Archive - Dec 20, 2011 - Story

"Gold again proves it is not the safe haven many had hoped for, breaking the 200-day moving average, the first time since 2009 and signaling that prices may drop to US$1400/ounce." So begins a post by a "market strategist" from Roubini Global Economics as of less than a week ago. Well, since as the chart below shows gold just took out the 200-DMA, this time in the opposite direction upside, having proven the recent drop was nothing but a buying opportunity as was suggested by the non-Ph.D. community, we assume that using the author's logic, gold has proven that it is in fact a safe haven, and that since it is not going to $1400 it can only go to infinity.... Or is that us taking liberties with our lack of an economics Ph.D. a little too far?

Here’s a quick crash course in how the intelligence business works these days. Despite the Hollywood mystique of suave, womanizing, pun-dropping men of mystery flitting around the world, it’s much more mundane. In reality, government operatives from a host of three-letter agencies are working to develop large networks of informants. These are mostly folks who deal with other people and are in the know– the bartender in Beirut, the luxury car dealer in Bogota, the money changer in Riyadh, the hotel manager in Shanghai, etc. These assets are constantly being pumped for information– who did you see, what were they buying, where did they go next, who were they with, what were they discussing, etc. And in exchange, informants typically get paid. In the United States, there are a number of laws on the books which are theoretically supposed to prevent the three letter agencies from spying on US citizens. Naturally, the government dispenses with such inconvenient formalities in its sole discretion, and Congress frequently passes legislative exceptions (USA PATRIOT Act, NDAA, etc.) There’s a little known division of the Treasury Department called the Financial Crimes Enforcement Network (FinCEN) whose mission is to “to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems from abuse by promoting transparency in the U.S. and international financial systems.”

Once again we seem to have a discrepancy between what “credit” people think and what “equity” and “FX” people think.  The broad market rallied strongly today, at least in part because of the LTRO. On one thing, everyone agrees, the take up rate will be high.  There will be strong demand for the LTRO.  What differs is the impact that will have on the market. At one end is a belief that banks will be borrowing this money so they can purchase new assets.  The allure of carry will be too much to pass up, and with government encouragement, they will rush to purchase new sovereign debt and maybe even lend more.  That will turn the tide in the European debt crisis since there will be buyers for every new issue, and the market can move on to “strong” economic data in the US. The other end of the spectrum is that the banks will use this facility to plug up existing holes in their borrowing.  They won’t have to rely on the wholesale market or repo market as much as they can tap this facility.  It will take some pressure off of the “money market” as banks won’t be scrambling for as much money every day, or over year end, but it won’t lead to new asset purchases by the banks.  Banks need to deleverage and that hasn’t changed.  The bonds can have a 0% risk weighting, but that doesn’t mean anyone, including the banks, believe it.  The road to hell is paved with carry.  That is an old adage and likely applies here. 

Once again, the momo and retail "traders" gets ripped off by the whales who take advantage of vacuum tube inspired momentum and retail bag holders praying for a few days that will make their year. From Goldman EOD market commentary: "Up, up, and away for stocks today. Europe gets the party going, and the music keeps playing for the US. The flow on our cash desk actually skewed to better selling – decent long-only selling (consumer staples and information technology) vs. small hedge fund buying (info tech and energy). ETF desk was better to buy, but only moderately so. SPX 1260 (200d) still the level to watch above – held twice in June, sliced through in August, been a consistent top in October, November, and December. SPX closes up 36 at 1241 (+2.98%)." And incidetnally as was noted here minutes ago, "Strange to see EURUSD and SPX decouple so sharply, but year-end brings funny things." Translation: thank you dumb money stock investors - without you the Putnams of the world would have nobody to sell to.

While there is nothing quite like using correlation to imply causation, or predicting the future by observing self-fulfilling prophecies which work until they wipe everyone who blindly follows them, investors do enjoy observing technical patterns that lead to at least some incremental and tranistory beta. Especially in this day and age of centrally planned alpha disintegration. And while many have noted historical phenomena which used to work in the old days, such as the "Merger Monday" effect, this was before the Obama administration decided it would be the best and last arbiter of what transactions should and shouldn't work. As a result, Merger Monday were promptly forgotten. Also promptly forgotten were POMO days (at least for now), as every Fed bond purchase, has an equal and offsetting bond sale (inverse POMO). Granted once the Fed starts monetizing Italian bonds this will quickly change. But what about now? Well, as a trading desk advises us, using 2011 statistica data, "Torrid Tuesdays" just may be the new "Merger Monday."

UPDATE: ORCL missed. $8.8bn Rev vs $9.23bn exp., 54c EPS vs 57c exp. - Stock -9% AH

With ES (the e-mini S&P futures contract) managing to pull over 40 points off overnight lows (bringing back memories of the 11/30 global bailout rampfest), we saw correlated risk assets disconnect one by one as the day proceeded. First to leave the party was FX carry (or more simply the USD) just before Europe closed. Then Gold stabilized and stopped accelerating and credit markets also went only gently higher/stable in the afternoon. Oil kept on lifting with stocks - helping Energy stocks lead the way (up over 4% on the day) - but even Oil went flat within an hour or so of the close. The only other asset that seemed to be correlating and self-reinforcing was the Treasury complex - most specifically the 10Y and the 2s10s30s butterfly but it was the former that had the highest correlation overall and kept going right to the end. Volume did die away towards the end but surged right at the close as average trade size picked up and ES started to roll over a little - pros selling into the close? Who knows but there was little else supporting ES up here on the day and with the 'news' ahead on LTRO take-up - maybe better safe than sorry.

Nearly two years ago, we first breached the topic of the Fed's nuclear option: the possibility (or is that likelihood) of the Fed stepping out of the continental US and proceeding to monetize European bonds. Back then we noted: "One thing learned over the past year is that everything is a distraction for something else, and that something else, quite usually without failure, ends up being the Marriner Eccles building on Constitution Avenue in D.C. What we refer to is disclosure from a paper written by none other than the Maestro Jr, in 2004, titled "Conducting Monetary Policy at Very Low Short-Term Interest Rates" (oddly appropriate). In this paper, Bernanke discusses not only the possibility of purchasing corporate assets (bonds and stocks), but emphasizes that one other security class which the Fed may be inclined to acquire under conditions such as those today, and has an explicit authority to do so, are foreign government bonds." The specific text referenced was the following: "In simple terms, if the liquidity or risk characteristics of securities differ, so that investors do not treat all securities as perfect substitutes, then changes in relative demands by a large purchaser have the potential to alter relative security prices. The same logic might lead the central bank to consider purchasing assets other than government securities, such as corporate bonds or stocks or foreign government bonds. (The Federal Reserve is currently authorized to purchase some foreign government bonds...)" So the question then becomes: with the ECB stubbornly refusing (for now) to proceed with outright monetization, and with its balance sheet already surpassing all time records as noted earlier (see below), coupled with tomorrow's LTRO which as discussed over the weekend will be a "Risk On" attempted failure, even if providing a brief relief rally in the interim, not to mention the complete lack of any long-term viability plan out of the Eurozone (EFSF failure due to lack of demand; IMF bailout plan failure due to the UK's veto and the circular joint and several funding by Italy and Spain of an Italian and Spanish bailout), will it be, once again, the Fed which at the end of the day will have to, by covert pathways or otherwise, be forced to step in and monetize European bonds: the so called Nuclear Option? Providing the latest thoughts on the topic is SocGen's Aneta Markowska...

The numbers tell us America is in decline... if not outright collapse. I say "the numbers tell us" because I've become very sensitive to the impact this kind of statement has on people. When I warned about the impending bankruptcy of General Motors in 2006 and 2007, readers actually blamed me for the company's problems – as if my warnings to the public were the real problem, rather than GM's $400 billion in debt. The claim was absurd. But the resentment my work engendered was real. So please... before you read this issue, which makes several arresting claims about the future of our country... understand I am only writing about the facts as I find them today. I am only drawing conclusions based on the situation as it stands. I am not saying that these conditions can't improve. Or that they won't improve. The truth is, I am optimistic. I believe our country is heading into a crisis. But I also believe that... sooner or later... Americans will make the right choices and put our country back on sound footing.

The Fed just released its 'framework' for thinking about planning to implement their proposals to take notice of the Dodd-Frank rules. There is little if any detail in here but the main points, via Bloomberg headlines from the 173 pages of admittedly well structured, but unclarifyingly disappointing prose are as follows:

• *FED BOLSTERS TOOLS FOR AVERTING COLLAPSE OF BIG FINANCIAL FIRMS
• *FED REGULATIONS FOCUS ON CAPITAL, LIQUIDITY, STRESS TESTS
• *FED RULES TARGET RISK MANAGEMENT, REMEDIATION, CREDIT RISK
• *FED PROPOSES `TRIGGERS' TO `EARLY REMEDIATION' OF WEAKNESSES
• *FED RULES TO LIMIT FIRMS' CREDIT RISK TO A SINGLE COUNTERPARTY
• *FED RULE REQUIRES BANK DIRECTORS TO APPROVE LIQUIDITY RISK
• *FED: FIRMS MUST ANNUALLY HAVE STRESS TESTS, PUBLICIZE RESULTS
  

And now the president explains why today's congressional vote slamming the 2 month tax extensions is not acceptable. We wonder if this means Obama's Hawaiian holiday will be delayed until this critical issue is resolved.

I’m not sure exactly when it happened, but Europe has finally starting dealing in the truth. Draghi can’t point out the limits of sovereign debt purchases often enough. The EU, usually happy to let completely false rumor after false rumor to drive the markets, took the time to quash the idea of EFSF and ESM being increased in size. Not just, once, but twice, as Merkel has said it on the 13th, and it came out after yesterday’s conference call. They even took the time to point out that they hadn’t been able to agree on 85% agreement. That could easily have been buried or ignored, but yet they chose to highlight it after their call yesterday. Finally, they even went ahead detailing the relatively puny IMF/Central Banks bailout fund. The fund was disappointingly small at €150 billion, rather than the €200 billion that had been expected. The UK is out, but so are Portugal, Ireland, and Greece. Those 3 not being in makes sense, but this is the first time that I can remember that the EU gave us the numbers straight. Usually they would have announced the big number with caveats about various “stepping out countries” and “yet to be ratified” countries. Estonia, which has no debt, is not going to participate. Again, makes sense, but is a step away from the EU making everything sound bigger and grander than in the past.

Today's 5 Year bond auction merely confirmed what we already knew from the 1 month Bill auction (and recurring negative yields thereof), namely that heading into year end everyone is scrambling for the "safety" of uncle Sam. The auction priced at a fresh record low yield of just 0.88%. In other words people will collect less than 1%/ year to hold US paper for 5 years. Naturally, the market is telegraphing that either it either does not buy any optimistic views about the LT economy, or, far more likely, is betting that very soon Bernanke will extend the ZIRP promise well beyond mis-2013 as Bernanke is left with no choice but to push the risk free security further and further to the right, and force everyone to chase every more duration, and go into risky assets to reflate if not the economy, then at least the stock market. Otherwise, the Bid To Cover dropped to a 4 auction low of 2.86, although above the 12 auction average of 2.83%, with Directs, Indirects and Dealers taking down 9.1%, 50.6% and 40.3%, respectively. Oddly enough, following yesterday's collapse in 2 Year Indirect interest, today foreign buyers, who tendered a total of $22 billion at a 79% hit rate, once again took down more than half the auction, and the highest since August 2010's 50.8%. Overall, this is merely more year end liquidity shennanigans, as equities experience a short squeeze, while credit parks all the money it can find in the safest paper. What this means for tomorrow's LTRO tender interest is still unclear.

Update: Payroll tax extension vote fails, as expected:

HOUSE HAS VOTES TO REJECT SENATE TAX PLAN; VOTE CONTINUING

Watch as the house votes on the Senate proposed two-month payroll tax extension, coupled with a motion to go to conference.