Archive - Jun 2014

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.

Moments ago, in what would be a clear escalation in the Iraq war, and confirmation that the US has finally gone "kinetic" as it warned on several occasions in the past it would, Iraq state-sponsored Iraqiya TV reported that US drones had struck ISIS targets near the Iraq-Syria border attack without giving details or saying how it obtained the information.  BBC Arabic has more:  "U.S. planes bombed targets in the drone region based on the Iraqi-Syrian border, according to sources close to Iraqi Prime Minister Nuri al-Maliki." This however was following moments later by the Pentagin Press Secretary issuing a sternly tweeted denial: "No truth to rumors in media today that US drones struck ISIL targets in Iraq." Clearly someone is lying.

While today's Case Shiller data was widely disappointing across the board, indicating a significant slowdown in price gains (and on a sequential seasonally adjusted basis, practically a decline), the one market we paid particular attention to was San Francisco. What we found is a red flag for everyone waiting to time the bursting of the latest housing bubble. Because after an unlucky 13 months of posting consecutive 20% Y/Y price gains, the San Francisco bubble appears to have finally burst, posting "just" an 18.2% price increase, the lowest since January of 2013.

Who could have seen that coming? "Most shorted" stocks, having recovered from the early squeeze, have been monkey-hammered higher once again as the confidence and home sales data hit. It's Tuesday after all - so why not buy the junkiest of the junk and ride it for a 3x beta outperformance...

While we will have much more to say about the price dynamics in the West in a follow up post, where the Western housing market appears to be appreciated right now is in the just released New Home Sales report, which showed that in May new home sales soared by a whopping 18.6%, orders of magnitude above the 1.4% increase expected, and resulting in some 504K new houses sold, far above the 439K expected, and certainly above the downward revised April print of 425K. What caused this surge? Simple: the West, which saw a 34% surge in new home sales, from 97K to 130K, the highest one month jump since February 2013.

The American consumer has not been as confident as this since January 2008... can you feel the confidence? The reaching for credit, the spending beyond your means; what could go wrong? Oddly, despite the exuberance, fewer people expect an increase in income (borrow or charge we assume?). The biggest driver of this confidence appears to be the spike from 79.7 to 99.5 in the Pacific region's confidence... but plunged in the Mountain and Central regions. Only 26.7% believe stocks can fall from here - near the lowest since 2009. Furthermore, those aged under-35 saw confidence plunge to 2014 lows.