Archive - Aug 23, 2013

Curious how the US retail investor is reacting to the surprising inability to BTFATH? Bank of America explains how: by yanking the most cash from equity funds since November 2011.

Perhaps the most curious part from the just released and detailed Nasdaq post-mortem is the following, which appears to be an attempt to answer our remaining question from yesterday:  "At approximately 12:03 p.m., Eastern Time (ET), the UTP SIP ceased dissemination via all outbound UTP Quote channels. The UTP Trade feeds were not impacted by this outage and continued to remain operational. The UTP SIP has no evidence of an attempted intrusion into SIP systems or of an unusual burst of quotation or trading messages in connection with yesterday's events." No evidence, except for these (and many more) locked bids and asks and the associated Nasdaq trading radio silence.

In spite of the prime-dealers seeming agreement that SepTaper is most likely; judging by the plethora of talking-heads and research pieces hitting in the last few days, the idea that a Taper was a good thing (Tepper) and in fact indicates 'health' appears to be on the back-burner as almost every sell-side shop is out with a discussion of just how potentially bad things are macro-economically and that a taper should be off the table. Below is BofAML's Ethan Harris' seven reasons to delay the taper following today's "punch in the stomach for the economic recovery story" (and our 4 reasons why they can't or won't).

While many begrudge the rise in interest rates and their concomittant tightening of financial conditions, Nomura's George Concalves notes that the move has been a "blessing in disguise" for most long-only bond investors. Insurance companies and pension-funds, who need 'yield' to cover long-term liabilities, have been underweight since the Fed began Operation Twist (on the basis of the yield became too compressed) but the recent sell-off in Treasuries (which does not reflect any asset-allocation or great rotation since stocks have been just as weak) enabled these funds to put money to work. This helps to explain the very notable flattening in the yield curve (5s30s -17bps in the last week) as duration extension is more economically attractive. Concalves suggests Taper fears are overdone and that should rates back up another 25bps, there is more dry-powder to put to work in bonds.

He's back at it. Home affordability... no bubbles... college affordability... no bubbles... More money for everyone but don't speculate - this will all end well (oh yeah and a pony for everyone)... President Obama is giving a town-hall style meeting in Binghamton University...

"So far, inflation has fallen only slightly and remains in positive territory. Fears in early 2009 that rapid deflation might break out and  cause the economy to collapse as in 1929 to 1933 proved unfounded, luckily. I have advanced the hypothesis that rampant price-cutting has failed to appear because businesses are in equilibrium and perceive that price-cutting has bigger costs than benefits. If the hypothesis is wrong and businesses are finally responding to five years of slack by cutting prices, the generally optimistic tone of this section could be quite mistaken. The bottom could fall out of the economy as it did in the Great Depression."

Just over a week ago, a funny thing happened in the options market for Microsoft; namely, massive flows into the September $32 and $33 Calls. A few days later those options have risen from around 23c to over $1.50. Given the surge in implied volatility it is clear that whoever was buying these options had little thought for 'value'. Of course, linking a short-dated (but very sizable) options purchase from a week ago to today's spike in price is difficult but it seems unusual activity at best (and nefarious at worst).

Stolper strikes again:  "Trade Update: Close Short GBP/NOK tactical trade recommendation for a potential loss. On June 27 we recommended going short GBP/NOK after the NOK weakened sharply following the Norges Bank meeting on June 20. At the time, even though Norges Bank showed some concern over the weaker pace of activity in Norway, we thought the weakening in the NOK was an overshoot. However, weaker-than-expected data out of Norway – especially the weak Q2 GDP reading earlier this week – have pushed the NOK weaker, while the recent run of better-than-expected UK data have also pushed the GBP stronger. This Wednesday (August 21) we went through our stop on this recommendation of 9.46 and close it for a potential loss of 3.4%."

What are the consequences of a central bank creating trillions of dollars for speculation and a central state borrowing trillions of dollars on a permanent basis? As noted before, risk cannot be extinguished, it can only be offloaded onto someone else or masked for a short time. The consequences of this sleight-of-hand (the Fed creates money to buy Federal bonds so the government can borrow and blow trillions of dollars) are not yet visible, but there will be consequences at some point; the risks have only been temporarily cloaked.Borrowing and printing $10 trillion hasn't fixed anything; it has only raised the reservoir of risk to the top of the dam. Cracks are opening as the pressure builds, and we should not be surprised when risk and consequence reconnect and the dam gives way.

1. Cease Treasury purchases;
2. Sell Treasury portfolio;
3. Sell older MBS;
4. Cease new MBS purchases

Here are the best and west performing hedge funds so far in 2013. We hardly find it surprising that the woefully named Keynesian Leveraged Quantitative Strategies, which has gotten every part of its name wrong, is among the worst alpha (and amusingly beta) generators so far in 2013.

One of the most published academics on gold in the world is Dr Brian Lucey of Trinity College Dublin (TCD) and he and another academic who has frequently covered the gold market, Dr Constantin Gurdgiev have just this week had an excellent research paper on gold published.

They have researched the gold market, along with Dr Cetin Ciner of the University of North Carolina and their paper,  ‘Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates’ finds that gold is a hedge against US dollar and British pound risk due to “its monetary asset role.”

It would appear the news that the housing 'recovery' may not be as strong as every asset-gethering talking-head exclaimed it will be in the face of soaring mortgage rates has driven investors to the safety of precious metals in a soon-to-be-re-stimulated economy as moar free money is clearly needed... (bonds are bid too on the Un-Taper inspiring news - and USD dumping - but stocks appear to have been side-tracked for now as the 'wedge' between fundamental reality and monetary-policy perceptions is shown even more egregiously).

And so the housing "recovery" comes to a screeching halt, which is not surprising as there never was a recovery to begin with.  Moments ago cheerleaders of the second housing bubble were shocked to learn that in July a tiny 35K new houses were sold (with just 3K sold in the Northeast, and just 19K in the otherwise strong South), of which 13K houses were not even started. This translated into a puny 394K seasonally adjusted annualized sales, missing expectations of 487K by nearly a record 100K, and in addition the June print was revised much lower from 497K to 455K (which back in July beat expectations of 484K and was trumpeted as the highest print since 2008 - so much for that). Yet one thing that did not change is that the median home sale price decline continued, and in July dropped to $257.2K down from $258.5. And now time to spin this ugly news as great because it means that maybe the Fed will delay the September taper (it won't).