Archive - Jun 2014

Fear - or no fear. VIX was monkey-hammered to fresh cycle lows at 10.34 today (still double-digits for now) and OPEX lifted US equity markets (Dow Industrials, Transports, and S&P) to new record highs. Notably European peripheral bond spreads jumped higher (worsened) by their most in 15 months this week. "Most shorted" stocks rose a massive 4.6% this week (surging this afternoon) - the biggest squeeze in 14 months. The USD lost ground (-0.4% on the week) led by EUR strength as JPY closed unch (hardly supportive of the 2% gain in the high-beta honeys this week). Treasuries were nothing like as exuberant as stocks this week (30Y +3bps, 5Y unch) having traded in a 10-11bps range all week. The ubiquitous late-day VIX slam forced stocks to all-time highs. Precious metals had their best week in 4 months closing above $1300 (gold) and $20 (silver) back at 2 and 3 month highs respectively and pushing gold above the S&P year-to-date.

As oil prices have risen on geopolitical concerns (that have been printed away by central banks in stocks), so gas prices at the pump in the US have risen to their highest for this time of year since 2008 (and that did not end well). We are not alone in our concern as Morgan Stanley's (and esx Fed) Vince Reinhart warns that a more extreme jump in oil prices would be enough to stall the recovery (lowering real GDP growth by 1.7 percentage points one year out; and perhaps more worryingly, raise CPI growth by about 3.6pp, lowering real consumer spending growth by a full two percentage points).

Timing matters, as fundamentals have no impact in a euphoric blow-off top or in a panic-driven, bidless crash. It's possible to be right about the fundamentals and lose money trying to trade those fundamentals. It's also possible to be wrong about the fundamentals and make a boatload of money trading Central Planning interventions. Our own advice that we try to live is: "invest in yourself, not Wall Street."

Petro Poroshenko's 14-point peace-plan is not going well (before it's even unleashed). First, Russia blasted back that they were "surprised" by comments on their support and that "this does not represent reality," and is more an ultimatum than a peace-plan:

• *RUSSIA SAYS UKRAINE CEASE-FIRE ISN'T OFFER OF PEACE: IFX
• *RUSSIA SAYS UKRAINE CEASE-FIRE LACKS KEY TALKS OFFER: IFX
• *POROSHENKO GIVING ULTIMATUM TO REBELS TO DISARM: IFX

Then things escalated further as Interfax reports, the 'severe injury' of a Russian border guard and ITAR-TASS reports "Moscow awaits explanations from the authorities in Kiev for the shelling of the Russian territory, which took place on the background of President Petro Proroshenko’s claims about a ceasefire."

Janet Yellen just cemented her status as the third member of the unholy triumvirate of Fed Presidents: Greenspan, Bernanke, and now Yellen.

On the day after Chairman Yellen’s press conference, investors aggressively bid up inflation trades across numerous asset classes. Gold and silver rallied sharply, TIPS implied inflation breakevens widened (despite a new slug of 30-year supply), Treasury yields rose, and the yield curve steepened. Based on investor positioning and market sentiment (CFTC’s Commitment of Traders data show record net short positions exceeding $1.5 trillion in notional rates exposure among speculators in the eurodollar futures markets), there’s decent potential for additional gains in these inflation expressions in the days and weeks ahead.

The Neocon Trials...

With 23 games behind us in the FIFA World Cup in Brazil, we stop to reflect on the success (or failure) of forecasts so far. As we showed here, Brazil began the tournament as more than 3 times more likely winners than any other team, and, according to Goldman's new estimations, remains the strong favorite with a 49.5% chance of raising the Jules Rimet trophy. England's disappointment leaves them a 3% chance of getting to the knockout phase (and USA a 0.7% chance of winning it all). Goldman, however, have severely over-estimated Brazil and Spain's performances (and under-estimated Holland and Spain) as their track-record so far is Stolper-esque at 34% win rate (8 right, 15 wrong).

According to the latest CapGemini wealth report the number of high net worth individuals increased by nearly 1.8 million in the past year, the second biggest surge since 2000, which also happened to be the crazy days of the first tech bubble (not to be confused with the current tech bubble). In other words, the epic, unprecedented stock bubble reflated by the world's coordinated central banks, has succeeded. Succeeded, that is, if its goal was to make the world's richest people wealthy beyond their wildest dreams. As for everyone else, just over 7 billion people, better luck next time.

UPDATE: Not going well... UKRAINE REBELS SAY WON'T DISARM UNTIL KIEV WITHDRAWS TROOPS:AFP

Petro Poroshenko earlier called Russia's Vladmimir Putin to explain his 14-point plan (to be unveiled to the public later today) to curb the pro-Russia insurgency in the east. As AFP reports:

UKRAINE PRESIDENT SAYS UNILATERAL CEASEFIRE TO BEGIN TODAY TO JUNE 27
Ukraine peace plan to call for 10-km buffer zone on Russia border

As Reuters notes, it was not clear if the whole of the proposed demilitarized no-man's land would be on Ukraine's side of the border or part of it on the Russian side. It was also not clear what the status of people living in border areas would be. Putin's initial response is to demand the "immediate end to military operations" against pro-Russian separatists.

While President Obama proclaimed "it is not the place for the United States to choose Iraq’s leaders," it appears that Iraq's current prime minister Maliki's days are numbered. At least three people, who like Mr. Maliki are all members of the Shiite majority, have emerged as possible candidates to take over, but as NY Times makes clear, they face an uphill battle as any prospective successor must convince Iraq’s Sunni Muslims and its ethnic Kurds that he can hold Iraq together, as well as vanquish a Sunni-led insurgency. The Sunnis are adamant that change is needed, "we will not allow a third term for the prime minister; they must change him if they want things to calm down," but it is the statement from the top Shiite cleric that it is time for a new government that likely put the final nail in Maliki's coffin. The only problem... his replacements are far from angelic reformers.

What happens when huge, reckless buyers with nearly endless resources cut back after a phenomenal binge? Well, we know what happened in 2008.

We suspect this is not exactly the great news that GE was expecting... but it looks like a win. French minister Montebourg believes none of the current offers fulfill their demands and will use a decree to block the deal:

• *MONTEBOURG SAYS FRENCH STATE TO TAKE 20% STAKE IN ALSTOM
• *MONTEBOURG SAYS FRANCE WILL BUY ALSTOM STAKE OR BLOCK GE OFFER
• *MONTEBOURG SAYS FRANCE WILL USE DECREE IN ALSTOM CASE
• *MONTEBOURG SAYS FRANCE WILL ENTER IN ALLIANCE WITH GE
• *MONTEBOURG SAYS FRANCE SEEKING ALSTOM STAKE AT MARKET PRICE

So GE forced to partner with French or no deal. Nothing like partnering with the (almost) most socialist government on the planet to make money.

US officials are "readying targeted sanctions on finance, defense, and tech sectors," as they tell Bloomberg that 10 Russian tanks crossed the border into Ukraine in the last 24 hours. Speaking on condition of anonymity, the official noted that EU-US discussions on Ukraine are intensifying. Russia has responded, "we are surprised by statements of alleged deployment of Russian troops along the border with Ukraine. In this case, there is no military buildup, there are only measures to strengthen the border security of the Russian Federation, measures taken on direct instructions from Russian president." This is all occurring with the background of Poroshenko's cease-fire plan.

To dream the impossible EURO dream...