for the past several years, should not be news to anyone by now: perhaps there is no better testament to a society in which a network that breaks news based on fake twitter rumors is still held in high regard. However, in the spirit of reverse psychology memes, does the fact that Jon Stewart is now constantly poking fun at CNN's "news-slaughter", mean that it may be, paradoxically, time to start taking CNN - "the most busted name in news" seriously again? (...that's obviously rhetorical).