Archive - May 27, 2014

For the 9th Tuesday of the last 11, stocks closed green with the S&P at new record highs. "Most shorted" stocks were under heavy testicular pressure but seemed the only driver supporting stocks as JPY decoupled, bonds decoupled, the USD decoupled, VIX decoupled, and credit spreads decoupled. But hey, it's Tuesday so that doesn't matter. Copper and oil were flat on the day but gold and silver (battered at the open) lost 1.5 to 2% on the day (gold's worst day in 6 months). Treasuries are 1-3bps lower in yield at the long-end with modest flattening. Volume remains abysmal. The last few minutes saw a mad buying panic come over Russell 2000 bulls which had its best day in almost 3 weeks and is up 6 of the last 7 days.

Inevitability...

Several of the largest oil companies in the world are doubling down in Russia despite moves by the West to isolate Russia and its economy. To be clear, the oil companies are not legally running afoul of international sanctions. But their collective shrug in the face of European and American pressure to boycott Russia – along with the $400 billion natural gas deal Russia signed with China last week – illustrates the difficulty with which the West will have at undermining Russia’s energy sector, if it chose to do so. Russia is too big of a prize for the likes of ExxonMobil, BP, and Shell. Or viewed another way, the moves to deepen business in Russia suggest that the world’s biggest oil companies are confident that the U.S. and Europe won’t be so bold as to truly attack Russia’s energy machine.

Mission Accomplished... Moments ago Obama proudly announced that America's job in Afghanistan is done. Heroin users and dealers around the world agree.

The USD is getting dumped; bond yields are tumbling; VIX is hgher; credit spreads are pushing wider... and stocks are (drum roll please) pleasantly green...

This should be good - President Barack Obama is expected to announce on Tuesday that the United States plans to keep just under 10,000 troops in Afghanistan after this year, if the Afghan government signs a security agreement.

Large speculators (read - hedge funds or the supposed "smart money") have shifted their S&P 500 positioning to net short, increased their Russell 2000 short positioning and decreased their NASDAQ longs to one-year lows. Market-neutral funds have dropped exposure notably in the last week and long/short funds are well below market norms for their long positioning. But what has the bond bears really scratching their heads (as they added to their shorts in the last week) is that the last time so many people were convinced that rates can only go higher (based on CFTC data), bad things happened in stocks.

Presented with little comment aside to note the odd coincidence of a massive 12,500 lot June $40 strike call option buy a week ago in Hillshire Brands (typically very low volume and very illiquid) and today's unsolicited bid for the company and accompanying sale of 12,500 lots of call options for a 1000% gain... nice work if you can get the inside scoop...

Today's 2 Year auction was not expected to be exciting, and it wasn't. Pricing at 0.392%, the auction tailed the 0.39% When Issued by 0.2 bps - the first tail since June - but was well below last month's 0.447%, and the lowest yield since February's 0.34%. The flipside is that the Bid to Cover of 3.519, higher than last month's 3.345 was also the highest since February's 3.605, and well above the TTM average of 3.29. It appears the trend of declining BTCs has finally broken. The internals were perhaps a little more exciting: Directs took down 25.23%, above the 18.96% last month, and the highest in 2014, above the 21.3% TTM average. Alternatively, indirects were left with 18.86%, below the 23.36%, and certainly well below the 40.93% from March, making the number the lowest Indirect takedown since January of 2013. The remaining 55.91% went to the Dealers, which was just a tad below the 57.7% from April, if above the 51.1% TTM average.

The big question remains: will the current signal be a sign of complacency, which suggests that lower prices are ahead or will the current signal be a failed signal leading to significant market gains?

With much hotter CPI & PPI reports the last two months, we anticipate the May reports before Fed's June meeting to be on the high side, and that the Fed will probably have to address these new inflation pressures....

The housing "recovery" since 2010 can be summarized in four phrases: diminishing returns, unprecedented central state/bank intervention, unintended consequences, end-game. The unintended consequences of the Fed's unprecedented interventions will rip the heart and lungs out of the housing market

You get what you didn't vote for...

Four years after he left the firm, PIMCO is hiring back Paul McCulley to save its brand and provide just enough ammo to defend its bullish/bearish positions now that El-Erian's disagreements have left. Unlike some firms who believe that 'chief economists' must be full-time - adding value each and every day with their extrapolations of every macro tick - McCulley will spend up to 100 days per year working in PIMCO offices. Bearing in mind McCulley's previous lazer-like focus on Capex (which is dismally flat still) and his belief in a "W" shaped recovery not a "U" or a "V", we suspect the bearded prognosticator will have a bullish bond bias - especially as the trillions of ticking time bombs in the shadow banking system remain as incendiary as ever.

Now that the rigged market jig is up, and the aging Baby Boomers - those who had some stocks in their discretionary accounts to begin with - have turned to outright sellers of equities (and in fact are doing so "in droves" as reported last week), primary dealers and hedge funds - tired of tossing overvalued hot potatoes among themselves and with the Fed gradually phasing out its daily market goosing - are in desperate need of a new buyer. They may have just found their mark. According to JPMorgan's sage advise to wannabe students, "it is not enough to save for college anymore, you need to invest."