Archive - Jun 2013

The major compression in VIX into the close combined with a complete lack of JPY-based carry-driver for the equity market comeback today has many asking just what happened? Though the mechanism for quote-stuffing or momentum ignition in this case is unclear - one thing is absolutely crystal clear - today's total and utter explosion in the quote volume for SPY options provides more than a little concern for just what this market has become. As Nanex notes, over 1.1 billion quotes for SPY Options were posted today as 'quote spam' seems to be serving as some kind of parasitic momentum spark. The point here is that just as the market's flash-crash occurred on a day in which quote-stuffing in cash stocks hit a record; so today we got the inverse flash-smash higher in stocks from a surge in quotes on the far-more levered options market. Just look at these charts!!

Earlier today the Fed released its quarterly Flow of Funds report for the first quarter of 2013, widely used to calculate the level of US household net worth. For those whose wealth is primarily in the form of various financial assets (about 1% of the population) it was a good, quarter, actually the best ever: following a $2.1 trillion increase in financial assets, coupled with a $0.8 trillion rise in tangible assets (including real estate), total household net worth rose from $67.3 trillion to $70.3 trillion, which is the new record high number, surpassing the $68.1 trillion record in Q3 2007. What is curious is that back in 2007, tangible assets amounted to $29 trillion compared to $26 trillion now, which means the bulk of asset creation has come thanks to the Fed reflating its final bubble and leading to all time highs in all assets that are directly correlated with the size of the Fed's balance sheet.

Quite a day in the markets but for those who turn on the six-o-clock news tonight - all is well in the world - Dow +78! Overnight weakness in Japan spilled over into Europe and so began the inkling of JPY-based levered trade unwinds. European high-beta risk was shellacked and as US opened JPY's strength accelerated and credit markets opened significantly gap wider (worse). Equity futures began to tumble and this weakness escalated through the open climaxing as Europe closed. JPY crashed and stocks collapsed soon after the EU close in what seemed very liquidation-driven moves but as soon as Europe was closed - and despite no follow-through from the JPY - equities were ramped magically back to overnight highs (on low volumes). It seems VIX and HYG were the ramping weapons of choice. Dow 15,000 appeared to be all that mattered as we head into the NFP tomorrow - but perhaps investors forgot that a) Japan opens in a 4 hours, b) Europe opens in 11 houors, and c) The 'Taper' talk is the fed jawboning us off the exuberance band-wagon - it is not about NFP.

Rising incomes and increasing levels of disposable income can be seen visibly in the increased traffic congestion in South East Asia. This is one way to play it.

Because sometimes you just have to laugh...

As the world waits breathless for some Goldilocks print in tomorrow's non-farm payroll data, Gallup's most recent survey of employment trends does not paint a pretty picture for the real economy. Though, by the 'adjustment bureau' and their Arima-X goal-seeking, nothing is ever clear, not only is the payroll-to-population (the number of people working) worse than a year ago but the unemployment rate is also rising with under-employment - at 18.0% - near 15 month highs. If the NFP print plays out in line with this, the estimate of 165k will be woefully over-optimistic, leaving the question of whether bad-is-good, or have we crossed the Rubicon of belief in moar is better.

Yes, Government Spooks May Be Listening

Some are surprised that inflation has failed to take off despite massive amounts of quantitative easing. The explanation, ECRI explains, is simple: recession kills inflation. For all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009. The 'r' word is seldom heard on the lips of the mainstream media - "how absurd" - but as SocGen's Albert Edwards notes, if anyone is waiting for the ISM to tell them that a recession has started in the US, they are looking at the wrong data. Much more importantly, Edwards explains, we may well be in for a double dose of bad news - both falling revenues and falling margins. History suggests this as good a leading indicator as any other for whether the US economy will endogenously fall back into recession. Unfortunately at the height of a recovery most commentators forget profit margins mean-revert as they become intoxicated by the equity market's prior stellar performance and tend to continue to price the market off analysts' forward earnings - which inevitably always forecast further healthy gains ahead.

Hawkish Dallas Fed head Richard Fisher was relatively outspoken following a speech this morning in Toronto as some insightful truthiness leaked out. As Money News reports, Fisher exclaimed, "we cannot live in fear that gee whiz the market is going to be unhappy that we are not giving them more monetary cocaine," adding that, "only time will reveal the efficacy of current policy and whether the risks that I and more experienced observers like Paul Volcker fret over are as substantial as we surmise, or whether we have made much ado about nothing."

It's a big club, and you ain't in it...--George Carlin

Two weeks ago, with its current account getting crushed by relentless gold imports, India's finance minister Chidambaram literally begged the people to stop buying gold. Judging by the popular response, the ongoing physical shortage, and last night's increase in Indian gold import duties from 6% to 8%, appealing to people's feeling when it comes to the choice of fiat vs physical, has failed miserably. So the FinMin Chidambaram has decided to escalate.  Per Reuters: "The Reserve Bank of India has advised banks against selling gold coins to retail customers, Finance Minister P. Chidambaram said on Thursday, a day after he raised gold import duty to try to ease pressure on India's bloated current account deficit." Well, if there ever was one sure way to send demand for any product through the roof (guns, ammo, etc), it is for the government to prohibit its outright sale. What follows next, almost without fail, is a panicked, chaotic buying scramble.

Not exactly a ringing endorsement of his hodgepodge of old ideas and new contradictions.

America may be a service economy but for the sake of tomorrow's NFP let's pretend it isn't. Because if the employment component of the Non-manufacturing (i.e., Services) ISM, which at least in the pre-centrally planned times correlated with the NFP number with an R² of about 0.9, is indicative of what to expect, one can kiss any hopes of a recovery goodbye. Which, of course, is great news! It means the Fed will never pull out and never realize that it is the Fed's central planning and market manipulation that is responsible for the every deeper global economic depression which benefits only stock holders (and traders).

Presented with no comment...

If we take out this trendline, stocks could easily go to 1,450. And if things get really ugly we could even see a Crash (though that would likely come later in the Autumn based on historic patterns).