Archive - Jun 2013

Until the great-and-powerful Ben pronounced the Taper, US Treasury bonds had tracked the deteriorating macro fundamentals of this 'recovery' rather well. In the few weeks since, the squeeze has hit and yields have played catch up to equity's exuberance. However, now that the two asset classes have recoupled in the less-supported world, the question is, which of the three legs of reality - equities, bonds, or fundamentals - will move next?

Presented with little comment (as we said it all here 2 months ago):

• *SKILLING SENTENCE REDUCED TO 14 YEARS BY JUDGE
• *SKILLING TO GET OUT OF PRISON IN 2017

It seems 14 is the new 24 - more accounting gimmicks, we presume?

It's funny 'coz it's true...

It appears the Federal Reserve's has not had enough time to figure out just who to blame or how to wriggle out of the situation that the March minutes were prematurely released to pretty much everyone that matters in the TPTB. As Reuters reports, the Fed's Office of Inspector General said it would miss the deadline on the investigation - offering no reason why the deadline will be pushed back three months.

Recent market actions have left many staunch gold advocates uncertain about what's ahead... not to mention how to invest wisely for both the short and long term. What gold assets are the best to buy? Should investors be buying today or holding for further drops? There is bad news and good news...

Bond markets were slow to react to the Hilsenramp - forced by equities it seems in the short-range - but have now reversed their gains. Credit markets stopped believing about 30 minutes ago. Are equity markets, having trod water around VWAP for a while, now ready to revert back to a world absent the WSJ reporter... or primed for a melt-up into OPEX?

With the confusion over Bernanke's comments - "have no fear as the economy is bad enough that the Taper will never come" confused with "the economy is picking-up and that's great so we don't need the Fed anymore" - one has to ask, as we have numerous times, is there another reason for the Fed to start the ball rolling on the Taper talk? In the last few weeks, the Treasury market's yields have risen notably but much more critically, the fails-to-deliver has surged. This critical indicator of both collateral shortages and technical carry trade unwinds is a little-discussed indicator of just how broken the market is thanks to the overwhelming ownership of the Fed. It's getting worse - as Barclays warns, the weakness in bonds is feeding on itself as more people want to short and so the need to borrow from the Fed (as dealer inventory is so low) increases and raises the cost (special-ness) of that short. Simply put, the main reason the Fed is tapering has nothing to do with the economy and everything to do with the TBAC presentation (rehypothecation and collateral shortages) and that the US is now running smaller deficits!!!

While arguments will likely flare over just how 'miserable' the occupants of Louisiana are relative to those of Minnesota, based on Bloomberg's quantification of 'misery' these two states are the most and least miserable in our Union. Based on thirteen factors, ranging from child poverty rates to pollution, income inequality, and mental health it seems New Mexico and West Virginia are moving up the most miserable ranks most rapidly year over year.

Considering the median price of a home in the US is $208,000 according to NAR, the average student debt balance is the equivalent of a 13% down payment. In other words, two-thirds of recent graduates have saved a negative 13% down payment toward their first home. Of course, these are the same people that the bulls are counting on for household formation, population growth, job creation and other equally irrelevant arguments for strong housing demand in the future. Take a look at the table below and tell us if you are still optimistic.

NSA leaker Snowden shed new light on old relationships with a vibrant all-American industry

The 'Hilsenramp' is here. As US equities look set to test previous all-time highs and important support (100DMA), the mouthpiece of the Fed proved his worth:

*WSJ's HILSENRATH: Analysis: Overlooked 'Dovish' Signals In Bernanke Press Conference
*WSJ's HILSENRATH - Analysis: Markets Might Be Misreading The Fed's Messages

Apparently, everyone messed up - there is nothing but good news for the money-printing-addicts. Hilsenrath's "New York Fed" sources have yet to leak the 2013 year-end price target for the S&P 500 (though we expect that next).

To find what is perhaps the best analogy of the mentality behind today's global capital markets and the perhaps the entire US economy as well, one has to travel to Zhongxiang in Hubei province, where a university entrance exam for 800 students did not go quite as expected. Telegraph reports: "When students at the No. 3 high school in Zhongxiang arrived to sit their exams earlier this month, they were dismayed to find they would be supervised not by their own teachers, but by 54 external invigilators randomly drafted in from different schools across the county. In short: everyone was hoping to continue a historical tradition and simply cheat, but the proctors finally and shockingly pulled the plug. End result: hundreds of test takers who had no idea what to do when the system is not rigged. "Outside, an angry mob of more than 2,000 people had gathered to vent its rage, smashing cars and chanting: "We want fairness. There is no fairness if you do not let us cheat."

European equity markets closed down for the fifth week in a row for the first time since Summer 2011's European crisis. The 3.75% loss on the week in the broad (S&P 500 equivalent) Bloomberg Europe index is the biggest drop in 13 months to close the week unchanged on the year. Italy and Spain were the worst performers - down around 4.5% to 5% on the week - even as sovereign spreads held in only 9bps wider on the week. Europe's VIX surged to 24% - its highest close in 4 months. Greece's problems are emerging once again - smashing the EUR down over 2% in the last 3 days - its worst drop in 11 months as GGBs (and Greek stocks) plunge.

While the headlines will note the 2.50% level's importance (given its highest rate since the August 2011 debt crisis), it is the belly (5Y and 7Y) that is being crushed.

The technical damage from yesterday’s bloodbath was severe. I’ve been warning readers of Gains Pains & Capital that we were heading for a serious collapse. Yesterday’s action was just the beginning.