Archive - May 2013

For the first 15 minutes or so after the Fed's statement, the market was largely unimpressed. EURUSD saw some squirliness but it was silver (and gold and oil) that was moving higher quickest. Bonds sold off modestly and stocks rose a point.That trend persisted into the T+30 minute mark but since then bonds and stocks are basically unchanged while Oil, Gold, Silver, and Copper are rising. EURUSD remains very gappy. VIX is modestly lower as pre-FOMC hedges are lofted but that is not supporting buying for now.

T+45: ES 1583 +1, 10Y 1.63% +1bps, Gold $1456 +$6, WTI $91.12 +$0.45, EUR 1.3208 +8

Central Bank governor now admits Irish banks need more capital. As the truth seeps slowly into the mainstream media, who do you believe - Reggie or the Central Bank of Ireland?

With the equity market dropping rather notedly into the release of the FOMC decision, chatter was that the 'early release' button had been hit, but...

• *FED SAYS LABOR MARKET HAS SHOWN SOME IMPROVEMENT
• *FED SEES `DOWNSIDE RISKS' TO ECONOMIC OUTLOOK
• *FED SAYS IT'S `PREPARED TO INCREASE OR REDUCE' PURCHASES

Which suggests some management of expectations... but more of the same and no big surprise. The only real difference from the March statement, as shown below, is the following sentence added in the fourth paragraph:

The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.

While some might scoff, there appears little the European leaders will not swoop to when it comes to papering over cracks and changing rules, we suspect that when they find out that by the mere waive of the May Day holiday they could increase output across the euro area (the majority of which is on holiday today) by an impressive $22.9 billion. Germany and France alone lose $11 billion of output for this holiday, according to Bloomberg Briefs. So is the next 'growth-and-austerity' plan to ban public holidays and boost GDP...

Curious where the always elusive "wealth effect" is going? It's going here:

PORSCHE REPORTS BEST SALES MONTH IN HISTORY; DELIVERIES UP 29%

At the very crux of the financial crisis, former Fed governor Kevin Warsh notes, "experimental extreme monetary policy," had the "right risk-reward", but, he warns, in this excellent (and somewhat chilling) discussion at the Milken Institute, "we left a financial crisis more than for years ago." and since then the Fed has "over-promised and under-delivered." The Fed has "enabled" Washington to do nothing, since the politicians expect the same "rabbit out of the hat" rescue that occurred in the darkest days of the financial crisis. This means no growth strategies ("the mix of policies has to be right") will occur. Since the financial crisis, Washington has done its level best to focus on GDP in the next quarter, or perhaps the election, and precious little beyond that short-term horizon. Warsh concludes, "There Is No Plan B." The Fed has fewer degrees of freedom and the rest of Washington is not coming to the rescue; and furthermore "the ability of a central bank, exclusively, without the rest of Washington doing any bit of the task, to turn an economy from a modest recovery to a robust one is an experiment that is untested - and will not prove to be successful."

The goal of capitalism is communism....-Timothy Trotski

Monday's income and spending (and implicitly 'saving') data provided plenty of fodder at the headline level for any and every opinion. We explained in great detail just how weak the data really was (here and here). But the following two charts suggest that any optimism of organic consumption-led exuberance is completely misplaced. Retail sales of clothing is growing at the slowest pace since 2010; but while major store sales are about to drop negative YoY for the first time in over 3 years, the utter collapse in general merchandise sales is worse that at the peak of the last recession at -5%. It seems tough to see how a nation with an economy built on 70% consumption is not in a recessionary environment. And while this alone is a dismal signal for the discretionary upside of the US economy/consumer; as Gluskin Sheff's David Rosenberg points out real personal income net of transfer receipts plunged at a stunning 5.8% annual rate in Q1. The other seven times we have seen such a collapse, the economy was either in recession of just coming out of one. But apart from that, everything is fine...

A month ago we highlighted the somewhat stunning reality of the real economy via the EIA's detailed energy supply and demand data. The key takeaway was  that we hoped this did not represent the true state of the economy since the data was so dismal. Fast forward to today and the DOE just released a much higher than expected build in crude inventories that took the stuffed-channel of oil products to all-time highs. The 395.3 million barrels is higher than the previous record in July 1990. There appears to be a number of factors at play - none of which are positive. There is a surge in supply due to the incessant harvesting of shale oil (which could have its own problems as we noted here). Second, we suspect there is a degree of 'channel-stuffing' occurring - if we pump it, they will buy - as producers and transporters are desperate to keep active and show incremental business (despite fading railcar loadings). But perhaps most important, as EIA data has shown, there has been a collapse in end demand for crude products not seen since the 1990s. Today's surge in inventories appears to confirm demand remains subdued at best.

In a remarkably candid interview, the President and Executive Chairman of CME Group Inc, Terrence Duffy,  told Bloomberg TV that today gold buyers "don’t want certificates ... They want the real product".  

"What’s interesting about gold, when we had that big break two weeks ago we saw all the gold stocks trade down significantly, we saw all the gold products trade down significantly, but one thing that did not trade down, was gold coins, tangible real  gold.  That’s going to show you, people don’t want certificates, they don’t want anything else.  They want the real product."

Three additional suspects taken into custody in Marathon bombing case. Details to follow.

— Boston Police Dept. (@Boston_Police) May 1, 2013

One of the New Normal responses to allegations, first started here in 2009 and subsequently everywhere, that all HFT does is to frontrun traditional market players (among many other evils) now that its conventional and flawed defense that it "provides liquidity" lies dead and buried, is that "everyone does it" so you must acquit because how can you possibly prosecute a technology that accounts for over 60% of all market volume and where if you throw one person in jail you would throw everyone in jail. Today we learn that this indeed may be the case, and not only at the traditional locus of HFT frontrunning such as conventional exchanges for stocks such as the NYSE or even dark pools, but at the heart of the biggest futures exchange in the US, the CME where as the WSJ's Scott Patterson explains frontrunning by HFT algos is not only a way of life, but is perfectly accepted and even smiled upon.

Just under a month ago we raised the prospect of a number of states following Utah (which authorized bullion for currency in 2011) down the path of gold and silver as legal tender. "The legislation is about signaling discontent with monetary policy and about what Ben Bernanke is doing," was how this shift was previously described and as Yahoo reports, the Arizona Senate on Tuesday approved a measure to make gold and silver legal currency in the state, in a response to what backers said was a lack of confidence in the international monetary system. The bill will make gold and silver coins legal tender as of mid-2014 and more than a dozen other states continue to mull the transition. Those against the bill argue somewhat ironically, "anybody who thinks gold or silver is a really safe place to put your money had better think again," anchored on the last two weeks, but as one supporter of the bill added, a "sound and honest money system such as gold and silver" is needed to bring stability.

Those expecting a complete collapse in the Manufacturing ISM, on par with yesterday's slide in the Chicago PMI, will have to wait some more before the complete devastation in the US manufacturing sector sends stocks into the stratosphere. Moments ago the ISM Manufacturing report for April was released, printing at a headline of 50.7, down from 51.3 and the lowest print since December 2012. The good news: it was still above 50 and beat expectations of a 50.6 print by the smallest amount possible. The bad news: it is sliding fast. The worst news: the Employment Indicator, which came at 50.2, down 4 on the month, was the lowest since November, tied with the biggest sequential drop since 2008 in absolute terms, and the biggest drop in percentage terms since the Great Financial Crisis. Judging by the stock market response, the news is not as bad as needed to send the S&P to over 1600, at least not just yet (but the biggest 3-month drop in construction spending in 26 months may be bad enough to get us there).