Archive - 2013

US dollar gains have been extended for the third session. The euro has been sold down to almost $.1.30 after testing $1.33 on Wed. More stale longs may be forced out on a break of $1.2985, which corresponds to a 50% retracement of the advance from the mid-Nov low near $1.2660 and the 50-day moving average. Sterling's decline is even more dramatic. It has come off hard since setting a 17-month high on Wed near $1.6380. It has now been pushed below $1.6040, which the 61.8% retracement of its rally from mid-Nov low near $1.5830. Sterling has also slipped below the 50 and 100-day moving averages for the first time in seven weeks.

While our previous visualization of the incredible impact of the ATRA seemed to clarify to many people exactly what 'compromises' had been made, the following infographic perfectly relates the stunning difference such a 'fair and balanced' act will make to both revenues and spending... just remember $1 billion (of $100 bills) would weigh 10 tons.

Maybe our man Kevin just got pissed off that he has to re-use his starbuck's cup & stopped working for the past few days.

• After the worst post-Christmas market performance since 1937, we had the largest surge to kick off any year in recorded history
• The myth is that we are now seeing the clouds part to the extent that cash will be put to work. Not so fast It is very likely that much of the market advance has been short-covering and some abatement in selling activity
• As equities now retest the cycle highs, it would be folly to believe that we will not experience recurring setbacks and heightened volatility along the way
• The reality is that the tough choices and the tough bargaining have been left to the next Congress and are about to be sworn in
• The myth is that the economy escaped a bullet here. The reality is that even with the proverbial "cliff" having been avoided, the impact of the legislation is going to extract at least a 11/2 percentage point bite out of GDP growth

Investor relief that the US fiscal cliff has been averted and optimism that the political compromise will make a small positive contribution to 2013 GDP are, for now at least, making investors forget about longer-term implications for debt sustainability and (temporarily) relax on euro matters. The Italian general election is over seven weeks away and until then the focus will probably remain on US fiscal developments (or FOMC expectations). However, European debt repayments are expected to top EUR40 billion in January and following today's German auction the onslaught of European auctions begins along with the ECB meeting next week (no rate change expected) followed soon after by the Eurogroup finance minister meetings. Plenty of headline-risk worthy dates here...

40% of the population surrendered more of their money than ever before for a tiny sliver of hope

FX markets and precious metals are continuing to trade weaker after hours along with Treasury yields (in some very gappy and unhappy ways) - but the S&P 500 futures are flatlining for now (as NKY futures push higher - merely playing catch up to ES since New Year's Eve). Odder and odderer...

With Spanish 10Y yields hovering at a 'relatively' healthy 5%, having been driven inexorably lower on the promise of ECB assistance at some time in the future, the market has become increasingly unsure of just who it is that keeps bidding for this stuff. Well, wonder no longer. As the WSJ notes, Spain has been quietly tapping the country's richest piggy bank, the Social Security Reserve Fund, as a buyer of last resort for Spanish government bonds - with at least 90% of the €65 billion ($85.7 billion) fund has been invested in increasingly risky Spanish debt. Of course, this is nothing new, the US (and the Irish) have been using quasi-government entities to fund themselves in a mutually-destructive circle-jerk for years - the only difference being there are other buyers in the Treasury market, whereas in Spain the marginal buyer is critical to support the sinking ship. The Spanish defend the use of pension funds to buy bonds as sustainable as long as it can issue bonds - and yet the only way it can actually get the bonds off in the public markets is through using the pension fund assets. The pensioners sum it up perfectly "We are very worried about this, we just don't know who's going to pay for the pensions of those who are younger now," or those who are older we would add.

Despite all the rancor about seasonally-adjusted ad hoc beats of holiday week retail sales (amid burgeoning discounts), the trend (post the Hurricane Sandy-driven surge) in GAFO (General Merchandise, Apparel and Accessories, Furniture and Other Sales) retail sales is most explicitly lower. As Bloomberg Brief notes, consumer incomes are in a fragile state and between the ATRA deal and a 'stable' at best unemployment picture, it seems that the YoY change in retail sales is indicating per capita disposable income is set to decline further. As Rich Yamarone concludes: it appears "You can't spend what you don't have." It seems 'tax-the-rich' is also misfiring as those making over $90k per year report recent spending at its lowest for this time of year since 2008.

The chart below illustrates why the U.S. economy is so dependent on the wealth effect generated by asset bubbles.   It’s stunning to think that average real earnings in the U.S. are almost 11 percent lower than where they were in 1973. Policymakers’ focus should be on increasing worker productivity through: 1) reforming the country’s education system;  2) unleashing entrepreneurship;  and 3) in the words of ECB chief, Mario Draghi, “doing whatever it takes” to empower small businesses. But, this is tough political business, however, so we take the easy way out.   The political pandering increases budget deficits, forcing the Fed to repress interest rates and print money to drive up asset prices.   The boom side of the cycle is sustained longer than most expect because of the reserve currency status of the dollar.  This temporarily generates artificially inflated demand (i.e, fake) through the wealth effect, which eventually collapses when asset markets crash. This is not a good long term economic strategy and sustainable path for permanent wealth creation

The Big Winners:  Big Banks and Big Companies

The short-squeeze rip extended through the middle of the day today but on considerably lower volume as we tested up to QE3 highs and sucked in just a few more traders. It seems retail sales (and outlooks) disappointing, higher taxes for 77% of us, debt ceiling and spending cuts to come, and earnings outlooks being slashed en masse was not enough to break the market's spirit... But, when the FOMC minutes hinted at the punchbowl being removed (even modestly), the bid disappeared and S&P 500 futures dropped 10 points and Treasury yields spiked (with 10Y pushing to 8 month highs). USD strength (+1% on the week) and commodity weakness (though gold and silver remain marginally higher on the week) weighed on risk assets in general but algos went quiet and ES depth-of-market plunged as correlations broke. The usual e-bay style close saw ES ramp off the lows of the day to test VWAP and end the day-session there (-4pts or so close to close) as VIX was held lower (sub-15% at 2-month lows). We said yesterday this feels fragile and sure enough today showed its brittleness - as AAPL clung to yesterday's lows staring into the gap. Now the bulls await NFP hoping for a bad print, we assume?

Overnight, Frank Partnoy and Jesse Eisinger released an epic magnum opus titled "What's Inside America's Banks", in which they use over 9000 words, including spot on references to Wells Fargo, JPM, Andy Haldane, Kevin Warsh, Basel II, Basel III (whose regulatory framework is now 509 pages and includes a ridiculous 78 calculus equations to suggest that banks have to delever by some $3 trillion, which is why it will never pass) to give their answer: "Nobody knows." Of course, while this yeoman's effort may come as news to a broader cross-section of the population, is it well known by anyone who has even a passing interest in the loan-loss reserve release earnings generating black boxes formerly known as banks (which once upon a time made their money using Net Interest margin, and actually lending out money to make a profit), and now simply known as FDIC insured Bank Holding Company hedge funds. This also happens to be the second sentence in the lead paragraph of the story: "Sophisticated investors describe big banks as “black boxes” that may still be concealing enormous risks—the sort that could again take down the economy." So far so good, and again - not truly news. What however may come as news to none other than the author is that the first sentence of the lead-in: 'Some four years after the 2008 financial crisis, public trust in banks is as low as ever" is, sadly, wrong.

It took the WSJ's Jon Hilsenrath, who one more time is modestly relevant in a world in which QE is implied until infinity or until the Fed loses all control of the money creation process, 12 whopping minutes to release a 589-word article analyzing the FOMC minutes. At least we know one of the people who had the embargoed version hours ago. We are confident he did not leak their content to anyone. Hilsenrath's prepared take: "A new fault line has opened up at the often-divided Federal Reserve: When to halt the bond-buying programs that are adding $85 billion a month of Treasury and mortgage securities to the central bank's assets. Minutes of the Fed's Dec. 11-12 policy meeting showed that officials were divided about when to halt the programs, with a few wanting to continue them until year-end, several others wanting to end the programs well before then and some wanting to halt them right away. While exposing the rift, the minutes left little clear indication which course the central bank would choose. In its official policy statement, it has been saying since September that it would continue the bond-buying programs until the job market substantially improves...  It is a hugely consequential decision for the Fed and likely the next big challenge for Ben Bernanke in what could be his final year at the helm of the central bank, where he has been chairman since 2006."