Archive - Jun 24, 2014

Euro area monetary policy and Anglo-Saxon monetary policy are taking different directions — radically so. It has been a decade since the Fed last embarked on a tightening cycle, and Euro area rates have never gone negative before. With the expectations and the reality of the direction of interest rates diverging in this manner the instinct of most in financial markets is to assume that the Euro will weaken against the US dollar. A weaker Euro has been forecast by financial markets for some time — and financial markets have been spectacularly wrong in their forecasts. The Euro weakened a little in the wake of the nudges and hints on policy from ECB President Draghi, but it still remains at a high level. How can this be explained? How is it that the Euro is not behaving the way everyone says it should?

According to the latest Nielsen Media Research data, in the second quarter of 2014, CNBC viewership for all viewers just dropped to 162,000 - a new (and depressing for Comcast) low, on par with CNBC's viewership from Q2 of 1997! Where things get funny is when one looks at the ratings of that consummate entertainer, that self-appointed "voice of the people", Jim Cramer. Sadly for Cramer, the people are now gone. Because also according to Nielsen Jim Cramer's Mad Money show just had its lowest ever rated month in the 25-54 demo, and is about to have its second lowest rated month ever across total viewers.

Something went horribly wrong. The Dow had almost its worst Tuesday in 8 months and Treasuries their best Tuesday of the year as once the data-sparked, POMO-driven short-squeeze had run its course stocks flatlined, tumbled at the 2Y auction, the dumped around 1500ET. VIX was no help whatsoever. Trannies gave up all their gains for the month of June. Various reasons were offered for the weakness, from Dubai's weakness, Ukraine's cease-fire cessation to Syria-Iraq escalation but it appears more likely just algos ran out of stops to run and shorts to squeeze amid the plethora of 'complacent' risk indicators we have shown. Treasury yields had been dropping modestly but as the 2Y showed modest strength, so the rates complex legged lower in yield (down 3 to 5bps) and dragged USDJPY and stocks with it. The USD pushed modestly higher to unch for the week (though JPY strngth back to 102 dragged stocks lower). Commodities in general closed unch (with WTI down 0.2%) but gold and silver saw European buying early on. Stocks close at their lows with the Dow's worst day in 5 weeks... "most shorted" stock had their best day in 7 weeks.

"Does society ever wake up?"

The Baltic Dry Index - so admired when it is soaring and supportive of all things great and good about credit creation and rehypothecation - has collapsed over 60% year-to-date. At $867, the index is at one-year lows and hovering near post-crisis lows as the hope-strewn surge of last year now lies torn asunder by the reality of China commodity ponzi probes and a 'real' slowing global economy. Of course, we will hear the echo chamber of 'over-supply' of ships rather than any 'under-demand' of actual aggregate product argument but the circularity of this argument is entirely lost on status quo huggers who viewed rising dry bulk commodity prices as indicative of growth (and built more ships) as opposed to the ponzi-financing scheme it really was... mal-investment writ large once again in a manipulated (and mismanaged) world.

Investors and speculators face some profound challenges today: How to deal with politicized markets, continuously “guided” by central bankers and regulators? In this environment it may ultimately pay to be a speculator rather than an investor. Speculators wait for opportunities to make money on price moves. They do not look for “income” or “yield” but for changes in prices, and some of the more interesting price swings may soon potentially come on the downside. They should know that their capital cannot be employed profitably at all times. They are happy (or should be happy) to sit on cash for a long while, and maybe let even some of the suckers’ rally pass them by. As Sir Michael at CQS said: "Maybe they [the central bankers] can keep control, but if people stop believing in them, all hell will break loose." We couldn't agree more.

As more sectorally focused Russia sanctions loom as AFP reports Petroshenko is consider revoking the cease-fire over the helicopter downing (and Iraq appears set to light the blue touch paper and retire), we thought UBS analysis of the impacts (gains and losses) on the world's nations from sustained higher oil prices would be worthwhile. As Larry Hatheway notes, an increase of USD 10 in the price of a barrel of oil - driven by supply shocks - will shave around 0.2 to 0.3 percentage points from global growth. Every USD10 per barrel increase in the price of oil typically transfers around 0.5% of global GDP from oil consumers to oil producers. So who gains the most? (Spoiler Alert: ryhmes with usher) And is $115 the tipping point for global growth?

With stocks at record-er and record-er highs, TPTB must be confused as as to how confused the American public is. While 'government' data showed confidence at Jan 08 highs, Gallup's latest survey shows, only one in five Americans (22%) say the economy is excellent or good, while 34% say it is poor; and worse still, Americans continue to be less optimistic about the economy's future - 38% say the economy is getting better, while 58% say it is getting worse - the worst differential since 2013. Gallup's U.S. Economic Confidence Index lost another point last week, the third week in a row, dropping to its lowest in over 2 months. The bottom line, sadly, is that in spit of all the sound and fury, Americans may not have shifted much in their perceptions of the economy's current status, but over the past month, they have become more negative about the economy's future.

The S&P 500 continues to make higher and higher, more record-er highs predicated, as FactSet notes, on the faith in soaring expectations for much higher earnings growth for the index in the second half of 2014. Combining the reported earnings for Q1 and the estimated earnings for Q2, the first half (1H) blended earnings growth rate for the S&P 500 is 3.7%. However, combining the estimated earnings for Q3 and Q4, the second half (2H) estimated earnings growth rate jumps to 9.9%. Given this expected improvement in the overall earnings growth rate, which sectors and companies are projected to see the largest turnaround in earnings growth in 2H 2014 relative to 1H 2014? (Spoiler Alert: the answer should make you nervous).

Well that didn't last long. While it is Tuesday, it appears the modest bid for the 2Y bond auction was enough to spark a slew of worrying sell orders through the equity and JPY-carry markets...

An overview of the chess game being played out in Europe. 

While one may opine if today's 2 Year auction was weak or strong, one thing is indisputable: at a pricing high yield of 0.511% (even if 0.4 bps through the When Issued), this was the highest closing yield for 2 Year paper since May 2011 when it priced at 0.56% just before the US debt ceiling debacle and US downgrade firmly reset the bond market far lower. As for the other components of today's auction, the Bid To Cover came at 3.231, below the 3.519 from May, if just below the TTM average of 3.34. The internals were unimpressive, with Direct and Indirects splitting the post almost equally, getting just over 23% of the auction each, while Dealers were left holding 54.6% of the final allottment.

Though the Fed is doing its best to mask its abject failure and lack of choices with public relations, the reality is it has no choice but to taper and eventually end its endless spew of credit and its unprecedented and destabilizing purchases of assets.

Before there was VIX, there was VXO (or "old" VIX) based on OEX calls and puts and trading all the way back to 1985. Because it covers the 1987 crash period, traders often use it as a more consistent gauge. While attention is focused on VIX being 'near' record lows; VXO has just broken below the crucial 9% level that has only been breached once before and has hit a record low. As Citi warns, this suggests that we are very close to if not at the cycle low (for volatility) - though as we noted yesterday, it is unclear if this is a 'good' low (melt-up in stocks) or 'bad' low (crash).

In a rather stunning step for the West's propaganda machine, 'devil-incarnate' Putin has asked the Russian parliament to revoke the right of military intervention in Ukraine. As The BBC reports, Vladimir Putin's move was aimed at "normalising the situation" in the conflict-torn eastern regions of Ukraine, his press-secretary said. Ukraine added that this move was a "first practical step" towards settling the crisis in the east. Presidential spokesman Peskov said the move was linked to Monday's launch of talks between Kiev and separatist leaders in the east (with the case-fire deadline ending Friday). One can only wonder, why now? for Putin's gesture of peace? Cold showers enough in Kiev? Or is it that oil prices are high enough to help thanks to the Iraq situation and his Syrian 'aid' is needed as Ukraine festers? However, it appears things are moving a little beyond his and Ukraine's control, as AFP reports, pro-Russian rebels have downed a Ukraine army helicopter, killing all on board.