Archive - Jan 21, 2014

Market tops occur when investor psychology changes. But it’s not a clean shift. Investors, like any category of people, are comprised of numerous groups or sub-sects: some get it sooner than others.

"A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by nearly anonymous researchers. Political idealists project visions of liberation and revolution onto it; establishment elites heap contempt and scorn on it. On the other hand, technologists — nerds — are transfixed by it. They see within it enormous potential and spend their nights and weekends tinkering with it. Eventually mainstream products, companies, and industries emerge to commercialize it; its effects become profound; and later, many people wonder why its powerful promise wasn’t more obvious from the start. What technology am I talking about? Personal computers in 1975, the Internet in 1993, and — I believe — Bitcoin in 2014."

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Ten days ago, the few carbon-based habitual gamblers left in the market stopped and read Goldman's report which, as we said, may have 'just killed the music' with its slam of the market saying the "S&P500 is now overvalued by almost any measure." Recall: "The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings." Since then, many of Goldman's client must have been displeased that David Kostin refuses to drink from the punchbowl anymore, and sent in their complaints. However, Goldman has refused to budge and issued a follow up defense to its thesis that stocks are overvalued more than at any other time except the tech bubble with "Valuation fact vs. fiction part 2: Responding to common questions about S&P 500 valuation."

Starting at 11:06, S&P futures began to slide, picked up at 11:09, then at ~11:11:11, someone decided to dump 6,800 e-mini contracts in one second all at once in a nice fiduciary-duty-worthy trade as Europe begins to close and POMO ends: the kind of idiotic dumping through the bid stack that is not only allowed, but encouraged in gold and silver. That is around $625 million notional in a second. Volume overall was huge in the last few minutes (as the chart below shows). VIX jerked 0.4 vols higs to 13.4%; JPY banged higher against the USD (but stocks still well below JPY expectations); and bonds quickly bid 1-2bps. This dump in the S&P drops it back to one-week lows.

Let's see: do massive sinkholes next to the headquarters of other massive sinkholes, located in a bankrupt city that may soon become a massive sinkhole, qualify for Federal bailouts?

"It is wrong to link [the Turkish Lira's] fall to the corruption probe," blasted Turkey's Prime Minister Erdogan, explaining that the Lira's fall "is linked to the Federal Reserve's actions." Since the taper was announced the Lira has collapsed over 12%, trading at 2.269 to the USD, a record low for the troubled nation's currency. Of course, the timing is useful for the PM to explain his nation's demise (as it is also proving a good excuse for Thailand - with massive outflows amid its riots; and Ukraine) but it seems the problems on the streets of Turkey are anything but going away. Today's drop in the Lira (the 7th in a row) follows a somewhat surprising "disastrous for their credibility" decision by the Turkish Central Bank to leave rates unchanged (and still warn of inflation).

The most notable feature of today's set of numbers is the IMF's forecast of world trade. In a word: it is crashing. Consider that 2013 world trade was expected to grow by 5.6% in April 2012. Now: it is more than 50% lower at just 2.7%! Yet what is truly hilarious and certainly head scratching, is that somehow the IMF now anticipates a pick up in global growth in 2014 from its previous forecast of 3.6% to 3.7%, even as global trade is revised lower once more to the lowest prediction for 2014:, and currently stands at just 4.5% compared to 4.9% in October 2013 and 5.5% a year ago (it goes without saying that the final global trade number for 2014 will be well lower than the IMF's optimistic forecast). How global GDP is expected to grow on the margin compared to previous forecasts even as trade contracts is anyone's guess...

It appears the early (pre-market) strength in US equities provided just the right amount of stop-hunting room for longs to cover and sellers to re-appear as the S&P 500 tested up towards record highs (and unch year-to-date). US equities ran away from their JPY-related proxy briefly but have collapsed back down to it now as perhaps the tell was a push higher in VIX right from the open. VIX rose over 13% briefly - its highest in a week - as US equities (notably the Dow with no support from Visa or American Express to save its skin) tumbled. Treasuries have ben rallying since 0600ET - about the same time gold and silver were slammed. Precious metals are rallying admirably off the lows as stocks tumble (and the USD is unch on the day now)

Despite much hope that the current breakout of the markets is the beginning of a new secular "bull" market - the economic and fundamental variables suggest otherwise. Valuations and sentiment are at very elevated levels which is the opposite of what has been seen previously. Interest rates, inflation, wages and savings rates are all at historically low levels which are normally seen at the end of secular bull market periods. Lastly, the consumer, the main driver of the economy, will not be able to again become a significantly larger chunk of the economy than they are today as the fundamental capacity to releverage to similar extremes is no longer available.

The soap opera that just won't end... won't end. After last week's collapse in the price of Nuskin, which dragged down the price of Herbalife, there were some rumors that Ackman's calls for a collapse of one of the best performing stocks of 2013 may finally come true. Not so if Barclays has anything to say about it. Moments ago the British bank reported that it is raising its price target on HLF from $78 to $94, and anticipates some 34% upside from current levels.  From the just released report: "Our new EPS also reflects a large stock buyback. HLF has said it was comfortable with leverage of 2.5x, which would permit it to repurchase stock worth about $1.5bn ($1.2bn from new debt, $0.3bn from cash). HLF has many ways to execute a buyback: dutch tender, ASR, or enhanced open market purchases, but right now it is in a blackout period following YE13. We assume the stock is repurchased at prices of $80 (1Q14) and $85 (2Q14), leading to 18.4mn shares being retired. Our price target rises to $94 from $78, which represents 15.0x our new FY14 EPS of $6.27 vs 13.8x our old $5.65. We maintain our OW rating." Cue some more theta.

Gross: “Give me a double shot,” global mkts said to its Fed & BOJ bartenders. Can we sober up on a single jigger of saké? I doubt it.

— PIMCO (@PIMCO) January 21, 2014

In a letter posted moments ago on Hvst.com, activist Dan Loeb announced that currently the largest investment of his Third Point is Dow Chemical, where he proceeds to use the usual hack-attack "spin off" proposal , and urges Dow to sell its upstream and downstream Petrochemical businesses (as Dow Petchem Co), about which it says, "the benefits from a spin-off far outweigh the supposed integration benefits." The reason: "Dow shares have woefully underperformed over the last decade, generating a return of 46% compared to a 199% return for the S&P 500 Chemicals... in April 1999 an investor could have purchased Dow shares for the same price that they trade at today." Now imagine where those shares would trade without $10 trillion in liquidity pumped by the central banks. We wish Loeb all the best: recall that precisely this strategy did not quite work out with Sony. The good news: George Clooney will hardly give a rat's ass what Dan Loeb does with some obscure "chemical" company, and thus Loeb's invites to the Hollywood party circuit are secure.

UPDATE: Some chatter that the earlier drop occurred around a story on the overhauling the London Gold fix (amid all the manipulation talk).

With no apparent news - who needs news - the precious metals market participants have decided that now is the time to sell, sell, sell in huge volume and all of a sudden... Gold is down 1.3% - its biggest drop in a month; and silver is down 2.8% - its biggest drop in 5 weeks. Gold has dropped back down to test its 50DMA and silver has crossed back down through it. Bonds are modestly bid, stocks ar enot moving on this collapse and the USD is hardly budging.