Archive - Jul 14, 2014

What’s changed is the perception that the USA has any role to play any longer even in the diplomatic theatrics. The Middle East is disintegrating faster than any polity in historical memory. It appears that, if anything, the USA has only succeeded in accelerating the process wherever we turn our attentions. Since the 1970s, we haven’t felt the ultimate consequence of trouble in that part of the world, which would be an interruption in the oil supply coming out of there. Simply put, it shapes up as a struggle to the death that will not be impeded by reason, the good intentions of others, or sentimentality.

When we look back there are a ton of things that have been said to have changed since the financial crisis wafted in like a bad smell into our lives

According to Goldman's sensitivity analysis, forget 2050: all that is needed for the S&P to hit a Venezuelan 3,560 by year end is for the 10 Year to plunge to 2.0% from its current levels of 2.5%, while the yield gap, or the earnings yield less then 10 Year UST yield, should compress from its current level of 300 bps to just about 100 bps. Or, in short, all that the stock market needs to rise 80% is for the US economy to implode in a deflationary singularity.

Clashes between Ukraine’s government forces and pro-Russia rebels in the east of the country have intensified since President Petro Poroshenko called off a cease-fire July 1. Putin and Merkel met as Russia warned of “irreversible consequences” after the Foreign Ministry said a Ukrainian army shell killed one person in the southern region of Rostov. Ukraine said its military didn’t fire on Russian territory and is ready to help investigate the incident. “Both leaders agreed that, unfortunately, the situation in Ukraine is degrading,” Peskov told reporters after Putin and Merkel met. The Russian leader expressed his “extreme concern” about Ukraine’s continuing offensive operations and today’s “tragedy,” Peskov said. Market shrugs.

Presented with little comment aside to remind the gung-ho stock-buyers who have been convinced (because the mainstream media has moved on from Banco Espirito Santo contagion concerns) that Portugal is anything but fixed. No government bailout coming means bail-ins and bail-ins means confiscation... Banco Espirito Santo bonds are collapsing today... down almost 8 points as they know this doesn't end well.

Surprise... following the worst week for stocks in months (and "most-shorted" stocks biggest down week in 2 years), one is hardly surprised that someone decided the investing public needs some confidence-boosting. VIX was slammed, "most shorted" stocks squeezed higher and all on the back of a USDJPY spike and surge based on absolutely no news whatsoever... Meanwhile, as stocks surge and gold collapses, Treasury yields are up (wait for it) 1bps...

With year-end target after year-end target having been met and raised by the oh-so-ethical sell-side strategists and asset-gatherers, it appears the Fed's grand plan of dragging every bit of cash into the increasingly more risky equity markets is working. After a rally driven more by financial engineering that real sustainable growth, Bloomberg reports, individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. As one senior equity manager warned, "if Wall Street, after poring over all known data, comes up with a target and we’re already there, and you still see individual investors buying and they’re typically the ones that are late to the party, it would seem there is limited upside," but that didn't stop about $100 billion being added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months. We have found this cycle's greater fool and once again it is the retail investor.

Now that the World Cup is over, and following last week's global macro reporting slumber (aside for the Portuguese risk flaring episode of course), things pick up quite a bit in the coming week. Here are the key events.

UPDATE: Gold is down 2.5% - the biggest daily drop since early Dec 2013

In a status-quo reinforcing smackdown, gold and silver prices have been clubbed lower this morning to one-month lows with the biggest drop in almost 2 months. The customary USDJPY surge (and risk asset spike) has accompanied this high volume dump just to make sure everyone believes that BES is fixed, Ukraine is fioxed, Iraq is fixed, earnings are great, and the water is warm....

Vested interests are threatened by the losses generated by small financial fires, so these are systemically suppressed. As a result, the fallen deadwood piles ever higher, creating more fuel for the next random lightning strike to ignite. Once the deadwood piles high enough, the random lightning strike ignites a fire so fast-moving and so hot that it cannot be suppressed, and the entire financial system burns to the ground. So go ahead and keep defending the Status Quo as the best system possible, or believe Elites will keep suppressing fires forever because they're so powerful, or whatever excuse, rationalization or justification you prefer. It won't matter, because the firestorm won't respond to words, beliefs, ideological certainties, reassurances or official pronouncements. It will do what fires do, which is burn all available fuel until there's no fuel left to consume.

If one were so inclined, one could imagine that the relentless barrage of domestic scandals plaguing Obama have been orchestrated with a simple reason: to divert attention from the worst US foreign policy in four decades. And sure enough, even a casual glimpse of all the raging international crises, in which the US is currently embroiled, is enough to make one wonder if the next global crisis will be fought not in the capital markets but in the actual battlefield. As the WSJ recounts, "a convergence of security crises is playing out around the globe, from the Palestinian territories and Iraq to Ukraine and the South China Sea, posing a serious challenge to President Barack Obama's foreign policy and reflecting a world in which U.S. global power seems increasingly tenuous. The breadth of global instability now unfolding hasn't been seen since the late 1970s, U.S. security strategists say, when the Soviet Union invaded Afghanistan, revolutionary Islamists took power in Iran, and Southeast Asia was reeling in the wake of the U.S. exit from Vietnam."

• Secret Path Revealed for Chinese Billions Overseas (BBG)
• Traders Flood U.S. With $3.4 Trillion of Bond-Auction Demand (BBG)
• Just in time to cover bad earnings in a massive $3.8 billion "one-time charge": Citi says to pay $7 billion to settle securities investigation (Reuters)
• Troubled Epirito Santo family loosens grip on Portugal's BES (Reuters)
• BES puts in place new executives after central bank push (Reuters)
• Bank of China-CCTV drama may reveal power struggle in Beijing (SCMP)
• Portugal speeds up Banco Espírito Santo management changes (FT)
• Dark pool probe builds pressure on Barclays boss (Reuters)
• Russia Vows to Respond After Shelling From Ukraine (BBG)
• Ukraine forces end rebel airport blockade (Reuters)
• Obama Contends With Arc of Instability Unseen Since '70s (WSJ)

Another round of overnight risk on exuberance helped Europe forget all about last week's Banco Espirito Santo worries, which earlier today announced a new CEO and executive team, concurrently with the announcement by the Espirito Santo family of a sale of 4.99% of the company to an unknown party, withe the proceeds used to repay a margin loan, issued during the bank's capital increase in May. This initially sent the stock of BES surging only to see it tumble promptly thereafter even despite the continuation of a short selling bank in BES shares this morning. Far more impotantly to macro risk, it was that 2013 staple, the European open surge in the USDJPY that has reset risk levels higher, while pushing gold lower by over 1% following the usual dump through the entire bid stack in overnight low volume trading. Clearly nothing has been fixed in Portugal, although at least for now, the investing community appears to have convinced itself that the slow motion wreck of Portugal's largest bank even after on Sunday, Portugal’s prime minister said taxpayers would not be called on to bail out failing banks, making clear there would be no state support for BES.