Archive - Aug 8, 2014

Obviously, this weekend's reading list is focused on what to do now.  Is this just another "dip" that investors should buy into? OR, is this the beginning of the long overdue intermediate term correction or a "mean reverting" process?

NATO threats to Russia - storm in a teacup. ISIS and Iraq airstrikes - transitory. Israel-Hamas un-cease-fire - fuggetabaadit. This was the week to buy stocks... the riskiest, most overvalued growth-oriented stocks. GDP downgrades - no sweat. Russell 2000 surges to its best week in the last 8 (up 1.5%) while Trannies closed lower for the 2nd week in a row - the first time in 6 months. The Russell rallied perfectly up to its 50-day moving-average. S&P, Dow, and Nasdaq scrambled back to around unch on the week on the back of a tweet and a 4-day-old piece of news... bonds and FX did not. Gold closed the week up 1.3%, back over $1,310 (but silver closed down 1.8%). Oil ended modestly lower (as did copper). Treasury yields saw safe-haven buying and fell 5-7bps on the week (but well off the week's lows -15bps). "Most shorted" stocks rose 1.3% today - best in almost 4 weeks (and biggest weekly squeeze in 2 months).

On the bright side, Marilyn Tavenner - appointed by President Obama to take over CMS within the Department of Health and human Services in 2013 - did not suffer a hard-drive crash. However, as MSNBC reports, she may be unable to cooperate with House Oversight and Government Reform Committee subpoenas because she deleted emails.

It was all fun and games with the West's ever escalating sanctions against Russia until Putin finally retaliated, sending the German stock market into a correction and German bunds to record highs. Now, following Obama's official latest military incursion into Iraq, it is time for ISIS, that ultra-aggressive spin off of Al Qaeda to do the same, and following last night's Obama announcement ISIS has called for attacks on US interests worldwide.

Update: US has launched another round of airstrikes

As the following clip shows, the explosions from two F-18s dropping 500lb bombs were large and Iraq officials stated that 45 ISIS fighters were killed (and 60 injured). While The Islamic State's response was to demand blood for US intervention, it appears they went domestic first. As AP reports, Iraqi officials say hundreds of Yazidi women (under 35) have been taken captive by Islamic State militants (and held in schools in Mosul).

If you are getting a strong sense of déjà vu from current news flow, well, join the club.  Everything feels so… familiar.  And not necessarily in a good way.  When we hear phrases like “Bubble markets”, “M&A cycle”, “historically low yields”, and “retail investor buying”, our minds automatically flash back to prior periods of history when those phrases last dominated the headlines. It isn’t hard to come up with a “Top 10” list of phrases with strong historical - and emotional - antecedents.  So, today we did just that. Fair warning, however: just because a tune sounds familiar doesn’t mean you actually know the song. It could just be what the kids today call a “Sample” – a snippet of a song put in another song. Yep, what we’ve got here is something out of hip hop, not rock.  Don’t especially like rap?  Too bad, homey.

CNN does it again...

Want to read a really terrifying article? Take a look at this August 6th Op-Ed piece in the FT by Draghi’s former colleague, Lorenzo Bini Smaghi: “The ECB Must Move to Counteract Market Turbulence”. Are you kidding me? This is what we have come to … that the proper role of a central bank is to counteract “market turbulence” before it happens? I’d laugh, but then I remember that Yellen means exactly the same thing when she refers to “macroprudential policy”, and I want to cry.

"Your gonna need a bigger boat..."

Junk bond investors are running for the hills. But there are no hills.

US equity markets are surging back to pre-geopolitical risk highs on the back of a headline proclaiming Russia's military drill over...

RUSSIAN MILITARY EXERCISES THAT WORRIED U.S. DEPARTMENT OF STATE HAVE BEEN FINISHED - RUSSIAN DEFENSE MINISTRY
AIRCRAFT WHICH TOOK PART IN ASHULUK DRILLS RETURN TO PERMANENT BASES - RUSSIAN DEFENSE MINISTRY

This is in no way a de-escalation - in fact, had Russia continued the exercise that would have been a clear provocation. But as usual Johnny 5 ignites momentum first, finds out he never actually read between the original lines, and asks questions never.

Following the WHO's warnings, (the ironically named) Nigerian President Goodluck Jonathan has declared a "state of emergency" over the Ebola outbreak that is rapidly escalating in his nation. This comes on the heels of a US medical journal study that finds, as Reuters reports, the Ebola virus that is ravagaing West Africa was not imported from Central Africa but caused by a "new strain" of the disease - raising the specter of further regional epidemics.

US equities have retraced all the losses suffered from the moment headlines hit yesterday suggesting Iraq airstrikes were possible. They remain lower from the "NATO Russia threat" levels earlier in the day. US Treasury yields remains 8bps lower...

"If this is the beginning of a more important, intermediate term, correction; how large could it be?" There is one important truth that is indisputable, irrefutable, and absolutely undeniable: "mean reversions" are the only constant in the financial markets over time. The problem is that the next "mean reverting" event will remove most, if not all, of the gains investors have made over the last five years. Hopefully, this won't be you.

GDP-weighted average sovereign risk for European nations has risen 14% in the last 2 weeks - the most since Nov 2012. European peripheral bond spreads finally started to 'adjust' for real risk this week with a dramatic 30-40bps decompression from the early week's tights to the closing wides. Portugal was worst (+23bps on the week) followed by Italy and Spain. Stocks were hammered - EuroStoxx 600 2-week drop is the biggest since May 2012 and Germany's DAX 2-week drop is largest since Nov 2011.