Archive - Feb 12, 2014

Apart from a 45-minute period from 1030ET to 1115ET (POMO) of totally failed momentum ignition, US equities and USDJPY were once again perfectly coupled leaving the Dow and S&P in the red today and the rest practically unchanged on dismally low volumes. Treasuries continue to slide with yields now 5bps (30Y) to 10bps (5Y) higher in the last 2 days (the worst 2 days for 5Y in almost 2 months). The USD ended practically unchanged on the week (once again) as EUR weakness (Coeure comments on negative rates) offset GBP strength (Carney comments). VIX traded down to 14.02% intraday (and the term structure is very steep and complacent once again). Gold (new 3-month highs) and silver surged intraday but the afternoon saw selling even as bonds, stocks, and the USD weakened. Dow remains below 16k.

On the chart below, try to guess, without peeking, which is the average salary of a Federal worker in the US and which is the average per capita income for all Americans.

2014 has been an unusual year so far. The worst start for stocks in decades stunned many but has been saved by the best rally in a few years' asset-gatherers proclaim it was the dip to be bought but volume never came back to buy that dip (despite its exuberant surge). So where is all the volume in 2014? Nanex has the answer... investors have been geting 'high' by weeding-out OTC stocks...

It seems yet another (luxury) car maker did not get the "but it's the weather" memo. Following Mercedes record sales in January, Porsche has announced today that expects to hit a target of selling more than 200,000 sports cars next year, three years earlier than originally scheduled. As Reuters reports, Volkswagen-owned Porsche is entering the lucrative segment of compact SUVs with its new Macan model, which has already sold out about eight months of production ahead of its arrival at German dealerships on April 4. Wealth effect, of course, is all that matters... and the promise of higher minimum wages and a Maserati in every garage.

By the power of his pen... President Obama gives minimum-wage-earning Federal employees (and physically and mentally handicapped workers) a 39% pay hike to $10.10 (and there's nothing you can do about it) to "benefit hundreds of thousands of people." We suspect that the president will remind us to the new "myRA" program and its benefits and how we should all tell our young friends to sign up for Obamacare too... and how this is paid for by the usual unicorn-tears-for-dollars swap...

Many have opined that while the unemployment rate may be 6.6%, down from a peak of 10% three and a half year ago, the so-called recovery sure doesn't feel like one: after all so many Americans are still struggling to find work and as so many complain, employers are simply not hiring. Well, as it turns out, all those complaining are absolutely correct....

The default cycle that should have occurred, given historical patterns of issuance cycles, has morphed (thanks to the Fed) into a refinancing cycle; but while DoubleLine's Jeff Gundlach suggests that fundamentals are supportive, "the valuation of junk bonds as a category is at its all-time overvalued versus long-time treasury bonds." So despite Yellen exclaiming that she sees no bubbles, one of the world's largest bond fund managers has never seen corporate bonds (investment grade and high yield) more expensive. Gundlach goes on to note he has sold some Apple (but believes it will remain range-bound), is baffled by the valuation of Chipotle, and sees 10Y Treasury yields dropping to 2.5% or lower.

In the aftermath of yesterday's 3 Year auction, which was nothing to write home about except for the surge in Indirect demand (and corresponding plunge in Direct take down), the Treasury just priced it latest soon to be POMO-ed 10 Year paper, $24 billion of it to be exact with a couple of reopenings scheduled in the near future, at a closing yield of 2.795% which was inside the 2.801% When Issued at 1 pm indicating solid demand dynamics during the auction process. That said, the Bid to Cover of 2.54 was well below both the January 2.68, and the TTM average of 2.69, and in fact was the lowest since the 2.44 print from last August. The internals were more solid, as Dealers took down 34.1%, below the 38.4% TTM average, while Indirects - like yesterday - soared to 49.7% of the final allocation, the highest since June's 51.7%. This means that Directs were left with 16.2% of the auction, or just below the 19.8% average. As a result of the auction failing to tail, the Treasury complex popped modestly higher in the aftermath of the announcement, although this bullish sentiment may not last unless DE Shaw links up its bond buying algo to the USDJPY to match its SPOO buying "logic."

Recently debates over minimum wage laws have flared up again. The starting point was president Obama's State of the Union speech, in which he announced that he would push through a higher minimum wage (among other things) regardless of the objections anyone in e.g. Congress might have. There can actually not be any controversy over the basic economic laws involved, and yet the debate continues to be revived again and again.

In what has to be the most surreal "news" of the past 24 hours, we learned that Spain, caught in the vice of an unprecedented historic depression, endless "recovery" propaganda notwithstanding, and Turkey, the country whose currency crashed to record lows against the dollar a few short days ago and whose government has been defending itself from a tsunami of corruption allegations and busy firing all the judges who dare to voice disagreement with PM Erdogan, have decided to jointly build ... wait for it ... an aircraft carrier.

We previously highlighted just how serious the situation was in Ukraine - and Victoria Nuland's FUBAR comments and clear US manipulation did nothing to calm matters - but today's news (via Ria Novosti) suggests things are escalating rapidly. Alexander Lobodenko - a 34-year-old district court judge who recently sentenced several political protesters to house arrest has been shot dead. Police have opened a criminal case into the death and said that Lobodenko was likely killed as a result of his judicial work.

Yellen confirmed that the U.S. recovery is fragile and said more work is needed to restore the labor market. She signalled the Fed’s ultra loose monetary policies will continue and the Fed will continue printing $65 billion every month in order to buy U.S. government debt.

Trying to force simplistic results out of complex systems inevitably generates unintended consequences. Liquidity and credit expansion act like pressure in a closed system; central planners look at the site of the last financial break and see no leaks, so they assume they've got the system under control. But the next failure in the system will occur where no one is looking--the points in the system that everyone assumes are "safe." The system is doomed if central banks continue creating trillions of dollars in new leveraged credit and liquidity to keep the system from imploding, and it is also doomed if they cease creating new leveraged credit (i.e. taper their geometric expansion of credit). Doomed if you do taper, doomed if you don't taper.

Ordinarily we would ignore the news of another banker's death - after all these sad events happen all the time - if it wasn't for several contextual aspects of this most recent passage. First, the death in question, as reported by the Stamford Daily Voice is that of Ryan Henry Crane, a Harvard graduate, who is survived by his wife, son and parents at the very young age of 37. Second, Ryan Henry Crane was formerly employed by JPMorgan - a bank which was featured prominently in the news as recently as two weeks ago when another of its London-based employees committed suicide by jumping from the top floor of its Canary Wharf building. Third: Crane was an Executive Director in JPM's Global Program Trading desk, founded in 1999 by an ex-DE Shaw'er, a function of the firm which is instrumental to preserving JPM's impeccable and (so far in 2013) flawless trading record of zero trading losses.

Despite being told by Bullard, Yellen (and numerous other Federal Reserve thinkers) that quantitative easing was aimed at improving the housing market, the data suggests that - somewhat predictably - it did very little for mom-and-pop organic real home-buyer but stoked speculation and fervor among fast-money cheap-funding investors (and as Marc Faber noted actually hurt the average homebuyer via un-affordability). The week-to-week ebbs and and flows in mortgage applications are notable  (this week saw purchase applications drop 5% and back near recent lows) but a bigger picture glance at just where this "recovery" has been tells a very different story about confidence among home-buyers.